[2024] KETAT 11 (KLR)

Seven Seas Technologies Ltd v Commissioner of Domestic Taxes (Appeal 1245 of 2022) [2024] KETAT 11 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 11 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1245 of 2022

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

January 26, 2024

Between

Seven Seas Technologies Ltd

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company registered in Kenya. It is a provider of integrated business and technology solutions in Sub-Saharan Africa serving institutional clients in the healthcare, finance, security and social services industries.

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 KRA is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) with respect to the performance of its functions under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out in Part 1& 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant was issued with a demand of Ksh. 900,443,330. 00 vide the Respondent’s letter dated 27th August, 2020. The demand was for the period 2015 to 2019 in respect to Value Added Tax, PAYE and Withholding tax.

4. The Appellant objected to the demand on 22nd September, 2020. There followed various correspondence between the parties mainly the request and provision of documents.

5. The Respondent vide a letter dated 10th March, 2021 issued its objection decision confirming the tax liability of Kshs. 900,442,330. 00 which was inclusive of penalties and interest.

6. Aggrieved by the Respondent’s decision, the Appellant filed its Notice of Appeal dated 21st October 2022, on 27th October 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 21st October, 2022 and filed on 27th October, 2022:a.That the Respondent erred in law and fact in failing to issue the Appellant with its decision in response to the Appellant’s objection dated 22nd September 2020 until the Respondent was prompted by the Appellant on 18th May, 2022 which is in clear contravention of the statutory timelines provided in Section 51(11) of the Tax Procedures Act (hereinafter ‘TPA’).b.That the Respondent erred in law and fact in demanding for payment of Withholding taxes in respect of certain payments and yet the Withholding taxes in respect of the said payments had already been deducted and remitted accordingly to the Respondent.c.That the Respondent erred in law and fact in demanding payment of Withholding tax in respect of supply of goods contrary to the provisions of Sections 10 and 35 of the Income Tax Act, Chapter 470 of Kenya’s Laws (hereinafter ‘ITA’).d.That the Respondent erred in law and fact in demanding for payment of Withholding taxes in respect of accruals relating to audit, legal and professional fees that were reversed by the Appellant upon issuance of actual fees by the suppliers. Consequently, these supplies were never received or consumed by the Appellant hence no payments made subject to payment of Withholding taxes.e.That the Respondent erred in law and fact in charging Withholding tax and legal and audit fees from the input VAT Schedule, legal and audit ledgers, trade creditors ledger and customer payments yet the said invoices and payments had already been subjected to Withholding taxes.f.That the Respondent erred in law and fact in demanding for Withholding tax as relates to supplies made to related parties and yet these supplies related to payments made by the Appellant on behalf of its related parties and for which were reimbursed to the Appellant and had been booked as amounts receivable to the Appellant in its financials.g.That the Respondent erred in law and fact in demanding payment of Withholding tax on revenue items and foreign exchange differences for which are not subject to Withholding taxes.h.That the Respondent erred in law and fact in demanding for payment of PAYE in respect of accrued director fees which were not paid and were later reversed hence no taxable benefit that was accorded to the directors.i.That the Respondent erred in law and fact in demanding for PAYE amounts in respect of director’s fees, more specifically, for Michael Macharia and Wanjiku Muchemi yet the amounts thereto had already been subjected to tax in the payroll.j.That the Respondent erred in law and fact in charging PAYE on payments made by classifying the same as directors’ drawings. However, the drawings selected related to the amounts used to settle business expense that were wholly and exclusively incurred by the Appellant in generating its income.k.That the Respondent erred in law and fact in failing to factor its computations the variances resulting from zero-rated sales for which were omitted from the VAT returns in the computation of the payable VAT amounts.l.That the Respondent erred in law and fact in failing to factor in the invoices that had initially been included in the sales declared in the income tax returns/financials leading to double taxation of the respective sales thereto.m.That the Respondent erred in law and fact in failing to take consideration of the sales that were reversed and subsequent credit notes issued and proceeding to demand VAT from credit notes and yet no VAT was collected from the said credit notes.n.That in view of the foregoing, the Appellant is apprehensive that the actions of the Respondent lack in merit, are unlawful and manifestly unjust and that unless the orders sought are granted, the Appellant risks being unjustly compelled to pay the alleged taxes to the unfair prejudice of the Appellant.

Appellant’s Case 8. In its Statement of Facts dated 21st October, 2022 and filed on 27th October 2022 the Appellant reiterated its grounds of Appeal and stated as herein after.

9. It contended that the Respondent erred in law and fact and contrary to Section 51(11) of the TPA issuing its objection decision after sixty (60) days as stipulated in law. It argued that it lodged its notice of objection on 22nd September 2020 and forwarded additional documents to the Respondent on 18th February 2021. The objection decision was subsequently issued through an email dated 18th May 2022. It therefore averred that per the law the Appellant’s objection was deemed valid and allowed.

