[2024] KETAT 627 (KLR)

Timber Tank Enterprises Limited v Commissioner of Domestic Taxes (Tax Appeal 1248 of 2022) [2024] KETAT 627 (KLR) (5 April 2024) (Judgment)

Neutral citation: [2024] KETAT 627 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1248 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, B Gitari & AM Diriye, Members

April 5, 2024

Between

Timber Tank Enterprises Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a registered company in the business of importing timber.

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. On 11th November 2021, the Respondent issued the Appellant with a tax demand of Kshs 82,710,815. 00 for the period 2018 to 2020. On 23rd December 2021, the Respondent issued the Appellant with additional Corporation tax and VAT assessments for the period 2018 to 2020.

4. The Appellant lodged a manual objection on 19th January 2022, against the additional Corporation tax and VAT assessments and on 21st January 2022, the Appellant’s objection was raised on i-Tax.

5. The Respondent issued its objection decision dated 28th September 2022, confirming the payment of principal taxes amounting to Kshs 82,710,815. Dissatisfied with the Respondent’s objection decision, the Appellant filed this Appeal by lodging a Notice of Appeal filed on 24th October 2022.

The Appeal 6. The Appeal is based on the Amended Memorandum of Appeal dated 2nd February 2024 and filed on 3rd March 2024 raising the following grounds:a.That the Respondent erred in law and fact by failing to issue an objection decision in respect to the customs assessment within the 30 days as stipulated by Section 229 of EACCMA.b.That the Respondent erred in law and fact by failing to issue an objection decision in respect to the corporate tax assessment within the 60 days as stipulated by Section 51 of Tax Procedures Act.c.That the Respondent erred in fact and law by using arbitrary and fictitious customs method in arriving at the additional taxes contrary to Section 122 of EACCMA.d.The Respondent erred in fact and law by using arbitrary and fictitious customs value and using that incorrect value to assess additional taxes contrary to Section 122 of EACCMA.e.The Respondent erred in arbitrarily applying a projected sales markup pf 25%.f.The Appellant’s PIN has been misused by unknown persons to make border entries into Kenya through the Malaba and Busia border point.

The Appellant’s Case 7. The Appellant relied on its;a.Statement of Facts dated 18th October 2022 and filed on 24th October 2022 together with the documents attached thereto;

8. The Appellant’s case is that the Respondent raised a notice of tax investigations and tax demand amounting to Kshs. 82,710,815. 00 for Import taxes, Corporation tax, and VAT for the period 2018 to 2020. The Respondent then wrote to the Appellant on 23rd December 2021 communicating the assessments on Corporate taxes and VAT for the period 2018 to 2020 amounting to Kshs. 64,549,058. 69. The Appellant objected to the assessment on 21st January 2022. The Appellant stated that on 28th September 2022, it received the manual Objection decision.

9. The Appellant argued that the additional assessment for the year of income 2018 to 2020 are estimated and excessive and that the Appellant has records of the true income and expenditure which if examined will reduce the tax liabilities.

10. In addition, the Appellant called one witness being Appellant’s legal officer one Matthew Magare who filed a witness statement on 9th November 2023. He testified that the Appellant's contention with the taxation assessment rises from these fraudulent entries, which the Respondent has failed to investigate, contrary to its obligations under Section 51 of the Tax Procedures Act and Section 236 of the East African Community Customs Management Act.

11. According to the witness, on 13th May 2022, an investigation officer from the Respondent's office began looking into the Appellant's complaint regarding the misuse of its PIN following which in June 2022, a dawn raid by the Respondent’s office at a rival competitor's sales shop resulted in the seizure of substantial evidence, including illegal C17 import entries bearing the Appellant's PIN.

12. The witness further testified that despite several complaints by the Appellant to the Respondent and the police which has unveiled fraudulent entries, the Respondent issued a confirmation of tax assessment on 28th September 2022, disregarding the need for a thorough investigation and prejudicing the Appellant's rights and interests.

13. The witness stated that the Respondent and the DCI have not provided a conclusive investigation report despite having lodged complaints with them. The witness maintained that the Appellant could not have made the 215 imports claimed but the entries were made by criminals.

14. The witness testified that the Respondent has failed to consider documentation submitted by the Appellant, leading to an incorrect and excessive Objection decision.

15. Further that the issue is that the Respondent’s calculation is erroneous because it applied a density factor of 1000kg/m^3 for the imported Mahogany wood. The witness argued that this calculation is incorrect and not supported by any legal framework. The Appellant advocating for the use of the 805 kg/m^3 density that was originally applied by the Commissioner for the entries rightfully imported by the Appellant.

