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1. The Appellant is a principal officer appointed under section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority (KRA) is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue and the administration and enforcement of all tax laws set out in parts 1 & 2 of the first schedule to the Act, for purposes of assessing, collecting and accounting for all tax revenues in accordance with those laws.
2. The Respondent is a limited liability company duly incorporated in Kenya and its principal business activity is being a payment service provider (PSP), duly licensed and regulated by the Central Bank of Kenya (CBK) under the National Payment System Act, Cap 491A of the Laws of Kenya (NPSA) and the National Payment System Regulations, 2014 (the Regulations).
3. Through a letter dated 16/05/2019, the Respondent was served with a notice of tax investigations. The investigations covered the period between January 2015 and December 2019 for corporation tax and Value Added Tax. On 16/06/2021, the Appellant issued preliminary investigation findings to the Respondent relating to a reconciliation of its banking receipts and recognized revenue. The VAT status of the Respondent’s commissions from the provision of automated revenue collection services and the nature of payments made from the Respondent’s bank accounts to that of its directors.
4. The Respondent responded on 17/06/2021 and after correspondence between the parties, the Appellant issued iTAX assessments on 21/02/2022. Through a letter dated 23/02/2022, the Appellant advised the Respondent of additional corporate tax assessments of kshs 25,481,299/= and additional VAT assessments of kshs 210,721,841/=.
5. The Respondent objected on 18/03/2022 and an objection decision was issued on 23/12/2022. Aggrieved by the said decision, the Respondent appealed to the Tax Appeals Tribunal.
Appeal before the Tax Appeals Tribunal
6. The Respondent (tax payer) raised the following grounds;
a) The Commissioner erred in law by issuing an objection decision outside the statutory time of sixty(60) days contrary to section 51(11) of the Tax Procedures Act, Cap 469B of the Laws of Kenya (TPA).
b) The Commissioner erred in law and fact in assessing VAT for the periods between January 2015 and 2017 which periods were beyond the five-year time limitation period contrary to section 31(4)(b)(i) of the TPA.
c) The Commissioner erred in law and fact by assessing VAT on the taxpayers Revenue Collection Services as they are exempted from VAT under paragraph 1(m) as read with paragraph 1(b) of part II of the first schedule to the VAT Act, Cap 476 Laws of Kenya.
d) The Commissioner erred in law and fact by violating the taxpayers right to legitimate expectation that their income from the revenue collection services qualify as VAT exempt based on the Commissioner’s failure to provide a contrary position to the Appellant’s letter dated 18/07/2016.
e) The Commissioner erred in law and fact by assessing corporation tax without considering some of the necessary adjustments in the banking analysis carried out.
7. The Tribunal found merit in the appeal partially and gave the following orders;
a) The Appeal be and is hereby partially allowed.
b) The Respondent’s objection decision dated 23/12/2022 be and is hereby varied as follows;
i. The corporation tax assessment of kshs 25,481,299/= be and is hereby upheld; and
ii. The entire VAT assessment of kshs 210,721,841/= be and is hereby expunged.
c) Each party to bear its own costs.
8. Aggrieved by that judgment, the Appellant herein appealed to this court, via a Memorandum of Appeal dated 20/12/2024, and raised the following grounds;
a) That the honorable Tribunal erred by holding that the registration with the Central Bank of Kenya was conclusive proof of being a financial service provider thus ignoring and overlooking the well-established principle that taxes and taxation are to be considered on a case-by-case basis and is transaction based.
b) That the honorable Tribunal erred in law by failing to appreciate the distinction between revenue collection vis a vis facilitation on revenue collection and thus erred in holding that the Respondent was providing revenue collection services while it only offered a platform for the management of payment of information and at no time handled the actual transfer of money.
c) That the honorable Tribunal erred in law by failing to appreciate that from the analysis of the documentation provided to wit; the contracts with the Nairobi City County (NCC) and the National Hospital Insurance fund (NHIF), the Respondent only handled the Financial Information on/or evidence of occurrence of a transaction as a reconciliation platform and never handled the actual finances which was the preserve of third-party financial institutions.
d) That the honorable Tribunal erred in law by holding that the Respondent operated its bank accounts for purposes of receiving revenue collected on behalf of clients whilst it was evident on record from the banking analysis that there were no through pass costs of monies held on behalf of client.
e) That the honorable Tribunal erred in its interpretation of the provisions of paragraph 1 of part II of the First Schedule of the VAT Act by holding that the Respondent was a financial service provider whilst it merely offered a platform for monitoring collection while the actual collection and handling of money, being the financial service, was provided by third parties i.e banks and mobile money service providers.
f) That the honorable Tribunal erred in law by computing the five-year statute limitation from the date of issuance of assessments.
g) That the honorable Tribunal erred in law by failing to appreciate that the Appellant admitted in contract with the NHIF at clause 35, charged and collected VAT on services rendered and failed to remit the same and therefore the Commissioner correctly assessed and charged VAT on the services rendered.
9. Directions were given that the appeal be canvassed through written submissions. Consequently, the parties complied and filed their respective submissions.
Appellant’s Submissions
10. The Appellant identified the issues for determination to be;
a) Whether the Respondent was a financial service provider.
b) Whether the VAT assessments were justified.
11. As to whether the Respondent was a financial service provider, it was submitted that in 2014, the Respondent was contracted by NCC and NHIF to provide electronic payment services through the Jambo pay software. That, the above referenced contracts and the Respondent’s own interpretation, (as may be gleaned from pages 137 to 285 of the Appellant’s record of appeal), demonstrates that Jambo Pay is a platform that allows real time transfer between the client’s customer accounts and the client’s system.
