O-Play Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E886 of 2023) [2024] KETAT 1857 (KLR) (17 December 2024) (Judgment)
Neutral citation:
[2024] KETAT 1857 (KLR)
Republic of Kenya
Tax Appeal E886 of 2023
E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & G Ogaga, Members
December 17, 2024
Between
O-Play Kenya Limited
Appellant
and
Commissioner of Domestic Taxes
Respondent
Judgment
Background
1.The Appellant is a private limited liability company incorporated in Kenya under the Companies Act, 2015 and whose business activities are in marketing, sales, and hosting activities, and formerly in microlending.
2.The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the Authority is charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.
3.The Respondent through an email dated 15th September 2022 to the Appellant issued its notice of intention to audit covering FY2017 to FY2021. The parties further held a Meeting at the Respondent's offices on 6th October 2022 with representatives from the parties.
4.Subsequently, vide a letter dated 14th February 2023, the Respondent issued its preliminary findings outlining its findings and requesting for supporting documentation.
5.The Appellant responded to the preliminary audit findings vide a letter dated 16th March 2023. The parties thereafter continued engaging and thereafter the Respondent issued its notice of assessment dated 28th July 2023.
6.The Appellant issued a notice of objection dated 25th August 2023 objecting to the entire assessment.
7.The Respondent vide a letter dated 23rd October 2023, issued its Objection decision confirming assessment amounting to Ksh. 665,479,817.00
8.Aggrieved by the Respondent’s decision the Appellant filed a Notice of Appeal on 22nd November, 2023.
The Appeal
9.In its Memorandum of Appeal dated and filed on 6th December 2023, the Appellant premised its Appeal on the following grounds;-a.The Respondent erred in law and fact assessing Corporate tax on bad debts written off in FY2019 and FY2020 through an erroneous interpretation of Section 15 of the Income Tax Act ("ITA”) as read together with Legal Notice No. 37 of 2011 on Guidelines for deductibility of bad debts.b.The Respondent erred in law and fact by failing to consider a decrease in bad debt provisions which has resulted in double taxation on the Appellant.c.The Respondent erred in law and fact by assessing Corporate tax on intercompany invoices based on the assertion that they did not contain a 5% mark up.
Appellant’s Case
10.The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant’s Statement of Facts dated and filed on 6th February, 2022 together with the documents attached thereto.ii.Appellant’s witness statement of Ethel Mwanyalo dated and filed on 19th July, 2024 that was admitted as evidence on oath on 10th September, 2024.iii.The Appellant’s written submissions dated 24th September, 2022 and filed on the same date.
11.The Appellant submitted that in 2020, the Respondent carried out an audit on the it's affairs covering the Financial Years ("FY") 2017 to 2020 and shared its findings through emails to the Appellant.
12.That further through an email dated 15th September 2022, the Respondent issued its notice of intention to audit covering FY2017 to FY2021. It averred that the parties held a Meeting at the Respondent's offices on 6th October 2022 with representatives from the Respondent and the Appellant.
13.The Appellant stated that it provided all the information requested by the Respondent during the preliminary stages of the audit. That subsequently, vide a letter dated 14th February 2023, the Respondent issued its preliminary findings outlining its findings and requesting further supporting documentation.
14.That the Appellant responded to the preliminary audit findings vide a letter dated 16th March 2023 providing explanations and supporting documents with regards to the matters raised.
15.That subsequently, through numerous working meetings between the parties, all matters were dropped other than the issue of the bad debts written off and the 5% mark up on inter-company invoices. It averred that this was communicated by the Respondent through the issuance of its notice of assessment dated 28th July 2023.
16.That in its notice of assessment, the Respondent demanded Ksh 651,348,474 in outstanding corporate taxes inclusive of penalties and interests for FY2019 to FY2021 as summarized in the table below:
| Year | 2019(KES) | 2020(KES) | 2021(KES) | Total (KES) |
| Corporation Tax | 256,771,41 | 125,05,731 | 88,867,648 | 471,044,792 |
| Penalty | 12,838,571 | 6,270,287 | 4,443,382 | 23,552,240 |
| Interest | 105,276,27 | 36,367,662 | 15,107,500 | 156,751,44 |
| Total | 374,886,26 | 68,043,680 | 108,418,531 | 651,348,474 |
17.The Appellant stated that it filed its notice of objection dated 25th August 2023 where it objected to the assessment in its entirety and provided a basis for vacation of the Assessment.
