[2025] KETAT 185 (KLR)

Stefanutti Stocks Kenya Limited v Commissioner of Domestic Taxes (Tribunal Appeal 18 of 2020) [2025] KETAT 185 (KLR) (14 March 2025) (Judgment)

Neutral citation: [2025] KETAT 185 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 18 of 2020

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

March 14, 2025

Between

Stefanutti Stocks Kenya Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a subsidiary of Stefanutti Stocks International Holdings Limited, a company resident in the Republic of South Africa. The Appellant carries on the business of providing engineering solutions and construction services for marine, civil and general works.

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 carried out a review of the Appellant’s financial records for the tax period ending in February 2013 and vide a notice of assessment dated 6th September 2019, it issued the Appellant with an additional assessment of Corporation tax.

4. The Appellant objected to the additional assessment vide a letter dated 4th October 2019, and the Respondent issued an Objection decision on 6th December 2019.

5. Dissatisfied with the Respondent’s Objection decision, the Appellant, filed its Notice of Appeal to the Tribunal on 3rd January 2020.

6. The Tribunal delivered its Judgment in this Appeal on 11th June 2021 and made the following Orders at Paragraph 77 of the Judgment:i.The assessment of tax on deferred income for the year 2013 is hereby set aside.ii.The claim of expense in respect of deferred income for year 2013 is disallowed.iii.Disallowing of personnel expense by the Respondent is hereby upheld.iv.Respondents' decision to disallow related party expenses is hereby upheld.v.Each party to bear its costs.

7. The Appellant appealed to the High Court in case reference Stefanutti Stocks KenyaLimited v Commissioner of Domestic Taxes (Tax Appeal E128 of 2021) against the Tribunal’s Judgment on the disallowed claims through the Memorandum of Appeal dated 13th August 2021.

8. The High Court delivered its Judgment in Stefanutti Stocks KenyaLimited v Commissioner of Domestic Taxes (Tax Appeal E128 of 2021) on 15th September 2023 and directed the Tribunal to make a determination as to whether the disallowed salary expenses are allowable costs pursuant to Section 15 of the Income Tax Act.

The Appeal 9. The Appeal is premised on the Memorandum of Appeal dated 17th January 2020 and filed on the same date which raised the ground that in computing the Appellant’s tax liability, the Respondent treated staff costs incurred on compensation of personnel as being a disallowable expense contrary to Section 15 of the Income Tax Act.

Appellant’s Case 10. The Appellant’s case is premised on its Statement of Facts dated 17th January 2020 and filed on the same date and the documents attached to it.

11. The Appellant stated that the Respondent conducted an in-depth review of the Appellant’s financial and tax affairs at various dates from 2017 to 2019 and issued a notice of assessment on 6th September 2019 having disallowed personnel costs amounting to Kshs. 46,391,512. 00 among other disallowed costs.

12. The Appellant further stated that it objected to the assessment on 8th October 2019, and that the Respondent issued its Objection decision on 6th December 2019 wherein it confirmed the disallowed personnel costs of Kshs. 46,391,512. 00 and the corresponding Corporation tax thereon.

13. That discontented with the Respondent disallowing the personnel costs, the Appellant filed a Notice of Appeal to the Tribunal on 3rd January 2020.

14. The Appellant stated that in the year 2013, it won a tender to provide supply and installation services for marine works to Base Titanium Limited. That pursuant to the terms of the contract, the Appellant incurred costs to employ personnel to perform the contract.

15. The Appellant averred that its contractual obligation necessitated the employment of resources in the possession of a related party – Stefanutti Stocks (Pty) Limited, a company that is resident in the Republic of South Africa. That the Appellant utilised the resources of related parties because the assets and services required to fulfill its contractual obligations were not readily available in the local market in Kenya.

16. The Appellant asserted that all its dealings with related parties were done in full and total compliance with the transfer pricing policy of the Stefanutti group, which it stated that it appended in its Appeal bundle.

17. The Appellant stated that it made payments of employee emoluments and incurred staff costs in the year 2013. That the breakdown and support for the staff emoluments incurred was attached to its Appeal bundle as Appendix 9 at page 87.

18. The Appellant affirmed that the intercompany invoices are sufficient to support the personnel costs that have been allocated between the related parties.

Appellant’s prayers 19. The Appellant prayed that the Tribunal finds that staff costs are allowable costs pursuant to Section 15 of the Income Tax Act.

Respondent’s Case 20. The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated and filed on 14th February 2020 and the documents attached thereto; andb.Its Written Submissions dated and filed on 22nd January 2025.

21. The Respondent stated that it carried out a review of the Appellant’s financial records for the tax year ending February 2013 and issued an additional assessment for Corporation tax on 6th September 2019.

22. The Respondent further stated that vide a letter dated 4th October 2019 received by it on 8th October 2019, the Appellant objected to the additional assessments raised.