16. The witness also alleged that the Respondent’s calculation disregards the actual characteristics of freshly cut wood, including its inherent high moisture content, which significantly affects the wood's mass and, consequently, the density calculation. This oversight has led to an inaccurate assessment of tax liabilities, unfairly penalizing the Appellant.

17. The witness contested the use of a 25% margin for calculating Corporation tax which the witness argued that is exorbitant and not founded on any factual data pertaining to the Appellant's operations. The witness stated that the Appellant's actual margin oscillates between 8% to 10%, which should be the basis for any tax calculations to ensure fairness and accuracy. Finally, the witness argued that the imposition of a 25% margin has resulted in an inflated tax assessment, which does not reflect the Appellant's financial reality and inflicts an undue financial burden. The witness urged the Tribunal to take into account these facts and allow the Appeal.

18. The Appellant filed elaborate written submissions on 3rd March 2024. The Appellant submitted the notice of tax investigations and tax demand failed to meet the requirements of a proper notice prescribed by the High Court in Geothermal Development Company Limited vs. Attorney General & 3 others [2013] eKLR where the Court set out the following:“In the circumstances of this case, I find that the Tax Demand letter of 20th June 2011 sent to the Company fell short of the requirements of a proper notice in as far as it did fail to disclose its nature and the implication and consequences of non-compliance as well as notifying the taxpayer of the avenues of appeal or review available to it. A notice of the nature issued to enforce collection of taxes must clearly state to be such a notice, state the amount claimed, state the legal provision under which it is made and draw the taxpayers attention to the consequences of failure to comply with the law and the opportunity provided by the law to contest the finding. Such a notice would give the opportunity to any Kenyan to know the case against it and utilise the legal provisions to contest the decision. The right to fair administrative action and the right of access of justice now enshrined in our Constitution demand nothing less.”

19. The Appellant submitted that the tax demand lacked specificity on the uplift of the customs duty; the automated assessments did not set out the law on which they were made; that the notice does not explain the basis of the assessments and that the tax demand did not draw the Appellant’s attention to the consequences of non-compliance, nor the opportunity provided by law to contest the Respondent's finding.

20. The Appellant submitted that the Respondent while demanding for revenue should demonstrate sufficiently the basis of demanding a certain tax. The Appellant relied on the case of Republic vs. Commissioner of Domestic Taxes Large Taxpayer’s Office Ex Parte Barclays Bank of Kenya Ltd (2012), where the court stated that;“The Respondent’s decision to claim withholding tax on the basis of the interchange fee lacks a legal footing as the Commissioner failed to identify the specific facts or transactions that form the basis of the application of the tax...”

21. On whether the Objection in regard to customs duty was allowed by dint of Section 229 (5) of the EACCMA, the Appellant submitted that the Respondent issued its objection decision on 28th September 2022, more than 250 days late yet the Respondent is required to respond within 30 days of receipt of the application for review. Consequently, the Appellant submitted that the Objection raised by it on 19th January 2022 was deemed allowed by the operation of the law.

22. In support of this position, the Appellant cited various case laws including Republic vs. Commissioner of Customs Services Ex-Parte Unilever Kenya Limited (2012) eKLR; Wallpaper Kenya vs.Commissioner of Customs & Border Control TAT No. 279 of 2020 (eKLR); W.E.C. Lines Ltd vs. the Commissioner of Domestic Taxes [TAT No. 247 of 2020); Krystalline Salt Ltd vs. KRA [2019] eKLR; Nicholas Kiptoo Arap Korir Salat v IEBC & 6 Others [2013] eKLR; and Kenya Breweries Limited vs the Commissioner of Customs and Border Control, TAT No 481 of 2022 to argue that the Respondent has a duty to observe timelines.

23. Apart from the above, the Appellant submitted that the Corporate tax and VAT assessment was deemed allowed under Section 51(11) of the Tax Procedures Act on grounds that the Respondent failed to issue objection decision within 60 days from the date that the taxpayer lodged a notice of the objection. In support of the case, the Appellant cited a number of cases laws including Equity Group Holdings vs. Commissioner of Domestic Taxes (civil Appeal E069 & E025 of 2020) [2021] KEHC 25 (KLR); Republic vs. Commissioner of Domestic Taxes Ex Parte I& M Bank Limited [2017] eKLR; and Eastleigh Mall Limited vs Commissioner of Investigations & Enforcement Appeal No. E0686 of 2020 (eKLR).

