[2024] KETAT 1454 (KLR)

Spread Marketing Consultancy Limited v Commissioner of Domestic Taxes (Tax Appeal E151 of 2023) [2024] KETAT 1454 (KLR) (13 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1454 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E151 of 2023

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

September 13, 2024

Between

Spread Marketing Consultancy Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a resident company whose principal activity was that of marketing activation.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued to the Appellant a notice of assessment on 13th December, 2022 on income tax, PAYE and VAT amounting to Kshs 28,707,705. 00.

4. The Appellant objected to the Respondent's tax assessment in its letter dated 23rd January, 2023.

5. The Respondent issued an objection decision on 20th March, 2023.

6. Thereafter, the Appellant being dissatisfied with the Respondent’ decision preferred the instant Appeal to the Tribunal.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 18th April, 2023 and filed on 19th April, 2023:-i.That the Respondent erred in fact and law, by charging the Appellant’s entire income into taxation, without considering the underlying factors the Appellant had with its suppliers.ii.That the Commissioner erred in fact and law by arbitrarily and retroactively imposing taxes on what he termed us undeclared income, to the Appellant's detriment.iii.That the Respondent breached the Appellant's right of certainty and regularity of law. The Appellant correctly relied on legitimate expectation, and correctly declared its taxes as per the income earned.iv.That the impugned assessment by the Respondent is contrary to the settled law and facts, therefore, suffering from serious legal infirmity hence unsustainable.v.That the Respondent erred in fact by not considering that the Appellant’s contract was strictly based on shilling-to-shilling reimbursement which is specifically stated in the contract.vi.That as per the contracts signed by the Appellant, it was earning a margin of 18% after all the disbursement. Thus, it correctly charged 16% VAT on its margin.vii.That the Respondent erred in fact by not considering the Appellant’s contract. The contract categorically states that Spread Marketing was to oversee and manage staff contracted on behalf of Glaxo smith( GSK). GSK was to pay all the staff costs to Spread Marketing, who in turn would pay the contracted staff under Spread Marketing and thereafter earn a commission/management fee of 18%. The reimbursement was strictly on shilling-to shilling as demonstrated in the Appellant’s invoices and bank statements.viii.That the Respondent failed to consider the director’s account and it's proper accounting as per IAS 24 on related parties’ disclosers. The directors had to, on several occasions, inject capital into the business, just to ensure that cashflow was not affected. The Respondent charged director’s drawings on PAYE, despite there being proof and documentation to assert that this was their injected capital.ix.That in 2018-2019 period under dispute, the company owed the directors a total of Kshs. 23,166,609.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:i.Its Statement of Facts dated 18th April, 2023 and filed on the 19th April, 2024 together with the documents attached thereto and proceedings before the Tribunal.ii.Its written submissions dated and filed on 14th May, 2024.

9. That the Appellant deems the acts of the Respondent as not only unfair but also illegal, amounting to violations of its fundamental rights and freedoms as illustrated herein below.

10. That in regard to breach of Article 27 of the Constitution, every person is equal before the law and has the right to equal protection of the law. That equality includes the enjoyment of all rights and fundamental freedoms.

11. That the Respondent issued the said demand notices against the Appellant without any regard to its rights to procedural fairness and in breach of natural justice. That the Respondent discriminated against the Appellant and exposed it to demand action for the colossal sum of Kshs. 29,448,349. 24 without any regard to its rights protected under the Tax Procedures Act.

12. That the Respondent also breached the doctrine of legitimate expectation. That the courts over the years have recognized both procedural and substantive legitimate expectation. The Appellant averred that a procedural legitimate expectation rests on the presumption that a public authority will follow a certain procedure in advancing a decision being made. That procedural legitimate expectation applies in this case.

13. That the Appellant is apprehensive that the Commissioner is unfair, unjust and malicious since other players in the industry are charging VAT based on their margin/mark-up are being subjected the law cannot be applied selectively.

Appellant’s Prayers 14. The Appellant prayed that:i.This Honorable Tribunal be pleased to set aside the assessments under review herein;ii.Thereafter, this Honorable Tribunal be pleased to substitute the assessment.iii.This Honorable Tribunal be pleased to order the Respondent to pay costs of this Appeal to the Appellant.iv.This Honorable Tribunal be pleased to issue any other order favorable to the Appellant as it may find just and expedient to issue.

