[2024] KETAT 651 (KLR)

Pernod Ricard Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E012 of 2023) [2024] KETAT 651 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 651 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E012 of 2023

RM Mutuma, Chair, M Makau, EN Njeru, B Gitari & AM Diriye, Members

April 26, 2024

Between

Pernod Ricard Kenya Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Kenya under the Companies Act and its core business engagement is the distribution of premium wines and spirits.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority (the Authority) is an agency of the Government for the collection and receipt of all revenue. Further, under Section 5 (2) with respect to the performance of its function under subsection (1), the Authority is mandated with the responsibility for the administration and enforcement of the various statutes set out in Parts 1 & 2 of the First Schedule to the said Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The dispute giving rise to the Appeal herein arose out of the Appellant’s refund application to the Respondent relating to Value Added Tax lodged on 19th January 2021 in the sum of Kshs. 4,639,307. 00, upon an audit exercise, the Respondent allowed the VAT refund claim, however, it further issued a demand for Corporation income tax in the sum of Kshs. 34,140,480. 00, vide the assessment dated 15th September 2022.

4. The Appellant being dissatisfied objected to the assessment vide the notice of objection dated 12th October 2022 and received by the Respondent on 14th October 2022.

5. The Respondent issued its Objection decision on 13th December 2022 and confirmed its assessment on Corporation tax in the sum of Kshs. 34,140,480. 00.

6. Dissatisfied with the Respondent’s Objection decision, the Appellant lodged its Notice of Appeal on 12th January 2023.

The Appeal 7. The Appellant in its Memorandum of Appeal dated 25th January 2023 and filed on 26th January 2023 set out the following grounds of appeal, that;i.The Respondent erred in law and fact by failing to state the deficiency in the explanations offered by the Appellant, whilst purporting in its Objection that it was not persuaded to agree with the Appellant’s tax computation; andii.The Respondent erred in law and fact in adjusting the Appellant’s Corporate income tax computations by disallowing the foreign exchange gains/losses contrary to the provisions of Section 4 A of the Income Tax Act;

The Appellant’s Case 8. The Appellant has set out its case on its;i.Statement of Facts dated 25th January 2023 and filed on 26th January 2023, together with the documents annexed thereto;ii.Witness Statement of Andrew Kiptoo dated and filed on 7th August 2023 and admitted on oath as the evidence in chief on the 21st November 2023; andiii.Written submissions dated 6th December 2023 and filed on 7th December 2023.

9. The Appellant averred that it supplied goods to Nakumatt Holdings Ltd ("Nakumatt") in the year 2017. That the attempts to recover the debts from Nakumatt turned out unsuccessful as it had been declared insolvent. In the circumstances, the Appellant was forced to declare the debts owed to it by Nakumatt as bad debts in its books of accounting as the recovery of the debts turned out to be impossible.

10. By a letter dated and lodged on 19th January 2021, the Appellant made an application for the refund of taxes in the sum of Kshs. 4,639,307. 00, being the VAT paid in connection with bad debts as envisaged under Section 31 of the Value Added Tax Act.

11. The Appellant stated that the Respondent proceeded to conduct a desk audit review of the Appellant's VAT returns pursuant to the provisions of Section 31 of the VAT Act. Subsequently, upon conclusion of the audit exercise, the Respondent allowed the VAT refund claim in the sum of Kshs. 4,639,307. 00 vide the letter dated 15th September 2022, however, the Respondent concurrently proceeded to issue an assessment for Corporate income tax ("CIT") in the sum of Kshs. 34,140,480. 00. PARAGRAPH 12. The Appellant asserted that the said assessment was predicated on the erroneous finding by the Respondent that the Appellant was thinly capitalized. That the Respondent, in the aforesaid assessment also provided a breakdown and computation justifying its adjustment of the Appellant's CIT returns and the subsequent demand of the CIT in the sum of Kshs. 34,140,480. 00.

13. The Appellant avowed that being dissatisfied with the assessment, it lodged its notice of objection dated 12th October 2022, which was received by the Respondent on 14th October 2022.

14. The Appellant contended that the Respondent, whilst reviewing the Appellant's notice of objection, sent by way of an email dated 21st October 2022, the Respondent advised thus:“...Note that your application will not be considered valid until all the requirements above are met.Kindly share the tax computation demonstrating the add-back and match the same to the declared returns on i-tax for each period under review.Kindly submit all the relevant documents to support your objection by close of business, 27th October 2022 or earlier via email or drop them at Upperhill, Ushuru Pension Towers (next to Radisson Blu), Block B at 2nd Floor."

15. The Appellant further stated that in a further email dated 5th December 2022, the Respondent sought the following information from the Appellant advising as follows:“You have failed to provide important documents to support your objection. Kindly share the tax computation demonstrating the add-back and match the same to the declared returns on i-tax for each period under review.

Supporting documents to show that in the year 2020, the company was not thinly capitalized."

Please note that if you don't provide the documents by close of business Tuesday the 6th of December 2022, the same will be rejected."

16. The Appellant averred that it responded to all the issues raised by the Respondent in its emails set out above annexing thereto all the information sought by the Respondent vide a letter dated 6th December 2022.

17. The Appellant stated that the Respondent issued its objection decision dated 13th December 2022, whilst allowing the refund claim for the sum of Kshs. 4,639,307. 00, the Respondent also confirmed its assessment for taxes in the sum of Kshs. 34,140,480. 00 relating to CIT. That the Appellant lodged its Notice of Appeal on 12th January 2023.

18. The Appellant stated that the Respondent in its objection decision, made its findings in the following terms:“a)Whereas you provided the requested documents on 6th December 2022, the Commissioner has not been persuaded to agree with your tax computation demonstrating the add back and matching the same to the declared returns on iTax for each period under review.b)The Commissioner was not convinced with the supporting documents adduced to show that in the year 2020, you were not thinly capitalized.”

19. It was the Appellant's position that the Respondent ought to have given substantive reasons. It was therefore irregular for the Respondent to merely claim that it was not persuaded or convinced by the explanations given by the Appellant without stating with precision the inadequacy in the Appellant's explanations.

