Africa’s Talking Limited v Commissioner of Domestic Taxes (Appeal E733 of 2023) [2024] KETAT 1455 (KLR) (4 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1455 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E733 of 2023

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

October 4, 2024

Between

Africa’s Talking Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1.The Appellant is a limited liability company incorporated under the Companies Act. Its principle business activity is the provision of technology services.

2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3.On 22^nd September 2021, the Respondent communicated to the Appellant regarding the returns and tax payment review conducted by the Respondent on Value Added Tax (VAT), Pay as You Earn (PAYE), Withholding Tax (WHT) and Corporation tax for the period 2016 to 2020.

4.The Respondent issued the Appellant its preliminary audit findings for the period 2017 to 2021 on 2^nd March 2023.

5.The Respondent subsequently issued the Appellant with Income tax, VAT, PAYE, WHT and WHVAT additional assessments with a total principal tax liability of Kshs. 251,182,432.00 on 26^th June 2023, which the Appellant objected to on 26^th July 2023.

6.The Respondent issued its objection decision on 22^nd September 2023, partially amending the assessment.

7.Dissatisfied with the Respondent’s objection decision, the Appellant filed its Notice of Appeal on 19^th October 2023.

The Appeal

8.The Appeal is premised on the Memorandum of Appeal filed on 27^th October 2023 which raised the following grounds: -i.That contrary to the provisions of the Tax Procedures Act, the Commissioner erred and misdirected himself in issuing tax assessments relating to a period beyond the statutory 5 years.ii.That the Commissioner erred in law and in fact by basing its assessment of under declared revenue on the variance between the sales as per the trial balance and sales as per Value Added Tax returns without considering the Income tax returns filed by the Appellant.iii.That the Commissioner erred in law and in fact by using erroneous figures in computation of the variances on the Appellant’s revenue in arriving at its decision that the Appellant had underdeclared its revenue.iv.That the Commissioner erred in law and in fact in holding that the Appellant had not provided the supporting documents and signed financials required to prove its objection against the Commissioner’s principal tax assessment.v.That contrary to Section 15 of the Income Tax Act, the Commissioner erred and misdirected himself in law and in fact by disallowing expenses incurred wholly and exclusively in generating income for the business of the Appellant.vi.That the Commissioner erred in law and in fact by charging PAYE on salaries that were not advanced to the directors despite the Appellant providing sufficient evidence to demonstrate that the said salaries had not been paid and therefore should not have been subjected to PAYE.vii.That the Commissioner erred in law and in fact by misapprehending the nature of the transactions entered into between the Appellant and the telecommunication companies thereby concluding that the purchase of Bulk SMS was a purchase of enterprise message services which entails a managed service and Withholding tax is applicable in line with Section 35 (1)(l).viii.That the Commissioner erred in law and in fact by misapprehending the nature of hosting services by holding that the Appellant consumed cloud hosting services and therefore erroneously subjected payments made in relation to cloud infrastructure to Withholding tax.ix.That the Commissioner erred in law and fact in its decision to subject software licences and subscription payments made to non-residents for the right to use various internet resources to Withholding tax as per Section 35 (1)(b) as the Appellant does not have the right to exploitation of the software.x.That the Commissioner erred in law and in fact by misapprehending the nature of the transactions entered into between the Appellant and the telecommunication companies thereby concluding that the Appellant pays set-up and maintenance fees which fall under the definition of management and professional fees under Section 2 of the ITA and therefore subjected the same to Withholding Tax.xi.That despite being furnished with evidence of purchase invoices and receipts, the Commissioner erred in law by disallowing input VAT attributable to making of taxable supplies that were claimed in strict compliance with Section 17 of the VAT Act.xii.That the Respondent erred in law and in fact in concluding that the Appellant failed to withhold VAT on some transactions or withheld and failed to remit the taxes to the Commissioner contrary to provisions of Section 42A of the Tax Procedures Act, 2015 based on a comparison of the purchases claimed in the VAT3 returns vis-à-vis the withholding VAT paid for the same month without taking into consideration that such a comparison would not yield desired results since the two taxes are filed and paid at different times.

Appellant’s Case

9.The Appellant’s case is also premised on the following documents filed before the Tribunal: -i.The Appellant’s Statement of Facts dated 9^th August 2023 and filed on 14^th August 2023 and the documents attached to it; andii.The Appellant’s written submissions dated and filed on 11^th July 2024.

10.The Appellant stated that on 22^nd September 2021 the Commissioner communicated its intention to conduct a returns and tax payments review for Value Added Tax, Pay As You Earn, Withholding tax and Corporation tax for the period 2016-2020 to determine whether correct amounts of taxes payable were made as required by law by the Appellant.

11.That on 2^nd March 2023 the Commissioner issued the Appellant with its preliminary audit findings for the period January 2017 to December 2021 in which it alleged that there had been some omissions or taxes had been underpaid and more particularly Corporation tax, Pay As You Earn, Withholding Income tax, Value Added Tax and Withholding Value Added Tax.

12.That subsequently, the Appellant and the Commissioner engaged in various correspondences and meetings with the view to discuss the tax matters arising from the audit findings.

13.The Appellant stated that the Commissioner then proceeded to issue a notice of assessment dated 26^th June 2023 purporting to demand the taxes inclusive of penalties and interest.

14.The Appellant stated that it objected to the Commissioner’s assessment through its authorized tax agent and challenged the same by furnishing the Commissioner with the necessary documents and explanations.

15.That the Commissioner issued its Objection decision on 22^nd September 2023 partially amending the assessment to the extent of agreeing to Withholding VAT paid of Kshs. 1,628,226.00 arising from the gross amount of Kshs. 81,411,300.00 relating to Basebone Ltd and confirming its assessment of principal tax together with penalties and interest amounting to Kshs. 326,351,687.

16.The Appellant pleaded its case under various tax heads as follows:

Corporation Tax

17.The Appellant averred that the Respondent issued Income tax assessments for the years 2017 and 2018 that were beyond the statutory 5-year period.

18.The Appellant stated that the Respondent compared the sales as per the trial balances and sales as per VAT returns in arriving at its decision that there was an under declaration of revenue

19.The Appellant contended the Respondent’s reconciliation stating that it was incomplete as the reconciliation should include a reconciliation between the trial balance, the income tax returns filed and the sales as per the VAT returns.

20.The Appellant further stated that the Respondent used erroneous figures in arriving at its decision that there was an under declaration of revenue for the year 2020, as the correct VAT 3 returns figures are Kshs. 1,217,230,387.00 for the vatable sales, Kshs. 30,510,746.00 for zero rated sales and Kshs 62,891,938.00 for exempt sales.

21.The Appellant relied on the case of Republic v Commissioner for Income Tax & another Ex-Parte Stockman Rozen (K) Limited [2015] eKLR in its submission that the Respondent cannot pluck figures from the air in demanding for alleged taxes due. That in the case the Court held that: -“Therefore, whereas this Court is not entitled to question the merits of the decision of taxing authority, that authority must exercise its powers fairly and there ought to be a basis for the exercise of such powers. A taxing authority is not entitled to pluck a figure from the air and impose it upon a taxpayer without some rational basis for arriving at that figure and not another figure. Such action would be arbitrary, capricious and in bad faith. It would be an unreasonable exercise of power and discretion and that would justify the Court in intervening. in Republic vs. Institute of Certified Public Accountants of Kenya ex parte Vipichandra Bhatt T/A J V Bhatt & Company Nairobi HCMA No. 285 of 2006. It was held that in the absence of a rational explanation, one must conclude that the decision challenged can only be termed Irrational within the meaning of the Wednesbury unreasonableness, was in bad faith and constitutes a serious abuse of statutory power since no statute can ever allow anyone on whom it confers a power to exercise such power arbitrarily and capriciously or in bad faith.”

22.The Appellant averred that the Respondent disregarded the signed financials for the year 2018 with the restated comparatives for the year 2017 and revised tax computation in arriving at its decision on the restatement of 2017 accounts in 2018 annual financial statements, overstated costs of sales in the financial year 2017, overstated administrative costs in the financial year 2017 and suspense account.

23.The Appellant stated that it provided the annual financial statements to the Respondent, and contrary to the Respondent’s assertion in the objection decision, the financial statements were duly signed by the independent auditors.

24.The Appellant relied on the case of Silver Chain Ltd -vs- Commissioner Income Tax & 3 Others (2016) eKLR where the Court stated: -“The task of collecting taxes should not lead to discouraging taxpayers from carrying on with their businesses. If the taxpayers close shop, there will be no taxes to be collected. On the other hand, if no taxes are paid there will be no funds to run government operations. Therefore, is calls for a balance between the tax collectors and taxpayers whereby the process becomes inclusive as opposed to being unilateral. There must be fairness in the process of tax assessment.”

25.The Appellant stated that the Respondent disallowed the expenses relating to Bluu as it misapprehended the nature of the project. That the Respondent indicated that the expenses were payments to a non-resident who would help in putting together content to be sold under the revenue stream premium SMS and as such, it constituted capital expenditure.

26.The Appellant argued that the Respondent’s understanding is incorrect because the Bluu project was a financing mechanism under a business arrangement in respect of which all the profits generated are duly reported and taxed. That the Appellant, through its tax agent, provided support to prove that the corresponding revenues relating to the expenses incurred on Bluu were declared, and, therefore, the income and expenses were treated correctly from an income tax perspective.

27.The Appellant further argued that whereas the Respondent averred that the expenses relating to the Bluu project were capital in nature, it should be noted that there was income directly generated as a result of the expenses.

28.The Appellant posited that it is common knowledge that capital expenditure refers to a long-term investment that will result in generation of income over time while revenue expenditure is for purposes of regular income generation. The Appellant averred that it provided schedules to show month on month sales/income relating to the expenses incurred under Bluu.