18.That the Respondent vide a letter dated 23rd October 2023, issued its Objection decision confirming the assessment amounting to Ksh. 665,479,817.00 in outstanding liability inclusive of penalties and interest as summarized in the table below;
| Year | 2019(KES) | 2020 (KES) | 2021 (KES) | Total (KES) |
| Corporation Tax | 256,771,413 | 125,405,731 | 88,867,648 | 471,044,792 |
| Penalty | 12,838,571 | 6,270,287 | 4,443,382 | 23,552,240 |
| Interest | 112,979,421 | 40,129,834 | 17,773,529 | 170,882,78 |
| Total | 382,589,405 | 171,805,852 | 111,084,559 | 665,479,817 |
19.The Appellant also expounded on its grounds of Appeal as hereunder;i.The Respondent erred in law and fact by fact by assessing Corporate tax on bad debts written off in FY2019 and FY2020 through an erroneous interpretation of Section 15 of the Income Tax Act ("ITA”) as read together with Legal Notice No. 37 of 2011 (Guidelines for deductibility of bad debts)
20.The Appellant stated that the bad debts written off relate to the microlending business that the Appellant was carrying on up to FY2020. That the Appellant would advance small, short-term loans (for a period of 15 to 30 days) to its clients and charge interest on the loans. That according to it's loan policy, the loans were marked as bad debts and considered uncollectible after the lapse of 90 days.
21.The Appellant averred that in FY2020, it underwent an internal re-organization whereby the microlending business was taken up by Tenspot Kenya Limited, a related entity, which was within the financial services division of the Group. That the Appellant was in the e-commerce division of the Group.
22.It submitted that in the FY2019 and FY2020, the Appellant had accumulated bad debts as a result of the microlending business which were written off according to the provisions of Section 15(2) of the ITA which states as follows;
23.That Paragraph 1 of Legal Notice no. 37 on Guidelines on allowability of bad debts provides that a debt shall be considered to have become bad if it is proved to the satisfaction of the Commissioner to have become uncollectable after all reasonable steps have been taken to collect the debt. That Paragraph 2 of the Guidelines subsequently provides:
24.That specifically, among other conditions, the Guidelines provide that a debt shall be deemed to have become uncollectible if no form of security or collateral is realizable whether partially or in full, the costs of recovering the debt exceeds the debt itself or efforts to collect the debt are abandoned for another reasonable cause. The Appellant averred that it satisfied these three conditions, and that the deduction was merited. The Appellant explained each point below;a.No form of security or collateral is realisable whether partially or in full.
25.The Appellant submitted that it was important to note that on account of the minimal value of the individual debts, no security or collateral was provided to the Appellant by the individual borrowers and instead the Appellant covered itself from the credit risk by charging high interest rates (>15%).
26.That the Appellant, therefore, had no form of security or collateral to realize for the purpose of recovering the debts. It added that the cost of insuring the debts (premiums payable to an insurance company) would have been significantly high considering the high number of loans with individually low loan balances.
b. The cost of recovering the debt exceeded the debt itself
27.The Appellant stated that it had circa three hundred and seventy-four thousand loan balances as at the end of FY2019 whose value ranged between Ksh 1,000 and Ksh 10,000. That of these loans, circa two hundred and fourteen thousand loan balances were more than ninety days old. That the Appellant proceeded to write off these loans in line with its loan policy.
28.The Appellant averred that the costs of recovering each of these debts clearly exceeded the debt amounts. That this was because the process of pursuing such debts would entail hiring additional staff and debt collectors for each unpaid debt. That the salaries and fees payable to such additional staff and debt collectors and would certainly exceed the value of the debts themselves.
c. Efforts to collect were abandoned for another reasonable cause
29.The Appellant averred that it deployed all reasonable efforts to collect the debts without success. That the efforts deployed by the Appellant included but were not limited to making follow ups with the borrowers via calls and sending SMS reminders.
30.That despite the cost of recovering the debts being significantly higher than the debts, the Appellant made attempts to collect the debts by engaging professional debt collectors. That however, the debt collectors were unable to fully collect the outstanding amounts. That considering the efforts to collect the debts did not yield much fruit, it was only reasonable for the Appellant to redirect its efforts on growing its business and recovering from this setback. It added that despite the significant credit losses, the Appellant was able to register a 15% profit margin in 2019 which resulted in a Corporate tax payment of Ksh 212 Million (instalment taxes of circa Ksh 6 Million and balance of tax of circa Ksh 206 Million). That this goes to demonstrate that the Appellant had no intention of avoiding taxes.
31.The Appellant further stated that the Respondent's view in its objection decision that the debtor collector agreements provided by the Appellant were not registered and stamped and therefore their authenticity cannot be verified was erroneous. That the debt collector agreements provided by the Appellant were signed and stamped by the respective parties and as such the agreements were valid and binding between them.
