[2023] KETAT 321 (KLR)

Unga Limited v Commissioner of Domestic Taxes (Appeal 1191 of 2022) [2023] KETAT 321 (KLR) (Civ) (19 May 2023) (Judgment)

Neutral citation: [2023] KETAT 321 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 1191 of 2022

RM Mutuma, Chair, RO Oluoch, E.N Njeru, D.K Ngala & EK Cheluget, Members

May 19, 2023

Between

Unga Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated under the Companies Act, and is engaged in the business of grain milling, mainly wheat and maize, and also processing of baking products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act of the Laws of Kenya, and the Kenya Revenue Authority is mandated with the responsibility of assessment, collection, receipt and accounting for all tax revenue on behalf of the Government of Kenya, and the administration and enforcement of all the statutes specified in the Schedule to the Act.

3. The Appellant lodged investment deduction claims for the financial years 2014 to 2019. Consequently, the Respondent through the Large Taxpayers Office (LTO) undertook an investment deduction claim audit on the Appellant.

4. On the March 8, 2021, the Respondent provided the Appellant with its preliminary findings of the investment deduction audit. In the letter, the Respondent requested for documentation supporting the investment deduction claim or else the claim would be disallowed. The Respondent also requested for reconciliation from the Appellant with regard to Withholding Tax (WHT).

5. The Appellant responded to the Respondent’s letter dated March 8, 2021 vide a letter dated March 24, 2021 providing the supporting documentation for the investment deductions and WHT and the reconciliation for WHT.

6. The Respondent upon review of the Appellant’s response issued a notice of assessment vide its letter dated 8th June 2021. The notice of assessment demanded payment of the sum of Kshs 34,321,919. 00 being principal tax, penalties and interest relating to Corporate income tax, and Withholding tax.

7. The Appellant filed its notice of objection in respect of the entire assessment, upon which the Appellant received several requests for additional information from the Respondent. The Appellant submitted the information requested via several emails resting on the email dated February 22, 2022.

8. The Respondent issued its Objection decision on the August 29, 2022, and acquiesced to the Appellant’s contentions and agreed to allow a substantial number of the investment deductions and IBD claims. As a result, the Respondent partially amended the assessments from a principal tax of Kshs 24,455,960. 00 to Kshs 6,274,294. 00, and declined to allow the other claims.

9. Dissatisfied with the findings of the Respondent, the Appellant lodged the Notice of Appeal on September 29, 2022, and filed its Appeal on October 13, 2022.

The Appeal 10. The Appellant filed its Memorandum of Appeal together with its Statement of Facts on March 13, 2022. The Appeal is founded on the following grounds of appeal:-i.That the Objection decision is null and void because it was not issued within 60 days contrary to Section 51(11) of the Tax Procedures Act, and the effect of which the notice of objection was allowed by the operation of law.ii.That the Respondent erred in law and fact by arriving at the erroneous conclusion that the Kshs 1,382,809. 00 incurred in the construction of grain silos in Eldoret was allegedly overclaimed investment deduction.iii.That the Respondent erred in law and fact by finding that the weighbridge did not form part of the building nor the process of manufacturing.iv.That the Respondent erred by declining to allow Kshs 3,988,830. 00. 00 relating to capital expenditure on consultancy fees, travel and accommodation expenses and landscaping costs.v.That the Respondent erred in law by finding that the Appellant’s payment to Span Engineering was not a contractual fee and consequently applied the wrong WHT rate to the payment.

The Appellant’s Case 11. The Appellant stated that it received a notice of assessment dated June 8, 2021 (vide email on June 9, 2021), and subsequently lodged a notice of objection thereto on July 8, 2021.

12. The Appellant also stated that between August 2021 and January 2022, the Appellant and Respondent held working meetings in which the Appellant provided explanations on various issues arising from the Respondent’s assessment. During the same period, the Respondent continued to request for documentation and evidence from the Appellant. The Appellant stated that it complied with all the requests for documents and evidence and the same was shared with the Respondent.

13. The Appellant further stated that following a meeting on February 14, 2022, the Respondent requested the Appellant for more documents in support of the notice of objection, and pursuant to the request, the Appellant shared all the documents requested with the last documents being shared on January 22, 2022. The Appellant notes that the last request for information from the Respondent was responded to on February 22, 2022. Therefore, the Objection decision should have been issued by April 23, 2022.

14. The Appellant stated that pursuant to the provisions of the law, the Respondent ought to have issued a decision within 60 days of January 22, 2022 being the date of receipt of the information requested from the Appellant. Before the expiry of the initial 60 days, the Respondent exercised its power to request for further information, which then added to days when the information would be provided by the Appellant, which cycle took 8 months or 240 days from the date of the notice of objection. The Respondent then rendered the Objection decision 120 days later, meaning the Respondent took about 360 days to render the Objection decision.