12. It was submitted that the Respondent earns transaction fees defined as commissions, charged on its transactions processed or routed, being a percentage or fraction of the transaction amount payable by contributor or customer hence the Respondent was only providing a platform for the processing of financial messages. That, the Appellant conducted a banking analysis of the Respondent’s banking receipts and recognized revenue, where it noted variances which the Respondent explained were as a result of intercompany transfer of funds between its own accounts.
13. It was submitted that from the banking analysis, it can clearly be established that the Respondent did not receive the actual monies which were done by third parties but its Jambo Pay platform processed the messages of successful transactions hence the Respondent’s Jambo Pay gateway only deals with electronic monetary value for information purposes but not the actual handling of transfer of the physical monetary value, which is done by third parties. Consequently, it was submitted that the Tribunal ought to have considered the specific terms of the contracts
between the Appellant and its clients. Reliance was placed on Seven Seas Technologies Limited -vs- Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021] KEHC 358 (KLR) (Commercial and Tax) (10 December 2021) where the Court held that the determination boils to the wording of the contract or the document governing the financial transaction.
14. It was submitted that the above position has further been cemented by the Court of Appeal in Commissioner of Domestic Tax -vs- Barclays Bank of Kenya Ltd [2020] eKLR where the Court had to determine whether payment by Barclays Bank to international card companies such as Mastercard and Visa, amounted to royalties to which they were obligated to withhold tax on the royalties. The Court stated that:
“How are we to determine whether payments made by the respondent to the card Companies constitute royalty? Is it as the respondent suggests, by reference only to terms of written Agreement, agreements between respondent or the card companies? In our view, it is by considering the terms of the Statute, written agreements and the totality of the relationship between the Respondent and card companies including actual dealings between parties.”
15. Consequently, it was submitted that the services offered by the Respondent do not qualify as a financial service as envisaged under paragraph 1 of Part II of the First Schedule to the VAT Act as it does not do the actual monetary transfer which is a preserve of third-party financial institutions.
16. As to whether the VAT assessments were justified, it was submitted that after establishing that the Respondent was not a financial service provider, its services were not exempt from VAT. That, from the terms of payment under clause 35 of the Contract with NHIF, the Respondent charged VAT of KSH.6,829,440 which it never remitted to the Appellant as required and was in contravention of the provisions of the Tax Procedures Act.
17. It was submitted that from the banking analysis, the Respondent did not indicate or seek adjustments for monies held in trust for the clients as a result of collecting on behalf of the clients hence the services offered were payable and the Appellant correctly assessed and demanded for VAT.
Respondent’s Submissions
18. It was submitted that the Tribunal erred by upholding a time barred objection decision in favor of the Appellant. Relying on section 51 (11) of the TPA, it was submitted that the moment the sixtieth day lapsed after the Appellant had received the notice of objection by the Respondent, the objection was deemed allowed by operation of the law. Reliance was placed on Republic -vs- Kenya Revenue Authority ex-parte M-Kopa Kenya Limited [2018] eKLR where Odunga J espoused as follows:
“106. …In this case the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedures Act, 2015. Accordingly, the Respondent was required to make a decision in respect thereof within sixty (60) days under Section 51 (11) of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was deemed to have been allowed.”
19. Further reliance was placed on Morgan Air and Sea Freight Logistics Kenya -vs- the Commissioner of Domestic Taxes, TAT No. 286 of 2020, where the Tribunal held that;
“18. The TPA at Section 51 (1) obligates the Respondent, in mandatory terms no less, to render an objection decision within sixty (60) days of receipt of an objection notice. In this case, the Respondent has not rendered an objection decision within the stipulated statutory timeline; in fact, there is no objection decision at all to this date. This Section also, again in mandatory terms, further states that in the event the Respondent fails to make an objection decision, the objection shall be deemed allowed.
19. The effect of this is that the Respondent’s various rejection notices to the Appellant’s refund claims cease to have force in law as it has accepted the Appellant’s claim.”
20. It was submitted that section 51 (11) of the TPA must be read with perfect strictness in accordance with the rule of interpretation of tax statutes which provides that one must look merely at what is clearly said as there is no room for intendment, assumption or presumption in interpreting taxing legislation. Reliance was placed on Mount Kenya Bottlers Limited & 3 others -vs- Attorney General & 3 others [2019] eKLR where the Court of Appeal in appreciating these principles stated that:
“... ‘Nevertheless taxation is clearly “penal” within this section of the Code, and must not be enforced by the courts unless clearly imposed’…The same principles as above, were accepted and applied in the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1921] KB 64 where Ronlat J, restated the principle in these words: “in a taxing Act clear words are necessary in order to tax the subject…It simply means that in a taxing Act one has to look merely at what is clearly said. There is no reason 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 to be implied. One can only look fairly on the language used…”
21. It was submitted that the Respondent lodged a valid objection on 14/03/ 2022 hence the Appellant was required to issue the objection decision on or before 14/05/2022. It was contended that the Tribunal erroneously found that the 60-day period started running from the last correspondence between the Appellant and one of the Respondent’s directors.
22. It was submitted that there are two (2) relevant versions of Section 51 (11) of the TPA - the version prior to the amendment by the Finance Act, 2022 (the Previous Version) and the version after the amendment by the Finance Act, 2022 (the Amended Version). It was submitted that the Amended Version was effective 01/07/ 2022 and is the one that is applicable to the objection decision issued on 23/12/2022. It was submitted that the general rule in the construction of statutes is that they do not have a retrospective application unless it is the express intention of Parliament for them to apply retrospectively and in that case, they would expressly state so. Reliance was placed on Commissioner of Income Tax -vs- Pan African Paper Mills (E.A.) Limited [2018] where the Court of Appeal held that:
“20. We are guided by the case of Yew Bon Tew v Kenderaan Bas Mara [1982] 3 All ER 833 where the Privy Council held as follows: “Apart from the provisions of the interpretation of statutes, there is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation…”
23. Consequently, it was submitted that the Tribunal was factually mistaken in holding, at paragraph 102 of its Judgement, that the applicable section was the Previous Version when the same had already been overtaken by events by the time the Appellant was issuing the objection decision. It was contended that the objection is deemed to have been allowed by operation of the law hence additional CIT for the amount of KES 25,481,299 and VAT for the amount of KES 210,721,841 are not due and payable to the Appellant.
