[2023] KETAT 558 (KLR)

Tancity Energy Limited v Commissioner of Domestic Taxes (Tax Appeal 460 of 2022) [2023] KETAT 558 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 558 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 460 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

June 29, 2023

Between

Tancity Energy Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a company incorporated in Kenya and deals with the business of buying and selling petroleum products.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority 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 dispute arose from additional assessments issued on 2nd June 2021 of Kshs. 29,509,415. 00 plus penalties and interest relating to the years 2016 to 2019 and the same covering VAT, Income tax and PAYE.

4. The Appellant was risk profiled on the basis of variances in Income tax returns and VAT declarations and returns and variances between employment costs subjected to PAYE and those claimed in the Income tax returns.

5. The Respondent also issued an Agency notice against the Appellant’s bank accounts and customers dated 15th September 2021 of Kshs. 31,719,159. 00.

6. The Appellant made a request to file a late objection dated 22nd October 2022 and the same was accepted by the Respondent on 4th November 2022 and the Appellant consequently objected on 12th November 2021.

7. The Respondent made an objection decision dated 8th April 2022 vacating the Income tax head and retaining a demand for Kshs. 25,054,567. 00 consisting of VAT at Kshs. 104,495. 00 and Kshs. 24,950,073. 00 for PAYE.

8. Being aggrieved by the objection decision, the Appellant lodged a Notice of Appeal on 6th May 2022.

The Appeal 9. The Appeal is set in the Memorandum of Appeal filed on 6th May 2022 citing the following grounds:i.That the Respondent ignored the fact that petroleum products business in Kenya is mainly cash business, where buyers and sellers complete transactions on cash basis with few exceptions for the big corporates involved in the chain where credit facilities are common. The Appellant’s business being on the lower end segment, transact majorly on cash basis. The Respondent declined to accept this fact and went ahead and assumed that all cash withdrawals were income to the directors of the company.ii.That the Respondent made an arbitrary assumption that 60% of all cash withdrawals were subject to PAYE. This was not based on any scientific methodology or a generally accepted principal of accounting or taxation under any law. The Respondent demands were therefore unreasonable and cannot independently be verified. At no point during the audit or objection process was the 60% eriteria explained to the Appellant thus unfair treatment of the Appellant.iii.That the Respondent while aware of the profit margins in the petroleum sector in Kenya at wholesale and retail levels are between 1-2% and that the Appellant fully disclosed the margins and actual purchases and sales invoices for the year 2019 failed to apply reasonable gross profit to assess capacity of the company to pay salaries of the magnitude that would accrue the PAYE demanded.iv.That the Respondent while making the additional assessment failed to recognize the fact that the company is managed and operated by one (1) director and three (3) employees and with no office space could not reasonably have been paying salaries and wages that would accrue the tax demanded.v.That the Respondent claimed that the company made vatable sale in the year 2016 yet the company is exclusively involved in buying petroleum products that were not subject to VAT in the year 2016.

The Appellant’s Case 10. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant’s Statement of Facts dated 25th April, 2022 and filed on 6th May 2022 together with the documents attached thereto.

11. The Appellant averred that the Respondent issued it with an additional assessment on 2nd June 2021 of Kshs 29,509,415. 00 plus penalties and interest for the years of income 2016 to 2019.

12. The Appellant added that the Respondent also issued an agency notice against it to the banks and its customers dated 15th September 2021 of Kshs 31,719,159. 00 on the grounds that the Appellant had not objected to the Respondent’s decision on additional assessment.

13. The Appellant stated that consequently it made a request to make a late objection dated 22nd October 2021 and the same was allowed by the Respondent on 4th November 2021 whereupon the Appellant made the objection on 12th November 2021 and submitted various documents to support the same to the Respondent.

14. The Appellant averred that its main activities are buying and selling petroleum products and had been involved in this business during the review period 2016-2019. That the Appellant buys the petroleum products in depots in Nairobi and re-sells the products to its customers who are mainly independent petrol station dealers in Murang’a, Nyeri, Kiambu, Nakuru and Kajiado Counties.

