[2024] KETAT 650 (KLR)

SBI International Holdings AG Kenya v Commissioner of Domestic Taxes (Tax Appeal 888 of 2022) [2024] KETAT 650 (KLR) (Civ) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 650 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 888 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, T Vikiru & AK Kiprotich, Members

April 26, 2024

Between

Sbi International Holdings Ag Kenya

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a Kenyan branch of SBI International Holdings, a company based in Switzerland which operates across Africa, Europe, the Middle East and South America. Its principal business activity is the construction of roads and bridges, power stations, waterworks and quarries.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The issue in dispute in this Appeal arose when the Respondent carried out a compliance audit on the Appellant’s affairs for the years 2016 to 2020. The audit resulted in the issuance of an additional assessment for VAT and income tax on 22nd and 23rd December 2021, respectively, totalling Kshs 3,686,434,989. 49.

4. The Appellant lodged its objection to the assessment on 21st January 2022.

5. The Respondent issued its Objection decision on 22nd July 2022 wherein it partially confirmed income tax of Kshs 1,161, 676,730. 00 and confirmed the VAT of Kshs 588,943,608. 00.

6. Dissatisfied with the Respondent’s objection decision, the Appellant filed a Notice of Appeal on 10th August 2022 against the tax demand of Kshs 1,770,620,338. 00.

The Appeal 7. The Appellant’s Memorandum of Appeal dated 24th August 2022 and filed on the same date has set out the following grounds of Appeal:a.The Respondent erred in law and fact by confirming a tax demand of Kshs 145,320,562 on alleged under or non-declaration of Interim payment certificates (IPCs) which is erroneous.b.The Respondent erred in law and fact by confirming the assessment for the sum of Kshs 443,623,046. 00 on account that the Appellant’s claims from Kenya National Highways Authority (“KeNHA”) and treating the claims as VAT inclusive which is not only erroneous but premature as the said KeNHA claims had not yet crystalized and could not, in the circumstances, attract VAT.c.The Disputes Board held that the awards were VAT-exclusive.d.The Respondent erred in fact by alleging that there was a variance in sales per IPCs vis-à-vis sales per income tax returns filed, thereby erroneously adjusting the Appellant's Corporation income tax(CIT) allegedly on over and or under-declarations thereon without any basis either in law or in fact.e.The Respondent was misguided both in law and in fact in charging CIT on the KeNHA claims when they were fully aware that the said claims had not crystallized and could not therefore be taxed as the said income had not been ascertained.f.The Respondent was misguided both in law and in fact in disallowing rent expenses incurred wholly and exclusively for the generation of income contrary to the provisions of Section 15(1) of the Income Tax Act (ITA) and without due regard to the fact that any rent related to employees was already taxed as a benefit on the respective employees.g.The Respondent was misguided both in law and fact in disallowing school fee charges for purposes of ascertaining CIT payable on the basis that there was no sufficient supporting documentation contrary to the evidence thereon.h.The Respondent erred in law and fact by seeking to disallow service fees for tax computation purposes without any reasons pegged thereon or due regard to the fact that the amounts thereon were already added back for CIT purposes.i.The Respondent erred in law and fact by seeking to disallow donations for tax computation purposes without due regard to the fact that the amounts thereon were already added back for CIT purposes.j.The Respondent erred in law and fact by seeking to disallow provisions for post-employment benefits for computation purposes without due regard to the fact that the amounts thereon were correctly treated as a non-deductible expense for CIT purposes in the respective years.k.The Respondent erred in law and fact by disallowing the wear and tear allowances contrary to the provisions of Section 15(2) (b) of the Income Tax Act and the evidence on record in connection thereto.l.The Respondent erred in law and fact in disallowing loss on disposal of assets contrary to the law in connection thereon.m.The Respondent erred in law and fact in computing its increment CIT by failing to take into consideration withholding tax credits together with instalment taxes existing on iTax and which credits are allowable in law to be offset against any resulting CIT liability.n.The Respondent acted in contravention of the law by imposing a late penalty and interest upon the Appellant when there was no tax liability upon which the penalty would be pegged on.o.The Respondent erred in law and in fact in adjusting the net foreign exchange loss which was in any event realized and thereby not subject to CIT adjustments.

Appellant’s Case 8. The Appellant has supported its Appeal with the following documents:a.Statement of Facts dated and filed on 24th August 2022. b.Witness statement by Gilad Mishni dated 31st March 2023 and filed on the 3rd April, 2023 that was admitted in evidence under oath on the 6th February, 2024. c.Witness statement by Dorin Antohi dated 20th December 2023 and filed on the same date that was admitted in evidence under oath on the 6th February, 2024. d.Written submissions dated 20th February 2024 and filed on 21st February 2024.

9. The Appellant stated that it lodged its notice of objection dated 21st January 2022, objecting to the whole of the tax demand for VAT and CIT in the sum of Kshs 3,686,434,989. 49.

10. That the Respondent issued its Objection decision dated 22 July 2022, wherein it allowed the objection in part, confirmed a demand of principal taxes in the sum of Kshs 1,750,611,338 constituting a VAT assessment of Kshs 588,934,608 and CIT assessment of Kshs 1,161,676,730. That the Respondent thereafter proceeded to issue the Appellant with iTax-generated confirmation assessment notices amounting to Kshs 596,630. 764. 23 with respect to VAT as compared to the confirmed assessment of Kshs 588,934,608. 00 thereby raising a variance of Kshs 7,208,222. That it was thus not clear to the Appellant what was the exact sum of VAT in dispute.