24. It was submitted that the Respondent and its director are two distinct persons with separate tax liabilities. That even if it were the case that the Previous Version of Section 51(11) of the TPA was applicable, the Tribunal’s finding that the Appellant’s objection decision was proper in law was seemingly premised on a misapprehension of Company Law when it held, at paragraph 103 of its Judgement, that since there were electronic mails between the Appellant and one of the Respondent’s directors between March 2022 and October 2022, then the objection decision was issued within time on 23/12/2022. That, the holding was despite the fact that the Tribunal acknowledged that the correspondence between the Respondent’s director and the Appellant were in relation to the Respondent’s director’s own personal tax assessment. It was contended that the Appellant’s discussion with the director was in relation to the director who had received an assessment in his personal capacity under his own personal identification number (PIN).
25. It was submitted that even if the assessment of its director was linked to that of the Respondent, the fact remains that they were to be treated as two separate assessments as they are two separate persons. Reliance was placed on Stephen Kimathi Mutiso -vs- Commissioner of Domestic Taxes, TAT No. 187 of 2019 where the Tribunal noted that;
“35…. the law recognizes the company and the director as two distinct and separate legal persons…”
26. It was contended that even if it were the case that the information provided
by the director was relevant in the investigations on the Respondent’s tax affairs, the Appellant could not turn around to say that, the fact that they were in contact with the director who shared information with the Appellant in relation to his personal tax matters, means that the same was in relation to the Respondent’s assessment. That allowing such reasoning creates dangerous precedents in the assessment of corporate taxpayers where it may be believed that a director’s tax assessment will inevitably have undesirable consequences on the companies they serve, yet these are supposed to be two separate and distinct persons with distinct tax registrations as well as tax liabilities.
27. In response to the grounds of appeal, it was submitted that the Tribunal was right to find that the Respondent is providing financial services. That, the Tribunal appreciated the functions conducted by the Respondent, being revenue collection services, which are services that entail “dealing with money” and as it had observed at paragraph 120, “any other dealing with money” is a financial service under the First Schedule to the VAT Act. That, this was the main reason why the Tribunal found that the Respondent is a financial service provider and not only the fact that it was registered with the Central Bank of Kenya (CBK) as insinuated by the Appellant. It was contended that it is neither accurate nor fair for the Appellant to infer, assume or presume that registration with the CBK was the ONLY reason the Tribunal found in holding that the Respondent provides financial services.
28. It was submitted that the Appellant is attempting to split hairs before this Honourable Court by shifting the focus from the nature of the services provided by the Respondent and focusing on its registration status based on only one of the observations made by the Tribunal in its analysis. It was emphasized that the registration status with the CBK was an additional reason that convinced the Tribunal that the Respondent is a financial service provider.
29. It was submitted that the Tribunal was right to find that the Respondent was providing revenue collection services which were financial services for VAT purposes. That the revenue collection services are exempt from VAT since the Respondent is “dealing with money” by actually effecting the transfer of funds from an individual’s mobile money wallet to the Respondent’s client’s bank account hence the Respondent enables the collection, from the public, of payment for services offered by its clients. That, the fact of the transactions being effected electronically does not matter as section 2 of the VAT Act defines ‘money’ as among others.
30. Relying on Commissioner of Domestic Taxes -vs- Bank of Africa Limited, Civil Appeal E127 of 2020, it was submitted that the use of the word ‘including’ in Paragraph 1 (b) of Part II to the First Schedule of the VAT Act has been held to be inconclusive and thus creates ambiguity as to what constitutes money transfer services that may fall within this list of exempt services. That, this Honourable Court appreciated that where there is an inconclusive definition of what constitutes financial services, it is not open to this Court to say that the taxpayer was not providing financial services. That, in any event, this Court appreciated that in the interpretation of tax laws, it is established that where the law is ambiguous, then the ambiguity ought to be interpreted in favour of the taxpayer.
31. It was submitted that the Tribunal was right in its computation of the five-year timeline in partially invalidating the assessments by the Appellant. Relying on section 31 (4) (b) (i) of the TPA, it was submitted that the Appellant had no basis to assess the Respondent beyond the statutory timelines and was bound by the rule of strict interpretation of taxation statutes as set out in the case of Mount Kenya Bottlers Limited (supra). That, the TPA is a tax statute as set out in its section 2.
32. It was submitted that an amended tax assessment should be issued within five (5) years from the date the taxpayer submitted the self-assessment return. That the Respondent filed its VAT return for the month of January 2017 on 20/02/2017 hence an assessment for this period and beyond was limited to be issued between 20th February 2017 and 20th February 2022. That, the Appellant issued an assessment dated 23/02/2022 which was a period outside the statutory timeline for the amendment of assessments under Section 31 of the TPA. That, the assessment between January 2015 and January 2017 was out of time hence the Tribunal was right to find that the Appellant did not meet the requirements of Section 31 of the TPA at the time of amending the Respondent’s assessment.
