[2024] KETAT 749 (KLR)

Steel Makers Limited v Commissioner of Investigation and Enforcement (Tax Appeal E216 of 2023) [2024] KETAT 749 (KLR) (17 May 2024) (Judgment)

Neutral citation: [2024] KETAT 749 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E216 of 2023

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

May 17, 2024

Between

Steel Makers Limited

Appellant

and

Commissioner of Investigation and Enforcement

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya and a registered taxpayer whose principal business activity is manufacturing, supplying and exporting of steel products and galvanized products.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act (KRA), Act No. 2 of 1995, and KRA is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule of the KRA Act.

3. The Appellant filed a capital gains return in December 2022 with the sale value of the property being Kshs. 1,816,102,500. 00 for which it paid Capital Gains Tax amounting to Kshs. 71,431,125. 00

4. The Respondent carried out a compliance review to ascertain whether the output tax was declared against the sale of the manufacturing plant and commercial property as per the VAT Act.

5. The Respondent issued an additional assessment on 18th March 2023 for VAT amounting to Kshs. 290,576,400. 00 and principal tax amounting to Kshs. 219,962,589 for interest and penalties, followed by a demand notice. The total amount demanded was Kshs. 510,538,989.

6. The Appellant objected to the assessments on 22nd March 2023.

7. The Respondent invalidated the Appellant’s notice of objection on 31st March 2023.

8. The Appellant, aggrieved by the Respondent’s invalidation of its objection, lodged the Notice of Appeal at the Tribunal on 28th April 2023.

The Appeal 9. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 10th May 2023 filed on 11th May 2023:i.That the Respondent erred in law and fact by raising additional assessments for VAT on a transaction that involved a transfer of a business as a going concern contrary to the provisions of the Paragraph 94 of the First Schedule, Part I of the VAT Act, 2013. ii.That the Respondent erred in law and fact by overlooking the substance in the Sale Agreement between the Appellant and Lery Enterprises Company Limited (Purchaser) and placing its reliance on the form, thereby clouding its interpretation of the law.iii.That the Respondent erred in law and fact by raising an additional assessment for VAT of Kshs 290,576,400 on a zero-sum (Null) transaction between the Appellant and Lery Enterprises Company Limited (Purchaser).iv.That the Respondent erred in law and fact by applying Section 84 (2) (a) of the Tax Procedures Act, 2015, in charging penalties on the Appellant as the same is prejudicial and against Chapter 47 of the Constitution of Kenya, 2010. v.That the Respondent erred in law and fact by disregarding all the material facts presented before him by the Appellant during the case analysis and audit period and confirming the assessments in their entirety in their objection decision dated 31st March 2023.

Appellant’s Case 10. The Appellant's case is premised on the hereunder filed documents: -a.Its Statement of Facts dated on 10th May 2023 and filed on 11th May 2023b.Its Written Submissions dated and filed on 18th January 2024.

11. The Appellant averred that it provided explanation to the Respondent on the nature of the transaction contending that the CGT paid by the company was erroneously calculated thereby exaggerating the amount and that it would begin the process of refund.

12. The Appellant averred that pursuant to the sale agreement entered into in the year 2020 between itself and Lery Enterprises Company Limited, though not expressly stated in the Agreement, the transfer of Land Reference Number 337/1951 Mavoko and specific machinery constituted a transfer of a going concern.

13. The Appellant submitted that the Steel Plant (specific machinery) was sold together with the referenced land and could form a separate business in their own right. The Appellant averred that the machinery constituted, among others, the following items; weighbridge, refractory workshop, refractory, pressers, crushers and mixers, furnaces, chemical laboratory, spectrometer laboratory, pre-heating furnace plant, rolling mill workshop, rolling mills pump house, mills, mechanical laboratory, water treatment and filtering plants, electrical substation—66KV.