11. The Appellant submitted that the excess variance of Kshs 7,208,222. 00 ought to be revoked because the Respondent was not at liberty to adjust the VAT liability upwards after issuing the objection decision.

a.Value Added Tax 12. On the issue that it had failed to pay VAT of Kshs 145,320,562 on certain interim payments certificates (IPC), the Appellant stated that its contracts provided that the advance payment received from KeNHA was an interest-free loan for mobilization and cash flow support on the construction works undertaken by the company.

13. It was thus its view that these advance payments constituted a VAT-exempt supply being “the making of any advances or any credit” as provided under Paragraph 1(h) of Part II to the First Schedule to the VAT Act. That accordingly, no VAT is applicable as “exempt supplies” are defined under the VAT law to mean “supplies specified in the First Schedule which are not subject to tax.”

14. Its further argument was that VAT was accounted for on the gross amount of the IPCs before the recovery of a portion of the loan. That the VAT sought by the Respondent in the sum of Kshs 57,992,660. 00 was ultimately fully accounted for in subsequent IPCs issued by KeNHA. In the circumstances, no VAT was due and payable in relation to advance payments and accordingly, the sum of Kshs 57,992,660 being demanded thereon ought to be vacated forthwith.

15. The Appellant averred that the tax shortfall penalty demanded by the Respondent in its objection decision is not applicable as the Appellant did not utter any false or misleading statement on its tax affairs. As such, under the provisions of Section 84(5) (a) of the TPA, the demand for penalty ought to be vacated because the accusation of fraud is an afterthought and it has not been proved in this case.

16. On the accusations that it had conflated, omitted or split certain IPCs and thereby breached the provisions of Sections 2, 24, 28 and 71 of the TPA, the Appellant submitted that contrary to the Respondent’s allegation it had clarified the issue of lumped or split IPCs at their various meetings and therefore this issue does not lie. That it’s VAT was however fully accounted for.

17. That the Respondent's demand of Kshs 443,623,046 on account that the VAT point on KeNHA claims crystallized when the dispute board rendered its decision was erroneous because its pleading before the High Court was for enforcement of the terms of the contract between it and KeNHA. Accordingly the tax liability could only be triggered upon issuance of the court decree which determined the income earned.

18. That the High Court is yet to issue decrees in relation to all the Dispute Board (DB) decisions.

19. The Appellant stated that it lumped its sales declarations with VAT returns, and hence the reason why its declarations per project did not match with the details submitted for the VAT returns.

20. On the issue of that VAT demand of Kshs 443,623,046, the Appellant averred that this demand was premature because its claims for KeNHA were not inclusive of VAT. That moreover, VAT had not become due under Sections 5(3) and 12(1) of the VAT Act because the parties had not agreed under the contract as to whether services had been performed and no invoices had been issued concerning the contracts.

21. That the time of supply under the contract signed by the parties should crystallize at the earlier of the date on which payment is due or received as per Section 12(3) of the VAT Act. That the relevant time of supply was thus the point of issuance of the IPC by the engineer.

22. The Appellant urged that the compensation claims upon which the Respondent charged VAT were net of VAT. Consequently, the VAT payable would only have been determined based on the entire compensation value when the time of supply crystallizes.

23. That the date of award of interest on the DB decision had no bearing on the issue of tax point.

24. The Appellant concluded, under this head, by stating that the VAT demand of Kshs 443,623,046 on claims awarded to the Appellant by the DB is yet to crystallize and cannot in the circumstances attract VAT.

25. The Appellant submitted that the Respondent also acted in contravention of the law by imposing a late penalty and interest upon it when there was no tax liability upon which the penalty would be pegged on.

b.Corporate Income Tax 26. It is the Appellant’s case that all the IPCs for the respective years under consideration were properly recognized as income in the correct periods and were properly accounted for as such. That the purported taxation on this account is therefore neither predicated on law nor proper factual basis.

27. The Appellant submitted that the Respondent erred by alleging that there was variance in sales between per IPCs vis a vis sales per income tax returns and thereby erroneously adjusting the CIT.

28. It is the Appellant’s case that all IPCs were recognized as income in the correct periods and were properly accounted for.

29. On the issue of under-declared IPCs, the Appellant submitted that the alleged under-declaration of IPCs for 2016-2019 in the sum of Kshs 2,196,303,444 was false. That this issue was fully addressed under retention money, plants, and materials on site and advance payments made.

30. The Appellant stated that the Respondent acted erroneously when it adjusted CIT for Kshs 679,851,906.

31. The Appellant submitted that retention money ought not to have been adjusted for CIT because the money would be recognized in its books of account once work had been done and approved. That it was at this point that tax liability would crystallize.That it accounted for this money in full in the subsequent IPCs.

32. The Appellant further submitted that CIT could not be levied on KeNHA claims because this income of Kshs 2,907,175,271 had not been ascertained. That this claim was thus premature because the process of validating KeNHA claims had not been exhausted.

33. That the High Court has yet to issue decrees on the DB decision and the engineer has also not verified the compensation awarded. That in those circumstances and as supported by IFRS 15, income in the year 2019 had not accrued.

34. It held the view that the Respondent’s action amounted to taxation of a deferred revenue item when the same had not become due and payable.

