International Controls Limited v Commissioner of Domestic Taxes [2023] KETAT 1006 (KLR)

International Controls Limited v Commissioner of Domestic Taxes (Tax Appeal 499 of 2022) [2023] KETAT 1006 (KLR) (Commercial and Tax) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1006 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 499 of 2022

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

September 15, 2023

Between

International Controls Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and its principal activity is provision of professional services to related parties with common ownership to enhance economy and efficiency within the group.

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 issued additional assessments to the Appellant dated 29th December 2021 assuming income for the period in question at 10% of the costs incurred and assessed VAT of Kshs. 24,084,019. 00 and corporation tax of Kshs. 3,802,067. 00.

4. In the same assessment, the Respondent also subjected director's withdrawals of advances previously made to the company to PAYE amounting to Kshs. 25,764,434. 00 on the basis that this was income to the director earned from the company.

5. The Appellant on 27th January 2022 filed an objection in relation to corporation tax, VAT and PAYE for the years of income 2016 to 2020.

6. The Respondent rendered its objection decision vide a letter dated 27th April 2022.

7. The Appellant being dissatisfied with the Commissioner’s decision lodged a Notice of Appeal dated 11th May 2022 and filed on 12th May 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 13th May 2022 and filed on 16th May 2022:-a)The Respondent erred in material and facts by estimating income on the basis of costs incurred plus 10% margin and subjected the estimated income to VAT and corporation tax amounting to Kshs. 27,886,086. 00 and by so doing this resulted to excessive tax demand by the Respondent.b)The Respondent erred by failing to consider and appreciate that over the period in question the Appellant did not generate any income although it incurred costs in respect to personnel and administrative costs.c)The Respondent also erred in charging Pay As You Earn (PAYE) on the directors’ withdrawal of advances previously made to the company. The advances were from his employment income and had already been subjected to tax as evidenced by the P9s and self-assessment returns filed by the director. Subjecting these funds to addition PAYE will be taxing the same income twice and thus excessive.d)The Respondent's basis of determining the taxable income is incorrect as it assumes that the Appellant does not maintain complete records.eThe Appellant prays that the objection decision by the Respondent be dismissed with costs as the same is devoid any merit.

Appellant’s Case 9. The Appellant’s case is premised on the following documents:a)Appellant’s Statement of Facts dated 13th May 2022 and filed on 16th May 2022 together with the documents attached thereto.b)The Appellant’s written submissions dated and filed on 18th January, 2023 together with the authorities attached thereto.

10. That the company was established as an investment holding company of subsidiary investee companies in which it holds majority control. That to enhance efficiency and economy within the group, the company offers professional services to its subsidiaries in respect to management and related governance services.

11. The Appellant submits that each company in the group is managed independently of each other and any transactions between the related parties are at arms-length basis.

12. That for the years of income 2016 to October 2019, the company did not generate income from its operations although it incurred operational costs in respect to personnel and office administrative expenses. That during the said period the costs incurred were financed by the director.

13. That prior to November 2019, the Appellant had not charged management fees to any of the companies in the group although it incurred operational costs in respect to personnel and office administrative expenses which were financed by the director.

14. That from the month of November 2019, in the interest of ensuring accountability and financial independence within the group, the Appellant started invoicing one of the companies in the group for management services rendered. That the revenue generated was correctly declared for taxes for both VAT and income tax as evidenced by the Appellant's financial statements and self-assessments returns filed for the period

15. The Appellant contends that the Respondent's income estimates at cost plus 10% margin has no basis, is incorrect and punitive to the Appellant.

16. That the advances made by the director to the company were earnings from his employment income earned elsewhere and the resultant taxes had been paid by the respective employer.

17. That the further withdrawals by the director for advances made to the company do not constitute income charged to PAYE. That the withdrawals are refunds for income earned from other sources that had already been subjected to PAYE at source as evidenced by P9s issued to the director.

18. The Appellant further contends that the income advanced to the company had already been declared in the director’s self-assessment returns and therefore subjecting the withdrawal of advances previously made to the company amounts to taxing the same income twice.

19. It is the Appellant's contention that the Respondent’s assumption of the company’s income at 10% markup of its annual costs for each of the years of income 2015, 2016, 2017, 2018, 2019 and 2020 is erroneous and unfair. That operational business income is earned and costs should be passed to customer/ consumer and cannot be assumed or deemed as it is in this case.

20. The Appellant avers that the Respondent erred by confirming the assessments. That the Respondent acted in bad faith and malice by confirming such exorbitant taxes on such assumptions.

