[2025] KETAT 54 (KLR)

Skytrade Global Enterprises Limited v Commissioner of Domestic Taxes (Tribunal Appeal E104 of 2024) [2025] KETAT 54 (KLR) (24 January 2025) (Judgment)

Neutral citation: [2025] KETAT 54 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E104 of 2024

RO Oluoch, Chair, G Ogaga, AK Kiprotich & Cynthia B. Mayaka, Members

January 24, 2025

Between

Skytrade Global Enterprises Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya. It is involved in the importation and sale of bitumen.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent audited the tax affairs of the Appellant and issued its audit findings in a pre-assessment notice dated 13th October 2023 covering Corporation tax, Value Added Tax (VAT), Withholding tax (WHT) and Pay As You Earn (PAYE) tax.

4. The Respondent issued its notice of assessment in a letter dated 31st October 2023.

5. On 7th November 2023, the Appellant objected to the additional assessments and the Respondent issued an Objection decision on 5th January 2024.

6. The Appellant, being dissatisfied with the Respondent’s Objection decision lodged a Notice of Appeal dated 29th January 2024 and filed on the same date.

The Appeal 7. The Appeal is premised on the Memorandum of Appeal dated 29th January 2024 and filed on the 31st January, 2024 which raised the following grounds: -a.That the Commissioner erred in law and facts by raising taxes on incorrect reconciled purchases variance.b.That the Commissioner erred in law and in facts by raising taxes on incorrect computation of additional VAT amount from alleged export sales variance by comparing export sales as per VAT return and export entries (R3) customs values derived from the W700 which had the landed cost value of bitumen, in essence comparing the cost of bitumen with sales figure to arrive at the variance.c.That the Commissioner erred in law and facts by raising taxes on purported transfer of funds to related parties. That the facts are that the Appellant received monies from related parties as start-up capital. That from the absurdity, the Commissioner charged purported interest earned.d.That the Respondent erred in law and in fact in failing to provide sufficient information on the funds purportedly transferred to related parties, Kshs. 1,507,220,764. 00 of which the Respondent assumed interest income earned.e.That the Respondent erred in law and in fact by applying a speculative approach in raising additional taxes even after being given documentary evidence by the taxpayer.f.That the Commissioner erred in law and in facts by contravening Section 3(2)(i) as read together with Section 4 of the Income Tax Act Cap 470 of the Laws of Kenya.g.That the Commissioner erred in law and facts by raising VAT on purported variance arising from his comparison between values from export import entries R3 entries against the Appellant’s export sales commercial invoices without providing any evidence and workings of the same.h.That the Commissioner erred in law and facts by treating the finance lease as imported services for the bitutainers used to transport bitumen, of which a taxable supply is generated by the taxpayer, contrary to the VAT Act.i.That the Commissioner erred in law and facts by treating finance leasing as rentals hence charging WHT on monthly payments and disallowing the VAT charged on the same.j.That the Commissioner erred in law and facts by disallowing the input VAT charged and paid on import of bitutainers as per the import entries provided to the Commissioner.k.That the Commissioner erred in law and facts by disallowing input VAT paid to Mbaraki Terminals for heating services even though the Appellant paid for the services at 16% as proven by the invoices from Mbaraki.l.That the Commissioner erred in fact and law by using a speculative approach in raising additional tax even after being given all the documentary evidence by the taxpayer which are ignored without proof of otherwise to the taxpayer. That tax law provides that taxes paid must be factual and just. That the Appellant therefore treats this as a fishing expedition without proof.m.That the Commissioner has acted unreasonably, capriciously and is motivated by malice and extraneous considerations in issuing the various tax demands.n.That the Commissioner outrightly contravenes the doctrine of legitimate expectation that rests a presumption on the Commissioner to follow certain procedures at arriving at a tax liability and the benefits that accrue from it.

Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal:a.The Appellant’s Statement of Facts dated 29th January 2024 and filed on 31st January 2024 and the documents attached to it; andb.Its Written Submissions dated 22nd October 2024 and filed on 28th October 2024.

