Thaara Limited v Commissioner of Domestic Taxes [2023] KETAT 594 (KLR)

Thaara Limited v Commissioner of Domestic Taxes (Appeal 1111 of 2022) [2023] KETAT 594 (KLR) (Civ) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 594 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 1111 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, EN Njeru & AK Kiprotich, Members

June 29, 2023

Between

Thaara Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya and manages the Rosslyn Riviera Mall in Nairobi.

2. The Respondent is a principal officer of Kenya Revenue Authority, which Authority’s mandate is the collection of revenue and the administration of tax laws within the Republic of Kenya.

3. The Respondent issued an assessment order KRA202207704289 dated 30th May 2022 amounting to Kshs 18,689,679. 00 inclusive of interest and penalties.

4. The Appellant objected to the entire assessment through its letter dated 23rd June 2022.

5. On 22nd August 2022, the Respondent issued its objection decision (hereinafter referred to as "the Decision") partially confirming the assessment of income tax, amounting to Kshs 18,305,018. 00, inclusive of principal, penalties and interest.

6. The Appellant, being dissatisfied with the Respondent's decision, filed its Notice of Appeal dated 21st September 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal filed on 5th October, 2022:-a.That the Respondent erred in law and in fact by deeming the loan received by the Appellant as an interest-free loan, subsequently deeming interest on the loan, and charging Withholding Tax on the same, contrary to Section 2 of the Income Tax Act ("ITA");b.That the Respondent erred in law and in fact by equating deferral of interest on the loan to the loan being free of interest;c.That the Respondent erred in law by failing to anchor its Withholding tax assessment in the law; andd.That the Respondent erred in fact and in law by incorrectly calculating the sales VAT to Income Tax analysis thereby inflating the assessment by incorrectly picking the wrong amount for unrealized exchange gain.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated 4th October, 2022 and filed on 5th October, 2022 together with the documents attached thereto and proceedings before the Tribunal.b.The Appellant’s written submissions dated 30th November, 2022 and filed on 8th December, 2022 together with the authorities attached thereto.c.The Appellant’s Supplementary Submissions dated and filed on 3rd January 2023.

9. That the Appellant received a term loan from Vantage Mezzanine Ill Pan African Sub Fund Partnership (hereinafter referred to as "Vantage") in 2018. That under the terms and conditions of the loan agreement (hereinafter referred to as "the principal loan agreement"), interest was chargeable at the rate of Libor (London Inter Bank Offer Rate - which fluctuates monthly and is a global benchmark used to make adjustments to variable-rate loans) plus 11. 5%. That furthermore, the loan ought to have been paid in full (including interest) within 7 years of the date of signing the loan, such that the term expires in 2025.

10. That the principal loan agreement was amended in 2020 by both parties, whereby it was agreed that the interest payment, as well as accrual of the expense would be deferred, with effect from 2019. That this was due to the fact that the Appellant was facing financial constraints. That it is important to note that the addendum has in no way varied or altered the repayment date agreed upon in the principal loan agreement.

11. That based on this provision of the addendum, the Appellant did not accrue the interest in the books of account nor claimed this for tax purposes in the years 2019 and 2020.

12. That the Respondent proceeded to issue its assessment following a tax verification exercise carried out on the Appellant, following a VAT refund claim application lodged. That the same was objected to and the Respondent rendered its decision, premised on the grounds that the addendum changed the loan to an interest-free loan and that the Appellant did not furnish the Respondent with the Appellant's financial statements.

13. That the Appellant disputes the decision rendered by the Respondent for the aforementioned period as not only incorrect but prejudicial against it.

14. That Section 2 of the ITA defines deemed interest as "an amount of interest equal to the average ninety-one day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest".

15. That the loan received by the Appellant attracts interest at the libor rate plus an additional margin, as per clause 1. 2.6 of the principal loan agreement. That therefore, the Respondent cannot deem interest on a loan that already bears an interest charge. That this position was held in Commissioner of Domestic Taxes v Dominion Petroleum Dkenya Limited [2021] (supra) wherein Majanja J stated that:“In this case, there was clearly a lending transaction and the inclusion of the 0. 1% interest rate means that "Deemed Interest" could not apply."

