[2024] KETAT 1622 (KLR)

Ola Energy Kenya Limited v Commissioner of Investigations and Enforecement (Tribunal Appeal E702 of 2023) [2024] KETAT 1622 (KLR) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1622 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E702 of 2023

E.N Wafula, Chair, G Ogaga, RO Oluoch & AK Kiprotich, Members

November 22, 2024

Between

Ola Energy Kenya Limited

Appellant

and

Commissioner Of Investigations And Enforecement

Respondent

Judgment

Background 1. The Appellant, previously, Libya Oil Kenya Limited) is a limited liability company incorporated in Kenya. The Appellant is a Pan-African oil marketing company and has operations in Kenya. The Appellant’s operations include wholesale, retail and commercial sale and marketing of petroleum products including fuels and liquefied petroleum gas as well as manufacture of lubricants.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5(1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent carried out investigations of the Appellant’s tax affairs.

4. The Respondent issued the Appellant with Corporation tax assessments on 13th June 2023 for the years 2011 to 2016

5. The Appellant objected to the entire assessment in a notice of objection dated 12th July 2023, and the Respondent issued an objection decision on 8th September 2023 confirming the entire assessment.

6. The Appellant, being dissatisfied with the Respondent’s Objection decision, filed its Notice of Appeal dated 6th October 2023.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 19th October 2023 and filed on 24th October 2023 which raised the following grounds: -a.That the Respondent erred in law and fact by contravening the provisions of Section 31(4)(b)(i) of the Tax Procedures Act by issuing assessments for the years of income 2011, 2012, 2013, 2014, 2015 and 2016 beyond the five (5) year period prescribed in law.b.That the Respondent erred in law and fact by demanding for documentation beyond the five (5) year period prescribed by Section 23 of the Tax Procedures Act.c.That the Respondent contravened the provision of Article 47 of the Constitution of Kenya and the Fair Administrative Actions Act by failing to provide the Appellant with documents which they relied upon in arriving at the transfer pricing adjustments.d.That the Respondent erred in law and fact by failing to consider all the documents provided by the Appellant and in so doing arrived at a position that was contrary to OECD Transfer Pricing Guidelines.

Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal:a.The Appellant’s Statement of Facts dated 19th October 2023 and filed on 24th October 2023 and the documents attached to it;b.The Appellant’s written submissions dated 14th June 2024 and filed on 17th June 2024; andc.The Appellant’s supplementary written submissions dated 1st August 2024 and filed on 14th August 2024.

9. The Appellant stated that through a letter dated 13th June 2023, the Respondent issued it with transfer pricing assessments totalling Kshs. 442,751,754. 00 for the years 2011 to 2016.

10. The Appellant further stated that it objected to the entire assessment pursuant to the provisions of Section 51 of the TPA through its tax agent, on the following grounds:a.That the KRA assessment is ultra vires the powers of the Commissioner as provided for under Section 31(4)(b)(i) of the TPA as they have been raised beyond the five years provided; andb.Without prejudice to the foregoing, the Commissioner did not fully comprehend the controlled transactions occurring with OEKL.

11. That through a letter dated 8th September 2023, the Respondent issued an objection decision confirming the assessment in its entirety, which the Appellant, aggrieved by the decision, filed a Notice of Appeal on 6th October 2023 to the Tax Appeals Tribunal.

12. The Appellant stated that the Respondent conducted a transfer pricing audit on it for the period 2008 to 2011. That following discussions between the Appellant and the Respondent, the matter was amicably settled through a letter dated 19th November 2012, and the Appellant paid Kshs. 14,823,419. 00.

13. That the Respondent subsequently commenced another transfer pricing audit in 2016 covering the period 2012 to 2014 and issued its preliminary finding through a letter dated 5th December 2016, demanding additional corporation income tax of Kshs. 613,519,718. 00.

14. The Appellant stated that it responded to the preliminary findings through a letter dated 23rd December 2016, and averred that the Respondent subsequently expanded the scope to cover other tax heads including customs duties for the period 2010 to 2016.

15. That following the audit, the Respondent issued the Appellant with preliminary findings through a letter dated 3rd April 2018 and requested for additional information, which the Appellant stated it provided to the Respondent through a letter dated 10th April 2018.

16. The Appellant stated that on completion of the audit, the Respondent issued an assessment against the Appellant through a letter dated 6th July 2018 which did not contain any transfer pricing findings.

17. The Appellant further stated that it objected to the assessment in a letter dated 12th July 2018.

18. The Appellant averred that the Respondent through a letter dated 8th September 2018 issued its objection decision for the period 2010-2016, and therein did not make any transfer pricing adjustments and did not provide any reasons for the assessed taxes.

19. The Appellant further averred that the Respondent sought to subsequently provide the reasons through a letter titled "Clarification Letter" dated 27th September 2018. That the letter was issued outside the time-period for issuing an Objection decision and was an attempt by the Respondent to cure the defective and invalid Objection decision.

20. The Appellant asserted that in the clarification letter, the Respondent also stated that the transfer pricing audit was still on-going, and the findings would be communicated under a separate cover.

21. The Appellant, stated that it appealed to the Tax Appeals Tribunal in TAT No. 309 of 2018, Libya Oil Kenya Limited versus The Commissioner of Investigation and Enforcement) where the matter was decided in its favour on 1st October 2018.

Whether the Respondent erred in law and fact by contravening the provisions of Section 31(4)(b)(i) of the Tax Procedures Act by issuing assessments for the years of income 2011, 2012, 2013, 2014, 2015 and 2016 beyond the five (5) year period prescribed in law. 22. The Appellant cited Section 31(4)(b)(i) of the Tax Procedures Act, 2015 (TPA) which provides that the Respondent may amend an assessment within five (5) years of the date a self-assessment return was submitted by the taxpayer unless there is gross or wilful neglect, evasion or fraud by, or on behalf of, the taxpayer, at any time.