29.The Appellant submitted that it is clear from the foregoing that the Respondent was not justified in its demand for Corporation tax citing the case of Commissioner of Income Tax v Kencell Communications Limited (Now Airtel Kenya Limited) [20I6] eKLR wherein the Court observed that: -“In particular, the Court should have regard to the following guidelines (bearing in mind that the categories or guidelines are not closed):i.The manner of the expenditure: a one-time expenditure, as opposed to recurrent expenditures, would tend to suggest that the expenditure is capital in nature, although this factor is not conclusive; andii.The consequence or result of the expenditure: if the expenditure strengthens or adds to the taxpayer's existing core business structure, it is more likely to be capital in nature. The concept of a "core business structure" refers to the permanent (but not necessarily perpetual) structure of the taxpayer's business which is utilized for the generation of profits, and it must be said that this is the nature of inquiry that the Indian Tax Appellate Tribunal made in the case of Vodaphone Essar (Gujarat) vs. The Department of Income Tax cited to this Court by Kencell when it held: -"In Bombay Steam Navigation's Co, 1953 Ltd.’s case, it was held that the question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be viewed in the larger context of business necessity or expediency it was held that if the outgoing or expenditure is so related to the carrying on or the conduct of the business, that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure... What amounts to enduring benefit was considered in BFH (supra) where the Court held: -"It is clear that in order for an expense to be properly characterized as capital in nature, it should bring into existence an asset or an advantage of a permanent (but not necessarily perpetual) character. "Enduring" or "permanent" merely means that the asset or advantage acquired must have "enough durability to justify its being treated as a capital asset".”

30.The Appellant stated that it had a global expansion project named Elarian Global Expansion undertaken to expand the operations of the Appellant. The Appellant further stated that this was a project and not a separate legal entity.

31.The Appellant averred that the Respondent disallowed expenses that were wholly and exclusively incurred in generation of revenue for the Appellant in the ordinary course of its business and disregarded the matching principle of accounting in instances where there was a claiming of invoices in relation to foreign jurisdictions, the resultant revenue earned from such jurisdictions are declared in Kenya.

32.The Appellant referred to the Companies Act, 2015 Laws of Kenya which defines a subsidiary to mean a company of which another company is its holding company. That the Act further defines a company to mean a company formed and registered under this Act or an existing company.

33.The Appellant submitted that the law is clear that a subsidiary is a registered entity with a legal personality and that the company has to be registered for it to be recognised as a subsidiary.

34.Citing Section 15(1) of the Income Tax Act, the Appellant asserted that the said expenses were wholly and exclusively incurred for the production of the Appellant’s income and should therefore be allowed. That pursuant to the foregoing provision, the Appellant was entitled to deduct all the expenditure it properly incurred in the production of its respective income.

35.That in this regard, the Appellant provided sample invoices to show that it only claimed expenses wholly and exclusively incurred in the generation of revenue for itself and not its subsidiaries.

36.The Appellant affirmed that it also provided a ledger showing that it incurred expenses during its re-branding, which were its own expenses and not those of a subsidiary. The Appellant further claimed that the Respondent disregarded the Appellant’s documents and explanations on this issue.

Pay as You Earn (PAYE)

37.The Appellant averred that for the years 2019 and 2020, it faced cash flow challenges due to the unprecedented Covid 19 pandemic, and as a result the Appellant’s top management resolved to defer their emoluments, and their salaries were not advanced and thus PAYE could not have been deemed.

38.The Appellant avowed that it clearly explained to the Respondent that the variance identified by the Respondent arose from the difference between the staff costs which included both actual and deferred salaries and the declarations in the PAYE returns which only contained actual salaries.

39.The Appellant claimed that upon the remuneration of the respective directors, the Appellant would proceed to deduct PAYE as prescribed under Section 37 of the Income Tax Act.

Withholding Tax (WHT)

40.The Appellant averred that the Respondent misapprehended the nature of transactions entered between the Appellant and telecommunication companies with regard to bulk SMS and concluded that the Appellant consumed "transmission of messages" services from non-residents, which was subject to Withholding tax.

41.The Appellant asserted that it explained to the Respondent that it provides an Application Programming Interface (API) that enables persons to send bulk messages to intended recipients. That the Appellant purchases the bulk messages from telcos and maintains a platform that allows its clients to send the SMS to different recipients.

42.The Appellant explained that the nature of the purchase by the Appellant does not change in case of non-residents and the said purchase of bulk SMS from telcos does not fall under any of the items listed under Section 35 of the Income Tax Act. The Appellant stated that it provided agreements between itself and telcos demonstrating the nature of the transaction for provision of short codes as well as invoices.

43.The Appellant further cited Section 35 (1)(l) of the Income Tax Act which provides for withholding tax for gains and profits from the business of transmitting messages, and pointed out that the rate applicable for the said Section is 5% and not 20% as purported by the Respondent. The Appellant submitted that the Respondent has demanded for taxes that are not due and owing as a taxpayer can only be taxed as per provisions of the law. That the demand by the Respondent is contra statute and has no basis in law, and the same should, therefore, be set aside in its entirety.

44.It was the Appellant’s submission that Article 210(1) of the Constitution of Kenya, 2010 provides that, "No tax or licensing fee may be imposed, waived or varied except as provided by legislation." That the Respondent charging 20% Withholding tax while the law provides for 5% is illegal and baseless.

45.The Appellant referred to the case of Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others 2019] eKLR wherein the Court held that: -“Similar statements have been made in several judgments on tax cases. In Scott v. Russell (lnspector of Taxes), [1948] 2 All ER Lord Simonds expressed:"... there is a maxim in Income tax law which, though it may sometimes be over-stressed, yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him."”

46.The Appellant asserted that the Respondent misclassified the Bluu expenses as payments made to content creators to help in the development of content sold under premium SMS. The Appellant stated that contrary to the Respondent’s assertion, it did not pay management or professional fees nor make any payment to content creators.

47.The Appellant stated that it is a licensed Content Service Provider (CSP) licensed by the Communications Authority of Kenya (CAK). That it operates under a revenue share arrangement, alongside its telecom partner (Safaricom) and other partners. That all transactional flows under these arrangements suffer withholding tax at multiple tax points.

48.The Appellant clarified that for the Bluu arrangement, the operational partner drives the business venture and engages any necessary providers to promote growth. That the Appellant’s primary role in the arrangement is that of a financier. The Appellant explained that the funds disbursed to the operational partner for the purpose of business growth are neither fees nor payments to content creators, but rather, a part of a financing mechanism aimed at continuity of the business. That this business arrangement generates significant taxes which are remitted to the Respondent. Moreover, that any profits generated from this business model are reported and taxed appropriately.

49.The Appellant contended that for the arrangement under dispute, all revenues have been reported in the financial books of the Appellant and have been subjected to corporation tax and VAT.

50.The Appellant argued that the Respondent’s assertion that withholding tax should be charged on the financial support to the operational partner, misrepresents the nature of the business and the role of the Appellant within it. That the Respondent’s assertion is a misunderstanding of the business model and, if enforced, would result in double taxation on the product thus its economics.

51.The Appellant averred that the Respondent also made a claim for WHT on cloud hosting services, based on a misinterpretation of the Appellant’s records. The Appellant asserted that it does not engage in any outsourcing to third-party cloud providers for hosting services but relies on its internal team of infrastructure engineers to manage and maintain the cloud infrastructure. That the internal support infrastructure negates involvement of third-party cloud providers to offer core support other than providing the cloud. Based on this, the Appellant affirmed that it does not consume cloud hosting services.

52.The Appellant cited the case of Stanbic Bank Kenya Limited v Kenya Revenue Authority [2009] eKLR wherein the Court held that the fact that technology is used in providing a service is not indicative of whether a service is of a technical nature. That similarly, the delivery of the service via technical means does not make the service technical.

53.The Appellant stated that it procured software licences and subscriptions from non-residents for the right to use various internet resources. That the Appellant only purchased the copyright material and has no right to exploit the software or transfer the software to other users. That the Appellant only pays for a licence to continue using the software within the parameters subscribed to.

54.The Appellant contended the Respondent’s position submitting that it is contrary to the High Court decision in the case of Seven Seas Technologies Limited v Commissioner of Domestic Taxes (Income Tax Appeal 8 of 20I7) [2021] KEHC 358 (KLR) (Commercial and Tax) (10 December 2021) (Judgment), where the Court clearly pronounced itself that a royalty does not arise where there are no rights for exploitation of software.

55.The Appellant stated that the Respondent purported to charge WHT on set-up and maintenance fees paid to telcos relating to short codes, sender IDs and USSDs. The Appellant argued that the fees charged by the telcos in this regard do not constitute management and professional fees. That the nature of this arrangement is such that the telcos obtain codes being, short code, sender lD, key word and USSD from Communication Authority of Kenya (CAK) and sell the same to the Appellant for onward selling to customers.

56.The Appellant further stated that the fees charged by the telcos for them to be able to use the codes are issued by CAK. That the cost is then passed from telcos to API providers such as the Appellant. The Appellant argued that it would be punitive to impose WHT at the level of the Appellant, yet the cost is a pass-through cost originating from CAK.

57.The Appellant affirmed that the fee is not for management or professional services and is not one of items listed as subject to WHT under Section 35 of the Income Tax Act. That the fee does not fall within the definition of management and professional fees under Section 2 of the Income Tax Act.

Value Added Tax (VAT)

58.The Appellant stated that it provided supporting documentation to demonstrate that the invoice numbers quoted as "various" are legitimate purchases and deductible in accordance with Section 17 of the Value Added Tax Act. That the schedules shared were not considered by the Respondent in arriving at its objection decision.

59.The Appellant claimed that the remaining disputed VAT assessment of Kshs. 9,340,051 also comprises legitimate purchases that the Respondent declined to consider.

60.The Appellant submitted that having complied with Section 17 of the VAT Act it was entitled to input VAT. It relied on the case of Tarua Scrap Metal Dealers Limited vs Commissioner for Domestic Taxes Tax Appeal No. E053 of 2023 wherein the Tribunal held that: -“The Tribunal reiterates that the primary basis for input VAT deduction is Section 17 of the VAT, and a registered taxpayer is entitled to deduction of input VAT to the extent of its compliance with the said Section.”