32.The Appellant averred that having the debt collection agreements executed and stamped by each party renders the agreements valid and enforceable in a court of law. That it was neither normal practice, nor a legislative requirement that parties present private contracts to the Registrar of Documents in Kenya.
33.The Appellant stated that the Respondent's view in its objection decision that the documents provided by the Appellant to demonstrate efforts to recover the debts were not conclusive was grossly erroneous. That it was evident from the reports derived from the debt collectors that they had exhausted all means possible to collect the debts and the amounts collected were immaterial compared to the outstanding loan balances. It added that the Company did not have resources to continue following up on the non-performing loans as the total amount was made up of very many small debt balances,
34.The Appellant noted that the statements made by the Respondent in its Objection decision on the issue that the Appellant did not provide adequate information to provide explanations on the values queried by the Respondent was grossly erroneous. That the Appellant provided all relevant supporting documentation and had re-attached the same in the Appeal.
35.The Appellant averred that the Respondent had not questioned the validity of the documents provided by the Appellant but had merely given a blanket statement that the documents provided were not sufficient.
36.The Appellant averred that it had made out a prima facie case and the burden of proof now lies upon the Respondent to disqualify the evidence put before it by the Appellant.
37.That in the case of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR it was held that once a taxpayer proves its case to a prima facie level the burden of proof then shifts to the Respondent to prove that the taxpayer's prima facie evidence was incorrect, otherwise, the taxpayer, as it was in the case above, ought to be found to have discharged its burden of proof. That to that end the court held as follows:
38.That also, the Supreme Court of Canada provided guidance on this issue in Hickman Motors Ltd. v Canada and stated as follows:
39.That from the foregoing, it was evident that the Respondent failed to consider or rebutt the fact that:a.There was no security or collateral realisable by the Appellant towards recovery of the debts;b.The cost of recovering the small individual debts which were in the range of Ksh 1,000 to Ksh 10,000 far exceeded the debts themselves; andc.The Appellant made several attempts to recover the debts. That the attempts to recover the debts included efforts from the Appellant (via follow up calls and SMS reminders) as well as debt collectors engaged by the Appellant. That the efforts to recover the debts were unsuccessful and therefore had to be abandoned for other reasonable causes.
40.The Appellant further submitted that the use of the disjunctive term "or" under Paragraph 2 of the Guidelines signifies that satisfying any one condition in the list was sufficient. That for this reason, the Appellant was not required to satisfy all the conditions under the Guidelines for purposes of writing off the bad debts but rather any one or more of the conditions.
41.That this position was supported by the Judgment in Equity Bank Limited vs. Commissioner of Domestic Taxes (Tax Appeal No. E002 of 2020) where the issue for determination was whether the bad debts written off by the Appellant were tax deductible expenses pursuant to Section 15(2)(a) of the ITA as read together with the Guidelines on Allowability of Bad debts under Legal Notice No.37 of 2011. That in arriving at the determination, the presiding High Court Judge stated as follows;
42.That the position is further supported in the case of Kenpoly Manufacturers Limited vs.Commissioner of Domestic (Taxes Tax Appeal No. 116 of 2022) where the Appellant was involved in supplying products to Nakumatt Holdings Limited and its subsidiaries which were unable to meet their financial obligations and were later placed under administration. That the Appellant was unable to collect its debt after pursuit of the same over the years and later expensed the amounts as bad debts. That the Respondent raised an assessment and its objection decision on the premise that the claim contravened the provisions of Section 15(2) of the ITA. That in addition, the Respondent argued that the Appellant did not prove to the satisfaction of the Commissioner that the debts had become uncollectable and that it did not exhaust all avenues to collect the debts. That the Tribunal ruled in favour of the Appellant by adopting the High Court ruling in Equity Bank Limited vs. Commissioner of Domestic Taxes (Tax Appeal No. E002 of 2020) which determined that Legal Notice No. 37 on the Guidelines on allowability of bad debts does not require one to satisfy all the conditions contained therein towards demonstrating to the Commissioner that the debt was uncollectible but rather any one or more of the conditions contained therein.
43.That in the said case the court stated as follows:
44.The Appellant asserted that it applied different methods in its attempts to collect the bad debts including contracting third-party debt collectors. That however, the efforts did not bear much fruit. That in addition, the debts ranged between Ksh1,000 and Ksh 10,000 which made the cost of collecting the debts significantly higher than the debt itself. That further, the Appellant had no security or collateral that could be realised in the recovery of the debts. That Paragraph 2 (b), (e) and (f) of the Guidelines provide that should there be no security or collateral realisable partially or in full, the cost of recovering the debt exceeds the debt itself or the efforts to collect be abandoned for another reasonable cause, then the debt shall be considered uncollectible as per Paragraph 1 of the Guidelines and shall be classified as a bad debt under Section 15(2)(a) of the ITA. That therefore the Appellant had reasonable cause for writing off the debts pursuant to the provisions of the ITA as read together with the Guidelines on deductibility of bad debts.