23. The Respondent affirmed that it issued its Objection decision on 6th December 2019, which the Appellant appealed against at the Tribunal.

24. The Respondent stated that it assessed the Appellant based on observations that the Appellant entered into a contract with Base Titanium for the supply and installation of various categories of marine engineering works.

25. The Respondent further stated that for the year 2013 it noted a variance between employment costs claimed in the audited financial accounts and gross salaries from the payrolls/PAYE returns provided by the Appellant.

26. The Respondent asserted that the Appellant did not support the variance of Kshs. 46,391,512. 00 as expenditure wholly and exclusively incurred in the production of income as required by Section 15 of the Income Tax Act. That the amount was therefore disallowed in accordance with Section 16(1)(a) of the Income Tax Act.

27. The Respondent relied on the judgment of this Honourable Tribunal in TAT No. 70 of 2017 Afya Xray Centre Limited vs Commissioner of Domestic Taxes in which it was held that: -“From then foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents, in order that a comprehensive audit of its affairs be 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 Respondent's finding after the preliminary finding and after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent's assessment after all the Appellant by law bears the burden of proof.”

28. The Respondent referred to Section 56(1) of the Tax Procedures Act which places the burden on the taxpayer to prove that a tax decision is incorrect. That in this particular case, the Appellant failed to justify the variances as required.

29. That Section 30 of the Tax Appeals Tribunal Act states as follows: -“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.”

30. The Respondent submitted that the law places the onus on the Appellant to prove its case. That in this case, the Appellant has not proved that the tax decision should not have been made or should have been made differently. That this can be done by providing documents that prove their case. It buttressed this submission by citing the holding in Digital Box Limited v Commissioner of Investigations and Enforcement [2020].

31. The Respondent further relied on TAT 601 OF 2020: Cityking Realtors Ltd vs Comm DTD, whereby this Honourable Tribunal held that: -“37while reiterating Section 56(1) of the TPA , the Respondent averred that the Appellant did not provide any documentary evidence to support the claimed expenses on wages and salaries on the other hand, the Appellant maintained that all the relevant documents were provided for the Respondent in support of the expenses claimed.38Section 30 of the Tax Appeal Tribunal places the burden on the Appellant to prove that the tax liabilities as assessed or confirmed is erroneous. This is not necessarily an uphill task as reasonable explanations and documents are sufficient to discharge the burden.39Whereas the Appellant averred that it provided all the necessary documents Respondent, the nature of the documents provided were not disclosed. In addition, the Appellant added that it provided all the documents in support of the Appeal…41For avoidance of doubt, no evidence or explanation was adduced before the Tribunal to demonstrate that the assessment was incorrect and unjustified or prove that the disallowed expenses on wages and salaries were indeed incurred by the Appellant. This is a legal burden placed on the Appellant which it has been unable to discharge.”

32. The Respondent referred to the case of TAT 155 of 2024: Wilson Waweru Mwangi vs Comm DTD, whereby this Honourable Tribunal while dismissing the Appeal, held in paragraph 28 that: -“The Tribunal observes that the Appellant asserted that his expenses were correctly claimed under Section 15 of the ITA and that he had adduced requisite documentation as corroborative evidence of claiming the expense. The position was contested by the Respondent who insisted that it disallowed the expenses because the Appellant failed to provide schedules to fully sustain the expenses. The Tribunal notes that the Appellant did not attach the averred documents in its pleadings herein a such the Tribunal reiterates its position in Faisawema Company Limited vs Comm DTT, TAT 326 OF 2022 which was that... The assertions that the Appellant provided documents must be shown to the Tribunal as well.”

Respondent’s prayers 33. The Respondent prayed that the Tribunal: -a.Upholds the Respondent’s decision.b.Dismisses this Appeal with costs to the Respondent.

Issue for Determination 34. The Tribunal has considered the facts of the matter and the submissions made by the parties, and considers the issue for determination as follows:Whether the disallowed salary expenses are allowable costs pursuant to Section 15 of the Income Tax Act.

Analysis and Findings 35. The Tribunal analysed the issue that calls 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.

36. The Respondent carried out a review of the Appellant’s financial records for the tax period ending in February 2013 and vide a notice of assessment dated 6th September 2019, it issued the Appellant with an additional assessment of Corporation tax.

37. The Appellant objected to the additional assessment vide a letter dated 4th October 2019, and the Respondent issued an Objection decision on 6th December 2019.

38. Dissatisfied with the Respondent’s Objection decision, the Appellant, filed its Notice of Appeal to the Tribunal on 3rd January 2020, and thereafter filed its Memorandum of Appeal and Statement of Facts on 17th January 2020.

