[2023] KETAT 901 (KLR)

Pine Energy EA Ltd v Commissioner of Domestic Taxes (Appeal 1239 of 2022) [2023] KETAT 901 (KLR) (Civ) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 901 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 1239 of 2022

E.N Wafula, Chair, D.K Ngala, GA Kashindi, AM Diriye & SS Ololchike, Members

December 20, 2023

Between

Pine Energy Ea Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability Company incorporated in Kenya whose principal business activity is wholesale importation and sale of Liquified Petroleum Gas (hereinafter ‘LPG’).

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 5th October, 2021 the Respondent herein issued a pre-assessment notice to the Appellant for the periods 2017 to 2020 for Corporation taxes amounting to Kshs. 3,838,871,603. 00. The Appellant objected to the Respondent’s pre-assessment notice on 10th November, 2021.

4. The Respondent confirmed the assessment for the period 2017 to 2020 in respect of Corporation taxes amounting to Kshs. 3,548,324,782. 00 on 11th November, 2021 and advised the Appellant that itax assessments were to follow. Both the Respondent and Appellant alluded to the fact that the objection to the assessment was dated 15th November, 2021. The Appellant then forwarded cash sales invoices through an electronic mail dated 23rd February, 2022.

5. In an electronic mail dated 9th March, 2022, the Respondent made a request for additional sales invoices for the period under review [2017-2020] and referred to another electronic mail dated 24th November, 2021. The Appellant responded to the electronic mail dated 9th March, 2022 on 15th March, 2022 and requested if it could be given two weeks to respond.

6. On 17th March, 2022 the Respondent replied to the electronic mail dated 15th March, 2022 and gave the Appellant up to 23rd March, 2022 to provide the sales ledgers. The Appellant did not provide any additional information.

7. The Respondent then made an objection decision through a letter dated 31st March, 2022 and the Appellant, being dissatisfied with the objection decision filed a Notice of Appeal on 27th April, 2022.

The Appeal 8. The Appeal as contained in the Memorandum of Appeal dated 19th October, 2022 and filed on 21st October 2022 was premised on the following grounds:a.Basis of income tax charged on salesi.That the Respondent erred in its decision to assess the tax liability, initially based on banking and later on, assumed prices per kilogram based on a non-representative sample of the total sales over the period.ii.The assumed average prices do not meet a proper sampling distribution of the total sales made by the taxpayer and therefore the resultant conclusion is incorrect, erroneous and misleading.iii.The assessing officer misunderstood the client's business operation hence arriving at a wrong conclusion. Understanding of the taxpayer business is an important consideration before this erratic sampling distribution is used in computing expected sales.iv.Pine Energy E.A Limited and Gazlin Energy Limited are sister companies that handle same product at different levels of the value chain. Pine Energy E.A Limited purchase the products from the supplier(s) and arranged for importation while Gazlin Energy Limited handles the logistics and delivery of the products to the point of sale where they do wholesale distribution. The few invoices used to derive the expected sales by the commissioner are the only exceptions where the normal supply chain of the product was not followed.v.The normal supply chain for this business is that after the purchase of the product and importation arrangements are done, the product is taken over by Gazlin Energy Limited who does all logistical arrangement.vi.The taxpayer will provide sufficient documentation showing the actual prices and quantities that will remedy the assumed average prices used by the Respondent.vii.The Respondent in raising the assessment ought to have used best judgement as per Section 29(1) and 31(1) of Tax Procedures Act No. 29 of 2015. The Respondent in this case failed to exercise best judgement and relied on market survey, non-preservative sample to arrive at exorbitant prices which is way off the actuals.b.Understated salesi.The Respondent erred in the quantity of LPG imports by the taxpayer during the years in question wherein the Respondent stated that the total quantity of import was 85,496,554. 00 Kilogrammes whilst the correct figure was 55,606,360. 00 Kilograms. The basis of computing the expected sales and the variances thereon are inaccurate and based on wrong premise.ii.The Respondent failed to consider allowable expenditure in each year of income incurred in the production of income, if considered will reduce the tax assessed significantly.iii.The Respondent rejected all Appellant’s objections for Income tax which it calculated at Kshs. 679,910,076. 00. iv.The Constitution of Kenya calls for fair administration action i.e. fair hearing to be accorded to all parties before an escalated action be taken. The taxpayer was not accorded such treatment before the assessments were raised.v.The assessment on the taxpayer is therefore exorbitant, punitive and unrealistic for a business undertaken by a taxpayer as this. This kind of assessment is intended to punish taxpayers and kick it out of business.