21. That the Respondent did not consider all the material facts as presented by the Appellant when it came up with the additional assessment.

22. The Appellant avers that it indeed maintains proper records of every transaction undertaken by it in accordance to Section 23 of Tax Procedures Act, 2015 and these documents were provided by the Appellant at the audit stage and objection stage as well.

23. The Appellants submits that where management fees were charged and earned, the taxes were correctly accounted for as evidenced by the self-assessments returns filed by the Appellant.

24. That Article 47 of the Constitution of Kenya 2010 codifies that every person has a right to fair administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair before any adverse action is taken against.

25. The Appellant asserts that the assessment was based on mere estimates not backed by facts. The Appellant asserts that it is straight principle of law that there is no taxation without express legislation and that a tax cannot be imposed by intendment, interpretation, presumption or implied.

26. That it is on this basis that the Appellant prays to this Honorable Tribunal, that it be guided by equity, strict interpretation of the law, previous rulings and the circumstance of this case to allow this Appeal and order the Respondent to withdraw its entire assessment and be stopped from demanding the tax, interest and penalties in respect of this case

Appellant’s Prayers 27. The Appellant prayed that the Tribunal:a)Allows the Appeal.b)Order the Commissioner to withdraw the additional assessment notices and be accordingly stopped from taking any enforcement or recovery measures of the principal tax, interest and penalties in respect to the additional assessments.

Respondent’s Case 28. The Respondent’s case is premised on the hereunder filed documents:-i.The Respondent’s Statement of Facts dated and filed on 16th June 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated 19th January 2023 and filed on the same date together with the authorities attached thereto.

29. That the documents provided by the Appellant were reviewed as provided.

30. That the Appellant has not demonstrated that this income was otherwise declared. That valuation for the management services has been done at cost plus 10% in accordance with Section 13 of the VAT Act 2013 to cover the cost of providing such services and the tax withheld on invoiced services.

31. That the management services offered by the company are subject to income tax. That in its income tax returns, the Appellant has recognized management fees in the year 2020 under its business income. That the declared income is equivalent to the VAT turnover.

32. That Section 31(1) of the Tax Procedures Act, with regards to amendments of assessments, provides that:-“Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment” by making alterations or additions from the available information and to the best of the Commissioner's judgement.. to the original assessment of a taxpayer for a reporting period to ensure.”

33. That in addition the Appellant failed to provide the supporting documents to support its objection.

34. The Respondent also states that upon objection to the VAT assessments, the Appellant failed to provide any supporting documentation to support the objection leading to the confirmation of the additional VAT assessments.

35. That the Respondent was also guided by Section 51(3) and (4) of the TPA and Section 43(3) of the VAT Act.

36. That Section 51(3) of the TPA provides that:“(a)The notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendment; and(b)In relation to an objection to an assessment, the taxpayer has paid the entire amount of the tax due under the assessment that is not in dispute.”

37. The Respondent states that the Appellant’s objection was invalid as the Appellant failed to precisely state the grounds for objection, the amendments required to correct/change the decision and provide to all documentation required as requested by the Respondent.

38. That the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.

39. The Respondent reiterates that the Appellant failed to discharge its burden of proof in proving that the Respondent’s tax decision is incorrect as per the provisions of Section 56(1) of the TPA.

40. The Respondent submits that it is empowered by tax laws to conduct an assessment against any taxpayer should there be a need to do so. That Section 24(2) of the Tax Procedures Act states that:-“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer’s tax liability using any information available to the Commissioner.”

41. That in regard to the assessment the test set out is not whether it was excessive or punitive but whether it was reasonable. The Respondent buttresses that every taxpayer has a duty to pay the correct taxes and when they are due. That this is a basic obligation imposed on every taxpayer. That it is the failure to pay the correct taxes that the Commissioner can make an assessment against the taxpayer. That the assessment contains the amount the taxpayer should have paid. That the ground that an assessment is excessive, punitive or unjustified is unsubstantiated.

42. That the Tribunal has highlighted the requirements for what is deemed to as a reasonable assessment in Digital Box Limited vs. Commissioner of Investigations and Enforcement (TAT 115 of 2017).

43. That the assessment met all the conditions for a reasonable assessment.

44. That data was objectively gathered. That information was gathered in relation to VAT and that prior to November 2019 the Appellant was not declaring nor charging VAT on management fees it offered to its subsidiaries. That the same should be charged to VAT as per Section 5 of the VAT Act 2013.

45. That in relation to income tax, the undeclared income prior to November 2019, that had no reconciliation is subject to income tax, as per Section 3 of the Income Tax Act, 2013.

