BAC/GKA JV Company Limited v Commissioner of Domestic Taxes [2024] KETAT 107 (KLR) | Vat Exemption | Esheria

BAC/GKA JV Company Limited v Commissioner of Domestic Taxes [2024] KETAT 107 (KLR)

Full Case Text

BAC/GKA JV Company Limited v Commissioner of Domestic Taxes (Appeal 1410 of 2022) [2024] KETAT 107 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 107 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1410 of 2022

E.N Wafula, Chair, RO Oluoch, Cynthia B. Mayaka, AK Kiprotich, E Ng'ang'a & B Gitari, Members

February 2, 2024

Between

BAC/GKA JV Company Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a resident company incorporated in Kenya under the provisions of the companies Act. The Appellant’s principal place of business is in Nairobi County, and its principal activities are engineering consultancy.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue 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. The Respondent raised additional assessments for Value Added Tax, Income tax and Withholding income tax through the issuance of a pre-assessment notice dated 16th June 2022 of Kshs 249,778,912. 00

4. The Appellant being dissatisfied with the assessment subsequently lodged an objected to the said pre-assessment notice on the iTax platform on 8th July 2022, with a hardcopy of the objection dated 27th June 2022.

5. The Respondent acknowledged receipt of the Appellant’s Objection but invalidated the same.

6. Subsequently the Respondent issued its objection decision vide a letter dated 2nd September 2022 informing the Appellant of the rejection in full of the objection and requested the payment of the total objected principal amount of Kshs 249,778,912. 00.

7. The Appellant being dissatisfied with the objection decision lodged a Notice of Appeal dated 30th September 2022.

The Appeal 8. In its Memorandum of Appeal dated 4th November 2022 and filed on the 23rd November 2022, the Appellant premised its Appeal on the following grounds: -a.That the Appellant's notice of objection letter dated 27th June 2022 in response to the Respondent's notice of tax assessment dated 16th June, 2022 was a valid objection within the meaning of Section 51(3) of the Tax Procedures Act; a fact conceded by the Respondent in its objection decision dated 2nd September, 2022. b.That the Respondent erred in law and in fact by charging Value Added Tax (VAT) on exempt supplies as the project in question was exempt and, by extension, supplies to subcontractors to the project suppliers were also exempt.c.That the Respondent erred in law and in fact in charging the variances between bankings versus income as per audited accounts.d.That the Respondent erred in law and in fact by subjecting to Income tax the 2020 accrued bonus, which had already been subjected to tax and payment made and remitted.e.That the Respondent erred in law and in fact by not appreciating the true nature and status of the Appellant, as well as the true nature and structure of the subject project.f.That the Respondent erred in law and in fact by acting against the public interest and against the express terms of a binding contract entered into by the Government of the Republic of Kenyag.That the demand of additional Value Added Tax, that is the subject of this Appeal, is ultra vires, arbitrary, and erroneous, and have been levied on the Appellant in a manner that contravenes the law.

The Appellant’s Case 9. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated 4th November 2022 and filed on 23rd November 2022 together with the bundle of documents attached thereto.b.The Appellant’s witness statement of Peter Osogo dated 5th July 2023 filed on 10th July 2023 and admitted as evidence under oath on 28th September, 2023

10. It is the Appellant's contention that the Appellant's notice of objection letter dated 27th June 2022 was a valid objection within the meaning of Section 51(3) of the Tax Procedures Act.

11. The Appellant highlighted that the objection decision/confirmation notice dated 2nd September 2022 does not challenge the validity of the Appellant's objection.

12. That as raised by the Appellant in its objection letter dated 27th June 2022, the Kenya Ports Authority (KPA) project was approved for tax exemption for both Corporate tax and VAT as per Legal Notice No. 15 (Special Issue: Kenya Gazette Supplement No. 17-Legislative Supplement No. 10) issued on 26th February 2021, which were attached to the objection letter dated 27th June 2022.

13. That furthermore, the Appellant also submitted the primary document that was the subject of the exemption whose contents reveal that it is a Government-to-Government exchange of Notes Agreement, which defines the term consultant to include both Japan Port Consultants Ltd and BAC/GKA JV Company Limited. Furthermore, the General Manager of Japan Port Consultants Ltd signed the contract on behalf of all the consultants referred to in the Agreement.

14. It is therefore the Appellant’s position that the Respondent came to incorrect conclusions that resulted in erroneous demands for additional taxes because it made no effort to deliberate on this issue further with the Appellant as suggested in the objection letter 27th June 2022; which would have informed the Respondent's approach and guide them to legal and accurate tax decisions.

15. The Appellant in its Objection dated 27th June 2022, stated that the Respondent's adoption of a bankings method was legally and factually erroneous. This much maligned approach does not take into account pertinent considerations, including but not limited to:a.Opening balance (audit adjustments going back to the year 2015) of KSHS. 1,775,900. 00. b.Advance payment recoveries deducted from each invoice of Kes.6,744,348. 00c.Share of bank charges recovered at source of Kshs. 1,236,279. 00d.Credit notes issued to correct invoice over charges of Kes.10,424,858. 00

16. That the computation in the Respondent's demand notice only factored in the bank payments/remittances and withholding tax certificates amounts as the only credits in the receivable cycle.

17. That the method failed to take into account pertinent considerations such as credit notes issued to correct invoice over-charges to the principal debtor and remittance towards refunding the overcharges and other amounts deducted at source by the principal debtor.