35. On the issue of expenses, the Appellant stated that it:-a.Rent expenses of Kshs 168,977,888/= were incurred wholly and exclusively for the generation of income as is provided in section 15(1) of the ITA. That the same ought to have been allowed.b.School fees expenses of Kshs 12,066,734. 00 had been taxed from the salary of respective employees via payroll that the balance amount of Kshs 9,823,603. 00 after the said taxation should be allowed as an expense. It stated that its argument was supported by Section 5(4) (d) of the ITA which provides that educational fees of employee dependants do not constitute gains or profits.c.Service fees of Kshs 920,003,674 were disallowed without any reason contrary to the provisions of the Fair Administrative Act.d.Donations of Kshs 2,659,721 were disallowed for the 2016 year of income without regard to the fact that the amount had already been added back for CIT purposes.e.Taxes for tax computation of Kshs 1,773,946,179 were disallowed when the same amount had previously been treated as a non-deductible expense for CIT purposes in accordance with Section 16(2) (c) of the ITA.f.Provisions for post-employment benefits were disallowed even though the same amount had correctly been treated as a non-deductible expense for CIT in the respective years.

36. The Appellant also averred that the Respondent erred when it failed to take its withholding tax credits together with instalment taxes amounting to Kshs 383,034,846 into consideration to offset its CIT liability.

37. It further submitted that the Respondent introduced the issue of disallowing loss on disposal of assets at the objection stage and thereby denying it the right to object to this tax head contrary to Section 51(8) of the ITA.

38. That the Respondent adjusted its CIT for the sum of Kshs 221,861,804 purportedly for the net foreign exchange “gain” and yet what was realized was a net foreign exchange loss and not a gain as purported by the Respondent. That the said exchange loss having been realized, the same ought to have been treated as allowable expense since it had crystallized.

39. It was of the further view that the decision to levy a late payment interest at the rate of 1% was contrary to the provision of Section 38(1) of the TPA because it had not failed to pay tax on or before the due date given that no tax was due from it.

Witness Statement of Dorin Antohi 40. The Appellant’s witness Dorin Antohi dated 20th December 2023 winch was adopted by the Tribunal on 6th February 2014 where he stated that Respondent failed to recognize several reconciling factors in the IPCs issued including the fact that:a.Each IPC would be issued based on advance payment in the form of a loan by the government to enable it to commence the works. That the amount paid in the 1st IPC would be deducted from the subsequent IPCs, it is thus not revenue.b.Due to the guaranteed nature of this retention amount, the Appellant recognized it upfront at the beginning of each of the projects and not at the point when IPC was issued.c.The Respondent included material on site in the IPC as part of the revenue thereby grossly miscalculating the revenues raised from the various IPCs.d.Work done is recognised in the year the IPC is issued and it accounted for IPC in the years when they were issued. That in total disregard of this fact, the Respondent lumped up the gross amount indicated as materials on site in the IPCs as forming part of the revenues. In so doing, the Respondent grossly miscalculated the revenues arising from the various IPCs hence arriving at its position that there was under declaration of IPCs.

41. The Appellant indeed accounted for revenues received for work done during the years the related IPCs for work done were issued and the Respondent therefore erred when it grossed up the Appellant’s revenues as received under the various IPCs.

42. He stated further that the claims awarded by the DB were net of taxes.

43. It was of the view that the Respondent lacked consistency in this claim to the extent that on the one hand, the Respondent has based its analysis of revenue recognition based on the IPCs issued but on the other hand it required the Appellant to account for and pay taxes where IPCs have not been issued.

Witness Statement of Gilad Mishni 44. The Appellant's second witness, Gilan Mishni stated in their witness statement dated 31st March 2023 and which was adopted by the Tribunal as its testimony on 6th February 2024, stated that based on his understanding of the terms of the contracts, the advance payments that they received were exempt supplies.

45. That the Appellant accounted for its VAT on the gross amount of the IPC issued before the recovery of the loan.

46. On the issue of the VAT sought by the Respondent on IPC 1 of projects 1912, 1925 and 1926, the Respondent held the view that it had fully accounted for in subsequent IPCs issued under the respective projects. No VAT was due relating to advance payments.

47. He stated that the Appellant approached the High Court to enforce the terms of the contract and not the DB's decision.

48. That all sales declared were tied to relevant IPCs onto which tax was paid.

49. That the rental charges incurred amounting to Kshs 168,977,888 in its financial statements related to rent paid for various site offices, storage areas, guest houses and a few family houses occupied by various staff members.

50. He also stated that school fees related to employee dependants amounting to Kshs 52,767,772 for the FYs 2016 to 2018 were not added back in the respective tax computations for purposes of determining Corporate Income Tax (“CIT) payable.

51. That out of an amount of Kshs 12,066,734, a total sum of Kshs 21,890,337 relating to school fees was taxed on the respective employees by the Appellant via the payroll with the balance of Kshs 9,823,603 that was not taxed through the payroll being properly treated as a non-deductible expense and added back for CIT purposes.

52. He stated that for tax computation for the year 2016, the Appellant disallowed donations amounting to Kshs 2,659,721, service fees amounting to Kshs 92,003,674 and taxes amounting to Kshs 1,773,946,179 in its original tax return

53. That additionally, SBI had excess withholding tax (“WHT”) credits in its iTax ledger amounting to Kshs 383,034,846 which it should have offset from its CIT.