10. On the issue of erroneous double charge of Withholding tax, it asserted that the Respondent charged Withholding tax an accrued legal and audit fees from the input VAT Schedule, legal and audit ledgers, trade creditor’s ledgers and customer payments. It argued that these were the same supplies/payments recurring. As such, in doing so, the Respondent subjected the same invoice/payments to WHT severally. It therefore submitted that the charge of WHT on the said amounts constituted double taxation as the same had already been subjected to tax and duly remitted to the Respondent.

11. The Appellant asserted that the Respondent demanded for payment of WHT in respect of disbursement, VAT and WHT contrary to the provisions of Paragraph 5 (f) of the Third Schedule of the ITA which stipulates that the resident withholding tax rates applicable for professional, management, contractual or training fees is the gross sum payable for the various income.

12. Further, that from the above provisions, the tax base for WHT is the gross sum payable or the gross fees exclusive of disbursement. As such it argued that it was erroneous for the Respondent to include in its computation the disbursements and VAT amounts and yet the same do not constitute part of the gross amount as stipulated under Paragraph 5 (f) of the Third Schedule of the ITA. It averred that some of the exposures as alleged by the Respondent constituted the VAT element as such for the Respondent to purport to charge WHT on the VAT amounts would amount to double taxation or a tax on tax contrary to the legal provisions of ITA.

13. The Appellant averred that the Respondent computed the alleged WHT due from the Appellant’s supply of goods contrary to the provisions of Sections 10 and 35 of the income tax Act. It argued that in instances where there was supply of goods or in cases where the same comprised the supply of both goods and services, the Respondent charged the full invoice amount inclusive of the cost of the goods to WHT contrary to the legal provision to only subject WHT on the gross fees relating to services or the service element in a supply.

14. The Appellant relied on the Tribunal’s holding in East Africa Marine Systems Limited vs Commissioner of Domestic Taxes, TAT 85 of 2015 where the Tribunal provided guidance of treatment of goods for Withholding tax purposes in the case of turnkey project where there is a supply of goods and services. In the said case, the Tribunal held that the contract was a multiple or split contract that constitutes the supply of goods and services and that for Withholding tax purposes, the contract was split and the service element above would be subjected to WHT. It therefore argued that based on the provisions of Sections 10 and 35 of ITA as read with the East African case, only supply of services alone are subject to WHT and not on the supply of goods. Hence for the Respondent to purport to charge WHT on the supply of goods is both bad in law and misinformed.

15. The Appellant faulted the Respondent in demanding for payment of Withholding tax in respect of accruals relating audit, legal and professional fees that were reversed by the Appellant upon issuance of actual fees by the suppliers. This is because these supplies were never received hence no payments made subject to payment of withholding taxes.

16. The Appellant contended that the Respondent erred in demanding for withholding tax as relates to supplies made to related parties yet these supplies related to payments made by the Appellant on behalf of its related parties and for which were reimbursed to the Appellant and had been booked as amounts receivable to the Appellant in its financials. Further that the corresponding invoices that relate to the said suppliers were invoices in the name of the related parties and that the services were supplied to the said related parties and not to the Appellant herein. These amounts therefore constituted reimbursement hence impractical for the Respondent to demand the Appellant to account for WHT on mere reimbursement. The Appellant asserted that some of the amounts related to the salaries and statutory deductions to which the monies were directly transferred to the relevant related company. Further that some of the revenue items related to foreign exchange difference for which were not subject to WHT.

17. It was the Appellant’s contention that the Respondent erred in subjecting alleged variance relating to XABA project where various expenses were selected twice and included in other appendices to the Respondent’s demand and that in computation of the alleged WHT, the Respondent included disbursement amounts such as travel expenses for the staff during the project.

18. On the issue of PAYE, the Appellant faulted the Respondent for demanding payment of PAYE in respect of accrual director fees which were not paid and were later reversed in the general ledgers, hence no taxable benefit that were accorded to the said directors as no payments were made.

19. It was the Appellant’s contention that the Respondent erred in demanding for PAYE amounts in respect of director’s fees, more specifically Michael Macharia and Wanjiku Muchemi yet these amounts had already been subjected to tax in the payroll. It argued that it provided for director’s fees in its books for the periods 2015 and 2016 and that due to financial constraints, the Appellant is to date yet to make any payments to the said directors for the respective fees as booked in the Appellant’s books. Based on this, the Appellant stated that the Respondent disallowed the expensed directors’ fees in its computations for the periods 2015 and 2016.

