'(Being an Appeal from the Judgment of the Tax Appeals Tribunal at Nairobi dated 25th October 2024 in Tax Appeals Tribunal Appeal No. E440 of 2023)
1. This judgment for the two appeals herein is consolidated as they arise from the same judgment of the Tax Appeals Tribunal (TAT) dated 25th October 2024 between the same parties. Inchcape Shipping Services Kenya Ltd (Inchcape) was the appellant while the Commissioner of Domestic Taxes (the Commissioner) was the respondent before the TAT. Each of the parties in the appeal before the Tribunal filed an appeal to this court.
2. On 25th October 2024 the Tax Appeals Tribunal determined the appeal by Inchcape Shipping Services Kenya Ltd (Inchcape) and made the following orders:
a) The Appeal be and is hereby partially allowed.
b) The Respondent''s objection decision dated 22nd June 2023 be
and is hereby varied in the following terms:
i. The Value Added Tax (VAT) assessments for the periods before March 2018 be and are hereby set aside.
ii. The Value Added Tax (VAT) assessments for the periods starting from March 2018 be and are hereby upheld.
iii. The Pay as You Earn (PAYE) assessments for the periods before March 2018 be and are hereby set aside.
iv. The Pay as You Earn (PAYE) assessments for the periods starting from March 2018 be and are hereby upheld.
v. The Respondent is hereby directed to recompute the tax
assessments based on the Tribunal''s findings under Orders (b) (i), (ii), (iii) and (iv) above within Thirty (30) days from the date of delivery of this Judgment.
3. Each party was dissatisfied with the part of the decision of the TAT that was not in its favour and separately filed an appeal to this court.
4. The Commissioner of Domestic Taxes, who was the respondent before the TAT was the first to file its appeal in the Milimani High Court, Income Tax Appeal No. E338 of 2024, through its memorandum dated 23rd December 2024 based on the following grounds that the TAT:
a. erred in law and fact in finding that the Commissioner’s assessment of PAYE and VAT for the tax periods before March 2018 were unlawful and unjustified.
b. erred in law and fact by failing to consider the evidence adduced by the Commissioner.
c. misapplied the law and facts and therefore arrived at the wrong decision in setting aside the Commissioner’s decision.
d. erred in law and fact in failing to consider the Commissioner’s response and submissions in its finding.
5. The Commissioner therefore prays that the appeal be allowed with costs to the Commissioner and that the consequential findings and orders of the Tribunal, subject to this appeal, be set aside in their entirety.
6. Inchcape in response to the appeal, filed its statement of facts dated 12th June 2025.
7. Both parties filed submissions urging their respective positions on the appeal, even though the appellant’s (Commissioner’s) submissions are titled “Respondent’s Submissions.”
8. Inchcape Shipping Services Kenya Limited (Inchcape) filed its appeal in the Milimani High Court, Income Tax Appeal No. E340 of 2024 through a memorandum of appeal dated 24th December 2024 and raised the following grounds of appeal:
a. The Tribunal erred in law in upholding the respondent''s Pay As You Earn (PAYE) assessment for the periods succeeding March 2018 despite the issue being settled through a consent dated 22nd May 2024 which was subsequently adopted as an order of the Tribunal on 24th June 2024 contrary to Section 55(1) of the Tax Procedures Act, 2015, Section 28(2) of the Tax Appeals Tribunal Act, 2013 and Regulation 9 of The Tax Procedures (Settlement of Tax Disputes Out of Court or Tribunal) Regulations.
b. The Tribunal misconstrued itself in holding that the expenses which the appellant had claimed input Value Added Tax (VAT) on were disbursements incurred on behalf of its principal, Inchcape Shipping Services Dubai (ISSD), rather than incidental costs incurred by the appellant in its ordinary course of business as an entity making taxable supplies as contemplated by Section 13(5) of the Value Added Tax Act, 2013.
c. The Tribunal erred in law in holding that the appellant had not satisfied the requirements of claiming input tax incurred on its purchases under Section 17 of the Value Added Tax Act, 2013 for want of documentation despite the appellant having provided the necessary documents underlying the supplies leading to the incurrence of the input VAT claimed.
d. The Tribunal erred in law in failing to uphold the distinctiveness of the purchases made by the appellant in the course of its business and as a distinct entity separate from its principal contrary to the definition of the term person under Section 2 of the Value Added Tax Act, 2013.
e. Inchcape thus prays to this court for orders that its appeal be allowed with costs and the judgment of the Tribunal dated 25th October 2024, but delivered to the appellant on 25th November 2024, upholding the respondent''s PAYE assessment and the decision of the respondent to disallow input VAT claimed for the periods succeeding March 2018 be set aside.