15. The Appellant averred that the sector is fairly competitive and thus the company makes profit by operating an extremely lean operation. That the company is managed and operated by the director with the assistance of three staff who work as truck operators. That the Company does not have a specific office space as the transactions involved do not require the same as it also does not hold stock of its products except what would be in a truck on transit from one region to another.

16. The Appellant also averred that petroleum products business is mainly done in cash with few exceptions for the big corporates and that the Appellant’s business being on the lower end segment, transacts mainly on cash basis. That the cash may either be banked or used to purchase the products for sale.

17. That the Appellant’s gross margins per sale invoice is between 1% and 3% and that they provided evidence on sample invoices for the year 2019 whose gross sales was Kshs 124,706,397. 00. That if the Appellant was to apply a maximum 2% gross margin the gross profit would be Kshs 2,494, 127. 00. That actual calculated based on all sales was Kshs. 1,949,676. 00 and which was less than 2%. That a demand of PAYE of Kshs 4,989,796. 00 suggested salaries of Kshs 16, 632,653. 00. That the company had other expenses especially in vehicle operations and that the actual salaries and wages were accurately disclosed, and PAYE paid.

18. The Appellant argued that petroleum products were not subject to VAT in the years 2016, 2017 and part of 2018. That during this time all the Appellant’s transactions were managed from the bank account. That the business followed a simple model where the Appellant’s buyers would make a deposit to the bank, then the product would be ordered, delivered and the transaction is closed. That most of the transactions were completed on the basis of bank’s deposit and withdrawal slips.

19. The Appellant argued that the PAYE demanded for the years 2016 - 2019 of Kshs. 3. 271,376. 00, Kshs. 7,079,310. 00, Kshs. 10,072,713. 00, and Kshs. 4,502 160. 00 for the years 2016, 2017, 2018 and 2019 respectively suggested salaries and wages expenses of Kshs. 10. 9 Million, Kshs. 23. 5 Million, Kshs. 33. 5 Million and Kshs. 15 Million respectively. That in each of the years in question the salaries and wages computed exceeded the gross profit of the company and it is obvious that a company cannot consistently be operating expenses exceeding the gross profit and remain in business.

20. The Appellant also averred that it had not been involved in transactions that did not relate to petroleum products and that in the year 2016 petroleum products were not subject to VAT and thus the claim of Kshs. 104, 495. 00 related to this year of income is invalid.

Appellant’s Prayers 21. The Appellant prayed that the Tribunal do:a)Uphold the objection filed by the Appellantb)Sets aside and annuls the objection decision by the Respondentc)Makes such other orders that it may deem appropriate

Respondent’s Case 22. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated and filed on 2nd June, 2022. ii.The Respondent’s written submissions dated and filed on 20th January, 2023

23. The Respondent raised two issues for determination as set out hereunder.(a)Whether the Respondent assessed VAT on non-Vatable products(b)Whether the assessments and subsequent objection decision made by the Respondent were proper in law.

a.Whether the respondent assessed vat on non-vatable products. 24. The Respondent stated that there are five types of supplies that attract VAT at different rates;16% for local taxable supplies, 8% on local supply of fuel, o% for zero rated supplies and exports, exempt supplies and supplies that are out of the VAT Scope.

25. That according to Section 2 of the VAT Act, 2013 exempt supplies are defined to mean supplies specified in the First Schedule which are not subject to tax. That this means if exempt supplies incur input tax in obtaining raw materials for the manufacture of exempt supplies, this input tax is passed on to purchasers of exempt supplies.

26. That Part B of the First Schedule to the VAT Act provides for exempt goods on transition and the same include, inter-alia; petroleum oils and oils obtained from bituminous minerals, crude, Kerosene type jet fuel, illuminating kerosene (IK), and other medium petroleum oils and preparations.