33. It was submitted that the Appellant is misdirecting this court by stating that the Respondent charged for VAT and failed to remit the same. That, this was not an issue in dispute at the Tribunal and is an ambush to the Respondent in this appeal. This court was urged not to consider this line of argument based on the well-settled principle that parties are bound by their own pleadings as was aptly stated by the Court of Appeal in Dakianga Distributors (K) Limited -vs- Kenya Seed Company Limited [2015] eKLR to wit;
“A useful discussion on the importance of pleadings is to be found in Bullen and Leake and Jacob’s Precedents of Pleadings, 12th Edition, London, Sweet & Maxwell (The Common Law Library No.5) where the learned authors declare:
“The system of pleadings operates to define and delimit with clarity and precision the real matters in controversy between the parties upon which they can prepare and present their respective cases and upon which the court will be called upon to adjudicate between them. It thus serves the two-fold purposes of informing each party what is the case of the opposite party which he will have to meet before and at trial, and at the same time informing the court what are the issues between the parties which will govern the interlocutory proceedings before the trial and which the court will have to determine at trial.”
34. Relying on section 35 of the Respondent’s contract with NHIF, it was submitted that the Appellant failed to recognize that the VAT cost referred to under clause 35.1 is in relation to taxable supplies and not the revenue collection services which are exempt supplies, and which have been the subject in this dispute on matters VAT. That, clause 35.2 is the breakdown of the costs for which VAT was computed in relation to taxable costs such as hardware equipment, trainings, remunerations etc. and NOT revenue collection services. That, these supplies were rightfully subjected to VAT and the same remitted to KRA as a separate matter from the issue currently in dispute.
35. It was submitted that the Appellant’s assertion is tantamount to allegations of fraud or tax evasion against the Respondent hence, he who alleges must prove. Reliance was placed on the case of National Social Security Fund Board of Trustees -vs- Commissioner of Domestic Taxes [2016] eKLR where the court stated;
“There is a world of difference between an assertion and proof. That which a party states to be his case is an assertion. The party needs to adduce evidence to support his said assertion, with a view to proving his case.”
36. It was submitted that the Appellant’s allegations in this regard are wholly in bad faith, outside the confines of its pleadings and should not to stand in this Honourable Court.
Duty of Court
37. Section 56(2) of the Tax Procedures Act provides that an appeal to the High Court from the decision of the Tax Appeals Tribunal or to the Court of Appeal is on a question of law only. In the case of John Munuve Mati -vs- Returning Officer Mwingi North Constituency & 2 others [2018] eKLR, the Court of Appeal summarized what amounts to “matters of law” as follows;
“The interpretation or construction of the Constitution, statute or regulations made thereunder or their application to the sets of facts established by the trial Court. As far as facts are concerned, our engagement with them is limited to background and context and to satisfy ourselves, when the issue is raised, whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them. We cannot be drawn into considerations of the credibility of witnesses or which witnesses are more believable than others; by law that is the province of the trial court.”
38. I have carefully considered the grounds of appeal, the statement of facts, the submissions by parties and the entire record. I am of the view that the issues for determination are;
a) Whether the Appellant amended the taxpayer’s returns within the timelines prescribed by the law.
b) Whether the Respondent was a financial service provider for purposes of VAT exemption.
c) Whether the additional corporate tax and VAT assessments were justified.
d) Whether the objection decision was issued on time.
Analysis & Determination
Whether the Appellant amended the taxpayer’s returns within the timelines prescribed by the law.
39. On 23/02/2022, the Appellant issued the Respondent with a notice of tax assessment for the period January 2015 to December 2019.
40. Section 24 of the TPA provides that;
(1)A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.
(2) The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer''s tax liability using any information available to the Commissioner.
41. It is clear from section 24(2) that the Commissioner is not bound by the self-assessed returns of a tax payer.
42. Section 31 of the TPA provides that;
(1) Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original 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;
……………………………………………..
……………………………………………..
(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:
Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.
43. The determination of this issue depends on the interpretation of the above provision and it is trite that in interpreting tax statutes, the court should do so strictly without leaving room for intendment, implication or presumption as held in Stanbic Bank Kenya Limited -vs- Kenya Revenue Authority (2009) eKLR. Similarly, in Commissioner of Investigations and Enforcement -vs- Libya Oil Kenya Ltd (Income Tax Appeal E104 of 2021) [2024] KEHC 3624 (KLR) (Commercial and Tax) (15 April 2024), the court stated that; “It is trite that Tax Statutes are to be strictly interpreted and there is no room for imputing that which has not been legislated into statute by Parliament.”
44. In this case, the Appellant issued a notice of tax investigations to the taxpayer via a letter dated 16/05/2019 (KRA 1). The letter indicated that the taxpayer was under investigation for the offence(s) of tax evasion which included but was not limited to acts of fraud i.e under declaration of corporation tax and VAT. Further, the letter indicated that preliminary findings showed unpaid VAT of kshs 114,088,006/=. In a letter dated 16/06/2021 (KRA 2), the Appellant informed the taxpayer that its findings therein constituted tax offences for which the commissioner was at liberty to institute criminal proceedings. There is no evidence that the said criminal proceedings were ever instituted hence no basis of finding that the additional assessments were made as a result of ‘gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer’ so as to reach a conclusion that the Appellant was at liberty to do the amendment at any time as provided for by section 31(4)(a) of the TPA.
45. The Respondent filed its VAT return for the month of January 2017 (Appendix 8) on 15/02/2017 thus bringing the matter within the purview of section 31(4) (b) of the TPA. This section requires the Commissioner to amend an assessment within five years from the date the t
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1. The Appellant is a principal officer appointed under section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority (KRA) is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue and the administration and enforcement of all tax laws set out in parts 1 & 2 of the first schedule to the Act, for purposes of assessing, collecting and accounting for all tax revenues in accordance with those laws.