16. That the Black's law dictionary defines deferred as "delayed; put off; remanded; postponed to a future date". That in line with this definition, the accrual and payment of the interest has been postponed to a future date, which has to be before the expiry of the loan in 2025. That based on this definition of deferral, the Respondent cannot construe the same to mean waived.

17. That it is trite that where tax laws are clear, they should be read with certainty. That they should be interpreted strictly. That this was affirmed in the case of Cape Brandy Syndicate v Inland Revenue Commissioner (1921) 1 KB 64, where the Court held that:“In a taxing Act one has to look at what is clearly stated. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

18. That this position was further buttressed by Republic v Kenya Revenue Authority & another ex-parte Fontana Limited (2014) eKLR wherein the Court held that:“In a taxing act one has to look merely at what is stated…there is no presumption as to tax”.

19. That it is clear from the above that the Respondent must strictly apply the definition of deemed interest as given under Section 2 of the ITA, and not alter or change its interpretation to unfairly and unjustly impose tax. That the Respondent has further failed to acknowledge the fact that the addendum did not only provide for the deferral of interest payments, but also the accrual of the expense in the Appellant's books of accounts. That it ought to be noted that the Appellant adopts the accrual system of accounting, and from the period 2019 onwards, the Appellant has not accrued nor credited this interest in favour of the lender in its profit or loss account, and thus did not enjoy the benefit of reduction of its taxable profit and therefore reduced corporation tax.

20. That this is also buttressed by the Court of Appeal in Kenya Revenue Authority v Republic (ex­ parte Fintel Ltd) [2019] eKLR wherein the Court held that:-“...The strict application of the definition of the word 'paid' will of necessity include any amount credited in the interest or on behalf of a person."

21. That Section 2 of the Income Tax Act defines paid as:“Includes distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person".

22. That under this definition, there has been no payment made by the Appellant. Furthermore, this definition should be read together with Section 35(3) of the ITA, which guides a taxpayer as to when to deduct Withholding tax. It states that:“Subject to subsection (3A), a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of .."

23. That it is clear from the above position that the tax point where Withholding tax arises is when a payment has been made, and in the instant Appeal, the Appellant has neither paid, nor accrued the payment. That therefore, there is no tax due. That as discussed above, the Respondent has a duty to interpret the law as it is, and cannot expand any definitions unless laid out by law.

24. That in the assessing letter, the KRA noted that the payments of the interest on the loan were deferred to a later date not specified in the addendum to the principal loan agreement. That whilst the Appellant agrees that the addendum to the principal loan agreement deferred interest payment and accrual of the expense, it does mean that the deferral was indefinite. That the loan agreement, under Clause 1. 2.89, defines the repayment date as:“The earlier of:i.The seventh anniversary of the Advance Date; andii.The date on which the Outstanding Balance becomes repayable of this Agreement, whether pursuant to 28, 29 or otherwise".

25. That this would indicate that the latest that the loan would be repaid would be by 2025, given that it was disbursed in 2018. That this clause remains unchanged by the amendments. That furthermore, the addendum did not waive the interest obligation of the Appellant, rather simply deferred the same. That additionally, it is important to note that the deferral occurred due to financial constraints faced by the Appellant, occasioned by low occupancy rates at the Rosslyn Riviera Mall, coupled with existing tenants defaulting on their rental payments. That this is a common practice in the industry worldwide, and this does not mean that the interest obligation is waived.

26. That the Respondent has stated in its assessment that interest was deemed on the foreign loan and purported to charge Withholding tax as per Section l(e) of the ITA. That the Respondent corrected this wrongful application in its objection decision by charging Withholding tax under Sections 3, 10 and 35 of the Income Tax Act as well as Paragraph 3(e) of the Third Schedule to the Income Tax Act.