24. On the issue of reliance on the ICRAFT study as a basis for the uplift, the Appellant accused the Respondent of non-disclosure and submitted that the Respondent did not attach a copy of the study to help the Appellant and the Tribunal understand whether its findings and recommendations refer to the type of mahogany imported by the Appellant. The Appellant relied on Pankaj Vrajlal Somaia & another v Kenya Revenue Authority & 2 others [2015] eKLR where the court held that full material disclosure makes it possible for the affected person to appreciate the allegations against it to prepare its own case.

25. On whether the Respondent erred in assessing additional Corporate tax and Value Added Tax on the Appellant, the Appellant submitted there was no underdeclaration of volumes at the time of importation, the additional assessment of Corporation tax and value added tax were illegal and capricious.

26. On whether the Respondent erred in demanding taxes from entries that did not belong to the Appellant, the Appellant submitted that its PIN had been used by third parties and the Respondent and DCI delayed to take action therefore, the Appellant argued that the Respondent relied on entries that did not belong to the Appellant.

Appellant’s Prayers 27. The Appellant’s prayers are as follows:a.The Appeal be allowed with no costs.b.The Respondent's Objection decision dated 28th September 2022 be set aside;c.The Respondent and/or its agents be stopped from demanding or taking further steps to enforce recovery of the tax assessed; andd.The Honourable Tribunal be at liberty to make any such orders as it deems fit and necessary in the circumstances.

The Respondent’s Case 28. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 22nd November 2022 together with the documents attached thereto;

29. It is important at this juncture to note that the Appellant filed Amended Memorandum of Appeal dated 2nd February 2024 on 3rd March 2024. The first Memorandum of Appeal was filed on 24th October 2022. The Respondent’s Statement of Facts was filed in response to Memorandum of Appeal before its amendment.

30. When the matter came up for hearing, the Appellant sought leave to amend its Memorandum of Appeal. The Record indicates that the Respondent requested 7 days to file and serve response to the Amended Memorandum of Appeal by 13th February 2024.

31. On 20th February 2024, the Respondent told the Tribunal that it had filed a Replying Affidavit. The Appellant argued that the Affidavit had not been served. The Respondent argued that it would be prejudiced by the delay occasioned by the amendment sort. The Tribunal found that the Respondent would not be prejudiced and allowed the Appellant to file the Amended Memorandum of Appeal. The Tribunal then directed parties to file and serve written submissions.

32. It is vital to note that the Respondent’s alleged Replying Affidavit is not on record. However, the Respondent filed written submissions dated 4th March 2024 and filed on even date in opposition to the Amended Memorandum of Appeal. Therefore, the Tribunal evaluates the Respondent’s written submissions.

33. The Respondent’s submissions identify two issues for determination. First, whether the assessments were justified and second, whether the Respondent's objection decision was issued outside the statutory timelines under Section 51(11) of the Tax Procedures Act.

34. On the first issue, the Respondent submitted that the decision to arrive at the additional assessments was justified and had basis in law as required under the Tax Procedures Act, 2015. It is the Respondent’s case that the additional VAT and corporation tax assessments in question were raised upon the Respondent noting that the Appellant had mis-declared their timber import entries.

35. The Respondent submitted that under Section 24 (2) of the Tax Procedures Act, it is at liberty to make assessments based on information available to it. The Respondent also submitted that Section 31 of the Tax Procedures Act empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on the Commissioner’s best judgement.

36. The Respondent submitted that it relied on its best judgement based on information available to it in compliance with Section 31 of the Tax Procedures Act while raising the additional assessment. The Respondent cited the High Court decision in Commissioner of Domestic Taxes vs. Altech Stream (EA) Limited [2021] eKLR wherein the court stated that Section 31 (1) of the Tax Procedures Act allows the Commissioner to make an assessment based on such information as may be available and to the best of his judgement.

37. The Respondent relied on Section 56 (1) of the Tax Procedures Act to submit that the Appellant had not discharged the burden of proof on grounds that the Appellant failed to provide documents in support of the objection. The Respondent relied on the case of Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR where it was held that: -“A party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough.”

38. The Respondent placed reliance on Sections 235 and 236 of the East Africa Community Customs Management Act, 2004 which provides for the Commissioner’s mandate to carry out a post clearance audit. Consequently, the Respondent submitted that the Appellant was subjected to a post clearance audit in accordance with Sections 235 and 236 of the EACCMA which revealed that the Appellant had imported a total of 564 entries.

39. The Respondent averred that it used the mirror analysis as a complimentary risk management tool useful in detection of value under/over declaration, smuggling, fictitious exports, fraud and revision of existing valuation databases. From the mirror analysis, the Respondent was of the view that the average density of wood ought to below the 1000kg/m3. However, the Appellant had declared that the density of the timber/wood is 805kg/m3.