45.The Appellant further noted that in the determination of the allowability of bad debts, only the conditions set out under Legal Notice No. 37 of 2011 should be taken into consideration. That it was therefore prejudicial on the Appellant for the Respondent to introduce additional conditions that are not enshrined in the law in determining whether or not the bad debts were deductible such as registration of debt collector agreements.
46.It was the Appellant’s contention that in the Objection decision, the Respondent stated that the Appellant did not provide the audited financial statements towards ascertainment of the loan book balances.
47.That this allegation propounded by the Respondent was simply not true. That the Appellant did offer to provide draft financial statements to the Respondent pending the conclusion of the 2019 and 2020 audit.
48.That the delay in finalizing the financial audit had largely been occasioned by the Appellant's auditors who had been engaged to carry out the audit in 2020 due to resourcing challenges occasioned by the Covid-19 pandemic, which also affected the Appellant employees, as previously highlighted to the Respondent's representatives.
49.The Appellant averred that the actions of the Respondent verbally, during a meeting with the Appellant, disregarding the offer to review the draft financial statements on the basis that they were not audited is trite law, and that the Respondent is obligated to review the documents provided by the Appellant and reach a conclusion based on the information provided.
50.The Appellant posited that in the case of Asea Boveri Brown Limited vs The Commissioner of Investigations and Enforcement TAT 854 of 2021 the Tribunal was deciding a similar matter where the Appellant had provided documents and evidence in support of its case and the Respondent had refused to consider the documents, the Tribunal held:
51.That the fact that the statements were not audited does not in any way affect the authenticity of the statements or the veracity of the information therein.
52.That it should be noted that the Respondent had not called into question the numbers appearing within the draft financial statements but disregarded the information altogether on account that they had not been audited.
ii. The Respondent erred in law and fact by failing to consider a decrease in bad debt provisions which has resulted in double taxation on the Appellant.
53.That without prejudice to its earlier arguments, the Appellant submitted that included in the FY2020 disallowed bad debts of Ksh. 796,210,237.00 was an amount of Ksh. 330,752,616.00 relating to decrease in provision for bad debts which had been disallowed and therefore taxed in prior years (FY2018 and FY2019).
54.That in this regard, the Respondent had not accounted for the decrease in bad debts provision and double taxed the Appellant by Ksh 99,225,784.00.
55.That based on the foregoing, the Appellant prays that this Tribunal rule in favour of the Appellant and set aside the Respondent's Corporate tax assessment in relation to the bad debts written off.
iii. The Respondent erred in law and fact by assessing Corporate tax on intercompany invoices based on the assertion that they did not contain a 5% mark up.
56.The Appellant stated that in the Objection decision, the Respondent made an adjustment of Ksh 35,379,910.00 relating to 5% mark up on intercompany invoices purported not to contain the mark up as provided under the Opera Group Service Pool Agreement ("Service Pool Agreement").
57.The Appellant stated that it is a service entity providing intercompany services to affiliates of the Opera Group. That its main customer during the period under review was Opera Norway, a related entity within the Group. That the services provided related to the following:i.Corporate services-this involves the provision of corporate, accounting, payroll, audit, budgeting, tax, legal, and other back-office services.ii.Hosting services- this involves the provision of hosting, co-location, peering, procurement and related IT services for Opera Norway's products and services.iii.Internal IT and HR-this involves the provision of internal IT systems (Workday) and HR services.iv.Marketing services - this involves promoting and marketing the products or services offered by the Opera Group in the local market, soliciting the sale of advertising inventory in the products or services and dealing with customers in the local market.
58.The Appellant explained that it applies a mark-up of 5% on the cost base for the services it provides to Opera Norway per the Service Pool Agreement and the OECD Guidelines. That this was in line with an independent benchmarking study carried out on the intercompany services rendered by the Appellant in the 2020 and 2021 financial years. That further, any third-party costs are recharged at cost (without a mark-up) as outlined in the Transfer Pricing Report.
59.It was the Appellant’s position that the Respondent’s approach was grossly erroneous given that invoice number 922300014 amounting to Ksh. 376,103,471.00 was inclusive of the 5% mark up. That while arriving at the final invoice amount, the Appellant included the 5% mark-up although itemization of the same was not disclosed on the face of the invoice.