14. The Appellant submitted that the purchaser, Lery Enterprises Company Limited, assumed an obligation of paying of the debts of the Appellant owed to Diamond Trust Bank Kenya Limited (DTB) and that DTB had charged the property and machinery to secure the various facilities advanced to the Appellant.

15. The Appellant averred that all the employees who were previously employed at the plant by the Appellant are still working at the plant to date.

16. The Appellant submitted that the steel plant shall be used by the purchaser, Messrs. Lery Enterprises Company Limited, to carry on the same kind of business as that operated by the Appellant.

17. The Appellant averred that the sale was an arrangement between the Appellant (who was heavily in debt), Diamond Trust Bank Kenya Limited (who had taken charge of the steel mills), and the Purchaser. The Appellant submitted that the Bank arranged for the sale and sourced for the purchaser on behalf of the Appellant to avoid winding-up or sequestration for reasons of insolvency.

18. The Appellant posited that a going concern has been defined by the South African Revenue Service (SARS) as a “supply of an income-earning activity and that “the purchaser must be placed in possession of a business which can be operated in that same form, without any further action on the part of the purchaser”

19. The Appellant relied on the case of National Education Health and Allied Workers Union (NEHAWU) v University of Cape Town , which provids that:“The whole or a part of a business, trade or undertaking is transferred as a going concern-i.if the old employer is insolvent and being wound up or is being sequestrated; orii.because a scheme of arrangement or compromise is being entered into to avoid winding-up or sequestration for reasons of insolvency.”

20. To buttress its definition of a going concern, the Appellant further relied on the case of South African Airways (PTY) Limited versus Aviation Union of South Africa and Others, Supreme Court of Appeal of south Africa Case No. 123 of 2010.

21. The Appellant submitted that the transaction between it and M/S Lery Enterprises Company Limited constituted a zero-sum transaction and the same should not have been subjected to VAT by the Respondent.

22. The Appellant averred that the sale value of USD 20M was a book entry, that was credited to the Appellant's bank account and debited to the bank for clearance of the outstanding liabilities that the Appellant owed to their bankers, M/S Diamond Trust Bank Kenya Limited.

23. The Appellant averred that they exchanged their assets for clearance of an outstanding liability with the bank, a zero-sum transaction that should ideally and logically not be subjected to any VAT. Therefore, the Appellant submitted that VAT does not apply to zero­sum transactions because no value is being added to the transaction.

24. The Appellant averred that Act No. 9 of 2018 amended the First Schedule Section A Part 1 of the VAT Act, 2013 No. 35 of 2013 by inserting paragraphs 94 which made transfers of business as a going concern exempt from taxation.

25. The Appellant submitted that the amount of VAT payable by them in the transaction has a direct and proportional impact on the amount of VAT claimed by M/S Lery Enterprises Company Limited.

26. The Appellant submitted that the net change in the overall wealth or utility of the system is zero where the Respondent raises additional assessments on the Appellant for VAT only to expect to pay out the same VAT to M/S Lery Enterprises Company Limited, via VAT Input claims and/or VAT credit refunds, because, while individual participants may experience gains or losses, the sum of these changes is balanced, resulting in no overall increase or decrease for the Respondent.

27. The Appellant averred that though paragraph 94 of the of the First Schedule of Part I of the VAT Act had been deleted, the sale was deemed to have been completed at the time when the sale agreement was signed and ratified by all the parties before the Assent of Act No. 2 of 2020. That therefore the sale of the Steel Mill to Messrs. Lery Enterprises Company Limited, was exempt from VAT.

28. The Appellant stated that it finds the Respondent’s action of invoking Section 84(2)(a) of the TPA in raising penalties, malicious, pre-meditated, arbitrary, prejudicial and against Chapter 47 of the Constitution of Kenya, 2010.

29. The Appellant submitted that the additional assessments are erroneous in fact and law as the Respondent acted in haste and did not consider all the material facts of the transaction contrary to the provisions of Section 31 of the Tax Procedures Act of 2015 and Section 4 of the Fair Administrative Action Act, 2015.

