H.P. Gauff Ingenieure GMBH & Co KG v Commissioner of Domestic Taxes [2024] KETAT 106 (KLR)

H.P. Gauff Ingenieure GMBH & Co KG v Commissioner of Domestic Taxes (Appeal 442 of 2020) [2024] KETAT 106 (KLR) (Commercial and Tax) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 106 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 442 of 2020

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

February 2, 2024

Between

H.P. Gauff Ingenieure GMBH & Co KG

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a German multinational with over 25 representations worldwide that helps to carry out projects in the disciplines of water and sewerage, transport, roads and rail, mobility and IT solutions, environment and energy, urban planning and architecture.

2. The Company was registered in Kenya on August 1986 under a Certificate of Compliance as a branch of H.P Gauff Ingenieure GMBH & CO (H.P Gauff-JBG) and the principal activity of the Kenya branch is the provision of consultancy and engineering services mainly in the infrastructure sector.

3. The Kenyan branch is headed by Director, East and Southern Africa and is responsible for overseeing projects in Kenya, Ethiopia, Tanzania, Uganda and Zambia. Some of their main projects included:-a.Kisumu-Kakamega road(A1)b.Merille-Marsabit roadc.MRTS Jogoo corridord.Nakuru-Loruk-Marich road

4. The Respondent is the principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and 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.

5. The genesis of this dispute arose when the Respondent issued a notice dated 12th February 2019 of an intention to audit the Appellant’s tax declarations covering the period 2012 to 2019.

6. Thereafter the parties engaged on the audit findings via correspondences.

7. The Appellant respondend in writing to the audit findings on 14th February 2020.

8. The Respondent considered the presentations by the Appellant and issued a notice of assessment dated 25th March 2020 and demanded an additional tax amounting to KShs 1,955,787,204. 00 which comprised of KShs 1,360,591,271. 00 in principal tax and a total penalty and interest of KShs 595,195,932.

9. The taxes assessed included Corporation tax, Pay As You Earn Tax (“PAYE”) and Value-Added Tax (“VAT”).

10. The Appellant issued a notice of objection on 28th April 2020 on the entire assessment as per Section 51(3) of Tax Procedure Act 2015,

11. The Respondent reviewed the objection based on the facts and supporting documentation provided and issued an Objection decision dated 22nd July 2020.

12. The Appellant being dissatisfied with the Respondent’s Objection decision filed the Appeal dated 21st August 2020.

The Appeal 13. The Appeal is premised on the following grounds as stated in Appellant’s Memorandum of Appeal dated 26th August 2020. a.That the Respondent failed to take into account all information and explanations (including documents) provided by the Appellant before arriving at the objection decision;b.That the Respondent failed to consider the decision in the judgment of TAT Case No. 165 of 2017 on the application of tax exemptions granted to Official Aid Funded Projects (OAFP).c.That the Respondent wrongfully assessed income tax on a project whose income arose from outside Kenya contrary to Section 4 of the Income Tax Act.d.That the Respondent wrongfully charged Value Added Tax (VAT) on the Merille - Marsabit Road project income contrary to the decision in the judgment of TAT Case No. 165 of 2017 relating to the same project.e.That the Respondent’s demand of Kshs 1,955,787,204. 00 is excessive, punitive and beyond the ability of the Appellant to pay contrary to generally accepted cannons of taxation

The Appellant’s Case 14. The Appellant case is laid out in its Statement of Facts dated 25th August 2020 and filled on 28th September 2020 and the written submissions dated 8th August 2023 filed on 11th August 2023 as follows;

15. That the Respondent conducted an in-depth audit on the Appellant’s tax declarations covering the period 2012 to 2019 years of income and issued its findings and assessments through letters received on 16th January 2020 and 30th day of March 2020 (but dated 25th March 2020) respectively. In the assessment letter dated 25th March 2020, the Respondent demanded an additional tax amounting to KShs 1,955,787,203. 00 which comprised of KShs 1,360,591,271. 00 in principal tax and a total penalty and interest of KShs 595,195,932. 00 The taxes assessed included Corporation tax, Pay As You Earn tax (“PAYE”) and Value-Added Tax (“VAT).

16. That the Appellant objected to the entire additional assessment amounting to KShs 1,360,591,271. 00 in principal tax and a total penalty and interest of KShs 595,195,932. 00 as per Section 51 (3) of the Tax Procedures Act, 2015. The Appellant’s notice of objection dated 28 April 2020 was received by the Respondent on 30th April 2020.

17. That the Respondent issued and delivered its objection decision on 28th day of July 2020 (but dated 22nd July 2020) in response to the Appellant’s notice of objection. In the Objection decision, the Respondent retained the original assessment dated 25 March 2020 and demanded additional taxes amounting to Kshs 1,955,787,203. 00 which comprised of Kshs 1,360,591,271. 00 in principal tax and a total penalty and interest of Kshs 595,195,932. 00.

18. That the Appellant being dissatisfied with the decision of the Respondent filed a Notice of Appeal to the Tribunal against the objection decision issued by the Respondent.

19. That in the Appeal the Appellant has given grounds of Appeal for the Corporation tax, VAT and PAYE as included in the Respondent’s assessment.

20. That on Corporation tax the Appellant stated that there were under declation of project revenue in the following projects;

Official Aid Funded Project (OAFP) – Merille Marsabit Supervision 21. That the Respondent erroneously concluded in its objection decision that the Appellant did not meet the threshold set out under Section 13 of the Income Tax Act and therefore did not qualify for exemption of the income from this project. That the reliance is placed on TAT Case, No. 165 0f 2017 that validated any tax exemption unless where it is proved that the taxpayer failed to discharge any of its duties towards processing of the exemption.