60.That further, according to Paragraph 6 of Part V (Fee Calculation) of the Service Pool Agreement, where services are purchased from third parties or other group entities towards the provision of services under the Service Pool Agreement, the costs in relation to such services are not subject to the 5% mark up at the point of recharge. That this was the case with respect to invoice numbers 922xxxx15, 922xxxx16, 922xxxx17, 922xxxx19, and 922xxxx22. That the expenses referred to were accrued by the Appellant in connection with Opera News and pertained to expenditures made on behalf of the IP owner, Opera Norway. That It is important to note that the Appellant solely handled the payment of invoices and did not provide any services.
61.The Appellant averred that invoice numbers 922xxxx20 and 922xxxx21 were outside the scope of the Service Pool Agreement and therefore not subject to the 5% mark up as they relate to recharge of accounting losses incurred by the Appellant to Opera Norway being the IP owner. That the recharge of the accounting losses by the Appellant to the IP owner in Norway was solely undertaken as a measure to ensure the Appellant was in a taxable position in subsequent years and the same gave rise to taxable business income in 2021. That this was sufficient proof that the Appellant does not employ any aggressive tax planning measures in Kenya and is willing to pay its rightful share of taxes.
Appellant’s Prayers
62.The Appellant made the following prayers;a.This Appeal be allowed.b.The Respondent's decision dated 23 October 2023 be set aside and annulled.c.The costs of and incidental to this Appeal be awarded to the Appellant.d.Any other orders that the Tribunal may deem fit.
The Respondent’s Case
63.The Respondent’s case is premised on its Statement of Facts dated 2nd December, 2023 and filed on 4th January 2024 together with the documents attached thereto.
64.The Respondent stated that it carried out investigations into the business of the Appellant for the period years 2017 to 2021 with a view of confirming its tax compliance under Income tax obligations with a view to confirm compliance in Corporation tax, VAT, withholding tax and PAYE and;a.Confirmation of Income declared under Section 3(2) and part IV on Income Tax Actb.To ascertain if PAYE had been declared.c.To ascertain if VAT had been declared.d.To ascertain if withholding tax had been declared under correct rates.e.To ascertain if the Appellant was involved in tax evasion.
65.That the Respondent vide letter dated 15th September, 2022 informed the Appellant on intention to carry out an audit on its business affairs and demanded for documents such as trial balances, sales invoices, general ledgers, bank statements among others.
66.It averred that the Appellant via email on 19th October, 2023 provided some documents which the Respondent reviewed for VAT, Corporation tax, Withholding tax and PAYE.
67.That further to the investigations, it was discovered that the Appellant's income was not declared in the years earned, withholding tax on lottery tax and winnings was charged at 15% and 20% respectively and the preliminary findings was shared vide letter date 14th February, 2023.
68.It stated that the Appellant on 16th March, 2023 responded to the findings and raised issues on the income reconciliations and the lottery tax and winnings analysis methods applied together with the withholding taxes demanded upon which the Respondent had several engagements with the Appellant via various meetings.
69.That the Respondent further analyzed into the Appellant's audited accounts and disallowed expenses such as professional and contractual fees, rental payments to non-residents, VAT and undeclared income from value as added services were allowed in light of explanation provided by the Appellant. That Corporation taxes were confirmed. That as a result the Respondent thereafter issued a tax assessment demand on 28th July, 2023.
70.That the Respondent thereafter issued a demand for further documents for audited financials, which were crucial to consider the amounts of bad debts and the intercompany invoices. That however, the Appellant failed to provide all supporting documents for its objection as requested within stipulated timelines upon which the Respondent issued an Objection decision dated 23rd October, 2023 reviewing the said taxes as assessed to Kshs. 665,479,817.00.
71.The Respondent averred that the assessments were correctly issued and conform to the Income Tax Act. That the Appellant did not provide any evidence that would have altered the assessment. That Section 56(1) Tax Procedure Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.
72.The Respondent submitted that examination of the Appellant's records, audited accounts and income tax returns established that the Appellant failed declare business income and all their incomes for years of income 2017-2021 respectively. That the Respondent is empowered under the Income Tax Act 2013 to bring to charge income where the same is established due. The section provides:
73.The Respondent averred that the Appellant failed to provide documentary evidence to demonstrate payments of withholding taxes on professional fees among other services analyzed under the period of audit.
74.It was the Respondent’s contention that the Appellant supplied insufficient documents and that the Respondent has embraced the self-assessment regime through trust and facilitation and only verifies information when in doubt of the declarations made in the tax returns. That the Respondent deals with each taxpayers' matter independently and based on available information. That the Respondent had used Sections 15 and 16 and Part IV of the Income Tax Act.
