[2024] KETAT 1464 (KLR)

Tursec Security Group Limited v Commissioner of Domestic Taxes (Tax Appeal E044 of 2024) [2024] KETAT 1464 (KLR) (Civ) (11 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1464 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E044 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

October 11, 2024

Between

Tursec Security Group Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a Limited Liability Company registered under the Companies Act Cap 486 of the Laws of Kenya whose principal business activity is private security services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 and 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 undertook a VAT and income tax return review of the Appellant in respect of the period October 2021 and June 2022 and Year 2022 respectively. Consequently, on 25th August 2022 the Respondent issued the Appellant with additional VAT assessments for the period amounting to Kshs. 6,835,545. 51 based on the variances noted between the declared VAT and income tax.

4. That the Appellant lodged late notices of objection wherein the Respondent acknowledged the objection applications on 24th July 2023 and on 23rd November 2023. Upon considering the objection, the Respondent on 21st September 2023 and on 6th December 2023, issued objection decisions amounting to Kshs. 5,440,744. 00 disallowing the objection applications and confirmed the assessed amounts.

5. On 7th August 2024, parties entered into a Partial Consent which stated that the Income Tax assessment amounting to Kshs. 2,178,312. 00 was revised to nil and the VAT assessment was to be referred back to the Tribunal for its determination.

6. The Appellant being aggrieved by the decision, lodged this appeal vide Notice of Appeal dated 16th January 2024 and filed on 17th January 2024.

The Appeal 7. The Appeal is based on the Memorandum of Appeal dated 16th January 2024 and filed on 17th January 2024 raising the following grounds of appeal:a.That the Respondent erred in law and fact by assessing unpaid taxes that the Appellant was unaware of.b.That the Respondent erred in law and fact by failing to note that the contract entered between the Appellant and China Railway No. 5 Engineering Group Company Limited had not included VAT and the same was not vatable. The Appellant claimed only the management fees were vatable, which was charged at 5% of the invoiced amount.c.That the Respondent erred in law and fact by issuing the objection without considering the Appellant’s documents.

Appellant’s Case 8. In further support of the appeal, the Appellant relied on its Statement of Facts dated 16th January 2024 and filed on 17th January 2024 and written submissions dated and filed on 3th June 2024.

9. The Appellant’s case is that on the 25th August 2022 the Respondent issued income tax assessment orders for the period December 2021 January to June 2022 amounting to Kshs 1,927,618. 16 and Kshs 1,855,296. 55. The Appellant objected to the assessments through an objection application on the 24th July 2023 and 23rd November 2023 challenging the said assessments.

10. The Appellant alleged that the Respondent failed to consider that the contract entered between the Appellant and China Railway No.5 Engineering Group Company Limited had not included VAT and the same was not vatable. The Appellant claimed only the management fees were vatable and the same was charged at 5% of the invoice amount.

11. The Appellant also alleged that the Respondent failed to consider documents presented by it in arriving at its decision and avowed that it relied on the service agreement between itself and the security officers, which clearly showed the nature of the business contracted had not included VAT. As such, the Appellant submitted that the Respondent erred in subjecting the security officer's gross pay to VAT.

12. The Appellant also submitted that due to the nature of its business the contractual amount of the security officers was a disbursement and therefore ought not to have been subjected to VAT as evidenced by the payroll records of the security officers.

13. The Appellant further relied on its invoices to argue that the only vatable amount was the 5% management fee of the contractual amount which was the benefit derived. The Appellant submitted that a review of the invoice for the month of October 2021 with a contractual amount of Kshs. 1, 145,000. 00 showed a 5% management fee of Kshs. 57,250. 00 which was the income earned by the Appellant. The Appellant argued that this clearly showed that the only vatable amount was 5% management fees as provided by the contract.

14. The Appellant submitted that the Respondent in its objection decisions never proved how the contract between it and China Railway No. 5 Engineering Group Company Limited was subjected to VAT even after the Appellant produced a service agreement showing that the said contracts were not vatable. The Appellant maintained that the contract was not vatable.

