Mwiti v Commissioner of Domestic Taxes [2023] KETAT 340 (KLR)

Mwiti v Commissioner of Domestic Taxes (Appeal 549 of 2022) [2023] KETAT 340 (KLR) (Commercial and Tax) (9 June 2023) (Judgment)

Neutral citation: [2023] KETAT 340 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 549 of 2022

RM Mutuma, Chair, EN Njeru, D.K Ngala & RO Oluoch, Members

June 9, 2023

Between

Douglas Kathurima Mwiti

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a registered taxpayer and an employee of Sidoman Investments Limited, a licensed customs agent providing services such as Import Customs Clearance.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. Under Section 5(1) of the Act, the Respondent is an Agency of the Government for the collection and receipt of all tax revenue. Further under Section 5(2)of the Act in respect to the performance of its functions under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent carried out investigations on the Appellant for the years of income 2016 to 2018 and vide a letter dated 20th April 2021 shared the investigations findings and demanded tax of Kshs 28, 669, 991. 00 being Corporation tax and VAT.

4. Some of the offences the Appellant was accused of following the investigations were: -a)Failure to file income tax returns for period 2016, 2017 & 2018 contrary to Section 94 of the Tax Procedures Act (TPA)b)Failure to pay taxes due and payable contrary to Section 95 of the Tax Procedures Act.c)Fraud in relation to tax contrary to Section 97 (c) of TPA.d)Use of false PIN contrary to Section 91 of TPA.e)Failure to apply for registration for Value Added Tax contrary to Section 37 (a) of the Value Added Tax Act.

5. The Appellant responded to the Respondent’s investigations findings letter vide his letter dated 28th April 2021 giving explanations to some of the issues raised by the Respondent.

6. Vide a letter dated 6th August, 2021 the Respondent demanded for tax of Kshs 30,498,927. 00 being Corporation tax of Kshs 10,979,614. 00 and VAT tax of Kshs 19,519,313. 00.

7. The Appellant objected to this demand vide his tax agent’s letter dated 30th November, 2021. There followed various engagements between the parties and vide a letter dated 14th April, 2022 the Respondent issued its Objection decision confirming the principal tax liability of Kshs 30,498,927. 00.

8. Aggrieved by the Respondent’s decision, the Appellant preferred this Appeal by filing his Memorandum of Appeal and Statement of Facts dated 24th May, 2022 and received at the Tribunal on 26th May, 2022.

The Appeal 9. The Appeal is premised on the following grounds: -a)That the assessment is based on erroneous grounds, that is, out of assumption that the Appellant is in the trade of importation and resale of goods. The actual position being that, the Appellant is a duly registered clearing and forwarding agent and only cleared consolidated imports belonging to third parties.b)That the Appellant avers that import data relied upon in raising an assessment, exclusively related to clearing consolidated cargo belonging to third parties.c)That the Appellant did not keep information in format required for by the Respondent for the individual owners of the consolidated consignment as there was no legal requirements to do so.d)That the Appellant duly declared all income earned in the period in question as provided for by the Income Tax Act Cap 476 Laws of Kenya, a fact that was demonstrated by provision of income tax self-assessment returns for the periods in question.e)That the basis relied upon to charge income tax is not only unconstitutional but also illegal as it’s contrary to Article 210 of the Constitution.f)That the Appellant fully declared business income earned in the years under audit and that the alleged under declared income does not fall under any of the above envisioned sources of income reproduced above.g)That the Appellant did at any given time recognise cost of alleged imports as it would be the norm for any entity involved in trade to claim cost of purchase.h)That VAT can only be charged as provided for under the VAT Act of 2013 charging section.i)That the alleged undeclared amount subjected to VAT does not amount to a supply as provided for by the charging section. Further the Appellant did claim any invoice associated with the alleged undeclared supplies.j)That the Appellant’s position that goods were consolidated cargo is factual evidence by the letter it wrote to the Respondent’s customs department requesting approval to clear the said consignments.

Appellant’s Prayers 10. The Appellant prayed that the Tribunal grants the following orders:a)That this Appeal be allowed with costsb)That the decision of the Commissioner of 14th April,2022 be set aside with costs to the Respondentc)That the Commissioner be restrained from taking any enforcement measures against the Appellant with a view to collecting the sum of Kshs 30,498,927. 00 and any penalties and interest relating thereto.d)That the Tribunal grant such orders as it may deem fit.