40. The Respondent averred that it profiled the Appellant’s imports of raw mahogany from the DRC through Malaba and Busia for the years 2015 to 2020. This led to the Respondent issuing an assessment amounting to Kshs 82,710,815. The Respondent averred that it raised a custom duty assessment since the Appellant had under-paid import duty.

41. The Respondent further averred that it raised a Corporation tax assessment since the Appellant had under-declared the timber purchases which were subjected to a mark-up of 25%.

42. It is the Respondent’s case that the Appellant has a responsibility of safeguarding and ensuring the proper application of its tax PIN. The Pin is confidential and it could only mean that someone with knowledge of the Pin being the Appellant or its agent shared the same with third parties. Therefore, the Respondent maintained that it is unreasonable for the Appellant to blame the Respondent for failure to conduct investigations when the DCI has the duty to carry out investigations on issues relating to fraud.

43. According to the Respondent, the Appellant did not institute investigations at the earliest time. The Respondent relied on the case of Republic vs. Kenya Revenue Authority & Another; Directorate Of Criminal Investigations & Another (Interested Party) Ex-Parte Cmc Di_Ravenna-Itinera Jr [2020] eKLR where the Court at paragraph 168 stated:‘‘The court will merely require the decision-maker to take the relevant considerations into account; it will not prescribe the weight that must be accorded to each consideration, for to do so could constitute a usurpation of the decision-maker’s discretion. The law remains, as I see it, that when a functionary is entrusted with a discretion, the weight to be attached to particular factors, or how far a particular factor affects the eventual determination of the issue, is a matter for the functionary to decide, and so long as it acts in good faith (and reasonably and rationally) a court of law cannot interfere.’’

44. The Respondent averred that the Appellant was not able to demonstrate which particular entries it had paid for nor the outcome of the investigations on the misuse of the PIN despite being granted time to do so.

45. On whether the Respondent’s Objection decision was issued outside the statutory timelines under Section 51 (11) of the Tax Procedures Act 2015, the Respondent submitted that the objection decision was issued within the statutory timelines provided under Section 51 (11) of the Tax Procedures Act 2015.

46. The Respondent submitted that the Appellant lodged an objection on 19th January 2022, the Respondent issued an invalidation on 16th February 2022. Parties exchanged correspondences from 13th July 2022 until 29th September 2022 and the Respondent issued an objection decision on 22nd September 2022. Therefore, the Respondent submitted that the said correspondences are in the list of documents dated 7th September 2023.

47. Therefore, the Respondent prayed that the Honorable Tribunal factors in the correspondences which will lead to a finding that the Respondent’s decision was issued within the statutory timelines.

Respondent’s prayers 48. The Respondent prayed that this Honourable Tribunal that’a.The Appeal be dismissed with costs to the Respondent as the same is devoid of merit.

Issues for Determination 49. The Tribunal having considered the Memorandum of Appeal, the parties’ Statements of Facts, and submissions, puts forth the following issues for determination:a.Whether the Respondent’s decision is time barred under Section 229 of EACCMA;b.Whether the Respondent’s decision is statutory time barred under Section 51 of Tax Procedures Act; andc.Whether the assessments were justified.

Analysis and Findings 50. The Tribunal wishes to analyse the issues as hereunder.

a. Whether the Respondent’s decision is time barred under Section 229 of EACCMA 51. The Respondent did not address this issue in its submissions at all. Therefore, the Respondent is presumed to have conceded it. However, the Tribunal examines the issue to find out whether the Appellant’s arguments are merited.

52. The Tribunal has examined the Respondent’s notice of tax investigations and tax demand dated 11th November, 2021. The said demand indicates pursuant to section 236 of the East Africa Community Customs Management Act (EACCMA) 2004, the Respondent carried out investigations regarding Appellant’s timber importations and tax declarations. The Respondent then demanded payment of Kshs. 82,710,815. 00 being Import taxes, Corporate taxes and Value Added Tax arising from the misdeclared consignments. The Appellant objected to the demand and on 21st January 2022, the Respondent through objection application acknowledgment receipts, acknowledged receipt of the Appellant’s objections.

53. The Respondent issued its decision through a letter dated 28th September 2022. In the decision, the Respondent under paragraph 22. 1.4 of the said decision clearly indicated that the authority to carry out post clearance audit was based on Sections 235 and 236 of EACCMA. The Respondent in the said decision stated as follows:‘‘Pursuant to the provisions of Section 135 (1) of the EACCMA, the Commissioner by a letter dated 11th November 2021 demanded the short levied taxes from you.’’“In the present case, Section 34 of EACCMA provides that the owner of goods imported into a country is under an obligation to enter and self-declare such goods to the proper officer.”