9. The appeal was disposed of on the written submissions of the parties.
10. I have considered the grounds of appeal in both cases, the judgment of the TAT, the statement of facts by both parties and the submissions of the parties herein. The appeals raise cross-cutting issues arising from the judgment of the TAT and therefore, in this judgment, the submissions are considered as such in the analysis that follows.
11. The case as discerned from the statement of facts by both the parties before before the TAT is that it arose from an objection decision delivered by the Commissioner dated 22nd June 2023 against Inchcape’s objection dated 20th April 2023 to the Commissioner’s amended assessment of tax for Inchcape to pay KShs 14,530,990/= as PAYE and disallowing Inchcape’s input VAT claim of KShs 208,536,905/=.
12. The claim for these taxes by the Commissioner against Inchcape arose from a tax audit the Commissioner conducted of Inchcape on 23rd March 2023. Following the tax audit, the Commissioner issued Inchcape with a notice of audit findings covering the period of January 2015 to December 2020. In the said notice, the Commissioner notified Inchcape of an amended assessment in respect of Pay As You Earn (PAYE) amounting to KES 14,530,990/- for the period 2016 to 2018. Further, the appellant proceeded to disallow the respondent''s input Value Added Tax (VAT) claim of KES 208,536,905/- for the period 2015 to 2019.
13. The Commissioner submits that the facts of the case are well captured in Inchcape’s statement of facts filed before the TAT.
14. It was Inchcape’s case before the TAT that the Commissioner erred in law and fact in failing to vacate the assessments made in respect of PAYE and VAT for the periods 2015, 2016 and 2017 as the same were time-barred under section 31(4)(b) of the Tax Procedures Act (Cap. 349B) Laws of Kenya which provides as follows:
(4) The Commissioner may amend an assessment—
a) in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or
b) in any other case, within five years of—
i. for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or
ii. for any other assessment, the date the Commissioner notified the taxpayer of the assessment:
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.
15. It was Inchcape’s position that having done a self-assessment, in the years 2015, 2016 and 2017, the five-year limit within which the Commissioner could do amendments of the same lapsed in 2020, 2021 and 2022 respectively. It further pointed out that, section 23 of the Tax Procedures Act provides for the taxpayer to maintain documents required under any tax law for a period of five years after the end of the reporting period.
16. It was Inchcape’s contention, therefore, that the Commissioner’s objection decision confirming the amended assessment in respect of PAYE and disallowing input VAT for the stated periods was time-barred and therefore, unlawful and the Commissioner had misdirected itself in its objection decision by stating that the assessment was within the five-year period.
17. Inchcape cited the case of Paragon Electronics Limited -vs- Commissioner of Domestic Taxes (TAT 709 OF 2015), decided by the TAT on the five-year limitation period.
18. Inchcape stated that even though it had made payment of KShs. 14,530,989/= for the amended assessment of PAYE, it maintained that the assessment was time-barred under section 31(4) of the Tax Procedures Act. and thus, it maintained its objection through the notice of objection to the Commissioner.
19. It therefore prayed to the TAT to find that the amended assessments by the Commissioner for the periods 2015, 2016 and 2017 in respect of VAT and PAYE were time-barred and should be set aside.
20. Inchcape’s second to fifth grounds of appeal before the TAT on the objection decision rendered by the Commissioner was that the Commissioner erred in law and fact in confirming its amended assessment which disallowed input VAT claimed by Inchcape by incorrectly treating the expenses incurred by the Inchcape as disbursements instead of incidental costs contrary to the provisions of section 13 (5) of the Value Added Tax Act.
21. Inchcape provided the background of the transaction that its principal, Inchcape Shipping Services Dubai (ISSD), entered into a contract on 1st September 2012 for the supply of foodstuff to the United Nations Support Office for AMISOM (UNSOA) in Somalia. Inchcape then entered into a contract with Inchcape Shipping Services Dubai (ISSD), as its principal to provide it with assistance in the form of logistical and administrative services. The supply of foodstuffs to Kenya was then handled by the Inchcape until the same was delivered to various locations of the AMISOM forces in Somalia. In the discharge of its contractual obligations with ISSD, Inchcape contracted other entities to provide various services namely Southern Shipping Services Limited (SSSL), Buri Transporters, Dodwell, Gateway Marine Limited and Almar Containers East Africa. Inchcape stated that having been contracted these entities they billed it directly for the supplies made and not ISSD as implied by the Commissioner in its objection decision. Further, that the costs were borne by Inchcape to ensure delivery of goods to the AMISOM locations as evidenced by the contracts, invoices and payment confirmations.