27. That the Respondent has further contended in its objection decision that the Appellant cannot defer interest payments from 2019 to 2025 and that normal accounting practice entails matching income and expense. That it is the Appellant’s position that the Respondent has not supported this ruling with law. That the Respondent has not specified under what law this is required. That it is trite that an assessment must be grounded in law, with clarity and specificity as in the case of Republic v Commissioner of Domestic Large Taxpayers Office ex-parte Barclays Bank of Kenya Ltd (2021) where the Court stated that:“The respondent is obliged by Iaw to state with clarity its claim and state how the transaction falls within the terms of the statute. The respondent cannot exercise its duty like a trawler in the deep seas expecting all the fish by casting its net wide. The respondent's decision in this respect falls below this standard and the transaction caught by the decision cannot be said to fall within the statutory definition of tax.”

28. That the Appellant further avers that it is free to enter into contracts, and choose what obligations it wishes to be bound with. That the Appellant is further free to make changes to the contracts that it enters into. That this position was held by the Court in Commissioner of Domestic Taxes v Dominion Petroleum Dkenya Limited (2021) where the Court held that:“I am in agreement with the Tribunal that in the absence of any demonstrable fraud or illegality, the parties are free to make amendments to their agreements.”

29. That the Respondent cannot interfere with the way a company runs its business, where there is no fraud or illegality.

30. That the Respondent has also contended that the addendum made to the principal loan agreement was to avoid paying tax. That however, the Respondent has failed to demonstrate this position and failed to provide evidence of the same.

31. The Respondent avers that the unreconciled amount of Kshs 21,088. 00 arises from unrealised exchange gain amounting to Kshs 4,477,555. 00. That it is the Appellant's contention that this figure has been incorrectly captured, and the exact amount of unrealised exchange gain is Kshs 4,456,467. 00. The Respondent has further stated that the Appellant did not provide the financial statements to prove the same. That however, it must be noted that Respondent has never asked for the Appellant’s financial statements when determining the objection. That the Respondent cannot fault the Appellant for failing to provide documents that it did not ask for. That in any event, the audit team of the Respondent was provided with the Appellant’s financial statements and that it would be a simple matter for the Respondent to obtain the same from its audit team.

Appellant’s Prayers 32. The Appellant prays that the Tribunal:a.Allows the instant Appeal;b.Annuls the Respondent's confirmed assessment based on the grounds above, as well as the information contained in the Statement of Facts attached; andc.Awards costs of this appeal to the Appellant.

The Respondent’s Case 33. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated and filed on 4th November, 2022 together with the documents attached thereto.ii.The Respondent’s written submissions dated and filed on 16th December, 2022 together with the legal authorities filed therewith.

34. That the income tax assessments were based on variances noted between the sales per VAT returns and the sales per income tax returns. That the Withholding tax assessments arose because the Appellant had a foreign loan on which they deferred interest payments in the year 2019 to a future date not specified in the addendums to the original loan agreement. That based on this indefinite deferment, interest was therefore deemed on the foreign loan and charged to Withholding tax.

35. That the Respondent raised the assessment on 24th May 2022 and the assessment order was sent out on 30th May 2022. That the Appellant objected to the assessment on 23rd June 2022, which is within the statutory timelines and validated the objection on 5th July 2022.

36. That the Appellant submitted final documents on 22nd July 2022 and the same reviewed by the Respondent. That thereafter the Respondent then issued its objection decision on 22nd August 2022 within the statutory timelines.

37. That in 2018, the Appellant received a mezzanine facility (herein referred to as "the loan") from Vantage Mezzanine III Pan African Sub Fund Partnership. That the loan agreement states that the loan is interest bearing at the rate of Libor (London interbank offer rate - which fluctuates monthly and is a global benchmark used to make adjustments to variable-rate loans) plus eleven-point five percent (11. 5%). That the loan provided was eight million dollars (USD 8,000,000) with a term loan of seven (7) years and was disbursed in April 2018.

38. That effective 2019, as seen in the addendums to the loan agreement, the payments of the interest on the loan were deferred to a later date not specified in the addendums to the loan agreement.

