https://new.kenyalaw.org/akn/ke/judgment/ketat/2026/101

Powerchina Huadong Engineering Corporation Ltd v Commissioner, Investigations and Enforcement (Tax Appeal E701 of 2025) [2026] KETAT 101 (KLR) (18 May 2026) (Judgment) Neutral citation: [2026] KETAT 101 (KLR) Republic of Kenya In the Tax Appeal Tribunal Tax Appeal E701 of 2025 RM Mutuma, Chair, G Ogaga, T Vikiru & JM Malla, Members May 18, 2026 Between Powerchina Huadong Engineering Corporation Limited Appellant and Commissioner, Investigations And Enforcement Respondent Judgment Background 1.The Appellant is a branch of Powerchina Huadong Engineering Corporation Limited, a company registered in China (‘‘Contractor’’/the ‘head office’) that was engaged in the business of construction and engineering works. 2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 and 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.The Respondent carried out investigations on the tax affairs of the Appellant with a view to ensuring compliance with tax laws. The Respondent found that the tax amounting to Kshs 213,367,922.00 was owing. The Respondent communicated its findings to the Appellant on 11th November 2024. 4.Subsequently, the Respondent issued additional assessments to the Appellant dated 20th November 2024 in relation to income tax and VAT. The Appellant objected to the additional assessments on 26th March 2025. 5.The Respondent having considered the objection, rendered an objection decision dated 19th May 2025 partially allowing the Appellant’s Objection and revising the assessment from Kshs 213,367,922.00 to Kshs 200,263,760. 6.The Appellant being dissatisfied with the Respondent’s decision filed notice of appeal dated 17th June 2025. The Appeal 7.The Appellant lodged a memorandum of appeal dated 1st July 2025 and filed on 2nd July 2025 on the grounds:a.That the Respondent erred in law and in fact by raising a corporate income tax assessment on income earned by the Appellant's head office from the supply of equipment and services, which was neither accrued in nor derived from Kenya.b.That the Respondent erred in law and in fact by demanding VAT on the supply of goods and services that were made outside Kenya by the Appellant's head office to Kenya Power and Lighting Corporation (KPLC).c.That the Respondent erred in law and in fact by relying on erroneous withholding tax certificates to estimate income that the Appellant should have declared in its returns irrespective of the fact that KPLC had made an error when deducting withholding tax and issuing withholding tax certificates.d.That the Respondent erred in law and in fact by issuing an additional assessment relating to returns filed on or before 20th November 2019, which is invalid and ultra vires, as they were issued outside the statutory timelines expressly provided for by law.e.That the Respondent erred in law and in fact by conducting an audit over the same period and issuing assessments under the same tax heads from an already audited period without justification, which is a breach of the Appellant's legitimate expectation. The Appellant’s Case 8.In support of the appeal, the Appellant relied on its statement of facts dated 1st July 2025 and filed on 2nd July 2025 wherein it stated that Kenya Power and Lighting Company (KPLC) contracted the Head Office to design manufacture, test deliver, install, complete and commission Mamlaka Road Sub-station (the Project). KPLC and the Head Office executed an Engineering Procurement and Construction contract dated 24th December 2013. 9.According to the Appellant, in order to fulfil its obligations under the contract with KPLC, the Head Office partnered with its branch in Kenya (the Appellant). The Project was executed in Kenya and concluded in 2020. That the Contract was split into offshore and onshore elements as below:i.Offshore (outside Kenya): the supply of design and engineering services as well as procurement of plant, equipment and materials. This was delivered to KPLC by the Head Office which is based outside Kenya; andii.Onshore (within Kenya): the construction, testing, commissioning and other onsite activities associated with the works. This was delivered by the Appellant in Kenya. 10.The Appellant averred that based on the foregoing, the invoicing arrangement was as follows:a.The Head Office issued invoices for the offshore component directly to KPLC in Dollars. KPLC directly imported equipment from the Head Office, and handled customs clearance and Value Added Tax (VAT) of the equipment. It stated that the invoices from the Head Office are in relation to offshore supply of goods and services and that KPLC paid the Head Office directly for this portion of the work; andb.Since the construction of the Project was executed by the Appellant, the Appellant issued the invoices to KPLC for the onshore services in Kenya Shillings. It stated that KPLC paid the Branch directly for this portion of the work. 11.The Appellant asserted that for income tax purposes, it only declared the income it earned from the onshore element of the contract as taxable income in Kenya. The Appellant also declared and paid VAT on the income that it earned from the onshore element of the Contract. 12.The Appellant contended that KPLC erroneously deducted withholding tax at the rate of three percent (3%) on the entire Contract value, including the offshore equipment portion. 13.The Appellant averred that the Respondent audited its affairs for the period 2017 to 2020 covering corporate income tax, VAT, Pay as You Earn (PAYE) and withholding tax. That subsequently, the Respondent issued it with a verification findings letter dated l6th December 2021 wherein it assessed corporation tax, withholding tax and PAYE. 14.It stated that in the Letter of Findings, the Respondent concluded that the only tax payable was corporation tax amounting to Kshs 1,132,446, withholding tax amounting to Kshs 2,436.692 and PAYE amounting to Kshs 2,186,126. The Appellant stated that it proceeded to pay the taxes and considered the matter as closed. 15.The Appellant stated that the Respondent subsequently issued an Assessment for the period 2017 to 2023 through a letter dated 20th November 2024. It noted that in the assessment, the Respondent demanded principal taxes, penalties and interest amounting to Kshs 213,367,922 for the years of income 2017 to 2020. 16.The Appellant averred that the assessment was arrived at on the basis that income computed from withholding tax certificates issued to the Appellant does not tie to the income declared in the corporate income tax returns and VAT returns filed by the Appellant. According to the Appellant, the Respondent inferred that the Appellant had under declared the income earned for income tax and VAT purposes, and subjected the alleged under declared income to corporate income tax and VAT. The Appellant then objected to the assessments which led to issuance of the objection decision and consequently, filing of this appeal. Whether the Respondent wrongfully assessed taxes on the income attributable to the Head Office which was not accrued or derived from Kenya 17.The Appellant argued that under the Contract, the Head Office was engaged to "design, manufacture, test, deliver, install, complete and commission" certain facilities in respect of a power substation in Kenya. Separately, the Appellant entered into a contract with KPLC to undertake a specific scope of work for an agreed consideration. 