9. The Appellant stated that on 11th November 2022, the Respondent (KRA MTO MSA) initiated a notice to audit the tax affairs of the Appellant for the period of January 2020 to December 2021. That the Appellant requested for an extension and provided all the documents, as per the letter dated 11th November 2022, in various communications. That the Respondent eventually issued the Appellant with a pre-assessment notice dated 27th June 2023.

10. That thereafter MTO KRA Nairobi issued a notice to audit dated 2nd August 2023 the tax affairs of the Appellant for the period of 2019 to 2023. That the Appellant responded and provided the documents as per the letter. That thereafter, on 13th October 2023 the Respondent issued a pre-assessment notice of even date.

11. The Appellant further stated that the Respondent subsequently issued a notice of assessment of Corporation tax, VAT, WHT and PAYE on 31st October 2023 for the years 2020, 2021 and 2022, amounting to a principal tax of Kshs. 179,500,694. 00, penalties of Kshs. 8,975,035. 00 and interest of Kshs. 19,462,242. 00.

12. That the Appellant filed a letter of Objection dated 7th November 2023 providing detailed grounds of objection to the assessments.

13. The Appellant stated that on 15th December 2023, the Respondent via email requested for additional documents, which in response the Appellant asserted that it provided a detailed explanation on the issues raised on the email with all copies of the documents requested for in the letter dated 20th December 2023 delivered manually and stamped received on the same date.

14. That by a letter dated 5th January 2024 the Respondent issued its Objection decision in which it upheld its assessment of Kshs. 179,500,694. 00 being principal Income tax, VAT, WHT and PAYE, stating that the Appellant had failed to avail requested information.

15. The Appellant maintained that the Respondent’s Objection decision is erroneous for the following reasons:a.That the Respondent disregarded the information, documents and explanations provided by the Appellant during the Respondent’s audit and following the issuance of the Respondent’s pre-assessment notice which sufficiently explained the variances identified by the Respondent.b.That the Respondent failed to provide any information on the customs data that informed the basis of its conclusion that there were variances between exports as declared on VAT 3 and information at customs which pointed to declaring local sales as exports. That the Respondent simply provided cumulative figures without providing a breakdown of the same and the invoices or entries in question. That it was unfair and unreasonable for the Respondent to require the Appellant to provide explanations on the variances without specifying which specific entry claims were in issue or otherwise providing information on the invoices to enable the Appellant to sufficiently respond to the issues.c.That in the pre-assessment notice, the Respondent summarised the tax demanded as Kshs. 165,201,276. 00, and in the Respondent’s notice of assessment, the amounts demanded grew to Kshs, 179,500,694. 00, both principal taxes. That this clearly indicates that the Respondent was engaged in a fishing expedition and did not give the Appellant an opportunity to explain the extra growth of Kshs. 14,299,418. 00 between the pre-assessment and the assessment. That there is no way the final assessment can be more than the pre-assessment which explanations were sort from the Appellant.

16. The Appellant argued that its Objection was valid by referring to Section 51(3) of the Tax Procedures Act and the holding in the case of Tax Tribunal Appeal No. 369 of 2019: Histoto Limited Vs. The Commissioner of Domestic Taxes at paragraph 37 where the Tribunal held that: -“By reproducing the provisions of Section 51(3) of Tax Procedures Act, 2015 above, the Tribunal notes that a Notice of Objection is considered to be validly lodged if it precisely states the grounds of objection, the amendment required to be made to correct the decision, and the reasons for amendments required to be made to correct the decision, and the reasons for amendments.”

17. The Appellant urged the Tribunal to be guided by the case of Cape Brandy Syndicate v LR, Commissioners [1921] 1KB cited in the case of Mount Kenya Bottlers Ltd & 3 others V Attorney General & 3 others [2011] eKLR where the Court expressed the common law position in this area when it stated: -“ln a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

18. The Appellant submitted that in tax related disputes, the burden of proof lies with the Appellant, but after production of documents and raising merited objections, the burden of proof shifts to the Respondent who has not at all discharged the burden of proof that requires that whoever alleges must prove, as per Section 107 of the Evidence Act which provides that: -“1)Whoever desires any court to give judgment as to any legal or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any of fact it is said that the burden proof lies on that person.”