22. The Appellant averred that the Respondent requested for Financing agreement which guaranteed the tax exemption and which is a confidential Government document not shared with the Appellant. Nevertheless, the principal of legitimate expectation for tax exemption is already set out under the Instructions to Tenderers as ruled under TAT Case No. 165 of 2017.

Other Projects’ revenue under declared in Kenya 23. That the Respondent failed to consider the information and explanations shared in the objection notice, namely: Shared services agreement, Transfer pricing policy and additional invoices and supporting documents.

24. That in addition, on Income tax not declared in Kenya, the Appellant stated that the Respondent failed to consider the information and explanations shared in the Shared services agreement and Transfer pricing policy. Furthermore, the Respondent declared that all income that arose from outside Kenya had been derived in Kenya hence taxable under the ITA, hence not taxable under Section 4 of the ITA.

25. That the Appellant disagrees with this treatment and application of the ITA because of two reasons:a.On taxation of worldwide income the Appellant agrees with the interpretation of Section 3 of the ITA that provides for taxation of ‘worldwide income’ accrued by Kenyan tax residents, it seeks to remind the Respondent that the ‘worldwide income’ (income from Yei Water Supply Project) under dispute was earned/ accrued by the Appellant and not its personnel. It is therefore improper to deem this income as taxable in Kenya by the mere fact that the personnel involved were Kenyan residents. These personnel did not earn the income from this project hence cannot be deemed to have accrued or derived it in Kenya (on behalf of the Kenyan branch office).b.On the Nexus of the income the Appellant stated that the taxation of the income of a non-resident (permanent establishment- PE) is guided by Section 4 of the ITA which only applies tax on income earned from outside Kenya where it is earned tax residents only. The non-resident entities (PEs) of foreign enterprises operating in Kenya are only taxed on income accrued or derived from Kenya.

26. That similarly, on the issue of Regional Office services the Respondent failed to consider the information and explanations shared in the Shared services agreement and Transfer pricing policy. In addition, the Respondent disagreed with classification of these services as ‘low value adding intra group’ services. The Appellant presented a copy of the Shared service agreement which confirms the supportive nature of the Regional Office services and that the services offered like administrative support are not the core services of the Appellant as pointed out in the objection decision. Therefore, the provisions under the 2015 OECD BEPS Action 8 to 10 Report on ‘low value adding intra group’ services and the standardized mark-up recommended therein need to be considered.

27. That on Value Added Tax, the Appellant stated that the dispute was on VAT charged on project revenue not declared in Kenya and VAT Exemption certificates not availed.

28. That as explained in the objection notice the Yei Water Supply project was a project where services were provided to a ‘recipient outside Kenya for use, consumption or enjoyment outside Kenya’ (as per VAT Regulations 2017 since the project location was in South Sudan).

29. That the Respondent also requested for exemption letters contrary to the ruling in the TAT Case No. 165 of 2017. The matter under contention was therefore whether the absence of a VAT exemption letter should render the supplies in question standard rated. In summary, the ruling set out two main conditions that should stay any enforcement measures by the Respondent in instances where an exemption letter is not available. The conditions are:a.It must be proven that the taxpayer discharged all his duties in the administrative process of obtaining an exemption letter; andb.That Respondent is unable to present any legal reason for rejecting a taxpayer’s application for the tax exemption.

30. That the ruling cited the principle of legitimate expectation as follows:“legal certainty births legitimate expectation and to levy tax based on administrative procedure not expressly provided for and when it’s quite clear that the Appellant relied on express provisions would amount to infringing on its legitimate expectation created by the wording of the Law a legitimate expectation may arise either from an express promise given on behalf of a public authority or from the existence of a regular practice which the claimant can reasonably expect to continue ”

31. That on invoices without ETR the Appellant stated that it had already shared the requested information. That according to the objection decision, the Respondent stated that some of the documents presented were not clear. However, the Respondent did not present a list of the specific documents which it required more legible documents.

32. The Appellant averred that on VAT on overtime supervision services, the Respondent failed to consider the decision in the judgement of the TAT Case No. 165 of 2017 relating to the same transaction where it was ruled as follows:-“With regard to the contract of Merille-Marsabit, the Tribunal has reviewed the contract dated June 2012 and agrees with the Appellant’s sentiments that the contract is between the Ministry of Transport and the Appellant’s head office, which is an autonomous foreign company. Further, the Appellant has demonstrated that PAYE was paid for the staff engaged under this contract.With the evidence on record, and without prejudice to the foregoing, we note that the said project as can be adduced from Clause 2 of the contract, is funded by the European Union and consequently falling within the ambit of finance Official Aid Funded Projects, and VAT is therefore zero-rated”

33. That as regards Pay As You Earn on low pay for expatriate employees not in the payroll, the Appellant stated that the Respondent failed to consider the following information and explanations that it presented in the objection notice:a.The benchmarks applied in the workings seemed to have only matched the job titles in the Appellant’s employment contracts and not the duties and tasks mentioned. This greatly distorted the comparability of the Respondent benchmark. The Appellant submitted that it is important that the benchmarks reflect the duties of personnel in engineering consultancy business.b.Since the contracts are based on German (tax) law, it is important to consider emoluments awarded as tax free daily subsistence allowance (Auslandstagegeld). The Daily rate of 42 Euros is included with 30 days per calendar-months. There is a legitimate expectation to exempt this from the benchmarked salary since the foreign expatriates remain tax residents of Germany as per the Kenya Germany DTA. It is worth mentioning that the official EU per diem rate is 281 € / day.c.There are no annual bonus payments made as considered in the workings.