23. That the Respondent through the assessment and Objection decision is seeking to demand Kshs. 442,751,754. 00, being transfer pricing adjustments to the Appellant’s self-assessment returns for the 2011-2016 years of income.

24. The Appellant stated that its self-assessment returns for the years of income under review were filed as follows:Year of income Date of self-assessment return

2011 30 June 2012

2012 30 June 2013

2013 30 June 2014

2014 30 June 2015

2015 30 June 2016

2016 30 June 2017

25. The Appellant asserted that in light of the above, it is crystal clear that the Respondent’s amended assessment issued through the letter dated 13th June 2023 was outside the timeline prescribed in law for issuance of an amended assessment.

26. That pursuant to the provision of Section 31(4)(b)(i) of the TPA, the only circumstances under which the Respondent can raise amended assessments outside the prescribed five (5) year period, is where the Respondent has established gross or wilful neglect, evasion or fraud by or on behalf of the taxpayer.

27. The Appellant submitted that the Evidence Act (Cap 80 of the Laws of Kenya) under Part IV provides that the burden of proof lies with the person who asserts or alleges a fact.

28. That in the current circumstances, the Respondent in assessing the Appellant beyond the five (5) year statutory period, would be required to provide evidence to the effect that there was an instance of gross or wilful neglect, evasion, or fraud on the part of the Appellant.

29. The Appellant further asserted that in the assessment dated 13th June 2023, the Respondent did not raise the issue of fraud in relation to justifying the reason for assessing the Appellant beyond the five (5) year period prescribed in law.

30. The Appellant stated that in making the finding set out above without setting out clearly the actions or omissions of the Appellant which resulted in that finding, the Respondent was not only being reactive to the Appellant’s objection, but was also clearly in contravention of Article 47 of the Constitution of Kenya (2010) and the provisions of the Fair Administrative Actions Act which provides that any person who is likely to be adversely affected by a decision of an administrative body, must be given reasons for the adverse action.

31. The Appellant submitted that the Court of Appeal in the case of Kenya Power & Lighting Company Limited -versus- Rassul Nzembe Mwadzaya (2020 eKLR) held that: -“It is trite that if no evidence is tendered to support an averment in a pleading...such averment stands as such as a mere statement.”

32. That additionally, the Tribunal in the case of Chemical MagadiLimited versus- The Commissioner of Investigation and Enforcement (TAT No. 19 of 2021), made a finding that the Respondent had not discharged the burden of proving the allegation of fraud at paragraph 47: -“It is trite law that any allegation of fraud must be strictly pleaded and strictly proved. Having failed to do so in this appeal, the Respondent contravened the statutory timelines set in 31(4) of the TPA by issuing assessments beyond the period of 5 years.”

33. The Appellant submitted that it is important to note that tax laws must be strictly interpreted. That this means that there is no room for intendment or presumptions in the interpretation of tax legislation.

34. The Appellant buttressed its argument by referring to the holdings in the following cases:a.Mount Kenya Bottlers Limited & 3 others v Attorney General & 3 others [2019] eKLR.b.Stefanutti Stocks KenyaLimited v Commissioner of Domestic Taxes (Tax Appeal El 17 of 2021) [2023] KEHC 2322 (KLR)

35. That taking into consideration the decisions cited above, the Appellant submitted as follows:a.that Section 97 of the TPA is a general provision with no relationship to Section 31 which permits the Respondent to issue an amended assessment;b.that in citing Section 97 of the TPA, the Respondent did not state the nature of offence committed or even attempt to provide evidence to support the alleged offence;c.that in citing Section 97 of the TPA, the Respondent failed to strictly state which proviso within Section 97 of the TPA the Appellant was guilty of.

36. That in addition to the above, the Appellant noted that Section 107(2) of the Evidence Act (Chapter 80, Laws of Kenya) provides that: -“When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

37. The Appellant asserted that the Respondent in the circumstances has not discharged its burden of proof pursuant to either Section 80 of the Evidence Act, Section 31(4)(b)(i) of the TPA nor Section 97 of the TPA and the objection decision demanding payment of Kshs. 442,751,754. 00 should be set aside in its entirety.

38. The Appellant submitted that regarding the issue of burden of proof on the part of the taxpayer where allegations of wilful neglect, evasion or fraud are made, this Tribunal in the case of Paragon Electronics Limited v Commissioner of Domestic Taxes (Tax Appeal No. 207 of 2015), (as referenced in the Tribunal case of Airtel Networks Kenya Limited v The Commissioner of Domestic Taxes (Appeal No 221 of 2021), supra, the Tribunal held that: -“Secondly, the Respondent failed to submit any evidence showing that the Appellant had committed any fraud as was anticipated by the Act. The mere allegation of the Appellant having committed fraud is not enough to sustain a case of this magnitude. The burden remains with the one who alleges and shall remain so until the person alleging it proves it...”

39. The Appellant argued that the Respondent, both in the Objection decision and its Statement of Facts failed to justify its decision to assess the Appellant beyond the 5-year limitation period and to prove any allegations of fraud beyond reasonable doubt. That the Respondent merely alleged that its investigations uncovered a tax evasion strategy and failed to disclose the nature of the evasion strategy established and the revenue stream impacted that would entitle it to issue an assessment beyond the five-year period.

40. The Appellant concluded that the failure by the Respondent to adhere to the statutory time limitation set out in Section 31(4) is incurable as it goes to the root and substance of the matter. That once 5 years from the date a self-assessment is made has lapsed, the Respondent has no power or discretion to demand or collect taxes for the period outside the said time limit.

Whether the Respondent erred in law and fact by demanding for documentation beyond the five (5) year period prescribed under Section 23 of the Tax Procedures Act. 41. The Appellant averred, that without prejudice to the above, pursuant to the provisions of Section 23 of the TPA it was not legally required to keep documents beyond five (5) years.

42. The Appellant cited Section 23(1)(c) of the TPA which provides that a person shall retain documents required under a tax law for a period of five (5) years from the end of the reporting period to which it relates and averred that, thereafter, a taxpayer is not legally obligated to retain these documents for a longer duration in ordinary circumstances.