18.The Appellant stated that Kenya applies the source-based system of taxation where all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya is taxable. It relied on section 3 (1) of the Income Tax Act Cap 470 (ITA) which provides that "...income tax shall be charged for each year of income upon al the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya." 19.It stated that Section 3(2) of the ITA highlights the various categories of income subject to tax in Kenya, including, inter alia, gains or profits from business. It stated that a "business" is defined in Section 2 of the ITA to include any trade, profession or vocation, and every manufacture, adventure and concern in the nature of trade, but does not include employment. 20.The Appellant cited Section 3(1) of the ITA to state that only income that is "accrued in or derived from Kenya" is taxable in Kenya. It cited the case of Heritage Insurance Company Kenya Limited v Commissioner of Legal Services and Board Coordination Tax Appeal E386 of 2023 where the Tribunal held that:“Section 3 (1) is not ambiguous in any way. Under the said section, income which did not accrue in or was not derived from Kenya cannot be charged of tax.” 21.It stated that Rule 5(b) of the Income Tax (Transfer Pricing) Rules, 2007 provides that "The guidelines referred to in rule 3 shall apply to transactions between a permanent establishment and its head office or other related branches, in which case the permanent establishment shall be treated as a distinct and separate enterprise from its head office and related branches." Consequently, it stated that the Appellant is regarded as a separate and independent enterprise from the non-resident person or the Head Office. The Appellant asserted, therefore, that only the income attributable to the Appellant would be deemed to be accrued in or derived from Kenya, and therefore subject to Income Tax in Kenya. 22.The Appellant sought to ascertain profits of a permanent establishment under the Organisation for Economic Cooperation and Development ("OECD") Model Tax Convention and its Commentaries ("OECD Commentary") to support its case. The Appellant stated that the OECD Commentaries provide as follows in relation to the profits attributable to Head Office and the profits attributable to the Appellant:i.Paragraph 2 of the OECD Commentary to Article 7 provides that where an enterprise carries on business in another state through a permanent establishment, only the profits attributable to the permanent establishment may be taxed in the other state.ii.Paragraph 15 of the OECD Commentary to Article 7 provides that the profits attributable to a Permanent Establishment (PE) are the profits it might be expected to make if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions taking into account the functions performed, assets used, and risks assumed through the permanent establishment and through other parts of the enterprise.iii.Paragraph 24 of the OECD Commentary to Article 7 provides that where a transaction that takes place between the enterprise and an associated enterprise affects directly the determination of the profits attributable to the permanent establishment, paragraph 2 also requires that, for the purpose of computing the profits attributable to the permanent establishment, the conditions of the transaction be adjusted, if necessary, to reflect the conditions of a similar transaction between independent enterprises;iv.Paragraph 36 of the OECD Commentary to Article 7 provides that in respect of goods provided or services performed in construction or installation projects, it is important to apply "...the general principle that profits are attributable to a permanent establishment only with respect to activities carried on by the enterprise through that permanent establishment."v.Paragraph 37 of the OECD Commentary to Article 7 provides that"...where such goods are supplied by the other parts of the enterprise, the profits arising from that supply do not result from the activities carried on through the permanent establishment and are not attributable to it. Similarly, profits resulting from the provision of services (such as planning, designing, drawing blueprints, or rendering technical advice) by the parts of the enterprise operating outside the State where the permanent establishment is located do not result from the activities carried on through the permanent establishment and are not attributable to it." 23.In light of the above, the Appellant contended that in ascertaining and taxing the income of non-resident persons conducting business through a permanent establishment in Kenya, only the profits attributable to the permanent establishment's activities are taxable in Kenya. Income attributable to the Appellant as per the Contract 24.The Appellant asserted that as per Appendix I of the Contract between KPLC and the Head Office, the scope of services under the Contract was divided into the supply of plant and equipment from abroad, design services and installation services. The Appellant averred that the treatment of the various services was as follows: Supply of plant and equipmenti.Appendix 3 of the Contract indicates that the plant and equipment, including transformers, switchgears, cables and control and telecommunication systems would be purchased from non-resident entities in China and Switzerland. The plant and equipment under the Contract were supplied directly by the Head Office to KPLC. Notably, the exporter on record on the customs entries is the Head Office in China, while the importer on record is KPLC.ii.Based on the foregoing, the Appellant asserted that the activities undertaken on supply of Plant And Equipment were exclusively carried out by the Head Office, with no involvement of the Appellant. Consequently, it stated that the income earned by the Head Office in respect of the supply of plant and Equipment was not attributable to activities performed by the Appellant. It asserted that it is clear that the income earned in respect of those activities was not accrued in or derived from Kenya and is therefore not subject to corporate income tax in Kenya. Design servicesiii.According to the Appellant, based on Appendix 6 of the Contract, the scope of works for equipment in respect of the substations covered "engineering design, manufacture, testing before shipment and packing seaworthy or otherwise as required, delivery CIP site, of all equipment as specified in the preceding chapters'". Per the Contract, the Tribunal will note that the engineering. design, manufacture and testing of the plant and equipment under the Contract was to be undertaken before shipment to Kenya.iv.It asserted that the income earned from design services is attributable to activities undertaken offshore by the Head Office, and not to activities undertaken by the Appellant. 25.The Appellant stated that section 5(6) of the Value Added Tax Act Cap 476 (VATA) provides that tax on the importation of taxable goods shall be charged as if it were duty of customs and shall become due and payable by the importer at the time of importation. 26.It relied on Section 2 of VATA which defines a 'supply' to mean a supply of goods or services. It also asserted that section 2 of the VATA defines 'goods' to mean tangible movable and immovable property and includes electrical or thermal energy, gas and water, but does not include money. It stated that 'services' is defined to mean anything that is not goods or money. 