39. That Section 2 of the Income Tax Act defines deemed interest as;“an amount of interest equal to the average ninety-one-day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest.”

40. That the Respondent therefore legally deemed interest on the loan based on the above provision of the law and accurately charged Withholding tax on the same.

41. That the Appellant argues that, the company requested for a deferral of the accrual and payment of interest to which the lender obliged after consideration, due to cash flow constraints from the low occupancy rates at the Rosslyn Mall coupled with the fact some of the mall tenants have been defaulting in paying their rents.

42. The Respondent avers that this is nothing out of the norm as is a common practice worldwide and does not change the terms of the loan to an interest-free loan as these amounts have not been waived and will have to be accrued and paid before the expiry of the term period of the loan in the year 2025.

43. That the Appellant also argues that, the assessing team failed to acknowledge the fact that the addendum to the loan agreement provided for the deferral of not only the physical payment of interest but also the accrual of the same in the books of accounts.

44. That it should be noted that the Appellant adopts the accrual system of accounting for both its income and expenses and from the period 2019 onwards, the Appellant has not accrued i.e., credited this interest in favour of the lender in its profit and loss account.

45. That therefore, the Appellant did not reduce the amount of profit chargeable to tax as corporation tax and in effect has not enjoyed the interest expense as a benefit while tabulating its taxable position.

46. That it is the Respondent's considered view that the third addendum to the mezzanine facility agreement introduced a clause that deletes clause 6 of the mezzanine facility agreement, which dealt with interest calculation. That the new clause in the third addendum gives the lender the option to elect whether interest should accrue.

47. That further, the Appellant did not provide the audited books of accounts and profit and loss accounts for concurrence of the assertions above and therefore the Respondent made its objection decision based on the availed documents and on its best judgment.

48. The Respondent avers that the withholding tax assessments arose because the taxpayer had a foreign loan on which it deferred interest payments in the year 2019 to a future date not specified. That based on this indefinite deferment, interest was therefore deemed on the foreign loan and charged to Withholding tax as per Section 2 of the Income Tax Act.

49. The Respondent avers that the sales per aggregate VAT returns and Income tax returns were compared. That from the comparisons, the variances were majorly reconciled. That the balance of the unreconciled variances charged to tax was Kshs 262,595. 00 for 2017, Kshs 297,169. 00 for 2018 and Kshs 358,224. 00 for 2019.

50. That however, following a reconciliation of the income tax returns review, the above variances emanated from interest income, which the Appellant earned from a fixed deposit account.

51. The Respondent avers that this interest income as guided by Section 3(2)(b) of the Income Tax Act, should have been treated as a separate source of income as declared by the Appellant in their 2017, 2018 and 2019 Income Tax returns.

52. That further, the 2019 reconciliation has a balance of Kshs 21,088. 00, which the Appellant argues arose from a reconciling item - unrealized exchange gain, a figure which was picked wrongly as Kshs 4,477,555. 00 instead of Kshs 4,456,467. 00.

53. That the income tax return review shows that the figure as picked by the Respondent's assessing team is correct. That the Appellant did not provide audited financial statements for comparison. That this amount should therefore be charged to income as follows:Description 2017 2018 2019

Unreconciled variance 262,595 297,169 358,224

Interest Income (262,595) (297,172) (337,136)

54. The Respondent therefore avers that the assessments as issued are correct and the taxes demanded from the Appellant are due and payable. That further, the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.

55. The Respondent maintains that since the Appellant has not been paying interest on the loan, nor accruing the same in its books of accounts, then the same is an interest free loan as per the Section 2 of the Income Tax Act.

56. That therefore, the Court of Appeal decision in Kenya Revenue Authority v Republic {Exparte Fintel Ltd) [2019] eKLR does not apply to this particular case as the Appellant has admitted that it has not recognized accrued interest as a liability in its books of accounts and subsequently has not reduced the amount of profit chargeable to corporation tax.