20. The Appellant stated that the Respondent’s statement in the Objection decision, that it was simply not persuaded or convinced by the Appellant’s tax computation and supporting documentation, does not meet the threshold expressly laid out in the TPA as to what a valid Objection decision ought to contain. The Respondent neither addressed material facts in the tax computation nor gave reasons as to why they felt it was not adequate support to the Appellant’s claim that it was not thinly capitalised. The Objection Decision cannot, therefore, meet the threshold under Section 51 (10) of the TPA.

21. The Appellant while relying on Article 47 of the Constitution of Kenya and Section 4 of the Fair Administrative Action Act, 2015 ("FAAA"), stated that the reasons given by the Respondent (or lack thereof) cannot be said to be sufficient reasons. Further, the Respondent had not provided the information, basis, material and evidence that informed its objection decision. The Objection decision cannot, therefore, meet the Constitutional threshold under Article 47 of the Constitution of Kenya 2010.

22. The Appellant maintained that the right to a fair hearing under Article 50 as well as the right to Fair Administrative Action under Article 47 of the Constitution not only envisages reasons being given but expects that the reasons given are substantive and adequate.

23. The Appellant prayed that the Objection decision be set aside for want of adequate and substantive reasons to support the decision as envisaged under Section 51 (10) of the TPA, Article 47 of the Constitution and Section 4 (3) of the FAAA.

24. The Appellant contended that, in addition thereto, and in any event, it is clear that by a letter dated 21st January 2021, the Appellant applied for a refund in relation to its bad debts as provided for under Section 31 (1) of the VAT Act. Instead of issuing a refund decision, in its assessment, the Respondent conflated its decision by allowing the refund claim application while also issuing a tax assessment in connection thereto.

25. The Appellant avowed that, whereas the powers of the Commissioner to issue an assessment are not in doubt, it was the Appellant’s view that in the circumstances herein, the issuance of the assessment was merely a disguise to disenfranchise the Appellant from benefiting from the allowed refund claim application in the sum of Kshs. 4,639,307. 00. The Appellant therefore reads bad faith in the Respondent’s conduct of issuing an assessment in response to a refund claim.

26. Further, the Appellant stated that the powers of the Respondent to amend an assessment are provided for under Section 31 (1) of the TPA, in the circumstances herein, the assessment was not predicated on the tax payable in respect of an original assessment as provided for under Section 31 (1) (c) of the TPA but rather on a refund claim application under Section 31 (1) of the VAT Act. Accordingly, the proposed adjustment to the CIT returns and the attendant assessment was clearly meant to disenfranchise the Appellant of its tax refund.

27. The Appellant stated that it prayed that this Tribunal be pleased to vacate the entire assessment for the sum of Kshs. 34,140,480. 00, for want of sufficient and adequate reasons as discussed above and for having been issued maliciously and in bad faith merely to disenfranchise the Appellant of its tax refund.

28. The Appellant contended that Section 4 (A) of the ITA regulates foreign exchange loss and the circumstances under which the same can be deferred (disallowed as an expense in tax computations).

29. The Appellant maintained, from these provisions, that it was apparent that where a company had incurred a foreign exchange loss/gain, it may opt to treat this foreign exchange loss as a deductible expense in computing the gains and of profits of its business, what is termed as a trading expense.

30. The Appellant stated that, in circumstances where the foreign exchange loss is not deducted as an expense in the tax computation for the year of income, the same is termed as having been deferred/disallowed. However, for the foreign exchange loss to be treated as an expense, certain conditions must be met as provided for under Section 4 A of the ITA. Notably, the foreign exchange loss shall be deferred (not be taken into account (deducted as an expense)) where the ratio of the debt and equity exceeds 3:1 ratio.

31. The Appellant having provided an overview, proceeded to deal with each of these reconciliation and adjustments as purported by the Respondent as herein:-i.Foreign exchange loss already disallowed in the CIT computations

32. The Appellant stated that in the years of incomes 2017, 2018 and 2019, the Appellant in its tax computations disallowed the respective unrealised foreign exchange losses.

2017 33. The Appellant contended that for the year 2017, the assessment disallowed an amount of Kshs. 54,902,958. 00. A crucial consideration of the Appellant’s tax computation revealed that the sum was made up of unrealised exchange gain of Kshs. 34,580,921. 00 and unrealised exchange loss of Kshs. 20,322,037. 00. The Appellant noted that the Kshs. 20,322,037. 00 relates to unrealised trade losses from prior year (2016) and thus this sum ought not to have been deferred since Section 4 A permits only deferral of foreign exchange losses arising from loans and not foreign exchange losses arising from trade.

34. The Appellant stated that the sum of Kshs. 34,580,921. 00 relates to unrealised exchange gain in the year 2017 and not a loss. As such, it was erroneous for the Respondent to defer (disallow) the same under the auspices of Section 4 A of the ITA which is primarily concerned with deferral of foreign exchange losses and not gains thereof.

2018 35. The Appellant avowed that, in the assessment, the Respondent purported to disallow the unrealised exchange losses in the sum of Kshs. 72,516,715. 00. A crucial analysis of this sum revealed that this sum was made up of unrealised foreign exchange loss for prior year 2017 in the sum of Kshs. 47,473,473. 00 relating to trading which relates to trade and an unrealised foreign exchange losses for prior year 2017 on loans of Kshs. 25,043,242. 00.

36. The Appellant asserted that in its tax return filed for the year 2018 it deferred the unrealized losses arising out of loans for the prior year 2017 in Kshs. 25,043,242. 00 by first, adding back the same and deducting the said sum in the tax computation. Thereby giving a zero-net effect on the tax computation. Accordingly, it was evident that the sum of Kshs. 25,043,242. 00 being a foreign exchange loss out of loans was indeed deferred as provided for under Section 4 A of the ITA. The Respondent is therefore misguided in law by disallowing the sum of Kshs. 25,043,242. 00.

37. In relation to the sum of Kshs. 47,473,473. 00, the Appellant clarified that the loss for prior year 2017 related to trade and that the same is not a foreign exchange loss arising out of loans and thus, the same is deductible under Section 4 A of the ITA. In the circumstances, the Respondent erred in disallowing the said sum.