34. In its submissions the Appellant provided the following as issues for determination;a.Whether the Respondent did not consider all information and explanations provided by the Appellant ( especially the Shared Service agreement, Transfer Pricing policy and invoice copies availed) before arriving at the objection decision.b.Whether the Respondent overlook the decision in the Judgment in TAT Case No. 165 of2017 on the application of tax exemptions granted to Official Aid Funded Projects (OAFP).c.Whether the Respondent had wrongfully assessed income tax on a project whose income arose from outside Kenya contrary to Section 4 of the Income Tax Act.d.Whether the Respondent had wrongfully charged Value Added Tax (VAT) on the Merille -Marsabit Road project income contrary to the decision in the Judgment in TAT Case No. 165 of2017 relating to the same project.a.On whether the Respondent considered all information and explanations provided by the Appellant ( especially the Shared Service agreement, Transfer Pricing policy and invoice copies availed) before arriving at the objection decision.

35. The Appellant submitted that the Respondent contended that there was understatement of project contract revenue which the Appellant had declared on the following projects;a.Kisumu-Kakamega Road (Al) projectb.MR TS Jogoo Corridor projectc.Nakum-Loruk-Marich Road project

36. The Appellant submitted that the Respondent further stated that these contracts related majorly to provision of supervision services which were carried out in Kenya by personnel who are the Appellant's employees and therefore the income arising ought to be brought to charge in accordance with Section 3(2)(a)(i) and Section 15 of the Income Tax Act (iTA). The Respondent also listed in the objection decision other contracts whose income was entirely not declared as per the provisions of Section 3(1) of the iTA as income derived from Kenya.

37. That in addition, the Respondent also opined that the Regional Office services are not low value adding intra­group services as they constitute the core business of the group; and the Respondent's benchmarking analysis be adopted to arrive at an arm's length remuneration as it sampled comparables that are similar in functions performed, assets employed, and risks faced.

38. That furthermore, the Appellant submitted that the Respondent further disallowed input VAT on invoices provided during the review for lack of ETR support in conformity with Section 17 of the VAT Act 2013, because they are not legible.

39. That finally, the Appellant averred that the Respondent team observed that the remuneration of expatriates was relatively low as compared to the locals and opted to benchmark the expatriates' salaries based on duties and tasks done. The Respondent also insisted that Yvonne Myer's salary was apportioned as per the Appellant's objection and Mathias Obermann salary benchmarked for six months as per the Appellant's contention in its objection.

40. That the Appellant averred that it generally and vehemently disagrees with the Respondent on the above matters since the Respondent broadly failed to consider the various information and explanations shared in the Appellant's objection notice. The documents shared uincluded; Shared services agreement, Transfer pricing policy and additional invoices and snpporting documents in relation to project revenues purportedly under declared or undeclared in Kenya.

39. That in regard to the exclusion of Regional Office Services the Appellant presented a copy of its Shared service agreement which confirms and explains the supportive nature of the Regional Office services. The services offered like administrative support are not the core services of the Appellant as wrongfully pointed out in the Respondent's objection decision.

40. That therefore, the Appellant contended that the provisions under the 2015 OECD BEPS Action 8 to IO Report on 'low value adding intra group' services and the standardized mark-up recommended therein remain applicable and should be rightfully considered by the Respondent instead of an independent benchmark.

41. That on the matter of ETR support, the Appellant insisted that the Respondent have never availed a list of the ETR receipts that were not legible.

42. That finally, on the Respondent's concern relating to “Low Pay” for Expatriate employees and Expatriate employees not in the payroll, the Appellant contended that the Respondent failed to consider the following information and explanations that was presented in its notice of objection:-a.that the benchmarks applied in the Respondent workings seem to have only matched the job titles in the Appellant's employment contracts and not the duties and tasks mentioned. This parameter reflects the 'substance-over-form' nature of any benchmark hence adversely affecting and greatly distorting the comparability aspect of the Respondent's benchmark. It is important that any benchmark should reflect the duties of personnel in engineering consultancy business and not purely the job titles.b.that since the contracts are based on German (tax) law, it is important to consider emoluments awarded as tax free daily subsistence allowance (Auslandstagegeld) under German law. The Daily rate of 42 Euro is included with 30 days per calendar-months. There is a legitimate expectation to exempt this from the benchmarked salary since the foreign expatriates remain tax residents of Germany as per the Kenya Germany DTA. It is worth mentioning that the official and tax free EU per diem rate was 281 €/day.c.There are no annual bonus payments made as considered in the Respondent workings.

43. That in summary the Appellant stated that it had duly exercised its duty of proving its appeal as set out under Section 56(1) of the TPA:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. "

44. The Appellant submitted that the Honourable Tribunal had expressed the threshold for bearing the burden of proof in the case of Appeal no. 133 of 2020 Samich Construction Ltd vs Commissioner of Domestic Taxes

45. That the Tribunal made reference to case TAT No. 115 of 2017; Digital Box Ltd vs Commissioner of Domestic Taxes, where the Tribunal held that the taxpayer bears the burden of proof and which burden is discharged by adducing evidence. The Tribunal relied on the decision in Alfred Kioko Muteti vs Timothy Miheso & Another (2015) eKLR where the Court held that:-“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough. In reaching its findings, the Court stated that: "Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party .... "Para 75. “It is the Tribunal's view that the Appellant failed to prove that the tax liability was wrongly assessed considering that the tax was reduced to KShs. 191,707,829. 15 from KShs. 257,383,775, bearing in mind that the Appellant originally failed to submit the required documents in time. "b)Did the Respondent overlook the decision in the judgment of TAT Case No. 165 of 2017 ou the application of tax exemptions granted to Official Aid Funded Projects (OAFP)?

46. The Appellant contended that the Respondent did not realize that the taxation (both Corporate tax and VAT) of the named projects was already heard and determined by the same court in TAT Case No. 165 Of 2017. The matter under contention in the case was “whether the absence of a VAT exemption letter should render the supplies in question standard rated”. That in summary, the ruling set out two main conditions that should stay any enforcement measures by the Respondent in instances where an exemption letter is not available. The conditions are:a.It must be proven that the taxpayer discharged all his duties in the administrative process of obtaining an exemption letter; andb.The Respondent is unable to present any legal reason for rejecting a taxpayer's application for the tax exemption.