Appellant’s Prayer 54. The Appellant prays that:a.The Appeal be allowed.b.This Honourable Tribunal be pleased to set aside, in its entirety, the Objection decision dated 22 July 2022 demanding the principal tax in the sum of Kshs 1,750,611,338. 00 being Value Added Tax in the sum of Kshs 588,934,608. 00 and Corporation tax assessment in the sum of Kshs 1,161,676,730. 00c.Subsequent thereto, this Honourable Tribunal be pleased to set aside both the Value Added Tax assessments in the sum of Kshs 596,630,764. 23 connection hereto and revoke the 14 Conformation assessment notices dated 2nd August 2022 appurtenant to the objection Decision subject hereto.d.Any other orders that the Tax Appeals Tribunal may deem fit.

Respondent’s Case 55. The Respondent grounded its Appeal on the following documents:-a.The Statement of Facts dated 23rd September 2022 and filed on the same date.b.The Witness statement of Moses Ndirangu dated 28th March, 2023 and filed on the 26th March, 2023 that was admitted in evidence under oath on 6th February 2024. c.The Written submissions dated 8th February 2024.

56. The Respondent stated that it took extreme measures to accord the Appellant an opportunity to account for the variances but it did not provide any evidence that would have altered the assessment. That the TPA placed the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving at a different objection decision.

57. That the Appellant failed to correctly declare its income earned from Kenya National Highways Authority (KeNHA). That it for example declared the 2015 IPCs with a value of Kshs 1,617,372,175 in 2016.

58. The Respondent averred that the Appellant split its IPCs and made a partial declaration thereof. That this variances were subsequently brought to charge.

59. That the Appellant failed to declare its VAT correctly and it is for this reason that it brought the undeclared IPCs of Kshs 145,320,560. 00 and KeNHA claims of Kshs 443, 623,045. 00 to tax.

60. That an in-depth examination of the records established that:a.There were inconsistencies in the returns filed by suppliers and the invoices claimed by the Appellant and this indicated a variance as per the VAT returns filed and Income tax returns filed.b.An analysis of VAT returns produced by the Appellant established that the Appellant was in contravention of Sections 2, 24 and 28 as read together with Section 71 of the TPA regarding the filing of VAT returns in the prescribed manner and form as required.c.The returns omitted, lumped or split several IPCs and this made it difficult for the Commissioner to independently verify if all the IPCs had been declared.

61. The Respondent averred that the Appellant filed nil VAT returns for July 2016 and November 2016 despite having IPCs that ought to have been declared.

62. That advance payment and retention money have different tax points for income tax and VAT and therefore it leads to variances in the turnover declared in the two tax regimes. That as per Section 12 of the VAT Act, advance payment should be declared on receipt while Section 3 of the Income Tax Act requires advance payment to be declared only when earned and not when received.

63. That when the IPCs are being issued the taxable value is the amount certified as work done. The amount to declare for VAT should be this amount less recovery of the advance payment portion as advance payment had been declared. The amount payable to the contractor however is the taxable amount less recovery of advance tax and amount to be retained.

64. The Respondent averred that the tax point for VAT is the time the DBs were issued and upon expiry of time given to KeHNA to appeal the decision of the DBs. That it is recognised that income accrued when the DB decision was issued and not on the date of the decree.

65. That the Appellant had been requested to provide ledgers for each of the expenses together with the supporting documentation that was used to pass the entries such as invoices, payment slips, lease agreement and proof of payments. That the required documentations were not availed.

66. That its computation was from the net loss declared as opposed to the taxable loss declared. Therefore, adjustments for non-allowable expenses were made for tax purposes and added back expenses which had not been fully supported.

67. The Respondent averred that the tax computation was done starting with the declared taxable loss as per the self-assessment. That the Appellant provided a schedule of rent expenses with sample lease agreements but failed to provide the documents showing the posting of the entries in the ledger like payment slips, and bank statements to prove that the amounts were indeed paid. That it consequently, allowed what had been supported and disallowed rent expenses that had not been supported.

68. That the Appellant provided a schedule of school fees expenses but failed to provide the documents that enabled the posting of the entries in the ledger like payment slips, bank statements to prove that the amounts were indeed paid, the names of students whom the school fees were paid for, the employees whose children were paid for, the school names where the fees were paid and bank statements to show that the amounts were paid.

69. The Respondent averred that there was a lot of inconsistency in the Plant Property & Equipment in Appellant’s various income tax returns and audited financial statements which were not consistent over the years. That it was provided with the explanation that there was a reclassification of motor vehicles to class 1 but it did not provide ownership documents of the said assets and proof of purchase of the assets to enable it to determine if the wear & tear claimed was the correct amount, and if the classification had been done properly. That in the absence of this proof, it disallowed the wear and tear expense as its correctness could not be ascertained.

70. That the tax credit of Kshs 498,777,928. 00 for WHT and advance tax for the years 2018 to 2020 was considered when the Appellant’s tax liability was determined. That it was also advised to exercise its rights under Section 47 of the TPA to benefit and obtain any refunds to which it was entitled.

71. In response to ground 13 of the Statement of Facts, the Respondent denied that the taxpayer has paid all its tax dues and reiterated that as a result of the short levy the Appellant is in debt of Kshs. 1,770,620,338.

Respondent’s Prayers 72. The Respondent prayed that this Tribunal finds that:-a.That the Respondent’s objection decision be upheld.b.The outstanding tax arrears of Kshs. 1,770,620,338 are due and payable by the Appellant.c.The demand assessments dated 6th March 2020 were proper in law.d.That the Appeal herein be dismissed with cost to the Respondent.

