Ola Energy Kenya Limited v Commissioner of Domestic Taxes [2024] KETAT 1473 (KLR)

Ola Energy Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E760 of 2023) [2024] KETAT 1473 (KLR) (Commercial and Tax) (13 September 2024) (Judgment)

Neutral citation: [2024] KETAT 1473 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E760 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, G Ogaga & AK Kiprotich, Members

September 13, 2024

Between

Ola Energy Kenya Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant that was previously known as Libya Oil Kenya Limited, is a limited liability company incorporated in Kenya in the year 1951 under the Companies Act, CAP 486 of the Laws of Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and the Authority is mandated with the responsibility for the assessment, collection, receipting and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out in the Schedule of the Act.

3. The Respondent investigated the affairs of the Appellant regarding its transactions with alleged non-resident related entities. It subsequently issued a tax assessment for the period 2017 to 2018 through a letter dated 29th June 2023. The Appellant objected to this assessment on 2nd July 2023.

4. The Respondent issued its objection confirming the assessment of Kshs 736,437,644. 00, inclusive of interest and penalties, vide a letter dated 21st September 2023.

5. Aggrieved by this decision the Appellant filed a Notice of Appeal dated 19th October 2023.

THE APPEAL 6. The Appellant’s Memorandum of Appeal dated and filed on 2nd November 2023 raised the following grounds of appeal:a.That The Respondent erred in law and fact by failing to issue the Appellant with a proper notice of assessment contrary to the provisions of Section 31 of the Tax Procedures Act 2015;b.The Respondent erred in law and fact by violating the Appellant’s right to legitimate expectation.c.The Respondent erred in fact and law by contravening the provisions of Article 47 of the Constitution of Kenya and the Fair Administrative Actions Act by failing to provide the Appellant with documents that they relied upon in arriving at the transfer pricing adjustments.d.The Respondent erred in law and fact in disregarding the Appellant's supporting documents and in so doing, arrived at a conclusion contrary to the provision of Section 18 of the Income Tax Act as read together with the Income Tax (Transfer Pricing Rules) and the Organization for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

APPELLANT’S CASE 7. The Appellant laid out its Appeal in its:a.Statement of Facts dated and filed on 2nd November 2023b.Witness statements of Francis Cheruiyot dated and filed on 17th June 2024 that was admitted in evidence under oath on the 16th July, 2024. c.Witness statement of Thomas Abade dated and filed on 17th day of June 2024 that was admitted in evidence under oath on the 16th July, 2024.

8. The Appellant stated that the Respondent through a letter dated 3rd September 2018 issued its objection decision for the period 2010-2016 wherein the said Respondent did not make any transfer pricing adjustments or provide any reasons for the assessed taxes.

9. That upon realising that no reason had been provided in its objection decision the Respondent issued a second letter dated 27th September 2018 to provide reasons for its decision.

10. That the said letter titled "Clarification Letter" was issued outside the time-period for issuing an objection decision and was thus an attempt by the Respondent to cure the defective and invalid objection decision.

11. That the said clarification letter also stated that the transfer-pricing audit was still on-going, and the findings would be communicated under a separate cover.

12. The Appellant maintained that the Respondent did not contact it to confirm the continuation of the said audit, neither did the Respondent make requests for any documentation from it pertaining to the said audit.

13. That it was nevertheless issued with a preliminary audit finding on 7th June 2023 on transfer pricing for the financial years 2017 and 2018 and was requested to respond and provide certain documents thereto within seven (7) days.

14. The Appellant stated that it was unaware of an ongoing audit for a five year period of between 27th September, 2018 to 7th June, 2023. That it nevertheless issued its response to the said preliminary findings and submitted the requested documentation to the Respondent vide a letter dated 3rd June 2023.

On Whether the Respondent erred in law and fact by failing to issue the Respondent with a proper Notice of Assessment contrary to the provisions of Section 31 of the Tax Procedures Act, 2015. 15. According to the Appellant, the Respondent erred by falling to issue it with a proper notice of assessment contrary to the provisions of Section 31 of the Tax Procedures Act. That the letter dated 29th June 2023 did not serve as a proper notice of assessment as it failed to meet the requirements provided under Section 31 (8) of the Tax Procedures Act.

16. It was its view, that the Respondent’s letter required immediate payment of the alleged assessed taxes which is contrary to Section 29 (2) and 31(8) of the TPA because the law required the taxpayer to be granted at least 30 days from the date that the taxpayer received the Notice of Assessment.

17. That the immediate payment of the taxes demanded denied it a fair chance to object to the demand as provided under Section 51 of the Tax Procedures Act because its immediate payment would have denied it the right to object to the alleged assessment.

18. The Appellant relied on the cases of Anne Wanjiku Kahwai & Another versus Kenya Revenue Authority & Another (2019) eKLR and Sukari Investments Limited versus Commissioner of Domestic Taxes (2021) to underscore the need to adhere to the statutory provisions.

19. The Appellant stated that the Respondent generated electronic assessment which it received on 30th October 2023 and that the Assessment Orders differed from the notice of assessment dated 29th June 2023 because the letter of 29th June 2023 assessed principal tax at Kshs 449,853,906. 00 while the electronically generated assessed principal tax at Kshs 455, 978,316. 00.

20. That the electronically generated assessment did not provide reasons for the additionally assessed tax contrary to the provisions of the Fair Administrative Action Act and thereby denying it the opportunity to substantively respond to the additionally assessed tax of Kshs 6,124,410. 00.

On Whether the Respondent erred in law and fact by violating the Appellant's legitimate expectation 21. The Appellant averred that the Respondent informed it of the audit process vide a letter dated 27th September 2018 that its transfer pricing affairs were under review and that the findings would be communicated under separate cover. That it was never informed of the progress of this audit between the periods September 2018 to June 2023.

22. The Appellant stated that due to the Respondent's silence on this matter for close to five (5) years, it was under the impression that all of the company's tax matters were in order and no issues were expected to arise at a later date.

23. The Appellant argued that it did not understand why it took the Respondent five years to issue its assessment.

24. The Appellant relied on the case of Republic v The Principal Secretary, Ministry of Transport, Housing and Uban Development (2019) ekLR in support of the preposition that the Respondent breached its legitimate expectation in demanding for additional taxes without informing it of the ongoing investigation.

On Whether the Respondent contravened the provision of Article 47 of the Constitution of Kenya and the Fair Administrative Action Act 25. It was the Appellant’s case that it provided supporting documents through a letter dated 23rd June 2023 to buttress its arguments in the response to preliminary findings including:a.related party contracts as proof of provision of management services by OEKL to related parties;b.extracts of general ledgers showing revenues received by OEKL from related parties;c.sample copies of debit notes for corporate services rendered by employees of OEKL to related parties;d.correspondence and support of proof of receipt of management and support services by OEKL from related parties;e.contract between OEKL and related party as proof of intra-group purchase of products;f.OEKL's Transfer Pricing Policy covering the period 2017 -2018;g.breakdown of sales of jet fuel to third parties and related parties; andh.OEKL'S audited financial statements for 2017 and 2018.

