[2023] KETAT 938 (KLR)

Transchem Pharmaceuticals Limited v Commissioner of Domestic Taxes (Appeal 1525 of 2022) [2023] KETAT 938 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 938 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1525 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

December 20, 2023

Between

Transchem Pharmaceuticals Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a taxpayer domiciled in Kenya whose principal business activity is wholesale and retail distribution of pharmaceutical products through its branches located across Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of the laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent carried out investigations into the business of the Appellant with a view of confirming tax compliance for Corporation tax and VAT obligations for December 2016 to 2020 review period.

4. Consequent compliance checks on correctness of declarations established that the Appellant had under-declared its business income and was on the Respondent’s iTax database list as a non-filer.

5. On 8th November 2022, the Respondent confirmed additional assessment for the 2016 to 2020 review period against the Appellant for Corporation tax totaling Kshs. 305,104,227. 00 inclusive of penalties and interest.

6. In a letter dated 19th April 2023, the Appellant objected to the assessments.

7. Through an objection decision dated 16th June 2023, the Respondent confirmed a revised Corporation tax assessment of Kshs. 390,565,725. 00 inclusive of penalties and interest for the 2016 to 2020 review period.

8. Aggrieved by the Respondent’s decision the Appellant filed its Notice of Appeal at the Tribunal on 7th December 2022.

The Appeal 9. The Appeal was premised on the following grounds as laid-out in the Memorandum of Appeal dated 15th December 2022 and filed on even date;i.That the Appellant’s retail outlets at times sell products with different codes from Head office resulting in stock difference.ii.That the Respondent raised assessment based on stock movement differences compared with physical stock and failed to consider the mismatch between purchases and sales stock.iii.That the Respondent failed to consider expired drugs that the Appellant had not sold and were either destroyed by the Kenya Pharmacy and Poisons Board or had been identified by the Appellant and kept aside.iv.That the Respondent only considered positive stock variances while raising the assessment instead of aggregating the net of positive and negative variances.v.That the prices used by the Respondent were not accurate as they were overstated.

Appellant’s Case 10. The Appeal was anchored on the Appellant’s Statement of Facts dated and filed on 15th December 2022 .

11. That the Appellant was a distributor as well as a retailer of pharmaceutical products operating several branches across Kenya and was contesting the Respondent’s Corporation principal tax assessment of Kshs. 196,540,875. 00 for the 2016 to 2020 review period.

12. The Appellant stated that it operates a centralized purchasing system for its pharmaceutical products which are sourced from manufacturers through its Head office. That once purchased, the Head office handles wholesale segment whereas the outlets deal with retail segment of the pharmaceutical market.

13. That it was not uncommon for Appellant’s retail outlets to sell similar products with different codes from Head office purchases resulting in stock difference. Further, the Appellant stated that stock difference could also arise from unsold expired drugs which had either been destroyed by the Kenya Pharmacy and Poisons Board or had been identified and kept aside by the Appellant. That the differences resulting could either be positive or negative variance as compared to the Appellant’s physical stock takes that were the basis for stock valuation in the financial statements.

14. That in raising the additional assessment, the Respondent failed to consider the stock mismatch that arose from stock movement differences due to expiry of drugs. Additionally, the Appellant claimed that the Respondent only considered positive variances while raising the assessment instead of netting off the positives against the negatives to arrive at the correct assessment.

15. That the prices used by the Respondent in assessments were not accurate as they had been overstated and the Appellant was not given the final workings of the assessment.

The Respondent’s Case 16. The Respondent replied to the Appeal through its Statement of Facts dated 8th June 2023 and filed on the same date.

17. The Respondent stated that it carried out investigations against the Appellant’s business for the 2016 to 2020 review period with a view of confirming tax compliance obligations under Income tax and VAT. The Respondent claimed that information obtained from its i-Tax database on non-filers indicated that the Appellant failed to declare business income earned from December 2016 to 2020 relating to pharmaceutical products.

18. The Respondent further stated that review compliance check was conducted by examining records and audited accounts of the Appellant to establish the correctness of the declarations which established that the Appellant had underdeclared income by overstating its expenses while other expenses were unsupported.

19. That upon issuance of additional assessments dated 8th November 2022, the Appellant neither filed a notice of objection to the assessment as stipulated under Section 51(2) &(3) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’) nor provided supportive documentation within the stipulated timelines. That as a result, the Respondent was unable to issue an objection decision confirming or revising the assessment since no notice of objection was ever raised by the Appellant.

20. The Respondent contested the instant Appeal against the assessment on the basis that it did not meet the threshold provided for under Section 52 of the TPA as read together with Sections 12 & 13 of the Tax Appeals Tribunal Act No. 40 of 2013 (hereinafter ‘TAT’) which provides that an appeal can only be lodged in dispute to an objection decision which in the instant Appeal had not been issued.

Respondent’s Prayers 21. The Respondent prayers to the Tribunal were;i.That the Tribunal upholds the objection decision and order the Appellant to pay confirmed tax assessment as issued.ii.That the Tribunal dismisses the Appeal for lack of merit with costs.