Issues For Determination 73. The Tribunal has looked at the extensive pleadings, evidence adduced, documents and submissions filed by the parties and it is of the view that this Appeal distils into the following issues:a.Whether the Respondent introduced -new issues in its objection decision.b.Whether the Appellant was subjected to instances of double taxation.c.Whether the Respondent erred in issuing a demand for KeNHA claims.d.Whether the Respondent erred when it failed to offset the Appellant’s Withholding tax credits from its resulting tax liability.e.Whether the Respondent erred in:-i.Confirming its tax demands for under-declarations and sale variances,ii.Disallowing the Appellant’s claims for rent expenses, school fees, service fees, donations tax, post-employment benefits, wear and tear allowance and loss on disposal of assets.iii.Not taking the Appellant’s withholding tax credits and installment taxes in computing the Appellant’s CIT liabilityf.Whether the Respondent erred in imposing penalty and interests on the Appellant’s tax liability.

74. Both parties in this Appeal opted to file supplementary submissions and documents without leave of the Tribunal. Such documents stand expunged from the record and shall not be considered by the Tribunal in its analysis and determination of the Appeal.

Analysis And Determination 75. The Tribunal having identified the issues falling for its determination proceeds to analyze the same as hereinafter.

a.Whether the Respondent introduced new issues in its objection decision. 76. The sequence for handling tax disputes under Section 51 of the TAT Act is as follows:a.An assessment is issued.b.A taxpayer is allowed to object to that decision under Section 51(1) of the TPA.c.The Commissioner would issue its objection decision under Section 51(8) and (9) of the TPA.

77. Section 51(8) of the TPA provides as follows in explaining the genesis of the objection decision:“Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part or disallow it, and the Commissioner's decision shall be referred to as an "objection decision".

78. The law is thus emphatic that an objection decision emanates from an objection, and an objection emanates from an assessment. The Respondent cannot therefore introduce an assessment at the objection stage as this would amount to levying a new tax against the Appellant without giving it the chance to object to that assessment as is provided under Section 51(1) of the TPA. Indeed such an action would be out rightly unlawful.

79. The Appellant argued that the following tax heads were introduced in the objection decision:-a.Loss on disposal of Kshs 192,573. 00 was adjusted in the objection decision yet it was never raised in the assessment.b.An adjustment on foreign exchange loss of Kshs 221,861,804. 00 was introduced in the objection decisions and yet it was not raised in the assessmentc.Provision for post-employment for the year 2016 of Kshs 2,054,106 was adjusted even though it was not raised in the Respondent’s assessment but that it surfaced in the objection decision.

80. The Respondent did not expressly respond or address these issues in its pleadings and submissions.

81. The Respondent’s review findings are contained in a letter dated 10th March 2021. Having gleaned through the said letter the Tribunal noted that the issue of loss of disposal of assets was raised in Paragraphs (f) and (g) of the said letter and the Appellant was requested to supply documents to support its adjustments. The Respondent did not therefore fall into error when it included issues of loss on disposal of assets worth Kshs 192,573. 00 and CIT adjustment in the sum of Kshs 221,861,804. 00 in its objection decision.

82. The iTax-generated confirmation assessment notices amounting to Kshs 596,630. 764. 23 with respect to VAT and the confirmed assessment of Kshs 588,934,608. 00 did not amount to a variance because the Appellant was required to object to the confirmed assessment as this was the last notice that was served on it.

83. The Tribunal has noted that the Appellant responded to this confirmed assessment of Kshs 588,934,608. 00 in its objection letter dated 21st January 2022.

84. The Respondent’s objection decision also restricted itself to the VAT assessment as contained in its confirmed assessment. It did not introduce new VAT assessments in the objection decision.

85. The Tribunal concludes that under the circumstances the Respondent did not introduce new issues in its objection decision.

b.Whether the Appellant was subjected to instances of double taxation. 86. Double taxation occurs when an entity is taxed twice on the same profits earned during a particular year.

87. The Appellant averred that it was double taxed when the Respondent disallowed its service fees of Kshs 92,003,674 and donations of Kshs 2,659,721 for the year 2016.

88. The Respondent stated in its objection decision that it requested ledgers for each expense, invoices, payment slips and proof of payments but these documents were never provided. That it nevertheless added back expenses which were fully supported but it did not rework the tax computation for 2016 as there were two returns filed.

89. This explanation provided by the Respondent was presumed to be correct and the Appellant was thus required to discharge its burden of proof to show that the Respondent’s action in disallowing its service fees for tax and donations was in error.

90. The Appellant’s explanation on how it was double taxed when the Appellant had asserted that it did not rework its tax computation for the year 2016 was not clear. It merely referred the Tribunal to the 2016 CIT returns which the Respondent had acknowledged and affirmed that it considered them in its tax computation.

91. The Appellant thus failed to show the error committed by the Respondent in arriving at its decision. It did not even explain the error that the Commissioner may have committed while considering its 2016 CIT returns. How it was double taxed was neither clear nor could it be discerned from the sum of its pleadings and evidence.

92. The result of this inadequacy is that the burden of proof that was placed on the Appellant by statute was not moved. This failure meant that the Respondent's assessment could not be faulted and the Appellant was thus not subjected to double taxation when its service fees and donations were disallowed for failure to supply documents.

93. It is for this reason that the Tribunal finds and holds that the Respondent's actions and assessments did not result in any instance of double taxation against the Appellant.

c.Whether the Respondent erred in issuing a demand for KeNHA claims. 94. The Appellant averred that the tax issue in this matter could only crystallize upon the issuance of a decree by the High Court, which decree had not been issued.