The Appellant’s Case 9. The Appellant has set out its case in the Statement of Facts dated and filed on 21st October, 2022. 1.That assessments were raised on it on 21st October, 2021 and that the Respondent erred in its decision to assess the tax liability, initially based on banking and later on, assumed prices per kilogram based on a non-representative sample of the total sales over the period. The prices assumed by the Respondent are average prices and did not meet a proper sampling distribution of the total sales made by it and therefore the resultant conclusion was incorrect, erroneous and misleading.2. That it objected to the decision on 15th November, 2021 and the objection decision that was issued on 31st March, 2022 and further stated that the main director had been unwell and remained indisposed.3. The Appellant submitted that the basis of computing the expected sales and the variances thereon were inaccurate and based on the wrong premise and on this basis the Appellant prayed that the assessment be set aside.

The Respondent’s Case 10. The Respondent replied to the Appellant’s Appeal through its Statement of Facts dated 21st November, 2022.

11. The Respondent stated that Appellant supplied all LPG to a related company Gazlin Energy Limited for the period 2017 to 2020 which was under review. On 5th October 2021 the Respondent wrote to the Appellant requesting for explanations on variances noted between sales declared and expected sales based on import data.

12. That the Appellant failed to provide explanations and reconciliations requested and therefore the Respondent raised Corporation tax assessments on 11th November 2021 based on available information covering years 2017 to 2020 with total tax liability amounting to Kshs. 3,548,324,787. 00. The Appellant objected to the whole assessment through objection notice dated 15th November 2021.

12. That in the objection letter and in all correspondence during the objection review stage, the Appellant did not object to the quantity of LPG imported. The main contention by the Appellant was on LPG price used by the Respondent in the assessment.

13. The Respondent submitted that after reviewing the objection, the Respondent amended the assessment and issued an objection decision dated 31st March 2022 with total amended tax liability of Kshs. 679,910,075. 00.

14. That contrary to the argument by the Appellant, the assessment and the objection decision were not based on banking analysis. The basis of the assessment were sales as derived from the quantity of LPG that was imported by the Appellant in the period under review.

15. That the Appellant after it failed to provide supporting documents to facilitate tax compliance review, the Respondent had to rely on the available information as empowered under Section 31(1)(c) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’) which states that:-“Subject to this section, the Commissioner may amend an assessment (referred to as in this section as the “original assessment”) by making alterations or additions, from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period to ensure that. ...(c) in any other case, the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.”

16. That even at the objection stage, the Appellant failed to provide supporting documents requested by the Respondent. That on 9th and 29th March 2022, the Respondent sent electronic mails to the Appellant with reminders to provide additional sales ledgers and sales invoices to facilitate objection review. The Appellant was not responsive leaving the Respondent with no option but to rely on available information in amending the assessment.

17. That the argument by the Appellant in its Memorandum of Appeal that the sample invoices did not meet sampling distribution were not substantiated. That it noted that the Appellant was still concealing information on sales by not providing copies of all sales invoices together with sales ledgers.

18. The Respondent asserted that it relied on copies of invoices provided by the Appellant during the objection review stage to compute expected average price. That the Appellant did not provide the correct sales figures in its Appeal documents. That the arguments by the Appellant were therefore incorrect and unreliable.

19. That the Appellant did not explain through detailed analysis of its sales invoices, how copies of the invoices provided were exceptions from normal supply chain as alleged under grounds (iv) and (v) of its Memorandum of Appeal. The Respondent stated that the argument by the Appellant under grounds (vi) and (x) of its MOA was a self-admission that it failed to provide relevant supporting documents. That the promise by the Appellant to provide additional documents at the appeal stage could only be construed as blatant disregard of the tax dispute process. That the Appellant should not be allowed to belabour this Honourable Tribunal with tasks of reviewing additional documents and reconciliations.

20. That the Respondent is empowered under the TPA to apply best judgement in assessing tax where information has not been availed. That after the Appellant failed to provide supporting documents, the Respondent did the right thing by relying on available information in form of import data and selling price to assess the Appellant.

21. The Respondent stated that the Appellant did not object the quantity of LPG that was used in the assessment and objection decision. That the Appellant attempted to introduce new information at the Appeal stage by stating import quantities that are not supported by detailed breakdown and import documents.

22. The Respondent further stated that details of new import figures as alleged by the Appellant had not been attached in the bundle of documents provided meaning that this also was unsupported and incorrect.

23. The Respondent submitted that as provided under Section 15(1) of the Income Tax Act CAP 470 of Kenya’s Laws (hereinafter ‘ITA’) all costs and expenses incurred in each year under review were allowed in the tax computations that it prepared. Furthermore, the Appellant did not specify which allowable expenditure was not considered.