18. The Appellant argued that without the benefit of a schedule or computation of the same, which the Respondent did not share with the Appellant, it was impossible for the Appellant to comprehend how the Respondent arrived at the sums in question.

19. On the issue of 2020 accrued bonus which had already been subjected to tax and payments made and remitted, the Appellant stated that the Respondent is statutorily obligated under Section 31(1) of the Tax Procedures Act to utilize the information available to it and presented before it to amend the return of a taxpayer so as to arrive at the correct tax position. In the present case, the Respondent did not even consider doing this; opting instead to discount that clear provision in law in favor of generating the highest possible demand for payment of additional taxes.

20. That the Respondent did not have an accurate picture of what the Appellant's business, financial, and tax affairs, as well as what the nature of the Kenya Ports Authority Project entailed. The Respondent therefore came to incorrect conclusions that resulted in erroneous demands for additional taxes because it made no effort to conduct a follow-up audit meeting with the Appellant after the Appellant objected to its pre-assessment notice; which would have informed the Respondent's approach and guide them to legal and accurate tax decisions.

21. The Appellant stated that the Kenya Ports Authority signed a loan agreement on 9th March, 2015 with the Japan International Cooperation Agency (JICA} to finance the Mombasa Port Development Project Phase II and this loan agreement was based on a Government-to-Government Exchange of Notes of 16th January, 2015 which provided for an exemption of the Japanese consultants and employees from the payment of all fiscal levies, taxes and duties that would otherwise have been taxed under Kenyan tax law.

22. That the Exchange of Notes dated 16th January, 2015 stated the express terms and conditions agreed upon by the Government of the Republic of Kenya and the Government of Japan for the funding of the Mombasa Port Development Project Phase 11. That Article 2(6) of the 2010 Constitution of Kenya confirms that international treaties entered into by Kenya form part of the laws of Kenya.

23. That the Appellant is a joint venture company incorporated in Kenya under the Companies Act, 2015, and whose principal activities are engineering consultancy. The joint venture between BAC Engineering and Architecture limited and Gachagua Kahoro and Associates LLP, forms part of the consortium with Japan Port Consultants Limited.

24. Further the consortium as a single entity was contracted by the Kenya Ports Authority to offer consultancy services such as detailed design, tender assistance, and construction supervision for the Mombasa Port Development Project Phase II.

25. That the Consortium Agreement dated July 2016 stated that the Kenya Ports Authority was effectively the employer and executing agency of the Mombasa Port Development Project Phase II at Kipevu. This position is unequivocally confirmed by the contract of 29th April, 2016 between the Kenya Ports Authority and the Consortium of JPC and BAC/GKA JV Co. Limited. The leading member of the consortium, the Japan Port Consultants, would take the lead in the management of the Consortium's affairs, and provide the Consortium's authorised representative for liaison with the employer, Kenya Ports Authority.

26. That as the Consortium's employer, the Kenya Ports Authority would have been responsible for the withholding and remittance of VAT and income tax for the services rendered. However, since the loan agreement and the Exchange of Notes relied on to fund the project had required an exemption of the Consortium from fiscal taxes, duties and levies, the Kenya Ports Authority complied by requesting the Cabinet Secretary of the Ministry of Transport and Infrastructure for the exemption. Five letters which were sent by the Kenya Ports Authority between 25th July, 2017 and 31st January, 2019 were attached to the bundle of documents.

27. That Vide a Legal Notice No. 15 in the Kenya Gazette Supplement No. 17 dated 26th February, 2021, the Cabinet Secretary for National Treasury and Planning directed that the income which accrued in or was derived from Kenya by Japanese companies, Japanese consultants and Japanese employees involved in the Mombasa Port Area Road Development Project (Phase 1) and the Mombasa Port Area Road Development Project (Phase II) would be exempt from income tax to the extent specified in the Financing Agreements.

28. That since the Mombasa Port Development Project Phase II was exempt from paying VAT, by extension, supplies to the subcontractors were also exempt. The Government-to-Government Exchange of Notes dated 16th January, 2015 defined the term consultant to include both Japan Port Consultants Limited and BAC/GKA JV Company Limited. I wish to reiterate the sentiments in the Appellant's Statement of Facts dated 4th November, 2022 that the Respondent arrived at incorrect conclusions that resulted in erroneous demands for additional taxes because it made no effort to deliberate on the issue further as suggested in the Objection Letter of 27th June, 2022; which would have informed the Respondent's approach and guide them to legal and accurate tax decisions.

29. That the Respondent did not take the time to peruse and understand the contents of the supporting documents submitted by the Appellant because the services of the Appellant and its involvement in the Agreement clearly do not support the Respondent's contention.

30. That a clear perusal of the letter requesting exemption from payment of tax reveals that there was and is no need of justification for the Respondent not to have agreed with the Appellant that it was covered by Legal Notice No.15.

31. In light of the foregoing arguments of law and of fact, it is the Appellant's contention that the demand of additional Value Added Tax that is the subject of this Appeal is ultra vires, arbitrary, excessive, and erroneous; and has been levied on the Appellant in a manner that contravenes the Law.

32. That the Respondent failed to correctly interpret and apply the law, took into consideration things it ought not to have considered, misinterpreted the material facts and relevant documents, and arbitrarily and without justification reversed a decades-old tax treatment that predates the Value Added Tax Act and stretches all the way back to the defunct Sales Tax.