2. The Respondent is a limited liability company duly incorporated in Kenya and its principal business activity is being a payment service provider (PSP), duly licensed and regulated by the Central Bank of Kenya (CBK) under the National Payment System Act, Cap 491A of the Laws of Kenya (NPSA) and the National Payment System Regulations, 2014 (the Regulations).
3. Through a letter dated 16/05/2019, the Respondent was served with a notice of tax investigations. The investigations covered the period between January 2015 and December 2019 for corporation tax and Value Added Tax. On 16/06/2021, the Appellant issued preliminary investigation findings to the Respondent relating to a reconciliation of its banking receipts and recognized revenue. The VAT status of the Respondent’s commissions from the provision of automated revenue collection services and the nature of payments made from the Respondent’s bank accounts to that of its directors.
4. The Respondent responded on 17/06/2021 and after correspondence between the parties, the Appellant issued iTAX assessments on 21/02/2022. Through a letter dated 23/02/2022, the Appellant advised the Respondent of additional corporate tax assessments of kshs 25,481,299/= and additional VAT assessments of kshs 210,721,841/=.
5. The Respondent objected on 18/03/2022 and an objection decision was issued on 23/12/2022. Aggrieved by the said decision, the Respondent appealed to the Tax Appeals Tribunal.
Appeal before the Tax Appeals Tribunal
6. The Respondent (tax payer) raised the following grounds;
a) The Commissioner erred in law by issuing an objection decision outside the statutory time of sixty(60) days contrary to section 51(11) of the Tax Procedures Act, Cap 469B of the Laws of Kenya (TPA).
b) The Commissioner erred in law and fact in assessing VAT for the periods between January 2015 and 2017 which periods were beyond the five-year time limitation period contrary to section 31(4)(b)(i) of the TPA.
c) The Commissioner erred in law and fact by assessing VAT on the taxpayers Revenue Collection Services as they are exempted from VAT under paragraph 1(m) as read with paragraph 1(b) of part II of the first schedule to the VAT Act, Cap 476 Laws of Kenya.
d) The Commissioner erred in law and fact by violating the taxpayers right to legitimate expectation that their income from the revenue collection services qualify as VAT exempt based on the Commissioner’s failure to provide a contrary position to the Appellant’s letter dated 18/07/2016.
e) The Commissioner erred in law and fact by assessing corporation tax without considering some of the necessary adjustments in the banking analysis carried out.
7. The Tribunal found merit in the appeal partially and gave the following orders;
a) The Appeal be and is hereby partially allowed.
b) The Respondent’s objection decision dated 23/12/2022 be and is hereby varied as follows;
i. The corporation tax assessment of kshs 25,481,299/= be and is hereby upheld; and
ii. The entire VAT assessment of kshs 210,721,841/= be and is hereby expunged.
c) Each party to bear its own costs.
8. Aggrieved by that judgment, the Appellant herein appealed to this court, via a Memorandum of Appeal dated 20/12/2024, and raised the following grounds;
a) That the honorable Tribunal erred by holding that the registration with the Central Bank of Kenya was conclusive proof of being a financial service provider thus ignoring and overlooking the well-established principle that taxes and taxation are to be considered on a case-by-case basis and is transaction based.
b) That the honorable Tribunal erred in law by failing to appreciate the distinction between revenue collection vis a vis facilitation on revenue collection and thus erred in holding that the Respondent was providing revenue collection services while it only offered a platform for the management of payment of information and at no time handled the actual transfer of money.
c) That the honorable Tribunal erred in law by failing to appreciate that from the analysis of the documentation provided to wit; the contracts with the Nairobi City County (NCC) and the National Hospital Insurance fund (NHIF), the Respondent only handled the Financial Information on/or evidence of occurrence of a transaction as a reconciliation platform and never handled the actual finances which was the preserve of third-party financial institutions.
d) That the honorable Tribunal erred in law by holding that the Respondent operated its bank accounts for purposes of receiving revenue collected on behalf of clients whilst it was evident on record from the banking analysis that there were no through pass costs of monies held on behalf of client.
e) That the honorable Tribunal erred in its interpretation of the provisions of paragraph 1 of part II of the First Schedule of the VAT Act by holding that the Respondent was a financial service provider whilst it merely offered a platform for monitoring collection while the actual collection and handling of money, being the financial service, was provided by third parties i.e banks and mobile money service providers.
f) That the honorable Tribunal erred in law by computing the five-year statute limitation from the date of issuance of assessments.
g) That the honorable Tribunal erred in law by failing to appreciate that the Appellant admitted in contract with the NHIF at clause 35, charged and collected VAT on services rendered and failed to remit the same and therefore the Commissioner correctly assessed and charged VAT on the services rendered.
9. Directions were given that the appeal be canvassed through written submissions. Consequently, the parties complied and filed their respective submissions.
Appellant’s Submissions
10. The Appellant identified the issues for determination to be;
a) Whether the Respondent was a financial service provider.
b) Whether the VAT assessments were justified.
11. As to whether the Respondent was a financial service provider, it was submitted that in 2014, the Respondent was contracted by NCC and NHIF to provide electronic payment services through the Jambo pay software. That, the above referenced contracts and the Respondent’s own interpretation, (as may be gleaned from pages 137 to 285 of the Appellant’s record of appeal), demonstrates that Jambo Pay is a platform that allows real time transfer between the client’s customer accounts and the client’s system.
12. It was submitted that the Respondent earns transaction fees defined as commissions, charged on its transactions processed or routed, being a percentage or fraction of the transaction amount payable by contributor or customer hence the Respondent was only providing a platform for the processing of financial messages. That, the Appellant conducted a banking analysis of the Respondent’s banking receipts and recognized revenue, where it noted variances which the Respondent explained were as a result of intercompany transfer of funds between its own accounts.
