[2023] KETAT 560 (KLR)

Naboisho Tourism Partners v Commissioner of Domestic Taxes (Tax Appeal 454 of 2022) [2023] KETAT 560 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 560 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 454 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

June 29, 2023

Between

Naboisho Tourism Partners

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private company and a registered taxpayer located in Kiambu County and its principal activity is the management of Mara Naboisho Conservancy.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent has both Income tax and VAT obligations.

4. The Appellant had filed its VAT returns for the period December 2016 to December 2018 and in the month of December 2018 filed a nil return.

5. The Respondent wrote to the Appellant and requested for documents from the Appellant on 16th October, 2019, and 7th September, 2020.

6. The Respondent issued the Appellant with a Preliminary review on 3rd March, 2020.

7. On 8th May, 2020, the Respondent assessed the Appellant 's tax liability to be principal VAT of Kshs. 11,677,695 in December 2016, Kshs. 15,195. 536. 48 in December 2017 and Kshs. 12,455,798. 87 in December 2018.

8. On 11th June, 2020, the Appellant objected to the assessments and the Respondent issued the Appellant with Objection Application Acknowledgement Receipts.

9. On 22nd March, 2022, the Respondent sent the Appellant the objection decision rejecting the objection.

10. The Appellant being aggrieved by the decision preferred an Appeal against the decision by filing its Notice of Appeal on 21st April, 2022.

The Appeal 11. The Appellant in its Memorandum of Appeal dated and filed on 5th May, 2022, cited the following grounds:a.The Appellant was incorporated in Kenya on 27" May, 2011, under the Certificate of incorporation number CPR/2011/48229. The company's principal activity is management of the Mara Naboisho Conservancy and the related camps within the Conservancy.b.The Respondent instituted an in-depth audit of the Appellant 's tax affairs for the years of income 2016 to 2018 and issued a notice of additional assessment on 8th August, 2020. The in-depth audit pertains to Value Added Tax.c.In computing the Appellant 's tax liability, the Respondent brought to charge (Value Added Tax) supplies made by the Appellant as follows:i.Kshs. 72,985,598. 00 for the 2016 year of income and have assessed VAT on the supplies at Kshs. 11,677,696. 00, with penalties amounting to Kshs. 583,885 and late payment interest amounting to Kshs. 4,671,078. 00. The total amount demanded for 2016 is Kshs. 16,932,659. 00. ii.Kshs. 94,972,103. 00 for the 2017 year of income and have assessed VAT on the supplies at Kshs. 15, 195,536. 00, with penalties amounting to Kshs. 759,777. 00 and late payment interest amounting to Kshs. 4,254,750. 00. The total amount demanded for 2017 is Kshs. 20,210,064. 00. iii.Kshs. 77,848,743. 00for the 2018 year of income and have assessed VAT on the supplies at Kshs. 12,455,799. 00, with penalties amounting to Kshs. 622,790. 00 and late payment interest amounting to Kshs. 1,992,928. 00. The total amount demanded for 2018 is Kshs. 15,071,517. 00. d.In computing the Appellant 's tax liability, the Respondent brought to charge Value Added Tax on: -i.Commercial rental income in contravention of the VAT legislation as read with a precedent of the High Court of Kenya.ii.Cost recoveries incurred by the Appellant on behalf of the camps in the Conservancy for the years 2016-2018 in contravention of the VAT Act 2013.

The Appellant ’s Case 12. The Appellant ’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant ’s Statement of Facts dated and filed on 5th May, 2022, together with the documents attached thereto.ii.The Appellant ’s written submissions dated and filed on 5th December, 2022.

13. The Appellant averred that in 2020, the Respondent carried out an audit of the Appellant 's books of accounts. That during the process, the Respondent met with the Appellant and its tax advisors at its Thika offices on 13th November, 2019, and was provided with the following documentation:i.Bank statements for the entire period under review (2016 to 2018).ii.Financial statements for the entire period under review (2016 to 2018).iii.Sample contracts (between the Appellant and tourist camps, the Appellant and the land owners, the Appellant and related companies) and invoices for lease and reimbursement of expenses.iv.Creditors listing and debtors listing.v.Trial balance and supporting ledgers.

14. The Appellant stated that on 9th March, 2020, the Appellant received from the Respondent a demand letter for VAT amounting to Kshs. 69,614,403. 00 for the years 2016 to 2019 inclusive of penalties and interest and consequently formal assessment orders were also received on 12th May, 2020.

15. The Appellant averred that it filed its tax objections on 11th June, 2020, and the same were acknowledged by the Respondent.

16. The Appellant added that on 18th August, 2020, pursuant to a request for supporting information, the Appellant shared all the supporting information pertinent to this appeal with the Respondent.