27.It relied on VATA to define terms including, “taxable supply”, “supply of goods” “supply of services”. 28.The Appellant asserted that VAT is chargeable on both the supply of goods and services within Kenya and the importation of taxable goods and imported taxable services into Kenya. It stated that VAT does not apply on supplies that were not made in Kenya. 29.It argued that based on the analysis of the activities performed by the Appellant vis-à-vis those performed by the Head office under the Contract as set out in paragraph 29 above, it was the Appellant's position that the appropriate VAT treatment of the income earned from the Contract is as follows: Supply of plant and equipmenti.The commercial invoices were addressed to KPLC from the Head Office indicating that the Head Office sold the equipment and materials directly to KPLC and not through the Appellant. The customs entries indicate that the importer of the equipment was KPLC. It stated that the VATA provides that VAT on the importation of taxable goods shall be charged as if it were a duty of customs and shall become due and payable by the importer at the time of importation. According to the Appellant, this means that import VAT was the liability of the importer, KPLC; and the revenue from the sale of the equipment is out of scope for VAT in Kenya, as the goods were sold by a non- resident entity, the Head Office. Design Servicesii.It stated that the design services were provided to KPLC by the Head Office therefore, these would qualify as imported services by KPLC. It averred that under section 5 (6) of the VATA, tax on the supply of imported taxable services shall be a liability of any person receiving the supply. Thus, the Appellant contended that the obligation to account for VAT if any is on the recipient of the service in this case, KPLC. Installation and other servicesiii.The Appellant asserted that the "foreign currency" scope of the installation and other services was provided by the Head Office to KPLC. According to the Appellant, these would qualify as imported services by KPLC. It argued that under section 5 (6) of the VATA, the obligation to account for VAT is on the recipient of the service in this case, KPLC. The Appellant contended that the income earned from the "local currency" scope of the installation and other services is taxable in Kenya as it is attributable to activities performed onshore by the Appellant. The Appellant asserted that it declared this income in its VAT returns. 30.Based on the foregoing. the Appellant averred that it correctly accounted for VAT based on its VAT returns. Whether the computation of estimated revenues based on withholding tax certificates was erroneous 31.The Appellant reiterated that the withholding tax certificates that are attached to the branch's personal identification numbers on iTax reflect overstated revenues because KPLC erroneously deducted withholding tax on the total Contract value including equipment and services that were supplied by the Head Office offshore, resulting in an overstatement of the income that was accrued and derived by the Appellant from Kenya. 32.The Appellant contended that KPLC ought to have accounted for withholding tax on the amount payable to the Head Office relating to offshore design, installation and other services. It stated that this withholding tax is final; and no withholding tax ought to have been deducted on the supply of equipment, as there was no withholding tax applicable on the supply of goods to public entities during the contract period. 33.The Appellant stated that it notified KPLC that it had made an error while withholding tax on a portion of the "foreign currency" payments and sought regularisation of the erroneous withholding tax deductions through a letter dated 16th March 2016. The Appellant maintained that it was improper for the Respondent to penalise the Applicant for the mistakes of KPLC and proceed to demand tax from erroneous tabulations without any proper basis in law. 34.The Appellant maintained that it does not bear any legal obligation to retain documents for returns filed before 20th November 2019. However, it asserted that Respondent on its part, has no legal basis to issue or maintain the assessments relating to years of income of 2017 and 2018 and any other returns filed before 20th November 2019. Therefore, the Appellant argued that the Respondent lacks jurisdiction to pursue the matter further. 35.Whereas in the Objection Decision the Respondent claimed that the Appellant must have either wilfully neglected to declare the full income from the withholding tax credits received or fraudulently enjoyed erroneous withholding tax credits therefore, the Respondent was entitled to raise assessments beyond the five-year statutory period set out in law. The Appellant asserted that the High Court in National Social Security Fund Board of Trustees v Commissioner of Domestic Taxes, Kenya Revenue Authority [2016] eKLR stated that in the event the Kenya Revenue Authority caries out a tax assessment beyond the statutory limit, it would need to specify for each year assessed and provide evidence of fraud or wilful neglect. 36.The Appellant averred that it was not negligent and did not wilfully neglect to declare the income tax. The Appellant asserted that it declared the income that was attributable to it being the income that was accrued and derived from Kenya. The Appellant contended that the Respondent based the assessments on withholding tax certificates issued by KPLC yet KPLC made an error in computing the withholding taxes. The Appellant also averred that it is unfair for the Respondent to rely on errors by third parties to punish the Appellant. Whether a re-assessment on the same period and same tax heads was a breach of the doctrine of legitimate expectation. 37.The Appellant asserted that the Respondent in issuing the Assessment, sought to assess a period that was already the subject of an audit by Respondent resulting in the letter of findings with the demanded taxes being paid by the Appellant. The Appellant was of the view that this conduct should not be encouraged as it is a great breach of legitimate expectation upon which taxpayers rely, and that it breached the fundamentals of proper tax adjudication. 38.The Appellant reiterated that the assessment breached the legitimate expectation of the Appellant on the basis that:i.The Assessment covers the 2017 to 2020 period which was the same period covered by the audit which covered 2017 to 2020.ii.In the audit, the Respondent concluded that the only tax payable was corporation tax amounting to Kshs 1,132,446, withholding tax amounting to Kshs 2,436,692 and PAYE amounting to Kshs 2,186,126. The Appellant asserted that on the basis of the communication by the Respondent, proceeded to pay the taxes and considered the matter as closed.iii.Having conducted an audit and determined the additional taxes payable, the Respondent could only reassess the period if new information became available, as was stated in the letter of findings. However, given that the withholding tax certificates that the Respondent relied on were on iTax (a system that the Respondent controls) from the moment that KPLC made the payments, the Respondent was well aware of this information during the audit and cannot now claim that this information is new to it. Appellant’s prayers 39.The Appellant prayed that the Honourable Tribunal be pleased to:a.Set aside the confirmed assessment and the Objection Decision;b.Find that the additional assessments relating to all the returns filed on or before 20th November 2019 are outside the statutory timelines, hence invalid under Kenyan tax laws;c.Hold that the Respondent cannot reassess the same period and same tax heads as it is a breach of the doctrine of legitimate expectation; andd.Allow the appeal with costs to the Appellant. The Respondent’s Case 40.In response to the appeal, the Respondent relied on its Statement of facts dated and filed on 3rd August 2025. 