75.The Respondent averred that the tax was reached at based on the information available and provided by the Appellant and the Commissioner is empowered by Section 29(1) of Tax Procedure Act to make such decisions.
76.The Respondent asserted that the Appellant in lodging its objection failed to state the reasons precisely to be addressed in the assessments raised. That in addition, the Appellant failed to properly lodge his objection as provided by Section 51(3) of the Tax Procedures Act.
77.The Respondent averred that the assessment was issued based on the information provided and in light of the inconsistencies within the Appellant's Income, VAT, Withholding tax and PAYE ledgers. That Section 31 of the Tax Procedure Act empowers the Respondent to make alterations or additions to original assessments from available information for a reporting period based on its best judgment.
78.The Respondent submitted that the taxpayer despite declaring some income knowingly continued to under declare income for the period under review contrary to the provisions of the Income Tax Act. The Respondent averred that according to Section 54A of the Income Tax Act it is the responsibility of any person carrying on business to maintain records of all transactions.
79.The Respondent insisted that the Appellant filed all necessary returns and paid what it had assessed itself to be payable. The Respondent averred that the Appellant was uncooperative in the provision of relevant records and failed to respond to request of documents hence no relevant documents or records were provided to support its objection. That as a result, the assessments were made based on the only available information based on the best judgement by the Respondent. That Section 59(1) of the TPA empowers the Respondent or require production of such documents vide issuance of notice as deemed necessary in determination of tax liability.
80.The Respondent submitted that the Appellant did not file income tax returns for the accounting period 2017-2021 in contravention of the requirements of Section 94 of the Tax Procedures Act and that the estimated assessments were correct.
81.The Respondent submitted that the tax assessments were correct and the same was based on the best judgement where the Appellant's audited accounts and records were analyzed and adjustments made for income declared and withheld tax deducted at source were brought to charge.
82.The Respondent reiterated that the Appellant failed to provide signed financial statements and books of account to support its allegations. That Section 24(1) of the Tax Procedure Act empowers the Respondent to carry out assessment based on the information available. The Respondent averred that the assessment was issued based on information provided.
83.The Respondent denied that the Appellant had paid all its tax due and reiterated that because of its under-declaration, the Appellant was in debt of Kshs. 665,479,817
84.The Respondent averred that the Appellant was undeserving of the prayers sought due to the foretasted reasons.
Respondent’s Prayers
85.The Respondent prayed that the Tribunal considers the case and find:a.That the Respondent's objection decision be upheld.b.The outstanding tax arrears of Kshs. 665,479,817.00 are due and payable by the Appellant.c.The confirmed assessments dated 28th July, 2023 were proper in law.d.That the Appeal herein be dismissed with cost to the Respondent.
Issues for Determination
86.Having considered the parties’ pleadings, submissions, witness statement and all documentation provided, the Tribunal is of the view that the issues for its determination are:a.Whether the Respondent was justified in its decision to disallow the Appellant’s claim for bad debts.b.Whether the Respondent erred in applying 5% mark-up on the Appellant’s intercompany invoices and thereafter subjecting the same to tax.
Analysis and Findings
87.Having identified the issues falling for its determination, the Tribunal wishes to analyze each separately as hereunder.
a. Whether the Respondent was justified in its decision to disallow the Appellant’s claim for bad debts.
88.The genesis of the dispute is the Respondent’s decision not to allow the Appellant to expense accumulated debts relating to the Appellant’s lending business.
89.The Appellant stated that the bad debts written off relate to the microlending business that the Appellant was carrying on up to FY2020. That the Appellant would advance small, short-term loans (for a period of 15 to 30 days) to its clients and charge interest on the loans. That according to it's loan policy, the loans were marked as bad debts and considered uncollectible after the lapse of 90 days.
90.The Appellant averred that in FY2020, it underwent an internal re-organization whereby the microlending business was taken up by Tenspot Kenya Limited, a related entity, which was within the financial services division of the Group. That the Appellant was in the e-commerce division of the Group.
91.It submitted that in the FY2019 and FY2020, the Appellant had accumulated bad debts as a result of the microlending business which were written off according to the provisions of Section 15(2) of the ITA.
92.The Appellant stated that it applied different methods in its attempts to collect the bad debts including contracting third-party debt collectors. That however, the efforts did not bear much fruit. That in addition, the debts ranged between Ksh1,000.00 and Kshs 10,000.00 which made the cost of collecting the debts significantly higher than the debt itself. That further, the Appellant had no security or collateral that could be realized in the recovery of the debts. That Paragraph 2 (b), (e) and (f) of the Guidelines provide that should there be no security or collateral realizable partially or in full, the cost of recovering the debt exceeds the debt itself or the efforts to collect be abandoned for another reasonable cause, then the debt shall be considered uncollectible as per Paragraph 1 of the Guidelines and shall be classified as a bad debt under Section 15(2)(a) of the ITA. That therefore the Appellant had reasonable cause for writing off the debts pursuant to the provisions of the ITA as read together with the Guidelines on deductibility of bad debts.