20. The Appellant contended that the Respondent erred in charging PAYE on payments made by classifying the same as director drawings. However, the drawings selected related to the amounts used to settle business expense that were wholly and exclusively incurred by the Appellant in generating its income. It argued that in its assessment, the Respondent charged PAYE on payments by allegedly classifying the same as director drawings and yet the selected drawings were used to settle expenses that were wholly and exclusively incurred by the Appellant in generating its income. It averred further that the Respondent did not provide any evidence to show that these amounts were linked to or associated with the directors of the Appellant.

21. The Appellant averred that the said alleged drawings were associated with business expenses such as software costs, salaries, investments and general operating expenses which were wholly and exclusively incurred for purposes of generating income as per Section 15(1) of the ITA. It argued therefore that the Respondent erred in disallowing the said expenses on grounds that the same were drawings and yet the same were expenses wholly and exclusively used for the production of income.

22. The Appellant also faulted the Respondent for failing to factor in its computation, the variances resulting from zero rated sales for which were omitted from the VAT returns in the computation of payable VAT amounts. The Appellant contended that the highlighted alleged variances by the Respondent between sales declared in the financials and sales per the VAT return were however variances that were as a result of undeclared zero-rated sales. As such, while these amounts were omitted from the VAT returns, no VAT was payable from the same.

23. The Appellant averred that the Respondent erred in failing to factor in the Invoices that had initially been included in the sales declared in the income tax returns/financials leading to double taxation of the respective sales thereto. This is because the alleged variances as highlighted by the Respondent related to missing invoices, however the amounts thereto in respect of the said invoices had been declared in the income tax returns/financials.

24. The Appellant faulted the Respondent for failing to take consideration of the sales that were reversed and subsequent credit notes issued and proceeding to demand VAT from credit notes yet no VAT was collected from the said credit notes. It argued that some of the alleged variances included sales that were reversed and subsequent credit notes issued, as such the Respondent could not demand for payment of VAT from the credit notes as no VAT was collected from them.

25. The Appellant pointed out that the Respondent had no basis whatsoever to charge VAT on the proforma invoices as the same were not tax invoices to be subjected to charge of VAT. These tax invoices corresponding to the proforma invoices were later issued and declared in the VAT returns hence there was no VAT payable.

Appellants Prayers 26. The Appellant therefore prayed that the Tribunal finds in the Appellants favour and determine that:a.The Respondent failed to issue an objection decision within the period of sixty (60) days as stipulated in the TPA therefore the Appellant’s Objection dated 22nd September 2020 had been deemed accepted by the Respondent.b.The Respondent never effected service to the Appellant with respect to the objection decision dated 11th March,2021 and as such, the demand for taxes therein is without legal basis.c.The objection decision dated 11th March 2021 be hereby set aside.d.The Appellant be granted the costs of this Appeal.

The Respondent’s Case 27. The Respondent addressed the Appellant’s grounds of Appeal through its Statement of Facts dated 26th November 2022 and filed on 28th November 2022.

28. In response to ground a of the Appeal, the Respondent stated that it requested for further documentation from the Appellant through various correspondence. The appendices were acknowledged and on 1st December 2021 where the Respondent sought for further clarification in relation to the already shared supporting appendices which culminated in a working meeting on 11th February 2021. Following the meeting, further documents were requested where the Appellant acknowledged and partially shared the documents through an email of 18th February 2021.

29. The Respondent stated that the Appellant was yet to provide some of the requested documents. It averred that the email it sent on 18th May, 2022 was merely a response to the clarifications sought by the Appellant and it cannot be deemed to be an objection decision as this had already been issued on 11th March 2021.

30. In response to grounds b to g the Respondent noted the following in respect to Withholding tax:

a. Withholding tax payments to local suppliers 31. The Respondent stated that a review of the Appellant’s 2015-2017 withholding tax ledgers to service providers indicated that the Appellant had not been withholding tax as required by Section 35 of the ITA. It stated further that a number of services rendered to the Appellant and paid for were not charged withholding taxes and that of particular concern was the payment in respect of technical services as well as contractual services.

32. The Respondent contended that Paragraph 5 (f) of the Third Schedule of the ITA provides that withholding tax rate chargeable in respect of technical fees is five percent of the gross amount payable while in respect of contractual fees, it is three percent of the gross amount payable. It contended further that through its letter dated 13th February 2020 the Appellant had indicated that in some instances, withholding tax was computed on gross invoice amounts including Value Added Tax. The Appellant also indicated in the same letter that the Respondent had double charged withholding tax on some invoices, however it did not specify which invoices were double charged. In response, the Respondent stated that it reviewed and adjusted where necessary and that it reviewed all the invoices and worksheets and confirmed that in cases where there was double charging, it was corrected.