57. The Respondent submits that this Tribunal ought to distinguish the above-cited case as the facts therein do not apply to the current case. That therefore, the said loan is interest free and the Respondent rightly applied Section 2 of the Income Tax Act in deeming the same.

58. The Respondent further relies on Section 78 of the Tax Procedures Act, 2015 which states as follows: -“Defect not to affect validity of tax assessments or other documents (1)When a notice of assessment or any other document purporting to be made, issued, or executed under a tax law is, in substance and effect, in conformity with, is consistent with the intent and meaning of, the tax law under which it has been made and the person assessed, intended to be assessed, or affected by the document, is designated in it according to common intent and understanding-(a)the validity of the notice of assessment or other document is not affected by reason that any of the provisions of the tax law under which it has been made or issued have not been complied with;(b)the notice of assessment or other document shall not be quashed or deemed to be void or voidable for want of form; and .(c)the notice of assessment or other document shall not be affected by reason of any mistake, defect, or omission therein.”

59. The Respondent urges this Tribunal to be guided by the above provision of the law and reiterates the position of the High Court in Republic v Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited (2014] eKLR, that:“Payment of tax is an obligation imposed by the law. It is not a voluntary activity. That being the case, a taxpayer is not obliged to pay a single coin more than is due to the taxman. The taxman on the other and is entitled to collect up to the last coin that is due from a taxpayer.”

60. The Respondent reiterates that it is the obligation of a taxpayer under Section 59 of the Tax Procedures Act to produce all records or provide information for their ascertainment of tax liability and this obligation does not shift to the Commissioner at any point in time.

61. That the Appellant is therefore being mischievous in its submissions in alleging that the Respondent ought to have obtained the Appellant's financial statements from the Respondent's audit team.

62. That further, the Respondent is not bound by a taxpayer's returns provided in order to ascertain their tax liability and is allowed under Section 31 of the Tax Procedures Act to make an amendment by making alterations or additions from the available information and to the best of the Commissioner's judgement, to the original assessment of a taxpayer for a reporting period.

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

64. That in addition, Section 30 of the Tax Appeals Tribunal Act of 2013 on burden of proof provides that:“In a proceeding before the Tribunal, the Appellant has the burden of proving-a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently.”

65. That being guided by the above provisions of the law, the Respondent submits that the Appellant failed to discharge its burden of proving that the assessments as issued by the Respondent were incorrect/ ought not to have been made/ should have been made differently.

66. That this Tribunal has held severally that the Respondent having issued the assessment, it is the responsibility of the Appellant to prove its case by providing sufficient evidence to support its position. That it is not enough to just allege that there were errors or that the assessments were excessive. That this was the case in TAT No 421 of 2019 - Ole Seguti Investments Ltd v Commissioner of Domestic Taxes.

67. That Hon. Makau J in Primarosa Flowers Limited v Commissioner of Domestic Taxes (2019) eKLR, whilst making reference to the Australian case of Mulherin v Commissioner of Taxation [2013] FCAFC 115 held that:-“.......The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

68. That further, Hon Kasango J in Sheria Sacco Limited v Commissioner of Domestic Taxes (2019) eKLR in dismissing the Appellant's Appeal held the following on the issue of the taxpayer discharging its burden of proof:“The SACCO however needs to appreciate that what the Tribunal was dealing with was an appeal against the Commissioner’s confirming notice that the SACCO had taxes to pay. When one appreciates that then the submissions of the Commissioner, under this head, are correct that the burden of proof lay on the SACCO. This is what is provided under Section 30(b) of the Tax Appeal Tribunal Act Cap 40. That section provides:“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."The SACCO did not meet that burden of proof.”

69. That the Respondent associates itself fully with the said judgments and persuades this Honourable Tribunal to adopt the same.

Respondent’s Prayers 70. The Respondent prayed that:a.This Appeal be dismissed with costs to the Respondent.b.The assessment amounting to Kshs 18,305,018. 00 be upheld.