2019 38. The Appellant averred that the Respondent in its assessment purported to adjust the Appellant’s returns for the year 2019 by adding back unrealised losses of Kshs. 76,120,539. 00.

39. The Appellant stated that, having keenly considered the tax returns and computation to decipher the basis of the said sum of Kshs. 76,120,539. 00, the Appellant submitted that the same relates to Kshs. 51,077,297. 00 being an unrealised exchange loss from prior year 2018 which related to trading and the sum of Kshs. 25,043,242. 00 which was unrealised foreign exchange loss for the year 2017. The company having been thinly capitalised in 2017 and 2018, the loss in the sum of Kshs. 25,043,242. 00 as deferred in consecutive years including the year 2019.

40. In relation to the sum of Kshs. 51,077,297. 00, the Appellant took issue with the fact that the Respondent in its assessment purported to disallow this foreign exchange loss, when the same is related to trading loss and not a foreign exchange loss arising from loans. Accordingly, it was not open in law for the Respondent to disallow this amount as the same is not provided for under Section 4 A of the ITA.

41. The Appellant contended that it was opposed to the adjustments by the Respondent's CIT tax adjustments for the years 2017, 2018 & 2019 as the foreign exchange losses in relation to the said periods having been deferred in the respective CIT computations, it was not proper for the Respondent to adjust the Appellant’s CIT returns and computations and to demand taxes thereon contrary to the dictates of Section 4 A of the ITA.

42. The Appellant sought that this Tribunal do set aside the tax demand and the Objection decision issued in connection hereto.ii.Unrealised forex loss of Kshs. 55,027,596. 00 in 2020

43. The Appellant stated that the Respondent erred in adjusting the Appellant’s CIT computation disallowing the unrealised forex losses to the tune of Kshs. 55,027,596. 00 for the year 2020, purportedly on the basis that the Appellant was thinly capitalised.

44. The Appellant avowed that in the year 2020, its foreign exchange loss was not for the sum of Kshs. 55,027,596. 00 as purported in the assessment but rather Kshs. 32,634,242. 00. As such, the Appellant was not able to decipher the basis upon which the Respondent arrived at the sum of Kshs. 55,027,596. 00.

45. The Appellant averred that in the year 2020, it was thinly capitalised and that it proceeded to defer the foreign exchange losses of Kshs. 32,634,242. 00 for that year of income. This sum of Kshs. 32,634,242. 00 was a summation of the foreign exchange loss on loans for the year 2017 of Kshs. 25,043,242. 00 which had been deferred in successive years including the year of income 2020 together with the foreign exchange loss on loans for the year 2019 of Kshs. 7,591,000. 00.

46. The Appellant reiterated that the sum of Kshs. 32,634,242. 00 was fully accounted for and deferred in the year of income 2020 as required by law under Section 4 A of the ITA.

47. It is for these reasons that the Appellant prayed that the Tribunal be pleased to set aside the assessment on foreign exchange loss as the same was predicated on fundamental misunderstanding of the applicable law.

48. The Appellant in its submissions, identified three issues for determination, namely;i.Whether the Respondent erred by failing to pay a Vat refund claim it had approved;ii.Whether the forex exchange losses that arose from loans incurred by the Appellant received the correct tax treatment in accordance with Section 4 A of the Income Tax Act; andiii.Whether the Respondent erred in law and in fact by failing to give sufficient reasons and failing to state the deficiency in the explanations and the evidence tabled by the Appellant.

49. The Appellant proceeded to analyze its issues as herein under;i.Whether the Respondent erred by failing to pay a VAT refund claim it had approved;

50. The Appellant submitted that despite the confirmation by the Respondent, these amounts allowed were never refunded to the Appellant, prompting the Appellant to raise this concern in its notice of objection.

51. The Appellant submitted that the refund claim relating to the year of income 2017, a period of over 5 years, which was in fact approved by the Respondent in its tax decision dated 15th September 2022 (over 1 year and 2 months ago) and confirmed in the Objection decision dated 13th December 2023, (over 11 months ago), yet till to date the Respondent has failed to make out payments to the Appellant. The delay is unreasonable and unjustifiable.

52. The Appellant further submitted that as a taxpayer, it was entitled to the use and enjoyment of its property, in this case, its money and therefore, the withholding of the VAT refunds due for over 14 months amounts to an infringement of its Constitutional right to property and such action has the effect of conferring an undue benefit upon the Respondent, to the detriment of the Appellant, and amounts to unjust enrichment.

53. The Appellant submitted that Section 47 (5) of the Tax Procedures Act grants the Respondent powers to either apply the tax refunds in offsetting current tax liabilities, if any, or to refund the same to a taxpayer. Regrettably, the Respondent has not acted in accordance thereof.

54. In the circumstances, the Appellant submitted that the default on the part of the Respondent to make out refunds, attracts a monthly interest of 1% per annum in accordance with the provisions of Section 47 (7) of the TPA.

55. The Appellant submitted it is properly guided, and rightly so, in seeking an express order from this Tribunal directing the Respondent to refund it the sum of Kshs. 4,639,307. 00, within 30 days or such timelines as shall be specified by this Tribunal in its judgement.ii.Whether the forex exchange losses that arose from loans incurred by the Appellant received the correct tax treatment in accordance with Section 4A of the Income Tax Act

56. The Appellant submitted that the Respondent in its Objection decision and Statement of Facts stated that the Appellant had wrongly expensed the foreign exchange losses. The Respondent therefore proceeded to issue an additional assessment on the tax period 2017 to 2020 of Kshs. 34,140,480. 00, ostensibly whilst relying on the provisions of Section 4 A of the ITA.

57. The Appellant submitted that during the hearing of this matter, the Respondent's Counsel overly cross-examined the Appellant's Witness Mr. Kiptoo on whether the Appellant was thinly capitalised, when in fact this was not an issue in dispute.