Parties Submissions 22. The Appellant’s written submissions were dated 17th June 2023 and filed on 19th June 2023 and it submitted as follows:

23. The Appellant averred it did not have a harmonized product coding system and therefore, a similar product was likely to have a different code at the Head office level or at the retail outlet level.

24. The Appellant asserted that the Respondent failed to consider incongruity of product codes at the Head office and retail outlets and went ahead to assess tax based on comparison of physical stock movement against book balances. Additionally, the Respondent only considered positive variances instead of netting off against the negative stock variances to get the correct tax position. It was the Appellant’s assertion that if the Respondent did this, it would have found that there were no undeclared sales as demonstrated by the attached stock movement worksheet.

25. The Appellant stated that it applied physical stock take balances in preparing annual financial statements not the system balances which may be distorted by the incongruity of the coding system and expired products.

26. That even though the Appellant availed a certificate of destruction for expired drugs for the period under review from the Kenya Pharmacy and Poisons Board, the Respondent went ahead to treat them as sold. Additionally, the Appellant claimed that the Respondent treated transfers to outlets as purchases.

27. The Appellant further claimed that the transfer quantities used by the Respondent in assessment were not correct because they were inflated positive stock variances whose adjustment by the Respondent was done incorrectly as stock transfers to outlets had been removed from the adjustments.

28. It was the Appellant’s contention that a year’s variances cannot be taken in isolation of other years as they have a rollover effect since sales can be done the following year before stock take of the preceding year. That therefore, physical stock take balances would not agree with system balances at the close of the year.

29. The Appellant contested the Respondent’s assessment summary of 16th June 2023 as it included items already agreed during the previous assessment.

30. The Appellant averred that due to the bulky nature of its stock movement sheet for the period under review, it did not print but shared a soft copy of the same.

31. The Respondent’s written submissions dated 8th June 2023 were filed on the same date where the Respondent submitted on two issues as follows;

i. Whether the Notice of Objection was invalid on the grounds that the Appellant failed to comply with the provisions of Section 51(7) of the TPA. 32. The Respondent affirmed that the assessment was correctly issued and conformed to the TPA since the Appellant was notified via email of the assessment and was requested to provide documents; that however, the Appellant neither filed a notice of objection nor provided sufficient evidence to counter the Respondent’s assessment.

33. The Respondent relied on the High Court’s judgment as guided by Makau J in Primarosa Flowers Limited v Commissioner of Domestic Taxes [2019] where in reference to Mulheran v Commissioner of Taxation [2013] it was held that;“The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied....”

34. The Respondent asserted that the Appellant failed to discharge the duty placed upon it by Section 51(3) of the TPA despite the Respondent communicating and according the Appellant an opportunity for fair hearing.

35. That the Appellant failed to provide supporting documentation or seek leave of the Respondent for extension of time as provided under Section 51(7) of the TPA. It was the Respondent’s assertion that the Appellant was not entitled to extension of time as there was no reasonable reason or legitimate expectation on the part of the Respondent. The Respondent relied on the case of Commissioner of Domestic Taxes vs Mayfair Insurance Company Limited [Income Tax Appeal No 31 of 2017] eKLR where the Court held that;“One of the reasons stated under the Rule is that the court may extend time where there is reasonable cause for the delay. Effectively, the court’s powers and discretion to extend time is unlimited. It is however not to be capriciously exercised. Time, in other words, is not to be extended as a matter of right. Each case is to be viewed sui generis and on its own circumstances and facts. The starting point is that Applicant ought to advance sufficient and reasonable grounds for any delay on its part.”

36. To buttress this position, the Respondent further cited the case of Kenya Cuttings Limited vs Commissioner of Domestic Taxes [Appeal No. 666 of 2022] where the Tribunal held that;“The Tribunal is therefore satisfied that the Appellant failed to provide any supporting documentation and reasons to support its application to lodge its objection out of time. The Appellant has therefore not demonstrated that it suffered any incapacity or hardship which could have prevented it in lodging its notice of objection or from making application for extension of time to the Commissioner’s, or properly supporting the said application when granted an opportunity to do so by this Tribunal. The Appellant is therefore imploring this Tribunal to intervene in the exercise of the discretionary powers of the Commissioner in the refusal to allow for extension of time without giving the Tribunal a compelling reason to do so objection out of time.”