33. That the Respondent's decision, if allowed to stand, shall have the consequence of creating an unfair environment in the Kenya Consultancy sector; and one which runs afoul of the express provisions of the Value Added Tax Act and the clear intentions of Parliament.

34. The Appellant confirmed that with respect to the assessment taxes at issue, the entire taxes are disputed by the Appellant; and there are no undisputed taxes with respect to which the Appellant should pay in the interim.

Appellants Prayers 35. The Appellant prayed that this Honourable Tribunal finds:-a)That the Respondent acted illegally, unreasonably, ultra vires the powers conferred on that Office by the applicable Tax Statutes;b)That the Respondent erred in law by failing to take into account all the information relevant to this Matter and without due regard to either the information and documents adduced by the Appellant, or the information and records of the Appellant held by the Kenya Revenue Authority;c)That the Respondent's decisions were guided by extraneous considerations that the Respondent is not legally entitled to consider; and the assessments flowing therefrom were consequently incurably tainted, thus illegal;d)That the Respondent's decisions were unmerited and unsupported by facts; resulting in a sweeping decision to raise additional assessments, to the benefit of the Respondent, without any justification;e)That the additional assessments herein are ultra vires, arbitrary, excessive, and erroneous; and have been levied on the Appellant in a manner that contravenes the Law; andf)That the Appeal herein is merited and should be allowed with costs to the Appellant as against the Respondent.

The Respondent’s Case 36. The Respondent’s case is premised on its Statement of Facts dated and filed on 21st December 2022 and submissions dated and filed on 13th October 2023.

37. The Respondent stated that it carried out an audit exercise for the period 2016 to 2020 on the Appellant's Corporation tax, VAT, PAYE & Withholding tax declarations.

38. That on VAT the Appellant declared all supplies made in the period under review as local/exempt supplies but the same were not supported by exemption/remission letters.

39. That further, following the review of reconciliations, explanations and documentations provided on the turnover variance raised in the Respondent’s previous notice, the Respondent established undeclared taxable supplies for the period 2016 to 2020.

40. Subsequently VAT was then charged on the undeclared taxable supplies amounting to a Kshs 239,180,663. 00

41. That on income tax the variances between turnovers as per bankings and Income tax returns for the years 2017 and 2016 were not reconciled and thus taken as undeclared income and subjected to income tax amounting to Kshs 5,421,391. 00

42. That on accrued bonuses, the Respondent stated that one of the reconciling items on the variance between salaries per income tax return and PAYE return in 2020 is accrued bonus of Kshs. 18,714,285. 00 which was disallowed because it was not incurred but was a provision. The resulting income tax adjustments and liability was calculated as Kshs 9,235,546. 00 for the year 2017

43. On withholding tax variances between withholding income tax payable as derived from expenses incurred & chargeable to Withholding income tax and paid amounts the Respondent charged Withholding income tax on the variances amounting to Kshs 1,362,702. 00

44. That based on the findings made, the Respondent on 16th June 2022 issued a pre-assessment notice to the Appellant as shown below: -Tax Head Principal Penalty Interest Total

VAT 156883898 7,844,195 74,452,570 239,180,663

INCOMETAX 6,282,685 314,134 2,638,728 9,235,546

WHT 1,073,866 53,693 235,143 1,362,702

TOTAL 164,240,448 8,212,022 77,326,441 249,778,912

45. Responding to the Appellant’s Memorandum of Appeal, The Respondent averred that Section 24 of the Tax Procedures Act, 2015 allows a taxpayer to submit tax returns in the approved form and manner prescribed by the Respondent but the Respondent is not bound by the information provided therein and can assess for additional taxes based on any other available information.

46. On the issue that the Commissioner erred in charging VAT on exempt supplies as the project was exempt, the Respondent averred that from the review of the Appellant's grounds of objection and supporting documentation, it was noted that the supporting documentation provided did not explicitly exempt the Appellant from VAT, but its supplier to the project.

47. That according to the Respondent, the Appellant should have secured its own explicit exemption so as to be assured that VAT on its supply was not due. Therefore, in the absence of this, VAT ought to have been levied on all supplies made by the company.

48. On whether the Respondent erred in charging the variance between the bankings versus income as per audited financials the Respondent asserted that upon examining the grounds and documents adduced by the Appellant, it was noted that the variances between turnovers per bankings and Income tax returns remained unreconciled. Therefore, the tax thereon remains due and payable.

49. On whether the Respondent erred in subjecting tax on the accrued bonus for the year 2020 already taxed and remitted, the Respondent noted that indeed the 2020 bonus was actually paid and the tax thereon remitted in May 2021 and as such the same was expunged from the assessment template. However, the tax being demanded on this item was found to be only due in 2017 where the assessment exceeded the tax credits on iTax.

50. That according to the Respondent, the tax demand of Kshs 9,235,546 in relation to the 2020 accrued bonus remains due and payable. This is because the Appellant failed to address the undeclared Income brought to charge in 2016 & 2017.

51. With regards to Withholding tax, the Appellant concurred with the assessment and communicated its intention to settle the tax liability in full. As such, the Appellant was advised to provide a settlement proposal for the Commissioner’s review.

52. From the foregoing, the Appellant’s notice of objection was fully rejected and taxes amounting to Kshs. 249,778,912. 00 found to be due and owing as communicated vide objection decision dated 2nd September 2022.