46. The Respondent noted that the Appellant deducts payments of emoluments made to its employees. That however, the director's current account for the periods under review contain cash payments made directly to the director for payment of personal services which are not subjected to PAYE.

47. That the Appellant did not provide enough evidence to support the contention that the director made advances to the company and no cash movement confirmation, board management approvals and bank movements were provided thus the same should be subjected to PAYE as provided under Sections 2 and 5 of the Income Tax Act 2013.

48. The Respondent avers that the calculations of the taxes were sound and correct and thus the Appellant is liable to pay the corporation tax that accrued from the undeclared income.

49. That the confirmed assessment as issued is proper in law and the same should be upheld.

50. The Respondent further relied on the following cases:a)Commissioner of Domestic Taxes vs. Galaxy Tools Limited (2021).b)Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya (2021) eKLR.c)Kenya Revenue Authority vs. Maluki Kitili Mwendwa (2021) eKLR.

Respondent’s Prayers 51. The Respondent prays that this Honorable Tribunal finds:a)That the Respondent’s objection decision together with the penalties and interest are due and payable.b)That this Appeal be dismissed with costs to the Respondent as the same is without merit.

Issues for Determination 52. The Tribunal has carefully studied the pleadings and documentation filed by both parties and is of the respectful view that the issues that fall for its determination are as follows:-a)Whether the Corporation Tax assessment was justified.b)Whether the VAT assessment was justified.c)Whether the PAYE assessment was justified

Analysis and Findings 53. The Tribunal having established the issues falling for its determination, proceeds to analyse the same as hereunder.

a. Whether the Corporation Tax assessment was justified. 54. This dispute arose from the Respondent’s assessment of Corporation tax on what the Respondent termed to be undeclared income of the Appellant.

55. The Respondent averred that the Appellant did not demonstrate that this income was otherwise declared. That valuation for the management services was done at cost plus 10% in accordance with Section 13 of the VAT Act 2013 to cover the cost of providing such services and the tax withheld on invoiced services.

56. The Respondent also averred that the Appellant did not provide documentation to support its objection and in this regard did not discharge its burden of proof in proving that the Commissioner’s assessments were erroneous.

57. The Appellant submitted that for the years of income 2016 to October 2019, the company did not generate income from its operations although it incurred operational costs in respect to personnel and office administrative expenses and that during the said period the costs incurred were financed by the director.

58. The Appellant further averred that prior to November 2019, it had not charged management fees to any of the companies in the group although it incurred operational costs in respect to the personnel and office administrative expenses which were financed by the director.

59. The Appellant further stated that from the month of November 2019, in the interest of ensuring accountability and financial independence within the group, the Appellant started invoicing one of the companies in the group for management services rendered.

60. The Appellant also stated that from November 2019, the revenue generated was correctly declared for taxes for income tax as evidenced by the Appellant's financial statements and self-assessments returns filed for the period

61. The Tribunal reviewed the parties pleadings in detail and established that indeed the Appellant did not adduce any evidence to support its pleadings in relation to income tax.

62. The Tribunal is clear that provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act which provides as thus:-“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.”

63. Section 30 of the Tax Appeals Tribunal Act (TATA) places the burden of proof on the taxpayer to submit all the necessary documentation to support its case. This position was affirmed by the court in Alfred Kioko Muteti vs. Timothy Miheso & Another [2015] eKLR where it was held that a party can only discharge its burden upon adducing evidence as merely making pleadings is not enough. 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…. Pleadings are not evidence, and it is not enough to plead particulars of negligence and make no attempt in one’s testimony in court to demonstrate by way of evidence how the accident occurred and how the 1st defendant was to blame for the said accident. It is trite law that he who alleges must prove and that burden does not shift to the adverse party even if the case proceeds by way of formal proof and or undefended.”

64. Additionally, the Tribunal found it appropriate to rely on the provisions of Section 107 of the Evidence Act which provides that:“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.”

65. It is trite law that the burden to prove that a tax assessment is erroneous lies on the Appellant and that the Appellant therefore should have adduced documentary evidence to support its averments in the instant case.

66. The Appellant, in the instant case provided no supporting documents to support its objection to the assessment and in this regard, the Tribunal finds that the income tax assessment was justified.

b. Whether the VAT assessment was justified. 67. This dispute arose from the Respondent’s assessment of VAT on what the Respondent termed to be undeclared income of the Appellant.