Respondent’s Case 15. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-i.The Respondent’s Statement of Facts dated 29th August, 2023 and filed on 30th August, 2023 together with the documents attached thereto.ii.The Respondent’s written submissions dated 11th April, 2024 and filed on 12th April, 2024 together with the legal authorities filed therewith.

16. That the Appellant was subjected to a compliance check on Corporation tax for 2018, PAYE for the period 2018 to 2019 and VAT for the period 2018 to 2019 arising from variances in VAT declarations. That during the period under review, the Appellant had marketing contracts with Astra Zeneca and GSK

17. That on 13th December, the Respondent raised Income tax and VAT assessments amounting to Kshs. 28,707,705. 00 (including penalties & interest) and notified the Appellant.

18. That the Appellant submitted notices of objection to the full assessments on 25th January, 2023 and 6th February, 2023.

19. That the Respondent, through email correspondence, requested for the following additional documents from the taxpayer through its emails of 8th February, 2023 and 7th March, 2023;i.Audited accounts - 2018 and 2019ii.General ledgers - 2018 and 2019iii.Proof of shilling-to-shilling reimbursement of staff costiv.Director's account - 2018 and 2019v.Proof of reimbursement of expenses (staff costs)vi.GSK contract - 2018vii.AstraZeneca contracts - 2018 and 2019

20. That the taxpayer provided the following through emails of 13th February, 2023 and 15th February, 2023:i.Audited accounts - 2018 and 2019ii.Sales ledgers - 2018 and 2019iii.Director's account - 2018 and 2019;iv.Copies of undeclared invoicesv.Bank statements - 2018 and 2019vi.GlaxoSmithKline contract - 2019

21. That the Respondent reviewed the documents provided and issued the Appellant with a decision on 20th March, 2023. That the Respondent adjusted the assessment under PAYE for supported drawings.

22. That the Respondent identified specific invoices that had not been declared from the Appellant's financial statements and brought them to charge under VAT and Income tax. That the total value of the invoices was Kshs. 2,859,802. 00.

23. The Respondent averred that the invoices in question had not been declared according to the sales ledger provided at the objection review stage.

24. That the Appellant failed to declare the invoices in its VAT declarations on i-Tax. That the Respondent established that some of the invoices had been claimed by the Appellant's respective customers in their VAT returns.

25. The Respondent averred that the Appellant did not support its grounds that invoices were duplicates.

26. That in addition, the Respondent requested the Appellant to provide the 2018 GSK contract and the AstraZeneca contract for 2018 and 2019 to enable it to establish the contract terms. That these were not provided as explained below;i.That the Respondent requested the Appellant to provide the 2018 GSK contract and the AstraZeneca contract for 2018 and 2019 for review and comparison. That these were not provided.ii.That according to Clause 5. 13 of the GSK Contract for 2019, the Appellant was in charge of hiring staff and managing them under the terms of the Contract.iii.That according to several other clauses in the Contract, it is clear that the Appellant was in charge of employees performing duties under the contract.iv.That sample invoices provided did not demonstrate that the Appellant was receiving reimbursement for staff costs incurred on behalf of its clients.

27. That the Appellant therefore failed to controvert the Respondent's position.

28. The Respondent noted that in 2019, the Appellant started splitting the contracts into labour (staff costs) and management fees and declaring VAT on the management fees only. That the rest of the amount was declared as a tax-exempt reimbursement. That further, in 2018, the Appellant was charged the full contract price under VAT.

29. On PAYE, the Respondent averred that regarding PAYE on directors' drawings, the Appellant failed to support its explanation that drawings were repayment for loans by directors.

30. That the Appellant's averments on amounts deemed as drawings by the Respondent were actually refunds to directors for loans previously provided to the company.

31. The Respondent averred that the said amounts were well documented as per the provided schedules and bank statements.

32. The Respondent stated that it established that the amounts are replicated in 2019 as money being settled by the company or directors loaning the company more money.