53. The Responded averred that during the cross examination of the Appellant’s witness, Mr. Peter Osogo, the witness admitted to the following issues:-i.The consortium is not a registered personality and that the members of a consortium do not lose their individual legal status and underlying legal obligations.ii.The exemption in question was exclusive to JPCiii.The subject contract was between JPC and the Kenya Ports Authority

54. It is the Respondent submission that the demand of additional Value Added Tax that is the subject of this Appeal is not ultra vires, arbitrary, excessive, and erroneous; and have been levied on the Appellant in accordance to the law.

55. The Respondent further averred that the burden of proof is on the Appellant to produce the evidence challenging the Respondent's decision. Section 56(1) of the Tax Procedures Act,2015 provides that;" The burden shall be on the taxpayer to prove that a tax decision is wrong/incorrect.”

56. The Respondent stated that the Appellant was given an opportunity to present its case by way of documentary evidence which it squandered prior to its objection decision.

57. It is the Respondent's position that the objection was legally and procedurally rejected and the assessment legally and procedurally issued and that the Appellant's objection was duly considered and objection decision made as per the law

58. The Respondent maintained that the Appellant has not provided any additional evidence to show that the Respondent's confirmed assessment was wrong and therefore the Appeal herein is devoid of any merits.

59. That contrary to the Appellant's averments, the Respondent's decision and assessment was rendered in accordance with the law.

60. The Respondent reiterated that the Appellant has failed to discharge his burden of proof in proving that the Respondent's tax decision is incorrect as per the provisions of Section 56(1) of the Tax Procedures Act.

61. The Respondent stated that the confirmed assessment issued is proper and the same should be upheld.

62. That the Appellant's Appeal is materially defective as only the Statement of Facts has been filed contrary to the mandatory proceedings of Section 13(2) of the Tax Appeals Tribunal Act.

63. That Section 13(2) of the Tax Appeals Tribunal Act provides that: -“(2)The appellant shall, within fourteen days from the date of filing the notice of appeal, submit enough copies, as may be advised by the Tribunal, of-(a)A memorandum of appeal(b)Statement of Facts; and(c)The tax decision.”

64. The Respondent further stated that it was justified in applying the banking analysis method in determining the correct amount of income earned by the Appellant the Appellant having failed to provide all the information that had been request at the pre-assessment stage.

65. The Respondent submitted on the following issues for determination:a.What services were being offered by the Appellant?b.Whether the services offered by the Appellant were exempt from VAT?c.Whether the Respondent’s Assessment Order and Objection Decision are justified?

a. What services were being offered by the Appellant 66. The Respondent submitted that In Paragraph 19 of the Appellant's witness statement by Peter Osogo and Paragraph 1 of the Statement of Facts of November 4, 2022, it is stated that the Appellant identified itself as an engineering consultancy.

66. That this consultancy endeavor was a collaborative effort between BAC Engineering and Architectural Limited and Gachagua Kahoro & Associates LLP, serving as a joint venture. These services were provided for the Mombasa Port Development Project - Phase II, a project supported by the Japan International Cooperation Agency and the Government of Kenya, and executed by the Kenya Ports Authority.

b. Whether the services offered by the Appellant were exempt from VAT 68. The Respondent submitted that the Appellant had argued that the Respondent was wrong in charging VAT on exempt supplies as the project in question was exempt and by extension, suppliers to subcontractors to the project supplies were also exempt. The Respondent submitted that it is not in doubt that the Appellant was in the business of supply of vatable services to the Mombasa Port Development Project – Phase –II. That supply of services has been defined in Section 2 of the VAT Act as:-“Supply of services” means anything done that is not a supply of goods or money, including –a.The performance of services for another person;b.The grant, assignment, or surrender of any right;c.The making available of any facility or advantage; ord.The toleration”

69. That the Appellant having supplied services to the Mombasa Port Development Project – Phase –II, it was bound to account for VAT and remit the resultant taxes as provided for in Section 5 of the VAT Act which reads as follows:-“Section 5. Charge to tax1. A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on—a.A taxable supply made by a registered person in Kenya;b.The importation of taxable goods; andc.A supply of imported taxable services.2. The rate of tax shall be –a.in the case of a zero-rated supply, zero per cent; or”

70. That the in the Appeal herein, the Appellant has argued that the services it offered were exempt and therefore, the VAT assessment was erroneous. The Respondent submitted that the Appellant’s assertion is erroneous for the following reasons:a.Articles 209 and 210 (1) of the Constitution are unequivocal that legislation is the only legal instrument that may impose or waive taxes as the case maybe.b.With regard to VAT, the VAT Act expressly provides for exemptions of services under the First Schedule and Part II on exempt services.

71. It was the Respondent’s position that the Appellant herein does not bring itself with the four corners of the Constitutional provisions nor the applicable sections/schedule of the VAT Act.

72. That the Appellant erroneously hinged its exempt status exclusively on the Loan Agreement between the Kenya Port’s Authority and the Japan International Corporation Agency (the Loan Agreement) and Exchange of Notes between the Kenya and Japanese Governments

73. The Respondent further submitted that the Appellant’s presumption is not supported in law or fact and that firstly, the contractual terms, like the Loan Agreement, cannot supersede legislative provisions and must comply with the principle of legality. It further clarified that tax liabilities, rooted in statutory regulations, cannot be nullified through contractual agreements. Notably, the Loan Agreement does not stipulate tax exemption for the successful bidders engaged in the Kenya Ports Authority project. Consequently, the source document for the project, the Loan Agreement, does not contain any provisions for exempting taxes for the nationals participating in the contract

74. The Respondent pointed the Tribunal to the case of Trans Mara Sugar Co Ltd & another v Ben Kangwaya Ayiemba & another [2020] eKLR at paragraphs 57 to 66.