27. That on 3rd September 2018, the Respondent issued a public notice clarifying that with effect from 1st September 2018, VAT would be chargeable on all petroleum products at a rate of 16% of transaction value. The charge was in accordance with the VAT Act,2013 which deferred implementation for three (3) years upto September 2016, with a further two (2) year extension being granted under Finance Act, 2016.

28. That consequently VAT charge on petroleum products came into effect on 1st September 2018.

29. The Respondent averred that although the Appellant claims that during the year 2016, being the period under review, petroleum products were not subject to VAT the Appellant did not make any VAT declaration during that year of income and the variance has since been charged to VAT. In buttressing this position the Respondent seeks to rely on the case of Pharmaceutical manufacturing (k) Co Ltd &3 others v Commissioner General of Kenya Revenue Authority &2others (2017)e KLR .

30. The Respondent also contended that for an objection to be considered as valid, a taxpayer ought to lodge a notice of objection within 30 days of receipt of an assessment together with precise grounds of objection as provided for in Section 51(3) of the Tax Procedures Act.

31. The Respondent averred that it requested the Appellant on 2nd December for additional documents including purchase ledgers, invoices, sales ledgers for sales to both VAT registered and non-registered customers, payrolls 2015-2019 and audited accounts.

32. The Respondent added that on 8th December, 2021, the Appellant provided the requested additional documents partially including the purchase ledgers & sales ledgers. That the Respondent requested for the provision of the remaining documents at a later date and same were received on 18th March 2022.

33. That on VAT, although the Appellant averred that one of its clients, Gactor Enterprises Limited, claimed VAT on purchases from it, the Appellant's explanations could not be supported by the relevant records i.e. purchase invoices, delivery notes and proof of payment and the explanations could not be admitted.

34. The Respondent added that from the foregoing, the Appellant's Notice of Objection was not compliant to the mandatory provisions of Section 51 (3) of the Tax Procedures Act and was therefore invalid. That the Appellant failed to prove that the Respondent's assessment was erroneous or excessive and therefore ought to be set aside as prayed in the Appeal herein. The Respondent stated that in the circumstances its assessment order remains valid and ought to be upheld. The Respondent in support of the averment relied on the case of Pearson Vs. Belcher CH.M Inspector of Taxes) Tax Cases Volume 38.

b.Whether the assessments and subsequent objection decision made by the respondent were proper in law. 35. The Respondent submitted that the Assessment order issued as well as the Confirmation Assessment Notices issued on 8th April 2022 are valid for reasons that although the Appellant was given an opportunity to sort out the inconsistencies and variances noted in its returns, the Appellant failed to do so thereby breaching the provisions of Section 51 (3) of the Tax Procedures Act.

36. That Section 24 of the Tax Procedures Act 2015 allows a taxpayer to submit returns in the approved form and manner prescribed by the Respondent but the latter is not bound by the information provided therein and can assess for additional taxes based on any other available information.

37. The Respondent added that Section 3I (1) of the TPA Act, 2015 empowers the Respondent to issue an assessment based on the information within its custody as well as the Respondent's best judgement.

38. The Respondent submitted that on PAYE, the variances arose from the difference between PAYE declarations for the year compared to Corporation tax charge and which variances were not explained by the Appellant comprehensively and the Respondent therefore confirmed the assessment.

39. That the Appellant was also not able to reconcile and proof that withdrawals done were for the purchase invoices they provided.

40. The Respondent further submitted that in conducting an examination of the Appellant's business operations, it was guided it Section 23(1) of the TPA which requires any person making taxable supplies under the VAT Act to keep certain records and Section 23 (1) TPA on record keeping.

41. The Respondent submitted that the PAYE assessments were based on variances relating to PAYE from drawings made by the director without the expected PAYE deducted and paid to the Respondent. That the Appellant stated that the drawings were for purchasing fuel, however no invoices were provided to support their purchase.