26. That the Respondent disregarded its supporting documents in arriving at its decision because it neither pointed out insufficiency in the documents nor did it request for additional information. That the Respondent's assessment and objection decision was predetermined before issuance of the preliminary findings.

On Whether the Respondent disregarded the Appellant's supporting documents 27. The Appellant averred that all transactions conducted between itself and its related parties during the periods ending 31 December 2017 and 31 December 2018, were informed and guided by the provisions of the Income Tax Act, its Transfer Pricing policy, Section 18 (3) of the Income Tax Act and Rule 10 of Income Tax Transfer Pricing Rules which provide guidelines to be applied by related enterprises in determining the arm's length prices of goods and services.

28. That its Transfer Pricing policy described each transaction, the functional analysis, the risks, economic analysis, selection of the tested party, application of the method and the justification of the margin achieved in compliance with Section 18 (3) of the Income Tax Act and the Transfer Pricing Rules.

29. The Appellant averred that the Transfer Pricing policy proved that it did all that was required of it to confirm and demonstrate that its transactions with its related parties were at arm's length. That additionally, the Respondent did not dispute the analysis contained in the Transfer Pricing policy or the benchmarking analysis that it had conducted.

30. That in disregarding its Transfer Pricing policy and documentation, the Respondent erroneously allocated various costs to a group of employees whom it perceived to be directly involved in the provision of the intra-group services.

31. It was the Appellant’s case that the Respondent held that its transactions with its related parties were not conducted at arm's length without providing any proof to support its claims or any third party data to collaborate its assertions. That this was an arbitrary and unfair way to conduct a tax administration process. It supported this assertion with the case of Republic vs Kenya Revenue Authority Exparte Jaffer Mujtab Mohamed [2015] eKLR and Anne Wanjiku Kahwai v Kenya Revenue Authority (2018) eKLR.

32. That the Respondent failed to provide it with the following information despite the pronouncements by the Court in the above cited cases:i.The source of the information and the basis upon which the Respondent allocated costs relating to certain employees that the Respondent deemed to have provided management services to related parties;ii.The rationale behind disallowing the entire margin paid to OESD for the purchase of products despite acknowledging that the Appellant does indeed benefit from economies of scale from central purchasing of products and prolonged credit period; andiii.The third party contract relied on by the Commissioner in concluding that the Appellant should have earned a margin of KShs 7. 5/litre for the sale of aviation fuel to OAFS.

On Provision of Management Services by the Appellant to Related Parties 33. With regards to this issue, the Appellant stated that the Respondent's averments are incorrect and unfounded because it informed the Respondent that it only provides accounting and finance support to OEUG. To support this argument, the Appellant alleged that it provided the Respondent with a copy of the Agreement between it and OEUG that laid down the terms with respect to the provision of accounting and finance support to OEUG. That the terms of the service agreement were in tandem with the provisions of the Transfer Pricing policy.

34. That under its Transfer Pricing policy, the transfer price applied to the services provided to OEUG was based on the total costs incurred by Appellant plus a 10% mark-up. That it provided a detailed breakdown of the costs incurred when rendering these services, details of the employees involved, the time allocation key used, mark up applied as set out in the said agreement and proof of the revenue earned from OEUG.

35. On the issue of having employees designated as 'coordinators', the Appellant maintained that this was a baseless finding as such people do not exist in its employment.

36. It argued that OES DMCC provides management services to the various OLA affiliates of the Group. That OES DMCC has dedicated teams internally but also relies on staff employed by other group entities and located in their respective territories.

37. It asserted that OES DMCC centralizes all management services, and is responsible for re-invoicing these services to all the group's entities with each employed staff assigned to an affiliate on a need basis when required to provide corporate services.

38. That it invoiced all costs incurred in providing the services for the benefit of the group's affiliates. That the costs included a portion of the salaries of the staff partially involved in providing the corporate services as well as some fixed costs incurred for these services.

39. It also argued that the costs on-charged to OES DMCC for the provision of employees performing corporate functions were declared in the financial statements, the income tax returns and the transfer pricing documentation for years 2017 and 2018.

40. The Appellant affirmed that it was compensated for the services it provided to OES DMCC at arm's length and therefore, no transfer pricing adjustment should be passed. That this income was provided in the Trial Balance for 2017 and 2018.

41. That the breakdown of the costs incurred in providing the services to OES DMCC, details of the employees involved, the time allocation key used and the mark-up applied was also provided to the Respondent.

42. That the Respondent adopted its Transfer Pricing policy and accepted that a mark-up of 6% would be charged on the total costs incurred at arm's length. That contrary to this policy the Respondent proceeded to tabulate unfounded figures amounting to Kshs 209,512,688. 00, without providing any basis on how this figure had been arrived at.

43. It averred that it invoiced the relevant costs incurred in providing the services to the related entities and was compensated for the services provided to related parties together with a mark-up of 6%.

44. That the Respondent took a position that the Appelant’s transactions with its related parties are not conducted at arm's length without providing any proof to support its claims or any third party data to corroborate its assertions. To support the Appeal on this issue, the Appellant cited the case of Republic v Kenya Revenue Authority Exparte Jaffer Mujitab Mohamed [2015] eKLR.

On Whether the Respondent was entitled to disallow expenses incurred in the generation of the taxable income 45. According to the Appellant, under the OECD, Paragraph 7. 45 of the OECD Guidelines question on whether an intra-group service has been rendered should depend on whether the activity provides a respective group member with economic or commercial value to enhance or maintain its commercial position. It argued that this can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity performed for it by an independent enterprise or would have performed the activity in-house for itself.

46. The Appellant stated that the Respondent wrongfully found that the costs incurred by the Appellant was Kshs 171,607,265. 00 without providing evidence on how it arrived at the figure.

47. The Appellant averred that due to the nature of the services rendered, it was a difficult task to understand the benefit from an outsider perspective considering that it had adduced sufficient evidence that intra group services have been provided through affiliate visits, remote meetings, email correspondence, and periodic review.. The Appellant argued that this was contrary to the Cohan Rule as stated in Cohan v. Commissioner of Internal Revenue, 39 F.2d 540, 2U.S. TaxCas.(CCH) P489, 8 A.F.I.R. (P-H) P10552(C.C,A 2d Cir. 1930) where the court stated that a tax authority is expected to accept reasonable explanations given by the taxpayer. The Appellant also relied on the case of Hyderabad-Tns India Private Itd vs Assessee to support its case.

48. The Appellant asserted that the expenses amounting to Kshs 171,607,265. 00 were wholly and exclusively incurred in the generation of taxable income in Kenya and therefore they should be deducted against its taxable income as provided under Section 15 of the Income Tax Act.

49. The Appellant asserted that the services rendered amounting to Kshs 171,607,265. 00 met the requirements provided in Chapter 7 of the OECD Guidelines and should thus have been allowed.

50. The Appellant argued that it provided sufficient evidence that intra group services had been provided either through affiliate visits, remote meetings, email correspondence and periodic reviews. That the Appellant did indeed derive benefits from the same. It opined that the amount totalling to Kshs 171,607,265. 00 should be allowed entirely as it had provided evidence.