47. That the ruling cited the principle of legitimate expectation as follows:-“legal certainty births legitimate expectation and to levy tax based on administrative procedure not expressly provided for and when it's quite clear that the Appellant relied on express provisions would amount to infringing on its legitimate expectation created by the wording of the Law……… legitimate expectation may arise either from an express promise given on behalf of a public authority or from the existence of a regular practice which the claimant can reasonably expect to continue "

48. That the Appellant also noted that the Respondent's request for the Financing agreement which guaranteed the tax exemption, and explained the confidential nature of this Government document that was never shared with the Appellant. Nevertheless, the principal oflegitimate expectation for Tax exemption is already set out under the Instructions to Tenderers shared with the Respondent as ruled under TAT Case No. 165 of 2017.

49. The Appellant submitted that the Respondent had previously appealed the judgment in TAT Case No. 165 of 2017 at the High Court under Case No. HCCOMMITA/E0S7/2020 that was subsequently dismissed as cited below:-“For the reasons I have set out above, I affirm the Tribunal's findings that the subject projects were Official Aid Funded Projects and that as such, they qualified for remission and that the Respondent properly applied for remissions. I also do not find any fault in the Tribunal directing the Respondent to complete the process of obtaining the exemption certificates through the line Ministry. This order is consistent with the right to the Respondent to expect fair administrative action from State agencies protected in Article 47 of the Constitution".

50. That in regard to the Yei Water Supply project, the Appellant explained that it is a project where services were provided to a 'recipient outside Kenya for use, consumption or enjoyment outside Kenya' ( as defined under VAT Regulations 201 7) since the project location was in South Sudan. Therefore, the Respondent should not be allowed to standard rate the income from this project but rather zero-rate it as an exported service. In conclusion the Respondent's assessments should be vacated since they ignored the facts mentioned above.c)Did the Respondent wrongfully assess income tax on a project whose income arose from outside Kenya contrary to Section 4 of the Income Tax Act?

51. The Appellant stated that the Respondent had declared that all income earned by the Appellant that arose from outside Kenya had been derived in Kenya because they were partially performed by the Appellant's personnel hence taxable under the ITA. The Appellant disagrees with this treatment and application of the ITA because of 2 reasons:a)Taxation of worldwide income - Whereas the Appellant agrees with the Respondent's interpretation of Section 3 of the !TA that provides for taxation of 'worldwide income' accrued by Kenyan tax residents, the Appellant seeks to remind the Respondent that the 'worldwide income' (especially income from Yei water supply project) under dispute in this case has been earned/ accrued by the Appellant and not its personnel. It is therefore improper to deem this income as taxable in Kenya by the mere fact that the personnel involved were Kenyan residents. These personnel did not earn the income from this project hence cannot be deemed to have accrued or derived it in Kenya ( on behalf of the Kenyan branch office). The doctrine of separate personality under both the ITA and the Companies Act has indeed been ignored by the Respondent.b)Nexus of the income-The taxation of the income ofa non-resident (permanent establishment - PE) is guided by Section 4 of the !TA which only applies tax on income earned from outside Kenya where it is earned tax residents only. The non-resident entities (PEs) of foreign enterprises (such as the Appellant) operating in Kenya are only taxed on income accrued or derived from Kenya.

52. That it is on this basis that the Respondent should not be allowed to subject the income from the Yei Water Supply project to income tax in Kenya.d)Did the Respondent wrongfully charge Value Added Tax (VAT) on the Merille - Marsabit Road project income contrary to the decision in the judgment of TAT Case No. 165 of2017 relating to the same project?

53. That the Respondent further contended that the provision of services by the Appellant's personnel outside normal working hours constituted a service provided in the course of its business hence classified the services as taxable under the VAT Act 2013.

54. That on the contrary the Appellant vehemently disagreed with the Respondent's interpretation of the VAT Act since it ignored the interpretation and decision in the judgement of the TAT Case No. 165 of 2017 relating to the same transaction where it was ruled as follows:“With regard to the contract of Merille-Marsabit, the Tribunal has reviewed the contract dated June 2012 and agrees with the Appellant's sentiments that the contract is between the Ministry of Transport and the Appellant's head office, which is an autonomous foreign company. Further, the Appellant has demonstrated that PAYE was paid for the staff engaged under this contract.a.With the evidence on record, and without prejudice to the foregoing, we note that the said proiect as can be adduced fi:om Clause 2 of the contract, is funded by the European Union and consequently falling within the ambit offinance Official Aid Funded Proiects, and VAT is therefore zero-rated".

55. That the Respondent appealed the judgment in this case at the High Court under Case No. HCCOMMITA/E057/2020 which was subsequently dismissed. That in conclusion, the Respondent should not be allowed to challenge a decision made by both the same and higher court in this case.

The Appellant’s Prayers 56. The Appellant prayers are as followsa)That the Respondent’s Objection decision dated 22 July 2020 be set aside and annulledb)The Appellant’s objection notice dated 28th April 2020 be upheld.

The Respondent’s Case 57. The Respondent’s case is premised on its Statement of Facts filed on 30th September 2020 and the submissions dated and filed on 5th August 2023.

58. The Respondent replied to the issues for determination as stated in the Appellant’s Memorandum of Appeal, Statement of Facts and Submissions as follows;“THAT the Respondent failed to take into account the information and explanations provided by the Appellant especially the shared service agreement, Transfer Pricing policy, and invoices availed before arriving at the objection decision.”

59. The Respondent submitted that it denies this allegation and made reference to the Respondent’s objection decision dated 22rd July 2022. The Respondent fully relied on all these documents that were provided by the Appellant and made reference to these documents in the objection decision.