24. That contrary to the explanation given by the Appellant that the Respondent rejected its objection, the correct position was that assessments were amended based on available information from Kshs. 3,548,324,787. 00 to Kshs. 679,910,075. 00. That this did not constitute rejection of the objection.

25. The Respondent submitted that the Appellant was properly engaged at all levels as required. That prior to raising the assessments, a pre-assessment notice was sent to the Appellant requesting it to provide explanations and supporting documents but the Appellant failed to comply. That at the objection review stage, the Appellant was requested and even allowed more time to provide supporting documents but chose not to cooperate.

26. The Respondent pleads with the Honorable Tribunal to make a finding that the appeal is not supported, is characterized by unsubstantiated statements and is not made in good faith. It would only be fair to reject the Appeal and uphold the amended assessments.

27. The Respondent relied on Section 31(1) of the TPA and Section 15 of the ITA, among other enabling provisions of the law.

Respondent’s Prayers 28. Based on the foregoing, the Respondent prayed that the Appeal be dismissed with costs and that the objection decision dated 31st March, 2022 be upheld.

Submissions of the Parties 29. The parties were to file written submissions by 21st June, 2023 failing which reliance would be placed on their respective pleadings. The Respondent filed its written submissions on 15th June, 2023. The Appellant attempted to file submissions on 3rd November, 2023 whilst introducing new evidence in this case, on the same date. The Tribunal placed reliance on the Appellant’s pleadings having struck out its written submissions for late filing. The Respondent’s submissions were considered as hereunder.

30. The Respondent identified one issue for determination which was whether the assessments issued by it as well as the objection decision dated 31st March, 2022 were justified.

31. That it had not been disputed that there were variances detected during the review of the Appellant's returns vis a vis its customs data. In exercising its obligations, and based on available evidence, the Respondent raised additional assessments against the Appellant. That the Appellant objected to the additional assessment but failed to avail supporting evidence, despite its indulgence and an objection decision was issued based on the information available to the Respondent.

32. That Sections 23 and 24 of the TPA enjoins all taxpayers including the Appellant to maintain their records and submit tax returns as required by law. The Respondent relied on the decision in Nairobi TAT Appeal No. 55 of 2018- Boleyn International Limited Vs. Commissioner of Investigations and Enforcement, where the Tribunal held that: -“We find that the Appellant's at all times bore the burden of proving that the Respondent's decisions and investigations were wrong. The Tribunal is guided by the provisions of section 56(1) of the Tax Procedures Act, 2015 which states: In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. Further, the Tribunal finds the following paragraphs from Pierson V Belder (H.M. Inspector of Taxes)(1956 -1960) 38 TC 387 to be instructive; but the matter may be disposed of, I think even more shortly in this way: there is an assessment made by the Commissioner upon the Appellant; it is perfectly clearly-settled by cases such as in the case of Norman V Golder 26 T.C. 293, that the onus is upon the Appellant to show that the assessment made upon him is excessive or incorrect; and of course he has completely failed to do so. That is sufficient to dispose of the Appeal, which is I accordingly dismiss with costs."

33. That its additional assessments and confirmation could not be faulted at all. The Respondent urged the Tribunal to uphold the same and dismiss the Appeal with costs.

Issues for Determination 34. The Tribunal having carefully considered the parties’ pleadings, documentation and Submissions finds that the following two issues call for its determination:i.Whether this Appeal is properly before the Tribunal.ii.Whether the additional Income tax assessment is excessive.

Analysis And Findings i. Whether this Appeal is properly before the Tribunal. 35. In a letter dated 5th October, 2021 through which the pre-assessment notice was issued by the Respondent, reference is made to a meeting held between the Respondent and the Appellant on 22nd September, 2021. The Tribunal having read the pre-assessment notice found that the Respondent raised three issues namely:a.The fact that the Appellant paid taxes amounting to Kshs. 37,658. 00 for the period 2017 to 2020 which was a lower figure when compared to others in the same industry;b.The Sales declared by the Appellant did not match expected sales computed from the information on imports as obtained from Customs; andc.The purchases claimed by Gazlin Limited, a related party, were more than sales declared by the Appellant and the variance was deemed by the Respondent to be undeclared sales.

36. The Tribunal observes that the Appellant first objected to the pre-assessment notice by stating that the Respondent applied the wrong formulas in coming up with the additional Income Tax Assessment. The assessment was confirmed by the Respondent on 11th November, 2021.