On Intra- group Purchase of Products by the Appellant from OESD 51On this issue, the Appellant relied on Section 15 (1) of the Income Tax Act which provides that;“for the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of thot income.”

52. The Appellant also relied on Paragraph 1. 168 of the OECD Guidelines which provides that:“the remuneration of a company acting as a "central purchasing manager on behalf of the entire group" should be consistent with the "arm's length price that would remunerate the entity for its services of coordinating purchasing activity."

53. According to the Appellant, the general rule is that if a company, acting as a central purchasing entity, achieves a margin of around 5. 5%, then there is no need to perform a search for comparable pricing to justify the arm's length nature of the remuneration.

54. The Appellant asserted that its declared margins for the years 2017 and 2018 as provided in the Transfer Pricing policy document from OESD are which were within the OECD range and that the commission charged by OESD is within the arm's length price.

55. The Appellant contended that the expenses amounting to Kshs 48,282,062. 00 were wholly and exclusively incurred in the generation of taxable income in Kenya and should thus be deducted against the Appellant's taxable income as provided under Section 15 of the Income Tax Act. It objected to the dis-allowance of the whole amount because the Respondent did not offer an alternative pricing model nor an alternative benchmarking analysis to support its case.

On Whether a tax authority can make a Transfer Pricing adjustment on a related party transactions 56. The Appellant asserted that it obtained petroleum products through the Open Tender System (0TS) for refuelling airlines. That customers in the aviation business line are global customers of OAFS to whom the Appellant provides Jet Al refuelling services at Kenyan airport facilities.

57. It stated that the OAFS team is responsible for customer identification at group level, tendering and price negotiation, drafting and concluding contracts with the airlines, collecting amounts due from customers and paying the Appellant within 20 days.

58. It added that the OAFS team participates in international bids to win supply contracts to international airlines. That these competitive bids mean that OAFS needs to apply volume discounts to win the supply contracts that would translate into higher sales volume at competitive margins for its affiliate companies such as the Appellant who eventually supply the fuel to the airlines.

59. The Appellant averred that the Respondent failed to consider the following in comparing the international selling price margin enjoyed at OAFS level to that earned from the alleged independently obtained local customers indicated that:i.The sales to independent local customers account for less than 20% of the total volume of sales for jet fuel. The Appellant stated that the volume scale should be taken into consideration when determining the comparability of the price charged to each party. It noted that if over 80% of the sales of a business are derived from one customer, then it makes business and economic sense to bid at competitive prices in order to retain and maintain that customer;ii.The international aviation customers acquired through OAFS, are a result of aggressive international competitive bidding among the big Oil Marketing Companies (OMCS), for global supply, not country by country. That as a result, the margins are very tight compared to local stand alone contracts.iii.The international contracts through OAFS are based on contractual volumes, which guarantees regular sales and supply, without inventory risk fluctuations; The Appellant bears the credit risk when dealing with the independent customers as opposed to the guaranteed payment when fuel is supplied to airlines sourced by OAFS.iv.An adjustment should also be passed to consider the cost of the credit risk when comparing the two prices.

60. According to the Appellant, it earned an average margin of Kshs 0. 5 per litre from total sale of aviation fuel for the years 2011 to 2018 including to third parties. That the margins earned were in line with the global aviation margins, which are based on the Platts pricing formula that is a global reference point for commodity prices.

61. That the margins earned from sales to independent customers such as Kenya Airways during the period under review average at Kshs 1. 8/litre for a very low volume compared to the global contracts through OAFS that has a higher volume and a lower margin averaging Kshs 0. 61/litre.

62. That the total sales to Kenya Airways for 2017 and 2018 was 9. 6 million litres (7% of total aviation volume) while the total sales to global airlines through OAFS was 115 million litres (78% of total aviation volume).

63. It was the Appellant’s case that the Respondent failed to provide the source of margins of Kshs 7. 5/litre used in making the adjustments. That it instead referred to information availed by an unidentified third party.

64. It was its view that this action by the Respondent was arbitrary and contrary to the decision of the Tribunal in Mumbai Income Tax Appellate Tribunal in the case of Federal Mogul Anand Bearing India Ltd, (Case No.TS-580-1TAT-2020 (MUM-TP) .

65. In support of its pricing model for aviation fuel, the Appellant alleged that it provided a detailed breakdown of the volumes of sales of jet fuel and consistency of purchase by the customers. It reiterated that the Transfer Pricing adjustment of Kshs 1,023,346,653. 00 has no basis and should be dismissed.On provision of Financial Services by the Appellant to related parties through extended Credit Period

66. In opposition of the Respondent’s process in relation to this issue, the Appellant relied on Section 18 (3) of the Income Tax Act to assert that it does not charge interest for late payment even for long outstanding receivables when dealing with local independent customers.

67. The Appellant averred that charging interest for late payment contradicts its credit policy. That it would also be detrimental to its business and that this would lead to loss of customers who would in turn seek other Oil Marketing Companies that grant extended credit terms. That it extended the same treatment to OEUG as one of its customers with regard to its outstanding trade debts.

68. That in any event, it does not accrue any interest from its independent customers if they do not pay within the expected credit period of 60 days. It supported this with its receivable ageing analysis to demonstrate that it does not impose late payment interest with respect to overdue independent customers' accounts receivables.

69. It objected to the tabulations by the Respondent of Kshs 67,179,058. 00, because it failed to consider the fact that the Appellant does not charge its independent customers late payment interest.

Appellant’s Prayers 70. The Appellant prayed for orders that:a.The Appeal be allowed with costs;b.The Respondent's objection decision dated 21st September 2023 be set aside in its entirety;c.The additional assessed tax of Kshs. 6,124,410. 00 communicated to the Appellant through the electronically generated assessments be vacated;a.The Honourable Tribunal be pleased to make any other orders it deems fit.

Respondent’s Case 71. In response to the Appeal, the Respondent relied on its Statements of Facts dated 4th December 2024 and filed on 6th December 2023 and the written submissions dated 25th July 2024.

Whether the Respondent issued a Proper Notice Assessment as per the Provisions of Section 31(8) of the Tax Procedure Act, 2015. 72. In response to ground 1 of the Memorandum of Appeal and paragraphs 24 to 33 of the Appellant’s Statement of Fact, the Respondent stated that the Appellant was served with a notice of assessment dated 29th June 2023 in accordance with the provision of Section 31 of the Tax Procedures Act which empowers it to issue assessments based on the information available to it and as per its best judgment.

73. The Respondent averred that the request for payment of tax in the notice of the assessment did not infringe on the Appellant's right to object since the Appellant objected on 27th July, 2023. That an assessment usually precedes a demand notice and in this case it did not issue any demand notice of the assessed taxes.

74. It asserted that it did not enforce the taxes raised in the assessment notice in consideration of the Appellant's rights to object to the assessments as provided by Section 51 of the Tax Procedure Act.