39. The Tribunal delivered its Judgment in this Appeal, on 11th June 2021 and made the following Orders at paragraph 77 of the Judgment:“i.The assessment of tax on deferred income for the year 2013 is hereby set aside.ii.The claim of expense in respect of deferred income for year 2013 is disallowed.iii.Disallowing of personnel expense by the Respondent is hereby upheld.iv.Respondents' decision to disallow related party expenses is hereby upheld.v.Each party to bear its costs.

40. The Appellant appealed to the High Court in case reference Stefanutti Stocks KenyaLimited v Commissioner of Domestic Taxes (Tax Appeal E128 of 2021) against the Tribunal’s Judgment on the disallowed claims through the Memorandum of Appeal dated 13th August 2021.

41. The High Court made the following findings on the disallowed staff costs for the year 2013: -“Staff costs incurred by the Appellant on its expatriate personnel31. According to the commissioner, the appellant did not support the variance between employment costs claimed in the audited financial accounts and gross salaries from the payrolls/paye returns as expenditure wholly and exclusively incurred in the production of Income as required by section 15 of the ITA. The commissioner held that costs relating to rent, cable television subscription, installation and activation fees as well as other miscellaneous payments were well supported and were indeed incurred in the production of the appellant’s business revenue.32. The tribunal held that the aforementioned expenses were personal expenses and not allowable against business income. I agree with the appellant that this conclusion was erroneous in light of the commissioner’s findings that the appellant had supported the same as having been incurred in generating the business income.33. However, the tribunal did not deal with the issue whether the Commissioner erred in disallowing the salary expense as this was an express ground of appeal and which the Appellant submitted on. Although the Appellant urges the court to make a finding on this issue, this is a factual issue reserved for determination by the Tribunal and this court, in considering only matters of law can only conclude that the Tribunal erred in failing to make the decision but cannot go ahead and determine the matter. In this respect, the proper remedy would be to order the Tribunal to hear and determine this issue (see Guaca Stationers v Commissioner of Domestic Taxes ML ITA No. 24 of 2017 [2020] eKLR and Commissioner for Investigations and Enforcement v Menengai Oils Limited ML HC ITA No. 40 of 2020 [2021] eKLR).”

42. The High Court delivered its Judgment on Stefanutti Stocks KenyaLimited v Commissioner of Domestic Taxes (Tax Appeal E128 of 2021) on 15th September 2023 and made the following Orders at paragraph 36 of the Judgment: -“a.The appeal in respect of the related party transactions is dismissed.b.The appeal in respect of costs incurred in generation of deferred income is allowed.c.The Tribunal is directed to rehear the appeal and make a determination as to whether salary expenses are allowable costs pursuant to section 15 of the Income Tax Act.”

43. As per the Order of the High Court, the Tribunal herein proceeds to make a determination as to whether the disallowed salary expenses of Kshs. 46,391,512. 00 in the year 2013 are allowable costs pursuant to Section 15 of the Income Tax Act.

44. The Respondent stated that for the year 2013 it noted a variance of Kshs. 46,391,512. 00 between employment costs claimed in the audited financial accounts and gross salaries from the payrolls/PAYE returns provided by the Appellant.

45. The Respondent asserted that the Appellant did not support the variance of Kshs. 46,391,512. 00 as expenditure wholly and exclusively incurred in the production of income as required by Section 15 of the Income Tax Act. That the amount was therefore disallowed in accordance with Section 16(1)(a) of the Income Tax Act.

46. The Appellant asserted that all its dealings with related parties were done in full and total compliance with the transfer pricing policy of the Stefanutti group.

47. The Appellant stated that it made payments of employee emoluments and incurred staff costs in the year 2013. That the breakdown and support for the staff emoluments incurred was attached to its Appeal bundle as Appendix 9 at page 87.

48. The Appellant asserted that the intercompany invoices are sufficient to support the personnel costs that have been allocated between the related parties.

49. The Tribunal has reviewed the information and documents adduced by the Appellant and determines from its notice of objection dated 4th October 2019, that it provided to the Respondent the following documents at the Objection stage in respect of the disallowed salary expenses of Kshs. 46,391,512. 00:-a.intercompany invoices from Stefanutti Stocks (Pty) Ltd to the Appellant, which had the descriptions of ‘cost recovery’, ‘salary recovery’, or ‘wages recovery’; andb.a credit note from Stefanutti Stocks Stock (Pty) Ltd with the description of ‘salary adjustment - Frans’.

50. The Tribunal notes that the Appellant appended to its Appeal bundle as Appendix 9 at page 87, what it referred to in paragraph 12 of its Statement of Facts as ‘the breakdown and support for the staff emoluments incurred’. The Tribunal notes that the Appellant attached this breakdown in its Appeal bundle and did not demonstrate that the same was provided to the Respondent in the Objection review stage of the dispute. This action by the Appellant, in the Tribunal’s view is a blatant attempt to introduce additional documents without leave of the Tribunal and in effect, and attempt to introduce new grounds in its Appeal, which is contra Section 56(3) of the Tax Procedures Act and Section 13(6) of the Tax Appeals Tribunal Act, cited below, and would amount to reopening the objection process all over again.