33. The Respondent was guided by Section 56(1) of the Tax Procedures Act which provides that:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

34. That the Respondent is allowed by Section 24(2) of the Tax Procedures Act to assess a taxpayer's liability using any information available to it. That to this extent, the Respondent confirms to have operated within the confines of the law by using the data available following a return review for the period of 2018 and 2019 which indicated variances in VAT declarations and Income tax.

35. The Respondent averred that it is allowed to make additional assessments based on the available information to the best of its judgment pursuant to Section 31 of the Tax Procedures Act.

36. That the Respondent reviewed the Appellant's provided debtors' ledgers and sales ledgers provided and vacated the assessments save for the year 2020, where the Appellant could not explain the variance between declared imports in VAT 3 returns with the imports as per Customs data.

37. That the Appellant failed to provide evidence to contrast the withholding tax assessment and overclaimed purchases as no supporting documentation was provided for purchases claimed by Kotecha Wholesalers Limited.

38. The Respondent stated that legitimate expectation must be within the confines of law since a public body cannot make a promise which goes against the express letter of the law.

39. The Respondent averred that legitimate expectation cannot be contrary to statutory provisions and that the demand made by the Respondent on the Income tax and VAT was anchored in law and cannot be said to be unilateral, unreasonable or unfair.

40. That it is in the public interest that the Appellant remits the taxes in line with the provisions of Article 201 (b) (i) of the Constitution of Kenya which requires that the tax burden be equitably shared by all persons.

41. The Respondent relied on Digital Box Ltd vs. Commissioner Investigations and Enforcement (TAT Act 115 of2017). That in this case the Respondent stated that it employed the best judgment in determining the taxes due as provided by Section 29 of the Tax Procedures Act, 2015.

42. That the Respondent was carefully guided by all relevant laws and followed due procedure. The Respondent submitted that the Appellant was given adequate opportunity to defend its position but failed to do so.

43. That the Appellant failed to provide evidence to contrast the VAT, PAYE and Corporation tax assessments even at the objection stage.

44. That Section 51(3) of the Tax Procedures Act, 2015 enjoins the Appellant to provide all documents in support of the objection. The Section reads as follows:“Objection to tax decision (1)...(3)A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2)if-(a)...(c)all the relevant documents relating to the objection have been submitted.”

45. That the Appellant is duty bound to keep and maintain proper records for purposes of computation of tax. That Section 23 of the Tax Procedures Act (TPA) provides for record-keeping. That subsection 1 reads as follows:“(i)A person shall-i.maintain any document required under a tax law, int either of the official languages;ii.maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; andiii.subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.”

46. That further Section 82 of the TPA provides for penalty for failing to keep documents. It provides as follows:“(1)A person who, without reasonable cause, fails to keep, retain, or maintain a document as required under a tax law without reasonable cause for a reporting period shall be liable to a penalty.”

47. That under Section 51(3) of the TPA, a notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-“a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andb)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute.”

48. That further, under Section 51(8) of the Tax Procedures Act, 2015, 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".

49. The Respondent invited this Tribunal to note that the Appellant in its Appeal did not challenge the assessment on grounds that the Respondent failed to review the documents submitted. That this fact gives credence to the Respondent's position that the Appellant never submitted all the documentation required to support its objection.

50. The Respondent relied on the following cases:i.Commissioner of Domestic Taxes vs. Structural International Kenya Ltd (Income Tax Appeal No. Eo89 of 2020) [2021] KEHC 152 (KLR).ii.Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR Nairobi High Court Income Tax Appeal No. E125 of 2020. iii.Commissioner of Domestic Taxes vs Golden Acre Limited (2021) eKLRiv.Sheria Sacco Society Limited V Commissioner of Domestic Taxes (2019) eKLRv.Mulheim v Commissioner of Taxation |2013]FCAFC 115vi.Republic v Commissioner of Domestic Taxes Ex-parte Sony Holdings Limited [2019] eKLR

51. That Section 56 of the Tax Procedure Act and Section 30 of the Tax Appeals Tribunal Act places the burden of proof upon the taxpayer.