75. The Respondent admitted that there was an error regarding the additional tax of Kshs 6,124,410. 00 by the electronically generated assessments but it did not affect the validity of assessment as served under Section 78(2) (d) of the Tax Procedure Act.

76. It relied on the provision of Section 79 of the Tax Procedure Act, which allows the Commissioner to rectify a mistake in an assessment that does not involve a dispute as to the interpretation of the law or facts of the case.

77. The Respondent asserted that Section 30 (1) of the Tax Procedures Act also empowered it to use its best judgement to arrive at a tax decision.

Whether the Respondent Violated the Appellant's Right to Legitimate Expectation on Issuing the Assessments for the Years 2017 and 2018. 78. In response to ground 2 of the Memorandum of Appeal and paragraphs 34 to 39 of the Appellant’s Statement of Facts, the Respondent asserted that it informed the Appellant of the audit findings relating to the years 2017 and 2018 vide the letter of 7th June 2023. That the Appellant responded to the letter through its letter of 23rd June 2023 without raising any concerns that there existed a ‘‘legitimate expectation" on the matter of transfer pricing.

79. According to the Respondent, the processes that the Appellant was relying on to argue legitimate expectation was for the years 2011 and 2016. It noted that the Transfer Pricing matter addressed by the Respondent in this Appeal are of a different period as articulated in its notice of assessment and notice of objection which are based on the provision of Section 31(8) and 51(8) of the Tax Procedure Act respectively.

80. The Respondent cited the case of Communications Commission of Kenya and 5 others v Royal Media Services Limited and 5 others to support the position that the Appellant did not demonstrate how its legitimate expectation was breached.

Whether the Respondent provided Appellant with the Documentation to Support the Transfer Pricing Adjustments. 81. In response to ground 3 of the Memorandum of Appeal and paragraphs 40 to 45 of the Appellant’s Statement of Facts, the Respondent stated that the notice of assessment dated 29th June 2023 stated the documentation provided by the Appellant included the Transfer Pricing policy (TPP); the contract with Ola Energy Uganda Limited (OEUL) dated 1st August 2022 and sample cost-sharing invoices to OEUL from Oil Libya Services DMCC (OSDMCC) were all considered in its assessment. That no other information was availed.

82. The Respondent stated that the transfer pricing adjustments relating to management fees as enumerated in the notice of assessment and notice of objection decision adopted the TPP approach as provided by the Appellant. That this was a clear indication that the documentation provided were utilized.

83. The Respondent averred that the time taken to review the documentation was sufficient as the specific information and documents to support the Appellant’s contrary position were not provided.

84. It relied on Section 56 of the Tax Procedures Act to state that the Appellant failed to discharge its burden of proof.

Provision of Management Services by the Appellant to Related Parties 85. In response to grounds 4 of the Memorandum of Appeal and paragraphs 46 to 108 of the Appellant’s Statement of Facts, the Respondent stated that the nature of the corporate and management services provided to the affiliates included; policies and procedures for corporate governance; market strategies and plans; safety management and business administration; project management; and developing policies and procedures for standardization.

86. According to the Respondent, some of the Appellant's employees were designated as "Coordinators" for the Eastern cluster and were paid an additional "hardship allowance" as remuneration for services offered to the Eastern Cluster affiliates. It averred that in carrying out their function, the "coordinators" incurred costs such as accommodation bills, air tickets, and transport costs, which were booked as expenses in the Appellant’s books of account.

87. The Respondent added that the Appellant failed to provide critical information to support assertions that no services were provided to the Eastern Cluster affiliates. It argued that documentation such as recharge statements and details of the Appellant’s employees performing the affiliate functions were not provided. That the agreement with OEUL which had an effective date of 1st August 2022 could not be relied upon since it related to a period outside the audit period.

88. According to the Respondent, the information requested was key in demonstrating the total cost incurred in the provision of the above services. That in the circumstances, it adopted the mark-up of 10% and 6% on total costs of provision of the services to OEUL and Ola Energy Supply DMCC (0ESDMCC) as proposed in the Appellant’s TPP for the years 2017 and 2018 to compensate the Appellant for provision of the services to related parties.

Receipt of Management and Support Services by Appellant from Related Parties. 89. The Respondent averred that the Appellant paid OHL and Ola Energy Services (OSJLT) for various services beginning in year 2014. That the said services ranged from; lube; information technology; human resources; aviation services; internal audit; planning and budgeting; accounting and finance; business review services; legal and regional support services.

90. It is the Respondent’s case that OHL and OSJLT are service providers of the Ola group and were remunerated based on a mark-up of 6% on costs. In addition, in some instances, the regional managers located at local affiliate entities assisted corporate entities in the provision of services within the region.

91. The Respondent stated that its letter dated 7th June 2023 requested for information from the Appellant to support assertions that the services were actually rendered by the Appellant's related parties through documentary evidence; and that the services rendered provided the Appellant with a benefit or economic benefit.

92. It cited Paragraph 7. 6 of the Organization for Economic Cooperation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2010 (0ECD TPG, 2010) which considered whether the services rendered provided "economic or commercial value to enhance or maintain its business position" to the service recipient.

93. Apart from that, the Respondent asserted that in applying the benefits test, the Guidelines recommend a willingness to pay/perform for itself the test, that is, whether "an independent enterprise in comparable circumstances would have been unwilling to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself."

94. According to the Respondent, the information availed to support intra-group services could not pass the requirements provided in Chapter 7 of the OECD TPG.

95. The Respondent maintained that the evidence failed due to the following reasons: passive benefits which do not attract intra-group charges; duplicated activities, since, the Appellant offers corporate services to itself, OEDMCC and other group affiliates; inconclusive evidence since the information failed to demonstrate any provision of services. It argued that supporting evidence as visits, meetings, e-mail correspondences, reviews, among others, are not a prima facie service that has been provided and the receipt derived a benefit out of it; and that no benefit analysis was attached in the Transfer Pricing Policy.

96. The Respondent asserted that failure by the Appellant to sufficiently demonstrate that the services were actually rendered and that it derived economic benefit upon consumption of the services is what led it to disallow the expenses as costs relating to the intra-group services as provided by Section 15(1) of the Income Tax Act.

Intra-Group Purchase of Products by OEKL from OESD 97. With regard to this issue, the Respondent stated that the Appellant used the base oils and additives purchased from OESD to blend into lubricants at its blending plant in Mombasa. That OESD does not manufacture the products but rather purchases the same from third-party manufacturers and or suppliers for onward re-invoicing to the Appellant.

98. The Respondent noted that the Appellant acknowledged in its response to the preliminary findings that OESD charged a premium over and above the cost of the product for sourcing the materials. That the service fee was alleged to cater for negotiation, contracting, shipping costs and other incidental costs with respect to procurement resulting in OESD earned margins of 2. 6% and 1. 89% on sales made to the Appellant for the years 2017 and 2018.

99. It relied on Paragraph 1. 168 of the OECD TPG, 2017, to argue that where a company acts a central purchasing entity it should be remunerated for its services of coordinating purchasing activity.