95. The Appellant has asserted that the date of supply, in this case, ought to be the date when its engineers issued them with completion certificates, and that tax which was assessed on the date of issuance of the DB decision was done prematurely.

96. Unlike the Appellant’s argument that the date of supply is the date when the Engineers issue it with a completion certificate, the argument by the Respondent was that the decision by DB meant that the amount had accrued and was thus taxable.

97. The issue in dispute here is to determine the tax point for claims that the Appellant had filed against KeNHA and which were awarded by the Disputes Board.

98. Section 12(1) of the VAT Act provides as follows regarding the time for the supply of goods and services.“Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of—a.the date on which the goods are delivered or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;c.the date on which the invoice for the supply is issued; or(d)the date on which payment for the supply is received, in whole or in part.”

99. Section 12(1) (b) of the VAT Act indicates that in the absence of evidence of when the goods or services were delivered, then the date when a person acting in a consultant capacity issues its certificate would be the date of supply. The date of award or issuance of decrees by courts is not listed under Section 12(1) of the VAT Act.

100. It thus follows that the time for supply for the payments related to these DB awards had not crystallized. The Respondent thus erred when it held that the date of the DB decision was the tax point. This action was not only premature but it was also unlawful to the extent that it contravened Section 12(1) of the VAT Act.

b.Whether the Respondent erred when it failed to offset the Appellant’s Withholding tax credits from its resulting tax liability. 101. The Appellant stated that its withholding tax credits together with instalment taxes of Kshs 383,034,846 were not considered and or offset in its resultant CIT liability. That Section 39(1) of the ITA provides that such WHT credits are allowable to be offset against resulting CIT liability.

102. The Respondent retorted that it had given credits for WHT deducted at source and advance tax in the year where the tax was payable. That the Appellant had not followed the due process as indicated in Section 47 of the TPA.

103. The Parties have quoted rival Sections of the law to support their arguments. The Tribunal shall juxtapose the two provisions of the law to aid it in deciding this issue.

104. Section 39(1) of the ITA provides as follows:“Set-off of tax 39(1) An amount of tax which -(a)has been deducted under section 17A (in respect of a person other than an individual), 35, 36 or 37; or(b)has been borne by a trustee, executor or administrator in his capacity as such as an amount paid as income to a beneficiary;(c)has been paid by the person under section 12A.shall be deemed to have been paid by the person chargeable with that tax and shall be set off for the purposes of collection against the tax charged on that person for the year of income in respect of which it was deducted, and where an assessment is made by the Commissioner on a person for a year of income under section 73 the amount of tax which has already been paid under a provisional assessment on that person for that year of income shall be set off for collection against the tax charged in the assessment made under section 73. 2.If any citizen of Kenya chargeable to tax in Kenya for any year of income on employment income or income in respect of any activity under Section (10)(e) of this Act accrued in or derived from another country proves to the satisfaction of the Commissioner that he has paid tax in such other country for such year of income in respect of the same income, it shall be entitled to set-off by way of credit of the same tax against the tax charged in Kenya on such income.(3)The tax chargeable on the income of any person in respect of which set-off is to be allowed under this section shall be taken to be the amount by which the tax chargeable (before set-off under this section) in respect of his employment income or income in respect of any activity under section (10) (e) is increased by the inclusion of such income in his employment income or income in respect of any activity under section (10) (e).(4)Credit under this section shall not exceed the amount of tax payable in Kenya on such employment income or income in respect of any activity under section (10) (e).”

105. Section 47 of the TPA which was cited by the Respondent provides as follows:“47. Refund of overpaid tax(1)When a taxpayer has overpaid a tax under a tax law the taxpayer may apply to the Commissioner, in the approved form, for a refund of the overpaid tax within five years of the date on which the tax was paid.Provided that for value added tax the period of refund shall be as provided for under the Value Added Tax Act, 2013 (No. 35 of 2013).(2)The Commissioner may, for purposes of ascertaining the validity of the refund claimed, subject the claim to an audit.(3)The Commissioner shall notify in writing an applicant under Subsection (1) of the decision in relation to the application within ninety days of receiving the application for a refund.(4)Where, in relation to an application for a refund made under this section or made under any other tax law, the Commissioner is satisfied that a taxpayer has overpaid a tax, the Commissioner shall apply the overpayment in the following order –(a)in payment of any other tax owing by the taxpayer under the tax law;(b)in payment of a tax owing by the taxpayer under any other tax law; and(c)any remainder shall be refunded to the taxpayer.(5)The Commissioner shall repay the overpaid tax within a period of two years from the date of application, failure to which the amount due shall attract an interest of 1% per month or part thereof of such unpaid amount after the period of two years.”

106. A reading of the two Sections of the law makes it apparent that the relevant provision of the law dealing with WHT set off is Section 39 of the ITA. Section 47 of the TPA deals with refunds of overpaid tax and is thus not applicable to this case.

107. The Appellant has stated in Paragraph 149 of its Statement of Facts that it was claiming tax credits for the year 2015.

108. It is however agreed between parties, and it is also clear from the documents availed to the Tribunal that the compliance audit carried out by the Respondent was for the the years 2016 to 2020.

109. It thus follows that 2015 from where the Appellant claims WHT credits was not a subject of review by the Respondent both in its assessment and objection decision. Meaning that the transactions that took place in 2015 were not a subject of this Appeal.