13. It was submitted that from the banking analysis, it can clearly be established that the Respondent did not receive the actual monies which were done by third parties but its Jambo Pay platform processed the messages of successful transactions hence the Respondent’s Jambo Pay gateway only deals with electronic monetary value for information purposes but not the actual handling of transfer of the physical monetary value, which is done by third parties. Consequently, it was submitted that the Tribunal ought to have considered the specific terms of the contracts
between the Appellant and its clients. Reliance was placed on Seven Seas Technologies Limited -vs- Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021] KEHC 358 (KLR) (Commercial and Tax) (10 December 2021) where the Court held that the determination boils to the wording of the contract or the document governing the financial transaction.
14. It was submitted that the above position has further been cemented by the Court of Appeal in Commissioner of Domestic Tax -vs- Barclays Bank of Kenya Ltd [2020] eKLR where the Court had to determine whether payment by Barclays Bank to international card companies such as Mastercard and Visa, amounted to royalties to which they were obligated to withhold tax on the royalties. The Court stated that:
“How are we to determine whether payments made by the respondent to the card Companies constitute royalty? Is it as the respondent suggests, by reference only to terms of written Agreement, agreements between respondent or the card companies? In our view, it is by considering the terms of the Statute, written agreements and the totality of the relationship between the Respondent and card companies including actual dealings between parties.”
15. Consequently, it was submitted that the services offered by the Respondent do not qualify as a financial service as envisaged under paragraph 1 of Part II of the First Schedule to the VAT Act as it does not do the actual monetary transfer which is a preserve of third-party financial institutions.
16. As to whether the VAT assessments were justified, it was submitted that after establishing that the Respondent was not a financial service provider, its services were not exempt from VAT. That, from the terms of payment under clause 35 of the Contract with NHIF, the Respondent charged VAT of KSH.6,829,440 which it never remitted to the Appellant as required and was in contravention of the provisions of the Tax Procedures Act.
17. It was submitted that from the banking analysis, the Respondent did not indicate or seek adjustments for monies held in trust for the clients as a result of collecting on behalf of the clients hence the services offered were payable and the Appellant correctly assessed and demanded for VAT.
Respondent’s Submissions
18. It was submitted that the Tribunal erred by upholding a time barred objection decision in favor of the Appellant. Relying on section 51 (11) of the TPA, it was submitted that the moment the sixtieth day lapsed after the Appellant had received the notice of objection by the Respondent, the objection was deemed allowed by operation of the law. Reliance was placed on Republic -vs- Kenya Revenue Authority ex-parte M-Kopa Kenya Limited [2018] eKLR where Odunga J espoused as follows:
“106. …In this case the applicant had clearly made what was in substance an objection as envisioned under section 51 of the Tax Procedures Act, 2015. Accordingly, the Respondent was required to make a decision in respect thereof within sixty (60) days under Section 51 (11) of the said Act. As the Respondent defaulted in making a determination thereon within the prescribed time, the said objection was deemed to have been allowed.”
19. Further reliance was placed on Morgan Air and Sea Freight Logistics Kenya -vs- the Commissioner of Domestic Taxes, TAT No. 286 of 2020, where the Tribunal held that;
“18. The TPA at Section 51 (1) obligates the Respondent, in mandatory terms no less, to render an objection decision within sixty (60) days of receipt of an objection notice. In this case, the Respondent has not rendered an objection decision within the stipulated statutory timeline; in fact, there is no objection decision at all to this date. This Section also, again in mandatory terms, further states that in the event the Respondent fails to make an objection decision, the objection shall be deemed allowed.
19. The effect of this is that the Respondent’s various rejection notices to the Appellant’s refund claims cease to have force in law as it has accepted the Appellant’s claim.”
20. It was submitted that section 51 (11) of the TPA must be read with perfect strictness in accordance with the rule of interpretation of tax statutes which provides that one must look merely at what is clearly said as there is no room for intendment, assumption or presumption in interpreting taxing legislation. Reliance was placed on Mount Kenya Bottlers Limited & 3 others -vs- Attorney General & 3 others [2019] eKLR where the Court of Appeal in appreciating these principles stated that:
“... ‘Nevertheless taxation is clearly “penal” within this section of the Code, and must not be enforced by the courts unless clearly imposed’…The same principles as above, were accepted and applied in the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1921] KB 64 where Ronlat J, restated the principle in these words: “in a taxing Act clear words are necessary in order to tax the subject…It simply means that in a taxing Act one has to look merely at what is clearly said. There is no reason 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 to be implied. One can only look fairly on the language used…”
21. It was submitted that the Respondent lodged a valid objection on 14/03/ 2022 hence the Appellant was required to issue the objection decision on or before 14/05/2022. It was contended that the Tribunal erroneously found that the 60-day period started running from the last correspondence between the Appellant and one of the Respondent’s directors.