75. That secondly the text emphasizes that the doctrine of privity of contracts restricts third parties from claiming benefits within a contract, citing the case of Helga Christa Ohany v ICEALION General Insurance Company Ltd.

76. It pointed out that the Appellant, as a third party, cannot enforce rights or benefits arising from an agreement between the Kenyan and Japanese Governments (Exchange notes). Moreover, since the Exchange notes involve international actors, the tribunal lacks jurisdiction, as supported by the precedent of Republic v Public Procurement Administrative Review Board & 2 others Exparte Kenya Power & Lighting Company. The content of the Exchange Notes, specifically paragraph 4, is straightforward, leaving no room for interpretation. Paragraph 8 of the Exchange Note grants exemptions from income and VAT to JICA, Japanese companies, and employees but does not extend these exemptions to the Appellant or other national entities. Ultimately, the terms of a contract cannot override statutory provisions, including those outlined in the VAT Act.

77. The Respondent averred that thirdly as per Section 8(1) of the Kenya Port's Authority Act, the primary function of the Kenya Port's Authority Board (KPA) is to establish a coordinated system of Ports and related facilities. Consequently, the series of letters issued by KPA hold no legal weight in determining the applicable tax rate. It is reiterated that tax waivers are subject to constitutional provisions outlined in Articles 209 and 210, which the KPA's letters fail to meet. Moreover, it is emphasized that public bodies, such as KPA, are confined to the powers granted to them by statute. Thus, KPA lacks both the authority and the technical expertise to provide advice or make decisions concerning tax-related matters that would bind the executive on tax liability or waivers

78. The Respondent reiterated that, the services issued by the Appellant are not exempt supplies as provided for in the First Schedule to the VAT Act and in the absence of an exemption certificate, the Respondent was justified in demanding for the resultant VAT.

79. The Respondent further submitted that, the exemptions per Legal Notice No. 15 of 2021 was anchored on the Income Tax Act under Section 13(2) and therefore does not extend to any liability premised on the VAT Act.

80. It is therefore the Respondent’s submission that the services offered by the Appellants were in fact not exempt from VAT in summary for reasons that: -a.The services offered by the Appellant are taxable services under Section 5 of the VAT Act.b.Legal Notice No. 15 of 2021 only exempted Japanese companies, Japanese consultants and Japanese employees involved in the project under the Financial Agreement and not Kenyan Companies or consultancies as is the case of the Appellant.c.The Appellant did not obtain and has not presented an exemption certificate issued to it from Treasury exempting it from tax.d.Legal Notice No. 15 of 2021 was a country to country exemption, between the Governments of Kenya and Japan and the Appellant being neither, the exemption provided does not suffice. See paragraph 137(e) of the court’s judgement in Matindi v CS, National Treasury & Planning & 4 others (infra).

81. The Respondent submitted that the Legal Notice No. 15 of 2021 has since been declared unconstitutional by the High Court sitting in Mombasa on 17th February 2023 by Justice D.K. Magare in Matindi v CS, National Treasury & Planning & 4 others (Constitutional Petition E280 of 2021) [2023] KEHC 1144 (KLR) (Constitutional and Human Rights) (17 February 2023) (Judgment).

82. The Respondent pointed the Tribunal to paragraph 137 of the case of Matindi v CS, National Treasury & Planning & 4 others.

83. The Respondent averred that the letters from KPA are addressed to the Ministry of Transport and Infrastructure. The Respondent requests the Tribunal to take judicial notice that the officers at Ministry of Transport and Infrastructure are neither competent nor sufficiently informed of matters of tax and exemption to be reliable sources.

84. That in addition, while Section 13 (2) of the Income Act delegates the power to allow for waiver to the Cabinet Secretary for National Treasury and Planning, the principle in constitutional and administrative law encapsulated in the maxim, delegata potestas non potest delegari (delegated power cannot be delegated), extinguishes any administrative actions by the Ministry of Transport and Infrastructure to bind the government or the Respondent as concerns the Appellant’s tax liability.

85. The Respondent cited the following cases in support of its argument;a.Anyang Nyongo & 10 Others v Attorney General & Others [2008] 3 KLR (EP) 397b.Kasozi Robinson v. Attorney General, Uganda Constitutional Court, Const, Pet. No. 37 of 2010.

86. The Respondent further questioned the Appellant's diligence in determining whether its participation in the KPA tender was subject to taxes or exempt is called into question.

87. The Respondent submitted that the Tax Procedures Act under Sections 63 and 65 provides an avenue for the Appellant to seek clarification on a taxpayer’s tax liability. Section 65 specifically provides the following on binding private rulings”-“(1)A taxpayer may apply to the Commissioner for a private ruling, which shall set out the Commissioner's interpretation of a tax law in relation to a transaction entered into, or proposed to be entered into, by the taxpayer.”