Appellant’s Prayers 15. The Appellant prayed for the following orders:a.The Respondent's assessments for Kshs 1,927,618. 16 and Kshs 1,855,296 were irregular and thus the same be set aside;b.The Respondent's objection decisions dated 21st September 2023 and 6th December 2023 be set aside; andc.The costs of the Appeal be borne by the Respondent.

Respondent’s Case 16. The Respondent’s case was premised on its Statement of facts dated 26th February 2024 together with its written submissions dated 26th February,2024 and filed on 10th June 2024 and supplementary submissions dated and filed on 24th July 2024.

17. The Respondent pleaded that whereas Section 24 of the Tax Procedure Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent, the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information and to the best of its judgement.

18. The Respondent stated that the assessment by the Respondent was in accordance with Section 31 of the TPA, which gives the Respondent leeway to issue additional assessments based on the available information and best of judgement.

19. The Respondent stated that pursuant to Sections 56 of the TPA and 30 of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”) the burden of proof lies on the Appellant to demonstrate that it discharged tax liability. The Respondent stated that this burden was never discharged as the Appellant was required to amend the respective VAT and income tax returns which it failed to amend and the undeclared taxes therefore, the Respondent submitted it subjected the Appellant to VAT and income tax.

20. The Respondent maintained that the assessment was conducted in accordance with the provisions outlined in Section 31(7) of TPA, which stipulates the procedure for amended tax assessments. The Respondent argued that the Appellant's awareness of the taxes owed did not absolve it of the tax obligations, as tax liability is determined by the relevant tax law.

21. In response to allegation that the the Respondent erred by failing to note that the contract entered between the Appellant and China Railway No. 5 Engineering Group Company Limited had not included VAT and the same was not vatable, the Respondent stated that upon review of the invoices and documents available, the same revealed that the Appellant had provided security services which are not listed under exempt services as per First Schedule of Part 11 nor zero rated under the Second Schedule of the VAT Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”).

22. According to the Respondent, on 24th November 2023 the Appellant was asked to furnish documents supporting its objection. The Appellant submitted a copy of the service agreement, a letter of grounds of objection, and copies of invoices, crucial documents such as ETR receipts, delivery notes, and proof of payments were not provided as requested.

23. The Respondent stated that it has a wide berth in assessing the correctness or falsity of the said returns as stated under section 31 of the TPA. The Respondent averred that the burden of proving that the assessments were wrong rested on the Appellant in line with Section 56(1) of the TPA.

24. Whereas the Appellant's claimed that the Respondent made its objection decision without reviewing the presented documents, the Respondent maintained that the availed documents were inaccurate and deceptive. The Respondent also alleged that the Appellant failed to substantiate its stance adequately by neglecting to provide the requested documents, namely ETR receipts, delivery notes, and proof of payments, as requested on 24th November 2023.

25. The Respondent submitted that it is empowered to make assessments pursuant to Section 31 of the TPA. The Respondent cited the case of Mara BeefLimited v Commissioner of Domestic Taxes TAT Appeal No. 226 of 2020 to reiterate the view that the Respondent is empowered to make a decision based on information available and its own best judgment.

26. The Respondent also submitted that the Appellant failed to discharge its burden of proof contrary to the provisions of Section 30 of the TATA and section 56(1) of the TPA. It cited the case of George v Federal Commissioner of Taxation wherein it was stated that a taxpayer has to discharge its burden of proof in tax matters.

27. With regard to the contract entered between the Appellant and China Railway No.5 Engineering Group Company Limited, the Respondent submitted that the service agreement did not provide details of the taxability of the services provided as alleged by the Appellant. It submitted that security services are not listed under exempt services under the First Schedule of Part II nor zero rated under the Second Schedule of the VAT Act and therefore subject to VAT.

28. The Respondent maintained that the Appellant failed to provide crucial documents including ETR receipts, delivery notes and proof of payments. The Respondent submitted that this was contrary to Section 43 of the VAT Act, and Section 23 of the TPA, which mandates taxpayers to keep proper records.