(b) Withholding tax on payments to related parties. 33. On this issue, the Respondent averred that the Appellant made payments for services performed by three of its related parties. However, the Withholding tax was not charged on payments made in relation to these services in the years 2014 and 2015 contrary to the provisions of Section 35 of the ITA as read together with the Third Schedule. It averred further that it made adjustments where necessary in view of the explanations provided and evidence adduced.

(c) Withholding tax on payments to Data GR8 34. The Respondent contended that the Appellant had engaged Data GR8, a South African entity, in data migration projects in relation to the Safaricom project. However, payments relating to the services provided by Data GR8 were made by the Appellant without subjecting them to withholding tax resulting to a tax computation of Ksh 1,469,704. 00.

(d) Withholding tax on payments relating to XABA 35. On this issue, the Respondent stated that it noted that the Appellant had entered into a partnership with Safaricom to launch a project aimed at developing a project that connected blue collar workers with potential employers. The project was referred to as the XABA project and payments for services undertaken relating to this project was borne by the Appellant. The Respondent stated that no Withholding taxes was charged on the payments made for services rendered for this project contrary to Section 35 of the ITA.

36. In response to grounds h to j, the Respondent noted the following in respect to Value Added Tax:

a. Sales Discrepancy37. The Respondent averred that the information availed by the Appellant indicated that there were discrepancies between the aggregate sales declared in the Value added tax returns and income Tax returns for the period under audit. The variances were brought to the Appellant’s attention in various meetings and earlier correspondence where the Appellant was requested to reconcile the same. However, from the Appellant’s reconciliation, the Respondent noted that there were still unexplained variances, which were subjected to VAT charges.

(b) Undeclared Sales in VAT Returns 38. The Respondent asserted that it observed that some invoices issued to clients did not bear a VAT amount thereby not declared as sales in VAT returns contrary to Section 5 of the Value Added Tax Act that provided that VAT is chargeable on a taxable supply made by a registered person in Kenya. It asserted further that Section 3 of the VAT Act provides that tax on a taxable supply shall be a liability of the registered person making the supply and is due at the time of the supply.

39. It was the Respondent’s contention that the Appellant’s claim that the same was charged in the Value Added Tax 3 returns could not be substantiated as the Respondent’s review of the same returns could not locate the specific invoices. As such the Respondent aggregated the amounts in the invoices noted and charged Value Added Tax accordingly.

40. In response to grounds k to m the Respondent noted the following in respect to Pay as You Earn:

Paye charge on Directors fees 41. The Respondent averred that a review of the Appellant’s ledgers indicated that the directors earned director’s fees upon which PAYE was not operated contrary to Section 3(2) (a)(ii) of ITA which provides that gains or profits from employment or services rendered is income upon which tax is chargeable. Further that Section 37 of the ITA also provides that an employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon, to such extent and in such manner as may be prescribed.

42. The Respondent averred that it noted from an extract of the director’s fees account that for the year 2014 no PAYE had been charged and that the amounts in the directors’ accounts were expensed and that what was presented earlier were the Directors’ accrual account.

43. The Respondent stated that it charged directors fees of Kshs 24,431,521. 00 for the years 2015 and 2016 which the Appellant had stated that the amounts were reimbursements to directors in respect of salaries paid by them to employees on behalf of the company. However, the Appellant did not provide supporting documentation for this assertion. The Respondent averred that if the directors had indeed paid employees’ salaries on behalf of the company, then the following documents ought to have been provided: -i.Breakdown of the staff salaries per month showing the breakdown of the employees paid and the amounts due to themii.Details of how the monies were actually paid to the employees, bank transfers, including evidence of monies moving from the director’s bank to the company account.iii.Corresponding company Paye returns demonstrating to the respective months for which the amounts were paid.iv.The amounts paid by directors would have been to the company repayable at a future date and the company needed to demonstrate whether this amount was paid.

44. The Respondent stated that due to the unavailability of the supporting information, it charged the amounts as payments made to the directors.

a. PAYE on drawings 45. The Respondent averred that a review of the Appellant’s bank Statement; Cooperative Bank Account No. 0212041914600(USD), showed that there were amounts drawn by directors against which no explanation was provided. Further that the Appellant indicated that these amounts were payment for VAT yet it did not provide further evidence including evidence of payment of VAT and respective months VAT related to.

46. The Respondent had indicated that the amounts were receipts from Abay and Addis bank which were withdrawals from the Cooperative bank account and not money into the account. The Respondent countered the Appellants assertion and averred that the Abay and Addis bank were contracts implemented by the Appellant and for this it was expected that money would flow into the Appellant’s bank accounts.

47. The Respondent asserted that it is empowered under Section 24 (2) of the TPA to assess a taxpayer’s liability using any information available to it and that to this extent it has operated within the confines of the law by using the data availed and therefore it cannot be faulted. Further that it was guided by Section 56(1) of the TPA that provides that in any proceedings relating a tax dispute under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

Respondent’s Prayers 48. The Respondent prayed that this Tribunal;a.Upholds and affirms the Respondent’s objection decision dated 10th March 2021b.Dismisses the Appeal with costs to the Respondent.