Issues For Determination 71. The Tribunal upon due consideration of the pleadings and the written submissions of the parties was of the considered view that the Appeal raises the following issues for its determination:a.Whether the Withholding Tax assessment on deemed interest is justifiedb.Whether the Corporation Tax assessment on sales VAT to Income Tax analysis variance is justified

Analysis And Determination 72. The Tribunal having ascertained the issues for determination as set out above proceeds to deal with the same as hereunder.

a. Whether the Withholding Tax assessment on deemed interest is justified 73. This dispute arose from the Respondent’s assessment of Withholding tax on deemed interest on the Appellant.

74. The Respondent stated that the Withholding tax assessments arose because the Appellant had a foreign loan on which it deferred interest payments in the year 2019 to a future date not specified in the addendums to the original loan agreement and based on this indefinite deferment, interest was therefore deemed on the foreign loan and charged to Withholding tax.

75. The Appellant argued that the loan received by the Appellant attracts interest at the Libor rate plus an additional margin, as per clause 1. 2.6 of the principal loan agreement. That therefore, the Respondent cannot deem interest on a loan that already bears an interest charge.

76. The Appellant further averred that the Respondent failed to acknowledge the fact that the addendum to the Appellant’s loan agreement did not only provide for the deferral of interest payments, but also the accrual of the expense in the Appellant's books of accounts. That it ought to be noted that the Appellant adopts the accrual system of accounting, and from the period 2019 onwards, the Appellant has not accrued nor credited this interest in favour of the lender in its profit or loss account, and thus did not enjoy the benefit of reduction of its taxable profit and therefore reduced corporation tax.

77. The Tribunal notes that under Section 2 of the Income Tax Act “deemed interest” is defined to mean:“an amount of interest equal to the average ninety-one day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loan is provided free of interest.”

78. Further, Section 35 of the Income Tax Act provides as follows in relation to the payment of withholding tax on interest:(1)A person shall, upon payment of an amount to a non-resident person not having a permanent establishment in Kenya in respect of -(e)interest and deemed interest, including interest and deemed interest arising from a discount upon final redemption of a bond, loan, claim, obligation or other evidence of indebtedness measured as the original issue discount;” (Emphasis ours)

79. The Tribunal further delved into the meaning of the word “paid” under the Income Tax Act. Section 2 of the Income Tax Act defines “paid” to include:“distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person,”

80. It is noteworthy that the Income Tax Act neither defines the term “deferred” nor the term “deferred interest”. The Black’s Law Dictionary defines the term defer to mean “an intentional delay until a future date”.

81. The Tribunal reviewed the Third Addendum to the Mezzanine Facility Agreement to which the Appellant is a party and noted the following:a.That this addendum was based on a request by the Appellant that the Lender increases the capital amount and defers the accrual and payment of interest; of which the Lender agreed and hence the addendum.b.That the parties wished to further amend the Facility Agreement to provide for such increase in the Capital Amount and deferral of the accrual of interest and payment thereof.

82. The Tribunal also noted the following from the Mezzanine Facility Agreement executed by the parties on 21st March 2018:a.That the “agreed rate” meant the Libor rate plus the margin, accruing and compounding quarterly in arrears.b.That the effective date meant the date upon which this Agreement became unconditional and was effectively the date that the parties signed off, i.e. 21st March 2018. c.That Libor in relation to any loan meant:“the applicable Screen Rate as of the Specified Time for USD and for a period equal in length to the Interest Period of that loan; or as otherwise determined pursuant to 98, And if, in either case, that rate is less than zero, Libor shall be determined to be zero;d.That the margin was 11. 5% nominal annual compounded quarterly in arrears.e.That the repayment date was defined to be:“the earlier of- the seventh anniversary of the Advance Date; and the date on which the outstanding balance becomes repayable in terms of this agreement….”

83. The Tribunal, pondering on both parties’ lines of argument, noted that it is not in dispute that the amount borrowed by the Appellant under the Mezzanine Facility Agreement is a loan. The issue in dispute is as to whether it is interest free.