30. The Appellant averred that the Respondent neither inferred its best Judgment nor the available information before making the additional assessments as required by Section 31(1) of the TPA.

Appellant’s Prayers 31. The Appellant’s prayers to the Tribunal were that: -i.This appeal be allowed.ii.This Honourable Tribunal forthwith withdraws and cancels the objection decision letter dated 31st March 2023. iii.This Honourable Tribunal orders the Respondent to set aside the assessment orders dated 17th March 2023 as the same are prejudicial and are not founded on the provisions of the law.iv.This Honourable Tribunal relies upon the grounds in this Memorandum of Appeal and the attached Statement of Facts in making its ruling since the Appellant's objection application was rendered invalid.v.In the alternative, The Tribunal finds that the Respondent acted in contravention of the law in making his 'objection decision' in absence of a validly lodged objection. As a consequence, dismiss Respondent's purported decision and render a decision of us having no case to answer.vi.This Honourable Tribunal orders the Respondent to refund the VAT paid of USD 800,000 on the transaction as per invoice No. 83417 dated 24th February 2023 to Lery Enterprises Company Ltd since there was no basis for the assessment and the same was raised erroneously.vii.This Honourable Tribunal calls out the Respondent for arbitrary and prejudicial application of the Law in raising penalties for the Appellant.viii.This Honourable Tribunal orders the Respondent to stay the enforcement of assessed taxes until the matter is conclusively determined.ix.That pending the hearing and determination of the substantive Appeal, the Respondent, its agents, and/or workers will be barred from attaching any moveable and immovable assets of the Applicant.x.The Appellant be at liberty to apply for further orders, and the Honourable Tribunal be pleased to issue any other orders favourable to the Appellant as it may deem just and expedient to issue in the circumstances.

Respondent’s Case 32. The Respondent's case is premised on the hereunder filed documents: -i.The Respondent’s Statement of Facts dated 8th June 2023 and filed on 9th June 2023. ii.The Respondent’s Written Submission dated and filed on 28th December 2023.

33. The Respondent averred that it invalidated the Appellant’s objection dated 22nd March 2023 on the grounds that the Appellant failed to provide supporting documentation to support its objection.

34. That the Commissioner is empowered under Sections 58 and 59 of the TPA to require the production of documents and information to enable the Commissioner ascertain tax liability of a person.

35. The Respondent submitted that it relied on the provisions of Section 59 of the Tax Procedures Act, 2015 on the production of documents, that it severally requested for documents from the Appellant to support its assertions that the transfer of a commercial property and assets was in respect a business that was transferred as a going concern.

36. The Respondent averred despite requesting for the documents in its meeting with the Appellant on 9th February 2023, where it placed emphasis on the sale agreement for the commercial property and machinery disposal. That the Appellant once again failed to provide the documents and failed to declare the sale of the asset disposed in its January 2023 VAT return as agreed upon prompting it to raise an assessment.

37. The Respondent stated that the Appellant sent a notice of objection on 22nd March 2023 without providing any evidence or documentation to support its objection. That via an email dated 29th March 2023, the Respondent wrote to the Appellant confirming receipt of its objection, notifying it of the conditions that must be met for a notice of objection to be considered valid.

38. That Respondent stated that despite being very specific in its request for the documents it needed, the Appellant still failed to provide the following documents to support its objection and to demonstrate that the sale agreement was in respect of the transfer of a business as a going concern;i.Breakdown of stock listing as at December 2022ii.Debtors and Creditors listing for the years 2017 to 2022iii.Loan agreement and loan statements with the bankiv.Letter from the Commissioner granting an extension to keep goods in the bonded warehouse.

39. That the only document the Appellant had produced was the sale agreement for sale of land and an invoice of the sale of specific machinery to M/S Lery Enterprises Company Limited.

40. The Respondent averred that the sale agreement was not sufficient to enable it make a conclusive determination on the status of the sale as it could not ascertain the existence of any facilities in the absence of loan agreements/loan statements.