60. That the Respondent failed to consider the decision in the judgement in TAT Appeal No.165 of 2017 HP Gauff Ingenieure GMBH & Co K.G VS Commissioner of Domestic Taxes on the application of tax exemptions granted to official aid funded projects (OAFP).

61. The Respondent averred that the Tax Appeals Tribunal Judgement in TAT Appeal No.165 of 2017 delivered on 30th March 2020 determined that KRA stay the tax demanded to allow the Appellant (H.P Gauff) 120 days to obtain exemption certificates. The timelines allowed by this Honourable Tribunal have elapsed and there has been no indication by the Appellant that they will avail the exemption certificates as per the orders of the Tribunal.

62. That the Appellant’s assertion that the projects incomes should not be charged to tax in Kenya is not correct.

63. That the Appellant had claimed that the Merile Marsabit road supervision being an aid funded project is exempt from tax based on the instructions in the Financing agreement KE/FED/2009/021-655 between Kenya and The European Union that the Respondent was not privy to.

64. That Section 13 of the Income Tax Act (ITA) provides for exemption of certain incomes from income tax and provides as follows;“(1)Notwithstanding anything in Part II, the income specified in Part I of the First Schedule which accrued in or was derived from Kenya shall be exempt from tax to the extent so specified.(2)The Minister may, by notice in the Gazette, provide-a.that any income or class of income which accrued in or was derived from Kenya shall be exempt from tax to the extent specified in such notice;b.that any exemption under subsection (1) of this section shall cease to have effect either generally or to the extent specified in the notice.(3).A notice under subsection (2) of this section shall be laid before the National Assembly without unreasonable delay, and if a resolution is passed by the Assembly within twenty days on which it next sits after the notice is so laid that the notice be annulled, it shall thenceforth be void, but without prejudice to the validity of anything previously done thereunder, or to the issuing of a new notice.”

65. The Respondent submitted that the Appellant did not meet the threshold of Section 13 of the Income Tax Act Cap 470 and therefore these incomes did not qualify as exempt incomes and were therefore rightly brought to charge.

66. That on the Appellant’s shared service agreement and the Transfer Pricing policy, the Respondent submitted that the service agreement was to support the costs wholly and exclusively incurred by H.P Gauff Head office and which necessitated the invoicing of some projects directly by Head office in Euros as well as to demonstrate criteria for recharging within the Gauff group.

67. That the Respondent stated that the Appellant provided the Transfer Pricing Policy to support the recharge of costs to the Kenyan branch by its German head office. The Transfer pricing policy included a benchmarking analysis report that guides on an appropriate mark-up. From the Respondent’s analysis and understanding of the H.P Gauff business, the contracts entered into relate majorly to provision of supervision services which are carried out in Kenya. The personnel engaged in these projects are employees of H.P Gauff-Kenya.

68. That the Respondent was therefore right in bringing to charge income from the three projects in accordance with Section 3(2)(a)(i) and Section 15 of the Income Tax Act Cap 470.

69. That on income on projects carried out during the period and not declared in Kenya, the Respondent submitted that the Appellant entered into contracts as listed in the Respondents Statement of Facts amounting to Kshs 782,500,000. 00, and the Appellant alleged that it did not report these incomes in Kenya as the projects were exempt from tax based on the instructions in the Financing agreement KE/FED/2009/021-655 between Kenya and The European Union that the Respondent were not privy to.

70. The Respondent stated that these incomes were incomes derived in Kenya and therefore should be charged in Kenya as per the provisions of Sections 3(1) of the Income Tax Act Cap 470 of the laws of Kenya.

71. On the issue of Regional Offices the Respondent averred that the Appellant in its objection stated that the Respondent’s benchmarking analysis was incomparable and failed to consider recent developments in BEPS Action reports.The Appellant also highlighted provisions under the 2015 OECD BEPS Action 8 to 10 report on “low value adding intra group services and the standardized mark-up recommendation.

72. That the Respondent noted that these are not low value services as they constitute the core business of the group. Further, the mere reimbursement of costs was not at arm's length and therefore the Respondent's benchmarking analysis adopted to arrive at an arm's length remuneration was correct as it sampled comparables that are similar in functions performed, assets employed and risks faced. This adjustments resulted in taxes under the Corporation Tax tax-head.

73. The Respondent stated that it is important to note that subsequent to the review, the Appellant declared and paid taxes on these incomes in Kenya.

74. That on the issue that the Respondent wrongfully charged VAT on the Merille Marsabit Road project income contrary to the decision in the judgement of TAT Appeal No.165 of 2017 HP Gauff Ingenieure GMBH & Co K.G VS Commissioner of Domestic Taxes, the Respondent denied this allegation and provided the following reasons;a.VAT on project Revenue not declared in Kenyab.The Appellant did not provide any document that is, exemption certificates, and therefore VAT remains due and payable.

75. That on invoices without ETR the appellant provided invoices without ETR receipts, thus were disallowed. Invoices without ETR receipts cannot be allowed for Input VAT purposes as provided by Section 17 of the VAT Act 2013.

76. Similarly on (iii) VAT on overtime supervision services the Respondent stated that H.P Gauff-K provided supervision services outside of the normal working hours to Gulsan Insaat Sanayi Turizm – Kenya branch who were the main contractors in the construction of Merille-Marsabit Road and to China Overseas Engineering Group who were the main contractors in the construction of Kisumu-Kakamega Road.

77. That the VAT Act 2013 defines a service as ‘anything that is not goods or money’ while supply of services has been defined as;“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 of any situation or the refraining from the doing of any act;”

78. That it is not in dispute that the performance of services outside of the normal working hours constitute supply of services. The VAT Act further defines a taxable supply as “a supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person …”

79. Therefore the Respondent averred that the provision of services by Gauff-K outside of the normal working hours constitutes a service provided in the course of its business hence the services are vatable.