110. Plain reading of Section 39(1) of the ITA has led the Tribunal to find and hold that the Appellant could only apply its 2015 WHT credits to its 2015 CIT liabilities. Allowing the Appellant to apply its 2015 WHT credits to its 2016 CIT liabilities would thus be unlawful.

111. Based on the above analysis, the Tribunal finds and holds that the Respondent did not err when it failed to allow the Appellant to offset its CIT liability from its withholding tax credits. e.Whether the Respondent erred in:i.Confirming its tax demands for under-declarations and sale variances,ii.Disallowing Appellant’s claims for rent expenses, school fees, service fees, donations tax, post-employment benefits, wear and tear allowance and loss on disposal of assets.iii.Not taking the Appellant’s withholding tax credits and instalment taxes in computing the Appellant’s CIT liability. 112. The general argument by Appellant is that the Respondent erred in:i.Confirming its tax demands for under-declarations and sale variances,ii.Disallowing Appellant’s claims for rent expenses, school fees, service fees, donations tax, post-employment benefits, wear and tear allowance and loss on disposal of assets.iii.Not taking the Appellant’s withholding tax credits and instalment taxes in computing the Appellant’s CIT liability

113. It was the Appelant’s position that it provided sufficient evidence to prove its case but the Respondent ignored its evidence by upholding the assessment and or making minor adjustments to the original easement.

114. The Respondent on its part asserted that it considered the Appellant’s objection and adjusted its assessment in all areas where sufficient evidence was provided. That it affirmed its assessment in cases where it was never provided with sufficient evidence to displace the assessment.

115. It was its further view that the Appellant's VAT returns were not filled in the prescribed manner and forms that are stated in Sections 2, 24, 28 and 71 of the VAT Act, to the extent the IPCs were lumped, split and some even omitted in the returns. That it also declared nil VAT returns for July 2016 and November 2016 even though it had IPCs that should have been declared during this period.

116. It is settled law that the Commissioner’s assessment is always presumed to be correct, and that presumption shall remain until the taxpayer supplies credible, competent and relevant evidence to support its position that the Respondent had erred in its assessment.

117. This position was recently restated in Commissioner of Domestic Taxes -vs Metoxide Ltd (2021) eKLR where Justice Mabeya stated that:“Section 56 (1) of the Tax Procedures Act provides that; a taxpayer has the burden of proving that a tax decision is incorrect. It is common knowledge that, the Kenyan system of taxation is based on self-assessment. The taxpayer assesses self and remits what he/she considers to be the tax due to the tax authorities. In this regard, the tax laws mandate the appellant to later assess the taxpayer to ascertain whether the tax remitted was proper or not. Ordinarily, the assessment is made years after the tax has fallen due and been paid on the economic activity or commercial transaction for which the tax arisen had been undertaken. It is for this reason that the tax laws in this country shoulder the taxpayer with the burden of disproving the correctness of the appellant's tax decision."

118. Section 56(1) of the TPA that has been quoted in the above-cited Metoxide Ltd case provides as follows:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

119. The Appellant was thus under obligation to provide tangible evidence to show that the documents that it shared with the Respondent were sufficient, that they were not considered by the Respondent when it arrived at its decision and that it provided all the relevant documents that had been requested by the Respondent.

120. The Tribunal has noted that the relevant portion of the Respondent’s review findings dated 10th March 2021 provided as follows:“We wish to advise that the tax returns exercise will yield additional tax in the various tax initiatives as detailed below:…a.In the years 2017 to 2019, your gross profit is negative. Your cost of sales is way much than sales. Kindly provide a breakdown of both sales and cost of sales.b.Foreign Loans have been increasing since 2015 but there is no corresponding withholding tax in demand interest as there is no interest expense claimed for the same. The amount was Kshs. 4,963,577,947 in 2015, Kshs. 11,470,087,035 in 2016 and Kshs 13, 566,698,595. Kindly provide proof of withholding tax computations and payments.c.In 2019, you have advanced loans of Kshs. 40,760,242. 00 to related parties and there is no corresponding interest income out of this.d.In the year 2016, you had claimed conveyance fees of Kshs. 51,760,141. Kindly provide support as to what expense is related to.e.In 2017 accounts, there is a release expense of Kshs. 121,555,304 provide support on the lease agreement of the same.f.In the year 2017, motor vehicles were Kshs. 1,98,028,825 while in the year 2018, the figure went down to Kshs. 377,424,366. We haven't seen corresponding income on disposal of the motor vehicle. Kindly provide supporting explanations.g.In 2017, other assets were reported as 5,177,737,321 and plant and machinery was zero. In 2018, other assets were reduced to Kshs. 40,434,051 while plant and machinery rose to Kshs, 7,132,942,972 kindly explain this movement and provide your assets classification schedule.h.In 2016, there was a tax expense of Kshs. 1,773,946,179 which in the amended return has not been disallowed. We will disallow the expense and demand any taxes accruing.i.In 2018 there is a disallowable figure of Kshs. 424,806,559 in the tax computation but could not trace the same in the financial statements. Explain this scenario.j.The amendment of the 2016 income tax return provides a net foreign exchange gain of Kshs. 221,861,804 which was treated as an expense. This will be reversed and charged as income.”

121. The Appellant responded to this letter vide its letter dated 15th March 2021 which stated as follows in the relevant part:“... we are requesting for extension of days to gather all supporting documents and comprehensively address the issues you have raised.”