37. The Tribunal notes, observes and has found that on various dates between 15th November, 2021 and 23rd February, 2022, as documented in the objection decision, the Appellant provided documents which the Respondent relied on to reduce the additional tax assessment from Kshs. 3,838,871,603. 00 to Kshs. 679,910,075. 00, as confirmed in the objection decision dated 31st March, 2022.

38. The Tribunal has further noted that both parties in this Appeal refer to an objection letter dated 15th November, 2021 which was not attached to either of the pleadings of the parties. Although the Tribunal has not reviewed it, it is not a matter in dispute. The Tribunal therefore relies on the assertions of the parties in this regard and pursuant to Section 51 (11) of the TPA finds that the objection decision was made in the time provided by statute. More particularly, Section 51 (11) of the TPA stipulates as follows:“(11)The Commissioner shall make the objection decision within sixty days from the date of receipt of—(a)the notice of objection; or(b)any further information the Commissioner may require from the taxpayer,’failure to which the objection shall be deemed to be allowed.”

39. The Tribunal having reviewed the pleadings and submissions of the parties finds that the Appellant issued its objection on 15th November, 2021 and then provided documentation and engaged in correspondence with the Respondent on various dates between 15th November, 2021 and 23rd February, 2022. It is therefore the view of the Tribunal that the issue of a late objection decision does not arise.

40. The Tribunal has found that the objection decision was made by the Respondent on time [31st March, 2022]. The Tribunal further finds that the Notice of Appeal was filed on 27th April, 2022, within the time limits set by statute. The law requires that a Notice of Appeal is filed 30 days upon receipt of the decision of the Respondent. Section 13 of the Tax Appeals Tribunal Act No. 40 of 2013 (hereinafter ‘TAT’) provides as follows regarding the time set out for filing of an Appeal:-“13. Procedure for appeal:(1)A notice of appeal to the Tribunal shall—(a)be in writing or through electronic means;(b)be submitted to the Tribunal within thirty days upon receipt of the decision of the Commissioner.(2)The appellant shall, within fourteen days from [emphasis ours] the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of—(a)a memorandum of appeal;(b)statements of facts; and(c)the tax decision.’

41. The Tribunal notes the provisions of Section 52 of the TPA which provides as follows:-“52. Appeal of appealable decision to the Tribunal(1)A person who is dissatisfied with an appealable decision may appeal the decision to the Tribunal in accordance with the provisions of the Tax Appeals Tribunal Act, 2013 (No. 40 of 2013).(2)A notice of appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into an arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

42. Although the Notice of Appeal was filed on time, the Tribunal notes that the Memorandum of Appeal, Statement of Facts and objection decision were filed by the Appellant on 21st October, 2022 and not within the specified time period of 14 days. In this regard, the Tribunal relies on the decision of the High Court in Equity Group Holdings Limited Vs. Commissioner of Domestic Taxes, Civil Appeal No. E069 & E025 of 2020 wherein it was held as follows with regard to compliance with statutory timelines : -“Substantive law is a statutory law that deals with the legal relationship between people or the people and the state. Therefore, substantive law defines the rights and duties of the people, but procedural law lays down the rules with the help of which they are enforced. ……………….. Article 159(2) (d) of the Constitution in clear terms talks about procedural technicalities. A statutory edict is not procedural technicality. It was a law which had to be complied with. Parliament in its wisdom expressly and in mandatory terms ……………………”

43. It is also notable that the Appellant continued to violate the timelines within which it was required to file its written submissions and attempted to sneak in additional evidence without making the requisite applications as provided under Section 13(3) and (4) of TAT which provides the following remedy for extension of time to file documents:“(3)The Tribunal may, upon application in writing or through electronic means,extend the time for filing the notice of appeal and for submitting the documents referred to in subsection (2).(4)An extension under subsection (3) may be granted owing to absence from Kenya, or sickness, or other reasonable cause that may have prevented the applicant from filing the notice of appeal or submitting the documents within the specified period.”

44. In the circumstances the Tribunal having considered this matter, finds that the Appeal documents having not been filed on time and the Appeal is to that extent not properly before the Tribunal.

ii. Whether the additional Income tax assessment is excessive. 45. Having determined the first issue and having found that the Memorandum of Appeal, Statement of Facts and objection decision were not filed within the required statutory timeline, the Tribunal will not delve into this second issue as the same has been rendered moot.

Final Decision 46. The upshot of the foregoing is that the Appeal is incompetent and unsustainable in law and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

47. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A MUGAMEMBERGEORGE KASHINDIMEMBERMOHAMED A. DIRIYEMEMBERSPENCER S. OLOLCHIKEMEMBER