37. The Respondent averred that the Appellant bore the burden of proof in showing that the assessment was excessive or erroneous pursuant to Section 23(1) of the TPA as read together with Section 15 and 16 of the Income Tax Act CAP 470 of the law of Kenya. The Respondent cited the following authorities in buttressing its position;i.Boleyn International Limited vs Commissioner of Investigations & Enforcement [Tax Appeal No. 55 of 2019]ii.Monaco Engineering Limited v Commissioner of Domestic Taxes [Tax Appeal No. 67 of 2017]iii.Farab International FZE vs Commissioner of Domestic Taxes [Tax Appeal No. 14 of 2017(2020)]iv.Ken Iron and Steel Limited vs Commissioner of Investigations & Enforcement [2021]

38. The Respondent submitted that the Appellant did not lodge its notice of objection as couched under Section 51(2) of the TPA, therefore, the Respondent could not render a procedurally fair decision that complied with Section 4(3) of the Fair Administrative Action Act No. 4 of 2015 (hereinafter “FAA’). The Respondent relied on the case of Kenya Cuttings vs Commissioner of Domestic Taxes [Appeal No. 378 of 2021] where the Tribunal pronounced itself as follows;“…no evidence adduces by the Appellant to extricate itself from the Respondent’s assertions regarding absence of a valid objection in line with Section 51(2) of the TPA.”

39. The Respondent further averred that the Appellant underdeclared income for tax purposes during the review period contrary to Section 94(1), 95 & 97 of the TPA; and failed to file returns for the same contrary to Section 5(1)(a), (b) and (c) of the VAT Act No. 35 of 2013 (hereinafter ‘VAT Act’)

Issues For Determination 40. The Tribunal having carefully considered the parties’ pleadings, documentation and written Submissions notes that two issues call for the Tribunal’s determination.i.Whether there is an appealable decision before the Tribunal.ii.Whether the objection decision was justified.

Analysis And Determination i. Whether there is an appealable decision before the Tribunal 41. The Tribunal notes that the Respondent conducted investigations that raised questions regarding the Appellant’s stock coding, valuation and quality issues that required the Appellant’s rebuttal. On the contrary, the Appellant contested the findings by stating that it operated a centralized purchase system but distribution at the outlets was independent and used difference coding system at times which resulted in different physical and book stock levels.

42. The Tribunal observes that the Appellant was adamant that the Respondent failed to net off positive variances against negative variances while obtaining the tax position. Moreover, the Respondent used inflated prices in assigning values to the stock differences noted while not cogitating about the expired drugs set aside by the Appellant and those that had been destroyed by the Kenya Pharmacy and Poisons Board as shown in the adduced destruction certificate.

43. The Tribunal also noted the Respondent’s averments that the Appellant failed to declare all income earned by overstating its expenses some of which were unsupported. On the contrary, the Appellant contested these assertions stating that it declared all the income earned during the period

44. The Tribunal observes that the Respondent contested the instant Appeal by stating that the Appellant failed to lodge a notice of objection as couched under Section 51(2) of the TPA. The Tribunal notes that the Appellant did not contest this assertion by the Respondent.

45. The Tribunal notes that the Respondent’s assessment was issued on 8th November 2022 thus the Appellant had up to 8th December 2022 to lodge its notice of objection with the Respondent pursuant to Section 51(2) of the TPA; but instead lodged a Notice of Appeal with the Tribunal on 7th December 2022. The procedure for commencement of an appeal before the Tribunal is provided under Section 51(2) of the TPA which reads as follows;“A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.”

46. As to what constitutes an appealable decision is defined pursuant to Section 3(1) of the TPA which states as follows;“…appealable decision means an objection decision and any other decision made under a tax law other thana.A tax decision; orb.A decision made in the course of making a tax decision.”

47. The Tribunal notes that the Appellant lodged an appeal against the Respondent’s assessment which according to the TPA is not an appealable decision to found an appeal before the Tribunal. An objection to an assessment is a decision whose sole discretion rests with the Respondent as provided for under Section 51(2) of the TPA as read together with Section 51 (11) of the TPA.

48. From the foregoing, it is clear that the Tribunal lacks jurisdiction to entertain the Appeal as lodged by the Appellant. The Tribunal reiterates the Court of Appeal holding in the case of Owners of the Motor Vessel “Lilian S” vs Caltex Oil (Kenya) Limited [Civil Appeal No. 50 of 1989] where the Court held as follows with regard to jurisdiction:-“Jurisdiction is everything. Without it, a court has no power to make one more step. Where a court has no jurisdiction, there would be no basis for a continuation of proceedings pending other evidence. A court of law down tools in respect of the matter before it the moment it holds the opinion that it is without jurisdiction.”

49. The Tribunal finds no evidence adduced by the Appellant to extricate itself from the Respondent’s assertions regarding the absence of a valid objection pursuant to Section 51(2) of the TPA, as a result the Tribunal is convinced there is no appealable decision before it.

ii. Whether the objection decision was justified 50. Having determined that there is no appealable decision before the Tribunal, the Tribunal will not delve into the second issue as the same has been rendered moot.

Final Decision 51. The upshot of the foregoing is that the Appeal is incompetent and unsustainable in law and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby struck out.b.Each party to bear its own costs.

52. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 20TH DAY OF DECEMBER, 2023ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALAMEMBERCHRISTINE A. MUGAMEMBERGEORGE KASHINDIMEMBERMOHAMED A. DIRIYEMEMBERSPENCER S. OLOLCHIKEMEMBER