Submissions of The Parties 49. The Appellant’s Written Submissions dated 31st May 2023 and filed on 5th June, 2023 raised five issues for determination namely:-

i. Whether the Respondent erred in issuing its objection decision outside the statutory timelines. 50. The Appellant submitted that upon its inquisition, the Respondent rendered its decision on 18th May 2022 in respect of the Appellant’s objection dated September, 2022 which was beyond the sixty (60) days statutory timeline as provided under Section 51(11) of the TPA. The Appellant relied on the case of Equity Group Holding Limited vs Commissioner for Domestic Taxes (CA No. ITA E069 of 2020 and ITA E025 of 2020) where the High Court determined the consequence of failure by the Commissioner to respond to the objection lodged by the Appellant within 60 days.

51. The Appellant additionally submitted that the Respondent erred in eventually purporting to issue its decision invalidating the Appellant’s objection yet the Appellant had lodged its objection and subsequently availed various documentation in support of its objection to the Respondent on 18th February 2021.

52. The Appellant therefore submitted that the Respondent erred in issuing its decision after the statutory timelines of sixty days and also erred in invalidating the Appellant’s objection yet the Appellant had provided various documents in support of its objection.

(ii) Whether the Respondent erred in demanding for payment of Withholding taxes in respect to withholding tax, supply of goods, revenue items and foreign exchange differences and supplies to related parties. 53. The Appellant submitted that the Respondent erroneously brought to charge various items that were not subject to withholding tax as provided for by law. It submitted that the Respondent had wrongly included previously tax invoice amounts to which Withholding tax had already been deducted and remitted.

54. It was the Appellant’s submission that the Respondent wrongly included amounts not subject to withholding tax in its withholding tax assessment. Further that contrary to Paragraph 5 (f) of the Third Schedule of the ITA, it failed to consider the tax base for withholding tax applicable on professional, contractual and management fees by including disbursement whereas the tax base for withholding tax is the gross sum payable or the gross fees exclusive of disbursements.

55. The Appellant contended that the Respondent included the VAT elements as well as withholding tax elements in the gross amount chargeable to withholding tax in some instances which is contrary to the ITA. As such the charge of WHT on the said amounts is erroneous.

56. It was the Appellant’s submission that the assessment of withholding tax on the supply of goods is contrary to Section 35 of the ITA which provides for Withholding tax to apply in respect of payments for “supply of various services” at the rates provided in the Third Schedule of the ITA. It averred that the Respondent’s confirmation of the withholding tax assessment in respect of payment for supply of goods was therefore unjustifiable as it is not founded on any legal provisions in the ITA as incorrectly stated by the Respondent.

57. The Appellant faulted the Respondent for generally considering all payments to local suppliers as being for payment for services rendered specifically technical and contractual services without factual or legal basis, noting that some of the contracts and invoices relate to composite supply of both goods and services hence the withholding tax assessed thereon is unjustified.

58. The Appellant submitted that the Respondent charged Withholding tax on same supplies/payments recurring in various sources and that the Respondent also erroneously considered revenue items as well as foreign exchange differences and charged the same to withholding tax despite these items not comprising of payments and thus consequently not falling under the scope of withholding tax. Further that the Respondent erred in demanding for withholding tax as related to supplies made to related parties yet these supplies related to payments made by the Appellant on behalf of its related parties and for which the entities reimburse the Appellant and had been booked as amounts receivable to the Appellant in its financials.

59. The Appellant submitted that the Respondent erred in treating all payments made by the Appellant relating to the XABA project as being subject to withholding tax as the Appellant had demonstrated that several payments were reversed, double taxed and others constituted disbursement amounts thus did not fall under the ambit of withholding tax. The Respondent also erred by subjecting non-taxable items to withholding disbursement such as travel expenses paid by the Appellant on behalf of staff as payments for services subject to withholding tax.

(iii) Whether the Respondent erred in demanding PAYE in respect of drawings used to settle business expenses, reversed accrued director’s fees, unpaid directors’ fees and directors’ fees which had already been subjected to tax in the payroll. 60. It was the Appellant’s submission that the director fees ledger clearly highlighted that the Appellant herein had accrued director fees which were not paid and were later reversed and that given that these fees were reversed and not paid to the directors, there was no taxable benefit that was accorded to the directors.

61. The Appellant submitted that the directors’ drawings were solely for purposes of settling business expenses incurred by the Appellant and not directors’ drawings as alleged by the Respondent. The Appellant submitted further that it availed relevant supporting documents and that drawings for purposes of settling various business expenses are not subject to tax under Section 3(2) of the ITA.