100. The Respondent also cited Paragraph 7. 6 of the OECD TPG which provides that in determining whether a service was rendered one must first establish whether the service being rendered by the related party provides economic benefit or commercial value to enhance or maintain the business position of the recipient of the service.

101. It was the Respondent’s view that despite the fact that the Appellant benefited from economy of scale and prolonged credit period from purchasing from OESD; the remuneration accruing to OESD should not have been as a mark up on total costs including the product cost. That based on this it disallowed the margin earned.

Intra-Group Sale of Products by the Appellant to OAFS 102. The Respondent stated that Ola group entered an arrangement with its affiliates to set up an aviation company to manage the group's aviation activities through a centralized entity, which was to hold the aviation business through international aviation tenders. That the said group consequently registered OAFS in United Arab Emirates.

103. The Respondent asserted that the Appellant and OAFS on 2nd September 2015 entered into an Aviation Fuel Supply Agreement for the supply of fuel for consumption in OAFS nominated aircraft or its customer's aircraft.

104. The Respondent alleged that the Appellant sells Jet A1 products to OAFS at Mombasa International Airport and Jomo Kenyatta International Airport. That the Appellant also held contracts with third party customers and was entitled to all of the profits earned from sale of Jet A-1 products.

105. It was the Respondent’s view, that the Appellant is the entrepreneur in sale of Jet A-1 products and is entitled to the residual profit arising from sale of products to third party airlines. That it follows that the margins applied are the industry margins that the Appellant, as an Oil Marketing Company, earns on sale of Jet A-1 products to its customers. Based on this view, the Respondent maintained that it is not in agreement with the Appellant's assertion that it applied a secret comparable/information in it computations.

Provision of Financial Services by the Appellant to Related Parties through Extended Credit Period 106. With regards to the period 2017, the Respondent alleged that the Appellant:a.Had outstanding intra-group balances from OEUL but OEUL did not pay within the allowable credit period.b.Carried undue financing costs on behalf of the related parties since it was borrowing from third-party lenders to finance its operations.c.Sold products to OEUL and in some instances, made payment for products sourced by OEUL from Kenya's Open Tender System (OTS) on its behalf.

107. The Respondent characterized the overdue intra-group receivables as loans to OEUL. It cited the provisions of Paragraph 1. 35 of the OECD TPG, which require accurate delineation of a transaction between two related enterprises.

108. The Respondent stated that since the intra-group receivables were outstanding for long periods, interest should have accrued on the outstanding balances to reflect an arm's length return on the funding. That this was informed by the fact that independent parties operating under similar circumstances would charge interest on overdue accounts owed by another unrelated party.

109. It was the Respondent’s position that the benefit provided by the Appellant to OEUL in making available the use of a prolonged credit period without adequate consideration is of the same nature as the benefit provided by granting an interest-free loan. That in such an arrangement, the arm's length interest would be the correct measure of the value of the benefit.

110. The Respondent argued that, interest was chargeable on the over-due intra group receivables calculated based on the days they were overdue; after taking into consideration the normal credit cycle of 60 days.

111. The Respondent adopted the Comparable Uncontrolled Price (CUP) method to determine the arm's length interest rate applicable on the over-due intra-group receivables since there existed an internal uncontrolled comparable transaction. That the information availed indicated that the Appellant's cost of capital averaged 10% during the 2017 and 2018 period.

112. The Respondent relied on Paragraph 2. 14 of the OECD TPG 2010, which states that where it is possible to locate comparable uncontrolled transactions, the CUP method is the most direct and reliable way to apply the arm's length principle.

113. According to the Respondent, it reviewed the uncontrolled comparable arrangements to determine whether the CUP method was applicable and whether the internal comparable satisfied the comparability factors, especially, the functional analysis and contractual terms. That based on contract, the Appellant had borrowed in United States Dollar (USD) and also invoiced the related parties in USD.

114. The Respondent maintained that the Appellant's cost of borrowing was the applicable arm's length price (interest rate). It further asserted that it applied the same to charge interest on the outstanding intra-group receivables from related parties.

115. The Respondent posited that the Appellant did not provide any documents to prove that the assessments made were excessive or erroneous. It supported its position with the case of Digital Box Ltd V Commissioner of Investigation & Enforcement (2019) eKLR to submit that it was empowered to use documents and information that is available. It also relied on Osho Drapers Limited Versus Commissioner of Domestic Taxes [20221 eKLR and Commissioner of Domestic Services V Galaxy Tools Limited (20211) eKLR to submit that Section 59 of the Tax Procedures Act allows it to seek additional documents but the Appellant failed to adduce necessary documents.

116. The Respondent submitted that it did not breach the Appellant’s legitimate expectation and that the Appellant’s assertions did not meet the elements of legitimation expectation as stated in the cases of Communications Commission of Kenya & 5 others v Royal Media Services Limited & 5 others Republic v Kenya Revenue Authority and Proto Energy limited (Exparte) (Judicial Review Application E023 of 2021) (2022] KEHC 5 (KLR

117. It also relied on the cases of Primarosa v Commissioner of Domestic Taxes (2019) eKLR, Pearson v Belcher CH.M Inspector of Taxes) Tax Cases Volume 38 and Afya Xray Centre TAT and No. 70 Limited v Commissioner of Domestic Taxes to submit that the Appellant has a burden of proof to demonstrate that the Respondent’s decision was incorrect but the Appellant herein failed to discharge the burden.

Respondent’s Prayers 118. The Respondent prayed for the Honourable Tribunal to uphold its objection decision dated 21st September 2023 and dismiss this Appeal with costs.

Issues for Determination 119. The Tribunal has gleaned through the parties’ pleadings, witness statement, documents and submissions and is of the view that the issues that call for its determination are as hereunder:a.Whether the Respondent issued contradictory objection decisions.b.Whether Respondent’s assessment is time barred;c.Whether the Respondent’s assessment is in compliance with Section 31(8) of the Tax Procedures Act; andd.Whether the Respondent erred in its assessment of transfer pricing.

Analysis and Findings 120. It is to the identified issues that the Tribunal will turn to analyse as here below.

a) Whether the Respondent issued contradictory objection decisions. 121. The Appellant asserted that it was issued with two objection decisions dated 3rd September 2018 and 21st September 2023.

122. A look at the two ‘objection decisions’ show that:a.The two decisions relate to different periods.b.The objection decision dated 3rd September 2018 relate to the period 2010 to 2016. That it was also related to assessments dated 6th July 2018. c.The objection decision dated 21st September 2023 relate to the period 2017 and 2018. It was in relation to assessments dated 29th June 2023.

123. It is thus difficult to fathom the premise upon which this ground of appeal was based when it is clear that the two objection decisions relate to different tax periods.

124. The Appellant was also aware that the assessment for the period 2010 to 2016 had been settled and spent. It is for this reason that it filed a Notice of Appeal and Memorandum of Appeal against the objection decision dated 21st September 2023 which was the only appeal that was still alive.

125. The Appellant’s assertion that the two decisions caused it prejudice, were contradictory or breached the principle of fairness is thus unfounded, not supported by law and body of evidence available to the Tribunal.