41. The Respondent therefore averred that the instant matter cannot be determined on merits since it did not make a decision on merit. That in the circumstances there is no appealable decision and the Appeal ought to be dismissed with costs at this point.

42. The Respondent submitted that the Appellant in its notice of objection letter dated 22nd March 2023 indicated that the property in question had not been sold and that the true position was that the sale had not been concluded. That it was however evident from the documents that the Appellant provided to the Respondent, that the property was sold as commercial land with a factory used for the manufacture of basic iron and steel.

43. The Respondent averred that the Appellant in its letter dated 19th January 2023 stated that it had reached an agreement with the bank to sell an asset of the company so as to reduce its debt with the bank and bring down the company's exposure to the bank. That however, despite several requests to provide documents to support its assertions, the Appellant did not provide any documents to show that such an agreement with the bank existed, and the sale of the assets was not for its own gain.

44. The Respondent stated that the sale agreement provided by the Appellant showed that the Appellant was to receive a sum of USD 1,000,000 (referred to as the deposit) from the purchaser on or before the execution of the agreement. That the Appellant received the remaining sum of USD 19,000,000 plus VAT on the machinery on or before the completion date which was 31st December 2021.

45. The Respondent averred that the Appellant also issued an invoice to Lery Enterprises Company Limited on 24th February 2023 for the sale of machinery for the sum of USD 5,000,000 plus VAT for the amount of USD 800,000.

46. The Respondent submitted that the Appellant argued that Act No. 9 of 2018 amended the 1st Schedule Section A part 1 of the VAT Act, 2013 by inserting Paragraph 94, exempting transfer of a business of a going concern from taxation. The Respondent submitted that this was later changed by the Tax Laws (Amendment) Act, No.2 of 2020, which deleted Paragraph 94 of the First Schedule of Part 1 of the VAT Act, 2013 making the transfer of a business as a going concern taxable.

47. The Respondent posited that whereas the Appellant argued that as at the time of this amendment, the Agreement had already been entered into and ratified by the parties, making it exempt as Paragraph 94 of the VAT Act exempted businesses transferred as a going concern from a charge of VAT tax; the Appellant in its Statement of Facts admitted that a perusal of the Sale Agreement does not state that the transfer of the property and specific machinery constitutes a transfer of a going concerns, a fact which if the Appellant considered material, reasonably ought to have been included in the Agreement.

48. The Respondent proffered that both the cases the Appellant relied on guide on how to determine whether a business has been transferred as a going concern, but the Appellant has not at any point attempted to prove that its business was transferred as a going concern as guided by these cases. That the recommendation in the said cases is that such a determination is a factual matter, to be determined objectively considering all relevant factors. This, the Respondent averred, involves perusal of all the involved documentation.

49. The Respondent relied on the High Court's holding in National Bank of Kenya Ltd v Commissioner of Domestic Taxes (Income Tax Appeal E155 & 533 of 2020 (Consolidated)) [2022] KEHC 10549, wherein the court in its interpretation of Paragraph 8 of the 1st schedule of the VAT Act 2013, held that the legislature did not intend to include commercial properties amongst exempted supplies.

50. The Respondent submitted that the Appellant bears the full burden of proving that the sale transaction was in respect to a transfer of a going concern and despite being afforded several opportunities to enhance its argument it fails to bring to light its assertions that the transfer of its property and specific machinery amounted to transfer of a going concern (TOG).That even in the current Appeal no document has been availed to support the claim, just mere assertions of the same.

51. The Respondent asserted that the Appellant having failed to prove that the sale of the commercial property and machinery was done as a transfer of a going concern. The transaction was vat-able at the general rate of 16% and the Respondent's assessment and confirmation of the same in its objection invalidation was proper in law.

52. The Respondent submitted further that the Appellant did not provide any documentation to show that this was a zero-sum transaction on its end. That whereas on the basis that the Appellant had claimed that the sale had been done in exchange for settlement of a loan facility by the purchaser, emphatically no loan agreement or statements were provided to prove this assertion. That on the contrary the sale agreement and invoices provided showed that it had gained from the sale of machinery to Lery Enterprises Company Limited.

