[2024] KETAT 1344 (KLR)

Weihai International Economic and Technical Cooperative Ltd v Commissioner for Domestic Taxes (Tax Appeal E789 of 2023) [2024] KETAT 1344 (KLR) (20 September 2024) (Ruling)

Neutral citation: [2024] KETAT 1344 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E789 of 2023

RM Mutuma, Chair, D.K Ngala, M Makau, T Vikiru & Jephthah Njagi, Members

September 20, 2024

Between

Weihai International Economic and Technical Cooperative Ltd

Appellant

and

Commissioner for Domestic Taxes

Respondent

Ruling

Background 1. The Applicant moved this Tribunal vide a Notice of Motion Application dated 3rd July 2024 and filed on 5th July 2024 under a certificate of urgency that is supported by an Affidavit sworn on 3rd July 2024 by HE Kai seeking for the following orders; -a.Spent;b.Declaration Order that the Appellant/Applicant’s Letter of Objection dated 12th May 2023 as buttressed by the further Letter of Objection dated 29th May 2023 in response to the Respondent’s Notice of Tax Assessment dated 18th April 2023 were jointly and severally valid objections within the meaning of Section 51 (3) of the Tax Procedures Act, to be issued;c.The purported Objection Decision dated 27th July 2023 sent via email and received on 28th July 2023 is/was not statutorily compliant as the window for serving a legally valid Objection Decision closes within sixty (60) days of receiving an Objection from the taxpayer and at that time no legally valid Objection Decision had been filed;d.The purported Objection Decision dated 27th July, 2023 did not meet the legal and factual requirements for a valid Objection Decision as it was issued to the Appellant/Applicant via an incomplete and incomprehensible document containing missing pages.e.Following the aforementioned arguments, the Appellant’s Letter of Objection dated 12th May, 2023 as buttressed by the further Letter of Objection dated 29th May 2023, in response to the Respondent’s Notice of Tax Assessment dated 18th April 2023 was and is thus automatically allowed by operation of statute;f.Costs of this Application be in the cause; and,g.Any other orders that this Honourable Tribunal may deem just and expedient to issue.

2. The Application is premised on the following grounds that: -a.The Respondent audited the Appellant/Applicant and raised an Assessment vide a letter dated 18th April 2023, with regard to Corporate Income Tax, Value Added Tax, Withholding Income Tax, and Pay-As-You-Earn for the fiscal years 2017 - 2021 increased to the aggregate amount of Kshs. 2,460,996,251. 00 inclusive of penalties and interest;b.The Appellant/Applicant objected to the entirety of the above-mentioned Assessment vide a letter of Objection dated 10th May 2023, as buttressed by the further letter of Objection dated 29th May 2023;c.The Respondent, considered the Appellant/Applicant’s Objection and communicated a purported Objection Decision dated 27th July 2023 and received by the Appellant/Applicant on 28th July 2023 via email;d.Further to the aversions outlined in the aforementioned paragraphs, the Respondent failed and/or neglected to adduce either a legally or factually valid Objection Decision on the Appellant’s Objection and communicate the same to the Appellant within sixty (60) days as required under Section 51 (II) of the Tax Procedures Act confirming the Assessment out of time as stipulated by Section 51 (II) of the Tax Procedures Act as read together with subsections 8 - 10 of the same Section 51, thus automatically allowing the Appellant/Applicant’s Objection by operation of statute;e.The Appellant/Applicant has raised an arguable point of law on jurisdiction; a preliminary point which the court must satisfy itself on at the earliest moment before the Hearing of the Appeal; which Appeal would be rendered nugatory unless the orders sought in this Notice of Motion Application are granted.f.The point of law raised by the Appellant/Applicant raises a substantive issue with the purported Decision of the Commissioner to confirm their Assessment out of time contrary to Section 51 (II) of the Tax Procedures Act, as read together with subsection 8 - 10 of the same Section 51. The question of time goes to jurisdiction and does not fall on a procedural technicality;g.The Respondent will not suffer any prejudice from the grant of the orders sought herein; and,h.The grant of orders sought in this Notice of Motion Application will allow for the determination of the substantive tax dispute herein based on the provisions of the enabling law.