Withholding Value Added Tax

61.The Appellant stated that the Respondent compared the purchases claimed in the VAT3 returns vis-à-vis the withholding VAT paid for the same month and noted some variances.

62.The Appellant explained that the variances are due to timing differences as purchases are filed when they have been incurred or accrued in the books. That there is also a six-month window of filing of purchases.

63.The Appellant argued that withholding VAT on the other hand is paid on payment of the respective suppliers. That the Respondent’s comparison between the two could not yield desired results since the two are filed and paid at different times. That the method adopted by the Respondent is not supported by any known accounting standard or audit tests.

64.The Appellant further argued that the Respondent failed to consider that the Appellant did not make actual payments to the telecommunication companies since there was a set-off payment plan agreed between the Appellant and the telcos for set off of liabilities amongst themselves.

65.The Appellant submitted that Section 42A of the Tax Procedures Act clearly provides that withholding VAT is to be applied at the time of paying for the supplies. That in an offset arrangement, it is impractical to apply Withholding VAT as there is no payment to the supplier. The Appellant argued that since no payment was made in the set off arrangement, the Appellant could not withhold VAT.

66.The Appellant relied on the case of Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] eKLR wherein the Honourable Court held that: -“However, when it comes to interpretation of tax legislation, the statute must be looked at using slightly different lenses. With regard to tax legislation, the language imposing the tax must receive a strict construction. Judge Rowlett in his decision in Cape Brandy Syndicate v l.R. Commissioners [1921] 1KB (cited by the appellants) expressed the common law position in this area when he stated; ‘...in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.’”

67.The Appellant further averred that there is no revenue loss to the Respondent since the supplier has recognised the sale and declared VAT where applicable irrespective of the set off/offset.

68.The Appellant contended that the decision taken by the Respondent is materially influenced by an error of the applicable tax laws, is not rationally connected to the information provided to the Respondent and violates the legitimate expectations of the Appellant.

69.The Appellant averred that in arriving at the erroneous findings contained in the objection decision, the Respondent failed to consider the provisions of the law and in doing so, acted in excess of jurisdiction or power conferred under the tax laws highlighted above. That, therefore, the objection decision issued by the Respondent is contra statute, time barred in relevant part, unreasonable and unfair and the same should be vacated in its entirety.

70.That being aggrieved by the objection decision, the Appellant filed a Notice of Appeal dated 19^th October 2023.

Appellant’s prayers

71.The Appellant prayed as follows: -a.That the Commissioner’s assessment dated 26^th June 2023 and objection decision dated 22^nd September 2023 demanding Kshs. 326,351,687.00 in principal tax together with penalties and interests be set aside.b.That the Commissioner, its employees, agents, or other person purporting to act on its behalf be barred and/or estopped from demanding or taking any further steps towards enforcement or recovery of principal tax, penalties and interest on the Commissioner’s demand as stipulated above:c.The costs of this Appeal; andd.Any other remedies that the Honourable Tribunal deems just and reasonable.

Respondent’s Case

72.The Respondent’s case is premised on the following documents:a.The Respondent’s Statement of Facts dated 1^st December 2023 and filed on 4^th December 2023 and the documents attached to it; andb.The Respondent’s written submissions dated and filed on 19^th June 2024.

73.The Respondent stated that it communicated to the Appellant regarding the returns and tax payment review conducted by the Respondent on Value Added Tax (VAT), Pay as You Earn (PAYE), Withholding Tax (WHT) and Corporation tax for the period 2016 to 2020.

74.That the Respondent issued the Appellant its preliminary audit findings for the period 2017 to 2021 on 2^nd March 2023.

75.The Respondent asserted that it subsequently issued the Appellant with income tax, VAT, PAYE, WHT and WHVAT additional assessments with a total principal tax liability of Kshs. 251,182,432.00 on 26^th June 2023, which the Appellant objected to on 26^th July 2023.

76.The Respondent stated that it issued its objection decision on 22^nd September 2023, partially amending the assessment.

77.That the Appellant, dissatisfied with the Respondent’s objection decision lodged its Memorandum of Appeal on 27^th October 2023.

78.The Respondent summarised its issues for determination in this appeal as follows:i.Whether the Commissioner erred in issuing tax assessments relating to a period beyond the statutory 5 years.ii.Whether the Respondent erred by basing its assessment of under-declared revenue on the variance between the sales as per the trial balance and sales as per the VAT returns without considering the Income tax returns filed by the taxpayer.iii.Whether the Respondent used erroneous figures to compute the Appellant’s revenue.iv.Whether the Respondent erred in holding that the Appellant had not provided the supporting documents.v.Whether the Commissioner erred by disallowing expenses incurred wholly and exclusively in generating income for the business of the Appellant.vi.Whether the Respondent erred by issuing the WHT assessment.vii.Whether the Commissioner erred by misapprehending the nature of hosting services by holding that the Appellant consumed cloud hosting services thereby charging it to WHT.viii.Whether the Commissioner erred in its decision to subject software licence and subscription payments made to non-residents for the right to use various internet resources to WHT.ix.Whether the Commissioner erred by misapprehending the nature of the transactions entered into between the Appellant and the telecommunication companies thereby concluding that the Appellant pays set up and maintenance fees.x.Whether the Commissioner erred in law by disallowing input VAT attributable to making of taxable supplies that were claimed in strict compliance with Section 17 of the VAT Act.xi.Whether the Commissioner erred in concluding that the Appellant failed to withhold VAT on some transactions or withheld and failed to remit the taxes to the Commissioner contrary to provisions of Section 42A of the Tax Procedures Act.

On whether the Commissioner erred in issuing tax assessments relating to a period beyond the statutory 5 years.

79.In response to Ground 1 in the Memorandum of Appeal, the Respondent averred that the additional assessment on the 2017 income tax return is within the statutory 5 years period. That the Appellant filed its 2017 return on 29^th June 2018, while the notice of assessment is dated 26^th June 2023.

On whether the Respondent erred by basing its assessment of under-declared revenue on the variance between the sales as per the trial balance and sales as per the VAT returns without considering the income tax returns filed by the taxpayer.

80.In response to Ground 2 in the Memorandum of Appeal, the Respondent averred that it requested the Appellant to provide a reconciliation of its revenue as per trial balances and income tax returns in support of its grounds of objection, which the Appellant did not provide.

81.The Respondent cited Section 56(1) of the Tax Procedures Act which places the burden on the taxpayer to prove that a tax decision is incorrect. The Respondent stated that in the absence of such evidence, the Respondent was justified in confirming the assessment.

82.The Respondent buttressed its position by referring to the cases of Leah Njeri Njiru v Commissioner of Investigations and Enforcement Kenya Revenue Authority & another [2021] eKLR, Tumaini Distributors Company (K) Limited v Commissioner of Domestic Taxes [2020] eKLR and Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR, where the Court in the latter case stated as follows with regard to the burden of proof in tax matters: -“The importance of the above provision is that the party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof. The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. 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.”

On whether the Respondent used erroneous figures to compute the Appellant’s revenue.

83.In response to Grounds 3 and 4 in the Memorandum of Appeal, the Respondent averred that it scrutinised the shared financials and noted that they were unsigned and therefore they could not rely on them.

84.On this issue, the Respondent submitted that, placing reliance on Section 24(2) of the Tax Procedures Act, the Respondent is legally mandated to use whatever information available to it in order to determine the taxpayer’s tax liability.

85.That the Court in the case of Oliver Merrick Fowler & another v Kenya Revenue Authority [2022] eKLR quoted with authority the case of Saima Khalid vs The Commissioner for Her Majesty's Revenue and Customs- Appeal No. TC/2017/02292 and stated: -“...The very use of the word judgement makes it clear that the commissioners are required to exercise their power in such a way that they make a value judgement on the material which is before them... what the words best of their judgement envisage, in my view is that the commissioners will fairly consider all material placed before them, and on that material come to decision which is one which is reasonable and not arbitrary as to the amount of tax which is due.”

On whether the Commissioner erred in holding that the Appellant had not provided the supporting documents.

86.The Respondent stated that the Appellant had requested to be allowed to restate their 2017 accounts. That the Respondent, consequently requested the Appellant to provide a confirmation letter from its previous auditors detailing the reasons why the Respondent should disregard the original 2017 audited financial statements, but the same was not provided, offending Section 71(1) of the Tax Procedures Act which provides: -“(1)A tax return, application, notice, statement, or other document required to be submitted or lodged with the Commissioner under a tax law shall be in the prescribed form if the document—(a)in the form prescribed by the Commissioner for that type of tax return, application, notice, statement, or document; and(b)contains the information (including any attached documents required) and is signed as required by the form.”

87.The Respondent asserted that the Appellant’s primary records in support of the changes made to the original accounts were not shared with the Respondent for review.

88.The Respondent submitted that a taxpayer has an obligation under Section 23(1)(b) and (c) of the Tax Procedures Act to keep tax records and supporting documents, for a period of five years, to show that the taxpayer has complied with tax laws and to adduce and produce all documents when they have been requested for by the Commissioner.

89.The Respondent cited the following cases in support of its case: -i.Commissioner of Investigations & Enforcement v Dr, Evans Kidero (2022) eKLR;ii.Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022]; andiii.Income Tax Appeal E088 of 2020: Commissioner of Domestic Taxes vs. Galaxy Tools Limited.

90.The Respondent urged the Tribunal to uphold the cited decisions that the burden is on the taxpayer to provide competent and relevant evidence to support its tax position.

On whether the Commissioner erred by disallowing expenses incurred wholly and exclusively in generating income for the business of the Appellant.

91.In response to Ground 5 in the Memorandum of Appeal, the Respondent averred that the expenses claimed in the Appellant’s ledgers were not exclusively incurred in the production of the reported income as required under Section 15(1) of the Income Tax Act.