43. The Appellant submitted that although the TPA came into force on 19th January 2016, Section 113 of the TPA which provides for transitional provisions of the TPA upon its coming into force in 2016, provides that it is the applicable law in relation to any act for which no prosecution was commenced, or any assessment made for which no appeal was made upon its enactment. That given that there was no prosecution or appeal against an assessment in relation to the Appellant on this matter prior to 2015, the provisions of the TPA shall be applicable. The Appellant supported this argument by referring to the case of Fast Generation Limited v Commissioner of Domestic Taxes TAT Appeal No. 42 of 2016.

44. It was the Appellant’s view that it is clear that the Respondent’s request for records should have been limited to a period of five (5) years. The Appellant submitted that tax laws must be interpreted strictly according to the rule of strict interpretation of taxation statutes.

45. The Appellant stated that relying on the strict interpretation of tax statutes, it would only for instance for the year of income 2016, been required to keep the records for that year of income until 30th June 2022. That the Respondent’s request for information beyond the five-year period, has no basis in law and the Objection decision issued by the Respondent should be vacated in its entirety.

46. The Appellant added that despite the above, it, using best efforts, provided to the Respondent information that was readily available inspite of the lapse of the five (5) year period within which it was required to keep records.

47. The Appellant further submitted that it did not have any legal duty to maintain documents that are beyond the statutory period of 5 years, placing reliance on the holdings in the following cases: -a.High Court case of Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (income Tax Appeal E062 of 2022) (2023] KEHC 25059 (KLR).b.Republic v Commissioner of Domestic Taxes (Large Taxpayers Office) Ex-parte Unilever Tea Kenya Limited [2017] eKLRc.Airtel Networks Kenya Limited v The Commissioner of Domestic Taxes (Appeal No 221 of 2021).

Whether the Respondent contravened the provisions of Article 47 of the Constitution of Kenya and the Fair Administrative Actions Act by failing to provide the Appellant with documents which it relied upon in arriving at the transfer pricing adjustments. 48. The Appellant stated that in Section 1. 2 of the Objection decision, the Respondent stated that it had reviewed the Appellant’s draft transfer pricing policy, and this was the basis of the transfer pricing adjustments made on the Appellant’s self-assessment returns.

49. The Appellant affirmed that at no point did the Respondent present the alleged draft transfer pricing policy and alleged new information to the Appellant. That this has hindered the Appellant’s ability to defend itself adequately as provided for under Article 47 of the Constitution which guarantees the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.

50. That furthermore, Section 6 of the Fair Administrative Actions Act, 2015 requires that persons be supplied by the administrative authority with information consisting of the reasons and relevant documents. That the Respondent failed to provide the Appellant with material relevant documents that it relied on when issuing the assessment. That particularly, the Respondent has not provided the purported draft transfer pricing documentation in its custody that is the supposed basis for the assessment issued to the Appellant.

51. The Appellant further affirmed that it has continuously acted and transacted in a manner as to adhere to the set transfer pricing regulations in its transactions with related parties and third parties thus the Respondent has erroneously made these adjustments.

52. The Appellant asserted that the Respondent has erroneously made transfer pricing adjustments without providing any proof or legal basis relied upon. That this has greatly hampered the Appellant’s right of response due to lack of evidence presented to it.

Whether the Respondent erred in law and fact by failing to consider all the documents provided by the Appellant and in so doing arrived at a position that is contrary to the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. 53. The Appellant argued that Kenya operates a self-assessment regime where taxpayers submit a self-assessment return in the prescribed form having assessed the tax payable in the relevant reporting period.

54. The Appellant reiterated that it has consistently paid its taxes and has never acted in any manner as to be assumed that it was profit shifting and thus the Respondent cannot be seen to advance such position in light of the controlled transactions.

55. That further, the Respondent’s transfer pricing adjustments are punitive and do not consider the material evidence provided by the Appellant in justification of its stand on the issues assessed. That Paragraph 1. 2 of the 2010 Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter referred to as 2010 TP Guidelines) provides, inter alia, that tax administrations should not automatically assume that associated enterprises have sought to manipulate their profits.

56. The Appellant referred to Paragraph 5. 2 of the 2010 TP Guidelines which provides as follows: -“The burden of proof should never be used by either tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing.”

57. The Appellant averred that the Respondent, in making unproven allegations against it, has acted contrary to the requirements of the OECD Guidelines which are part of Kenya’s jurisprudence as determined by Visram J in Income Tax Appeal 753 of 2003 where he held: -“I have no doubt in my mind that the OECD principles on income and on capital and the relevant guidelines such as "Transfer Pricing" principles, the CUP method adopted for calculations of what ought to be the income, the Cost Plus Return method as well as Resale Minus Method adopted for looking into compliance with arm's length principles are not just there for relaxed reading. These have been evolved in other jurisdictions after considerable debates and taking into account appropriate factors to arrive at results that are equitable to all parties.”

58. The Appellant argued that the Respondent has simply disregarded information shared and, in any event, has not requested the Appellant for any further documentation to assert otherwise, therefore, the Appellant puts the Respondent to strict proof thereof.

59. That additionally, it is now trite law that the Respondent must inform the Appellant of any documents it requires to reach a reasonable conclusion, and the Respondent cannot be seen to be incessant that the documents submitted for review were insufficient when it did not make any particular request.

60. The Appellant reiterated that having made the clarifications above, the Respondent’s assessment is flawed and should be vacated without considering more.