41.The Respondent’s case was that it established the expected income by analysing the self-assessment returns by the Appellant and compared income as declared in the income tax returns, VAT returns with income as per withholding tax and established that the income as per withholding tax yielded higher revenue. At the end of the investigation, the Respondent compared income as per withholding tax certificates and income declared in the income tax returns and variances charged to tax. 42.Similarly, for VAT, the Respondent asserted that it established expected income from the withholding tax certificates then compared with the income declared in the VAT returns and the variance charged to tax. 43.The Respondent stated that it is not bound by the tax returns of the Appellant and that it may asses a taxpayer's tax liability using any information available to the Respondent pursuant to Sections 24(2), and 31(1) of the TPA. 44.The Respondent asserted that it relied on its best judgement based on information available to it in compliance with Section 31 of the TPA while raising the additional Assessments. It cited the decision in the case of Commissioner of Domestic Taxes v Altech Stream (EA) Limited [2021] eKLR wherein the Court stated that Section 31(1) of the TPA allows the Commissioner to make an assessment based on such information as may be available and to the best of judgement. The Respondent therefore, maintained that the assessments issued were proper. 45.On whether the Objection decision is justified, the Respondent pleaded that it reviewed the Appellant’s Objection and the supporting documentation which led to the following observations: 46.Whereas the Appellant contended that the additional assessments relating to returns filed on or before 20th November 2019 were invalid as they were issued outside statutory timelines permitted by law, the Respondent averred that Section 31 (4)(a) of the TPA provides that the Commissioner may amend an assessment in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time. 47.The Respondent pleaded that it established that the Appellant received and enjoyed relief from the withholding tax credits from KPLC and other companies but wilfully neglected to declare full income from such withholding tax credits. 48.It further pleaded that whereas the Appellant claimed that a portion of the contract relates to income from supply of equipment that was executed by the head office outside Kenya and as such, the income was accrued and derived outside Kenya hence cannot be taxed in Kenya and that KLPC erroneously deducted withholding tax on the total contract value including purchases that was supplied by the head office offshore, the Appellant neither complained upon receipt of the tax credits nor informed KPLC of the error that occurred from 2017 to 2020 to wit, the period of investigation. 49.The Respondent pleaded that it was right to conclude that the Appellant either wilfully neglected to declare full income from the withholding tax credits received or fraudulently enjoyed erroneous withholding tax credits. 50.The Respondent relied on the case of Kenya Revenue Authority v Jimmy Mutuku Kiamba 2015] eKLR where the learned Judge opined that, “By dint of the provisions of Section 79 (1) (a) of the income Tax Act, the Kenya Revenue Authority is permitted to conduct an assessment of tax even after the lapse of 7 years, provided that the person for who tax was being assessed, wilfully neglected to provide an accurate self-assessment, or where the said person was deemed to have been fraudulent”. The Respondent thus pleaded that Section 31(4) (a) of the TPA applies and assessments for the period 2017-2019 were legally assessed. 51.Whereas the Appellant contended that in issuing the assessments, the Respondent assessed a period that was already the subject of an audit and that the assessment was a breach of legitimate expectation of the branch company since the assessment covered the period 2017-2022 which was the same period covered by the previous audit, the Respondent stated that the tax computed was based on offshore payment for purchase of equipment and not on income as per withholding taxes as is the current assessment. Further, the Respondent asserted that there was a disclaimer in the previous audit that the findings were limited to records reviewed and conclusions drawn from them and that the Respondent reserved the right to re-audit where new information became available and further that areas not audited would be open for any enquiry to ensure compliance. 52.According to the Respondent, the Appellant was made aware of a re-audit in the event new information become available. It thus pleaded that the assessment was validly issued and that it adjusted any taxes assessed and paid from the previous audit against the confirmed taxes in the final computation. 53.In response to the Appellant’s contention that the Respondent relied on withholding tax certificates issued by KPLC to estimate income that the branch should have declared in its returns, the Respondent stated that it compared the expected income to the income declared by the branch in income tax and VAT returns and found the branch to have under-declaration income. 54.Whereas the Appellant argued that offshore procurement of goods involves transactions executed entirely outside Kenya hence income did not arise from a Kenyan source under the ITA therefore, not taxable in Kenya; and that a portion of the contract relates to income from supply of equipment that was executed by the head office outside Kenya and as such, the income was accrued and derived outside Kenya hence cannot be taxed in Kenya, the Respondent contended that upon review of the terms of the contract agreement between the Appellant and KPLC, it established that under clause 14.4 on taxes and duties provided as follows:“for the purposes of the contract, it is agreed that the contract price is based on the taxes, duties, levies and charges prevailing 28 days prior to the date of bid submission in the country where the site is located.” 55.The Respondent asserted that the clause also provided that, ‘‘should there be an increase in tax, decrease in tax, introduction of new tax or abolishment of existing tax, the contract price would be revised to take into account the changes by addition to the contract price or deduction therefrom as the case may be." 56.According to the Respondent, the clause meant that the taxes were to be paid on the contract price. It argued that the Appellant and head office company is one and the same person since the contract was between KPLC and the mother company based in China and the contractor operates in Kenya through the Appellant's permanent establishment in Kenya. 