15. The Appellant stated that the effect of the failure to issue an objection decision within the stipulated timeline was that the objection filed by the Appellant was allowed by operation of the law.

16. The Appellant stated that it is an established position of law that in a taxing statute one has to look at merely what is clearly said. There is no room for intendment. There is no equity about a tax, and there is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look at the language used. The Appellant cited the case of Stanbic Bank Kenya Ltd -vs- KRA CA No. 77 of 2008(2009) eKLR, and the case of Equity Group Holdings Ltd -vs- Commissioner of Domestic Taxes.

17. The Appellant therefore submitted that from the foregoing, its notice of objection was allowed by operation of the law and the assessments that the Appellant had objected to, were also vacated by operation of the law, and the Respondent’s Objection decision having been issued beyond the statutory timelines is also invalid and ultra vires.

18. On the ground that the Respondent erred in law and fact by arriving at the erroneous conclusion that the Kshs 1,382,809. 00 incurred in the construction of grain storage silos in Eldoret was allegedly overclaimed investment deduction. The Appellant stated that upon receiving the Respondent’s notice of assessment that claimed that the Appellant had allegedly overclaimed Kshs 1,382,809. 00 as an overclaimed investment deduction, the Appellant supplied the Respondent with two invoices from Seaboard and Urgent Cargo of Kshs 3,059,285. 00. These invoices evidenced capital expenditures incurred by the Appellant that the Respondent did not factor in when assessing the Kshs 1,382,809. 00.

19. The Appellant further stated that when determining the allegedly overclaimed amount of Kshs 1,382,809. 00 the Respondent factored the total cost incurred of Kshs 201,753,418. 00 and applied the investment deduction rate of 150%. The Appellant’s contention is that the allegedly overclaimed amount resulted in from the Respondent’s failure to factor in the invoices for the costs incurred of Kshs 3,059,285. 00 The Appellant contended that if the costs had been factored in, then the Respondent would have found that there would be no alleged overclaimed amount.

20. On the ground that the Respondent erred in law and fact by finding that the weighbridge did not form part of the building or manufacturing, the Appellant stated that the Respondent noted, although the weighbridge is used to weigh raw materials and the outputs at various stages during manufacturing to ensure the correct final weight of the manufactured product is achieved, it did not form part of the building nor the process of manufacturing.

21. The Appellant stated that the weighbridge was built in 2016 and forms an intergal part of the manufacturing process. The weighbridge is a machine for weighing vehicles and their loads, usually with a platform onto which the vehicle is driven as part of the road network inside the Appellant’s premises.

22. The Appellant further stated that the Respondent’s contention that the weighbridge does not form part of the building is erroneous, as a building has been defined as any building structure and where the building is used for the purposes of manufacture it includes the civil works and structures deemed to be part of an industrial building.

23. That the Tribunal in Ace Nairobi One Ltd -vs- Commissioner of Domestic services TAT 15/2021, upheld the Appellant’s assertion to the effect that;“The conjunction ‘and’ in paragraph 24(3) e the repealed second schedule is a coordinating conjunction used to join two or more independent clauses. Therefore, the use of the conjunction ‘and’ in the definition leads to the following distinct definition as to what constitutes a building;i.That a building includes any building structure.ii.That for a building in use for manufacturing, a building includes the civil works and the structures deemed to be part of an industrial building under paragraph 1(1A) of the second schedule.”

24. The Appellant further defined a weighbridge as, “A weighbridge is a devise that is used to measure the weight of unloaded/ loaded trucks and vehicles and is ab le to provide data regarding stock levels. Since the price of the Appellant’s products depends on their weight, it is important to ensure that products are properly weighed before dispatch to the consumer.”

25. In view of the foregoing the Appellant stated that the weighbridge and the data on the weight of the input and output is very integral part of the manufacturing process. The Respondent’s contention is that the weighbridge is not directly used in manufacturing is therefore erroneous. The Appellant contended that the Respondent was misguided in its assertion interpreting manufacturing to be an event that happens in the machine inside the mill rather than a process that starts outside the mill. The Appellant therefore sought the vacation of the assessment and the Objection decision by the Respondent.

26. On the ground whether the Respondent erred in declining to allow the Kshs 3,988,830. 00 relating to capital expenditure on consultancy fees, travel, accommodation expenses and landscaping costs, the Respondent noted that the consultancy fees related to fees paid to the Appellant’s auditor and indicated that there was no way to verify that this consultancy related to this claim. The Appellant in response provided the Respondent with a copy of the consultancy fees invoice issued by the Auditors and settled by the Appellant. The Appellant averred that the invoice was very clear in its narration that the payment is in respect of a consultation on the deductibility of costs in the project.