42. That although the Appellant alleged that it did not make any VAT declaration during the year of income, the Appellant's explanations could not be supported by the relevant records such as purchase invoices, delivery notes and proof of payment and that the explanations could not be admitted. In buttressing this position, the Respondent relied on the case of (Income Tax Appeal Eo28 Of 2020) Commissioner of Investigations and Enforcement .vs. Evans Odhiambo Kidero.

43. The Respondent averred that the Appellant failed to discharge its burden of proof as required by Section 56(1) of the Tax Procedures Act as read with Section 30 of the Tax Appeals Tribunal Act and prove that the Respondent's objection decision was incorrect. On this position the Respondent relied on the cases of Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya (2021)eKLR and Primarosa Flowers Ltd vs. Commissioner of Domestic Taxes [2019l

44. The Respondent argued that the Appellant has failed to prove that the Commissioner's tax decision was in any way inconsistent, based on extraneous factors, excessive or incorrect and therefore urged the Tribunal to affirm and declare the Confirmed Assessment Notices issued by the Respondent on the 8th April 2022 demanding ksh.29,509,415. 00 as the tax due legally.

Respondent’s Prayers 45. The Respondent prayed for the dismissal of the Appeal as the same is unmerited.

Issues For Determination 46. The Tribunal upon careful consideration of the pleadings in the matter and submissions made by the parties herein is of the considered view that only one issue falls for its determination and which is:Whether the Respondent’s assessment of the Appellant’s VAT and PAYE taxes was justified.

Analysis And Findings 47. Having identified the issue falling for its determination, the Tribunal proceeds to analyse the same as hereunder.

48. The genesis of this dispute is the additional assessments made by the Respondent on 2nd June 2021 and to which the Appellant objected through its notices of objection. The assessments had covered three heads namely VAT, PAYE and Income tax. The same were confirmed by the Respondent’s objection decision dated 8th April 2022. However, the Income tax head was vacated by the Respondent and the Appellant’s tax liability as per the objection decision of Kshs. 25,054,073. 00 was made up of VAT and PAYE.

49. On the issue of the PAYE the Appellant argued that it only had as employees the Director and three other persons and that the calculations of the Respondent on the PAYE was unreasonable. That the Respondent had calculated the PAYE as 60% of all the bank withdrawals and this resulted in a figure which was exceeding the gross profit of the company.

50. The Appellant had also argued that the profit margin in the petroleum sector was between 1 and 2% and that taking that into consideration the reasonable gross profit that would accrue would not be in the magnitude demanded by the Respondent.

51. The Appellant had averred that the Respondent in computing its tax liability had not taken into consideration the expenses of the Appellant in running the company.

52. The Respondent alleged in its pleadings that the PAYE head arose out of variances between employment costs subjected to PAYE by the Appellant and those claimed in the Income tax Company returns. That the PAYE assessments were based on variances relating to PAYE from the drawings made by the director without the expected PAYE deducted and paid to KRA. The Respondent had also determined that 60% of all the bank cash withdrawals were subject to PAYE.

53. The Appellant in its pleadings indicated that it provided the Respondent with its supporting documentation and also stated that most of its transactions were done on a cash basis. The Respondent on the other hand argued that the documents provided by the Appellant had been taken into consideration in making the final tax liability.

54. The Tribunal noted that the Appellant other than stating that it provided the Respondent with documents has not annexed any to its Statement of Facts. It has also not stated in its pleadings the documents it supplied in support of its notices of objection.

55. The law in Section 59 of the TPA states as follows:“1)for the purpose of obtaining the full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing to-a)produce for examination, at such time and place as may be specified in the notice, any documents (including in the electronic format) that are in the person’s custody or under the person’s control relating to the tax liability of any person;b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; orc)attended, at the time and place specified in the notice, for the purpose of giving evidence in respect of any liability of any person.”