57.It also stated that under clause 3.9 of the contract, country of origin is defined as "place where the plan and component parts thereof are mined, grown, produced or manufactured and from which the services are provided". The Respondent established that according to the terms of the agreement, the contractor was to design, manufacture, test, deliver, install, complete and commission certain facilities at Mamlaka road power substation in Kenya. It noted that the project was exclusively carried out in Kenya at Mamlaka road and as such income from it was accrued in or derived from Kenya hence chargeable to tax under Section 3 of the ITA. 58.According to the Respondent, Section 35(1) of the ITA provides that payments to non-resident persons not having a permanent resident in Kenya would attract resident withholding tax. It stated that a permanent establishment is defined under Section 2 of the ITA as a building site, construction, assembly or installation project or any supervisory activity connected to the site or project, but only if it continues for a period of more than one hundred and eighty-three days." 59.The Respondent established that since the Appellant is the permanent establishment of the mother company, all payments were made through the Appellant and as such, income from the project was accrued in and derived in Kenya and the permanent establishment ought to have declared income based on taxes withheld and paid all the requisite taxes. 60.The Respondent also noted that the Appellant received the withholding taxes in its ledger thereby reducing its tax liabilities and during the period 2017-2020 that KPLC withheld and paid withholding taxes into the Appellant's iTax account, the Appellant did not complain or inform KPLC that the taxes were wrongly withheld and paid into their ledger. 61.The Respondent established that the totals for the above analysed withholding certificates is Kshs 306,068,372 and not Kshs 584,783,715 as computed by the investigating team. The Respondent further established that not all the above withholding taxes were withheld and paid by KPLC. It contended that the taxes were withheld by 3 different companies to wit; KPLC, Stanbic Bank and Rareh Icon Solar Limited. 62.It stated that section 30 of the Tax Appeals Tribunals Act Cap 469A (TATA) and Section 56 of the TPA places the burden of proof on the Taxpayer. 63.It averred that it requested the Appellant to provide supporting documentation when the Appellant rejected the assessments and that it reviewed the documents provided and the evidence was deemed to be insufficient to make any changes. It cited section 59 (1) of the TPA which provides that a tax payer shall produce records when required to do so by the Commissioner. 64.The Respondent pleaded that it issued additional assessments and reviewed the objection subject to the law. Respondent’s Prayers 65.The Respondent prayed that the Appellant's Appeal be dismissed with costs; the Assessment raised by the Respondent amounting to Kshs. 200,263,760 be confirmed; and the principal taxes and interest be found due and payable as per the objection decision. Parties’ Written Submissions Appellant’s Written Submissions 66.The Appellant relied on its written submissions dated 18th March 2026 wherein it submitted that the Respondent erred in law by assessing corporate income tax on income attributable to the Head Office on account of its offshore activities and which income was neither accrued in nor derived from Kenya. 67.It also submitted that the Respondent erred in law by assessing VAT on income attributable to the Head Office which was neither accrued in nor derived from Kenya. 68.The Appellant also submitted that the Respondent's reliance on the withholding tax credits per the certificates issued by KPLC as a basis for the assessment was improper. 69.It submitted further that the additional assessments relating to returns filed on or before 20th November 2019 are time-barred. 70.The Appellant also submitted that the re-assessment of an already audited period constitutes a breach of the doctrine of legitimate expectation, where there was no new information to merit the same re-assessment. 71.The Appellant relied on the following case laws:i.Commissioner of Income Tax v Mabati Rolling Mills Limited (2012) eKLR;ii.Heritage Insurance Company Kenya Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E386 of 2023);iii.Kenya Ports Authority vs Commissioner of Domestic Taxes (Tax Appeal No. 247 of 2022) [2023] KETAT 986 (KLR);iv.Ishikawajma-Harima Heavy Industries Ltd v Director of Income Tax, Mumbai Appeal(civil) 9 of 2007;v.Kipeto Energy PLC vs Commissioner of Domestic Taxes (Appeal No. 233 of 2022) [2023] KETAT 214 (KLR);vi.Unilever Kenya Limited v Commissioner of Income Tax [2005] eKLR;vii.KRA v MAN Diesel & Turbo SE Kenya [2021] KEHC 13347 (KLR);viii.Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal No. E062 of 2022);ix.Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal No. E062 of 2022);x.Ola Energy Kenya Limited v Commissioner of Investigations and Enforcement (Tribunal Appeal E702 of 2023);xi.Adede v Commissioner, Investigations and Enforcement (Tax Appeal E241 of 2024) [2024] KETAT 1858 (KLR);xii.Mahan Limited v Commissioner of Domestic Taxes (Appeal No. 487 of 2021). Respondent’s Written Submissions 72.The Respondent filed written submissions dated 23rd March, 2026. In summary, the Respondent submitted that the assessments were proper; and that objection decision was justified. 73.It relied on the following case laws:i.Rebecca Fashion (Kenya) Limited v Commissioner Investigations & Enforcement Tax Appeal E1331 of 2024) [2025] KETAT 278 (KLR);ii.Kenya Revenue Authority v Man Diesel & Turbo SE, Kenya [2021] eKLR;iii.Commissioner of Domestic Taxes v Altech Stream (EA) Limited [2021] eKLRiv.R v. Sheppard [1980] UKHL J1127-1v.Kenya Revenue Authority v Jimmy Mutuku Kiamba [2015] eKLRvi.Travelport Services (Kenya) Limited v Commissioner of Legal Services & Board Coordination Tax Appeal E445 of 2025; andvii.Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR. Issues for Determination 74.Upon considering the pleadings and submissions of the Parties, the Tribunal identified the following issues for determination:a.Whether the Respondent erred by conducting an audit over the same period and issuing assessments under the same tax heads from an already audited period.b.Whether the Respondent erred by raising a Corporation tax assessment upon the Appellant on income earned by the Contractor (the Appellant’s head office) from the supply of equipment and services;c.Whether Respondent erred in law and in fact by demanding VAT on the supply of goods and services that were made outside Kenya by the Appellant's head office to Kenya Power and Lighting Corporation (KPLC); andd.Whether the Respondent was justified in finding that the Appellant was wilfully negligent so as to support the issuance of additional assessments relating to returns filed before 20th November 2019. Analysis and Findings 75.Having identified the issues for determination, the Tribunal proceeds to analyse the same as hereunder. a. Whether the Respondent erred by conducting an audit over the same period and issuing assessments under the same tax heads from an already audited period 76.The Appellant argued that the Respondent breached the doctrine of legitimate expectation by reassessing periods already subject to a previous audit, during which the Appellant had been assessed, had paid the taxes, and had relied on the finality of those findings. The Respondent countered that its prior letter of findings reserved the right to re-audit upon availability of new information, and that it credited taxes already paid from the earlier audit against the revised assessment. 