80. That on VAT Exemption certificates not availed on Official aid funded projects (Kisumu-Kakamega road) the Respondent stated that in relation to these services Paragraph 20 of Part II of the First Schedule to the VAT Act 2013 states the supply of the following services shall be exempt supplies.

81. That Paragraph (20) states that:-“Taxable services for direct and exclusive use in the implementation of official aid funded projects upon approval by cabinet secretary to the National Treasury”.

82. That further in relation to goods the First Schedule, Part 1, Paragraph 51 of VAT Act 2013 as read with Legal Notice Number 54 of 2017, Paragraph 18(2) states that “The supply or importation of the following goods shall be exempt supplies

83. That Paragraph (51) of VAT ACT 2013 states that : Taxable goods ,imported or purchased for direct and exclusive use in the implementation of official aid funded projects upon approval by the cabinet secretary responsible for the National Treasury.” Section 18(2): The Value Added Tax (Remission)(Official Aid Funded Projects),2003 shall continue to apply until another regulation relating to official aid funded projects is put in place.

84. That the National Treasury on 21st December 2010 issued a circular Ref DFN 415/232/011 which provided for procedures for exemption from duties and VAT for official aid funded projects .The Guidelines outlined by Treasury for exemption from duties are as follows:a.The Sector Ministry is required to make an application to the permanent secretary/Treasury confirming that under the particular project, there will be contracts for the provision of services such as consultancies, advertisements, workshops etc.(We can confirm that this is done).b.On receipt of such confirmation, the treasury will write to the Kenya Revenue Authority to confirm that the particular project is an official aid funded project and services to the project qualify for zero-rating(This has not been done).c.The letter will be copied to the sector ministry which is expected to forward any request for zero-rating under the project to KRA for the necessary processing without coming back to the treasury(This has not been done)and;d.The request to KRA for zero-rating should be made before the service is provided based on the quotation and proforma invoices provided by the service provider. This will enable KRA to authorize the service provider to do so on zero rated basis but on a case by case basis. There is no provision for blanket exemption.

85. That in as much as there was evidence that the project was an official aid funded project, H.P Gauff has not yet submitted to the Respondent any exemption letters from the National Treasury. The only authority that can be relied on is the explicit instructions from the National Treasury to treat services, goods or equipment as exempt detailing the specific proforma invoices to which the exemption applies.

86. That the Honourable Tribunal’s Judgment delivered on 30th March 2020 in TAT Appeal No.165 of 2017 HP Gauff Ingenieure GMBH & Co K.G VS Commissioner of Domestic Taxes directed the Respondent to stay the tax demanded to allow H.P Gauff 120 days to obtain exemption certificates. There has been no indication by the Appellant that it will avail the said exemption certificates.

87. That the Respondent maintained thus that the VAT amounts remain payable as demanded until the Appellant furnishes the Respondent with the relevant exemption certificates.

88. That on whether the Respondent's assessment of Kshs.1,955,787,204. 00 is excessive, punitive and beyond the ability of the appellant to pay contrary to generally accepted canons of taxation,the Respondent submitted that throughout the audit process it engaged the Appellant as evidenced by correspondence. It is not true that the tax demanded is excessive and punitive as alleged by the Appellant. The Respondent relied on information in the documents provided by the Appellant. As submitted herein above , the Respondent in its objection decision refers to the documents provided and explains how the said documents informed the objection decision.

89. That the Respondent's statutory obligation is enshrined under Article 210(1) of the Constitution of Kenya to assess and collect taxes on behalf of the Government of Kenya.

90. Further, that the Respondent's mandate as provided under Section 5 of the Kenya Revenue Authority Act is, inter alia, to administer tax laws listed in the first schedule and to assess, collect and account for all revenues in accordance with those laws.

91. That the Respondent averred that in exercising its mandate on tax laws the issues of alleged motives would not replace the clear provisions of the law. See the case of Republic vs. Commissioner of Domestic Taxes Large Tax paper's Office Exparte Barclays Bank of Kenya Limited [2012] eKLR.

92. The Respondent submitted that the Appellant was aware of the basis of the assessment and the sources which the Respondent relied upon and no evidence has been presented to this Honourable Tribunal to prove that the tax demand is unjustified.

93. That Section 30 of the TAT Act places the burden of proving correctness or otherwise of a tax assessment or a tax decision on the taxpayer.

94. That in Sheria Sacco Society Limited v Commissioner of Domestic Taxes [2019] eKLR, the learned judge of the superior court found that the Appellant did not discharge this burden. The judge observed that "The Respondent in addition to the information on the Appellant's website referred to the Appellant's manual; which governed its day to day activities. Under the subheading "FOSA" it provided that group accounts can be opened on terms that "at least one member of the group"is a member of the Appellant. Further that FOSA services are extended to a group of_between ten (10) to twenty (20) people who are registered with the Ministry of Culture and Social Services.”

95. That the Learned Judge went on to find at paragraph 29 of her judgment that:-“that in my view was damning evidence which the SACCO needed to rebut. The SACOO failed to produce before the Tribunal evidence that no FOSA services were extended to non- members as provided in the Policy and Procedure Manual!. All the Sacco needed to do was to produce evidence of those who had accessed FOSA's services and thereby prove that those who accessed those services were members of the SACCO. The SACCO failed to do so."

96. That in its Appeal, the Appellant had not provided information or documents to rebut the Respondent's position as required by law; No exemption certificates provided, no parallel tabulations different from those by the Respondent, some documents provided for example the invoices do not meet threshold required in the VAT Act.

97. Further, in the case of Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR, the Learned Judge in holding that the burden of disproving a tax assessment by the Commissioner lay with a taxpayer held;-“Having appraised the record, I find that the conclusions of the Commissioner and the Tribunal in respect of the assessments appealed against were in accordance with the evidence and material available to the Commissioner. The appellant did not discharge its burden of showing that the tax decision was wrong or incorrect..."