58. The Appellant submitted that the issues in dispute before this Tribunal as submitted by the Appellant, however, is on the following: -Double Deferral of foreign exchange losses:i.That where the Appellant realised a foreign exchange loss arising out of loans, in certain years, such as 2017, the Appellant in its tax computations already deferred these losses. However, the Respondent proceeded to defer the same amount of foreign tax losses twice, when in fact the same had already been deferred. Contrary to Section 4 A which does not envision a double deferral of foreign exchange losses.Deferral of forex loss arising out of trading receipt:ii.That where the Appellant realised a foreign exchange loss arising out of trading (trading receipt being the ordinary purchases and sale of the Appellant's goods), the same was treated as a deduction, rightly so, noting that this loss arose out of a trading receipt thus deductible as an expense. Since this was not a foreign exchange loss arising out of loan, the same ought not to have been deferred by the Respondent as seen in the Assessment.Deferral of foreign exchange "gain" as opposed to a "loss";ii.That even where the Appellant had realised foreign exchange gain, the Respondent attempted to defer the same, yet it was not available for deferral as this is a gain rather than a loss.

59. The Appellant submitted, a fact that was attested to by Mr. Kiptoo in his testimony before the Tribunal, that the Kshs. 20,322,037. 00 related to unrealised trade losses from a prior year and thus these should not be deferred as per Section 4 A of the Income Tax Act as the same was not a loss arising out of loans.

60. Further, the Appellant submitted that the fact was demonstrated by Mr. Kiptoo in his testimony whilst referring to the tax computations at page 59 of the Appellant's SOF, and to the returns at pages 70 of the SOF where it was demonstrated that the sum of Kshs. 20,322,037 had been rightly booked as trade loss.

61. The Appellant asserted that the outstanding balance of Kshs. 34,580,921. 00, was made up of unrealised exchange gain and being a gain and in fact, was not open for deferral as proposed by the Respondent.

2018 62. The Appellant submitted that its tax return filed, did defer the unrealised losses from the prior year relating to loans of Kshs. 25,043,242. 00 as required under Section 4 A of the ITA. That the sum of Kshs. 25,043,242. 00 is first added back and subsequently deducted thereby giving it a net zero-effect, meaning that this amount is deferred i.e. not taken in account in arriving at the taxable income under Section 4 A of the Income Tax. This is the very succinct explanation that was proffered by Mr. Kiptoo (Appellant's Witness) in his testimony before this Tribunal.

63. The Appellant submitted, in relation to the loss arising out of trading in the sum of Kshs. 47,473,473. 00, which is both rightly captured under the tax returns, the same was not open in law to be deferred under Section 4 A of the ITA thus was not deferred by the Appellant. The Respondent’s adjustments in this respect thus have no basis in law.

64. The Appellant submitted that there was therefore little doubt that based on the foregoing, that the Appellant correctly treated the foreign exchange loss arising from loan as well as loss arising out of trading. The Respondent therefore erred in making findings, as it did, to the contrary.

65. The Appellant submitted that in its assessment the Respondent purported to adjust the Appellant’s returns for the year 2019 by adding back unrealised losses of Kshs. 76,120,539. 00. Having keenly considered the tax returns and computation to decipher the basis of the said sum of Kshs. 76,120,539. 00, the Appellant submitted that the same relates to Kshs. 51,077,297. 00 being an unrealised exchange loss from prior year (2018) which related to trading and the sum of Kshs. 25,043,242. 00 which was unrealised foreign exchange loss for the year 2017. The Appellant having been thinly capitalised in 2017 and 2018, the loss in the sum of Kshs. 25,043,242. 00 was deferred in consecutive years including the year 2019 as demonstrated in the tax computations and returns.

66. In relation to the sum of Kshs. 51,077,297. 00, the Appellant submitted that whereas the Respondent in its assessment purported to disallow this foreign exchange loss, the same was related to trading loss and not a foreign exchange loss arising from loans. Accordingly, it was not open in law for the Respondent to disallow this amount as the same is not provided for under Section 4 A of the ITA.

67. From the above, it was the Appellant’s most humble submission that the adjustments to the Respondent's CIT tax adjustments for the years 2017, 2018 & 2019 as the foreign exchange losses in relation to the said periods having been deferred in the respective CIT computations, it was not proper for the Respondent to adjust the Appellant's CIT returns and computations and to demand taxes thereon contrary to the dictates of Section 4 A of the ITA.

2020 68. The Appellant submitted that the Respondent erred in adjusting the Appellant's CIT computation disallowing the unrealised forex losses to the tune of Kshs. 55,027,596. 00 for the year 2020, purportedly on the basis that the Appellant was thinly capitalised.

69. The Appellant submitted that the lack of clarity on what the sum of Kshs. 55,027,596. 00 less Kshs. 32,634,242. 00 (which has been explained herein). In the Notice of Objection, the Appellant had sought for this clarification from the Respondent. Regrettably, the Respondent did not care to proffer this clarification in its objection decision.

70. The Appellant reiterated that this sum of Kshs. 32,634,242. 00 was fully accounted for and deferred in the year of income 2020 as required by law under Section 4 A of the ITA. Further thereto, the Appellant has demonstrated that indeed it incurred foreign losses/gains as the case may be.

71. The Appellant stated that it had accorded the foreign exchange losses arising from loans the correct tax treatment and further, that the Respondent had grossly erred in its interpretation of Section 4 A of the ITA by disallowing foreign exchange gains or in certain instances, foreign exchange losses that arose from trade as opposed to those arising from loans.iii.Whether the Respondent erred in law and in fact by failing to state the reasons for its decision or else expressly stating the deficiency in the explanations offered by the Appellant if any

72. The Appellant humbly submitted that on 5th December 2022, the Respondent requested via email the tax computations demonstrating the add-back and match the same to the declared returns on iTax for each period under review i.e., 2017 to 2020.

73. The Appellant submitted that it demonstrated extensively in the tax computation annexed as Appendix 9, 10, 11 and 12 in its Statement of Facts. There is therefore little doubt that contrary to the Respondent’s assertions, the Appellant provided all the requisite documentations as and when requested by the Respondent, the last piece of information being supplied to the Respondent on 6th December 2022 which was in response to a request of 5th December 2022.