92.The Respondent claimed that some of the Appellant’s expenses related to a subsidiary of the Appellant and should be charged against the income of the subsidiary.

93.The Respondent also averred that it noted that the Appellant had a project with the aim of sourcing/development of content initiated by AT Labs Limited, a sister company to the Appellant.

94.The Respondent stated that pursuant to Section 59(1)(a) and (b) of the Tax Procedures Act, it requested the Appellant to share the joint venture agreement to enable it to understand the nature of these expenses, but the same was not availed.

95.That in the absence of competent and relevant proof that the said expenses were wholly and exclusively incurred in the generation of the Appellant’s income, the Respondent disallowed the expenses in line with Sections 15 and 16 of the Income Tax Act

96.The Respondent stated as the Appellant failed to demonstrate how the money spent in Bluu expenses in the project are of revenue nature. That it concluded that the expenses are of capital nature, therefore, disallowed the expenses in line with Sections 15 and 16 of the Income Tax Act.

97.The Respondent averred that tax expense (penalties), sponsorship & donations, write off balances and increase in provisions were not exclusively incurred in the generation of reported revenue and were therefore disallowed in line with Sections 15 and 16 of the Income Tax Act.

On whether the Respondent erred by issuing the WHT assessment.

98.In response to Ground 7 in the Memorandum of Appeal, the Respondent averred that it established that the Appellant purchases bulk SMS from local and foreign suppliers for resale, which entails purchase of enterprise messaging services.

99.The Respondent posited that this entails a managed service and withholding tax is applicable in line with Section 35(1)(l) as read together with Section 9(2) of the Income Tax Act.

100.That Section 35(1)(l) of the Income Tax Act provides: -“Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of–(l)gains or profits from the business of transmitting messages which is chargeable to tax under section 9 (2);which is chargeable to tax, deduct therefrom tax at the appropriate non-resident withholding tax rate;”

101.The Respondent maintained that withholding tax is payable and the assessment was justified and that it was upon the Appellant to provide evidence to disprove this assessment, which it failed to do.

On whether the Commissioner erred by misapprehending the nature of hosting services by holding that the Appellant consumed cloud hosting services thereby charging it to WHT.

102.In response to Ground 8 in the Memorandum of Appeal, the Respondent averred that the Appellant consumed cloud-hosting services.

103.The Respondent claimed that the services were offered as a package of support services and right to use of internet resources availed through hosting. The Respondent averred that it requested the Appellant to provide a breakdown of payments relating to support services and those relating to product.

104.The Respondent submitted that contrary to Section 59 of the Tax Procedures Act, the Appellant did not provide a breakdown showing which payments relate to support services and which relate to the product.

105.The Respondent stated that using its best judgment, it found that the taxpayer failed to subject the payments made to withholding tax as provided under Section 35 of the Income Tax Act.

106.That the burden of proof again was on the Appellant to provide documents or sufficient explanations to prove that the withholding tax assessment was incorrect or excessive.

On whether the Commissioner erred in its decision to subject software license and subscription payments made to non-residents for the right to use various internet resources to WHT.

107.In response to Ground 9 in the Memorandum of Appeal, the Respondent averred that the Appellant made payments for software licences and subscriptions to non-resident providers for the right to use various internet resources. That the payments ought to have been processed as per Section 35(1)(b) of the Income Tax Act.

108.The Respondent emphasised that, at the objection review, the Appellant failed to demonstrate that the payments were not for the exploitation of the software, and further failed to classify the various licences and software procured so as to determine which would correctly attract WHT or not. That the Appellant, therefore, failed to discharge its burden of proof that the assessment was erroneous.

On whether the Commissioner erred by misapprehending the nature of the transactions entered into between the Appellant and the telecommunication companies thereby concluding that the Appellant pays set up and maintenance fees.

109.In response to Ground 10 in the Memorandum of Appeal, the Respondent averred that the Appellant operates short codes acquired from the telecommunication companies where the Appellant pays set up and maintenance fees.

110.The Respondent submitted that these charges fall under the definition of management and professional fees as defined under Section 2 of the Income Tax Act.

On whether the Commissioner erred in law by disallowing input VAT attributable to making of taxable supplies that were claimed in strict compliance with Section 17 of the VAT Act.

111.In response to Ground 11 in the Memorandum of Appeal, the Respondent averred that the Appellant failed to apportion input VAT and had conceded on the issue and requested a payment plan. The Respondent stated that the Appellant also claimed duplicate input VAT and conceded to the same, and also requested for a payment plan.

112.The Respondent stated that the Appellant failed to provide a detailed breakdown of the claimed input VAT through invoice numbers quoted as "various".

113.The Respondent averred that it also requested the Appellant to provide a reconciliation of its revenues as per VAT3 and income tax returns in support of this ground, however, the Appellant failed to provide the same.

On whether the Commissioner erred in concluding that the Appellant failed to withhold VAT on some transactions or withheld and failed to remit the taxes to the Commissioner contrary to provisions of Section 42A of the Tax Procedures Act.

114.In response to Ground 12 in the Memorandum of Appeal, the Respondent averred that the Appellant admitted to failing to withhold VAT due to offsetting of accounts between the Appellant and Safaricom as well as with Airtel Networks Kenya.

115.The Respondent confirmed that the Appellant withheld VAT on payments to Basebone Ltd with a WHVAT amount of Kshs. 1,628,226.00 as per the withholding certificates provided for the period 2022. That the Respondent, therefore, amended the assessment to the extent of the gross amounts of Kshs. 81,411,300.00 relating to Basebone Limited.

116.The Respondent submitted that the failure of the Appellant to remit the taxes withheld contravened the provisions of Section 42A(4C) of the Tax Procedures Act which stipulates thus: -“A person who is required under this section to withhold tax commits an offence if the person –(a)fails to withhold the whole amount of the tax which should have been withheld; or(b)fails to remit the amount of the withheld tax to the Commissioner by the twentieth day of the month following that in which the deduction was made.”

117.The Respondent submitted that the tax decisions issued by the Respondent in this case were all lawful as they complied with the relevant provisions under tax laws. That in view of the fact that the Appellant did not produce all the documents that it was requested to produce, the Appellant has failed to discharge its burden of proof under Section 56(1) of the Tax Procedures Act.

On PAYE assessments

118.In response to Ground 6 in the Memorandum of Appeal, the Respondent averred that although the Appellant claims that the salaries were not advanced to the directors, hence PAYE could not have been deemed, the Appellant went ahead to claim the salaries expense in its income tax return.

119.The Respondent cited Section 2 of the Income Tax Act which provides for the definition of paid to include distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person.

120.The Respondent averred that the Appellant, having expensed the accrued salaries triggered a tax point for PAYE and the amounts are considered as paid. That the amounts continue to accrue interest and have taken the nature of a debt owed to the directors.

Respondent’s prayers

121.The Respondent prayed that the Tribunal:i.Upholds the Respondent’s assessment dated 26^th June 2023 and objection decision dated 22^nd September 2023 demanding Kshs. 326,351,687.00 in principal tax together with interest and penalties.ii.Dismisses this Appeal with costs to the Respondent as the same is without merit.

Issues For Determination

122.The parties entered into a Partial Consent dated and filed on the 8^th May, 2024 that was endorsed by the Tribunal as Partial Judgment on the 21^st May, 2024. It is pursuant to the Consent the Parties agreed to refer to the Tribunal for determination disputed assessments relating to VAT of Kshs 9,340,051.00, Corporation tax of Kshs 68,393,819.00, Withholding tax of Kshs 9,340,051.00 and Withholding VAT of Kshs33,643,930.00.

123.The Tribunal has considered the facts of the matter and the submissions made by the parties, and is of the view the issues falling for determination are as follows:-i.Whether the Respondent’s assessments were time-barred.ii.Whether the Respondent was justified in issuing its objection decision dated 22^nd September 2023.

Analysis And Findings

124.On 22^nd September 2021, the Respondent communicated to the Appellant regarding the returns and tax payment review conducted by the Respondent on Value Added Tax (VAT), Pay as You Earn (PAYE), Withholding Tax (WHT) and Corporation tax for the period 2016 to 2020.

125.The Respondent issued the Appellant its preliminary audit findings for the period 2017 to 2021 on 2^nd March 2023.

126.The Respondent subsequently issued the Appellant with income tax, VAT, PAYE, WHT and WHVAT additional assessments with a total principal tax liability of Kshs. 251,182,432.00 on 26^th June 2023, which the Appellant objected to on 26^th July 2023.

127.The Respondent issued its objection decision on 22^nd September 2023, partially amending the assessment, a decision which the Appellant appealed against at the Tribunal.

a) Whether the Respondent’s assessments were time-barred.

128.The Appellant averred that the Respondent issued income tax assessments for the years 2017 and 2018 that were beyond the statutory 5-year period.

129.The Respondent asserted that the additional assessment on the 2017 income tax return is within the statutory 5-year period. That the Appellant filed its 2017 return on 29^th June 2018, while the notice of assessment is dated 26^th June 2023.

130.Before delving into the merits of the Respondent’s income tax assessments and the Appellant’s arguments against them, the Tribunal refers to the appeal documents on record which show that the Appellant’s accounting period end is 31^st December.

131.On 26^th June 2023, the Respondent issued the Appellant with income tax assessments for the years of income 2017 to 2021.

132.The Tribunal refers to Section 52B(1)(b) which provides as follows regarding the due date for filing a self-assessment return of income tax: -“every person, other than an individual chargeable to tax under the Act, shall for any accounting period commencing on or after 1st January, 1992, furnish to the Commissioner a return of income, including a self-assessment of his tax on such income, not later than the last day of the sixth month following the end of the year of income.”

