[2024] KETAT 750 (KLR)

Samasource Kenya EPZ Limited v Commissioner of Domestic Taxes (Appeal E173 of 2023) [2024] KETAT 750 (KLR) (9 May 2024) (Judgment)

Neutral citation: [2024] KETAT 750 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E173 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

May 9, 2024

Between

Samasource Kenya Epz Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant (Samasource Kenya EPZ Limited-SKEL) is a company incorporated in Kenya under the Companies Act and a subsidiary of Samasource Impact Sourcing Inc. (SIS) that is incorporated and domiciled in the United States of America.

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 Parts 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. The Appellant offers various digital services to its customers including but not limited to content moderation, digital transcription and data annotation. The parent company sources for clients in the USA and subcontracts a part of the work to SKEL as well as other subsidiaries in other parts of the world.

4. On 21st December 2022, the Respondent issued an assessment letter demanding capital gains tax of 14,565,822. 00 being the principal, interest and penalties.

5. On 20th January 2023, the Appellant lodged its notice of objection against the Respondent’s assessment.

6. The Respondent issued its objection decision dated 16th March 2023 for Ksh 24,848,163. 00 in relation to principal capital gains tax, interest and penalties.

7. Aggrieved by the Respondent’s objection decision, the Appellant filed its Notice of Appeal at the Tribunal on 14th April 2023.

The Appeal 8. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 28th April 2023 and filed on even date;a.That the Respondent erred in fact and in law by alleging that Bestseller and Samasource International B.V are related parties.b.That the Respondent erred in fact by disregarding the price of Ksh 221,057. 00 price per share which was the best reference as to the price the shares sold at the open market value.

Appellant’s Case 9. The Appellant stated as hereunder in its Statement of Facts dated and filed on 28th April 2023;

10. That the Appellant is a company that was incorporated in 2011 in Kenya with a nominal capital of Ksh 100,000 made up of 1,000 ordinary shares of Ksh 100 each. Until 2017, the Appellant had two shareholders SIS and Leila Chirayath each holding 999 and 1 ordinary shares, respectively.

11. In 2017, the Appellant allotted additional 917 ordinary shares to Bestseller Foundation an entity resident in Denmark in consideration for Ksh 171,635,807. 00; similarly, 462 ordinary shares valued at Ksh 125,825,067. 00 were allotted to SIS in consideration for extinguishing shareholder debt. This resulted in an increase in value of the Appellant’s issued and authorized share capital to Ksh 237,900. 00 divided into 2,379 ordinary shares with a par value of Ksh 100. 00

12. On 12th February 2019, SIS transferred its entire ordinary shares of 1,461 in SKEL to Samasource International B.V (SIBV), a firm incorporated in the Netherlands, for a consideration of Ksh 146,100. 00; similarly, on 11th March 2019, Leila Chirayath transferred 1 ordinary share to Samasource International B.V for consideration of Ksh 125,400. 00.

13. This was closely followed by Bestseller Foundation which was paid Ksh 202,708,705. 00 for transfer of its entire 917 ordinary shares to Samasource International B.V in consideration for 767,202 shares of Series A-2 preferred stock of SIS. The Appellant declared and paid capital gains tax of Ksh 1,311,723. 00. Whereas SIS and Samasource International B.V are related entities, the Appellant and Bestseller Foundation are unrelated parties.

14. The Appellant computed capital gains tax for SIS and Leila Chirayath based on the per share price of Ksh 221,057. 00 used in the Bestseller Foundation transaction. The resulting unpaid principal CGT, interest and penalties amounting to Ksh 13,940,771. 73 was disclosed to the Respondent in a letter dated 27th June 2022. The Appellant paid the disclosed principal of Ksh 9,817,444. 85.

15. The Appellant averred that it paid the principal disclosed in good faith yet the Respondent proceeded to demand additional CGT amounting to Ksh 14,565,822. 00 through the assessment letter dated 21st December 2022 by alleging that Bestseller Foundation and Samasource International BV were related parties as defined by Paragraph 2 of the Eight Schedule to the Income Tax Act (hereinafter ‘ITA’). The implication of which resulted in the Respondent concluding that the transfer value used in the CGT declaration by Bestseller as arbitrary and not reflecting a bargain made at arm’s length. The Respondent thus arrived at a wrong transfer “market value” of Ksh 272,349. 00 per share as the price for transfer of shares by SIS, Bestseller and Leila Chirayath pursuant to Paragraph 9(3) of the Eighth Schedule of the ITA.

16. The Appellant averred that the Respondent disregarded the valuation it put forth of Ksh 221,057. 00 per share that was used to compute CGT on the transactions; that as a result, the Respondent sought to recover erroneous and unfounded taxes.