19. The Appellant further submitted that in the instant matter, the Respondent has just filed before the Tribunal charts with figures and left out the actual source of the information before the Court. That it is the legal duty of the Respondent to prove its claim before the Court, without which its case is frail and ought to be dismissed. In support of this submission, the Appellant placed reliance on the case of Ahmed Mohammed Noor v Abdi Aziz Osman [2019] eKLR where the Court held that: -“For clarity, the legal burden of proof in a case is always static and rests on the Claimant throughout the trial. It is only the evidential burden of proof which may shift to the Defendant depending on the nature and effect of evidence adduced by the Claimant...”

Appellant’s prayers 20. The Appellant prayed for the following Orders:-a.That the Appeal be allowed.b.That the demand for Kshs. 179,500,694. 00 together with interest and resultant penalties be set aside and in place thereof, the Honorable Tribunal find that no tax is payable.c.That costs be borne by the Respondent.

Respondent’s Case 21. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated 23rd February 2023 and filed on 27th February 2023; andb.Its Written Submissions dated 30th October 2024 and filed on 8th November 2024.

22. The Respondent stated that it issued assessment on the accounts of the Appellant for tax compliance and veracity of information declared for the period of 2020 to 2022 in relation to Income tax, VAT, WHT and PAYE based on various factors including discrepancies in sales reconciliations, disallowed expenses and audit adjustments.

23. That the Respondent reconciled sales declared in the VAT monthly returns filed on iTax to turnover on the Income tax returns (IT2C) and established variances that were communicated to the Appellant in Respondent’s statement of findings dated 31st October 2023. That the tax due as per the notice of assessment was a principal tax of Kshs. 179,500,694. 00, penalties of Kshs. 8,975,035. 00 and interest of Kshs. 19,462,242. 00.

24. The Respondent further stated that it also noted that the Appellant made reconciliation which did not tally with the ones declared on iTax. That therefore, the unreconciled sales variance was treated as under declared income for both VAT and Income tax.

25. The Respondent averred that from investigations it found that there were variances on purchases, drawn from comparison between the value of imports as per KRA Customs data to purchases of bitumen claimed in IT2C.

26. The Respondent further averred that the Appellant earned income on export sales from South Sudan and Uganda. That the Respondent compared the export declared in the VAT 3 returns to export sales as per custom data and established variances amounting to Kshs. 77,109,892. 00 for the years 2021 and 2022.

27. That the Appellant leased bitutainers/tanks from Hillstone which amounts to supply of imported services as provided for under Section 6 of VAT Act, 2013, therefore, lease rentals were charged.

28. The Respondent stated that the Appellant claimed input VAT relating to the service and that VAT should not be claimed. That Section 17(4) of the VAT Act, 2013 provides for such services to include: passenger cars and mini buses, entertainment, restaurant and accommodation services.

29. That further, the Appellant claimed input VAT on services which were not for business including car hire services, meals and accommodation and Hillstone Leasing B.V. input, therefore, the input VAT was disallowed.

30. The Respondent stated that it also noted from investigations that in the Mbaraki Terminal storage contract, Mbaraki was to provide heating services to maintain bitumen’s requisite temperatures. That the company was to cater for the heating expenses relating to fuel, however, the Appellant claimed input VAT on fuel at 16% instead of 8% contrary to and as provided for under Section 5(2)(a) of the VAT Act.

31. The Respondent averred that the Appellant accepted the Withholding tax (WHT) liability in the correspondence dated 31st August 2023. The Respondent asserted that the Appellant also engaged in other transactions that attract WHT on the repair and maintenance, construction services, leasing from Hillistone B.V (subject to Section 35(1)(c) of the Income Tax), loans from shareholders and transfer of funds.

32. The Respondent stated that in the investigation it noted variances between PAYE monthly returns and staff costs that were expensed in the audited financial statements.

33. The Respondent averred that the Appellant commenced operations in 2020 with two directors. That the directors signed contracts in December 2017, which shows that they were already active in service during the period, and that the two directors had cash receivables from Appellant during the period of February to September 2020, therefore, they were subjected to PAYE.