22. It was submitted that there are two (2) relevant versions of Section 51 (11) of the TPA - the version prior to the amendment by the Finance Act, 2022 (the Previous Version) and the version after the amendment by the Finance Act, 2022 (the Amended Version). It was submitted that the Amended Version was effective 01/07/ 2022 and is the one that is applicable to the objection decision issued on 23/12/2022. It was submitted that the general rule in the construction of statutes is that they do not have a retrospective application unless it is the express intention of Parliament for them to apply retrospectively and in that case, they would expressly state so. Reliance was placed on Commissioner of Income Tax -vs- Pan African Paper Mills (E.A.) Limited [2018] where the Court of Appeal held that:
“20. We are guided by the case of Yew Bon Tew v Kenderaan Bas Mara [1982] 3 All ER 833 where the Privy Council held as follows: “Apart from the provisions of the interpretation of statutes, there is at common law a prima facie rule of construction that a statute should not be interpreted retrospectively so as to impair an existing right or obligation…”
23. Consequently, it was submitted that the Tribunal was factually mistaken in holding, at paragraph 102 of its Judgement, that the applicable section was the Previous Version when the same had already been overtaken by events by the time the Appellant was issuing the objection decision. It was contended that the objection is deemed to have been allowed by operation of the law hence additional CIT for the amount of KES 25,481,299 and VAT for the amount of KES 210,721,841 are not due and payable to the Appellant.
24. It was submitted that the Respondent and its director are two distinct persons with separate tax liabilities. That even if it were the case that the Previous Version of Section 51(11) of the TPA was applicable, the Tribunal’s finding that the Appellant’s objection decision was proper in law was seemingly premised on a misapprehension of Company Law when it held, at paragraph 103 of its Judgement, that since there were electronic mails between the Appellant and one of the Respondent’s directors between March 2022 and October 2022, then the objection decision was issued within time on 23/12/2022. That, the holding was despite the fact that the Tribunal acknowledged that the correspondence between the Respondent’s director and the Appellant were in relation to the Respondent’s director’s own personal tax assessment. It was contended that the Appellant’s discussion with the director was in relation to the director who had received an assessment in his personal capacity under his own personal identification number (PIN).
25. It was submitted that even if the assessment of its director was linked to that of the Respondent, the fact remains that they were to be treated as two separate assessments as they are two separate persons. Reliance was placed on Stephen Kimathi Mutiso -vs- Commissioner of Domestic Taxes, TAT No. 187 of 2019 where the Tribunal noted that;
“35…. the law recognizes the company and the director as two distinct and separate legal persons…”
26. It was contended that even if it were the case that the information provided
by the director was relevant in the investigations on the Respondent’s tax affairs, the Appellant could not turn around to say that, the fact that they were in contact with the director who shared information with the Appellant in relation to his personal tax matters, means that the same was in relation to the Respondent’s assessment. That allowing such reasoning creates dangerous precedents in the assessment of corporate taxpayers where it may be believed that a director’s tax assessment will inevitably have undesirable consequences on the companies they serve, yet these are supposed to be two separate and distinct persons with distinct tax registrations as well as tax liabilities.
27. In response to the grounds of appeal, it was submitted that the Tribunal was right to find that the Respondent is providing financial services. That, the Tribunal appreciated the functions conducted by the Respondent, being revenue collection services, which are services that entail “dealing with money” and as it had observed at paragraph 120, “any other dealing with money” is a financial service under the First Schedule to the VAT Act. That, this was the main reason why the Tribunal found that the Respondent is a financial service provider and not only the fact that it was registered with the Central Bank of Kenya (CBK) as insinuated by the Appellant. It was contended that it is neither accurate nor fair for the Appellant to infer, assume or presume that registration with the CBK was the ONLY reason the Tribunal found in holding that the Respondent provides financial services.
28. It was submitted that the Appellant is attempting to split hairs before this Honourable Court by shifting the focus from the nature of the services provided by the Respondent and focusing on its registration status based on only one of the observations made by the Tribunal in its analysis. It was emphasized that the registration status with the CBK was an additional reason that convinced the Tribunal that the Respondent is a financial service provider.
29. It was submitted that the Tribunal was right to find that the Respondent was providing revenue collection services which were financial services for VAT purposes. That the revenue collection services are exempt from VAT since the Respondent is “dealing with money” by actually effecting the transfer of funds from an individual’s mobile money wallet to the Respondent’s client’s bank account hence the Respondent enables the collection, from the public, of payment for services offered by its clients. That, the fact of the transactions being effected electronically does not matter as section 2 of the VAT Act defines ‘money’ as among others.
30. Relying on Commissioner of Domestic Taxes -vs- Bank of Africa Limited, Civil Appeal E127 of 2020, it was submitted that the use of the word ‘including’ in Paragraph 1 (b) of Part II to the First Schedule of the VAT Act has been held to be inconclusive and thus creates ambiguity as to what constitutes money transfer services that may fall within this list of exempt services. That, this Honourable Court appreciated that where there is an inconclusive definition of what constitutes financial services, it is not open to this Court to say that the taxpayer was not providing financial services. That, in any event, this Court appreciated that in the interpretation of tax laws, it is established that where the law is ambiguous, then the ambiguity ought to be interpreted in favour of the taxpayer.
31. It was submitted that the Tribunal was right in its computation of the five-year timeline in partially invalidating the assessments by the Appellant. Relying on section 31 (4) (b) (i) of the TPA, it was submitted that the Appellant had no basis to assess the Respondent beyond the statutory timelines and was bound by the rule of strict interpretation of taxation statutes as set out in the case of Mount Kenya Bottlers Limited (supra). That, the TPA is a tax statute as set out in its section 2.
32. It was submitted that an amended tax assessment should be issued within five (5) years from the date the taxpayer submitted the self-assessment return. That the Respondent filed its VAT return for the month of January 2017 on 20/02/2017 hence an assessment for this period and beyond was limited to be issued between 20th February 2017 and 20th February 2022. That, the Appellant issued an assessment dated 23/02/2022 which was a period outside the statutory timeline for the amendment of assessments under Section 31 of the TPA. That, the assessment between January 2015 and January 2017 was out of time hence the Tribunal was right to find that the Appellant did not meet the requirements of Section 31 of the TPA at the time of amending the Respondent’s assessment.