93.In response, the Respondent stated that the assessments were correctly issued and conform to the Income Tax Act. That the Appellant did not provide any evidence that would have altered the assessment. That Section 56(1) Tax Procedure Act places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving to a different objection decision.
94.The Respondent submitted that examination of the Appellant's records, audited accounts and Income tax returns established that the Appellant failed declare business income and all their incomes for years of income 2017-2021 respectively. That the Respondent is empowered by Section 73(1) of the Income Tax Act 2013 to bring to charge income where the same is established to be due.
95.At the center of this dispute is the parties view of the application of Legal Notice No. 37 of 2011 and the provisions of Section 15(2)(a) of the Income Tax Act.
96.The Legal Notice No. 37 of 2011 states as follows regarding provision for bad debt;
97.In addition, Section 15(2)(a) of the Income Tax Act provides as follows regarding deduction of bad debt in the process of ascertainment of the total income of a person;
98.It follows from the above provision of the ITA and the Legal Notice No. 37 of 2011 that the Appellant ought to prove to the satisfaction of the Commissioner that the debt had become uncollectable. The Tribunal sought therefore to determine whether the Appellant had satisfied the conditions set out in law in confirming that the debt had qualified to be referred to as bad debt not capable of being collected.
99.The Tribunal notes that in the instant case the Appellant had submitted that the debt had met the threshold of bad debt as provided for under the Legal Notice No 37 of 2011 specifically Paragraph 1, 2(b) 2(e) and 2(f). However, the Respondent in the Objection decision was of the view that the Appellant did provide sufficient documents and further did not demonstrate its efforts to recover the loans.
100.It was not in dispute the Appellant during the period under review offered loans to small short term loans to its clients ranging from Kshs 1,000.00 to Kshs 10,000.00. The Appellant’s argument was that there was no form of security or collateral provided by these clients. That further the cost of recovering the debt exceeded the debt itself and that efforts to collect were abandoned for other reasonable cause as provided under Legal Notice no 37 of 2011.
101.The Tribunal notes that in support of its arguments to the effect that the debts owed were bad or doubtful, the Appellant attached the loan description/features, breakdown of the bad debts written off, sample follow-up reports by the debt collectors, sample debt collector agreements, its tax computation, its draft 2019 and 2020 draft financial statements and bad debt movement schedule all of which it averred had been provided to the Respondent during the review stage.
102.The Respondent’s contention however was that the Appellant did not provide signed audited financial statements and that the Debt Collectors Agreements were not registered.
103.The Tribunal however notes that the parties agree that the Appellant had provided unsigned financial statements stating that finalization were delayed by issues relating to Covid-19 pandemic. The Tribunal is of the view that the Respondent ought to have specifically challenged the entries in those draft financial statements rather than just dismissing them.
104.Further, the Tribunal’s position was that given that the Appellant had provided signed the agreements with the debt collectors and provided the report, the Appellant had provided the documentation to demonstrate that it had made efforts to recover the debt. The Respondent did not state which Section of the law requires the registration of the agreements and further did not address itself to the report emanating from the debt collectors.
105.In the circumstances the Tribunal concludes that the Appellant had satisfied the condition as set out under Cause 2(b) and of the Legal Notice No. 37 of 2011 namely; No form of security or collateral is realisable whether partially or in full.
106.The Tribunal further reiterates the holding in the case of Equity Bank Limited Vs Commissioner of Domestic Taxes Tax Appeal No. 161 of 2017 where the Learned Judge stated that;
107.Going by the foregoing analysis and the position as held by the court in the case of Equity Bank Limited Vs Commissioner of Domestic Taxes, it follows that the Appellant only needed to satisfy one or more of the conditions set out in clause 2 of the Legal Notice No. 37 of 2011.
108.Consequently, the Tribunal finds that the Respondent was not justified in its decision to disallow the Appellant’s claim for bad debts.
b) Whether the Respondent erred in applying 5% mark-up on the Appellant’s intercompany invoices.