68. The Respondent stated that data was objectively gathered. That information was gathered in relation to VAT and that prior to November 2019 the Appellant was not declaring or charging VAT on management fees it offered to its subsidiaries. That the same should be charged to VAT as per Section 5 of the VAT Act 2013.

69. The Respondent also averred that the Appellant did not provide documentation to support its averments and in this regard did not discharge its burden of proof in proving that the Commissioner’s assessments were erroneous.

70. The Appellant stated that from November 2019, the revenue generated was correctly declared for VAT as evidenced by the Appellant's financial statements and self-assessments returns filed for the period.

71. The Tribunal reviewed the parties pleadings in detail and established that indeed the Appellant did not adduce any evidence to support its pleadings in relation to VAT.

72. The Tribunal is clear that provision of documents as evidence is well stated under Section 30 of the Tax Appeals Tribunal Act which provides as thus:-“In a proceeding before the Tribunal, the appellant has the burden of proving-1. Where an appeal relates to an assessment, that the assessment is excessive; or2. In any other case, that the tax decision should not have been made or should have been made differently.”

73. The Tribunal further relies on Section 56(1) of the Tax Procedures Act which states as follows in relation to general provisions relating to burden of proof:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

74. In Metcash Trading Limited vs. Commissioner for the South African Revenue Service and Another Case CCT 3/2000, Justice Kriegler held that:“But the burden of proving the Commissioner wrong then rests on the vendor under section 37. Because VAT is inherently a system of self-assessment based on a vendor’s own records, it is obvious that the incidence of this onus can have a decisive effect on the outcome of an objection or appeal. Unlike income tax, where assessments can elicit genuine differences of opinion about accounting practice, legal interpretations or the like, in the case of a VAT assessment there must invariably have been an adverse credibility finding by the Commissioner; and by like token such a finding would usually have entailed a rejection of the truth of the vendor’s records, returns and averments relating thereto. Consequently, the discharge of the onus is a most formidable hurdle facing a VAT vendor who is aggrieved by an assessment: unless the Commissioner’s precipitating credibility finding can be shown to be wrong, the consequential assessment must stand.”

75. It is clear from tax legislation earlier stated and precedents cited by the Tribunal that the burden to prove that a tax assessment is erroneous lies on the Appellant and that the Appellant therefore should have adduced documentary evidence to support its averments in the instant case.

76. The Appellant, in the instant case provided no supporting documents to support its objections to the VAT tax assessments and in this regard, the Tribunal finds that both the VAT assessments were justified.

c. Whether the PAYE assessment was justified 77. The Appellant submitted that the assessment for PAYE on the director sought to charge tax on refunds to the director for advances previously made to the company through the director’s current account. That the advances were from a taxed source and therefore subjecting the same to PAYE amounted to taxing the same income twice.

78. The Respondent submitted that the director's current account for the periods under review contain cash payments made directly to the director for payment of personal services which are not subjected to PAYE.

79. The Respondent further submitted that the Appellant did not provide enough evidence to support the contention that the director made advances to the company and no cash movement confirmation, board management approvals and bank movements were provided thus the same should be subjected to PAYE as provided under Sections 2 and 5 of the Income Tax Act 2013.

80. The Tribunal noted that in relation to the PAYE assessment on the Appellant’s director, the Appellant provided the director’s PAYE returns for the years 2016, 2017, 2018, 2019 and 2020.

81. The Tribunal however noted that no further documentation was adduced by the Appellant to prove that the payments to the director were refunds for advances previously made to the company.

82. The Tribunal was therefore unable to verify the averment by the Appellant that these amounts were from previously taxed sources. Further, there were no supporting documents nor reconciliations submitted to prove that PAYE returns submitted for the director for the years 2016 to 2020 were in relation to the payments to which the assessment related.

83. In this regard, and based on the earlier stated statutory provisions and precedents relating to the burden of proof falling on the Appellant, the Tribunal came to the conclusion that the PAYE assessment was justified.

Final Decision 84. The final decision in the matter, taking into consideration the overall proceedings, is that the Appeal is not merited and the Tribunal accordingly proceeds to make the following Orders:a)The Appeal be and is hereby dismissed.b)The Respondent’s objection decision dated 27th April 2022 be and is hereby upheld.c)Each party to bear its own costs.

85. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER 2023ERIC NYONGESA WAFULA...............CHAIRMANCYNTHIA B. MAYAKA......................MEMBERDR. RODNEY O. OLUOCH...............MEMBEREUNICE NGANGA..............................MEMBERABRAHAM K. KIPROTICH..............MEMBERBERNADETTE GITARI......................MEMBER