The Respondent’s Prayers 98. The Respondent prayed that;-a)The Tribunal finds that the Appellant's Appeal lacks merit.b)The Tribunal upholds the Respondent’s decision to charge tax amounting to Kshs, 1,955,787,204. 00 inclusive of penalties and interest.c)The Appeal be dismissed with costs to the Respondent.

ISSUES FOR DETERMINATION 99. Gleaning through the Memorandum of Appeal, the parties’ Statement of Facts and the submissions, the Tribunal puts forth the following issue for determination: -Whether the Respondent’s Assessment against the Appellant was justified.

Analysis And Findings 100. The Tribunal wishes to analyse the issue identified herein-under.

101. The genesis of this dispute arose when the Respondent issued on 12th February 2019, a notice of intention to audit Gauff Ingenieure GMBH & CO Kenya Branch (Gauff-K), a branch of H.P. Gauff lngenieure GMBH & CO {Gauff-G), a German consultant in engineering projects, for the period 2012 to 2019.

102. The parties held meetings and discussions on 13th August 2019 to review the preliminary findings and upon conclusion of the review the Respondent issued the Appellant with a preliminary letter of findings dated 16th January 2020 in which it requested the Appellant to address the following tax headsa.Corporation Tax- Under-declaration of project revenue and income not declared in Kenya regional offices services and unsupported expensesb.Value Added Tax (VAT)- Input tax invoices not availed and input tax invoices without ETR, VAT on overtime supervision services Vat Exemption Certificates on official aid funded projects and VAT on project revenue.c.Pay as you Earn(PAYE)- Low pay for expatriate employees

103. The Appellant responded to the audit findings vide its letter of 14th February 2020 and provided detailed explanations on the above tax heads and in particular stated that these contracts were exempt from Income Tax Act Cap 470 and the VAT Act of 2013 as they were Official/ Aid Funded Project (OIFP)- which means a “project funded by means of a grant or concessional loan in accordance with an agreement between the Government and any foreign Government, agency, institution, foundation, organization or any other aid agency”

104. Dissatisfied by the Appellant’s response the Respondent issued a detailed tax assessment dated 25th March 2020 in which it assessed the Appellant on the three tax heads a total of Kshs 1,955,787,203. 00 for the period 2012-2019.

105. The Appellant thereafter lodged an objection as provided in Section 51(3) of the TPA to the total assessed amount vide a letter dated 28th April 2020 and subsequently provided documentations and explanations in letters dated 30th April, 2020, 1st May, 2020, 19th June, 2020 and 6th July, 2020.

106. The Respondent, issued an objection decision dated 22rd July 2020 in which it confirmed the demanded tax of Kshs 1,955,787,204. 00.

107. The Tribunal notes that in the Objection decision attached to this Appeal, that the Respondent states that it did take into account the explanations and documents as stated in the Appellant’s notice of objection dated 28th April 2020. In particular the Respondent had analysed the contentious issues raised by the Appellant under the three tax heads in its objection decision.

108. The Tribunal observes that the Appellant on the other hand stated in its Memorandum of Appeal that the Respondent did not consider the following in arriving at the objection decision:-a)Information and explanations provided by the Appellantb)The Judgement of TAT Case No 165 of 2017 on application of tax exemption granted to Official Aid Funded Projects (OAFP) and Value Added Tax (VAT) on the Merille - Marsabit Road project incomec)Section 4 of the Income Tax Act on assessment of income tax on a project whose income arose from outside Kenya.

109. On the issue of information and explanations provided to the Respondent the Tribunal notes that the Appellant stated that it did duly exercise its duty of proving its appeal especially the issue raised by the Respondent on shared service agreements Transfer pricing Policy and invoice copies as set out under Section 56(1) of the TPA which states that:-“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect. "

110. On the Judgement in the TAT Case number 165 of 2017, regarding the application of tax exemption granted to Official Aid Funded Projects (OAFP) and Value Added Tax (VAT) on the Merille - Marsabit Road project income, the Tribunal notes that the Appellant alleged that the matter under contention in the case was “whether the absence of a VAT exemption letter should render the supplies in question standard rated”.

111. That in summary, the ruling set out two main conditions that should stay any enforcement measures by the Respondent in instances where an exemption letter is not available.(a)It must be proven that the taxpayer discharged all its duties in the administrative process of obtaining an exemption letter; and(b)The Respondent is unable to present any legal reason for rejecting a taxpayer's application for the tax exemption.

112. The Appellant stated that the judgement also cited the principle of legitimate expectation as follows:“legal certainty births legitimate expectation and to levy tax based on administrative procedure not expressly provided for and when it's quite clear that the Appellant relied on express provisions would amount to infringing on its legitimate expectation created by the wording of the Law……… legitimate expectation may arise either from an express promise given on behalf of a public authority or from the existence of a regular practice which the claimant can reasonably expect to continue.”

113. On whether the Respondent took into account Section 4 of the Income Tax Act, Cap 470 of the laws of Kenya which relates to Taxation of worldwide income and nexus of income, the Appellant stated that the Respondent did not address these two issues especially on the income delived from Yei Water Project and the taxation of income of non resident Permanent establishment-PE as income of a non-resident (permanent establishment- PE) which is guided by Section 4 of the ITA and which only applies to tax on income earned from outside Kenya where it is earned by tax residents only. The non-resident entities (PEs) of foreign enterprises operating in Kenya are only taxed on income accrued or derived from Kenya.

114. The Respondent addressed the issue of information and explanations provided by the Appellant in that it took into account in the Objection decision all the documents provided by the Appellant being the Service agreement, Transfer Pricing Policy and invoices. The Respondent further averred that the Appellant’s complaints are mere unsubstantiated allegations for reason that the Appellant does not clearly state which provisions of the documents were ignored by the Respondent and how such provisions would alter the quantum of the tax demanded.