74. The Appellant submitted that, in re-examination Mr. Kiptoo, the Appellant’s witness reiterated not once but thrice that they provided all the information that was requested by the Respondent in the email and letter dated 6th December 2022.

75. The Appellant submitted that in response to the Respondent’s Counsel’s question as to whether its financial statements and trial balance were availed to the Respondent to ascertain whether or not the Appellant was thinly capitalised, Mr. Kiptoo (the Appellant's Witness) clarified that the Respondent had not requested for this information from the Appellant and that all information sought was provided.

76. It was also the Appellant’s Witness testimony that in any event, the issue of whether or not the company was thinly capitalized was a non-issue as the same was not disputed and as such, the documents referred to by the Respondent’s Counsel had no probative value in connection thereto.

77. The Appellant submitted that through the documents and explanations provided in the Appellant’s Statement of Facts as detailed in ground (b) above, the Respondent had adequate and sufficient documentation support to satisfy itself of the fact the foreign exchange losses arising from loans had received the correct tax treatment by being deferred in the tax periods in question.

78. The Appellant therefore averred that its burden of proof was to prove its case to a prima facie level has been duly discharged as detailed in Ground (b) above. In this regard, the Appellant wishes to rely on the case of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR.

79. It was the Appellant's position that it had indeed proved its case through the addbacks and the tax computation that it accorded the foreign exchange losses and gains the right tax treatment as explained in detail underground (b) above and that it adduced documentations in support thereof.

80. The Appellant submitted that on its part, the Respondent has to date failed to challenge or discredit the same save for claiming that it is not persuaded. There was no explanation as to why the Respondent was not persuaded.

81. The Appellant, in fortifying its case, relied on the following authorities;i.Application 9 of 2020 Kioo Ltd vs. Attorney General of Kenya.ii.Tata Chemicals Magadi Limited vs. The Commissioner of Domestic Taxes (Large Taxpayers) [2014] eKLR.iii.Republic vs. Kenya Revenue Authority Ex-parte L.A.B International Kenya Limited.iv.Tax Appeal No. 81 of 2022 Izwe Loans Kenya Limited vs. Commissioner Dometic Taxes.v.Gideon Omare vs. Machakos University [2020] eKLR.vi.Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR.vii.Hickman Motors Ltd vs. Minister of National Revenue (1997), 213 N.R 81 (SCC).

Appellant’s Prayers 82. By reason of the foregoing submissions, the Appellant prayed to the Tribunal, that;i.The Appeal be allowed.ii.The Honourable Tribunal be pleased to declare that the Respondent’s Objection decision dated 13th December 2022 as having breached Section 51 (10) of the Tax Procedures Act and Article 47 of the Constitution for want of adequate and substantive reasons.iii.The Honourable Tribunal be pleased to Order the Respondent to refund the sum of Kshs. 4,639,307. 00, being a refundable sum already admitted by the Respondent as due, within 30 days from the date of this Order or such other period of time as deemed appropriate by this Tribunal.iv.The Honourable Tribunal be pleased to set aside the Respondent’s Objection decision dated 13th December 2022, assessing the Appellant for the sum of Kshs. 34,140,480. 00. v.Any other orders that the Tax Appeals Tribunal may deem fit.

The Respondent’s Case 83. The Respondent has set out its case on its;i.Statement of Facts dated and filed on 22nd February 2023, together with documents annexed thereto; andii.Written Submissions dated 4th December 2023 and filed on 5th December 2023;

84. The Respondent stated that on 15th September 2022, the Appellant was issued with additional assessments for Corporate tax for the period of 2017 to 2020 for Kshs. 34,140,480. 00, which assessment was premised on audit findings which revealed that the Appellant had been thinly capitalized.

85. The Respondent stated that on 14th October 2022, the Appellant lodged notices of objection to the above assessment in their entirety. Consequently, the Respondent proceeded to render an Objection decision on 13th December 2022.

86. The Respondent stated in its Objection decision, that primarily, the VAT refund claim on bad debts was allowed in terms of Kshs. 4,639,307. 00 whereas the Corporate income tax assessment for Kshs. 34,140,480. 00 was upheld.

87. The Respondent stated that upon receipt of the Appellant’s notice of objection dated 14th October 2022, it wrote to the Appellant vide its email dated 21st October 2022 directing it to ensure that its Objection complied with the provisions of Section 51 (3) of the Tax Procedures Act. That particularly, the Respondent requested the Appellant to provide it with a tax computation demonstrating the add back and match the same to the declared returns on iTax for each period under review.

88. The Respondent further averred that the Appellant was directed to provide the said documents via email or as hard copies by 27th October 2022 to grant the Respondent ample time to examine them before rendering an objection decision.

89. The Respondent stated that its Objection decision satisfies the criteria stipulated under Section 51 (10) of the Tax Procedures Act. That a cursory perusal of the Objection decision dated 13th December 2022 conspicuously captures the statement of findings on the material facts together with the reasons for the decision as required by law.

VAT Refund Claim 90. The Respondent averred that it established that the refund claim had been allowed in its entirety. This is on the grounds that the Appellant demonstrated to the Respondent that it had supplied goods to Nakumatt Holdings Limited which had during the pendency of payment had been declared insolvent compelling the Appellant to render those debts as bad debts. PARAGRAPH 91. The Respondent contended that the above series of circumstances squarely satisfied Section 31 (1) of the VAT Act 2013 wherefore the Commissioner allowed the refund in its entirety of Kshs. 4,639,307. 00.

Statutory time barred assessment 92. The Respondent asserted that contrary to the Appellant’s assertion, in its Objection Decision, outlined succinctly their findings with respect to this ground of Objection.

93. That the Appellant contended that the Respondent had acted contra-statute by issuing the amended assessment beyond the five (5) years stipulated under Section 31 (4) of the Tax Procedures Act, 2015. however, the Appellant had filed its financial within time.

Disallowed Foreign Gains/Losses 94. The Respondent stated that nothing limits it from issuing additional assessments save for the five-year limitation placed by statute. That therefore, the issuance of an assessment in the Objection decision dated 15th September 2022 does not in any way invalidate the objection decision.