Whether the Respondent erred in law and fact by misunderstanding the Appellant’s nature of business and therefore failed to recognize that the Appellant was compensated for the provision of management services to its related entities in accordance with the arm’s length principle. 61. The Appellant stated that the Respondent demanded additional tax of Kshs. 598,065,772. 00 on the erroneous basis that the Appellant provides corporate and management services to affiliates within the Eastern Cluster, that is OLA Energy Uganda Limited (OEUL), OLA Energy Ethiopia Limited (OEEL), OLA Energy Sudan Limited (OESL), OLA Energy Djibouti Limited (OEDL), Arabia Oil and Gas Pipeline company SAE Egypt, Shell Eritrea Assab Storage and Africa Oil Supply Limited (AOSL) on behalf of Africana Corporate Services SARL (ACS) and OLA Holdings Limited (OHL). Additionally, that the Appellant’s employees were designated as Coordinators of the Eastern Cluster and the Appellant was not compensated for the services rendered thus:i.That the Appellant has designated employees that offered the services to the affiliates and as such the whole of their costs should be recharged; andii.That the services offered by the Appellant to the affiliates are low value-adding services since they are supportive in nature and that the company did not assume or control significant risk in the provision of the services. That in view of this a mark-up of 5% has been adopted as the arm’s length basis for remunerating the Appellant for provision of the above services.

62. The Appellant argued that the Respondent erroneously determined that it was not compensated for the provision of services to its related entities. Further, that the Respondent has erred in demanding that the entire amount of the employees’ salaries be brought to charge on the basis that the Appellant has designated employees that offer the services to affiliates.

63. It was the Appellant’s assertion that in the years 2011-2016, it provided these services to related entities in the Africa region through designated employees with specific roles. The Appellant clarified that the services in question were not provided exclusively to the related entities but were instead undertaken in addition to the employees’ responsibilities to the Appellant as demonstrated in the sample contract of the corporate employees providing services to the region, which the Appellant attached as evidence in the appeal.

64. That the costs incurred by the Appellant on the provision of services were charged to OSJLT, which thereafter consolidated and recharged the costs to the relevant related entities. Thus, that the Respondent erroneously adjusted the employment costs of various employees of the Appellant on the premise that they are providing services to related parties within the region.

65. The Appellant cited Paragraph 7. 23 of the 2010 TP Guidelines which provides as follows: -“while every attempt should be made to charge fairly for the service provided, any charging has to be supported by an identifiable and reasonably foreseeable benefit. Any indirect-charge method should be sensitive to the commercial features of the individual case (e.g., the allocation key makes sense under the circumstances); contain safeguards against manipulation and follow sound accounting principles and be capable of producing charges or allocations of costs that are commensurate with the actual or reasonably expected benefits to the recipient of the service.”

66. The Appellant affirmed that it invoiced the relevant costs incurred in providing the services to the related entities and was compensated for the services provided to related parties and a markup of 5% charged on the hardship allowance paid to the coordinators. The Appellant stated that it attached as evidence sample debit notes for the services and the proof of payment for services rendered to related parties.

67. The Appellant referred to Paragraph 7. 4 of the 2010 TP Guidelines cited below: -“intra-group service activities may vary considerably among MNE groups, as does the extent to which those activities provide a benefit, or expected benefit, to one or more group members. Each case is dependent upon its own facts and circumstances and the arrangements within the group.”

68. That it is on the above basis that the Appellant, based on value estimation, deemed it appropriate to use the relevant portion of the staff costs that related to the provision of management services as the base on which the 5% mark-up was applied. The Appellant reiterated that it attached as evidence sample debit notes that include the markup charged on the services to OJSLT. That the Appellant netted off the income recognized from provision of management services against the related party expenses relating to the receipt of management services.

Whether the Respondent erred in law and fact by failing to recognise that management services received from the Appellant's related parties were allowable for corporate income tax purposes because they provide economic and commercial value to the Appellant’s business within the Kenyan market. 69. The Appellant stated that the Respondent demanded tax of Kshs. 265,176,021 on the basis that the Appellant paid OHL and OLA Services JLT (OSJLT) for alleged services ranging from lube, information technology, human resources, aviation services, internal audit, planning and budgeting, accounting and finance, business review services, legal and regional support services among other things.

70. That the Respondent further averred that the Appellant did not demonstrate that the services were incurred wholly and exclusively in the production of income and as such the costs should be disallowed in accordance with Section 15(1) of the Income Tax Act, Chapter 470, Laws of Kenya (ITA).

71. The Appellant asserted that it received intragroup services performed at corporate level by OiLibya Services JLT and OiLibya Holdings Limited (formerly known as Libya Oil Holdings Ltd).

72. That according to Paragraph 7. 6 of the 2010 TP Guidelines cited below: -“Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position.”

73. The Appellant explained that for the period 2011 - 2016, it received the following services from Corporate: legal, finance, IT, planning, HR, lubes, internal audit, aviation and business review.

74. The Appellant affirmed that it invoiced the relevant costs incurred in providing the services to the related entities and was compensated for the services provided to related parties and a markup of 5% charged on the hardship allowance paid to the coordinators. In support of this, the Appellant referred to Paragraph 7. 4 of the 2010 TP Guidelines which provides: -“intra-group service activities may vary considerably among MNE groups, as does the extent to which those activities provide a benefit, or expected benefit, to one or more group members. Each case is dependent upon its own facts and circumstances and the arrangements within the group.”

75. The Appellant submitted that it is on the above basis that the Appellant based on value estimation, deemed it appropriate to use the relevant portion of the staff costs that related to the provision of management services as the base on which the 5% mark-up was applied. That the Appellant netted off the income recognized from provision of management services against the related party expenses relating to the receipt of management services.

Whether the Respondent erred in law and fact by failing to recognise that management services received from the Appellant's related parties were allowable for corporate income tax (CIT) purposes because they provide economic and commercial value to the Appellant’s business within the Kenyan market. 76. The Appellant referred to Paragraph 7. 6 of the 2010 TP Guidelines cited above.