17. The Appellant contested the Respondent’s assertion as being erroneous that two directors appointed to the Appellant’s company was an indication that Bestseller actively participated in the management, control and capital of the Appellant. Moreover, the Appellant disputed the Respondent’s insistence that Bestseller and Samasource International BV were related parties. The Appellant cited Section 9(1)(d)(i) of the Eighth Schedule to the ITA which provides as follows;“9(1). Where property is acquired or transferred ;-…(d) as a result of a transaction between persons who are related, then for the purposes of (i) Paragraph 7 of this Schedule, the amount of consideration for the transfer of the property shall be deemed to be equal to the market value of the property at the time of transfer”

18. The Appellant asserted that Section 9(1)(d)(i) of the Eighth Schedule to the ITA serves to identify the case where market value of the property was deemed to be the transfer value. The Appellant stated that for a transaction to apply under this provision, the following requirements must be met;a.Property was acquired or transferred between personsb.The persons must be related.

19. The Appellant claimed that only upon identification of persons transferring/acquiring property (transacting parties) that can one investigate whether parties were related. The Appellant averred that in the instant Appeal, the transaction parties were Bestseller and Samasource International B.V and not the Appellant and Bestseller as alleged by the Respondent. On the contrary, it was Bestseller transferring its stake in the Appellant’s company to Samasource International B.V.

20. In reinforcing its position, the Appellant stated that Bestseller did not participate in the management, or capital or control of the business of Samasource International B.V. Similarly, the Appellant stated that Samasource International B.V did not participate in the management, or capital or control of the business of Bestseller. Additionally, the Appellant was categorical that no third person participated in the management, or capital or control of the business of both Bestseller and Samasource International B.V. Thus, the transaction between Bestseller and Samasource International B.V. was between two independent parties and the price that was used was Ksh 221,057. 00 per share. It was the Appellant’s assertion that the Respondent had no basis to deem a market value outside the provisions of Section 9(1)(d)(i) of the Eighth Schedule of ITA.

21. The Appellant was adamant that, to the best of its ability, it had furnished the Respondent with documents and information in its possession pertaining to this transaction. The Appellant cited the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021[ eKLR where the High Court held as follows;“Whereas the said section obligates a taxpayer to avail records, the flipside of this position is that a party can only produce documents in his possession. It could not have been the intention of the law to compel taxpayers to produce documents in the hands of a third party.”

22. The Appellant stated that it provided the Respondent with Articles of incorporation showing that SIS was the 100% owner of Samasource International B.V. The Appellant was adamant that Bestseller was a complete and different entity that was neither related to the Appellant nor the SIS. The Appellant emphasized that as a result of the foregoing, Bestseller and Samasource International B.V were correct to use Ksh 221,057 per share while computing the CGT payable on the transactions as this was a transaction between two independent parties as the price representative of the share price the shares would fetch when sold in the open market.

23. That the Appellant contested the Respondent’s price per share of Ksh 272,349. 00 as being hypothetical because the price the Appellant used in computing the CGT for SIS and Leila Chirayath of Ksh 221,057 per share was a negotiated price between two independent parties. That despite the overwhelming Appellant’s evidence, the Respondent completely ignored Appellant’s valuation. Additionally, the Appellant stated that the Respondent did not provide any evidence in form of a valuation model to support its allegations and lacked basis in overruling the share price used by the Appellant to compute CGT.

24. That contrary to Respondent’s assertions, the Appellant’s view was that a revenue-based methodology measures sales activity and does not take into consideration the cost base of the company which was particularly important for the Appellant as its costs had continued to increase over the years. It was the Appellant’s avowal that the EBITDA valuation gives a figure that clearly reflect the operating profitability of a business that can be compared to other metrics when deciding which business is more attractive as part of mergers and acquisition strategy Appellant’s Prayer

25. The Appellant prayed that the Tribunal would:a.Allow the Appeal with costs.b.Set aside and annuls the Respondent’s objection decision dated 16th March 2023.

The Respondent’s Case 26. The Respondent neither filed a Statement of Facts nor written submissions.

Appellant’s Written Submissions 27. The Appellant’s written submissions were dated and filed on 31st August 2023. The Appellant submitted on 3 issues as stated hereunder;a.Whether the Respondent erred in fact and in law by alleging that Bestseller and Samascource B.V were related parties.

28. The Appellant submitted that the Bestseller and Samasource International BV were not related parties as couched under Section 3 of the Eighth Schedule of the Income Tax Act (ITA).