126. This ground of appeal lacks basis and it thus dismissed.

b. Whether Respondent’s Assessment was time barred 127. Section 23 of the Tax Procedures Act provides for timelines for keeping records. In particular Section 23(1) (c) requires documents to be kept for five years or lesser period. The said Section provides as follows:“1)A person shall—(a)Maintain any document required under a tax law, in either of the official languages;(b)Maintain any document required under a tax law so as to enable the person's tax liability to be readily ascertained; and(c)Subject to subsection (3), retain the document for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law.’’

128. Apart from that, the law requires that default tax assessment be done within five years. Section 29(5) of the Tax Procedures Provides that:-“Subject to subsection (6), an assessment under subsection (1) shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.” (Emphasis added)

129. In relation to the amendment of assessment, Section 31(4) (b) of the Tax Procedures Act contains provisions on time frame. It provides as follows:“The Commissioner may amend an assessment—(b)In any other case, within five years of—(i)For a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or(ii)For any other assessment, the date the Commissioner notified the taxpayer of the assessment.’’

130. Under Section 27 of the Income Tax Act, time starts running in relation to income tax from 1st July of the year upon submitting a return on or before 30th day of June of the year. An assessment also has to be issued within five years.

131. The Appellant demanded for assessment for the period 2017 to 2018 in its assessment dated 29th June 2023. The assessment was made within the reporting period for the year 2022 which was due to lapse on 30th June 2023. The year 2022 would thus not be included in computing the time period herein because its reporting period had not lapsed.

132. The five-year statutory limit period for assessment in this case as per Section 29(5) of the TPA would thus run from 2017 to 2021 and the effective reporting period would thus be on the 30th June 2022. It hence follows that the assessment issued on the 29th June 2023 could only cover the period upto 2017. Any assessment made beyond the year 2017 is thus void as was stated in in Commissioner of Domestic Taxes v Airtel Networks Kenya Limited (Income Tax Appeal E062 of 2022) [2023] KEHC 25059 (KLR) (Commercial and Tax) (10 November 2023) (Judgment) where it was stated as thus:“In this regard, under section 31(4) of the Tax Procedures Act, an amendment outside the 5 years can only be permitted if there is evidence of wilful neglect, evasion, or fraud by or on behalf of the taxpayer…

133. The Tribunal has examined the Respondent’s assessment dated 29th June 2023 and notes that the assessment is for the years 2017 to 2018. Based on the foregoing analysis, the 2017-2018 tax assessments were within the five years limit period and were hence not time barred.

c) Whether the Assessment contravened Section 31(8) of the Tax Procedures Act 134. The Appellant alleged that the assessments in a letter dated 29th June 2023 did not serve as a proper notice under Section 31 (8) of the Tax Procedures Act on grounds that the said letter required immediate payment of the taxes yet the due date for payment of any tax, penalty and interest should not be less than 30 days from the date that the taxpayer receives the notice of assessment.

135. The Respondent’s view was that it issued assessment on 29th June 2023 and the Appellant objected on 27th July 2023. That it did not proceed with enforcement in the preceding period because it recognised the Appelant’s right to file its objection under Section 51 of the TPA.

136. Section 31 (8)(e) of the Tax Procedures Act provides that:“when the Commissioner has made an amended assessment, he or she shall notify the taxpayer in writing of the amended assessment and specify—the due date for payment of any tax, penalty or interest being a date that is not less than thirty days from the date of the taxpayer received the notice.”

137. The Tribunal has examined the said assessment wherein the Respondent stated as follows in the relevant part:“make immediate arrangements to pay the above assessed tax to the commissioner of domestic taxes.”

138. Based on the foregoing, the Appellant asserted that immediate payment of the taxes demanded denied it a fair chance to object to the demand as provided under Section 51 of the Tax Procedures Act because immediate payment would have preceded its right of objecting to the purported assessment.

139. The word immediately is defined in the Oxford Learners Dictionary to mean ‘without delay’. The Tribunal has noted that a demand to, ‘make immediate arrangements to pay assessed tax’ is a demand to make payment without delay. No time limit that infringed on the Appellant's right under Section 51(8) of the TPA was placed on this demand. Moreover it is also noted that no enforcement mechanism was employed by the Respondent to recover the tax demanded prior to the expiry of the statutory time limit prescribed in law.

140. The Appellant has not demonstrated how it was prejudiced by the phrasing of the assessment letter dated 29th June 2023 using the word immediately. The activities that followed the assessment also confirm that the said assessment and its wording was not intended to short circuit the provisions of Section 51(8) of the TPA under which the Appellant was allowed the prescribed 30 days time limit to file its objection. It filed the said objection on the 28th day which was 2 days before the statutory limit.

141. This ground of Appeal was thus intended to invite the Tribunal to determine an academic issue of what may have happened. Put another away, the Respondent posed a ‘what if’ question for the determination of the Tribunal.

142. The Tribunal is established to determine live disputes under Section of the 12 of the Tax Appeals Tribunal Act. It cannot thus issue judgement or determine issues that are based on conjectures, academic arguments, moot points or posturing of an issue that has not occurred. This ground of appeal was trifling and it is thus dismissed with a finding that the Respondent’s impugned assessment did not contravene Section 31(8) of the TPA.

d. Whether the Respondent was justified in making transfer pricing adjustments. 143. This issue shall be determined under five itemised sub headings as hereunder.

i. Whether Provision of Management Services by the Appellant was made to Related Parties 144. The Respondent submitted that the Appellant provides corporate and management services to OEUL, OEEL, OESL, OEDL, Arabia Oil and Gas Pipeline Company SAE -Egypt, Shell Eritrea Assab Storage; and engaged in a joint venture project known as Africa Oil Supply Limited on behalf of ACS and OHL without having any contractual relationship and receiving no remuneration from the related parties.

145. In addition, the Respondent submitted that some of the Appellant's employees were designated as 'coordinators' and were paid an additional 'hardship allowance' as remuneration for the additional services that they offered to other affiliates.

146. The Respondent further affirmed that the costs incurred were charged to OES DMCC but the Appellant was not remunerated for the services it rendered and hence the reason it adjusted the transfer pricing for the year 2017 to 2018 to Kshs 209,512,688.

147. On the other hand, the Appellant stated that it never provided corporate and management services to the entities identified by the Respondent. That it only provides accounting and finance support to OEUL (which the Appellant refers to as ‘OEUG’). It supported this assertion with an undated agreement between itself and OEUL marked and identified as ‘OEKL19. ’ Paragraph one of the said agreement states that, ‘this agreement, made effective as of 1st August 2022. ’

148. It is not in dipsute that the assessment in this Appeal was issued vide a letter dated 29th June 2023 covering the transfer pricing assessment for the years 2017 to 2018. On this basis alone, the Tribunal finds that the agreement between the Appellant and OEUL to support its position is irrelevant and incapable of supporting its appeal because it relates to the period after 1st August 2022 while the assessment relates to the period 2017 to 2018.