77. That based on the services outlined above, the Appellant provided a benefits-test analysis in its Objection which the Respondent completely disregarded without providing adequate reason. The Appellant reproduced below, an overview of the key benefits received by it from the receipt of the services: -a.That the Appellant benefits from knowledge and skills of the fully integrated central team who provide services in relation to the specific operational needs of the local entity given the specific knowledge of the Group;b.That centralization facilitates exchanges between the central team and hence increased quality and efficiency while reducing costs;c.That centralization enables creation of synergies between departments therefore ensuring knowledge sharing and improved decision making;d.That centralization is critical in the identification and mitigation of risks across the group to minimise operational risks and ensure business continuity;e.That centralization ensures consistency in the group's workforce, ensuring standardisation of employee welfare and development programs, recruitment processes and performance management; andf.That centralization ensures business continuity through customer acquisition and relationship management and streamlined procedures.

78. The Appellant stated that it has attached the inspection reports and email correspondences illustrating the services provided by corporate to Kenya, and averred that it previously provided the reports and correspondence in its Objection, that, however, the Respondent has completely disregarded this information without providing any justification.

79. The Appellant further stated that it also attached the Service Level Agreement to evidence the various shared services provided to the group entities, including the Appellant.

80. That from the above, it is clear that the Appellant received management and support services and has produced evidence centred on the transaction hence discharging its burden of proof in line with the 2010 TP Guidelines, and the ITA. That additionally, these related party expenses incurred by the Appellant are allowable for Corporate income tax purposes under Section 15 of the Income Tax Act.

81. The Appellant argued that it is evident that the services provided by corporate offer economic and commercial value to the Appellant’s business within the Kenyan market and based on Paragraph 7. 6 of the 2010 TP Guidelines, an independent party would have been willing to pay for the services based on the actual benefits obtained as delineated above.

82. The Appellant referred to the case of Bulgaria vs X EOOD, May 2012, Supreme Administrative Court, Case No 8788 where the Court upheld the decision of the Administrative Court emphasizing that indeed the burden of proof lies with the taxpayer to demonstrate that they benefited from the rendered service.

83. That in the present circumstances, a direct link between the costs and the services provides proof of services rendition in line with established case law and the 2010 TP Guidelines.

Whether the Respondent erred in law and fact by disallowing costs incurred by the Appellant in the purchase of petroleum products from OESD through a central procurement arrangement conducted with its related parties. 84. The Appellant stated that the Respondent demanded for alleged Corporation tax of Kshs. 264,119,643 on the basis that the Appellant did not derive any benefit by procuring the products from OLA Energy Supply DMCC (OESD); that there was no evidence to prove that OESD had the financial capacity to purchase the products from third party suppliers and therefore the Respondent allowed the markup applied on the products purchased and the service fees or commissions charged by OESD as non-allowable expenses; and that the available information does not show the non-duplicative elements of the intragroup service and the benefits test aligned in Paragraph 7. 6 of the 2010 TP Guidelines.

85. The Appellant asserted that the procurement services provided by OESD are essential for cost efficiency, global uniformity of products and ensuring the Appellant is competitive in the market. That this is evidenced by the benefits obtained in form of economies of scale from group purchasing, lower costs from central coordination, and favourable credit terms.

86. The Appellant clarified that OESD acts as the central purchasing manager by buying raw materials and finished products at competitive terms on behalf of group entities, including the Appellant.

87. That some of the benefits derived from the central purchasing are provided below:a.Standardisation and maintaining of quality of products through robust quality assurance and control processes, including vetting and prequalification of suppliers;b.Economies of scale through group purchasing arising from volume discounts and assurance policies, therefore, providing cost savings to the individual business units across the group;c.Favourable credit terms – That the Appellant is provided a 60-day credit term without prepayments of financing costs.

88. The Appellant averred that it benefits from the experience and skill of OESD with regard to global contracting in respect of negotiation, contracting, shipping and incurrence of incidental costs:a.That centralised purchasing by the Appellant ensures supply chain risk management and minimisation of supply chain disruptions before they occur; andb.That centralised purchasing for global and/or pan African entities with multiple presence is a supply chain best practice.

89. The Appellant, in support of its case, cited Paragraph 7. 14 of the 2010 TP Guidelines which provides as follows: -“Other activities that may relate to the group as a whole are those centralised in the parent Company or a group service centre (such as a regional headquarters company) and made available to the group (or multiple members thereof). The activities that are centralised depend on the kind of business and on the organisational structure of the group, but in general they may include administrative services such as planning, coordination, budgetary control, financial advice, accounting, auditing, legal, factoring, computer services; financial services such as supervision of cash flows and solvency, capital increases, loan contracts, management of interest and exchange rate risks, and refinancing; assistance in the fields of production, buying, distribution and marketing: and services in staff matters such as recruitment and training. Group service centres also often carry out research and development or administer and protect intangible property for all or part of the MNE group. These types of activities ordinarily will be considered intra-group services because they are the type of activities that independent enterprises would have been willing to pay for or to perform for themselves.”

90. The Appellant affirmed that it benefited from the favourable terms from centralised purchase of products through OESD. That an independent third party would be willing to pay or perform the services for themselves, and as such, the commission paid to OESD is an allowable expense.

91. That the Respondent on the other hand has not provided its source of information or benchmarking results from which the 7% mark-up was adopted in the assessment letter. The Appellant contended that this is an unfair application of the law as the Appellant has not been presented with any factual basis to substantiate the alleged mark-up by the Respondent.

92. The Appellant asserted that OESD earned an average margin of 2. 8% for the sale of products to the Appellant for the period 2014-2016. That had the Appellant proceeded to procure the products independently, it would have had to pay the following extra charges as published in the Open Tender System (OTS) for importation of petroleum products in Kenya:a.Financing costs at 3% of the value of the shipmentb.Administration fees of 0. 5% of the CIF Valuec.Letter of Credit charges of 1. 2% of the Cost and Freight

93. The Appellant averred that the above costs of 4. 7% of the value of shipment are significantly higher compared to the margin earned by OESD. That consequently, the Appellant maintains that an independent third party would be willing to purchase the petroleum products through OESD given the cost savings arising therefrom.

94. The Appellant posited that the above clearly demonstrate the benefits derived from the purchase of products by the Appellant from OESD, and prayed that the Tribunal vacates the Respondent’s erroneous assessment in full.