88. The Respondent submitted that were the Appellant desirous of ascertaining its correct tax liability and chargeability within the present set of facts, the Appellant would have sought clarification from the Respondent under Section 65 of the Tax Procedures Act. Yet, the Appellant completely failed to properly move the Respondent who is sole tax administrator in the country.

89. The Respondent submitted that the services offered by the Appellant were vatable and subject to income tax. As such the Respondent was proper and justified in raising a VAT and income assessment based on taxes that were found to be due and owing and prayed that this Honourable Tribunal finds as such.

c. Whether the Respondent’s Assessment Order and Objection Decision are justified? 90. That whereas Section 24 of the Tax Procedures Act 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

91. The Respondent submitted that in the present Appeal, an audit of the Appellant's operations revealed that not only did the Appellant categorize its services as exempt, but it also failed to account for and clarify the identified inconsistencies. Furthermore, the Respondent pointed out that the taxes demanded were calculated with precision and, therefore, asserted the legitimacy of the Assessment Order based on these audit findings.

92. The Respondent cited the case of Anne Wanjiku Kahwai vs. Kenya Revenue Authority & another (2019) eKLR to support its stance, highlighting the authority of the Respondent in conducting investigations and using the obtained information for the fulfillment of statutory obligations. This includes the ability to inform taxpayers of investigation outcomes that may impact them, such as identifying unpaid or underpaid taxes and requesting the provision of records and information concerning tax liability or any other matters related to tax laws.

93. The Respondent asserted that in issuing the disputed assessment order, it relied on available information and exercised its best judgment, citing Section 31(1) of the Tax Procedures Act. That this Section empowers the Commissioner to amend an assessment to ensure the accuracy of a taxpayer's original assessment for a reporting period.

94. The assertion by the Respondent on the definition of what constitutes the Commissioner's "best judgment" was extensively addressed in the case of The Commissioner for Her Majesty's Revenue and Customs TC/2017/02292 Saima Khalid Appellant vs. The Commissioners For Her Majesty’s Respondents Revenue & Customs, where the Tribunal outlined the requirements for such a determination. It was clarified that the Commissioner must make a value judgment based on the material available, without the obligation to perform exhaustive investigations that should ideally be conducted by the taxpayer. The focus is on the fair consideration of all provided material to reach a reasonable and non-arbitrary decision regarding the amount of tax owed, as long as there is some material on which the Commissioner can reasonably base their actions.

95. To support its arguments the Respondent submitted as follows;a.On VAT, the assessment was raised on the basis that the Appellant had declared all its supplies, made in the period under review as local/exempt supplies but were not supported by exemption/remission letters.b.On Income Tax- the Respondent raised an objection based on the variance between turnovers as per the bankings and income tax returns that the Appellant failed to reconcile despite being given an opportunity to do so.c.On Withholding Tax- the assessment raised was based on variances noted between Withholding income tax payable as derived from expenses incurred and chargeable to Withholding income tax and amount paid which the Appellant failed to reconcile and justify.

96. It is the Respondent’s submission that the income tax assessment calculations took into account disallowed accrued bonus as it was a provision and not incurred which under the Income Tax Act is considered as an income

97. The Respondent having issued its assessment, it was upon the Appellant to provide evidence that demonstrated that the assessment was excessive, erroneous or unlawful as provided for in Section 30 of the Tax Appeals Tribunal Act, however the Appellant failed to do so

98. Section 30 of the Tax Appeals Tribunal Act on burden of proof provides that “In a proceeding before the Tribunal, the appellant has the burden of proving— (a) where an appeal relates to an assessment, that the assessment is excessive; or (b) in any other case, that the tax decision should not have been made or should have been made differently”

99. That in addition, the Appellant is required under Section 56 to discharge a burden of proving that the Commissioner’s assessment is based on erroneous facts, and or not based on the law, a burden which the Appellant herein has failed to discharge.

100. That Section 56(1) of the Tax Procedures Act provides that: -“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.

101. In supporting its case it cited the cases in Mulherin vs Respondent of Taxation [2013] FCAFC 115 as cited in Primarosa Flowers Limited v Commissioner of Domestic Taxes [2019] eKLR, Pearson Vs. Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 referred to by Justice D.S. Majanja in PZ Cussons East Africa Limited Vs. Kenya Revenue Authority (2013) eKLR.

102. That in the instant case, the Appellant has failed to prove that the Respondent’s tax decision was in any way inconsistent, based on extraneous facts, excessive or incorrect.

103. That in addition, the Appellant though disputing the Respondent’s application of the banking method, it has failed to provide evidence that sufficiently explains the variances noted with between turnovers as per banking’s and income tax returns which remained unreconciled at the objection stage.

104. The Respondent submitted that it is allowed to embrace a range of methods and techniques for determining and verifying a taxpayer’s income. These methods include direct method indirect method and banking analysis method. In some instances, as in the case at hand, detecting and deterring non-compliance requires more than examination of the taxpayer’s books and records and necessitates an analysis of taxpayer’s financial affairs to correctly assess tax liabilities.

105. That the courts have in the past held that the banking analysis test (also known as bank deposit analysis) is an acceptable method of arriving at an assessment. This was held to be so in the case of Bachmann v. The Queen, 2015 TCC 51 where the court stated that: -“This Court has recognized that in an appropriate case a bank deposit analysis is an acceptable method to compute income.”