27. The Appellant also stated that the amounts in respect of staff and accommodation claim, related to the construction of the building, and the capital expenditure claimed were incurred in the months of May and October while the mill was under construction.

28. The Appellant further stated that civil works included works on roads, and parking areas where they relate or contribute to the use of the building, and therefore are subject of investment capital deduction. The Appellant stated that the landscaping was done along all the roads leading to the manufacturing mill that was constructed and therefore should qualify for investment deduction.

29. On whether the Respondent erred in law by finding that the Appellant’s payment to Span Engineering was not a contractual fee, and consequently applied the wrong WHT tax rate to the payment, the Appellant stated that it entered into an agreement with Span Engineering for the construction of the proposed wheat mill, Bran/Fawema warehouse, distribution offices, ablution block, trucks driveway and loading bay at the Appellant’s factory in Eldoret. The Appellant contended that pursuant to the provisions of Section 35(3)(f) and Paragraph 5(f) of the Third Schedule of the ITA, the payment for work done in respect of the works contracted are contractual fees and therefore the applicable WHT tax rate should be 3%.

30. The Appellant therefore submitted that the Respondent’s assertion that the contract between the parties is a consultancy contract and not a construction contract, is tantamount to re-writing the contract between the parties, and ought not to be entertained by the Tribunal.

31. By reason of the foregoing, the Appellant prays that the Respondent’s Objection decision be set aside and its Appeal herein be allowed with costs.

The Respondent’s Case 32. The Respondent has set out its response on the Statement of Facts filed on 9th November 2022, and the Written Submissions filed on 6th December 2022.

33. The Respondent stated that the Appellant’s deductions were disallowed for lack of supporting documents. The Respondent averred that it is the responsibility of the Appellant to provide documents, as provided for under Section 23(1) (a) of the TPA, that a taxpayer is required to keep documents or records in such a manner that the taxpayer’s liability can be readily ascertained.

34. The Respondent contended that under this claim for the investment deduction for the Eldoret silo, the Appellant did not support the claimed investments. The Respondent asserted that from the documentation provided, the Appellant attempted to reconcile these figures by using invoices related to Seaboard and Urgent Cargo, which two invoices did not tally with the amount disallowed.

35. The Respondent contended that the weighbridge is used to weigh raw materials, and the outputs at various stages during manufacturing to ensure the correct final weight of the manufactured products is achieved. However, it is not part of the building and part of the manufacturing process. The Respondent therefore contended that it correctly disallowed the amount and reclassified the deduction under wear and tear allowance.

36. With respect to consultancy fees, the Respondent stated that these fees related to consultancy fees paid to the Appellant’s auditor. The Appellant stated that these fees related to consultancy fees on how to make a project an investment deduction claim. The Respondent contended that the Appellant did not provide supporting documents to support that the consultancy related to this particular claim.

37. The Respondent stated that with regard to staff travel and accommodation claim, the Appellant did not provide documents to show that the travel and accommodation was for construction of the building.

38. With regards to landscaping fees, repairs and maintenance, from the landscaping images furnished by the Appellant, the Respondent stated that there were discrepancies which refer to different areas, which show that the landscaping costs was not in relation to the construction of the new building. The Respondent further stated that the landscaping fees was in relation to a specific building and not general landscaping, thus having images from a different area is a material difference, and the Respondent therefore correctly disallowed the claim.

39. The Respondent asserted that it correctly applied the WHT using 5 % instead of 3 %. It stated that Span Engineers entered into a construction contract with the Appellant for various projects. The contract for consultancy is not a contract for construction. The contract clearly stipulates that the contract was for offering structural Engineering Consultancy services and not the actual construction.

40. The Respondent contended that based on the foregoing, the Appellant has failed to discharge its burden of proof in the circumstances, and prays that its assessments be upheld.

41. The Respondent by reason of the foregoing prays that the Tribunal dismisses the Appellant’s Appeal and upholds its Objection decision.

Issues for Determination 42. The Tribunal having carefully considered the pleadings filed and the submissions made by the parties is of the considered view the Appeal herein distils into two issues for determination;i.Whether the Respondent’s Objection Decision dated 29th August 2022 was validly issued.ii.Whether the Respondent was justified in disallowing the appellant’s investment deduction allowance and confirming the assessment thereon vide its letter of 29th August 2022.

Analysis And Determination i. Whether the Respondent’s Objection decision dated 29th August 2022 was validly issued. 43. The Appeal herein is in regard to the Appellant’s investment deduction allowance claim disallowed by the Respondent. The Appellant had lodged investment deduction claims for the financial years covering 2014 to 2019.