(iv) Whether the Respondent erred in charging VAT on alleged variance arising from non-vatable items specifically zero-rated sales, reversed sales with issued credit notes, proforma invoices, declared invoices of customers not registered for VAT and double charged invoices already included in sales in the Income tax returns in its assessment leading to double taxation. 62. The Appellant submitted that the Respondent had considered zero-rated sales which had been declared as sales in its income tax returns but were omitted from the VAT returns as constituting a variance erroneously subjected to VAT. Further that since there in no VAT payable on zero-rated sales, the Respondent incorrectly charged the variance to the standard rated VAT rate yet it relates to zero-rated sales hence no VAT payable on the same for the period under review.

63. On the issue of double charge on VAT, the Appellant submitted that the Respondent considered invoices already included in the VAT assessment in respect of the sales in total disregard of the reconciliations and supporting documentation provided by the Appellant. Further that the Respondent erred in treating the alleged variance to VAT under two heads where the taxable amount under sales discrepancy in the demand formed the taxable amount under undeclared sales in VAT returns.

64. The Appellant submitted that the alleged variance which the Respondent sought to bring to charge was sufficiently demonstrated as arising from non-vatable amounts therefore the VAT assessment confirmed by the Respondent disregarded statutory provisions, was unfair and inconsistent with good tax practice as it subjected the same alleged variance in respect of the same sales/invoices to double taxation.

65. It was the Appellant’s submission that the Respondent erred in including credits issued where the Respondent proceeded to demand VAT from these amounts despite the fact that no VAT was collected from them. Further that the Respondent erred in including proforma invoices as part of the missing undeclared invoices and charged the same to VAT alleging that the Appellant failed to charge VAT on the same. It submitted further that these proforma invoices were not tax invoices and that invoices corresponding to the proforma invoices were later issued and declared in the VAT returns. The Respondent also included invoices filed under customers not registered for VAT under its list of missing invoices not subjected to VAT and subjected the same to VAT.

(v) Whether the actions of the Respondent lack in merit, are unlawful and manifestly unjust. 66. The Appellant submitted that the Respondent failed to consider the grounds on which the Appellant objected against the assessment as well as the documentation availed and proceeded to confirm its entire assessment of Ksh 900,443,330. 00. As such, the objection decision issued by the Respondent was without legal basis and the same should be set aside.

67. The Appellant relied on the following cases to buttress its argumenta.Republic v Commissioner of Domestic Taxes Ex-Parte Barclays Bank of Kenya ( Misc Civil Application No.1223 of 2007).b.3M Kenya Limited vs Commissioner of Domestic Taxes (Judgement Appeal No. 30 of 2016).c.Keroche Industries vs Kenya Revenue Authority and 5 others HC Misc Civil Appl No 743 of 2006(2007) eKLR.d.Republic v KRA (Ex-parte J.Mohamed Civil Application No. 312 of 2011.

68. The Respondent’s Written Submissions dated 5th June, 2023 and filed on 7th June 2023 raised two issues for determination namely:

i. Whether the Respondent’s Objection decision was issued out of the stipulated timelines. 69. The Respondent submitted that the Appellant lodged its objection on 22nd September 2020 after which the Respondent, through an email of 4th November 2020 requested for supporting documents to validate the objection which the Appellant responded on 13th November, 2020 attaching appendices to its objection. It submitted that it requested for more clarification on the appendices which culminated in a working meeting on 11th February 2021 where further documents were requested. The Appellant acknowledged and vide an email dated 18th February 2021 availed financial statements, audited general ledgers and trial balances. The Respondent thereafter issued the objection decision on 10th March 2021.

70. In its rebuttal to the Appellant’s claim that the objection decision had been issued on 18th May, 2022 it submitted that the email sent on the aforementioned date was merely a response to the clarifications sought by the Appellant and this cannot be deemed to be an objection decision as the same had already been issued on 11th March, 2021.

71. The Respondent submitted that it had been in communication with the Appellant through electronic mail correspondence save for the meeting that was held between the parties and that a review of the electronic mails clearly show that the electronic mail which the Appellant used for communication was to one Ms. Elizabeth Muyaa of email address: emuya@taxwise-consulting.com which the Appellant has not disputed to belong to its tax Representative or denied knowledge of. It submitted that the objection decision was made within the stipulated timelines as the 60 days commenced once the Appellant partially shared the documents on 18th February 2021.