53. The Respondent averred that the Appellant did not provide any evidence that would have altered the assessment despite the Respondent's several requests as provided for in Section 56(1) of the Tax Procedures Act which places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.

54. The Respondent submitted that Section 50 (1) (a) of Tax Procedures Act provides that;“Except in proceedings under this Part—a.the production of a notice of an assessment or a document under the hand of the Commissioner shall be conclusive evidence of the making of the assessment and that the amount and particulars of the assessment are correct; and”

55. The Respondent relied on the cases of:i.Kenya Revenue Authority V Man Diesel & Turbo Se, Kenya (2021] eKLRii.PZ Cussons East Africa Limited v Kenya Revenue Authority (2013] eKLR

56. The Respondent averred that the notice of invalidation dated 31st March 2023 was issued with full consideration of the only document provided by the Appellant, who had failed to provide the documents that had been requested for in accordance of Section 51 (3) of the Tax Procedure Act, which provides;“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;b.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 or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.”

57. The Respondent submitted that Section 51 (4) of the Tax Procedure Act provides that;“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

58. The Respondent submitted that the Appellant's transfer does not meet the conditions of a transfer of a going concern. The Respondent relied on the case of Elizabeth Washeke & 62 others V Airtel Networks (K) Limited & Another (2013) eKLR where the court describes a going concern as;“A 'going concern' means a business in operation and whether transfer has occurred is a factual matter, to be determined objectively by reference to all relevant factors considered cumulatively, the list not being exhaustive and none of the factors individually decisive, as held in the South Africa Case of South African Airways (PTY) Limited versus Aviation Union of South Africa and Others, Supreme Court of Appeal of south Africa, Case No. 123 of 2010. ”

59. The Respondent further relied on the case of South African Airways (P1Y) Limited versus Aviation Union of South Africa and Others; where the court held that;“Where parties wish to enter into an outsourcing agreement, and then for the business to revert to the outsourcer, or to be transferred to another provider, there must be a clear re-transfer, demonstrated through written contracts or conduct, of all assets and obligations of the business, including the transfer of the workforce rights and obligations so that no difficulty arises in invoking the protection afforded by s. 197 to affected employees who have been involved in carrying out the services provided for in the outsourcing agreement.”

60. The Respondent averred that the Appellant relied on the South African case but failed to prove that its business was transferred as a going concern as guided by the court by failing to provide relevant documentation to show that the sale agreement was for the transfer of a business as a going concern.

61. The Respondent submitted that the Appellant's Sale Agreement shows that the sale was for commercial property and machinery. The Respondent averred that Section 56(1) of the Tax Procedures Act provides that the burden of proving that the assessment is wrong lies with the Appellant.

Respondent’s Prayers 62. The Respondent prayed that the Tribunal:i.Dismisses this Appeal with costs to the Respondent as the same is without merit.ii.Upholds the Respondent's notice of invalidation of objection dated 31st March 2023. iii.Costs of this Appeal be issued to the Respondent.

Issues For Determination 63. Having considered the facts of the matter, pleadings and submissions made by the parties, the Tribunal identified the following to be the issues falling for its determination in this Appeal: -a.Whether the Respondent's invalidation notice dated 31st March 2023 was proper in law.b.Whether the Respondent’s Confirmation of Assessment was justified in law.