The Respondent’s Case 11. In its Statement of Facts dated and filed on 24th June, 2022, the Respondent has addressed itself to the Appellant’s grounds of Appeal.

12. It argued that it carried out investigations against Sidoman Investment limited where the Appellant was an employee and established that Sidoman Investment Limited under declared taxes by mis-declaring the imports and its income. The investigations also revealed that some of the imports under inquiry were cleared by the Appellant using the password of his employer. The investigations also revealed that the Appellant illegally used PIN A003482370R belonging to Nancy Moikera Gwaro and imported vatable products for resale and omitted income earned as a result. Further that the Appellant also imported vatable products or consolidated cargo using Githongo Holdings which was a non-existent company using his PIN and disguising then to belong to Nancy Mokeira Gwaro without her knowledge thereby illegally using her PIN.

13. The Respondent argued that by using Nancy Mokeira Gwaro’s PIN without her written permission the Appellant committed an offence under Sections 90(1) and 90 (2) of the TPA which provides as follows“(1)A person commits an offense if that person uses a false PIN on a tax return or other documents used for the purposes of a tax law. 2. A person who uses a PIN of another person shall be treated as having used a false PIN, unless the PIN has been used in the circumstances specified in section 13 (3).”In light of these facts the Respondent argued that the imports were not on behalf of the alleged clients and as such refuted the Appellant’s ground.

14. In response to the third ground of Appeal, the Respondent stated that it did not at all material times require that the Appellant present the information in a specific form, rather it required the Appellant to provide it with information to prove certain facts. The Respondent further averred that it requested the Appellant for information showing that he was acting on behalf of clients, which information it failed to provide.

15. The Respondent asserted that at the objection review and assessment stage, the Appellant did not provide information showing the clients he was acting on behalf of, neither did he give information on payment by the alleged clients. The only information given was that the payment received was employment income from Sidoman Investment limited. The Appellant therefore failed to show that it was clearing consolidated cargo for third parties.

16. The Respondent argued that the Appellant had earlier averred that Githongo Holdings was one of the clients for whom he was clearing the imported goods. However, a search at the Registrar of Companies revealed that Githongo Holdings was inexistent. Further, the Appellant also failed to reasonably explain his relationship with Nancy Mokeira Gwaro, yet he was using her PIN to import vatable supplies through his employer, Sidoman Investment limited. Nancy Mokeira Gwaro infact denied ever contracting with the Appellant to have him import and clear the vatable supplies on her behalf.

17. It was the Respondent’s contention that having claimed that the consolidated imports were cleared on behalf of others, the Appellant should have produced documents like contracts with customers and receipts of commissions paid by the alleged customers to prove his assertion. This proves that the was importing goods for resale by his associated companies and earning income other than employment income as defined under Section 54 A (1A) of the Income Tax Act.

18. The Respondent averred that failure by the Appellant to provide the requested documents forced the Respondent to reach the decision based on the information within its custody as per Section 24 (2) of the TPA.

19. On the issue of Corporation tax, the Respondent established that the Appellant had only declared employment income yet his associated companies had received income from the resale of the imported consignments. The Respondent further states that the fact that the Appellant and the associated companies did not claim cost of purchase as expenditure to be deducted from taxable income or as part of input VAT for a refund, does not mean that they were not trading. This is because the Appellant and the associated companies still stand to gain as the whole of the amount for which they were selling the imported consignments are not declared as income as such they pay zero income tax and corporation tax in this regard.

20. The Respondent averred that it was logical that the Appellant failed to pursue the purchase expenditure from the Respondent in any form even though he is trading through the associated companies. To claim these expenditures would have alerted the Respondent that he is importing the consignment on his own account, that he is reselling them contrary to the reports of his self-assessment and that he is earning other taxable income other than employment income.

21. In response to the 8th ground of Appeal, the Respondent stated that the investigations revealed that the Appellant was importing vatable goods on his own stead to be resold by associated companies. Having imported these goods to resell them to third parties, any VAT cost that the Appellant incurred during importation was potentially refunded by the third parties who purchased the goods.

22. The Respondent stated the following about the Appellant: -a)That he failed to show the goods he resold were exempt from VATb)That he failed show that his input exceeded the output.c)That he failed to provide sufficient information to show why the assessment was wrongd)That he failed to register and remit the difference between the VAT charge on the sale of the goods at the time he was reselling them and the VAT he was charged at the time he was purchasing the imported goods.In light of the foregoing the Respondent issued a VAT assessment as per Section 5(1) of the VAT Act.