106. The Honorable Tribunal in Digital Box Limited –vs- Commissioner of Domestic Taxes No. 115 of 2017 in determining whether the Commissioner was proper in applying the banking analysis held that:-“From the foregoing, it’s the Respondent’s submissions that it was proper in applying the banking analysis and in the absence of justified evidence from the Appellant on the contrary, the Respondent prays that the Honourable Tribunal finds that the Respondent was proper in applying the banking analysis”.

107. That the Appellant having failed to lodge a valid objection pursuant to the provisions of Section 51(3) of the Tax Procedures Act and prove that the assessment was erroneous, the Respondent stated that it was proper in upholding its assessment order remains valid and prayed to this Honorable Tribunal to uphold the same

108. The Respondent reiterated that the Appellant has failed to discharge his burden of proof in proving that the Respondent’s tax decision is incorrect as per the provisions of Section 56(1) of the Tax Procedures Act.

109. The Respondent relied on the case of TAT No. 331 of 2018: Geoffrey Mwanjoria Mwangi versus Commissioner of Domestic Taxes, where the Honourable TAT held as follows;“That notwithstanding, the provisions above (section 51(3)) are so phrased in order to assist the taxpayers successfully conform to the burden of proof placed upon them to prove that any assessment raised by the Commissioner are incorrect and excessive. Once the Commissioner receives the objection along with the documents in support, he is expected to consider such objection and decide either to allow the objection in whole or in part or disallow it. In the absence of the documents the Commissioner has no choice but to confirm the assessment.”

110. It was the Respondent’s submission to this Honorable Tribunal that, without the Appellant’s provision of documents it submitted tax returns in the approved form and manner prescribed by the Respondent, the objection decision issued on 2nd September 2022 is not only valid but also justified

The Respondent’s Prayers 111. The Respondent prayed that the Honorable Tribunal finds as follows;a.That the Assessment Order issued on 27th January 2022 and pre- assessment notice issued on 16th June 2022 demanding for taxes amounting to Kshs. 249,778,912. 00 was proper and prayed that the same be upheld.b.That the objection decision dated 2nd September 2022 demanding for taxes amounting to Kshs. 249,778,912. 00 being VAT, Income tax and WHIT are valid and prayed that the same be upheldc.That this Appeal be dismissed with costs to the Respondent as the same is without merit

Issues for Determination 112. Gleaning through the Memorandum of Appeal, the parties’ Statement of Facts and the parties’ submissions, the Tribunal puts forth the following issues for determination: -a.Whether the services offered by the Appellant were exempt from VATb.Whether the Respondent’s Objection Decision dated 2nd September 2022 was proper

Analysis and Findings 113. The Tribunal wishes to analyse the issues identified as herein-under.

a. Whether the services offered by the Appellant were exempt from VAT 114. It is evident that the Appellant heavily relied on Legal Notice No. 15 of 2021. This is apparent from a careful examination of the paragraphs, which suggests that the Appellant's position is centered around the belief that it was covered by Legal Notice No.15 of 2021.

115. It was the Respondent’s submission that the services offered by the Appellants were in fact not exempt from VAT for reasons that: -i.The services offered by the Appellant are taxable services under Section 5 of the VAT Act.ii.Legal Notice No. 15 of 2021 only exempted Japanese companies, Japanese consultants and Japanese employees involved in the project under the Financial Agreement and not Kenyan Companies or consultancies as is the case of the Appellant.iii.The Appellant did not obtain and has not presented its exemption certificate issued to it from Treasury exempting it from tax.iv.Legal Notice No. 15 of 2021 was a Country-to-Country exemption, between Kenya and the Government of Japan and the Appellant being neither, the exemption provided does not suffice. See paragraph 137(e) of the court’s judgement in Matindi v CS, National Treasury & Planning & 4 others (infra).

116. The primary issue in contention revolves around the Appellant's reliance on Legal Notice No. 15 of 2021 to assert that their services were exempt from Value Added Tax (VAT) in Kenya.

117. The Respondent challenged this assertion by arguing that the Appellant's services were not, in fact, exempt from VAT for several reasons, including the nature of the services, the scope of the exemption provided by Legal Notice No. 15, the absence of an exemption certificate, and the specific terms of the exemption agreement between the Government of Kenya and Japan.

118. A review of the documents submitted before this Tribunal reveals several letters from the Kenya Ports Authority addressed to the Ministry of Infrastructure. Regrettably, there is a notable absence of any response from the Ministry in these documents. This lack of response consequently leads to a significant gap in the information necessary for a comprehensive understanding of the issues at hand. The absence of any communication or feedback from the Ministry of Infrastructure raises questions regarding their stance or position on the matters discussed in these letters.

119. The Respondent correctly pointed out that the services offered by the Appellant are, in fact, taxable services under Section 5 of the VAT Act. This statutory provision establishes the tax liability for certain services, and the Appellant's services fall within this category.

120. The contention that Legal Notice No. 15 of 2021 exempts only Japanese entities and personnel involved in the specific project under the Financial Agreement between Kenya and Japan is valid. The scope of this exemption, as indicated in the Legal Notice, is clearly limited to Japanese entities and employees, making it inapplicable to the Appellant, a Kenyan company.

121. Furthermore, the Appellant's failure to obtain and present an exemption certificate issued by the National Treasury, as required for VAT exemption, strengthens the Respondent's case. The absence of this essential document casts doubts on the Appellant's claim of exemption.