95. That further to the foregoing, the Respondent averred that the Appellant was still given ample opportunity to challenge the assessment wherein it filed a notice of objection dated 14th October 2022. That in the circumstances, the assessment cannot be said to be infringing on the rights of the Appellant to be heard.

96. The Respondent avowed that it reviewed the evidence and documents adduced by the Appellant to disprove the Respondent on this ground in line with Section 4 A of the Income Tax Act, Cap 470 of the laws of Kenya.

97. The Respondent averred that the documents produced by the Appellant were inconsequential since they did not appropriately demonstrate the add back, whilst matching the same to the declared returns on iTax for each period of review as earlier requested by the Respondent.

98. The Respondent stated that the supporting documents produced by the Appellant for the year 2020 were not persuasive to warrant the revision of the assessments. Further, the Respondent stated that the Appellant disregarded Section 23 of the Tax Procedures Act and in the instant case, it is evident that the Appellant waived multiple opportunities within which to provide relevant evidence and documents in support of its Objection but failed to do so.

99. The Respondent stated that pursuant to Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, the burden of proof lies on the Appellant to demonstrate that it had discharged its tax liability. The Respondent stated that this burden was never discharged as not all documentary evidence was availed to the Respondent to enable it render a meritorious decision in the circumstances.

100. The Respondent stated that concerning the refund of VAT on bad debts, the Respondent has not refused to refund the same to warrant the making of that order by the Tribunal. The Appellant only needed to present the Objection decision to the Refunds Unit for processing.

101. In its considered view, the Respondent in its written submissions conjured the following issues for determination before the Tribunal: -i.Whether the Respondent's Objection decision contravened Article 47 of the Constitution for want of substantive reasons.ii.Whether the Respondent herein has declined to effect the refund of VAT to the sum of Kshs. 4,639,307. 00. iii.Whether the Respondent’s assessments were time barred in light of the provisions of Section 31 (4) of the Tax Procedures Act.iv.Whether the Respondent erred in disallowing the foreign exchange gains/losses contrary to the provisions of Section 4 A of the Income Tax Act.

102. The Respondent proceeded to submit on its issues as herein under;i.Whether the Respondent's Objection Decision contravened Article 47 of the Constitution for want of substantive reasons;

103. The Respondent submitted that the Appellant alleged that the Objection decision did not state the reasons of the decision, the Respondent submitted that the assertion by the Appellant is misleading and incorrect.

104. The Respondent submitted that, it was evident that the Objection decision summarizes the grounds of the Objection, the statement of findings and the decision of the Commissioner. Particularly, the Commissioner stated that it was not persuaded by the tax computation availed by the Appellant demonstrating the add back and matching the same to the declared returns on iTax for each period under review. The narration went ahead to state that the Commissioner was not convinced that with the supporting documents adduced to show that in year 2020, the Appellant was not thinly capitalized.

105. The Respondent submitted that the above reasons were stated categorically as the reason for which the assessment of Kshs. 34,140,480. 00 was confirmed. That from the foregoing, the Respondent submitted that its Objection decision satisfies the criteria stipulated under Section 51 (10) of the Tax Procedures Act which provides thus:“An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

106. The Respondent therefore submitted that the Objection decision was not in contravention of Article 47 of the Constitution as alleged by the Appellant and prayed that the same be upheld.ii.Whether the Respondent herein has declined to effect the refund of VAT to the sum of Kshs. 4,639,307. 00

107. The Respondent submitted that it was established that the refund claim had been allowed in its entirety pursuant to clause 3. 0 of the Objection decision. This is on the grounds that the Appellant demonstrated to the Respondent that it had supplied goods to Nakumatt Holdings Limited which had during the pendency of payment had been declared insolvent compelling the Appellant to render those debts as bad debts.

108. The Respondent submitted that the above series of circumstances squarely satisfied Section 31 (1) of the VAT Act 2013 wherefore the Commissioner allowed the refund in its entirety of Kshs. 4,639,307. 00.

109. The Respondent submitted that the Appellant has sought an order compelling the Respondent to order the refund of Kshs. 4,639,307. 00 within thirty (30) days. The Respondent urges the Honorable Tribunal to refer to the provisions of Section 31 of the VAT Act where this refund stems from. Particularly, Section 31 (1) (b) provides that:“Where a registered person has made a supply and has accounted for and paid tax on that supply but has not received any payment from the person liable to pay the tax on that supply and that person -(a)Has not received any payment from the person liable to pay the tax, he may, after a period of three years from the date of the supply; or(b)the person to whom the supply was made has been placed under statutory management through the appointment of an administrator, receiver, or liquidator,He may apply to the Commissioner for refund of the tax involved:Provided that-(a)no application for a refund shall be made under this section after the expiry of ten years from the date of supply;(b)the refund shall be made in compliance with section 47 (5) of the Tax Procedures Act;(c)the amounts may be credited to the taxpayer’s record for use against future Value Added Tax liabilities;

110. From a cursory reading of the above provision, the Respondent contended that, it follows that any refund from Section 31 (1) of the VAT Act is refunded subject to the provisions of Section 47 (5) of the Tax Procedures Act.

111. The Respondent stated that from the foregoing, it is evident that the law gives leeway to the Commissioner to apply the overpayment in the following order-(a)in payment of any other tax owing by the taxpayer under the specific tax law;(b)in payment of a tax owing by the taxpayer under any other tax law; and(c)any remainder shall be refunded to the taxpayer.

112. It is therefore the Respondent's submission that the Appellant can utilize the refund against future VAT liabilities and the Appellant has therefore not suffered any prejudice to warrant the grant of such order by the Tax Appeals Tribunal.iii.Whether the Respondent’s assessments were time barred in light of the provisions of Section 31 (4) of the Tax Procedures Act

113. The Respondent submitted that the Appellant contended that the Respondent had acted contra-statute by issuing the amended assessment beyond the five (5) years stipulated under Section 31 (4) of the Tax Procedures Act, 2015.