Analysis And Findings 64. Having identified the issues that fell for its determination, the Tribunal proceeds to analyse them as hereunder.a.Whether the Respondent's invalidation notice dated 31st March 2023 was proper in law.1. The genesis of this Appeal is the additional assessments raised by the Respondent based on a compliance review conducted on the Appellant to ascertain whether output tax was declared against the sale of its manufacturing plant and commercial property as per the VAT Act.2. The Respondent anchored its submissions on the invalidity of the Appellant’s notice of objection stating that the Appellant did not provide documents supporting its objection to facilitate review by the Respondent despite being reminded severally to do so. That the Appellant’s objection did not meet the threshold of validity as set out in Section 51(3) of the TPA.3. On its part the Appellant averred that it had provided the necessary documents to enable the Respondent to review its assessment.4. Section 51(3) of the TPA provides as follows regarding validity of a notice of objection:“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;(b)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 or has applied for an extension of time to pay the tax not in dispute Under section 33(1); and(c)all the relevant documents relating to the objection have been submitted.”

65. Further Section 51(4) of the TPA provides as follows regarding notification of an invalid objection.“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within a period of fourteen days notify the taxpayer in writing that the objection has not been validly lodged.”

66. To determine the dispute at hand, the chronology of events is crucial. The Tribunal analysed the events leading to the instant Appeal which are listed as follows:-a.Notice of assessment was issued on 17th March, 2023b.Appellant lodged its objection via iTax on 18th March 2023 followed by a letter of objection on 22nd March, 2023. c.Notice of invalidation of objection was issued on 31st March, 2023d.The Appellant filed this Appeal at the Tribunal on 28th April, 2023.

67. The Tribunal notes that the Respondent’s notice of invalidation to the Appellant was issued within the stipulated timelines as it was issued 13days, after the objection was lodged.

68. an analysis of the material placed before the Tribunal shows that the Appellant provided the Sale Agreement it signed with Lery Enterprises for the sale of land and machinery and an invoice for the same transaction. The Appellant failed to provide specific documents that had been requested by the Respondent during the pre-assessment period. The documents requested were:-i.Breakdown of stock listing as at December 2022ii.Debtors and creditors listing for the years 2017 to 2022iii.Loan agreement and loan statements with the bankiv.Letter from the Commissioner granting an extension to keep goods in the bonded warehouse.

69. The Respondent explained that the two documents namely the Sale Agreement and invoice provided by the Appellant could not enable a review of the assessments as they did not provide sufficient information to proof that the sale was a zero-sum transaction for the purpose of clearing the Diamond Trust Bank loan or that it was the sale of a going concern as alleged by the Appellant.

70. Section 23 of the TPA requires a taxpayer to maintain any document required under the law so as to enable its tax liability to be readily ascertained. Further Section 59 of the TPA enjoins a taxpayer to provide the records at the request of the Respondent.

71. The Tribunal is guided by its previous Judgment in the case of Boylen International Ltd vs Commissioner of Investigations and Enforcement, Nairobi TAT Appeal No. 55 of 2018, where it held that:-“….8th March 2018. The Appellant lodged an objection with the Respondent. However, the said objection did not reiterate the grounds of objection, the corrections required to be made and the reasons for the amendments. Neither did the Appellant provide the relevant documents in support of its alleged objection. Therefore, there was no conceivable way the Respondent would have considered the Appellant’s objection as the same did not place itself within the parameters of section 51 (3) of the Tax Procedures Act, 2015”

72. Accordingly, the Tribunal finds that the Appellant failed to provide relevant documents and the Respondent was thus justified in invalidating its objection.

73. Having determined that the Appellant’s objection was invalid, the Tribunal did not delve into the other issue that fell for its determination as the same had been rendered moot.

Final Decision 74. The upshot of the foregoing analysis is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s Invalidation decision dated 31st March 2023 be and is hereby upheld.c.Each party to bear its own costs.

75. It is so ordered

DATED and DELIVERED at NAIROBI this 17th day of May, 2024. ERIC NYONGESA WAFULACHAIRMANDR. RODNEY O. OLUOCH ABRAHAM K. KIPROTICHMEMBER MEMBERCYNTHIA B. MAYAKA TIMOTHY B. VIKIRU MEMBER MEMBERJUDGMENT TAT NO. E216 OF 2023 STEEL MAKERS LIMITED VS COMMISSIONER OF DOMESTIC TAXES Page 21