133.Section 31(4) of the Tax Procedures Act is clear that the Respondent can only issue assessments before the expiry of five years from the date of submitting of a self-assessment by a taxpayer. It provides as follows: -“(4)The Commissioner may amend an assessment—(a)in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(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.” Emphasis ours

134.According to Section 31(4)(a) of the Tax Procedures Act, the Respondent may only issue an assessment beyond the five years where the Respondent can prove gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer. It is thus clear that an assessment issued under Section 31 of the Tax Procedures Act beyond the five-year limit is unlawful, unless the Respondent can prove wilful neglect, evasion or fraud by or on behalf of the taxpayer.

135.The Tribunal reiterates its holding in a similar matter TAT Appeal No. 411 of 2021, City Gas East Africa v Commissioner of Investigations and Enforcement where Tribunal held that the Respondent erred in assessing the Appellant for a period beyond five years when there was no evidence of wilful neglect, evasion or fraud.

136.The Respondent’s assessment was dated 26^th June 2023, meaning that the earliest periods that the Respondent could assess the Appellant was for any tax returns that were filed from 27^th June 2018.

137.The Tribunal notes that the Appellant did not rebut the Respondent’s averment that the Appellant filed its 2017 income tax self-assessment return on 29^th June 2018.

138.Consequently, the Tribunal finds that the Respondent’s assessments of income tax for the years 2017 and 2018 were issued within the five-year timeline, and were thus not time-barred.b)Whether the Respondent was justified in issuing its objection decision dated 22^nd September 2023.

139.The Tribunal analysed this issue under sub-headings covering each tax-type assessed.

a. Corporation Tax

140.The Respondent confirmed its additional assessment of the Corporate tax of a principal tax of Kshs. 51,241,218.00 plus interest and penalties as raised in its notice of assessment to the Appellant. The Respondent stated that the tax assessments were based on:i.Understated revenue;ii.Over-stated direct cost;iii.Over-stated expenses;iv.Suspense account;v.Subsidiary expenses;vi.Other disallowed expenses; andvii.Bluu expenses.

Understated revenue

141.The Respondent established variances between the Appellant’s turnover declarations in the VAT returns and turnover in the trial balances for the years 2018, 2019, 2020 to 2021.

142.The Appellant contended the Respondent’s reconciliation averring that it was incomplete as the reconciliation should include a reconciliation between the trial balance, the income tax returns filed and the sales as per the VAT returns.

143.The Appellant further stated that the Respondent used erroneous figures in arriving at its decision that there was an under declaration of revenue for the year 2020, as the correct VAT 3 returns figures are Kshs. 1,217,230,387.00 for the vatable sales, Kshs. 30,510,746.00 for zero rated sales and Kshs 62,891,938.00 for exempt sales.

144.The Appellant also averred that the Respondent disregarded the signed financials for the year 2018 with the restated comparatives for the year 2017 and revised tax computation, in arriving at its decision on the restatement of 2017 accounts in 2018 annual financial statements, overstated costs of sales in the financial year 2017, overstated administrative costs in financial year 2017 and suspense account.

145.The Tribunal gleaned through the evidence and documents that the Appellant adduced in support of its case that the Respondent’s finding that the Appellant under-declared sales is incorrect and takes notice that the Appellant attempted to explain away the turnover variances sighted by the Respondent by attaching 2017 and 2018 accounts and no other documents besides these.

146.While the Appellant averred that the Respondent’s variance analysis was incomplete, the Tribunal observes that the Appellant did not furnish the Tribunal with the schedule of adjustments made to the trial balance and source documents in support of the adjustments that gave rise to the restated financial statements for the year 2017.

147.The Tribunal also observes that the Appellant failed to provide its VAT returns to support its averment that the Respondent used the wrong sales numbers for the Appellant’s sales declarations per the VAT returns in the Respondent’s computation of the under-declared revenue for the year 2020.

148.The Tribunal likewise takes notice that despite the Respondent requesting the Appellant to provide a confirmation letter from the Appellant’s previous auditors detailing the reasons why the Respondent should disregard the original 2017 audited financial statements, the Appellant failed to provide the confirmation. The Appellant also failed to present this confirmation at the Tribunal.

149.The Tribunal thus finds that the Respondent was justified in determining that the Appellant understated its revenue.

Over-stated direct cost, over-stated expenses and suspense account in 2017

150.The Respondent disallowed the Appellant’s expenses which the Appellant acknowledged in the correspondence sent by the Appellant in an email dated 18^th September 2023 to be overstated direct cost, overstated expenses and expenses in a suspense account in the year 2017.

151.The Tribunal observes that the Appellant stated in its objection and in its pleadings herein that it had restated its 2017 accounts (attached to its appeal documents), and revised its tax computation (not presented at the Tribunal) to reflect its true position, as it sought leave from the Respondent to be allowed to file an amended return, in its attempt to account for the overstated expenses. The Appellant’s defense on this issue ended at that point.

152.The Tribunal thus finds that the Respondent was justified in determining that the Appellant overstated its expenses.

Subsidiary expenses

153.The Respondent claimed that some of the expenses deducted by the Appellant related to a subsidiary of the Appellant and should be charged against the income of the subsidiary. The Respondent disallowed the identified expenses.

154.The Appellant rebutted the Respondent’s claim, stating that it had a global expansion project named Elarian Global Expansion undertaken to expand the operations of the Appellant. The Appellant further stated that this was a project and not a separate legal entity.

155.The Appellant stated that it claimed expenses that were wholly and exclusively incurred in the generation of its revenue. The Appellant affirmed that it provided sample invoices to support this position.

156.The Appellant referred to the Companies Act, 2015 Laws of Kenya which defines a subsidiary to mean a company of which another company is its holding company, in submitting that the law is clear that a subsidiary is a registered entity with a legal personality and that the company has to be registered for it to be recognised as a subsidiary.

157.The Appellant averred that the Respondent disregarded the matching principle of accounting in instances where there was a claim of invoices in relation to foreign jurisdictions, and that the resultant revenue earned from such jurisdictions are declared in Kenya.

158.In the Appellant’s objection, the Appellant further stated that there were instances where the company claimed expenses in relation to restructuring activities which according to the Appellant were critical for the business in Kenya as they would contribute to the growth of the business and in turn its revenues.

159.The Appellant further stated in its objection that expenses it booked in a ledger titled Elarian - Global Expansion were expenses incurred during re-branding, and that it also provided a ledger showing that it incurred expenses during its re-branding, which were its own expenses and not those of a subsidiary. The Appellant asserted that the Respondent disregarded the Appellant’s documents and explanations on this issue.

160.The Tribunal notes that the Appellant attached a multi-currency ledger titled Elarian - Global Expansion which listed amounts labelled as payable invoices including house rent and hospitality expenses, communication costs, subscriptions, media, utility costs, and spend money including for Bevy Labs Inc. – community management software provider, Microsoft Corporation – Elarian hosting fees, Toptal.com – Elarian SDK purchase. The Appellant also attached other ledgers listing other expenses that the Respondent disallowed.

161.The Tribunal notes that Appellant also attached to its Appeal some invoices for the Elarian – Global Expansion expenses and other disallowed expenses. These invoices contained descriptions such as legal fees for notarisation of documents including for Egyptian bank account opening, tax advisory fees, professional fees for extracting tax card for the company, incorporation of a joint stock company.

162.Indeed, the Tribunal during proceedings presumes that the Respondent’s assessment is correct until the taxpayer produces competent and relevant evidence to support his position. To discharge this burden, the taxpayer must furnish sufficient evidence to satisfy the required standard of proof and it is only then that the burden can shift.

163.Being that the Tax Appeals Tribunal Act does not set the standard of proof to be met in proceedings, the Tribunal approached this Appeal on the basis that the burden was on the Appellant to demonstrate on a preponderance of probability that the decisions of the Respondent against which it appealed were wrong.

164.The court in the case of Bar L Ranch, Inc. v. Phinney, (426 F.2d 995, 998-99 (5^th Cir. 1970)) took a similar approach where the court held that the taxpayer need only show that an assessment is arbitrary and that the burden of proof would then be on the government to show the existence and the amount of any deficiency.

165.The Tribunal is further guided by the holding in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR that: -“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.”

166.The Tribunal refers to Section 31(1) of the Tax Procedures Act which provides that the Commissioner may amend an assessment by making alterations or additions, from the available information and to the best of the Commissioner’s judgement, to the original assessment of a taxpayer for a reporting period to ensure that the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to which the original assessment relates.

167.The Tribunal observes that the Appellant during its objection review and appeal stages, averred that it incurred this expenditure in the course of its business and produced a comprehensive ledger showing its expenditure on its business activities. Further, the Appellant furnished the Tribunal with invoices in support of its expenditure.

168.In addition, the Appellant repudiated that this expenditure was incurred for a subsidiary for which the Respondent has alleged the expenditure was incurred. The Respondent did not cite the subsidiary which it alleged that the Appellant expended these amounts on.

169.Section 3(1) and (2)(a)(i) of the Income Tax Act provides as follows regarding income chargeable to tax in Kenya: -“(1)Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.(2)Subject to this Act, income upon which tax is chargeable under this Act is income in respect of–(a)gains or profits from–(i)any business, for whatever period of time carried on;(ii)any employment or services rendered;(iii)any right granted to any other person for use or occupation of property;”

170.Section 4(a) of the Income Tax Act further provides as follows:“For the purposes of section 3(2)(a)(i)–(a)where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from such business shall be deemed to have accrued in or to have been derived from Kenya;”

171.It follows that the worldwide business income of the Appellant, being a person resident in Kenya, is, according to the aforementioned Section 4(a) of the Income Tax Act, chargeable to tax in Kenya.

172.The Tribunal thus finds that the Appellant, under Section 15(1) of the Income Tax Act, for the purpose of ascertaining its total income for a year of income, was allowed to deduct all expenditure incurred, both in Kenya and outside Kenya, in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income, subject to Section 16 of the Act.

173.The Tribunal notes that the Appellant was further allowed under Section 15(2) of the Income Tax Act to deduct further expenditure, without prejudice to 15(1) of the Act, in computing for a year of income the gains or profits chargeable to tax under Section 3(2)(a) of the Act.