149. Moreover, the Schedule 2 on calculations Rules for fees marked and identified as annexure ‘OEKL20’ does not even have the Appellant’s name or identity of the parties. It is even not signed or dated. It looks like a document plucked from the air to support a belated realisation of taxation that was now imminent on its affairs.

150. On issue of employees, the Appellant asserted that it does not have any employees titled "coordinators" in its employment structure. It instead stated that that OES DMCC provides management services to the various OLA affiliates of the Group. It also maintained that OES DMCC is responsible for re-invoicing these services to all the Group's entities. It also averred that for the services provided for the benefit of the Group's affiliates, the Appellant invoices all costs incurred in providing the services plus a mark-up of 6%, which is within its TP policy.

151. The Tribunal has looked at the Appellant’s annexures market and identified as ‘OEKL21’ being debit/credit notes and OEKL22’ being journal memorandum and notes that:a.Provision were made by the Appellant for inter company related costs with a mark up of 6%.b.Provisions were made for employees salary and wages without clarifying why they were made outside the main payroll.

152. The foregoing resonates with the Respondent’s assertion and the basis for its assessment. It was not for the Respondent to provide evidence that the basis of its assessment was correct. Instead, Section 30 of the TAT Act requires the Appellant to prove that the basis of the Respondent’s assessment was wrong by providing the relevant documents and explanation to displace this assessment.

153. This position also aligns with Section 56(1) of the Tax Procedures Act which has placed the burden of proof on the taxpayer. The taxpayer has to provide documentary evidence to discharge this burden of proof as was stated in Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, where the High Court stated as follows regarding burden of proof:“Section 56 of the TPA in peremptory terms places the burden of proof in tax cases on the tax payer. The above section is reinforced by section 30 of the TAT Act which provides: -30. Burden of proofIn 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“..Generally, the taxpayer has the burden of proof in any tax controversy. The tax payer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect.The shifting of the burden of proof in tax disputes flows from the presumption of correctness which attaches to the Commissioner's assessments or determinations of deficiency. The commissioner's determinations of tax deficiencies are presumptively correct. Although the presumption created by the above provisions is not evidence in itself, the presumption remains until the taxpayer produces competent and relevant evidence to support his position. If the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented, with the burden of proof on the taxpayer.By placing the burden of proof on the party in possession of relevant information, the possibility of destruction of adverse information is minimized and time is saved by making that party responsible for culling through its own records to meet its burden. Placing the burden of proof on the government in tax cases would detract from these goals. Taxpayers might be tempted to destroy adverse relevant evidence and tax collection costs would increase because of the Revenue Authority’s difficulty in finding relevant information.’’

154. Instead of proving its case, the Appellant opted to accuse the Respondent of its failure to provide documents.

155. The debit/credit notes and journal memorandum documents seen by the Tribunal were suggestive of the fact that the Appellant had employees in its cluster and regional offices who were being paid for their services. The Respondent opted to describe these employees as ‘coordinators’.

156. The Appellant’s failure to provide information, documents and clarification to the Tribunal regarding these employees or coordinators and the reason why they were paid some money for the alleged services provided meant that the Respondent’s decision was not rebutted. It thus stood proved.

157. Under the circumstances, the Tribunal is unable to fault the Respondent’s decision on this issue.

ii. Whether the Respondent was entitled to disallow expenses incurred in the generation of the taxable income 158. It is the Appellant’s case that the Respondent disallowed expensed intra group management services amounting to Kshs 171,607,265. 00 on the grounds that the Appellant did not provide sufficient documents.

159. The Appellant at paragraph 74 of its Statement of Facts stated that, ‘‘due to the nature of the services being rendered it is a difficult task to understand the benefit from an outsider perspective.’

160. It asserted that it adduced sufficient evidence that intra group services were provided either through affiliate visits, remote meetings, email correspondence, and periodic reviews, and that it indeed derived benefits from the same. To this end, the Appellant relied on annexure "OEKL 23" as its evidence in support of its claim.

161. Respondent asserted that the Appellant registered an intra-group entity called OAFS. That the Appellant thereafter entered into a contract with OAFS for sale of oil to OAFS customers. That it applied industry margins on the profits earned from the Appellant’s transactions to OAFS and its customers.

162. The issue thus is whether the expenses in issue were incurred in the course of business and could thus be allowed as expenses. The Tribunal has examined the documents relied on by the Appellant under annexure 23 and notes that the documents therein are correspondences between the Appellant and its affiliates. The documents are invitation letters by the Appellant inviting guests to Nairobi for a business meeting. There is nothing in these letters to show the expenses incurred for these invitations like the costs of flight, cost of accommodation, cost of the conference/meeting and other related expenses were expensed or that they were wholly and exclusively incurred in the generation of taxable income in Kenya .

163. On the face of it therefore, it is difficult to discern the premise upon which the Appellant arrived at an expenses figure of Kshs 171,607,265. 00 as an allowable expense under this head.

164. Moreover, there is nothing in those letters indicating whether this event occurred and whether these people actually travelled to Kenya considering that they travelled from Ethiopia, Tunisia, Dubai, Cassablanca and other countries. Not even an air ticket, check in or hotel accommodation were provided to prove the alleged expenses.

165. As it is and in the absence of the specific documents to support these expenses, it looks like the Appellant merely plucked these expenses figure of Kshs 171,607,265. 00 from the air and presented them to the Respondent as costs incurred in the course of its business.

166. Section 15 (1) of the Income Tax Act provides that:“for the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, and where under section 27 of this Act any income of an accounting period ending on some day other than the last day of such year of income is, for the purpose of ascertaining total income for any year of income, taken to be income for any year of income, then such expenditure incurred during such period shall be treated as having been incurred during such year of income.” (Emphasis added)

167. The Tribunal finds and holds that the Appellant’s expenses were not proved. As such the Respondent did not err in disallowing them.

iii. Whether the Respondent erred in disallowing expenses in relation to Intra- Group Purchase of Products by the Appellant from OESD 168. On this issue, the Appellant relied on Section 15(1) of the Income Tax Act to argue that its expenses amounting to Kshs 48,282,062. 00 were wholly and exclusively incurred in the generation of taxable income in Kenya and therefore should be deducted against its taxable income as provided under Section 15.

169. The Appellant relied on the OECD Guidelines, Paragraph 1. 168, which provides that:“the remuneration of a company acting as a "central purchasing manager on behalf of the entire group" should be consistent with the "arm's length price that would remunerate the entity for its services of coordinating purchasing activity.”

170. The Respondent on its part averred that remuneration accruing to OESD should not be included as mark up on total costs including production costs because a company that acts as a central purchasing entity ought to be remunerated for its services and not allowed to deduct the cost of its services as expenses.

171. Nothing in the Appellant’s extensive list of documents explained or showed how the expenses of Kshs 48,282,062. 000 justifying the invocation of Section 15(1) of the Income Tax Act was arrived at. The Appellant did not also refer to any of the document in its List of Documents to support this expenditure and its relations in its normal operation.

172. Moreover, whereas the Appellant sought to rely on Paragraph 1. 168 of the OECD Guidelines, the Tribunal notes that the said Guidelines make reference to "central purchasing manager on behalf of the entire group" .