34. It was the Respondent’s averment that the Appellant was notified to provide responses/reconciliations emanating from the assessment within seven days or additional assessment could be raised. That the additional assessment was raised and is dated 31st October 2023.

35. That the Appellant raised an Objection to the assessment on 7th November 2023, after which there was a series of engagements between the Appellant and the Respondent. The Respondent affirmed that upon receipt of the Objection application, it considered the application and the evidence tendered and issued an Objection decision dated 5th January 2024 confirming the assessments, which the Appellant appealed at the Tax Appeals Tribunal.

36. The Respondent maintained that fundamentally, the assessment was based on audit and compliance checks. That Section 31 of the Tax Procedures Act empowers the Commissioner to make assessments according to the information available to him and best judgement in ensuring that the Appellant is only liable for the correct tax.

37. The Respondent affirmed that it held a meeting with the Appellant to discuss the grounds of objection and evidentiary documents to support the grounds. That the Appellant also acknowledged that it had correspondence with the Respondent relating to submission of documents to support the Appellant’s Objection and referred to their conversation dated 15th December 2023.

38. The Respondent asserted that the Appellant had not submitted the required documents, which include:a.Corporation taxi.Audited financial statements for the years 2020, 2021 and 2022. ii.Reconciliation for the purchases during period under review highlighting differences in the Respondent’s computation.iii.Support document regarding insurance premium expense on customs bonded warehouse.iv.Letter of representation from mother company supporting the ground of objection on expenses paid on behalf of Mr. Meheryar Eksandiv.Evidence to support grounds of objection that Skytrade was the receiver of funds from related parties.b.Value Added Taxi.Reconciliation for variances between export sales as declared under VAT returns and records on customs data.ii.Contracts on leased bitumen tanksiii.Evidence of importation charges on the container and import entries for the bitumen tanks.c.WHTi.Tabulation citing duplicates and other errors on management and professional fees.ii.Purchase invoice to support repairs and maintenance.d.PAYEi.Directors current account.

39. The Respondent submitted that according to Section 23 of the Tax Procedures Act, it is the duty of the Appellant to maintain its tax documents and for a minimum period of 5 years. That by failing to produce documents to support its Objection, the Appellant is in violation of Section 23 of the Tax Procedures Act.

40. The Respondent maintained that for an Objection to be validly lodged, Section 51(3) of the Tax Procedures Act provides that among other conditions, all documentation in support of the Objection must be availed.

41. The Respondent averred that the Appellant was granted sufficient opportunity to avail documents in support of its Objection, but the Appellant refused, failed, and neglected to provide documents and/or records to support its grounds of Objection raised in accordance to Section 51 of the Tax Procedures Act, despite having been requested to provide them, thus failed to make its Objection application valid.

42. That in the absence of requisite supporting documents to support the taxpayer’s assertions and objections, the Commissioner is mandated to rely on his/her best judgement in making tax decisions relating to that taxpayer. That this is precisely the position set by Section 29 of the Tax Procedures Act.

43. The Respondent buttressed this argument concerning the application of 'best judgement' by citing the holding in the case of Saima Khalid vs The Commissioner For Her Majesty's Revenue & Customs -Appeal No. TC/2017/02292.

44. It was the Respondent’s contention that the Appellant has not discharged its burden of proof in its assertion that the assessment was erroneous contrary to the provision in Section 56(1) of the Tax Procedures Act.

Respondent’s prayers 45. The Respondent prayed that the Tribunal finds: -a.That this Appeal be dismissed with costs to the Respondent as the same is devoid of merit.b.That the Objection decision dated 5th January 2024 be upheld and the taxes be deemed due and collectible.

Issues For Determination 46. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issues for determination as follows:a.Whether the Respondent Objection decision dated 5th January 2024 is proper in law.b.Whether the Respondent was justified in assessing Corporation tax, VAT, WHT and PAYE tax for the years 2020, 2021 and 2022.