3. The Respondent upon being served with the instant Application filed a Replying Affidavit sworn 13th August 2024 by Judith Kithinji, an officer of the Respondent and filed on an even date, which response raised the following grounds;a.That the Respondent carried out an audit against the Appellant following a risk profiling exercise which indicated that the Appellant could be under-declaring income;b.That on 15th January 2021 the Respondent issued the Appellant with a pre-assessment notice and thereafter, the Respondent issued the Appellant with its tax audit preliminary findings for the period 2017 to 2021 on 17th January 2023;c.That vide a letter dated 18th January 2023, the Respondent wrote to the Appellant advising them to submit the following documents for review;i.Audited financial statements and the tax computation for the financial years 2020 and 2021;ii.General ledgers, sales and purchases ledgers for the financial years 2020 and 2022;iii.Trial balance for the financial years 2020, 2021 and 2022;iv.Bank statements for the financial years 2020, 2021 and 2022;v.Wear and tear schedule and the asset movement register for the financial period 2020 and 2021; and,vi.Valuation certificates and the sales invoices for the financial years 2020, 2021 and 2022. d.That the Appellant was on 9th March 2023 issued with a pre- assessment notice; and,e.That in the preliminary audit the Respondent highlighted the following tax issues arising from the audit.a.Company Incomei.The Respondent noted that WEIHAI International Economic and Technical Co Limited (WEIHAI) Kenya Branch had won and was executing several local constructions tenders; and,ii.The WEIHAI Kenya branch being a branch of a foreign International company and might have had business relations with the parent company or other related parties, therefore the transfer pricing policy document was called for to ensure that all the transactions with the related parties are disclosed and declared.b.Income Tax Corporation taxi.The valuation certificates provided for the local works were compared to the sales ledgers, audited financial statements and bank statements and it was noted that the company had declared some valuation certificates despite the work having been done;ii.A review of the Appellant’s withholding tax records established that Wietec was receiving interest income from amounts deposited in bank accounts maintained by the Appellant;iii.The Respondent noted that there was unsupported surveyors’ expense of Kshs. 57,658,704. 83 in the Appellant’s books in 2018. Further review of this expense established that this expense could not be supported and it was in fact a valuation certificate;iv.The Respondent noted that the Appellant had incurred substantially high accommodation expenses which were not wholly and exclusively in the generation of income; and,v.The Respondent noted that the Appellant made several additions of plant and machinery in the financial statements and subsequently claimed wear and tear allowance in the tax computations which expense had not been adequately reconciled and the wear and tear allowance were thus disallowed.c.Value Added Taxi.The Appellant’s main business is construction and valuation certificates form the basis of determination of income, a comparison of the Appellant’s valuation certificates and income declared in the VAT returns highlighted that there are some valuation certificates that were not declared.d.PAYEi.An analysis into the Appellant’s general ledgers and the payroll expenses established that there were director expenses of Kshs. 4,800,300. 00 paid in December 2018 that were subjected to PAYE; and,ii.The Respondent noted that some expatriates of Chinese descent were not on the Appellant’s payroll despite there being evidence that the company incurred expenses on work permits, renewal of work permits accommodation services, travel air tickets and security bonds.e.Withholding Income Tax.i.The payments attracting withholding income tax were cross checked against withholding data and it was noted that the Appellant made some payments attracting withholding income tax and they were deducted as required.f.Contractors, Consultants and other professionalsi.A review of the Appellant’s operations revealed that some payments to contractors, subcontractors, consultants and other professionals were not subjected to withholding tax as per the provisions of Section 35 of the Income Tax Act. These amounts were brought to charge.f.That on 18th April 2023, the Respondent issued the Appellant with Assessments for income tax, withholding Income tax, PAYE, and VAT for the period 2017 to 2021 which was based on;i.Foreign income from transactions involving related entities;ii.Undeclared income from undisclosed bank accounts;iii.Undeclared valuation certificates;iv.Undeclared interest income;v.Unsupported surveyor expenses;vi.Unsupported travel and accommodation expense;vii.Unsupported addition of plant and machinery and claim of wear and tear;viii.Payments attracting withholding income tax not deducted;ix.Payee on salaries paid to expatriate employees and direct expenses.g.That the Appellant lodged an Objection vide a letter dated 12th May 2023 which did not conform with the provision of Section 51 (3) of the Tax Procedures Act;h.That the Appellant alleges that the Respondent’s Objection Decision issued on 27th July, 2023 is invalid for having been issued contrary to Section 51 (II) of the Tax Procedures Act. To this regard, the Respondent stated that the Appellant fully validated its Objection on 29th May 2023 hence the Respondent’s timelines started running from this date;i.That the Respondent’s Objection Decision was subsequently issued after 59 days from the date that the Appellant fully validated its Objection.j.That in further response to paragraph 4 of the Affidavit, it stated that the said information is not true as the same is only meant to mislead the Honourable Tribunal to believe that the Respondent’s Objection Decision was issued outside the statutory timelines;k.That prayer 4 of the Appellant’s Application is an attempt to fault the Respondent. The several faults and averments are aimed at misleading this Honourable Tribunal on the true position on the matter and further misrepresenting the Respondent’s actions;l.That to this regard, the Respondent’s decision dated 27th July, 2023 was lodged on the Appellants iTax and sent to the Appellant via the Appellant’s registered email on the same date;m.That further, the Objection Decision issued was complete as evidenced by the Appellant as the same has been annexed without being incomplete. The Appellant does not disclose to this Tribunal how it got hold of the complete Objection Decision.n.That the Appellant has failed to provide evidence to support its assertions;o.That the prayers sought by the Appellant in its Application cannot be granted in the Application stage as it would be tantamount to this Honourable Court making a final order at the interim stage without considering the merit of the dispute before it;p.That mere statements that are not backed by evidence of any sort are not solid grounds that would warrant this Honourable Tribunal to exercise its discretion in favour of the Appellant; and,q.That the Application is an afterthought brought in bad faith, meant to delay the hearing of this Appeal and the Tribunal pronouncing itself on the merits of the case.