84. The Tribunal analysed various clauses of the agreements as follows:a.Clause 7 of the Mezzanine Facility Agreement is titled “Payment of Interest and Repayment of Outstanding Balance” and proceeds to lay out the terms and conditions for repayment of the principle amount borrowed as well as the interest terms.b.Clause 4 of the Third Addendum to the Mezzanine Facility Agreement is titled “Amendment” and, under Clause 4. 1, proceeds to lay out the terms for an additional amount lent to the Appellant over and above the initial borrowed amount.c.Clause 4. 2 of the Addendum lays out the additional amount end date while the replacement to Clause 6 defines new terms for interest calculation.d.Lastly, Clause 4. 11 of the Addendum lays out the terms for repayment of interest on the outstanding loan as well as all other payments to be made towards repayment of the outstanding amounts.

85. The Tribunal noted, from the two documents adduced by the Appellant, i.e. the Mezzanine Facility Agreement and the Third Addendum to the Mezzanine Facility Agreement, that the loan repayment terms include payment to be made towards the actual amount borrowed as well as interest and a margin that would be payable by the Appellant for the borrowed amounts.

86. It is therefore clear to the Tribunal that the loan facility by the Appellant is not interest free and therefore should not be subjected to deemed interest provisions.

87. Consequently, the Tribunal finds that the funds borrowed by the Appellant as per the Mezzanine Facility Agreement do not constitute an interest free loan and therefore do not attract Withholding tax pursuant to Section 2 of the Income Tax Act.b.Whether the Corporation Tax assessment on sales VAT to Income Tax analysis variance is justified

88. This dispute arose from the Respondent’s assessment of income tax on the Appellant. The Respondent stated that its income tax assessment was based on variances noted between the sales per VAT returns and the sales per income tax returns.

89. Regarding the difference between the Appellant’s unreconciled variance as picked by the Respondent, the Appellant stated that it provided financial statements to the Respondent’s audit team. However, these financial statements were not adduced to the pleadings by the Appellant.

90. The Respondent on its part argued that the Appellant did not provide financial statements to verify its claims regarding the reconciling variances.

91. The Tribunal carefully reviewed the parties’ pleadings and established that the Appellant only provided an unverified extract of its financial statements for 2017, 2018 and 2019 in its pleadings

92. In this regard, the Tribunal was not able to establish the veracity of the Appellant’s claim that the variance of Kshs 21,088. 00 emanated from the 2019 unrealized exchange gain figure and that the Respondent picked Kshs 4,477,555. 00 whereas the correct amount per financials was Kshs 4,456,464. 00.

93. The law places the onus on the Appellant to prove its case. That in this particular case, the Appellant has not proved that the variance in reconciliation as picked by the Respondent was erroneous and this can only be done by providing documents that prove its case. In this regard, Section 107 of the Evidence Act states that:“Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”

94. To the extent that the Appellant only provided an explanation and an unverified extract of its financials for 2017, 2018 and 2019 in its pleadings, the Tribunal was unable to confirm that the variance taken into account by the Respondent in computing the tax payable amounting to Kshs 8,477. 00 was erroneous.

95. The Tribunal relied on the case of Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR where the court held that:-“a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough”. In reaching its findings, the Court stated that: “Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence....”

96. The Tribunal therefore finds that the income tax assessment raised by the Respondent in relation to unreconciled variances is payable.

Final Decision 97. In view of the foregoing, the Tribunal finds that the Appeal partially succeeds and accordingly makes the following orders: -a.The Appeal be and is hereby partially upheld.b.The Respondent’s confirmed Withholding tax assessment amounting to Kshs 18,296,541. 00 is hereby set aside.c.The Respondent’s confirmed income tax assessment amounting to Kshs 8,477. 00 is hereby upheld.d.Each party to bear its own costs.

98. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE 2023. ......................................ERIC N. WAFULACHAIRMAN......................................CYNTHIA B. MAYAKAMEMBER......................................GRACE MUKUHAMEMBER......................................JEPHTHAH NJAGIMEMBER......................................ABRAHAM K. KIPROTICHMEMBER