Whether the Respondent erred in law and fact by failing to appreciate that the Appellant applied an arms-length mark-up on sales of petroleum products to its related party, OLA Aviation Fuel Supply DMCC (OAFS), in line with the full range of margins earned by the Appellant from sales to independent third-party customers. 95. The Appellant stated that the Respondent has alleged tax due of Kshs. 396,847,451. 00 on the basis of information availed by a third party indicating that the Appellant was earning a margin of Kshs. 0. 5 per litre on sales to OAFS as opposed to an alleged arm’s length margin of Kshs. 7. 5 per litre applied on aviation fuel sold to independently obtained international airline customers. That in view of this, the Respondent proceeded to make an adjustment to bring the sales price to an alleged arm’s length price.

96. The Appellant asserted that it mainly obtains petroleum products through the Open Tender System (OTS). That the aviation fuel contracts are negotiated by OAFS where the OAFS team is responsible for customer identification at group level, tendering and price negotiation, drafting and concluding contracts with the airlines, collecting amounts due from customers and paying the Appellant. That OAFS is involved in the supply of fuel to international airlines through its affiliate company, the Appellant.

97. That further, to secure supply contracts with international airlines, OAFS participates in competitive bids. That the bids require OAFS to offer volume discounts, which allows them to win the contracts but also results in higher sales volume at competitive margins for its affiliate companies including the Appellant which ultimately supply the fuel to the airlines. That additionally, OAFS bears the credit risk for the supply contracts with international airlines, while the Appellant bears the credit risk for the local supply contracts.

98. The Appellant referred to Paragraph 1. 6 of the 2010 TP Guidelines cited below in support of its case: -“Business strategies also could include market penetration schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. Furthermore, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs (e.g., due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market.”

99. The Appellant asserted that even though the local and international sale relate to the supply of aviation fuel, the following conditions should be applied in the pricing adjustment:a.That in 2016 OAFS was a newly incorporated entity within the group whose main objective was to obtain market share by centralizing global aviation contracts. That this business strategy allowed OAFS to capture a large market share mainly through volume discounts to large multinational clients;b.That it is worth noting that the international aviation customers acquired through OAFS, are a result of aggressive international competitive bidding among the big Oil Marketing Companies (OMCs), for global supply, not country by country. That as a result, the margins are lower compared to local standalone contracts:c.That the international contracts through OAFS are based on contractual volumes, which guarantees regular sales and supply, without inventory risk fluctuations; andd.That the Appellant bears the credit risk when dealing with the independent customers as opposed to the guaranteed payment when fuel is supplied to airlines sourced by OAFS. That it was the Appellant’s opinion that consideration of the reduced credit risk should be made when comparing the two prices.

100. The Appellant contended that the Respondent has arbitrarily and without any proof, adjusted for a volume of 56,692,493 litres as alleged sales made to OAFS. That in reality, the Appellant only made sales of 2,884,200 litres to OAFS in the year 2016. It was therefore the Appellant’s position that the unit margins assessed by the Respondent are erroneous.

101. That from the information adduced by the Appellant as evidence, the Appellant earned a margin of 2. 04 per litre from sale to OAFS which is within the full range of margins earned by the Appellant from sales to independent third-party clients. That additionally, the margins earned are in line with the global aviation margins which are based on the Platts pricing formula which is a global reference point for commodity prices.

102. That from the above, it is clear that the Respondent ignored information presented by the Appellant and common industry standards in alleging that the Appellant only earned a margin of Kshs. 0. 5 per litre and further imputing a fictitious arm’s length margin of Kshs. 7. 5 per litre.

103. The Appellant asserted that the Respondent’s arbitrary way of tax administration was frowned upon by the Mumbai Income Tax Appellate Tribunal in the case of Federal Mogul Anand Bearing India Ltd, (Case No. TS 580-1TAT-2020 (MUM-TP) where the Tribunal rejected the imputing of a higher operating profit for the company based on a comparable which the tax administration had identified but not supported.

104. The Appellant referred to the 2010 OECD TP Guidelines for the definition of the arm’s length principle and also cited Section 18(3) of the Income Tax Act.

Whether the Respondent erred in law and fact by demanding Corporation tax on interest from outstanding intragroup balances because the Appellant’s credit policy does not envisage charging interest on overdue accounts for both related parties and third parties. 105. The Appellant stated that the Respondent demanded Corporation tax based on an interest rate of 15. 5% computed on interest on income from outstanding intragroup balances from OEUL, OEEL, OESL and AOSL.

106. The Appellant asserted that it provides standard payment terms of 60 days to some customers as per the attached credit policy and does not charge interest for outstanding payments as doing so will jeopardise the business and affect its business continuity. That the credit policy does not envisage charging interest on overdue accounts for both related parties and third parties.

107. The Appellant stated that the aging analysis for the period 2011-2016 shows that similar credit terms were provided to both independent third parties and related entities and therefore an interest charge is unfounded and cannot be deemed by the Respondent.

108. The Appellant affirmed that the Respondent has not provided any basis or justification in applying the impugned interest rate of 15. 5% in its assessment.

109. That in the Appellant’s view, the Respondent cannot impute interest where none has been provided for in the Appellant’s Credit Policy. That any attempt by the Appellant to impose additional interest on invoices beyond 60 days would be illegal as it will constitute rewriting of the contract to create an obligation on either party where none had been previously agreed.

110. That the Respondent has therefore erroneously issued an assessment relating to invoices that are due past the 60 days policy of the Appellant. That further, the Respondent has failed to take into consideration the particular circumstances of the Appellant and the common industry practices of the oil sector it operates in.

111. The Appellant stated that with regard to oil sales, it is common business practice for vendors to receive payment after a long period of time which in some cases runs into several months. The Appellant averred that the Respondent has not applied the reasonableness test in issuing a demand for interest on invoices older than 60 days.