23. The Respondent reiterated that before the investigations, it initially treated the Appellant as a consolidator. However, the investigations proved the contrary as such it requested for proof which would dissuade it from the conclusions of the investigations. Such proof was not availed by the Appellant hence the Respondent legally upheld the decision based on the findings of the investigations.

Respondent’s Prayers 24. The Respondent therefore prays that this Tribunal finds: -a)That the Respondent’s decision to confirm the Appellant’s tax liability as Kshs 30,498,927. 00 for the relevant period was proper in law and conformed with the Income Tax Act, Value Added Tax Act and Tax Procedures Act.b)That this Appeal be hereby dismissed with costs to the Respondent as the same is without merit.

Submissions of The Parties 25. In his Written Submissions dated 19th December, 2022 and filed on 22 December, 2022, the Appellant submitted that the assessment was based on erroneous grounds as it was done out of assumption that the Appellant is in the business of importation and resale of goods, while in fact its employer, Sidoman Investments limited, is the one who acted as a consolidator and used its KRA PIN since it was not possible to use respective KRA PINs of retail importers. Further that it’s PIN was used by his employer Sidoman Investments limited to process clearance of consolidated cargo and that he did not involve himself in the business of imports of goods for resale. The alleged imports belonged to retail importers whose duties and other taxes were processed and paid for by Sidonman Investments Limited on behalf of the respective owners and not the Appellant.

26. The Appellant submitted that what the Respondent relied on to charge income tax was not only unconstitutional but also illegal and contrary to the provisions of Article 210 of the Constitution which states in part as follows:“(1)) No tax or licensing fee may be imposed, waived or varied except as provided by legislation”

27. The Appellant also relied on Section 3 of the Income Tax Act and Section 5 of the Value Added Tax Act and submitted that he did not make any taxable supply as alleged to warrant charge of VAT and that he also did not earn income in relation to imports.

28. He submitted further that the Appellant only earned employment income from Sidoman Investments Limited and that the same fact was supported by availing his bank statement which only transacted salary income received from his employer.

29. The Appellant averred that he discharged his role by giving adequate explanation and that indeed he established a prima facie case which the Respondent has not controverted. He therefore prays that this Appeal be allowed.

30. In the Written Submissions dated 24th January 2023 and filed on even date, the Respondent has raised a single issue for determination.

Whether the Appellant Discharged his Burden to Prove that the Assessments were Erroneous 31. The Respondent contended that the investigations carried out established that the Appellant and company dealt with supply of imported taxable/vatable services which are chargeable to VAT in compliance with the provisions of Section 5 (1) (c) of the VAT Act,2013. Further that the Appellant had himself admitted that he was in the business of and is a registered clearing and forwarding agent and only cleared consolidated imports. The Appellant’s business therefore fits well within the meaning of “a supply of imported taxable services” as provided for under Section 5(1) (c) of the VATAct, 2013. It is therefore a supply contrary to what the Appellant has alleged.

32. It was the Respondent’s averment that the Appellant imported a total of 48 consignments with a cumulative vatable value of Kshs 121,995,906. 00 for the years of income 2016 to 2018. Further that he traded using his proprietor company Oxkat Solutions using his own PIN A003123759N by importing vatable products or consolidated cargo but failed to declare income earned.

33. The Respondent submitted that its investigations revealed that the Appellant illegally used the PIN number A003482370R belonging to Nancy Mokeira Gwaro and imported vatable products or imported consolidated cargo and omitted income earned as a result, contrary to the provisions as set out in tax laws. Further that it established that the Appellant also imported consolidated cargo using Githongo Holdings, a non-existing company, using his PIN and disguised them to belong to Nancy Mokeira Gwaro without her knowledge thereby illegally using her PIN number A003482370R contrary to the provisions as set out in the law.

34. The Respondent submitted that during the objection review and assessment stages, the Appellant neither provided a breakdown of which clients he acted on behalf of nor the income derived from the business he carried out during the period under review. Consequently, the Respondent computed taxes based on all consignments of 48 entries that were consolidated and cleared by the Appellant for the period 2014-2019. Further that in the absence of a personal bank account, the Respondent established the Appellant’s Corporation tax based on the established Gross Profit Margin of 30% in respect of taxpayers dealing with similar products and imports.