(ii) Whether the Respondent erred in assessing the tax payable. 72. On the issue of Withholding tax, the Respondent submitted that it adjusted in instances where withholding tax was computed on gross invoices which included Value Added Tax. Further that on the issue of charging double withholding tax on some invoices, it submitted that the Appellant did not specify the invoices that seemed to be double charged and that it made corrections to cases that confirmed double charging. It contended that it had noted that the Appellant had not withheld taxes required for technical services and contractual services rendered and paid for. The said technical services were in relation to payments made for services rendered by Data GR8 and the XABA Project. As for the contractual services it related to payments in relation to the following:a.Bring consulting on the Cooperative Bank contract.b.Knowledge transfer centre on the Cooperative Bank contract.c.Twenty third Century systems on the NHC contract.

73. On the issue of Value Added Tax, the Respondent reiterated that it noted unexplained variances upon reviewing the Appellant’s reconciliation and that on the issue of undeclared VAT on sales, it submitted that the Appellant had some invoices that were not declared as sales in the Value added tax returns. Further that the assertion by the Appellant that some invoices were charged in the VAT3 returns could not be verified as the invoices could not be located.

74. The Respondent submitted that it was guided by the provisions of Sections 53 and 5(1) of the VAT Act and that it acted within the confines of the law in charging VAT.

75. On the issue of PAYE, the Respondent submitted that upon audit, it was noted that the directors earned fees upon which PAYE was not charged contrary to Sections 3(2) (a) (ii) and 37 (1) of the ITA. Further that no documents were adduced in support of the Appellant’s assertion that the amounts for the period of December 2015 and 2016 were reimbursements to the directors in respect to salaries paid by them to employees on behalf of the company. Likewise, the Appellant failed to provide documentation to prove that the PAYE on drawings were payment of VAT.

76. The Respondent submitted that in respect to Withholding tax, the Appellant did not provide the following documents in support of its objection; outstanding invoices for related party transactions, evidence relating to Data GR8 exhibiting why it does not attract Withholding tax; XABA project demonstration of the Appellants assertion that Withholding tax was deducted twice and proof of reversals that link the ledgers extracts; and credit notes to assessed amounts.

77. It submitted further that in respect of Value Added Tax, the Appellant did not provide the following documents in support of its Objection; proof of exported services, contracts, proof of payment for services rendered outside Kenya, details of personnel executing the services; specifically copies of passports including the entry and exit stamps, proforma invoices, and supplier confirmations for credit notes issued, including supplier statements issued as well as correspondence stating reasons for credit note issuance.

78. The Respondent further submitted that in respect to PAYE terms, the Appellant did not provide the following documents in support of its objection; certified bank statements highlighting the amounts marked as drawings and matching them to the amounts in the bank statements, petty cash control accounts; and directors bank statements to demonstrate that the directors’ fees as declared in the financial statements were indeed reversed and that the directors did not enjoy the benefit.

79. The Respondent submitted that the said documents were necessary in ascertaining the Appellant’s tax liability and that its empowered by Section 24(2) and 31 of the TPA to assess taxpayer’s liability using the information available to it and to make alterations or additions to original assessments from available information for a reporting period based on its best judgement. It also submitted that the Appellant failed to discharge its burden of proof as per Section 56(1) of the TPA and Section 30 of the Tax Appeals Tribunal Act (hereinafter ‘TAT’).

80. The Respondent relied on the following cases to buttress its submissions;a.Tax Appeal No.552 of 2021: Pipe man Limited vs Commissioner of Investigations and Enforcement.b.Ushindi Exporters Limited vs Commissioner of Investigations and Enforcement (TAT No.7 of 2015).c.Tumaini Distributors Company (K) vs Commissioner of Domestic Taxes (2020) eKLR.

Issues for Determination 81. The Tribunal has considered the parties’ pleadings, documentation and submissions, and is of the considered view that this Appeal distils into two issues for its determination namely:a.Whether the Respondent’s Objection Decision dated 10th March, 2021 is valid.b.Whether the demanded tax is due and payable.

Analysis And Findings 82. Having established the two issues for determination, the Tribunal proceeds to analyse them as herein under:

SUBDIVISION - a. Whether the Respondent’s Objection Decision dated 10th March, 2021 was validly issued. 83. The Appellant had raised the issue of the validity of the Respondent’s objection decision by submitting that it was issued outside the sixty (60) days statutory timelines. It had argued that it availed documents upon the Respondents request on 13th November 2020 and 18th February,2021 while the Respondent issued the objection decision on 18th May 2022. On its part, the Respondent had submitted that it issued the objection decision after receiving the last batch of the requested documents as per Section 51(3)(c) of the TPA.

84. The Tribunal will provide a chronology of the relevant dates between the Respondent’s assessment and the objection decision to better appreciate the timelines. From the documentation availed, the Respondent issued the assessment vide its letter dated 27th August 2020 which was objected by the Appellant on 22nd September, 2020. This being within the thirty days statutory timelines as provided for under Section 51(2) of the TPA.