77.The Tribunal notes that the Respondent’s reservation of the right to re-audit was expressly communicated to the Appellant in the letter of findings. However, the question is whether the information relied upon in the subsequent assessment, that is, the Withholding tax (WHT) certificates on the iTax platform, was genuinely new information or information already within the Respondent’s possession during the initial audit. 78.The Appellant contended that since KPLC’s WHT payments were reflected on iTax from the time of payment, the Respondent had constructive access to this data during the earlier audit. The Appellant did not, however, produce affirmative evidence that the Respondent actually had sight of or analysed this data during the prior audit. 79.In the absence of such evidence, and given that the Respondent credited earlier assessed taxes against the revised assessment, the Tribunal finds that the Appellant has not discharged the burden of proving that the Respondent erred by conducting an audit over the same period and issuing assessments under the same tax heads from an already audited period. b. Whether the Respondent erred by raising a Corporation tax assessment upon the Appellant on income earned by the Contractor (the Appellant’s head office) from the supply of equipment and services. 80.The Appellant’s case was that vide contract agreement dated 24th December 2013, KPLC contracted the Contractor (Appellant's head office) to design, manufacture, test, deliver, install, complete and commission Mamlaka Road Sub-station (the Project). The Appellant also stated that in order to fulfil its obligations under the Contract with KPLC, the Contractor partnered with its branch in Kenya being the Appellant herein, to execute the project in Kenya which was concluded in 2020. 81.On the other hand, the Respondent established that according to the terms of the agreement, the contractor was to design, manufacture, test, deliver, install, complete and commission certain facilities at Mamlaka road power substation in Kenya. It stated that the project was exclusively carried out in Kenya at Mamlaka road and as such income from it was accrued in or derived from Kenya hence chargeable to tax under Section 3 of the Income Tax Act (ITA). 82.The Tribunal carefully examined the contract agreement that the Appellant adduced and noted that the agreement was indeed between KPLC (‘being the employer’) on one part and Hydrochina Huadong having its principal place of business at No. 22 Chaowang Road Hangzhou, PR CHINA PC 310014 (‘being the Contractor’) on the other part. 83.The Appellant at paragraph 21 of its statement of facts stated as follows:“Under the Contract, this Honorable Tribunal will note that the Head Office was engaged to "design, manufacture, test, deliver, install, complete and commission" certain facilities in respect of a power substation in Kenya. Separately, the Appellant entered into a contract with KPLC to undertake a specific scope of work for an agreed consideration.” 84.Whereas it was the Appellant’s position that there was a separate contract for onshore works entered into between the Appellant and KPLC, the Tribunal upon examining the contents of the contract agreement, noted that the Appellant herein was not party to the said contract and neither did it have a separate contract with KPLC but rather the Appellant was a local branch of the Contractor tasked by the contractor with implementing onshore components of the contract. 85.The Appellant at paragraph 7.2 of the statement of facts stated that it executed the construction of the Project and issued the invoices to KPLC for the onshore services in Kenya Shillings and that KPLC paid it directly for this portion of the work. That this formed the basis of the Appellant’s payment of taxes during the contract period and self-assessment returns it filed. 86.Being a branch of a non-resident person, the Appellant is a permanent establishment of a non-resident person according to the meaning of "permanent establishment" in Section 2(1) of the Income Tax Act which provides that: -“"permanent establishment" includes–a fixed place of business through which business is wholly or partly carried on and includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction or exploitation of natural resources, a warehouse in relation to a person whose business is providing storage facilities to others, a farm, plantation or other place where agricultural, forestry plantation or related activities are carried on and a sales outlet;…” 87.The Appellant, being a permanent establishment of a non-resident person, is chargeable to tax in Kenya on the gains or profits from business which accrued in or were derived from Kenya, according to Section 3(1) of the Income Tax Act which provides that: -“3.(1)Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.” 88.In effort to prove that part of the works under the Contract agreement was not taxable in Kenya, the Appellant relied on OECD’s commentary on ascertainment of profits of a permanent establishment. 89.Section 18(3), (4) and (5) of the Income Tax Act prescribes how to ascertain the gains or profits of business in relation to certain non-resident persons as follows: -“18.(3)Where a non-resident person carries on business with a related resident person and the course of such business is such that it produces to the resident person or through its permanent establishment either no profits or less than the ordinary profits which might be expected to accrue from that business if there had been no such relationship, then the gains or profits of such resident person or through its permanent establishment from such business shall be deemed to be of such an amount as might have been expected to accrue if the course of that business had been conducted by independent persons dealing at arm’s length.(4)For the purpose of ascertaining the gains or profits of a business carried on in Kenya no deductions shall be allowed in respect of expenditure incurred outside Kenya by a non-resident person other than expenditure in respect of which the Commissioner determines that adequate consideration has been given; and, in particular, no deduction shall be allowed in respect of expenditure -(a)on remuneration for services rendered by the non-resident directors (other than whole-time service directors) of a non-resident company the directors whereof have a controlling interest therein, in excess of five percent of the total income of that company, calculated before the deduction of that expenditure, or of twenty-five thousand shillings, whichever is the greater, but no deduction in excess of one hundred and fifty thousand shillings shall be allowed;(b)on executive and general administrative expenses except to the extent that the Commissioner may determine that expenditure to be just and reasonable.