122. Given that the Appellant is neither a Japanese entity nor a signatory to the Agreement, it cannot avail itself of the exemption provided.

123. The position of Legal Notice No. 15 of 2021 was definitively determined in the case of Matindi v CS, National Treasury & Planning & 4 others (Constitutional Petition E280 of 2021) [2023] KEHC 1144 (KLR), in which the High Court in Mombasa, through Justice D.K. Magare, delivered a judgment on 17th February 2023. This landmark judgment declared Legal Notice No. 15 of 2021 unconstitutional, effectively nullifying its legal effect. Therefore, the status of Legal Notice No. 15 as an enforceable legal provision has been invalidated.

124. In the Matindi case, the court successfully delved into the provisions of Article 210 of the Kenyan Constitution, and explicitly stated as follows: -“What I gather from Article 210 of the Constitution is that there can be no blanket exemption. This means that every waiver must:a.Be authorized by legislation.b.Each waiver must be reported to the Auditor General.c.Each waiver must be accompanied by a reason for such a waiver, andd.There should be a public record of the waiver and amount waived."

125. Article 210 of the Constitution provides as follows:-“(1)No tax or licensing fee may be imposed, waived or varied except as provided by legislation.2)If legislation permits waiver the waiver of any tax or license fee: -a.A public record of each waiver shall be maintained together with the reason for the waiver.b.Each waiver, and the reason for it, shall be reported to the Auditor General.3. No law may exclude or authorize the exclusion of a State Office from payment of tax by reason of.a.The office held by that state officer, or,b.The nature of work of the state officer.”

126. The Tribunal finds that the Appellant, being a Kenyan company, was not covered under the impugned Legal Notice. The Legal Notice in question, No. 15 of 2021, explicitly exempted Japanese companies, Japanese consultants, and Japanese employees involved in a specific project under the Financial Agreement. Given the Appellant's status as a Kenyan entity, the exemption provided in the Legal Notice did not apply to its services.

b) Whether the Respondent’s Objection Decision was proper 127. Section 30 of the Tax Appeals Tribunal Act on burden of proof provides that:-“In a proceeding before the Tribunal, the appellant has the burden of proving--(a)where an appeal relates to an assessment, that the assessment is excessive; or(b)in any other case, that the tax decision should not have been made or should have been made differently

128. Section 56(1) of the TPA further provides with regard to burden of proof as follows:-“In any proceedings under this part the burden shall be on the taxpayer to prove that the tax decision is incorrect”

129. To satisfy the above duty, the taxpayer ought to submit all the relevant evidentiary material in its possession. The Tribunal made similar observation in Tax Appeal Number 25 of 2021 Mugo Macharia Kigo v Commissioner of Investigations & Enforcement wherein it stated that:-“a taxpayer with an assessment arrived at based on an indirect method where information is secured from alternative source is enjoined to provide the necessary documents and information that suggest that such an assessment is erroneous, misplaced and not justified in the circumstances.”

130. The Tribunal has also dealt with a similar matter in Tax Appeal Number 353 of 2018 Rumish Limited vs Commissioner of Domestic Taxes, 23rd July 2021 where it stated at Paragraph 51, as follows:-“Additionally, Section 30 of the Tax Appeals Tribunal Act places the burden of proof on the taxpayer to submit all the necessary documentation to support its case...”

131. In this case, it is clear that the Appellant had a duty to provide all the relevant evidentiary material in its possession to support its claim for exemption.

132. The Appellant was duty-bound to provide an exemption certificate, along with any other relevant documents required to substantiate its claim for exemption from Value Added Tax (VAT). Unfortunately, the Appellant did not fulfill this obligation. Moreover, its reliance on Legal Notice No. 15 of 2021 as the basis for its exemption is deemed vague and unsustainable. The Legal Notice, as demonstrated, only pertained to Japanese entities and personnel involved in a specific project under a financial agreement, which did not encompass the Appellant's status as a Kenyan company. Therefore, the reliance on Legal Notice No. 15 of 2021, without the requisite supporting documentation, cannot be considered a valid basis for the Appellant's exemption claim

133. On the use by the Respondent of the bank analysis test the Respondent in its submissions confirmed that the bank analysis method is based on the credible assumption that money banked in a taxpayers account might be income and the same is subject to being eventually spent. The legal basis for use of the same is well premised within Sections 29 and 31 of the Tax Procedure Act 2015 wherein in the said Sections, the Respondent herein is allowed legally to use the banking method.

134. The Tribunal notes that the Appellant did not exhaustively provide documentary evidence to explain the variances in its bankings and the illegality as assessed by the Respondent.

135. Based on the aforementioned provisions of the law and the case laws, the Tribunal finds the Appellant has not discharged its burden of proof to show that the Respondent erred in arriving at the assessment and subsequently issuing the objection decision dated 2rd September 2022.

136. The Tribunal therefore finds that the Respondent’s objection decision was proper.

Final Decision 137. The upshot to the foregoing analysis is that the Appeal is not merited and the Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby dismissedb.The Respondent’s Objection decision dated 2nd September 2022 be and is hereby upheld.c.Each party to bear its own costs.

138. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY 2024. ERIC NYONGESA WAFULACHAIRMANDR RODNEY O. OLOUCHMEMBERCYNTHIA B. MAYAKAMEMBERABRAHAM K. KIPROTICHMEMBEREUNICE NG’ANG’AMEMBERBERNADETTE GITARIMEMBER