85. Vide an email of 4th November 2020, the Respondent requested for additional documents which the Appellant provided through an email of 13th November, 2020. The Respondent acknowledged the Appellant’s documents vide an email of 12th January 2021 where it also called for a meeting of the parties that took place on 11th February 2021. In the same meeting the Respondent requested for specific documents that it listed in its follow-up email to the Appellant dated 11th February,2021. The Appellant availed some of the documents vide an email dated 18th February,2021. The Respondent reviewed the documents and issued its objection decision on 10th March 2021 which was forwarded as an attachment vide the Respondent’s email of 11th March 2021.

86. Section 51(3)(c) of the TPA prescribes one of the conditions that validates a notice of objection. It provides as follows: -“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-c)all the relevant documents relating to the objection have been submitted”Further Section 51(11) of the TPA also stipulates the timelines and conditions that would validate an objection Decision. It provides as follows: -“The Commissioner shall make the objection decision within sixty days from the date of receipt of-a)The notice of objection; orb)Any further information the Commissioner may require from the taxpayer.”

87. From the chronology given above, the Respondent requested for additional documents on 4th November,2020 which the Appellant provided on 13th November 2020. The Respondent then called for a meeting on 11th February, 2021 where more documents were requested and which were received on 18th February 2021 and the objection decision was issued on 10th March, 2021, again within the statutory timelines as per Section 51(II) of TPA.

88. The Appellant had alleged that the Respondent had forwarded the objection decision vide an email of 18th May, 2022. However the Tribunal has gleaned through the documents availed and has sighted the Respondent’s email of 11th March 2021, forwarding the objection decision to one Elizabeth Muyaa and Samuel Njoroge, representatives of the Appellant. Further the Tribunal has observed that the email address used in this email is the same that has all along been used for communication between the parties. The Appellant is therefore being economic with the truth in its allegation that it never received the objection decision within the stipulated time.

89. In view of the foregoing the Tribunal finds that the Respondent’s Objection Decision dated 10th March, 2021 was validly issued.

(b) Whether the demanded tax is due and payable. 90. Section 56(1) of the TPA places the burden of proof on the taxpayer. It provides as follows: -“In any proceeding under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect”.

91. The Appellant alleged that the tax decision was incorrect by submitting that there had been erroneous double charge of Withholding tax, that the Respondent had demanded payment of Withholding tax in respect of disbursement, and other alleged errors made by the Respondent. That although each time when requested, the Appellant availed documents, however it’s one thing to avail documents and another to avail relevant documentation that would support one’s assertions.

92. The Tribunal notes that the Respondent had requested from the Appellant, the following specific documents for each of the three tax heads in contention so as to discharge its burden of proof as follows:

i. Withholding Tax 93. Under this tax head, the Appellant was unable to provide the following documents:a.Outstanding invoices for related party transactionsb.Evidence relating to Data GR8 exhibiting why it does not attract Withholding tax.c.XABA project demonstrating that withholding tax was deducted twice.d.Proof of reversals that link the ledger extracts.e.Credit notes to assessed amounts.

ii. Value Added Tax 94. Under this tax head, the Appellant was unable to provide the following documents:a.Proof of exported services.b.Contractsc.Proof of payment for services rendered outside Kenya.d.Details of personnel executing the services, copies of passports including the entry and exit stamps.e.Proforma invoices to explain variances.f.Supplier confirmations for credit notes issued.

iii. Paye 95. In respect of this tax head, the Appellant was unable to provide the following documents:a.Certified banks statements highlighting the amounts marked as drawings and matching them to the amounts in the bank statementsb.Petty cash control accounts.c.Directors bank statements to demonstrate that directors’ fees as declared in the financial statements were indeed reversed and that the directors did not enjoy the benefits.

96. It is the Tribunal’s considered view that the above documents requested by the Respondent and which the Appellant failed to provide, are relevant documents that would have adequately supported the Appellant’s objection.

97. The Tribunal will rely on its finding in TAT No.70 of 2017 Afya X-ray Centre vs Commissioner of Domestic Taxes where it held that: -“From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing documents in order that a comprehensive analysis of its affairs is done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to counter the Respondents findings after the preliminary finding and before confirmation of the assessment. Both are instances where the Appellant could have produced its books of accounts to counter the Respondents assessment, after all by law, the Appellant bears the burden of proof”.

98. In view of the above analysis, the Tribunal finds that the Respondent’s tax demand is due and payable.

Final Decision 99. The upshot of the above is that the Appeal lacks merit and therefore fails and the Tribunal will now proceed to make the following final Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 10th March, 2021 be and is hereby upheldc.Each party to bear its own costs.

100. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALA CHRISTINE A MUGAMEMBER MEMBERGEORGE KASHINDI SPENCER S. OLOLCHIKEMEMBER MEMBERMOHAMED A. ADIRIYEMEMBER