Appellant’s prayers 112. The Appellant prayed for the following:a.That the Appeal be allowed with costs to the Appellant.b.That the Objection decision of the Respondent dated 8th Sepetmber 2023 demanding payment of Kshs. 442,752,355. 00 be set aside in its entirety.c.Any orders that the Honourable Tribunal may deem fit.d.That the costs of the Appeal be in the cause.

Respondent’s Case 113. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated and filed on 21st November 2023; andb.The Respondent’s written submissions dated 27th June 2024 and filed on 28th June 2024.

114. The Respondent stated that it carried out investigations of the Appellant’s tax affairs.

115. That upon recommendations from the International Tax Office, the Respondent issued the Appellant with tax assessments on 13th June 2023 amounting to Kshs. 442,752,355. 00.

116. The Respondent further stated that the Appellant filed a notice of objection dated 12th July 2023 objecting to the assessments, and the Respondent issued an Objection decision dated 8th September 2023 confirming the assessments.

117. That aggrieved by the Respondent’s decision, the Appellant filed an Appeal to the Tribunal on 24th October 2023.

Whether the Respondent erred in issuing assessments in contravention of the five-year limitation of Section 31(4)(b) of the Tax Procedures Act, 2015 by issuing assessments for the years of income 2011, 2012, 2013, 2014, 2015 and 2016 beyond the five (5) year period prescribed in law. 118. The Respondent stated that Section 29(5) and (6) of the Tax Procedures Act allows the Respondent to analyze the business and accounts of a taxpayer past five years in case of gross or willful neglect, evasion or fraud.

119. The Respondent averred that investigations into the Appellant’s activities unveiled a tax evasion strategy, wherein the Appellant failed to disclose accurate income, warranting a review beyond the initial five-year period.

Whether the Respondent erred in demanding for documentation beyond the five-year period prescribed under Section 23 of the Tax Procedures Act. 120. The Respondent argued that the demand for documentation beyond the five-year period was justified.

121. The Respondent submitted that the above position has previously been appreciated and pronounced by the Tribunal in TAT Appeal No. 574 of 2020 - Mzuri Sweets Limited v Commissioner of Investigations and Enforcement at paragraph 104 of the Judgment dated 3rd December 2021 that: -“In the Tribunal's view, the five-year period of record-keeping as provided for by section 23 of the TPA applies at the time of commencement of the audit or investigation, which in this particular case of February, 2017, and not upon the issuance of assessment. As such the period covered 2013 - 2016 is well within the five years provision.”

Whether the Commissioner erred in contravening the provisions of Article 47 of the Constitution of Kenya, 2010 and the Fair Administrative Actions Act, 2015 by failing to provide the taxpayer with documents which they relied upon in arriving at the Transfer Pricing adjustments 122. The Respondent averred that at all times it was guided by the Constitution and the Fair Administrative Action Act in discharging its duty, and asserted that the Appellant’s claim lacks merit.

123. The Respondent stated that the letter of tax assessments issued to the Appellant clearly indicated the documentation relied upon by the Respondent in arriving at the transfer pricing adjustments.

124. The Respondent further stated that the documents used were those that could easily be retrieved by the Appellant and that the Appellant has also not demonstrated that it requested for documentation from the Respondent and which were not provided. 125. The Respondent submitted that the Appellant falls short of the requirements of the Access to Information Act, No. 31 of 2016 which provides for the manner in which a party can seek information held by a public institution such as the Authority, an avenue that was not explored by the Appellant.

Whether the Commissioner erred by failing to consider all the documents provided by the taxpayer and thus contravened the provisions of the OECD Transfer Pricing Guidelines. 126. The Respondent stated that the burden of proof is upon the Appellant to prove that the Respondent failed to consider all the documents provided by it and in so doing the Respondent arrived at a position contrary to OECD Transfer Pricing Guidelines.

127. The Respondent referred to Section 56 of the Tax Procedures Act which stipulates that the burden shall be on the taxpayer to prove that a tax decision is incorrect.

128. The Respondent stated that the Appellant has failed to demonstrate that the Respondent failed to consider its documentation prior to arriving at the tax assessed and therefore the Appellant’s contention lacks merit.

129. The Respondent further stated that it requested the Appellant to provide supporting documentation when the Appellant rejected the assessments. That the Respondent reviewed the documents provided and the evidence was deemed to be insufficient to make any changes.

Respondent’s prayers 130. The Respondent prayed that the Tribunal:a.Upholds the Respondent’s Objection decision dated 8th September 2023 amounting to Kshs. 442,752,355. 00. b.Dismisses the Appeal with costs to the Respondent.

Issues for Determination 131. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues falling for determination as follows:a.Whether the Respondent’s assessments were time-barred.b.Whether the Respondent was justified in issuing Corporation tax additional assessments for the years of income 2011 to 2016.

Analysis and Findings 132. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.a.Whether the Respondent’s assessments were time-barred.

133. The Respondent stated in its Statement of Facts that Section 29(5) and (6) of the Tax Procedures Act allows it to analyze the business and accounts of a taxpayer past five years in case of gross or wilful neglect, evasion or fraud.

134. The Respondent averred that investigations into the Appellant’s activities unveiled a tax evasion strategy, wherein the Appellant failed to disclose accurate income, warranting a review beyond the initial five-year period.

135. The Respondent in the Objection decision stated that it made a determination that some of the Appellant’s actions fall within the purview of the provisions of Section 97 of the Tax Procedures Act. That upon review of the documents supplied, the Respondent found that it was within the law to issue an assessment beyond the five year period provided under the law.

136. The Appellant asserted that the Respondent’s amended assessment issued through the letter dated 13th June 2023 was outside the timeline prescribed in law for issuance of an amended assessment. That pursuant to the provision of Section 31(4)(b)(i) of the TPA, the only circumstances under which the Respondent can raise amended assessments outside the prescribed five (5) year period, is where the Respondent has established gross or wilful neglect, evasion or fraud by or on behalf of the taxpayer.