173. To support its assessment the Respondent asserted that Appellant did provide:a.corporate and management services to OEUL, OEEL, OESL, OEDL, Arabia Oil and Gas Pipeline Company SAE -Egypt, Shell Eritrea Assab Storage;b.engaged in a joint venture project known as Africa Oil Supply Limited on behalf of ACS and OHL,

174. The Appellant on its part stated as follows at paragraph 58 of its Statement of Facts: ‘‘the Appellant categorically informed the Respondent that it only provides accounting and finance support to OEUG.’’ This was supported with the agreement which became effective on 1st August 2022 which the Tribunal has already held to be inapplicable of application in this dipsute.

175. The Respondent’s assertion that the Appellant operated a central system where the services being offered provided an economic benefit or commercial value to enhance its operations was not displaced. This is more so because the relationship between it and the affiliate companies that have been identified by the Respondent have not been displaced or sufficiently explained.

176. Indeed, even if the explanation by the Respondent that it was providing accounting and related services to these affiliates was to be believed, then the Respondent was behoved to provide evidence to support this assertion. None was provided. It instead provided an agreement between it and Ola Energy Uganda Limited and not OESD. The agreement provided was to be effective from the 1st August 2022 which was a period outside the years of assessment.

177. Contrary to its assertion that it was only providing accounting services, the said agreement stated under Schedule 1 that the Appellant was also providing other services in addition to the accounting services like procurement, warehouse operations, contract management and administrative services. It was thus not true that it was only providing accounting services.

178. The upshot of the foregoing analysis is that nothing was tabled before the Tribunal to show that the alleged expenses of Kshs 48,282,062. 00 were incurred in the course of its operation. The expenses were not even particularised to show how they were connected to its operations. Even worse the agreement provided by the Appellant as evidence was irrelevant as it related to a period outside the assessment period.

179. The Tribunal thus finds and holds that Appellant failed to provide material facts to clearly define its role in the whole equation with the related entities. This failure coupled with lack of documentary evidence required to support expenditure under Section 15(1) of the Income Tax Act has led the Tribunal to find and hold that the Appellant failed to discharge its burden of proof under this issue. Accordingly, the Tribunal’s finds that the Respondent did not err in disallowing expenses in relation to Intra- Group Purchase of Products by the Appellant from OESD .

iv. Whether the Respondent erred in making Transfer Pricing adjustment on a related party transaction 180. The Appellant alleged that the Respondent made a TP adjustment on a related party transaction without taking into consideration the existence of an internal comparable availed by the taxpayer and in complete disregard of the taxpayer's TP policy document.

181. On the other hand, the Respondent’s case is that the Appellant’s selling price margin was significantly lower than what the Appellant sells to unrelated parties, that is Kshs 0. 5/litre as opposed to Kshs 7. 5 /litre to its independently obtained international airline customers.

182. The issue here is whether the sale that was made to unrelated parties was at 0. 5/litre as opposed to Kshs 7. 5/litres to its customers and whether a reasonable explanation was provided for this variance.

183. The Appellant did not dispute that it entered into an Aviation Fuel Supply Agreement between itself and OAFS on 2nd September 2015 for the supply of fuel for consumption in OAFS nominated aircraft or its customer's aircraft.

184. The Appellant’s position regarding this issue is ambiguous and blurry as indicated in the hereunder illustrations.

185. The Appellant relied on a Schedule marked as annexure ‘OEKL 24’. The said annexure is a schedule which does not have source or primary evidence to support it. It is not particularised and does not constitute credible evidence that can be relied upon by the Tribunal to displace the Respondent’s decision.

186. The Appellant also relied on annexure marked ‘OEKL 25. ’ which gave worked out figures. The same was not supported by any documents to support the basis or source of the figures in the schedule.

187. The Appellant also sought to rely on an agreement attached as annexure ‘OEKL 26’ which is the Agreement between the Appellant and Kenya Airways PLC for the supply of aviation fuel. The said Agreement was made on 11th February 2019. and Clause 3 of the Agreement indicated the commencement date as 1st January 2019.

188. The assessment under this Appeal related to the period 2017 to 2018, and not 2019 as shown in the said Agreement. It is thus not applicable or relevant to this Appeal.

189. The Aviation Fuel Supply Agreement and supply invoices that would have been key in explaining this variance were not provided to the Tribunal.

190. The Appellant ought to have provided relevant documents and plausible explanations to explain how it arrived at the margins in issue. The provision of a transfer policy document to support its case was not sufficient. The Appellant needed to have provided documents and explanations that it was relying on to implement the said policy. This provision is supported by Rule 10 of the Income Tax (Transfer Pricing) Rules which provides:“Where a person avers the application of arm’s length pricing, such person shall –(a)develop an appropriate transfer pricing policy;(b)determine the arm’s length price as prescribed under the guidelines provided under these Rules; and(c)avail documentation to evidence their analysis upon request by the Commissioner.

191. This Rule provides that where arm's length price is implied by a person, then a transfer pricing policy coupled with a determination of arm's length price and relevant analysis documentation should be made available by that person. Again this was not done and sole reliance on the Policy document could not aid its cause.

192. Based on the foregoing, the Tribunal finds that the Appellant has failed to discharge its burden in relation to this issue.

SUBPARA v. Whether the Respondent erred in assessment of provision of Financial Services to related parties through extended Credit Period 193. The Respondent made transfer pricing adjustment on interest by computing deemed interest income of Kshs 67,179,058. 00 for the period 2017 and 2018 on the basis that for the year 2017, OEUG had an outstanding balance due and owing to the Appellant; that the Appellant incurred various expenses on behalf of OEUG; and that the Appellant carried undue financing costs on behalf of the related parties as it was borrowing from third party lenders to finance its operations. That therefore, the Respondent charged interest at a rate of 10% on these amounts after allowance of the normal credit cycle of 60 days.

194. The Appellant’s position was that when dealing with local independent customers, it does not charge interest for late payment even for long outstanding receivables. It relied on a copy of its Credit policy which it provided to the Tribunal.

195. The Tribunal notes that said Policy is not relevant to this Appeal because it clearly indicates that its effective date was 15th June 2022 yet the assessment in issue relate to the assessment for the period 2017 to 2018. The Policy itself was not indicative of whether it was carry over and or new policy effective from 15th June 2022.

196. In the circumstances, the Tribunal is obliged to the date of the Policy as presented to it by the Appellant. The Credit policy that the Appellant provided was not for the period under review therefore not credible evidence.

197. The totality of the foregoing is that the Appellant failed to adduces positive evidence to successfully challenge the Respondent’s finding on this issue.

FINAL DECISION 198. The upshot to the foregoing analysis is that the Appeal lacks merit and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby dismissed;b.Respondent’s objection decision dated 21st September 2023 be and is hereby upheld; andc.Each party is to bear its own costs.

199. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 13TH DAY OF SEPTEMBER, 2024. ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBERGLORIA A. OGAGA - MEMBERABRAHAM K. KIPROTICH - MEMBER