109.It was not in dispute that there existed an inter-company Service Pool Agreement between related companies which provided for 5% mark-up on certain services rendered between the related companies where the Appellant was part of. The dispute however arose from 8 (eight) invoices which the Respondent stated in the Objection decision that they had not been marked up by 5% as per the group service agreement leading to the assessment. The details of the invoices as provided by the Respondent in the Objection decision are as per the table below;
| Date | Invoice no. | Description | Currency | Amount | Forex conv. | 5% Mark up |
| 30/06/2021 | 922300014 | Service Fee for FY21 as per SF 9502 | Kes | 376,103,471 | 376,103,471 | 18,805,173.55 |
| 1/8/2021 | 922300015 | July fy21 Service fee | Kes | 4,877,270 | 4,877,270 | 243,863.50 |
| 31/08/2021 | 922300016 | August FY21 Service fee | Kes | 6,257,348 | 6,257,348 | 312,867.40 |
| 30/09/2021 | 922300017 | September FY21 | Kes | 5,746,725 | 5,746,725 | 287,336.25 |
| 31/10/2021 | 922300019 | OctoberFY21 Service fee | USD | 52,715 | 5,429,645 | 271,482.25 |
| 1/12/2021 | 922300022 | November FY service Fee | USD | 54,111 | 5,573,433 | 278,671.65 |
| 11/11/2021 | 922300020 | Recharge to IP owner losses carried forward from | USD | 1,694,402 | 174,523,406 | 8,726,170.30 |
| 11/11/2021 | 922300021 | Recharge to IP owner losses carried forward from | USD | 1,253,271 | 129,086,913 | 6,454,345.65 |
| Additional income to be charged | 707,598,211 | 35,379,910.55 |
110.The Appellant in its pleading stated that the Respondent’s approach was grossly erroneous given that invoice number 922300014 amounting to Ksh. 376,103,471.00 was inclusive of the 5% mark up.
111.That further, according to Paragraph 6 of Part V (Fee Calculation) of the Service Pool Agreement, where services are purchased from third parties or other group entities towards the provision of services under the Service Pool Agreement, the costs in relation to such services are not subject to the 5% mark up at the point of recharge. That this was the case with respect to invoice numbers 922xxxx15, 922xxxx16, 922xxxx17, 922xxxx19, and 922xxxx22. That the expenses referred to were accrued by the Appellant in connection with Opera News and pertained to expenditures made on behalf of the IP owner, Opera Norway. That it is important to note that the Appellant solely handled the payment of invoices and did not provide any services.
112.The Appellant further averred that invoice numbers 922xxxx20 and 922xxxx21 were outside the scope of the Service Pool Agreement and therefore not subject to the 5% mark up as they relate to recharge of accounting losses incurred by the Appellant to Opera Norway being the IP owner. That the recharge of the accounting losses by the Appellant to the IP owner in Norway was solely undertaken as a measure to ensure the Appellant was in a taxable position in subsequent years and the same gave rise to taxable business income in 2021. That this was sufficient proof that the Appellant does not employ any aggressive tax planning measures in Kenya and is willing to pay its rightful share of taxes.
113.The Respondent on its part submitted that the taxpayer despite declaring some income knowingly continued to under declare income for the period under review contrary to the provisions of the Income Tax Act. The Respondent averred that according to Section 54A of the Income Tax Act it is the responsibility of any person carrying on business to maintain records of all transactions.
114.The Tribunal having perused through the pleadings notes that although the Appellant had provided some explanation relating to each invoice as raised by the Respondent, it did not demonstrate that at the objection stage it provided these invoices to the Respondent. Further, the Appellant has not attached any of the invoices to this Appeal.
115.Section 23(1) of the Tax Procedures Act provides as follows regarding keeping of records:-
116.Additionally, Section 54A(1) of the Income Tax Act, envisages 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. The section provides as follows: -
117.In the instant case the Appellant has merely provided averments without any supporting documents contrary to the provisions of Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act which expressly places the burden on the Appellant to prove that the Respondent’s assessments were incorrect or excessive.
118.The Tribunal reiterates the conclusion by the High Court in 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) where the court held as follows;
119.Accordingly, the Tribunal finds and holds that the Respondent did not fall into error in applying 5% mark-up on the Appellant’s intercompany invoices and thereafter subjecting the same to tax.
Final Decision
120.In view of foregoing analysis the Tribunal has determined that the Appeal is partially merited and accordingly makes the following Orders;i.The Appeal be and is hereby partially allowed.ii.The Respondent’s Objection decision dated December 24, 2023 is varied in the following terms:-a.The assessment in relation to disallowed provision for bad debts be and is hereby set aside.b.The assessment in relation to intercompany invoices subjected to 5% markup be and is hereby upheld.c.The Respondent is hereby directed to recompute the assessments and issue a fresh Objection decision in line with Orders (a) and (b) above within Thirty (30) days of the date of delivery of this Judgment.iii.Each party to bear its costs.
121.It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF DECEMBER, 2024.ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERGLORIA A. OGAGA - MEMBER