51. Section 56(3) of the Tax Procedures Act provides as follows: -“(3)In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.”

52. Section 13(6) of the Tax Appeals Tribunal Act provides as follows: -“(6)The appellant shall, unless the Tribunal orders otherwise, be limited to the grounds stated in the appeal or documents to which the decision relates.”

53. The Tribunal further finds that the action of introducing additional documents would be prejudicial to the Respondent. It would also mean that the Tribunal could end up considering documents that the Respondent did not view or have a chance to respond to. Further, it should not be at the whim of a party to wake up from its deep slumber and opt to whimsically ambush the other party with documents in utter disregard to Tax Appeal Tribunal Rules, due process and the consequences of such an action.

54. The Appellant’s onus under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, was to prove that the Respondent’s assessment is incorrect or excessive with substantive grounds and competent evidence.

55. In analysing and determining the sufficiency and competence of the documentation to prove the Appellant’s assertion that the salary variances established by the Respondent related to expenses deductible under Section 15 of the Income Tax Act, the Tribunal has therefore, restricted itself to the intercompany invoices that the Appellant adduced as evidence to the Respondent during the Objection and to the Tribunal in this Appeal.

56. The Tribunal refers to Section 54A(1) of the Income Tax Act which enumerates the relevant documents which the Tribunal believes are in the possession of the Appellant which could have buttressed its arguments against the Respondent’s assessment. Section 54A(1) of the Income Tax Act provides as follows: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

57. A person is also obligated to maintain and retain any document required under a tax law for a period of five years from the end of the reporting period to which it relates, as per Section 23(1) of the Tax Procedures Act so as to enable the person’s tax liability to be readily ascertained.

58. The Appellant alleged that the salaries variance of Kshs. 46,391,512 is attributable to expatriate employees working on the projects located in Kenya. The Appellant averred that its contractual obligation necessitated the employment of resources in the possession of a related party – Stefanutti Stocks (Pty) Limited, a company that is resident in the Republic of South Africa. That the Appellant utilised the resources of related parties because the assets and services required to fulfill its contractual obligations were not readily available in the local market in Kenya.

59. The Tribunal’s task is to establish whether the intercompany invoices from Stefanutti Stocks (Pty) Ltd to the Appellant are sufficient to prove that the Appellant incurred the disallowed costs wholly and exclusively in the production of income in the year 2013 according to Section 15(1) of the Income Tax Act.

60. The Tribunal notes that the Appellant alleged a related party transaction with Stefanutti Stocks (Pty) Limited which it claimed to be the employment of expatriates to work in the Appellant’s projects located in Kenya. The Tribunal further notes that the Appellant attempted to prove this transaction with intercompany invoices from Stefanutti Stocks (Pty) Limited.

61. The Tribunal observes that the Appellant glaringly omitted to present competent evidence of the record of its expenses and relevant contract in accordance with Section 54A of the Income Tax Act, to support its position. Competent evidence could include the intercompany agreement between itself and Stefanutti Stocks (Pty) Ltd for the employment of expatriates specifying the terms and remuneration, the expatriates’ allocated work assignments in respect of the Appellant’s projects in Kenya and the expatriates’ work permits. The presentation of such crucial source documents could have enabled the Tribunal to confirm the verity of the Appellant’s assertion that the Respondent erred in disallowing the salary costs.

62. In addition, while the Appellant asserted that all its dealings with related parties were done in full and total compliance with the transfer pricing policy of the Stefanutti group, the transfer pricing policy which the Appellant appended in its Appeal bundle was dated February 2016, a date after the assessment period of 2013. The Tribunal could therefore not rely on the contents of that document as it was out of scope of the dispute that is the subject of this Appeal.

63. It is the Tribunal’s considered view that the Appellant failed to present evidence to demonstrate the underlying transaction of the employment of expatriates, and thus failed to discharge its burden of proof under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

64. 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 as follows at paragraph 26 with regard to the evidential burden of a taxpayer: -“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.”(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.”

65. Drawing from the aforementioned, the Tribunal concludes that the Respondent was justified in disallowing the personnel costs of Kshs. 46,391,512. 00 for the year 2013.

Final Decision 66. The upshot of the above analysis is that the Tribunal finds that the Appeal lacks merit and accordingly proceeds to make the following Orders:-a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 4th December 2019 on the disallowed personnel costs of Kshs. 46,391,512. 00 be and is hereby upheld.c.Each party to bear its own costs.

67. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 14TH DAY OF MARCH, 2025. ERIC NYONGESA WAFULA - CHAIRMANGLORIA A. OGAGA - MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA B. MAYAKA - MEMBER