(5)When a non-resident person carries on a business in Kenya through a permanent establishment in Kenya the gains or profits of the permanent establishment shall be ascertained without any deduction in respect of interest, royalties or management or professional fees paid or purported to be paid by the permanent establishment to the non-resident person and by disregarding any foreign exchange loss or gain with respect to net assets or liabilities purportedly established between the permanent establishment in Kenya and the non-resident person.Provided that for the avoidance of doubt, the expression “non-resident person” shall include both the head office and other offices of the non-resident person.” 90.In addition to Section 18(3), (4) and (5) of the Income Tax Act, the Tribunal is guided by the 2010 OECD Report on the Attribution of Profits to Permanent Establishments, to establish the Appellant’s income. 91.Section 18(3), (4) and (5) of the Income Tax Act envision that a permanent establishment should be treated as a functionally separate and independent enterprise for purposes of determining the gains or profits of that part of a multinational enterprise, which is an aspect in the Kenyan domestic law that aligns with the 2010 OECD Report on the Attribution of Profits to Permanent Establishments. 92.Paragraphs 8 and 10 of the OECD Report on the Attribution of Profits to Permanent Establishments provides as follows regarding the authorised OECD approach to attribution or profits to a permanent establishment as follows: -“8.The authorised OECD approach is that the profits to be attributed to a PE are the profits that the PE would have earned at arm‘s length, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the permanent establishment and through the other parts of the enterprise.9.…10.The interpretation of Article 7(2) under the authorised OECD approach is that a two-step analysis is required. First, a functional and factual analysis, conducted in accordance with the guidance found in the Guidelines, must be performed in order to hypothesise appropriately the PE and the remainder of the enterprise (or a segment or segments thereof) as if they were associated enterprises, each undertaking functions, owning and/or using assets, assuming risks, and entering into dealings with each other and transactions with other related and unrelated enterprises. Under the first step, the functional and factual analysis must identify the economically significant activities and responsibilities undertaken by the PE. This analysis should, to the extent relevant, consider the PE‘s activities and responsibilities in the context of the activities and responsibilities undertaken by the enterprise as a whole, particularly those parts of the enterprise that engage in dealings with the PE. Under the second step, the remuneration of any dealings between the hypothesised enterprises is determined by applying by analogy the Article 9 transfer pricing tools (as articulated in the Guidelines for separate enterprises) by reference to the functions performed, assets used and risk assumed by the hypothesised enterprises. The result of these two steps will be to allow the calculation of the profits (or losses) of the PE from all its activities, including transactions with other unrelated enterprises, transactions with related enterprises (with direct application of the Guidelines) and dealings with other parts of the enterprise (under step 2 of the authorised OECD approach).” 93.It follows, therefore that the revenue generated by the Appellant from the transactions with its head office, wholly fell within the ambit of profit attribution, therefore the gains or profits therefrom were to be determined in accordance with Section 18 of the Income Tax Act. The Income Tax Act does not provide room for an alternative method of the ascertainment of the gains or profits from business carried out by a permanent establishment of a non-resident, such as the Appellant, with regard transactions with its related non-resident parties. 94.In view of the foregoing provisions of the law and OECD guidelines, the gains and profits of the Appellant, being a branch of the head office (Contractor) and hence a permanent establishment in Kenya, ought to be determined separately on the income attributable to the permanent establishment. 95.The Appellant, having provided documentation and explanations to demonstrate that it was only liable to tax on payments made towards the onshore components of the project, it behoved the Respondent to base its assessment on only that component of the income that was directly attributable to the Appellant and not the entire contract sum, as part of it was attributable to the Appellant’s head office. 96.While the Respondent acknowledged that the Appellant was a permanent establishment, the Respondent misguided itself by failing to distinguish the income of the head office from that of the branch. 97.The Tribunal is therefore of the view that the Respondent’s approach of raising Corporation tax assessments on the basis of variances obtained from an analysis of withholding tax (WHT) certificates which comprised payments for the entire contract sum inclusive of both offshore and onshore components was misleading as this meant that the Appellant, a branch of the contractor only tasked with the onshore part of the contract, was being subjected to tax on both onshore and offshore income, a position that was bound to result in an inaccurate tax liability. 98.The Tribunal, having established that the Contractor was liable to taxation in Kenya with regard to supplies relating to the offshore components of the contract, and the Appellant was liable for only that portion of withholding taxes relating to the onshore component of the project, finds that KPLC ought to have separately withheld and accounted for the withholding taxes for each offshore and onshore component based on the implementing part of the Contractor. 99.The Tribunal finds that KPLC’s action of consolidating WHT deductions and issuing the corresponding WHT certificates in respect of the Appellant which incorporated both income attributable to the head office and the Appellant, meant that the Respondent erroneously placed reliance on such withholding tax certificates which resulted in erroneous assessments. 100.The Tribunal, having found that the treatment of WHT by KPLC was erroneous, and further that the basis of the Appellant’s income should rightfully be based on income attributable to the Appellant, it follows therefore that the Respondent erred by relying on the said WHT certificates to estimate income that the Appellant should have declared in its returns. 101.The Tribunal, consequently, finds and holds that the Respondent erred by raising a Corporation tax assessment on the Appellant for income earned by the Contractor (the Appellant’s head office) from the supply of equipment and services. c. Whether Respondent erred in assessing VAT on the supply of goods and services that were made outside Kenya by the Appellant's head office to Kenya Power and Lighting Corporation (KPLC). 