17. The Appellant also averred that in September 2020, pursuant to a notice of objection invalidation issued by the Respondent, the Appellant delivered hard copies of supporting documentation including financial statements and invoices to the Respondent’s offices in Thika and on 14th September, 2020, the Respondent acknowledged receipt of the same.

18. That the Respondent issued its objection decision dated 22nd March, 2022, via an e-mail and the same was received by the Appellant on 24th March, 2022, and in its objection decision, the Respondent rejected the Appellant 's objection notices.

19. The Appellant argued that it had contested the Appellant ’s assessments in their entirety for various reasons. The Appellant added that there was also a delay in the provision of the objection decision by the Respondent and on this the Appellant relied on Section 51(11) of the TPA which requires the Respondent to provide an objection decision within 60 days of:a)Receipt of objection decision orb)Receipt of any further information the commissioner may require from the taxpayer.

20. The Appellant added that it filed its objection on 11th June, 2020, and the last request for information from the Respondent was received in September 2020 after which it provided all the information requested for, and the Respondent acknowledged receipt of the same.

21. That the Respondent issued its objection decision on 22nd March, 2022, 21 months after the objection notices were made to the Appellant and 18 months after the final request for information sought and provided to the Respondent.

22. The Appellant submitted that the delay is inordinate and unreasonable and urged the Tribunal to consider the objection decision as being improperly issued owing to the lengthy delay between the date of filing the tax objection, the date of the last request for information and the date that the Respondent issued the objection decision. The Appellant on this relied on the decision of the High Court in Liberato Manga v Prime Bank Limited Civil Appeal (Application) 563 of 2019 and the Appellant urged that the tax objection be treated as allowed as required by the TPA Section 51(11).

23. The Appellant also argued that pursuant to the First Schedule, Part ll, Paragraph 8 of the VAT Act,2013, the leasing or letting of land is VAT exempt. That the First Schedule outlines the items and supplies that are exempt from VAT and that sale and letting of land is exempt from VAT. The Appellant on this relied on the case of David Mwangi Ndeqwa vs. Kenya Revenue Authority [Civil suit 541 of 2015].

24. The Appellant averred that it obtained land from landowners in the Mara Conservancy under a lease agreement and then entered into sub-leases with the camp operators who lease the land from it for the purpose of promoting Conservancy and operating tourism camps and which services the Appellant argued are exempt from VAT and that it is not required to account for VAT on the same.

25. The Appellant had also been assessed for VAT on cost recoveries for repairs, maintenance, wages and salaries incurred by it. The Appellant on this argued that as the entity in charge of the management of the Conservancy, it makes payments of expenses incurred in the management and maintenance of the Conservancy but added that the expenses are not part of the contractual obligation of the Appellant but rather are expenses of the camps that are operating on the Conservancy.

26. The Appellant added that it recovers the payments made in the management of the Conservancy from the camps that are operating in the Conservancy and that it does not make any profit or margins on the recoveries of costs. The Appellant added that the cost recoveries and reimbursements are not subject to VAT since they do not constitute a supply within the meaning of the VAT Act, 2013.

27. The Appellant also argued that wages are outside the scope of VAT and thus a charge for recovery of VAT in wages is not applicable.

28. The Appellant stated that the aggregate amount of costs recoveries and reimbursements from the camps received by the Appellant in the period under review is Kshs. 1,048,797. 00.

Appellant ’s Prayers 29. The Appellant prayed for:a.The setting aside of the Respondent’s VAT assessments.b.The Respondent to issue assessments taking into account the Appellant ’s arguments.

Respondent’s Case 30. The Respondent’s case is premised on the documents set out hereunder: -a.The Statement of Facts dated and filed on 3rd June, 2022. b.The Submissions dated 13th November, 2022, and filed on 14th November, 2022.

31. The Appellant averred that on the first ground of Appeal the Appellant failed to lodge a valid objection as per the provisions of Sections 51 (3) and 51 (8) of the TPA. That the Respondent consequently notified the Appellant to provide the necessary documents but the Appellant neglected to do the same.

32. The Respondent also averred that the communication to the Appellant titled objection decision was not an objection decision but a summation of what the Respondent had been communicating to the Appellant and the same is not what is envisioned under Section 51 (8) despite its title.

33. The Respondent on the second ground of Appeal stated that it was well aware of the holding in the case of David Mwangi Ndegwa vs KRA [2018] Eklr that the sale, renting, leasing, hiring, letting of all types of land was exempted from VAT. The Respondent, however, argued that there was a successful application for stay of the decision pending conclusion of the Appeal.

34. The Respondent added that the Tribunal had ruled in the case of National Bank of Kenya vs Commissioner of Domestic Taxes [TAT No.14 of 2017] that leasing commercial land was not exempted from VAT despite the High Court decision.