33. It was submitted that the Appellant is misdirecting this court by stating that the Respondent charged for VAT and failed to remit the same. That, this was not an issue in dispute at the Tribunal and is an ambush to the Respondent in this appeal. This court was urged not to consider this line of argument based on the well-settled principle that parties are bound by their own pleadings as was aptly stated by the Court of Appeal in Dakianga Distributors (K) Limited -vs- Kenya Seed Company Limited [2015] eKLR to wit;
“A useful discussion on the importance of pleadings is to be found in Bullen and Leake and Jacob’s Precedents of Pleadings, 12th Edition, London, Sweet & Maxwell (The Common Law Library No.5) where the learned authors declare:
“The system of pleadings operates to define and delimit with clarity and precision the real matters in controversy between the parties upon which they can prepare and present their respective cases and upon which the court will be called upon to adjudicate between them. It thus serves the two-fold purposes of informing each party what is the case of the opposite party which he will have to meet before and at trial, and at the same time informing the court what are the issues between the parties which will govern the interlocutory proceedings before the trial and which the court will have to determine at trial.”
34. Relying on section 35 of the Respondent’s contract with NHIF, it was submitted that the Appellant failed to recognize that the VAT cost referred to under clause 35.1 is in relation to taxable supplies and not the revenue collection services which are exempt supplies, and which have been the subject in this dispute on matters VAT. That, clause 35.2 is the breakdown of the costs for which VAT was computed in relation to taxable costs such as hardware equipment, trainings, remunerations etc. and NOT revenue collection services. That, these supplies were rightfully subjected to VAT and the same remitted to KRA as a separate matter from the issue currently in dispute.
35. It was submitted that the Appellant’s assertion is tantamount to allegations of fraud or tax evasion against the Respondent hence, he who alleges must prove. Reliance was placed on the case of National Social Security Fund Board of Trustees -vs- Commissioner of Domestic Taxes [2016] eKLR where the court stated;
“There is a world of difference between an assertion and proof. That which a party states to be his case is an assertion. The party needs to adduce evidence to support his said assertion, with a view to proving his case.”
36. It was submitted that the Appellant’s allegations in this regard are wholly in bad faith, outside the confines of its pleadings and should not to stand in this Honourable Court.
Duty of Court
37. Section 56(2) of the Tax Procedures Act provides that an appeal to the High Court from the decision of the Tax Appeals Tribunal or to the Court of Appeal is on a question of law only. In the case of John Munuve Mati -vs- Returning Officer Mwingi North Constituency & 2 others [2018] eKLR, the Court of Appeal summarized what amounts to “matters of law” as follows;
“The interpretation or construction of the Constitution, statute or regulations made thereunder or their application to the sets of facts established by the trial Court. As far as facts are concerned, our engagement with them is limited to background and context and to satisfy ourselves, when the issue is raised, whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them. We cannot be drawn into considerations of the credibility of witnesses or which witnesses are more believable than others; by law that is the province of the trial court.”
38. I have carefully considered the grounds of appeal, the statement of facts, the submissions by parties and the entire record. I am of the view that the issues for determination are;
a) Whether the Appellant amended the taxpayer’s returns within the timelines prescribed by the law.
b) Whether the Respondent was a financial service provider for purposes of VAT exemption.
c) Whether the additional corporate tax and VAT assessments were justified.
d) Whether the objection decision was issued on time.
Analysis & Determination
Whether the Appellant amended the taxpayer’s returns within the timelines prescribed by the law.
39. On 23/02/2022, the Appellant issued the Respondent with a notice of tax assessment for the period January 2015 to December 2019.
40. Section 24 of the TPA provides that;
(1)A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.
(2) The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer''s tax liability using any information available to the Commissioner.
41. It is clear from section 24(2) that the Commissioner is not bound by the self-assessed returns of a tax payer.
42. Section 31 of the TPA provides that;
(1) Subject to this section, the Commissioner may amend an assessment (referred to in this section as the “original 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;
……………………………………………..
……………………………………………..
(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:
Provided that in the case of value added tax, the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.
43. The determination of this issue depends on the interpretation of the above provision and it is trite that in interpreting tax statutes, the court should do so strictly without leaving room for intendment, implication or presumption as held in Stanbic Bank Kenya Limited -vs- Kenya Revenue Authority (2009) eKLR. Similarly, in Commissioner of Investigations and Enforcement -vs- Libya Oil Kenya Ltd (Income Tax Appeal E104 of 2021) [2024] KEHC 3624 (KLR) (Commercial and Tax) (15 April 2024), the court stated that; “It is trite that Tax Statutes are to be strictly interpreted and there is no room for imputing that which has not been legislated into statute by Parliament.”
44. In this case, the Appellant issued a notice of tax investigations to the taxpayer via a letter dated 16/05/2019 (KRA 1). The letter indicated that the taxpayer was under investigation for the offence(s) of tax evasion which included but was not limited to acts of fraud i.e under declaration of corporation tax and VAT. Further, the letter indicated that preliminary findings showed unpaid VAT of kshs 114,088,006/=. In a letter dated 16/06/2021 (KRA 2), the Appellant informed the taxpayer that its findings therein constituted tax offences for which the commissioner was at liberty to institute criminal proceedings. There is no evidence that the said criminal proceedings were ever instituted hence no basis of finding that the additional assessments were made as a result of ‘gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer’ so as to reach a conclusion that the Appellant was at liberty to do the amendment at any time as provided for by section 31(4)(a) of the TPA.
45. The Respondent filed its VAT return for the month of January 2017 (Appendix 8) on 15/02/2017 thus bringing the matter within the purview of section 31(4) (b) of the TPA. This section requires the Commissioner to amend an assessment within five years from the date the t
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