102.The basis of the impugned VAT assessments for the years 2017, 2018, 2019 and 2020, was the positive variances that the Respondent established after the Respondent compared grossed up Withholding income tax (WHT) certificates with the VAT sales turnovers declared in the Appellant’s VAT returns, which variances the Respondent charged to tax. 103.The Appellant disputed the assessments and asserted that VAT on the supply of goods and services that were made outside Kenya by the Appellant's head office to Kenya Power and Lighting Corporation (KPLC) was payable by the importer, in this case, by KPLC. 104.The Tribunal examined documents that the Appellant provided including Bills of lading which indicate that the consignee of the imports was KPLC, meaning that KPLC was the importer of the materials for the project. Section 2(1) of the VATA defines ‘importer’ as:“importer", in relation to goods, means the person who owns the goods, or any other person who is, for the time being, in possession of or beneficially interested in the goods at the time of importation. 105.Section 5(5) and (6) of the VATA provides as follows:“(5)Tax on the importation of taxable goods shall be charged as if it were duty of customs and shall become due and payable by the importer at the time of importation.(6)Tax on the supply of imported taxable services shall be a liability of any person receiving the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.” 106.The Tribunal examined the contract agreement in issue and noted that under clause 14.1 of the agreement, the Contractor was responsible for paying all taxes and levies except otherwise provided for in the contract. Clause 14.2 of the contract agreement provided that the KPLC was responsible for paying customs and import duty, and other domestic taxes such as sales tax, and VAT for the plant specified in price schedule 1. 107.The Tribunal examined the details of plant specified in price schedule 1 and noted that the schedule dealt with imports. This means that KPLC was clear that it would pay VAT for the imports as specified in schedule 1. The Tribunal, therefore, finds that this position complied with Section 5(5) and (6) of VATA which mandates the importer to pay VAT on imports. Pursuant to the provisions of the contract agreement, the parties thereto agreed that the KPLC was responsible for paying VAT on imports. 108.The Tribunal, having established in issue b. above that the Respondent erred by attributing income of the Appellant’s head office to the Appellant as a result of assuming that all the WHT certificates represented the Appellant’s income, sought to discern how the Respondent considered a VAT assessment in light of the documentation presented by the Appellant which demonstrated how the Contract was executed. 109.Drawing from the above, the Tribunal finds that the Respondent erred in assessing VAT on the supply of goods and services that were made outside Kenya by the Appellant’s head office to Kenya Power and Lighting Corporation (KPLC). d. Whether the Respondent was justified in finding that the Appellant was wilfully negligent so as to support the issuance of additional assessments relating to returns filed before 20th November 2019. 110.The Respondent issued the Appellant with Corporation tax and VAT assessments for the years 2017, 2018, 2019 and 2020 in a notice of assessment dated 20th November 2024. 111.The Appellant asserted that the Respondent erred in law and in fact by issuing an additional assessment relating to returns filed on or before 20th November 2019, which is invalid and ultra vires, as they were issued outside the statutory timelines expressly provided for by law. 112.On the other hand, the Respondent argued that Section 31 (4)(a) of the TPA provides that the Commissioner may amend an assessment in the case of gross or willful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time. The Respondent invoked this exception to justify assessments for periods in returns filed before 20th November 2019, contending that the Appellant wilfully neglected to declare the full income reflected in the WHT certificates. 113.Section 31(4) of the TPA provides as follows regarding additional assessment issued by the Commissioner:“(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.” 114.The standard for establishing wilful neglect was addressed in Kenya Revenue Authority v Jimmy Mutuku Kiamba [2015] KEHC 8343 (KLR), cited by the Respondent, where the Court held that wilful neglect may be established on a balance of probabilities without requiring proof of fraudulent intent. The burden of proving wilful neglect, therefore, rests on the Respondent. 115.However, the Tribunal has already found, in its analysis of issues b. and c. above, that the WHT certificates relied upon by the Respondent were erroneous. They were issued by KPLC on the consolidated contract value, encompassing both offshore income attributable to the head office and onshore income attributable to the Appellant. The Appellant asserted that it declared income in line with what was genuinely attributable to its onshore operations, which was the correct legal position. The discrepancy between the WHT certificates and the Appellant’s declared income arose not from any deliberate omission by the Appellant, but from KPLC’s failure to separate and account for WHT on each component individually. 116.In these circumstances, the Respondent has not discharged the burden of proving that the Appellant wilfully neglected to declare income. It would be unjust to characterise the Appellant’s conduct as wilful neglect when the receipt of the WHT certificates by the Appellant was caused by a third party’s administrative error, and when the Appellant consistently maintained, and the Tribunal has now confirmed, that it was only obligated to declare income attributable to its onshore activities. 117.Accordingly, the exception in Section 31(4)(a) of the TPA is not triggered, and the assessments relating to returns filed before 20th November 2019 are time-barred pursuant to Section 31(4)(b)(i) of the TPA. 118.Based on the foregoing, the Tribunal finds that the Respondent was not justified in finding that the Appellant was wilfully negligent so as to support the issuance of additional assessments relating to returns filed before 20th November 2019. Final Determination 119.The upshot to the foregoing is that the Tribunal finds that the Appeal is partially merited and accordingly issues the following orders: -a.The Appeal be and is hereby partially allowed;b.The Objection decision dated 19th May 2025 be and is hereby varied in the following terms:i.The additional assessments of Corporation tax for the years 2017 and 2018 be and are hereby set aside.ii.The additional assessments of VAT for the periods before October 2019 be and are hereby set aside.c.The Respondent to recompute the Corporation income tax assessments for the years 2019 and 2020 and VAT assessments for the periods starting from October 2019 based on the onshore component of the Contract which is what is attributable to the Appellant.d.The Respondent be and is hereby directed to revise the Objection decision within 60 days from the date of delivery of this judgment based on the Tribunal’s findings under Orders b. and c. above; ande.Each party to bear its own costs. 120.It is so ordered. DATED AND DELIVERED AT NAIROBI THIS 18TH DAY OF MAY 2026.……………………………..….ROBERT M. MUTUMACHAIRMAN……………………………… ……..….……..……………..DR. TIMOTHY B. VIKIRUMEMBER……………………………… ……..….……..……………..GLORIA A. OGAGAMEMBER………………………………JIMMY M. MALLAMEMBER