114. The Respondent submitted, in response thereof, that the Appellant had filed its financial statements for the year 2017 on 23rd August 2018 and as such, the assessment was well within time.iv.Whether the Respondent erred in disallowing the foreign exchange gains/losses contrary to the provisions of section 4 A of the Income Tax Act

115. The Respondent submitted that it reviewed the evidence and documents adduced by the Appellant to disprove the Respondent on this ground in line with Section 4 A of the Income Tax Act, CAP 470.

116. The Respondent submitted that the above provision of Section 4 A regulates the disallowance of foreign exchange loss/gain and envisages the circumstances under which the same can be deferred (disallowed as an expense in tax computations). That however, for the foreign exchange loss to be treated as an expense, an entity must not be thinly capitalized. In other words, the foreign exchange loss shall be deferred and not deducted as an expense where the ratio of debt and equity exceeds 3:1 ratio.

117. The Respondent maintained that in establishing whether an entity is thinly capitalized, the Tribunal ought to look at the ratio of debt to equity of the Appellant. The question that begs is, from the documents provided by the Appellant, can this ratio be ascertained? The answer is a resounding no.

118. The Respondent stated that during the hearing of this matter, the Appellant’s witness Mr. Andrew Kiptoo testified that in order to establish whether an entity is thinly capitalized, one should look at audited financial statements, balance sheet or a statement of income and expenditure.

119. The Respondent stated that despite the Appellant having this knowledge, these documents were not provided to the Respondent. It is for this reason that the Respondent stated that it was not persuaded or convinced by the tax computations and supporting documentation availed by the Appellant.

120. The Respondent averred that the documents availed by the Appellant were not persuasive to warrant the revision of the assessments. Further, the Appellant disregarded Section 23 of the Tax Procedures Act.

121. The Respondent submitted that in the instant case, it is evident that the Appellant was in possession and custody of these audited financial statements but never availed them to the Respondent for consideration before the Objection decision was issued.

122. The Respondent urged the Tribunal to note that, whereas the Appellant was well aware of the documents they needed to provide to the Respondent for the question of thin capitalization to be answered, it never provided the documents at the Objection stage.

123. The Respondent stated that the Appellant has not discharged its burden of proof in accordance with Section 56 of the TPA and Section 30 of the Tax Appeals Tribunal Act, as not all documentary evidence was availed to the Respondent to enable it render a meritorious decision in the circumstances.

124. The Respondent relied on the authority of Kenya Revenue Authority vs. Maluki Kitili Mwendwa [2021] eKLR.

Respondent’s Prayer 125. By reason of the foregoing the Respondent prayed to the Tribunal, that;i.The Objection decision dated 13th December 2022 be and is hereby upheld; andii.The Appeal be dismissed with costs.

Issues For Determination 126. The Tribunal having carefully considered the pleadings and submissions made by the parties, is of the considered view that the Appeal herein distils into three (3) issues for its determination;a.Whether the Respondent’s failure to make the refund on taxes was justified;b.Whether the Respondent’s Objection Decision issued on 13th December 2022 complied with the provisions of Section 51 (10) of the Tax Procedures Act; andc.Whether the Respondent’s Objection Decision issued on 13th December 2022 was justified in law?

Analysis And Determination 127. The Tribunal having identified the issues for determination shall analyze the same as herein under;a.Whether the Respondent’s failure to make the refund on taxes was justified;

128. The dispute giving rise to the Appeal herein arose out of the Respondent’s Objection decision contained in its letter dated 13th December 2022 allowing the Appellant’s refund claim in the sum of Kshs. 4,639,307. 00, rejecting the Appellant’s Objection and confirming the assessment on Corporation tax in the sum Kshs. 34,140,480. 00.

129. It was the Appellant’s assertion that it lodged an application for refund for VAT in the sum of Kshs. 4,639,307. 00 dated 19th January 2021 premised on bad debts as envisaged under the provisions of Section 31 of the VAT Act.

130. The Respondent in its audit findings issued on 15th September 2022 allowed the Appellant’s application in full for the sum of Kshs. 4,639,307. 00. That the position was reiterated in the Respondent’s Objection decision issued on 13th December 2022.

131. From the submissions of the parties to the Appeal, the Tribunal noted that there is no dispute as to whether the Appellant’s application dated 19th January 2022 for refund of taxes was allowed by the Respondent and further that the said refund has not been paid out to the Appellant.

132. It was the Respondent’s contention that refunds granted under Section 31 (1) of the Value Added Tax Act, the Commissioner has powers to deal otherwise with the refunds by virtue of Section 47 (5) of the TPA.

133. Section 31 (1) of the VAT Act provides;“(1)Where a registered person has made a supply and has accounted for and paid tax on that supply but has not received any payment from the person liable to pay the tax, he may, after a period of three years from the date of that supply or where that person has become legally insolvent, apply to the Commissioner for a refund of the tax involved and subject to the regulations, the Commissioner may refund the tax:Provided that no application for a refund shall be made under this section after the expiry of five years from the date of the supply.”

134. There is no dispute as to whether the Appellant’s application for refund conformed with the provisions of Section 31 (1) of the VAT Act, upon conclusion of the review of the same the Respondent allowed the refund claim.

135. It was the Respondent’s contention that it could deal with the refund in another manner as provided for in law, the Respondent in this regard placed reliance on Section 47 (4) 4 (A) and 4 (B) of the Tax procedures Act, which Section provides; -“(4)Where, in relation to an application for a refund made under this section or made under any other tax law, the Commissioner is satisfied that a taxpayer has overpaid a tax, the Commissioner shall apply the overpayment in the following order—(a)in payment of any other tax owing by the taxpayer under the tax law;(b)in payment of a tax owing by the taxpayer under any other tax law; and(c)any remainder shall be refunded to the taxpayer.(4A)Where the Commissioner notifies a taxpayer that an application for a refund has been ascertained in accordance with subsection (3), and applies the refund to the payment of an outstanding tax in accordance with subsection (4) (a) or (b), interest or penalties shall not accrue on the amount applied to the payment of the outstanding tax from the date of the notification.(4B)For the avoidance of doubt, where the Commissioner has applied a refund to the payment of an outstanding tax under subsection (4A), if there is any outstanding tax after such application, the outstanding tax shall accrue interest and penalties in accordance with this Act.”