115. To support its allegation the Respondent stated that it is important to note that subsequent to the review, the Appellant declared and paid taxes on Regional Office Services in Kenya.

116. On the judgement of TAT Case no 165 of 2017 on the application of tax exemption granted to Official Aid Funded Projects (OAFP) and Value Added Tax (VAT) on the Merille - Marsabit Road project income, the Respondent concurred that it has reviewed the above Judgment and noted that there is no dispute as to whether the projects and in particular the Merille - Marsabit Road project was an Official Aid Funded Projects (OAFD) as stated in Section 2 of the VAT Act 2013 as follows:-“Official Aid Funded Projects (OAFD) means a project funded by means of a grant or concessional loan in accordance with an agreement between the Government and any foreign government, agency, institution, foundation, organization or any other aid agency;”

117. However the Respondent stated that the Tribunal in its Judgment directed the Respondent to stay the tax demanded to allow the Appellant 120 days to obtain exemption certificates. The Respondent confirmed that the Appellant has not availed the same and there has been no indication by the Appellant that it will avail the said exemption certificates.

118. On the issues of whether the Respondent considered Section 4 of the Income Tax Act as alleged by the Appellant, the Respondent stated that this relates to income earned on projects carried outside Kenya and payments made to personnel who were not resident in Kenya.

119. The Tribunal notes that the Respondent stated in its submissions that the revenue arising from the supervision of the projects listed in the Objection decision did not fall under Section 4 of the Income Tax Act and it has provided the following reasons:-a.The Appellant claimed that the project is exempt from tax based on the instructions in the Financing agreement KE/FED/2009/021-655 between Kenya and The European Union that the Respondent was not privy to.b.Further, Section 13 of the Income Tax Act (ITA) provides for exemption of certain incomes from income tax and provides as follows:-“(1)Notwithstanding anything in Part II, the income specified in Part I of the First Schedule which accrued in or was derived from Kenya shall be exempt from tax to the extent so specified.(2)The Minister may, by notice in the Gazette, provide-a)that any income or class of income which accrued in or was derived from Kenya shall be exempt from tax to the extent specified in such notice;b)that any exemption under subsection (1) of this section shall cease to have effect either generally or to the extent specified in the notice.(3)A notice under subsection (2) of this section shall be laid before the National Assembly without unreasonable delay, and if a resolution is passed by the Assembly within twenty days on which it next sits after the notice is so laid that the notice be annulled, it shall thenceforth be void, but without prejudice to the validity of anything previously done thereunder, or to the issuing of a new notice.”

120. The Respondent therefore submitted that the Appellant did not meet the threshold of Section 13 of the Income Tax Act, Cap 470 and therefore these incomes did not qualify as exempt incomes and were therefore rightly brought to charge

121. The Tribunal notes that in the Respondent’s submissions it averred that the Appellant was aware of the basis of the assessment and the sources which the Respondent relied upon and no evidence has been presented to this Honourable Tribunal to prove that the tax demand is unjustified.

122. Section 30 of the TAT Act places the burden of proving correctness or otherwise of a tax assessment or a tax decision on the taxpayer.

123. From the above analysis of the issues raised by the Appellant and the Respondent rebuttals the Tribunal notes that there is no dispute as to whether the projects or contracts carried out by the Appellant were OAFD contracts and therefore exempt from Corporation tax, VAT and PAYE taxes.

124. In order to proof to the Respondent that the projects and or contracts were exempt from taxes the Appellant ought to make the necessary efforts to obtain the relevant official documentation on the tax exemption from the relevant Ministries in order to prove its case.

125. Indeed this Tribunal gave the Appellant 120 days from 30th March 2020 to seek for the exemption certificates in TAT Case no 165 of 2017 and the orders were confirmed by the High Court under Case No. HCCOMMITA/E057/2020

126. The Tribunal in the above case stated as follows with regard to VAT on the services provided on Kisumu-Kakamega Road which is also a subject of this Appeal:-“The Tribunal is in agreement that from the reading of the law above that tax exemption in regard to Official Aid Funded Projects is not automatic. Further, cognizance is given to the Treasury regulations dated 21st December 2010, particularly Recital B which states that the sector ministry ought to make an application to the Treasury, who upon confirmation that the project is an Official Aid Funded Project, makes an application to the Respondent to confirm that the project is an Official Aid Funded Project and services to the project qualify for zero-rating. Further, the letter is copied to the sector ministry which is expected to forward any request for zero rating under the project to the Respondent for the necessary processing without coming back to the Treasury. The Request to the Respondent should be done before service is provided based on the quotation and proforma invoice provided by the service provider. This will enable the Respondent to authorize the service provider to do so on zero rated basis and on a case by case basis.There is no dispute as to the fact that the Appellants have indeed applied for the exemption certificates but these have to date not been issued.”

127. Having made a determination in this matter, and the said determination affirmed by the High Court, the Tribunal lacks the jurisdictional right to change and or sit on an appeal on its decision.

128. Accordingly, seeing as it is that the Appellant has failed to obtain the tax exemption certificate despite being allowed sufficient time to do so, it follows that the Respondent was justified in issuing an assessment against the Appellant.

Final Decision 129. The upshot to the foregoing analysis is that the Appeal is not merited and the Tribunal accordingly proceeds to make the following Orders:-a.The Appeal is hereby dismissed.b.The Respondent’s Objection decision dated 22rd July 2022 is hereby upheldc.Each party to bear its own costs

130. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024. ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERCYNTHIA B. MAYAKA - MEMBERABRAHAM K. KIPROTICH - MEMBEREUNICE NG’ANG’A - MEMBERBERNADETTE GITARI - MEMBER