22. It was therefore Inchcape’s contention that the Commissioner erred in considering the input VAТ as disbursements and thereby disallowed the claims by Inchcape. According to Inchcape, the claims constituted incidental costs which form part of the taxable value of supply as provided for under section 13(5) of the VAT Act.
23. Inchcape’s contention before the TAT against the Commissioner’s objection decision on the issue of incidental costs versus disbursements was that the expenses incurred by Inchcape were not disbursements but incidental costs incurred in the course of making the supply in the meaning of section 13(5) of the VAT Act.
24. It stated that the transaction between Inchcape and ISSD was a related party transaction subject to transfer pricing rules and in accordance with Inchcape’s transfer pricing policy, in billing other related parties for provision of services, including ISSD, the charges were calculated as Aggregate costs + Net Cost-Plus Markup. Inchcape stated that under paragraph 1.4.3 of its transfer pricing policy, which it provided to the TAT, the price charged for the provision of agency services to ISSD for the UNSOA project was provided for and the transfer price determined as Net Cost-Plus Markup of 5% on the basis of a benchmark analysis.
25. Inchcape stated further that it acts as the agent to various unrelated shipping lines in Kenya similar to ISSD and the costs it incurs in respect of those contracts it claims input VAT on the basis that the said claims were in respect of incidental costs incurred in the provision of services by the suppliers.
26. Consequently, that the Commissioner erred in its treatment of the Inchcape’s transactions in respect of third-party service providers in the provision of agency services to ISSD which was inconsistent with input VAT claims allowed in respect of similar transactions between the Inchcape and unrelated entities as principals.
27. Inchcape thus invoked the principle of legitimate expectation as enunciated in the case of Republic -vs- Attorney General & another ex-parte Waswa & 2 others (2005) 1KLR 280, where the Court pronounced itself as follows: -
"The principle of a legitimate expectation...is a principle, which should not be restricted because it has its roots in what is gradually becoming a universal but fundamental principle of law namely the rule of law with its offshoot principle of legal certainty. If the reason for the principle is for the challenged bodies or decision makers to demonstrate regularity, predictability and certainty in their dealings, this is, in turn enables the affected parties to plan their affairs, lives and businesses with some measure of regularity, predictability, certainty and confidence. The principle has been very ably defined in public law in the last century but it is clear that it has its cousins in private law of honoring trusts and confidences. It is a principle, which has its origins in nearly every continent. Trusts and confidences must be honoured in public law and therefore the situations where the expectations shall be recognised and protected must of necessity defy restrictions in the years ahead. The strengths and weaknesses of the expectations must remain a central role for the public law courts to weigh and determine.”
28. Inchcape’s third ground of appeal before the TAT was that the Commissioner objection decision to disallow input VAT was in error because of the Commissioner’s interpretation of the business arrangement between Inchcape and its principal, ISSD. That the Commissioner misdirected itself in concluding that the input VAT claimed by Inchcape was in relation to costs fully borne by the principal and not directly related to the production of agency income and therefore that the input VAT claimed by Inchcape was contrary to section 17(1) of the VAT Act 2013, and that the affected supplies related to costs fully borne by the principal hence they were not directly related to the production of agency income as they were disbursements.
29. Inchcape referred to section 2 of the Value Added Tax Act (Cap. 476) Laws of Kenya, on the interpretation of "input tax", and submitted that the Commissioner erred in failing to consider that the input VAT claims made by the Inchcape were in respect of supplies used by it for the purpose of their business of logistical coordination for the main supply to UNSOA. Further that section 17(1) of the VAT Act provides for the deduction of input VAT incurred on a taxable supply from output VAT payable provided that the taxable supply was acquired for purposes of making taxable supplies. According to Inchcape, it claimed input VAT on purchases made by the it which were directly related to its agency business and in the coordination of logistical works for ISSD in its supply of foodstuff to UNSOA for which it earned agency income hence it qualified to claim input VAT for the period 2015 to 2020 and the same should therefore be allowed by the Commissioner.
30. The fourth ground of appeal by Inchcape against the Commissioner’s objection decision before the TAT was that in spite of the Commissioner disallowing input VAT claimed by Inchcape on the basis that the supplies were not directly related to the production of agency income as they related to disbursements, it nonetheless allowed the same expenses claimed by Inchcape as expenses wholly and exclusively incurred in the production of income under section 15 the Income Tax Act, (Cap. 470), Laws of Kenya. It was Inchcape’s contention that for that reason, the Commissioner’s decision disallowing its input VAT claims was inconsistent with its position that the corporation tax was fully reconciled wherein the same expenses were allowed as being "wholly and exclusively incurred" in the production of agency income and therefore, the same should be allowed for VAT purposes.