Analysis And Findings 47. The Tribunal analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned Objection decision.

a. Whether the Respondent Objection decision dated 5th January 2024 is proper in law. 48. The Respondent asserted in its Objection decision and Statement of Facts that prior to issuing its Objection decision, the Appellant had not submitted the information and documents that the Respondent had requested it to provide in an email dated 15th December 2023 in respect of Corporation tax, VAT, WHT and PAYE.

49. The Appellant stated that on 15th December 2023, the Respondent via email requested for additional documents, which in response the Appellant asserted that it provided a detailed explanation on the issues raised on the email with all copies of the documents requested for in the letter dated 20th December 2023 delivered manually and stamped received on the same date.

50. The Appellant argued that the Respondent applied a speculative approach in raising additional taxes even after being given documentary evidence by the taxpayer.

51. The Tribunal perused the Appellant’s bundle of documents and established that in a letter dated 20th December 2023, the Appellant provided the Respondent with additional information and supplied the Respondent with the documents in the Respondent’s list. The said letter was received by the Respondent on 20th December 2023, which was more than two weeks before the Respondent issued its Objection decision.

52. The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 as follows regarding the shifting of the burden of proof: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”

53. This position that the Respondent is obliged to consider the evidence presented to it by the taxpayer in its Objection decision was also discussed in Judgment – TAT No. E142 Of 2024 Escobar Kenya Limited–Vs- Commissioner Of Legal Services and Board Coordination where the Tribunal stated thus:-“Moreover, it was also not clear from the Objection Decision on how the documents provided were considered and the reasons, if any, why some of those documents may not have been considered. This explanation was crucial in persuading the Tribunal that the Appellant’s documents as submitted were indeed considered by the Respondent when it issued its decision.On this basis, the Tribunal finds that the Appellant was prejudiced by the Respondent failing to consider information which the Appellant provided before it issued its Objection decision.”

54. The Respondent’s failure to consider the Appellant’s documents presented in support of its objection amounted to dereliction of its duty and thereby possibly subjecting the Appellant to the payment of tax beyond what it was legally bound to pay. It cannot hence be the place of the Tribunal to assume the position of the Respondent and consider these documents which the Respondent was duty bound to consider.

55. The Respondent’s failure to consider the information and documents that the Appellant provided on 20th December 2023 for the ascertainment of its tax liability thus contravened Section 51(8) of the Tax Procedures Act and in the course of that contravention prejudiced the Appellant. The provision provides as follows: -“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 Commissioner's decision shall be referred to as an "objection decision".”

56. Accordingly, the Tribunal finds that the Appellant discharged its burden of proof, as required under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, by presenting documents and evidence to support its objection to the assessment. The pendulum thus shifted to the Respondent to show or prove that it had considered these documents by stating its decision regarding those documents in its Objection decision. This was not done.

57. This pendulum model in which burden of proof sometimes shifts from the Appellant to the Respondent was discussed by the High Court in the case Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, where the court stated that:“Once the taxpayer has made out a prima facie case to prove the facts, the onus then shifts to the Revenue Authority to rebut the prima facie case. If the Revenue Authority cannot provide any evidence to prove their position, the taxpayer will succeed.”

58. The Respondent has not provided evidence to prove that it exercised its mandate under Section 51(8) of the TPA and considered the objection and evidence provided by the Appellant in support of that Objection. The Appellant thus succeeds and the Tribunal thus finds that the Objection decision dated 5th January 2024 is not proper in law.

b. Whether the Respondent was justified in assessing Corporation tax, VAT, WHT and PAYE tax for the years 2020, 2021 and 2022. 59. Having determined that the Respondent failed to validly issue its Objection decision, the Tribunal did not delve into the second issue for determination as it has been rendered moot.

Final Decision 60. The upshot of the above analysis is that the Tribunal finds that the Appeal is meritorious and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 5th January 2024 be and is hereby set aside.c.Each party to bear its own costs.

61. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF JANUARY, 2025. DR RODNEY O. OLUOCH.........................CHAIRPERSONGLORIA A. OGAGA ............................MEMBERABRAHAM K. KIPROTICH............................MEMBERCYNTHIA B. MAYAKA............................MEMBER