44. The Respondent issued a notice of assessment vide letter dated June 8, 2021 and demanded a sum of Kshs 34,321,919. 00, made up of principal taxes of Kshs 24,455,960. 00, penalties of Kshs 1,222,798. 00 and interest of Kshs 8,643,161. 00.

45. The Appellant being aggrieved by the assessment lodged a notice of objection on July 8, 2021 in respect of the entire assessment.

46. It has been averred and evidence attached confirming that subsequent to the lodging of the notice of objection, the two parties engaged further, and additional supporting documents were submitted. Consequently, the Respondent issued its Objection decision on August 29, 2022, in which it partially amended the Appellant’s assessment from the principal tax of Kshs 24,455,960. 00 to Kshs 6,274,294. 00 but declined to allow the other claims, being;i.Kshs 1,382,809. 00 IDA claim for the year 2017 incurred in construction of grain storage silos in Eldoret,ii.Kshs 17,000,000. 00 relating to an investment deduction claim for a new weighbridge,iii.Kshs 3,988,830. 00 relating to capital expenditure on consultancy fees, travel, and accommodation expenses, and landscaping costs,iv.Kshs 759,450. 00 in respect of WHT on a payment to Span Engineering contract which the Respondent insisted ought to have been withheld at 5% rather than 3%.

47. Dissatisfied with the findings the Appellant appealed the Respondent’s decision.

48. At the outset, the Appellant has challenged the Respondent’s Objection decision as not validly issued.

49. The Appellant received a notice of assessment dated June 8, 2021 vide email on June 9, 2021, and lodged a notice of objection thereto on July 8, 2021.

50. It has been averred by both parties that between August 2021 and January 2022, the Appellant and the Respondent held working meetings in which the Appellant provided explanations on various issues arising from the Respondent’s assessment. During the same period, the Respondent continued to request for documentation and evidence from the Appellant, which the Appellant submitted to the Respondent.

51. The Appellant has averred that it shared the last documents with the Respondent on the February 22, 2022.

52. The Appellant has submitted that pursuant to Section 51 (11) of TPA, the Respondent ought to have issued an objection decision within 60 days of February 22, 2022 being the last date of receipt of the last supporting information requested from the Appellant. Section 51(11) of the TPA provides as follows;“The Commissioner shall make the objection decision within sixty days from the date of receipt of –a.the notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

53. The Appellant averred that the last request for information from the Respondent was responded to on February 22, 2022, therefore the Objection decision should have been issued by April 23, 2022. However the Respondent issued its Objection decision on 29th August 2022, which was more than 120 days beyond the prescribed statutory period.

54. A reading of Section 51(11) of the TPA, indicates that the Respondent was required to issue an Objection decision 60 days from the day it received further requested information from the Appellant. The effect of the failure to issue an objection decision within the stipulated timeline was that the objection filed by the Appellant was allowed by operation of the law.

55. In Morgan Air & Seafreight Logistics Kenya Ltd -vs- Commissioner of Domestic Taxes TAT 286 of 2020, the Tribunal observed as follows with regard to compliance with the timelines for issuance of objection decision;“The TPA at section 51(11) obligates the Respondent, in mandatory terms no less to render an objection decision within 60 days of receipt of an objection notice.” And “ The effect of this is that the Respondent’s various rejection notices to the Appellant’s refund claims cease to have force in law as it has accepted the appellant’s claim.”

56. The Tribunal having carefully reviewed the parties ‘ averments and submissions is satisfied that the Respondent’s Objection decision dated August 29, 2022 was issued beyond the statutory timeline and therefore invalid. Consequently, the Appellant’s notice of objection was allowed by operation of the law in accordance with Section 51(11) of the TPA. The effect of the foregoing is that the Respondent’s decision confirming the assessments cease to have effect, as the Appellant’s notice of objection was deemed to have been allowed.

57. The Tribunal therefore finds and holds that the Respondent’s Objection Decision dated August 29, 2022 is invalid for being issued beyond the statutory timelines, and the Appellant’s objection Notice allowed by operation of the law.

ii. Whether the Respondent was justified in disallowing the Appellant’s investment deduction allowance and confirming the assessments thereon vide its letter of August 29, 2022. 58. The Tribunal having made a finding that the Respondent’s Objection decision is invalid and the Appellant’s notice of objection was allowed by operation of the law, the second issue is rendered moot.

Final Decision 59. The upshot of the foregoing is that the Appeal is merited and the Tribunal accordingly proceeds to make the following orders;a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated August 29, 2021 be and is hereby set aside.c.Each party to bear its own costs.

60. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2023. …………………………..ROBERT M. MUTUMACHAIRPERSON………………………RODNEY O. OLUOCHMEMBER.................................ELISHAH N. NJERUMEMBER…………………………DELILAH K. NGALAMEMBER.................................EDWIN K. CHERUGETMEMBER