Respondent’s Prayers 52. The Respondent prayed:i.That this Tribunal upholds the Respondent's Objection decision dated 20th March, 2023. ii.That this Appeal be dismissed with costs to the Respondent as the same is devoid any merit.

Issues for Determination 53. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises the following single issue for its determination:Whether the assessments by the Respondent were justified

Analysis and Determination 54. The Tribunal having established the issue for its determination proceeds to analyse the same as hereunder.

55. The dispute at hand originated from the issuance of assessments on Income tax, PAYE and VAT by the Respondent.

56. The Appellant argued that the assessments were not justified while the Respondent argued that the Appellant’s case was not supported by documentation.

57. The Tribunal has gleaned through the Respondent’s pleadings and notes that the Appellant provided the following documentation that was reviewed at the objection stage:i.Audited accounts-2018 and 2019ii.General ledgers-2018 and 2019iii.Proof of shilling-to-shilling reimbursement of staff costiv.Director's account-2018 and 2019v.Proof of reimbursement of expenses (Staff costs)vi.GSK contract - 2018vii.AstraZeneca contracts - 2018 and 2019

58. The Tribunal notes that both parties were in agreement that the Appellant, in response to the request for documents as stated above, provided the documents requested except for the proof of shilling to shilling reimbursement of staff costs, copies of undeclared invoices, the GSK contract for 2018 and Astra Zeneca contract for 2019.

59. The Respondent made the following findings in its objection decision after considering the documents provided by the Appellant:i.That ledgers provided to the assessing Commissioner revealed that the Appellant failed to declare some invoices under VAT and Income tax.ii.That the invoices in question were not declared according to the sales ledger provided at the objection review stage.iii.That the invoices were not declared by the Appellant in its VAT declarations on i-Tax.iv.That during the assessing stage, the Appellant failed to demonstrate that the income declared as reimbursement was actually a shilling for shilling reimbursement of staff costs.v.That from the contract the Appellant provided to the Respondent, it was clear that the Appellant was in charge of employees performing duties under the contract.vi.That sample invoices provided did not demonstrate that the Appellant was receiving reimbursements for staff costs incurred on behalf of it clients.vii.That the Appellant failed to demonstrate its claims that it received shilling for shilling reimbursements for staff costs.viii.That directors’ drawings for 2019 were not explained or supported.

60. The Tribunal further notes, that the Appellant attached the following documents to its pleadings, which documents were not provided at the objection stage:i.2019 bank statementsii.Sample invoicesiii.2018 bank statementsiv.Schedules showing movement of funds from the directors to the company and vice versa.

61. The above listed documents were thus not sighted by the Respondent in making its objection decision. The Tribunal is thus enjoined from considering these documents that were never sighted by the Respondent.

62. It is also clear that the Respondent considered and amended the assessment based on the documents that the Appellant had provided.

63. Flowing from the above analysis the Tribunal finds that the Appellant did not provide all the documents that were required by the Respondent at the Appeal stage to support its objection. The Appellant did not also proffer an explanation as to why these documents that the Respondent had requested for were not availed, or why they were provided to the Tribunal and not the Respondent at the objection stage.

64. The Tribunal is of the considered view that if the Appellant provided all the documentation requested by the Respondent prior to the issuance of the objection decision, it should have provided evidence to show that indeed it provided the disputed information. The fact that it did not provide this evidence means that it did not discharge its burden of proof under Section 30 of the Tax Appeals Tribunal Act.

65. Section 30 of the Tax Appeals Tribunal Act provides as follows regarding burden of proof in tax appeals to the Tribunal:“In a proceeding before the Tribunal, the appellant has the burden of proving —(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently.”

66. The Tribunal relies on the case of Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] eKLR where the court held that:-“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”

67. The Tribunal thus finds and holds that the Respondent was justified in arriving at its objection decision because it issued the decision based on the documents as presented to it.

Final Decision 68. The Tribunal having found that the Appeal is not merited, accordingly makes the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 20th March, 2023 be and is hereby upheld.c.Each Party to bear its own costs.

69. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 13TH DAY OF SEPTEMBER, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERGLORIA A. OGAGA - MEMBERABRAHAM K. KIPROTICH - MEMBER