136. Whereas the Respondent is entitled and mandated in law to offset the refund against any taxes owing, the Respondent was duty bound to demonstrated to the Tribunal that it off-set the refund or part thereof against the Appellant’s tax liabilities, the Respondent has not made such an indication and demonstrated that this off-set was made.

137. The Appellant relied on Section 47 (5) of the Tax Procedures, in demanding for the refund of taxes with interest, which Section provides;-“The Commissioner shall repay the overpaid tax within a period of two years from the date of application, failure to which the amount due shall attract an interest of 1% per month or part thereof of such unpaid amount after the period of two years.”

138. The Tribunal is further minded of the above cited provisions of the law, it notes that the application of the refund was made on 19th January 2021 and was allowed on the 15th September 2022. The Tribunal’s interpretation of the provisions of Section 47 (5) of the TPA, is that for the Appellant’s claim to qualify for interest the refund claim ought be based on an overpayment of taxes, the Appellant demonstrated before the Tribunal that its claim was based on VAT on bad debts under the provisions of Section 31 of the VAT Act and not on an overpayment under Section 47 of the TPA.1. Consequently, the Tribunal finds that the Appellant is therefore not entitled to the interest of 1% per month under Section 47 (5) of the Tax Procedures Act as prayed for.b.Whether the Respondent’s Objection Decision issued on 13th December 2022 complied with the provisions of Section 51 (10) of the Tax Procedures Act;

139. It was the Appellant’s argument that the Respondent’s Objection Decision issued on 13th December 2022 did not comply with the law and particularly offends the provisions of Section 51 (10) of the Tax Procedures Act, the Section provides; -“(10) An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

140. The Appellant sustained the argument that whereas the Respondent included a statement of findings, the Respondent did not give the reasons for its decision as contained in the statement of findings.

141. The Tribunal has perused the Objection decision issued on 13th December 2022, and an extract of the statement of findings, which reads as follows; -“Disallowed Forex gains/losses.We made the following observations and deductions upon review of your grounds of objection and evidence adduced in line with Section 4A of the Income Tax Act CAP 470;a.Whereas you provided the requested documents on 6th December 2022, the Commissioner has not been persuaded to agree with your tax computation demonstrating the add back and matching the same to the declared returns on iTax for each period under review.b.The Commissioner was not convinced with the supporting documents adduced to show that in year 2020, you were not thinly capitalized.”

142. From the above extract of the statement of findings, it is clear to the Tribunal that from the Respondent’s own admission, the Appellant provided all the documentation that was requested for on the 6th December 2022 and the Appellant can only be deemed to have complied with the provisions of Section 51 (3) of the Tax Procedures Act.

143. Accordingly, it was for the Respondent to interrogated the documents provided by the Appellant, make a determination and advance reasons for the decision.

144. The Tribunal is not persuaded that by the Respondent’s mention of the terms that it was “not convinced or not persuaded” by the Appellant’s documentation and explanation did not amount to reasons as provided for under Section 51 (10) of the TPA, the Respondent ought to have given out specifics as to why it was not convinced or persuaded by the Appellant’s documentation.

145. The Tribunal reiterates the position taken in the case of TAT Appeal No. 90 of 2021 Ideal Developers & Consultants Limited vs. Commissioner of Domestic Taxes, where it stated that;“39. Section 51 (10) of the TPA lays down what an Objection Decision must contain. The said Section provides as follows’

‘51(10) An objection decision shall include a statement of findings on the material facts and the reasons for the decision.’

40. Therefore, Section 51 (10) requires that an Objection Decision should contain the statement of findings on the material facts and the reasons for the decision……”

146. It follows that, for an Objection decision to meet the threshold of a valid Objection decision it is required to strictly comply with the provisions of Section 51 (10) of the TPA, by containing not only the statement of findings but reasons. The provision is crafted in peremptory terms requiring strict adherence.

147. The Tribunal finds that the Objection decision did not meet the threshold of a valid Objection decision for want of reasons for the decision.

148. It was the Appellant’s position that the aforesaid objection decision offended the provisions of Article 47 of the Constitution of Kenya 2010 and Section 4 of the Fair Administrative Action Act, 2015.

149. Article 47 of the Constitution of Kenya 2010, reads: -“(1)Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.(2)If a right or fundamental freedom of a person has been or is likely to be adversely affected by administrative action, the person has the right to be given written reasons for the action.”

150. Section 4 (2) and (3) (g) of the Fair Administrative Action Act, 2015, provides:-“(2)Every person has the right to be given written reasons for any administrative action that is taken against him.(3)Where an administrative action is likely to adversely affect the rights or fundamental freedoms of any person, the administrator shall give the person affected by the decision-(a)………………………;(b)………………………;(c)………………………;(d)a statement of reasons pursuant to section 6;(e)………………………;(f)………………………; or(g)information, materials and evidence to be relied upon in making the decision or taking the administrative action.”

151. Consequently, it is the Tribunal’s finding that the Respondent’s Objection decision issued on 13th December 2022 offends the provisions of Section 51 (10) of the Tax Procedures Act, Article 47 of the Constitution of Kenya 2010 and Section 4 (3) of the Fair Administrative Action Act.

152. The Tribunal having established that the Respondent’s Objection decision issued on the 13th December 2022 was not inconformity with the provisions of Section 51 (10) of the TPA shall not delve in the other issue for determination as the same has been rendered moot.

153. In light of the foregoing, the Tribunal finds and holds that the Respondent was unjustified in issuing its objection decision of 13th December 2022 which was none compliant with the law.

154. The upshot of the foregoing is that the Appeal is found to be merited.

Final Decision 155. The Appeal having been found to be merited the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision issued on 13th December 2022 be and is hereby set aside.c.The Respondent is hereby directed to process the Appellant’s VAT refund in the sum of Kshs. 4,639,307. 00 within Ninety (90) days of the date of delivery this Judgment.d.Each party to bear its own costs.

156. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024ROBERT M. MUTUMA - CHAIRPERSONMUTISO MAKAU - MEMBERELISHAH N. NJERU - MEMBERBERNADETTE GITARI - MEMBERMOHAMED A. DIRIYE - MEMBER