35. On the third ground of Appeal the Respondent stated that the money spent on repairs, maintenance, wages and salaries was not spent on behalf of the camp owners. That it’s the Appellant who benefits if the property is in good repair as the camp owners leave the improvement on the ground upon leaving the leased property. The Respondent also argued that as per the provisions of the Land Act Section 65 (2) the services of repairing and maintaining the leased property are provided by the lessor.

36. The Respondent added that the services were incurred in the course of the Appellant making a supply of its own services and not entirely on a representative capacity on behalf of the camp owners.

37. The Respondent also averred that the burden of proof is on the Appellant and on this relied on the case of Mulheim vs Commissioner of Taxation [2013] FCAFC 115 and that the Appellant failed to do so.

38. The Respondent also argued that as per Section 43 of the VAT Act the tax payer is required to maintain documentation for the purposes of assessing the tax due.

Respondent’s Prayers 39. The Respondent prayed that the Tribunal finds:a.That the Commissioner’s decision to reject the objection and the consequent confirmation of the VAT assessment of Kshs. 11,677,695. 00 in December 2016, Kshs. 15,195,536. 48 in December 2017 and Kshs. 12,455,798. 87 in December 2018 was proper in law and in conformity with the VAT Act and the Tax Procedures Act.b.That the Appeal be dismissed with costs to the Respondent as the same is unmerited.

Issues For Determination 40. The Tribunal upon considering the pleadings, facts of the matter and the submissions of the parties is of the view that there are two issues for determination as hereunder: -a.Whether the Appellant ’s objection notice was allowed by operation of lawb.Whether the Respondent’s assessments on the Appellant on VAT were justified

Analysis And Determination 41. The Tribunal after deciding that the issues for determination are as hereabove stated, proceeded to deal with the same as hereunder.a.Whether the Appellant ’s objection notice was allowed by operation of law.

42. The Respondent issued the Appellant with the VAT assessments for the years 2016,2017 and 2018 on 12th May 2020 and on receipt of the same the Appellant lodged objection notices against all of them on 11th June, 2020.

43. The Appellant averred that thereafter there was correspondence between the parties and supply of documents by the Appellant to the Respondent as per the latter’s request culminating with the last relevant request for documents being made on 7th September, 2020.

44. The Appellant added that the objection decision was issued consequently by the Respondent on 22nd March, 2022, and that the issuance was against the provisions of Section 51(11) of the TPA.

45. The Respondent on its part averred that the document being referred to by the Appellant as the objection decision does not amount to one and refers to it as a “communication titled objection decision”. The Respondent does not, however, refute the chronology of events as set out by the Appellant at all.

46. The Tribunal has perused the record and the documentation filed by the parties. It has noted that the averments of the Appellant are supported by the various correspondence annexed to its pleadings.

47. The Tribunal has also perused the objection decision annexed to the Appellant ’s pleadings. The same is dated 22nd March, 2022, and is headed “objection decision”. The document clearly in all its details is an objection decision and the assertion by the Respondent that the same is not is incredulous to say the least. The document also meets the requirements of Section 51 (8) of the TPA and which Section does not define particular peculiarities that the decision should entail. All that the document should show is the clear and lucid decision of the Commissioner.

48. The provisions of Section 51 (11) of the TPA provide as follows:“The Commissioner shall make the objection decision within sixty days from the date of receipt of-a.the notice of objection; orb.any further information the Commissioner may require from the tax payer, failure to which the objection shall be deemed to be allowed.”

49. The Tribunal upon taking into consideration all the preceding details including the provisions of Section 51(11) of the TPA, the submissions of the parties and their supporting documents finds that the Commissioner acted without his powers in issuing the objection decision well over the 60 days stipulated period.

50. The Tribunal has also on innumerable occasions emphasized the necessity of the parties to observe the timelines set by the law. The issue has also been determined by the courts as being one of high importance as was held in the case of Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others [2013] eKLR, where the court held that; -“This Court, indeed all courts, must never provide succor and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is a clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned.”

51. The same position was upheld in the case of W.E.C. Lines Ltd vs. The Commissioner of Domestic Taxes [TAT CASE NO.247 of 2020] where it was held in Paragraph 70 and reiterating the holding in Krystalline Salt Ltd vs KRA [2019] eKLR that:“Where there is a clear procedure for redress of any particular grievance prescribed by the constitution or an Act of Parliament, that procedure should be strictly followed. Accordingly, the special procedure provided by any law must be strictly adhered to since there are good reasons for such special procedures”. The relevant procedure here is the process of opposing an assessment by the Commissioner.”

52. The upshot of the above is that the Tribunal found that the Appellant ’s objection notice was allowed by operation of the law and therefore did not deal with the other issue raised in the matter.

Final Orders 53. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly makes the final Orders as hereunder: -a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 22nd March 2022 be and is hereby set aside.c.Each party to bear its own costs.

54. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ERIC N. WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERJEPHTHAH NJAGI - MEMBERABRAHAM K. KIPROTICH - MEMBER