137. The Appellant further asserted that in the assessment dated 13th June 2023, the Respondent did not raise the issue of fraud in relation to justifying the reason for assessing the Appellant beyond the five (5) year period prescribed in law.

138. The Appellant argued that the Respondent, both in the Objection decision and its Statement of Facts failed to justify its decision to assess the Appellant beyond the 5-year limitation period and to prove any allegations of fraud beyond reasonable doubt. That the Respondent merely alleged that its investigations uncovered a tax evasion strategy and failed to disclose nature of the evasion strategy established and the revenue stream impacted that would entitle it to issue an assessment beyond the five-year period.

139. The Tribunal notes that the Respondent’s reference to Section 29 of the Tax Procedures Act in its Statement of Facts with regard to the impugned assessments is an error as it contradicts the Respondent’s illustration of the assessment in the notice of assessment dated 13th June 2023 and Objection decision dated 8th Sepetmber 2023.

140. In the Respondent’s notice of assessment and Objection decision, the Respondent, in the ascertainment of the Corporation tax due, enumerated the Appellant’s declared income, implying that the additional assessments were issued under Section 31 of the Tax Procedures Act and not Section 29 of the Tax Procedures Act. Therefore, the Tribunal’s analysis of the issues for determination will be with reference to assessments made under Section 31 of the Tax Procedures Act.

141. Before delving into the merits of the Respondent’s assessments and the Appellant’s arguments against them, the Tribunal sought to establish whether the Respondent issued assessments within the time allowed under Section 31(4) of the Tax Procedures Act.

142. On 13th June 2023, the Respondent issued the Appellant with Corporation tax assessments for the years of income 2011 to 2016 in its notice of assessment.

143. Section 31 of the Tax Procedures Act provides as follows with regard to issuance of assessments by the Respondent: -“(4)The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)in any other case, within five years of—(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment.” Emphasis added

144. According to Section 31(4)(a) of the Tax Procedures Act, the Respondent may only issue an assessment beyond the five years where the Respondent can prove gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer. It is thus clear that an assessment issued under Section 31 of the Tax Procedures Act beyond the five-year limit is unlawful unless the Respondent can prove gross or wilful neglect, evasion, or fraud by or on behalf of a taxpayer.

145. The Tribunal notes that the Respondent averred the following:a.That some of the Appellant’s actions fall within the purview of the provisions of Section 97 of the Tax Procedures Act; andb.That the investigations into the Appellant’s activities unveiled a tax evasion strategy.

146. The Tribunal refers to Section 97 of the Tax Procedures Act which has the marginal note heading ‘Fraud in relation to taxation’ which provides as follows: -“Any person who, in relation to a tax period, knowingly—(a)omits from his or her return any amount which should have been included; or(b)claims any relief or refund to which he or she is not entitled; or(c)makes any incorrect statement which affects his or her liability to tax; or(d)prepares false books of account or other records relating to that other person or falsifies any such books of account or other records; or(e)deliberately defaults on any obligation imposed under a tax law, commits an offence.”

147. The Tribunal refers to Section 104 of the Tax Procedures Act with the marginal note ‘Sanctions for offences’ and specifically observes that the sanction for an offence under Section 97 of the Tax Procedures Act is as follows: -“(1)Subject to subsection (2) or (3), a person convicted of an offence under this Act shall be liable to a fine not exceeding one million shillings and to imprisonment for a term not exceeding three years, or to both.(2)A person convicted of an offence under sections 98(1) or 102(1) is liable to a fine not exceeding two million shillings or to imprisonment for a term not exceeding five years, or to both.(3)A person convicted of an offence under section 97 shall be liable to a fine not exceeding ten million shillings or double the tax evaded, whichever is higher or to imprisonment for a term not exceeding ten years, or to both.”

148. An allegation of fraud or evasion in tax matters places the burden of proof on the Respondent. The Respondent, who pleaded that the Appellant committed fraud and evasion, ought to have proven its case by presenting to the Tribunal substantial evidence that the Appellant intentionally engaged in evasion or the activities listed under Section 97 of the Tax Procedures Act.

149. The Tribunal has perused through the pleadings and evidence of the Respondent with regard to the allegation of fraud and evasion that the Respondent made against the Appellant and notes the following:a.The Respondent did not present any evidence showing that the Appellant has committed fraud in relation to tax;b.The Respondent did not present any evidence showing that the Appellant has committed evasion;c.The Respondent did not present any evidence showing that the Appellant has been charged with the commission of fraud;d.The Respondent did not present any evidence showing that the Appellant has been prosecuted for commission of fraud; ande.The Respondent did not present any evidence showing that the Appellant has been convicted for commission of fraud.

150. The Tribunal reiterates its holding in a similar matter TAT Appeal No. 411 of 2021, City Gas East Africa v Commissioner of Investigations and Enforcement where Tribunal held that the Respondent erred in assessing the Appellant for a period beyond five years when there was no evidence of wilful neglect or fraud.

151. The Respondent’s assessment was dated 13th June 2023, meaning that the earliest periods that it could assess additional Corporation tax, absent of substantial proof of fraud and evasion by the Appellant, were the years of income starting from the year 2017.

152. For the above-stated reasons, the Tribunal finds that the Respondent’s failure to furnish the Tribunal with evidence of the Appellant’s alleged fraud and evasion has rendered the Respondent’s Corporation tax assessment for the years 2011 to 2016 unlawful for contravening Section 31(4) of the Tax Procedures Act.

b. Whether the Respondent was justified in issuing Corporation tax additional assessments for the years of income 2011 to 2016. 153. Having determined that the Respondent failed to validly issue the additional assessments of Corporation tax, the Tribunal did not delve into the second issue for determination as it has been rendered moot.

Final Decision 154. The upshot of the above analysis is that the Tribunal finds that the Appeal is merited and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 8th September 2023 be and is hereby set aside.c.Each party to bear its own costs.

155. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER, 2024. ERIC NYONGESA WAFULA - CHAIRMANGLORIA A. OGAGA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - - MEMBER