174.The Tribunal reviewed these records and established that the Appellant incurred expenditure relevant to its business.

175.Accordingly, the Tribunal finds that the Appellant discharged its burden of proof, as required under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, in establishing that it incurred some deductible expenditure.

176.After the Appellant discharged its burden of proof, the Respondent was obligated to dismantle the Appellant’s evidence in explanation and evidence. However, the Respondent failed to do so in its response to the Appeal.

177.In Hickman Motors Ltd. v. Canada, [1997] 2 S.C.R. 336 the Court stated that:“The taxpayer's initial onus of "demolishing" the Minister's exact assumptions is met where the appellant makes out at least prima facie case... Where the Minister's assumptions have been "demolished by the appellant, "the onus .... shifts to the Minister to rebut the prima facie case" made out by the appellant and to prove the assumptions ... The law is settled that unchallenged and uncontradicted evidence "demolishes" the Minister's assumptions; ...Where the burden has shifted to the Minister, and the Minister adduces no evidence whatsoever, the taxpayer is entitled to succeed; and even if the evidence contained ''gaps in logic, chronology, and substance", the taxpayer's appeal will be allowed if the Minister fails to present any evidence as to the source of income.”

178.The Tribunal finds that the Commissioner’s use of best judgement to arrive at an assessment does not exist in a vacuum and should be reasoned with reliable information. The Tribunal is guided by the Court’s finding on the application of ‘best judgement’ in Saima Khalid vs The Commissioner for Her Majesty’s Revenue & Customs Appeal No. TC/2017/02292, where the Court observed that: -“

29.The requirements for a decision to be to the best of HMRC’s judgement were set out in the High Court case of Van Boeckel v C & E Commissioners where Woolf J, as he then was, said:“…The very use of the word ‘judgment’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them … What the words ‘best of their judgment’ envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on commissioners will fairly consider all material placed before them and, on that material, come to a decision which is reasonable and not arbitrary as to the amount of tax which is due...”

179.Based on the foregoing, the Tribunal finds that the Respondent was not justified in finding that the Appellant had deducted expenditure in respect of a subsidiary, and erred in disallowing the expenditure it identified as subsidiary expenditure.

Other disallowed expenses

180.The Respondent disallowed the Appellant’s expenses that it determined were not wholly and exclusively incurred in the production of the Appellant’s income. The amounts disallowed were Kshs. 294,355.00, in 2019, Kshs. 7,987,189.00 in 2020 and Kshs. 66,910,574.00 in 2021.

181.The Appellant requested the Respondent in its objection, to be allowed to submit an amended return for the year 2021 which is consistent with the tax computation prepared for the year and which disallowed the identified amounts which would have the effect of reducing the Appellant’s loss position.

182.The Respondent confirmed in its objection decision the disallowing of the aforementioned expenses, and the Appellant appealed this decision.

183.The Tribunal notes firstly, that the Appellant, on its volition, admitted in writing to having overstated its deductible expenses by the aforementioned amounts. The Tribunal further notes that, the Appellant did not present any evidence to disprove the Respondent’s decision to disallow the expenses, nor did it argue its case on this issue, despite appealing against the Respondent’s decision.

184.Consequently, the Tribunal finds that the Respondent was justified in disallowing the expenses identified under other disallowed expenses.

Bluu expenses

185.The Respondent disallowed the expenses relating to Bluu project indicating that the expenses were payments to a non-resident who would help in putting together content to be sold under the revenue stream premium SMS and as such, the expenses for the project constituted capital expenditure.

186.The Appellant argued that the Respondent’s understanding is incorrect because the Bluu project was a financing mechanism under a business arrangement in respect of which all the profits generated are duly reported and taxed. The Appellant clarified that there was income directly generated as a result of the expenses.

187.The Appellant stated that through its tax agent, it provided support to prove that the corresponding revenues relating to the expenses incurred on the Bluu project were declared, and, therefore, the income and expenses were treated correctly from an income tax perspective. The Appellant averred that it provided schedules to show month on month sales/income relating to the expenses incurred under the Bluu project.

188.The Tribunal perused the Appellant’s documents on record to get more details of the Bluu project as the Appellant failed to elucidate the details in its pleadings.

189.In the Appellant’s objection, the Appellant explained that it is a licensed Content Service Provider. That it operates under a revenue share arrangement alongside its telecom partner (Safaricom) and other partners.

190.The Appellant, in its objection stated that Bluu was a project initiated by AT Labs Limited, a sister company of the Appellant. That for Bluu, the operational partner drives the business venture including engaging any necessary providers to promote business growth. The Appellant stated that its role was primarily that of a financier.

191.The Appellant further explained that the funds it disbursed to its operational partner for business growth are neither fees nor payments, but rather a part of a financing mechanism aimed at growing the business. That this business arrangement generates significant taxes remitted to the Respondent.

192.The Tribunal notes that the Appellant attached an email from the Appellant to the Respondent dated 19^th September 2023 which listed revenue which the Appellant alleged to have been generated and declared by it. However, beyond the Appellant’s averments regarding what the Bluu project entailed, the Appellant did not provide any supporting documents regarding the transaction; such documents are specifically listed under Section 54A of the Income Tax Act, and the Appellant is expected to keep the records.

193.Instead of furnishing documentary evidence of its transactions under the Bluu project, the Appellant left the Tribunal with wonder and speculation about what the transaction factually was and merely expected that the Tribunal would accept its averments and amounts provided in an email, without querying the information. The Tribunal finds that the information that the Appellant provided was necessary but not sufficient.

194.Further, that the Appellant described its role in the Bluu project to be that of a financier, considering that it has not affirmed that it is a financial institution, does not point in the direction of expenditure in the project being in the ordinary course of its business.

195.Indeed, there is no evidence to support the Appellant’s position that the expenses it incurred were expenditure in the ordinary course of business and not capital expenditure as the Respondent had assessed.

196.The Tribunal thus finds that the Respondent was justified in disallowing the Bluu expenses.

197.The Tribunal refers to Section 15(1) of the Income Tax Act which provides as follows regarding the deduction of expenses: -“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.”

198.Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal (TAT) Act place the burden of disproving the Commissioner upon the taxpayer. To satisfy this burden, a taxpayer ought to submit all the relevant evidentiary material in its possession.

199.Section 54A(1) of the Income Tax Act envisions that a person carrying on a business must keep certain records and documents which in the opinion of the Commissioner are adequate for computing tax. It provides as follows: -“A person carrying on a business shall keep records of all receipts and expenses, goods purchased and sold and accounts, books, deeds, contracts and vouchers which in the opinion of the Commissioner, are adequate for the purpose of computing tax.”

200.Section 23(1) of the Tax Procedures Act also provides that a taxpayer is required to keep records as follows: -“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.”

201.The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held at paragraph 26 that: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”(3)Every person required under subsection (1) to keep records shall, at all reasonable times, avail the records to an authorised officer for inspection and shall give the officer every facility necessary to inspect the records.” Emphasis added

202.In the absence of relevant documentation to facilitate the assessment of a tax liability, the Respondent is empowered under Section 31(1) of the Tax Procedures Act to use its best judgement in making its tax assessment.

203.Based on the foregoing analysis, the Tribunal finds that the Appellant did not sufficiently explain and support the computed under-declared revenue and further did not prove to the Tribunal that it wholly and exclusively incurred for all the disallowed expenditure in the production of its income.

204.Despite the law under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act expressly placing a burden on the Appellant as a taxpayer to prove its case, the Appellant did not adduce any relevant source documents it is required to keep under Section 54A(1) of the Income Tax Act and Section 23 of the Tax Procedures Act to support its tax position.

205.The Tribunal notes that the Appellant instead made mere assertions without evidence regarding the incorrectness of the Respondent’s additional assessments, offered unsubstantiated suggestions of how the Respondent ought to have conducted the revenue variance analysis.

206.Further, for most of the transactions assessed Corporation tax, the Appellant, failed to furnish the Tribunal with documents it is required to keep in support of its tax position. In addition, the Appellant failed to present its tax position.

207.Consequently, the Tribunal finds that the Appellant only partially discharged its burden of proving that the Respondent’s income tax assessments for the periods 2017, 2018, 2019, 2020 and 2021 were incorrect or excessive.

b. PAYE

208.By consent of the Parties, as documented in the partial consent entered by the Parties dated 8^th May 2024 and adopted as a judgment of the Tribunal on 21^st May 2024, the Appellant conceded to the PAYE assessment amounting to Kshs. 11,053,292.00, being principal tax of Kshs. 8,179,382.00, penalty of Kshs. 408,969.00 and interest of Kshs. 2,464,940.00.

c. Withholding Tax (WHT)

209.The Respondent assessed the Appellant principal Withholding tax (WHT) of Kshs. 144,599,553.00. The Respondent stated that the tax assessments were based on payments for following items:i.Bulk SMS;ii.Bluu expenses;iii.Hosting;iv.Licences and subscriptions; andv.Short codes.

Bulk SMS

210.The Respondent averred that it established that the Appellant purchases bulk SMS from local and foreign suppliers for resale, which entails purchase of enterprise messaging services. The Respondent assessed the Appellant WHT on purchase of bulk SMS having interpreted the transaction to be consumption of “transmission of messages” services from non-resident persons.

211.The Respondent averred that this transaction attracts WHT as provided under Section 35(1)(l) as read together with Section 9(2) of the Income Tax Act.

212.The Appellant disputed the assessment by averring that it purchases bulk SMS from telecommunication companies who transmit the bulk SMS, which does not fall under the items listed under Section 35 of the Income Tax Act.

213.The Appellant further argued that Section 35(1)(l) of the Income Tax Act does not attract WHT at 20% as purported by the Respondent. That the applicable WHT rate for transactions under the said Section is 5%.

214.The Tribunal reviewed the provisions of law which the Respondent applied to charge the Appellant WHT on the purchase of bulk SMS from non-residents to establish the correct position.