4. The Applicant/Appellant responded to the Respondent’s response vide its supplementary Affidavit by HE Kai sworn on 20th August 2024, and filed on 23rd August raising the following grounds;a.That it filed a Notice of Motion Application dated 27th September 2023 for enlargement of time to file its Appeal wherein it attained a draft Memorandum of Appeal in which it disclosed that the purported Objection Decision was a nullity;b.That it is the above Application that made the Respondent belatedly communicate the full Objection Decision to the Applicant via email on 3rd October, 2023 which was 127 days from the Appellant/Applicant’s letter of objection dated 29th May 2023 outside the statutory timelines of 60 days; and,c.That from the Respondent’s email dated 3rd October 2023 it acknowledged that the purported Objection Decision that was sent on 27th July 2023 was incomplete and incomprehensible. Further that it was on that basis that the Respondent was issuing a full Objection Decision, which was issued outside the statutory timeline hence the Applicant’s Objection was deemed allowed by operation of the law.

Parties Submissions 5. During the hearing of this Application on 13th August 2024 parties were granted seven (7) days to file and exchange their respective written submissions. However as at 23rd August 2024 the Applicant was the only party that had filed its written submissions which the Tribunal will now consider.

6. In its Written submissions dated 22nd August 2024 and filed on 23rd August 2024, the Appellant/Applicant raised three issues for determination, being;

i. Whether the Respondent’s Objection Decision was valid. 7. The Appellant/Applicant reiterated the chronology of events and submitted that on 28th July 2023, the Respondent communicated a purported Objection Decision dated 27th July 2023 that was incomplete, inadequate, incomprehensible and containing missing pages a fact that it admitted vide its email dated 3rd October 2023. It submitted further that as much as the Objection Decision dated 27th July 2023 was issued within statutory timeline the same was null and void for having been issued in an incomplete, inadequate and incomprehensible manner containing missing pages. Hence the same did not amount to an Objection as contemplated under Section 51 (10) of the TPA.

8. The Appellant/Applicant relied on the case of Ndirangu T/A Ndirangu Hardware vs. Commissioner of Domestic Taxes (Tax Appeal E070 of 2021(2023) KEHC 19357(KLR) where Majanja J. held as follows;“For the reasons I have set out, i hold that in as much as the Objection Decision was valid as it was made in time, it was inadequate for not providing written reasons for the decision hence it is null and void”

9. The Applicant submitted that since the Respondent issued the full Objection Decision on 3rd October 2023 which was 127 days outside the statutory timelines, the same was invalid, a nullity hence the Applicant’s objection dated 29th May 2023 was deemed allowed by operation of the law.

ii. Whether this Tribunal has jurisdiction to determine the substantive Appeal. 10. The Appellant/Applicant submitted that the Tribunal derives its jurisdiction from Section 12 of the TAT Act and Section 52 of the TPA and that in this case the Tribunal lacks jurisdiction to entertain this Application for the reason that the Respondent’s Full Objection Decision issued on 3rd October 2023 was an invalid one.

iii. Whether the Appellant/Applicant deserves the orders sought in the Notice of Motion Application dated 3rd July 2024. 11. The Appellant/Applicant submitted that having proved that the Respondent’s Objection Decision served on 3rd October 2023 was issued beyond the statutory timelines of sixty (60) days, its Objection issued on 29th May 2023 was deemed allowed.

Analysis and Findings 12. The Tribunal is enjoined to among other orders issue a Declaration Order to the effect that the Appellant/Applicant’s Notice of Objection dated 29th May 2023 was deemed allowed by operation of the law for reasons that the Respondent’s Objection Decision issued on 3rd October 2023 was statutorily time barred.

13. The Tribunal noted that the Appellant/Applicant filed a substantive Appeal before this Tribunal raising the same grounds among others. It is the Tribunal considered view that the orders sought in this Application are substantive in nature, cannot be granted at this stage as doing so would be akin to determining and granting the final orders without considering the merit of the Appeal herein.

14. Consequent to the above the Tribunal finds that the Respond will suffer prejudice if the orders sought in its Application are considered and granted as this action would otherwise determine the substantive Appeal without according the Respondent the right to be heard in a fait trial as guaranteed under Section 50 of the Constitution of Kenya.

Disposition 15. In view of the foregoing, the Tribunal makes the following orders: -a.The Application be and is hereby dismissed.b.Each party to bear its own costs.

16. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF SEPTEMBER 2024ROBERT M. MUTUMA - CHAIRMANDELILAH K. NGALA - MEMBERMUTISO MAKAU - MEMBERDR. TIMOTHY B. VIKIRU - MEMBERJEPHTHAH NJAGI - MEMBER