35. The Respondent submitted that contrary to Section56 (1) of TPA and Section 30 of TATAct, the Appellant failed to provide any proof of expenses or costs incurred and thus the Respondent was left with no choice but to rely on its best judgement by using the gross profit margin (GPR) of companies doing similar business. The Respondent concluded by stating that the Appellant did not at any time avail evidentiary documents in opposition of the assessment but only made assertions with no evidence.

Issues for Determination 36. Having considered the parties’ pleadings, submissions and documentation availed, the Tribunal is of the considered view that this Appeal raises one issue for determination.

Whether the Respondent’s Demand is due and Payable Analysis And Findings 37. Have established the single issue for determination, the Tribunal will proceed to analyse it as herein under:

Whether the Respondent’s Demand is Due and Payable 38. The tax demand arose after the Respondent carried out investigations against the Appellant and established that the Appellant had been importing goods on behalf of third parties using his company and failed to declare his income and pay VAT for the vatable supplies. The Appellant on the other hand stated that he was an employee of Sidoman Investment Limited, a clearing and forwarding company and that his only source of income was his employment income.

39. The Tribunal has had an opportunity to peruse through the documentation availed, especially by the Respondent, and has sighted several C.17B customs forms which indicate the importer as either Oxkat solutions c/o Douglas Kathurima (a company where the Appellant has a 70% shareholding), Githongo Holdings c/o Nancy Gwaro or Nancy Mokeira Gwaro in her personal capacity. In all these forms, the clearing Agent was Sidoman Investment Ltd. It goes without saying that the importer of the consignment was the Appellant and his employer carried out the clearing and forwarding of the consignment.

40. In his letter dated 4th May 2021, in response to the Respondent’s investigation findings letter dated 20th April, 2022 the Appellant admitted to be importing consolidated cargo for his clients and that Githongo Holdings and Oxkat Solutions were companies that were trading as the Appellant. It is therefore unconceivable that the Appellant would import for third parties without commission income or any form of remuneration noting that he has claimed that his only source of income is the employment income.

41. It is also curious that even as the Appellant admits importing cargo for his clients he has not availed any documentation to show who these clients are and what the written agreements between them stipulated. Sections 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act places the burden on the Appellant to prove the Respondent wrong. The said Sections provide as follows: -56(1) of TPA reads as follows:-“In any proceeding under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.Section of 30 TAT 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; orb)In any other case, that the tax decision should not have been made or should have been made differently.”

42. The onus was therefore on the Appellant to discharge his burden by adducing evidence which he failed to do. Merely making pleadings is not enough.

43. In its Statement of Facts, the Respondent had alleged that the Appellant unlawfully used the Personal Identification Number (PIN) of one Nancy Mokeira Gwaro without her written consent and that she denied any dealings with the Appellant. Further that the Appellant used his PIN when importing a consignment under Githongo Holdings contrary to Section 13 (2) of the Tax Procedures Act which provides as follows: -“Subject to subsection (3), one PIN shall be issued to each person and it shall not be used by a person other than the person to whom it was issued”Subsection (3) qualifies the circumstance under which one may use another person’s PIN. It provides as follows:“The PIN of a person may be used by a tax agent when –a)The person has given written permission to the tax agent to use the PIN and…”

44. In the above circumstances, the Appellant has failed to prove that indeed he received written authority from Ms Nancy to use her PIN, and has not given any plausible explanation on their relationship. It does not help his case the fact that he used the PIN on a company - Githongo Holdings that does not appear in the data base of registered businesses /companies, further casting aspersions as to his business activities and the incomes there from. The Tribunal has observed that several reminders made by the KRA Investigations Department to the Appellant to shed light on these issues were not honoured.

45. In view of the above circumstances and the Appellant’s inability to provide evidential documentation to defend his case, the Tribunal is inclined to believe that the Appellant was being economical with the true position of his business activities.

46. Consequently, the Tribunal holds and finds that the Respondent’s demand for the taxes is valid and that the said taxes are due and payable.

Final Decision 47. The upshot of the above is that the Appeal lacks merit and therefore fails. The Tribunal accordingly proceeds to make the following final Orders;a)The Appeal be and is hereby dismissed.b)The Respondent’s Objection decision dated 14th April, 2022 be and is hereby upheldc)Each party to bear its own costs

48. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF JUNE, 2023. ...................................ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERDELILAH K. NGALA - MEMBERRODNEY O. OLUOCH - MEMBER