215.Section 9(2) of the Income Tax Act provides that: -“Where a non-resident person carries on, in Kenya, the business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite or by any other similar method of communication, then the gains or profits from the business shall be the gross amount received for the transmission of messages which are transmitted by the apparatus established in or outside Kenya, whether or not those messages originate from Kenya, and such gains and profits shall be deemed to be income derived from Kenya.”

216.Section 35(1)(l) of the Income Tax Act provides as follows: -“Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of– gains or profits from the business of transmitting messages which is chargeable to tax under section 9 (2) which is chargeable to tax, deduct therefrom tax at the appropriate non-resident withholding tax rate;”

217.The question of law that calls for the Tribunal’s interpretation is whether trading of bulk SMS falls in the category of a business of transmitting messages by any other method of communication similar to transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet or satellite.

218.It is important to observe that the law under Section 9(2) of the Income tax Act enumerates the methods of transmitting messages, that is, by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite and then uses the terms “or” and “by any other similar method of communication”.

219.Bulk SMS also known as bulk messaging is transmitting of large numbers of SMS (short messages) for delivery to mobile phone terminals over cellular networks. The Appellant stated that it purchases bulk SMS from non-resident telecommunication companies which transmit the bulk messages.

220.It is the Tribunal’s interpretation that bulk SMS is a method of transmission of messages similar to the methods listed in Section 9(2) of the Income Tax Act. It is not open to this Tribunal to say that bulk SMS transmitted by the telecommunication companies do not fall under the said provision. The Tribunal therefore notes that the Appellant made payments to non-residents in respect of a business of transmitting messages under Section 9(2) of the Income Tax Act that is subject to WHT under Section 35(1)(l) of the Income Tax Act.

221.Section 34(2)(j) of the Income Tax Act provides that the tax upon the income of a non-resident person not having permanent establishment in Kenya which consists of a payment in respect of gains or profits from the business of transmitting messages which is chargeable to tax under Section 9(2) of the Income Tax Act shall be charged at the appropriate non-resident rate in force at the date of payment of such income and shall not be charged to tax under Section 34(1) of the Income Tax Act.

222.The applicable WHT rate for gains or profits from the business of transmitting messages in respect of gains and profits from the business of transmitting messages by cable or radio communication, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet and satellite or any other similar method of communication which is chargeable to tax under Section 9(2), is five per cent (5%) of the gross amount received as provided under Paragraph 3(l) of Head B of the Third Schedule to the Income Tax Act.

223.The Tribunal thus finds that the payments for bulk SMS by the Appellant were payments subject to deduction of WHT under Section 35(1)(l) of the Income Tax Act. The Tribunal, however, also finds that the Respondent erred in applying WHT at the rate of 20% instead of 5% as provided under Paragraph 3(l) of Head B of the Third Schedule to the Income Tax Act.

Bluu Expenses

224.The Respondent assessed the Appellant WHT on payments that the Appellant made to suppliers which the Respondent interpreted to be payments that relate to royalties, sales promotion, customer support as per descriptions in the ledgers and sample invoices availed to the Respondent.

225.The Appellant disputed this assessment by averring that it only provides financial support in the Bluu project and that the Respondent charging WHT on the Bluu expenses misrepresents the nature of the business and the Appellant’s role within it.

226.The Tribunal notes that the Appellant attached an email from the Appellant to the Respondent dated 19^th September 2023 which listed revenue which the Appellant alleged to have been generated and declared by it. However, beyond the Appellant’s averments regarding what the Bluu project entailed, the Appellant did not present to the Tribunal any supporting documents regarding the transaction; such documents are specifically listed under Section 54A of the Income Tax Act, and the Appellant is expected to keep the records.

227.Consequently, the Tribunal finds that, contrary to Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act, the Appellant did not discharge its burden of disproving the Respondent’s assessment of WHT on the Bluu expenses.

228.The Tribunal finds that the Respondent was justified in issuing its WHT assessment on the Bluu expenses.

Hosting

229.The Respondent assessed the Appellant WHT on a transaction that it considered to be cloud hosting. The Respondent averred that the services were offered as a package of support services and right to use of internet resources availed through hosting and that the Appellant did not provide a breakdown of which payments relate to support services and which relate to the product.

230.The Respondent assessed the Appellant on this transaction on the basis that the transaction was a management or professional service according to Section 2 of the Income Tax Act.

231.The Appellant averred that the Respondent made a claim for WHT on cloud hosting services, based on a misinterpretation of the Appellant’s records. The Appellant asserted that it does not engage in any outsourcing to third-party cloud providers for hosting services but relies on its internal team of infrastructure engineers to manage and maintain the cloud infrastructure. That the internal support infrastructure negates involvement of third-party cloud providers to offer core support other than providing the cloud. Based on this, the Appellant affirmed that it does not consume cloud hosting services.

232.The Tribunal reviewed copies of the invoices from Rackspace furnished to the Tribunal by the Appellant, on which the Respondent charged WHT to establish which services the Appellant purchased.

233.The Tribunal observes that the invoices from Rackspace charged the Appellant for cloud backup, cloud bandwidth, cloud block storage, cloud files, cloud load balancers, cloud servers. These charges, in the Tribunal’s considered view do not constitute management or professional fees, but rather are charges for storage space.

234.Cloud storage space is not subject to withholding tax under Section 35 of the Income Tax Act. Consequently, the Tribunal finds that the Respondent erred in charging WHT on the payments which it classified as cloud hosting services.

Licences and Subscriptions

235.The Respondent averred that the Appellant made payments for software licences and subscriptions to non-resident providers for the right to use various internet resources. That the payments ought to have been processed as per Section 35(1)(b) of the Income Tax Act.

236.The Appellant stated that it procured software licences and subscriptions from non-residents for the right to use various internet resources. That the Appellant only purchased the copyright material and has no right to exploit the software or transfer the software to other users. That the Appellant only pays for a licence to continue using the software within the parameters subscribed to.

237.The Respondent emphasised that, at the objection review, the Appellant failed to demonstrate that the payments were not for the exploitation of the software, and further failed to classify the various license and software procured so as to determine which would correctly attract WHT or not.

238.The Tribunal agrees with the holding of the High Court in Seven Seas Technologies Limited v Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021] KEHC 358 (KLR) (Commercial and Tax) (10 December 2021) (Judgment) (supra) in holding that payments for software licences and subscriptions where a person only purchases rights to use copyrighted articles does not constitute a royalty.

239.It was therefore the onus of the Appellant to prove with evidence that it purchased rights to copyrighted articles and not otherwise. The Tribunal notes that the Appellant, even at the Tribunal, did not furnish any evidence to support the nature of the software and licences and subscriptions that it made payments for, to persuade the Tribunal to arrive at a decision different from the Respondent’s decision.

240.The Tribunal thus finds that the Appellant failed to discharge its burden of proving that the Respondent’s assessment was erroneous, and as such, the Respondent was justified in charging WHT on these subscriptions and software licences.

Short Codes

241.The Respondent noted that the Appellant operates short codes acquired from telecommunication companies, where the Appellant pays set-up and maintenance fees. The Respondent averred that these set-up and maintenance charges fall under the definition of management and professional fees as provided under Section 2 of Income Tax Act, and subjected the charges to WHT.

242.The Appellant disputed the WHT assessment, stating that the nature of this arrangement is such that the telcos obtain codes being, short code, sender lD, key word and USSD from Communication Authority of Kenya (CAK) and sell the same to the Appellant for onward selling to customers.

243.The Appellant further stated that the fees charged by the telcos for them to be able to use the codes are issued by CAK. That the cost is then passed from telcos to API providers such as the Appellant. The Appellant argued that it would be punitive to impose WHT at the level of the Appellant, yet the cost is a pass-through cost originating from CAK.

244.The Appellant also argued that the fee is not for management or professional services and is not one of items listed as subject to WHT under Section 35 of the Income Tax Act. That the fee does not fall within the definition of management and professional fees under Section 2 of the Income Tax Act.

245.The Tribunal reviewed the Parties’ pleadings on this issue and referred to Section 2 of the Income Tax Act which provides the meaning of “management or professional” as follows: -“"management or professional fee" means any payment made to any person, other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services however calculated;”

246.The Appellant argued that the set-up and maintenance fees are pass-through costs charged by the telecommunication companies which were charged by the Communications Authority of Kenya and are thus not chargeable to WHT. The Tribunal, however, notes that the Appellant did not present any evidence of its averment that it was charged pass-through costs, and therefore this argument remains a mere averment.

247.The Tribunal, in addition, finds that set-up and maintenance of short codes is a technical service and payment for the same squarely falls under payment for management or professional fees that are subject to WHT under Section 35(3)(f) of the Income Tax Act.

248.The Tribunal cites the case of TAT No. 70 of 2017 Afya X-RAY Centre Limited v Commissioner of Domestic Taxes to emphasise the importance of a taxpayer in discharging its burden of proof. In that case, the Tribunal held that: -“From the foregoing chain of events, it is our understanding that the Appellant failed in its duty in providing these documents in order that a comprehensive audit of its affairs be done. Accordingly, the Respondent can hardly be faulted for raising the assessment in accordance with the availed documents. Moreover, the Appellant had an opportunity to consider the Respondent’s finding after the confirmation of the assessment. Both are instances, where the Appellant could have produced its books of accounts to counter the Respondent’s assessment, after all, the Appellant by law bears the burden of proof…”

249.Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act place the onus of proof on the taxpayer to prove that the Commissioner’s assessment is wrong or excessive.

250.Based on the aforementioned provisions of the law and case law, the Tribunal finds that the Appellant has not discharged its burden of proof to show that the Respondent erred in confirming the WHT on the set-up and maintenance fees.

251.Therefore, the Respondent was issuing its WHT assessment on the set-up and maintenance fees.

d. Value Added Tax (VAT)

252.The Respondent stated that the Appellant failed to provide a detailed breakdown of the claimed input VAT through invoice numbers quoted as “various”, and on this basis, it confirmed the VAT assessments.