54. Pursuant to the above analysis, there is no doubt that the Respondent proceeded under the provisions of EACCMA. However, in the objection decision, the Respondent shifted the goalpost by attempting to sneak in the provisions of Section 51 of the Tax Procedures Act 2015 when making its decision yet the investigations and assessments were based on EACCMA which has its own rules regarding investigations, inspections, assessments and issuance of review decision. Similarly, The Tax Procedures Act has another set of rules regarding assessments to issuance of objection decision. The Respondent subjected the Appellant to provisions of EACCMA right from issuance of the demand dated 11th November 2021 to issuance of the impugned decision dated 28th September 2022. It then follows that the Respondent had a duty to adhere to the provisions of EACCMA including the Section 229(4).

55. Section 229 (4) of EACCMA provides that:“The Commissioner shall, within a period not exceeding thirty days of the receipt of the application under subsection (2) and any further information the Commissioner may require from the person lodging the application, communicate his or her decision in writing to the person lodging the application stating reasons for the decision.”

56. Section 229 (4) of EACCMA is cast in stone. It does not have flexibility. It is strict. It does not have room to manoeuvre. It uses the word ‘shall.’ It uses coordinating conjunction ‘‘AND’’ as opposed to ‘‘OR.’’ The Respondent’s time to issue a decision starts ticking the moment the Respondent receives objection from a taxpayer. If the Respondent asks for additional documents on 30th day and a taxpayer provides a lorry full of evidence on the same day, the Respondent has no option but to examine the evidence and issue its decision on same day, otherwise the Respondent will be knocked out by Section 229(5) of EACCMA. Issuance of the decision on 31st day will render the decision unlawful.

57. Having stated as above, the question then is whether the Respondent complied with Section 229(4) of EACCMA. The demand was issued through a letter dated 11th November 2021. The documents filed by the Respondent indicates that the Respondent received the Appellant’s objection on 21st January 2022. The decision was issued through a letter dated 28th September 2022. Obviously, the Respondent issued the decision contrary to Section 229(4) of EACCMA.

58. Section 229(5) of EACCMA provides as follows:“Where the Commissioner has not communicated his or her decision to the person lodging the notice for review within the time specified in subsection (4) the Commissioner shall be deemed to have made a decision to allow the application.’’

59. It is needless to state that the Appellant’s application stood as allowed under Section 229(5) of EACCMA.

60. In Republic vs. Commissioner Of Customs Services Ex-Parte Africa K-Link International Limited[2012] eKLR, C.W. Githua J observed as follows:‘‘ I fully associate myself with the interpretation given to Section 229 of the Act by Korir J in R Vs Commissioner of customs Exparte Unilever Ltd (supra) in which he held that once an application for review is made against the Commissioner’s decision under Section 229 of the Act, the commissioner must communicate his/her decision to the tax payer within 30 days and failure to do so means that the commissioner will be deemed to have allowed the application for review by operation of the law and will be barred from demanding payment of the taxes specified in the decision subject matter of the review.”

61. As already noted herein above, the Respondent did not challenge the Appellant’s assertion that the decision was issued contrary to Section 229 of EACCMA. Instead, the Respondent decided to focus its attention on provisions of Section 51 (11) of tax Procedures Act. The impact is that the Respondent conceded that the decision was contrary to Section 229 of EACCMA.

62. Based on the totality of the foregoing, the Tribunal finds and holds that the Respondent’s decision was issued contrary to Section 229(4) of EACCMA and the Appellant’s application stood as allowed by operation of law under Section 229 (5) of EACCMA.

b. Whether the Respondent’s decision is statutory time barred under Section 51 of Tax Procedures Act. 63. The Respondent submitted that its decision was valid pursuant to Section 51 of Tax Procedures Act. The Tribunal finds that if the Appellant objection stood allowed under Section 229 (5) of EACCMA, validity or invalidity of the Respondent’s decision cannot arise under Section 51 of Tax Procedures. It is pointless to analyse the remaining issues.

Final Decision 64. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is meritorious and consequently makes the following Orders:-a.The Appeal be and is hereby allowed;b.The Respondent’s Objection decision issued through a letter dated 28th September 2022 is hereby set aside; andc.Each party to bear its own cost.

65. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 5TH DAY OF APRIL, 2024. ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBERNADETTE M. GITARI - MEMBERMOHAMED A. DIRIYE - MEMBER