56. The Tribunal notes that Section 56(1) of the Tax Procedures Act places the burden of proof on the taxpayer. The Section reads as follows:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

57. Further, Section 30 of the Tax Appeals Tribunal Act provides as follows:-“In any proceeding before the Tribunal the Appellant has the burden of proving-a)where an appeal relates to an assessment, that the assessment is excessive; orb)in any other case, that the tax decision should not have been made or should have been made differently.”

58. The Tribunal in its holding in Tax Appeal Number 353 of 2018Rumish Limited vs. Commissioner of Domestic Taxes at paragraph 51 stated that:-“Additionally, Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case.

59. The same position was held by the court in Metcash Trading Limited-vs Commissioner for the South African Revenue Service and Another Case CCT 3/2000, where it was held that:‘But the burden of proving the Commissioner wrong then rests on the vendor under Section 37. Because VAT is inherently a system of self­ assessment based on a vendor's own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor's records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner's precipitating credibility finding can be shown to be wrong, the consequential assessment must stand’ "

60. In TAT 55 of 2018 Boleyn International Ltd vs. Commissioner of Domestic Taxes the Tribunal held as thus:-“34 ..............we find that the Appellant at all times bore the burden of proving that the Respondent's decision and investigations were wrong. The Tribunal is guided by the provisions of Section 56 (1) of the Tax Procedures Act which states as follows:“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

61. Further, in TAT 101 of 2016 Bemarc Limited vs. Commissioner Domestic Taxes, the Tribunal also held that:“24. The Appellant in its Statement of Facts at paragraph 14 claims that it provided records for the Commissioner's examination. Again, no evidence of this was availed before the Tribunal. In fact, we find it interest telling that for an individual facing a hefty assessment of Kshs. 31,489,319. 89, the Appellant does not substantively dispute the specific tax issues raised in the additional assessment or the objection decision. This, coupled with the burden placed on the taxpayer by the provision of Section 56 (1) of the Tax Procedures Act, 2015 only serves to buttress our position that the Appellant failed in its responsibility to provide its records and documents for examination by the Respondent”.

62. The Appellant came to the Tribunal and tendered no documents to support its case. The Tribunal finds that the Appellant did not provide proof to defray the tax liability in PAYE nor has it provided any proof that the assessment is wrong.

63. On the VAT issue the Appellant argued that it only dealt with petroleum products and that the same were not Vatable in 2016. The Respondent on the other hand stated that VAT additional assessments were based on variances in declarations for VAT compared to purchases claimed by the Appellant’s customers and that no documents were provided by the Appellant to dislodge its burden of proof.

64. Section B of the 1st Schedule to the VAT Act provides for exempt goods on transaction on and provides as follows:“The following goods shall be exempt supplies for a period of three years from the commencement of this Act unless the exempt status of the supplies is earlier revoked”.

65. The goods aforementioned, inter-alia, are petroleum oils and oils obtained from bituminous minerals, crude, kerosene type jet fuel, illuminating kerosene and other medium petroleum oils and preparations.

66. The Tribunal found that its not in dispute that the Appellant only deals with petroleum products and Section 2 of the VAT Act has specified the Appellant’s products as exempt from VAT and are therefore not subject to tax.

67. The Tribunal on the basis of the aforementioned provisions of the law and the statutory edicts, found that the Appellant’s tax liability lies only on the PAYE head but its products were not Vatable in 2016.

Final Decision 56. The Tribunal in the circumstances determined that the Appeal partially succeeds and accordingly proceeds to make the Orders that:a.The Respondent’s objection decision dated 8th April 2022 be and is hereby varied as follows;-i)The confirmed assessement as relates to the PAYE be and is hereby upheld.ii)The confirmed assessment as relates to VAT be and is hereby set aside.b)Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ERIC N. WAFULA....................CHAIRMANCYNTHIA B. MAYAKA.................MEMBERGRACE MUKUHA.........................MEMBERJEPHTHAH NJAGI........................MEMBERABRAHAM K. KIPROTICH.........MEMBER