253.The Appellant stated that it provided supporting documentation to demonstrate that invoice numbers quoted as “various” are legitimate purchases and deductible in accordance with Section 17 of the VAT Act. That the schedules were not considered by the Respondent.

254.The Appellant attached as evidence the schedule of input VAT claimed in 2020. The Appellant also demonstrated to the Tribunal that the Respondent was provided this information when the Appellant filed its objection.

255.It is clear from the Respondent’s response that it did not consider the information provided by the Appellant regarding this input VAT in arriving at its objection decision on this issue.

256.On this basis, the Tribunal finds that the Appellant was prejudiced by the Respondent failing to consider information which the Appellant provided before the Respondent arrived at its objection decision.

257.The Tribunal, taking into consideration all the foregoing, finds that the Respondent was not justified in disallowing the input VAT.

e. Withholding VAT

258.The Respondent compared the general rated purchases in the Appellant’s VAT returns against transactions subjected to withholding VAT based on invoice years.

259.The Respondent identified the Appellant’s transactions with three suppliers, that is, Basebone, Safaricom and Airtel Networks, which it claimed that the Appellant did not withhold VAT and remit to the Commissioner principal withholding VAT of Kshs. 25,964,742.00 plus interest and penalties.

260.The Appellant explained that the variances identified by the Respondent are due to timing differences as purchases are filed when they have been incurred or accrued in the books and that there is also a six-month window of filing of purchases. That withholding VAT on the other hand is paid on payment of the respective suppliers. The Appellant stated that it annexed to its Appeal a copy of the supporting documents comprising the schedule of taxes withheld and the proof of payment.

261.The Appellant further argued that the Respondent failed to consider that the Appellant did not make actual payments to the telecommunication companies, that is Safaricom and Airtel Networks, since there was a set-off payment plan agreed between the Appellant and the telcos for set off of liabilities amongst themselves. The Appellant attached an example of its correspondence with telcos of such set-off arrangement.

262.It is not in dispute that the Appellant is an appointed VAT withholding agent under Section 42A of the Tax Procedures Act. The Appellant, having been appointed as an agent was required to withhold 6%/2% of the taxable value on purchasing taxable supplies at the time of paying for the supplies and remit the same directly to the Commissioner.

263.Section 39A of the Tax Procedures Act provides as follows: -“Where a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.”

264.The Tribunal reviewed the documents that the Appellant presented in its Appeal and notes that the Appellant attached a schedule with years, months, invoice amounts, amounts computed as 16% of the invoice amounts and amounts computed as 6%/2% labelled as WHVAT. The schedule did not list the names of any supplier. The Appellant also attached withholding VAT payment slips as evidence that the Appellant remitted withholding VAT on the Basebone Limited invoices. The Tribunal notes that the payment slips were merely tax payment registrations but did not illustrate that the tax payments were made to the Respondent.

265.The Tribunal finds that the documents furnished to it by the Appellant did not demonstrate that the Appellant had remitted withholding VAT on the Basebone invoices as the Tribunal could not identify any withholding VAT payments in respect of payments made to Basebone.

266.From the foregoing, the Tribunal finds that the Appellant did not discharge its burden of disproving the Respondent’s withholding VAT assessments in respect of the Basebone invoices, thus the Respondent was justified in demanding the tax pursuant to Section 39A of the Tax Procedures Act for periods beginning from 7^th November 2019, when the provision came into operation.

267.The Appellant raised a point of fact and law regarding the applicability of withholding VAT on its transactions with Safaricom and Airtel Networks where the Appellant admitted that it did not withhold VAT because it did not make actual payments to these suppliers as a setoff payment plan was established between the Appellant and these suppliers.

268.The Tribunal refers to Section 42A of the Tax Procedures Act which provides:-“(1)The Commissioner may appoint a person to withhold two per cent of the taxable value on purchasing taxable supplies at the time of paying for the supplies and remit the same directly to the Commissioner…”

269.The VAT Act is the substantive law with regard to matters of VAT. The Tax Procedures Act, on the other hand, provides the administrative framework for the appointment of VAT withholding agents, the rate of withholding VAT, collection and recovery of withholding VAT, offences related to withholding VAT and roles of parties involved in a withholding VAT transaction.

270.The Appellant implied that set-off of amounts owed for purchase of taxable supplies does not constitute payment. The Tribunal reviewed the VAT Act to establish what constitutes payment for purposes of implementing Section 42A of the Tax Procedures Act. Section 13 of the VAT Act provides as follows:“(1)Subject to this Act, the taxable value of a supply, including a supply of imported services, shall be—(a)the consideration for the supply; or(b)if the supplier and recipient are related, the open market value of the supply.(2)Deleted by Act No. 10 of 2018, s. 14.(3)Subject to subsections (4) to (6), the consideration for a supply, including a supply of imported services, shall be the total of—(a)the amount in money paid or payable, directly or indirectly, by any person, for the supply; or(b)the open market value at the time of the supply of an amount in kind paid or payable, directly or indirectly, by any person, for the supply; and(c)any taxes, duties, levies, fees, and charges (other than value added tax) paid or payable on, or by reason of the supply, reduced by any discounts or rebates allowed and accounted for at the time of the supply.” (Emphasis added)

271.Section 13(3) of the VAT Act defines the consideration for a supply, which constitutes what the taxable value of a supply between unrelated persons is. The Tribunal finds that it would be careless to disregard that the VAT Act, the substantive law upon which withholding VAT is governed, envisages that a supply can be paid for in money or in kind.

272.The set-off transaction which the Appellant and its suppliers, Safaricom and Airtel Networks are engaged in is a payment in kind, a form of barter, where liabilities between the parties to trade are offset between each other. The settlement of the Appellant’s invoices from Safaricom and Airtel Networks was payment in kind, and the Appellant acknowledges as much in its objection where it described the settlement as a set-off payment plan.

273.Based on the foregoing, the Tribunal finds that the Respondent was justified in demanding withholding VAT on amounts not remitted by the Appellant on Safaricom and Airtel Networks invoices for periods beginning from 7^th November 2019, when Section 39A of the Tax Procedures Act came into operation.

274.Consequently, the Tribunal finds that the Respondent erred in demanding withholding VAT for periods before 7^th November 2019 as there was no law enabling the collection and recovery of withholding VAT not remitted by a VAT withholding agent.

Final Decision

275.The upshot of the foregoing analysis is that the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following Orders: -a.The Partial Consent of the parties dated 8^th May 2024 and filed on the same date that was adopted as Part Judgment of this Tribunal on the 21^st May, 2024 is hereby reaffirmed.b.The Appeal on the issues referred to the Tribunal of Value Added Tax (VAT) of Kshs. 9,340,051, corporation tax of Kshs. 68,392,819, Withholding tax (WHT) of Kshs. 186,896,538 and Withholding VAT of Kshs. 33,643,930 be and is hereby partially allowed.c.The Respondent’s objection decision dated 23^rd September 2023 be and is hereby varied as follows:i.The corporation tax assessment be and is hereby revised to exclude the assessment on disallowed subsidiary expenses for 2017, 2018, 2019, 2020 and in 2021.ii.The WHT assessment on Bluu expenses be and is hereby upheld.iii.The WHT assessment on Hosting be and is hereby set aside.iv.The WHT assessment on Licenses and Subscriptions be and is hereby upheld.v.The WHT assessment on Short Codes be and is hereby upheld.vi.The VAT assessment on unsupported invoices be and is hereby set aside.vii.The Withholding VAT assessment for periods before 7^th November 2019 be and is hereby set aside.viii.The Withholding VAT assessment for periods from 7^th November 2019 be and is hereby upheld.ix.The WHT assessment on Bulk SMS be and is hereby referred back to the Respondent to recalculate the assessment using the WHT rate of 5%.x.The Respondent is hereby directed to recompute the tax assessments in compliance with the Tribunal’s findings under Orders b) (i),(vii),(viii) and (ix) above within 60 days of delivery of this judgment.d.Each party to bear its own costs.

276.It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 4^TH DAY OF OCTOBER, 2024.ERIC NYONGESA WAFULA......................CHAIRMANGLORIA A. OGAGA ......................... MEMBERDR. RODNEY O. OLUOCH .....................MEMBERABRAHAM K. KIPROTICH .....................MEMBERCYNTHIA B. MAYAKA......................... MEMBER

1.	Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment)	52 citations
2.	Republic v Kenya Revenue Authority; Proto Energy Limited (Exparte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (Judgment)	48 citations
3.	REPUBLIC v INSTUTUTE OF CERTIFIED PUBLIC ACCOUNTANTS OF KENYA EX PARTE JOY VIPINCHANDRA BHATT T/A JV BHAT & COMPANY (Miscellaneous Civil Application 285 of 2006) [2008] KEHC 3231 (KLR) (Judicial Review) (4 April 2008) (Ruling)	15 citations
4.	Seven Seas Technologies Limited v Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021] KEHC 358 (KLR) (Commercial and Tax) (10 December 2021) (Judgment)	3 citations
5.	Tarua Scrap Metal Dealers Limited v Commissioner for Domestic Taxes (Tax Appeal E053 of 2023) [2024] KETAT 355 (KLR) (Civ) (23 February 2024) (Judgment)	1 citation

Africa’s Talking Limited v Commissioner of Domestic Taxes (Appeal E733 of 2023) [2024] KETAT 1455 (KLR) (4 October 2024) (Judgment)

Africa’s Talking Limited v Commissioner of Domestic Taxes (Appeal E733 of 2023) [2024] KETAT 1455 (KLR) (4 October 2024) (Judgment)

Cited documents 12

Act 7

Judgment 5

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1.	Constitution of Kenya	45303 citations
2.	Companies Act	2210 citations
3.	Tax Procedures Act	1621 citations
4.	Kenya Revenue Authority Act	1376 citations
5.	Tax Appeals Tribunal Act	1147 citations
6.	Income Tax Act	986 citations
7.	Value Added Tax Act	618 citations