29. The Appellant termed the Respondent’s allegations as unfounded since neither of the two firms nor a third person actively participated in management, control and capital of the Appellant. The Appellant relied on Paragraph 9(1)(c)(i) of the Eight Schedule of the ITA which provides as thus;“where property is acquired or transferred as a result of a transaction between persons who are related, then, for the purposes of paragraph 7, the amount of the consideration for the transfer of property shall be deemed to be equal to the market value of the property at the time of the transfer.”

30. The Appellant averred that Paragraph 1 of the Eighth Schedule of the ITA clearly provided who “related person” were; additionally, that it was only upon identification of the persons transferring/ acquiring property that one must investigate whether the transaction parties are related. The Appellant asserted that in absence of “related person,” Paragraph 9(1)(c)(i) of the Eighth Schedule of the ITA did not apply in the transfer of shares of Bestseller in the Appellant to Samasource International BV since it was a transfer between two independent parties.

31. That obtaining from the foregoing, the price used by the two independent parties i.e. Ksh 221,057. 00 per share was the correct value as prescribed under Paragraph 7 of the Eighth Schedule of the ITA and that the transfer price used by the Respondent in the CGT declaration did not represent a bargain made at arm’s length.

32. The Appellant asserted that it provided the Respondent with Articles of Association which showed that SIS was the 100% owner of Samasource International BV. The Appellant also contested the Respondent’s insistence on supplementary evidence of ownership structure of SIS which it claimed would rule out any doubt on the possibility of relation between Samasource International BV and Bestseller whereas it had provided documents in its possession that were evidence of the group’s ownership structure. The Appellant relied on the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya[2012]eKLR where the court stated as follows;“Whereas the said section obligates a taxpayer to avail records, the flipside of this position is that a party can only produce documents in his possession. It could not have been the intention of the law to compel taxpayers to produce documents in the hands of a third party.”

33. The Appellant averred that it could not produce Bestseller documents since it was a complete and different entity neither related to the Appellant nor SIS and as such the Appellant could not be expected to provide information not in its possession.b.Whether the Appellant was justified in using the 2017 pre-money valuation of Ksh 221,057. 00 price per share in place of the 2019 valuation.

34. The Appellant asserted that the price of Ksh 221,057. 00 per share paid to Samasource International BV represented the price the shares would have fetched when sold in the open market which was the price negotiated between two independent parties being willing seller and willing buyer. The Appellant cited the case of Kanini Farm Ltd v Commissioner of Lands [1984]eKLR where the court defined the market value as follow;“the market value as the basis for assessing compensation is the price which a willing seller might be expected to obtain from a willing purchaser, a purchaser who though he may be a speculator, is neither a wild nor an unreasonable speculator.”

35. The Appellant claimed that the Respondent should not dictate how parties transact as long as parties are within the confines of the law and further stated that in its valuation of the company adopted the EBITDA [Earnings Before Interest, Taxes, Depreciation and Amortization] multiple valuation methodology since it measured a company’s profitability of operating business only; and since EBITDA is considered to reflect the performance of a business more accurately, it provides a clearer idea of the ability of a business to generate profit.

36. That as per 2019 audited financial statements, the Appellant’s EBITDA was $559,793 resulting the Appellant’s valuation of $3,078,862. 61 and a per share price of Ksh 214,786. 05 which was even lower than the amount used to compute CGT. That despite all the laid-out evidence, the Respondent completely ignored the Appellant’s valuation and without any evidence of a valuation model in support settled on a value of Ksh 272,057. 00 in total disregard of the open market value of the shares.

37. It was the Appellant’s assertion that the Respondent was fundamentally incorrect and wholly contrary to provisions of the Eighth Schedule of the ITA when it adopted a per share valuation that was not backed by any evidence in form of a model. Furthermore, the Appellant submitted that the value of a company was not static and could be affected by many factors that might increase or decrease the share value in a company.c.Whether the Respondent should be estopped from adducing any factual evidence in their submissions as they are in contravention of Section 15 of the TAT Act.

38. It was the Appellant assertion that the Respondent violated Section 15 of the Tax Appeals Tribunal Act, No. 40 of 2013 (hereinafter ‘TAT’)by failing to file its response within the statutory timeline. That whereas the Appellant filed its Appeal on 28th April 2023 and served the Respondent on the same date, the Respondent failed to file Statement of Facts in rebuttal before the mandatory statutory deadline for filing which expired on 28th May 2023.