122. The Appellant eventually lodged its objection on 21st January 2022 and attached the following documents:a.Demand letters by the Respondent dated 23rd December 2021 and 22nd December 2021. b.Emails between the parties.c.Respondent’s letter of findings dated 10th March 2021. d.Appellant’s response dated 15th March 2021. e.Respondent’s letter dated 18th March 2021. f.Appellant’s letter responding to audit findings dated 13th April 2021. g.It's a breakdown of the VAT assessment.h.The contracts between the Appellant and KeNHA.i.Copies of IPCs.j.An analysis of the IPCs and the relevant VAT declarations.k.Excell workbook for the IPCsl.Copies of Dispute Board decisions.m.KeNHA’s notice of dissatisfaction with DB’s decisionn.Court decrees.o.Breakdown of all IPCs.p.Tax computations for the 2016 to 2020 years of income.q.CIR returns for 2016. r.Expatriates PAYE data.

123. The Respondent subsequently issued its objection decision on 22nd July 2022 where it stated that it:i.confirmed its tax demands for under-declarations and sale variances,ii.disallowed Appellant’s claims for rent expenses, school fees, service fees, donations tax, post-employment benefits, wear and tear allowance and loss on disposal of assets;iii.did not take the Appellant’s withholding tax credits and instalment taxes into consideration in computing the Appellant’s CIT liability based on the limited documents which had been provided and examined.

124. The objection decision was specific on the following documents which were requested vide a letter dated 10th March 2022 or which ought to be declared under the law, but which were never provided with the objection lodged on the 21st January 2022:a.Reconciliation of variances between VAT and income tax turnover in the prescribed VAT return.b.Payment slips and, bank statements regarding disallowed rent expenses.c.Payment slips, bank statements, names of student beneficiaries, names of beneficiary schools and names of beneficiary employees to support a claim for disallowed school expenses.d.Ownership and proof of purchase documents to support claim for wear and tear allowance

125. The Tribunal also noted from the record of appeal that the following documents which were requested vide letter dated 10th March 2021 were never provided in the objection lodged on 21st January 2022 and the period subsequent thereto:a.Breakdown of costs of salesb.Proof of withholding tax computations.c.Proof of conveyance expenses.d.Asset classification schedule.

126. The Tribunal has noted that whereas the Appellant supplied several documents together with its objection. The Appellant failed in its duty when it did not provide the specific documents that were requested by the Respondent. It also did not provide an explanation why it did not supply these documents.

127. As was explained in the Metoxide Ltd case and Section 56(1) of the TPA, both of which have been cited above, the burden was on the Appellant to prove that it had provided relevant and sufficient documents that could persuade the Commissioner to review or vacate its assessment. The gaps created by the absence of documents cannot be cured by the Respondent’s submissions and explanations, however eloquent.

128. The Tribunal has also noted that the Appellant had noted these gaps and it made an attempt to fill the documentary gaps that have been identified vide its Notice of Motion application dated 12th May 2023, where it had prayed for leave to be allowed to file a Supplementary Statement of Facts and adduce relevant documentary evidence thereto. The said application was however dismissed by the Tribunal vide a Ruling dated 8th December 2023.

129. The Appellant has thus failed to discharge its burden of proof under 56(1) of the TPA in this case. The effect of that is that the Appellant has failed to disprove the correctness of the Respondent’s tax decision.

130. The said decision thus stands proved. Meaning that Respondent did not err in:-i.Confirming its tax demands for under-declarations and sale variances,ii.Disallowing Appellant’s claims for rent expenses, school fees, service fees, donations tax, post-employment benefits, wear and tear allowance and loss on disposal of assets.iii.Not taking the Appellant’s withholding tax credits and instalment taxes in computing the Appellant’s CIT liability.b.Whether the Respondent erred in imposing penalty and interests on the Appellant’s tax liability.

131. The Appellant argued under this head that it was not liable to payment of penalty and interest on the principal CIT because Section 38(1) of the TPA envisions payment of interests where one fails to pay tax by the due date. That penalty and interest were not chargeable because it did not have any tax liability.

132. The Respondent argued that interest was charged as per the provision of Sections 31, 38 and 84 of the TPA for the tax that was due and that the Appellant was thus obliged to pay interest and penalty.

133. Section 38(1) of the TPA provides as follows regarding payments of penalty and interest.“Due date for the payment of the tax shall be liable for late payment interest at a rate equal to one per cent per month or part of a month on the amount unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid.”

134. A plain reading of Section 38 (1) of the TPA makes it clear that penalty and interest are payable on an amount that is unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid.

135. The above analysis by the Tribunal shows that there are several tax heads under which tax was not paid. Thus the Respondent did not err in applying penalties and interest to these tax heads that were due.

Final Decision 136. Given the foregoing, the Tribunal finds that the Appeal is partially merited and accordingly proceeds to makes the following Orders: -a.The Appeal is partially allowed.b.The Respondent’s objection decision dated 22nd July 2022 be and is hereby varied as follows:-i.The VAT demand of Kshs.443,623,046. 00 relating to KeNHA claims is set aside.ii.All confirmed demands by the Respondent relating to Income tax and VAT, save for the VAT demand of Kshs 443,623,046. 00 related to KeNHA claims, be and are hereby upheld.c.Each party is to bear its own costs.

137. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26THDAY OF APRIL, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERTIMOTHY B. VIKIRU - MEMBERABRAHAM K. KIPROTICH - MEMBER