29. The Respondent submitted that clauses 4, 5 and 6 of the service agreement showed that the Appellant is fully responsible for the security officers and that at all times the Appellant was the direct supervisor of the security officers. On this basis the Respondent submitted that the Appellant was directly responsible for the remuneration and management of its staff and it therefore follows that these were services subject to VAT.

Respondent’s prayers 30. The Respondent prayed that the Tribunal would uphold its objection decision dated 6th December 2023 and that the Appeal be dismissed with costs to the Respondent.

Issues For Determination 31. The Tribunal has considered the pleadings and documentation filed by both parties and has identified a single issue for its determination as follows:

Whether the Respondent erred in subjecting the payments made to the Appellant under the Service Agreement to VAT. Analysis And Findings 32. The Tribunal having determined the issue falling for its determination proceeds to analyse it as hereunder:

Whether the Respondent erred in subjecting the payments made to the Appellant under the Service Agreement to VAT. 33. The origin of the dispute is whether the service agreement entered into between the Appellant and China Railway No.5 Engineering Group Company Limited and the services procured under the agreement are subject to VAT. It was the Appellant’s case that the agreement did not have any provisions concerning VAT therefore; the services thereunder were not vatable. On the other hand, the Respondent submitted that the services provided by the Appellant were not exempt from VAT nor are they zero-rated under the VAT Act.

34. The Tribunal notes the submission of the Respondent that the service agreement did not provide details of the taxability of the services provided as alleged by the Appellant and that the security services are not listed under exempt services under the First Schedule of Part II nor are they zero rated under the Second Schedule of the VAT Act and are therefore subject to VAT.

35. The Tribunal also notes the Respondent’s further submissions that the invoices and documents adduced as evidence by the Appellant revealed that the Appellant had provided security services which are not listed under exempt services as per First Schedule of Part 11 nor were they zero rated under the Second Schedule of the VAT Act.

36. The Tribunal finally, notes the Appellant’s submissions that due to the nature of its business the contractual amount of the security officers is a disbursement and therefore was not subjected to VAT as evidenced by the payroll records of the security officers. However, the Appellant did not avail copies of the payroll or adduce any other evidence to demonstrate that it was merely disbursing the funds.

37. The Tribunal is of the view that there is no dispute on the fact that the Appellant supplied services. The VAT Act defines "supply of services" as follows:‘‘Anything done that is not a supply of goods or money, including—a.The performance of services for another person.’’

38. The Tribunal notes the following provisions of Section 2(1) of the VAT Act which defines ‘taxable supply’ :‘‘a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business.’’

39. The Tribunal examined the contract in issue vis a vis the provisions of the part II of the First Schedule to the VAT Act and noted that the payments made to the Appellant were neither exempt from VAT nor zero rated. Accordingly, the Tribunal also observes that that since the payments made to the Appellant were neither exempt from VAT nor zero rated, the Appellant ought to have subjected the entire payments thereon to VAT. The Tribunal is guided by the case of Benard James Ndeda & 6 Others vs. Magistrates and Judges Vetting Board & 2 Others [2018] eKLR where it was held that the court should not enlarge the scope of legislation or the intention of the legislature when the language of the provision is plain.

40. The Tribunal finds that the fact that the service agreement is silent on VAT does not imply that the payments made to the Appellant were exempt from VAT. The Tribunal finds that the Respondent did not err in subjecting the payments made to the Appellant under the Service Agreement to VAT.

Final Decision 41. The upshot to the foregoing is that the Tribunal finds that the Appeal lacks merit and consequently makes the following Orders:a.The Appeal be and is hereby dismissed.b.The assessment in relation to VAT be and is hereby upheld as set out in the objection decision dated 21st September 2023. c.Each party to bear its own cost.

42. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 11TH DAY OF OCTOBER, 2024. .....................................CHRISTINE A. MUGACHAIRPERSON........................................BONIFACE K. TERER ELISHAH N. NJERUMEMBER MEMBER........................................EUNICE N. N’GANG’A OLOLCHIKE S. SPENCERMEMBER MEMBER