39. The Appellant was adamant that Section 15 of TAT is couched in mandatory terms that the Respondent ought to have filed its response in 30 days at the Tribunal but failed to provide evidence to support its case as required by Section 15 of the TAT. In buttressing its position, the Appellant relied on Sections 107 and 108 of the Evidence Act provides as follows;“(1).Whoever desires any court to give judgement as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist;(2).When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person108. The burden of proof in a suit or proceedings lies on that person who would fail if no evidence at all were given on either side”

40. Similarly, the Appellant well aware of Section 56 of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’) and Section 30 of the TAT, submitted that it discharged its burden of proof in the matter through evidence to support its case at which instance the pendulum shifted to the Respondent to prove its allegations against the Appellant but was yet to establish its case before the Tribunal. The Appellant relied on the case of Kenya Revenue v Man Diesel & Turbo Se, Kenya where the court quoted the Canadian case of Hickman Motors Ltd v Canada [1997]2 SCR 33. 6 where the court stated as follows;“the appellant’s initial onus of proof is met where a prima facie case is made out. The onus shifts to the Minister to rebut the prima facie case made out by the taxpayer and to prove the assumptions. The appellant adduced clear, unchallenged and uncontradicted evidence. The respondent adduced no evidence whatsoever. Where the onus has shifted to the Minister and the Minister has adduced no evidence whatsoever, the taxpayer is entitled to succeed”

41. The Appellant submitted further that the Respondent’s lack of response or any factual evidence on record was testament to the lack of factual rebuttal to the Appeal in its entirety. That therefore, the Respondent should be estopped from making or alluding to any factual evidence and the same ought to be ignored or struck out should the Respondent bring them in its submissions. The Appellant cited the case of Petra Development Services Limited v Evergreen Marine (Singapore) Pte Ltd and Another [2018] eKLR where the court held that where a defense had not been filed it was improper to allow a defendant to lead evidence as this would amount to allowing a party to depart from its case.

42. It was the Appellant’s assertion that it had given unchallenged evidence to show why the Respondent’s objection decision ought not to have been made.

Issues for Determination 43. The Tribunal having carefully considered the Appellant’s pleadings, documentation and Written Submissions notes that a single issue distils for its determination, :-

Whether the objection decision dated 16th March 2023 was justified. Analysis and Determination 44. Having identified this single issue for determination, the Tribunal proceeds to analyse it as follows:

45. The instant Appeal emanated from the Respondent’s assessment against the Appellant demanding capital gains tax for alleged sale of shares. The subsequent Appellant’s notice of objection did not extinguish the assessment which the Respondent proceeded to confirm in its objection decision.

46. The Tribunal however notes that the Respondent in the instant Appeal was derelict and squandered the opportunities granted to file and serve the Appellant with its Statement of Facts within statutory timelines pursuant to Section 15 of the TAT, which provides that;“(1).The Commissioner shall within thirty days after being served with a copy of an appeal to Tribunal, submit to the Tribunal enough copies as may be advised by the Tribunal, ofa.A statement of facts including the reasons for the tax decision; andb.Any other document which may be necessary for review of the decision by the Tribunal”

47. The Tribunal notes that Section 15 (1) above cited directs the Respondent regarding timelines of service to the Appellant. The Tribunal reiterates the Court’s decision in the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes [2021]eKLR where it was categorically that;“The word shall when used in a statutory provision imported a from of command or mandate. It was not permissive, it was mandatory. The word shall in its ordinary meaning was a word of command which was normally given a compulsory meaning as it was intended to denote obligation. Shall was used to express a command or exhortation or what was legally mandatory.”

48. The Tribunal observes that the Appellant’s assertions remain unchallenged and the Appeal is thus undefended and the Tribunal is inclined to agree with the Appellant since the onus was on the Respondent to rebut these allegations but failed to counter them in time. The Tribunal reiterates the court’s decision in the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) where Justice Majanja stated as thus:-“I agree with the Tribunal’s holding that the burden of proof in tax matters is not stationary but is like a pendulum swinging between the taxpayer and taxman at different points but more times than not swings towards the taxpayer.”

49. The Tribunal’s duty in Appeals is to be a just and impartial arbiter based on facts placed before it by all parties; however, where a party does not present its case, the other party is bound to succeed because its allegations have not been challenged or put to test on a scale of probabilities with the other party’s assertions. Thus, the parties before the Tribunal with their unimpeded evidence are bound to succeed.

50. From the foregoing, the Tribunal is of the view that the Appellant’s averments have not been controverted by the Respondent and because the Appeal has not been opposed, the Respondent’s objection decision dated 16th March 2023 was not justified.

Final Decision 51. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 16th March 2023 be and hereby set asidec.Each party to bear its own costs.

51. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF MAY, 2024CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBERGEORGE KASHINDI - MEMBERSPENCER S. OLOLCHIKEMEMBER