31. The final ground of appeal was that the Commissioner erred in law and fact in disallowing input VAT claimed by Inchcape on the misconception that the same relates to costs fully borne by the principal ISSD and were therefore disbursements as Inchcape and not ISSD was billed directly by the suppliers hence proceeded to claim input VAT incurred for the purpose of provision of services in relation to goods in transit. Inchcape stated that in billing ISSD, it charged for VAT together with disbursements incurred in the supply in accordance with section 13(5) of the VAT Act which provides as follows:
S. 13(5). In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client:
Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.
32. Inchcape summoned to its aid the provisions of Public Notice No. 13 of 1999 on VAT issued by the Commissioner in respect of clearing and forwarding services and stated that the same provides clarity on the tax treatment of payments received by clearing and forwarding agents in the course of supplying clearing and forwarding services. It explains that the Notice provides that costs purely incurred by Inchcape as an agent in servicing the principal, ISSD, form part of the costs incurred by the agent in offering the services and thus a taxable supply for VAT purposes.
33. In response to the appeal before the TAT through its statement of facts dated 8th September 2023, the Commissioner stated that with respect to the Inchcape’s objection regarding the amended assessments for the period 2015, 2016 and 2017, being beyond the five-year limitation period, as provided for under section 31(4) of the TPA, the Commissioner had stated in its notice of assessment that the adjustments resulted in a VAT credit adjustment from KShs 274,970,507/= to KShs 91,559,057 as at February 2023 and therefore the amended assessment was raised in the period February 2023 and not for the period 2015, 2016 and 2017 to adjust the VAT credit running balance. The Commissioner therefore stated that the amended assessment, which should be of KShs 91,559,057/= was within the five years as provided for under the law.
34. On the relationship between Inchcape and its principal ISSD, the Commissioner stated that it had noted that the contract between the parties provided that Inchcape would be reimbursed all costs incurred in the performance of the contract by ISSD as the principal. That, Inchcape was only offering facilitative and logistical services to the main supply contract and only earned agency income. The Commissioner maintained that the purchases by Inchcape were disbursements and Inchcape ought not to have claimed them in their VAT returns.
35. Further that the said purchases did not satisfy the provisions of section 17(1) of the VAT Act, which provides as follows:
S. 17(1). Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.
36. The Commissioner averred further that Inchcape was requested to provide supporting documents being sales invoices issued to its principal ISSD and it only provided sales invoices for management fee and no sales invoices showing a breakdown of costs recharged to ISSD. The Commissioner therefore made the amended assessment based on the only available information, and relying on the best judgment principle.
37. Upon reviewing the purchase invoices, the Commissioner noted that the suppliers would bill Inchcape directly and not the principal, ISSD for the services offered and Inchcape would proceed to claim input VAT in its returns.
38. The Commissioner therefore maintained that the amended assessments conformed to the law and were correctly issued and Inchcape had provided evidence otherwise that would have altered the amended assessments, thereby failing to discharge its burden under section 56(1) of the TPA to prove that the Commissioner’s tax decision was incorrect.
39. The Commissioner therefore prayed that its objection dated 23rd June 2023 be upheld and Inchcape’s appeal be dismissed.
40. Upon considering the facts as outlined above and the submissions of the parties, the TAT came to the decision as set out in paragraph 2 above.
41. Before considering the substantive issues above, this court has to consider a preliminary issue of jurisdiction raised by Inchcape in its statement of facts and submissions, that the Commissioner’s appeal raises issues of fact in an otherwise appeal restricted by law under section 56(2) of the Tax Procedures Act (Cap. Cap. 469B) Laws of Kenya (TPA), to issues of law and so the same should not be considered.
42. In support of its submissions on the issue of the court’s jurisdiction being circumscribed by the constitution, statute or both, Inchcape has cited the case of Macharia & another v Kenya Commercial Bank Limited & 2 others [2012] KESC 8 (KLR) and on the adherence to section 56(2) of the TPA the cases of Commissioner of Domestic Taxes v Sketchers Limited [2024] KEHC 5569 (KLR) and Commissioner of Investigations & Enforcement v Doshi Enterprises Limited [2025] KEHC 4501 (KLR)
43. The Commissioner did not respond to that submission by Inchcape.
44. Section 56(2) of the TPA provides that an appeal to the High Court or to the Court of Appeal shall be on a question of law only.
45. In all four paragraphs of the grounds of appeal laid out in the memorandum of appeal by the Commissioner, the learned counsel for the Commissioner keeps adverting to the honourable tribunal having “erred in law and fact,” or “misapplied the law and facts.” Learned counsel would do well to refer to and be guided by the Court of Appeal’s observation in the case of Independent Electoral and Boundaries Commission & another v Stephen Mutinda Mule & 3 others [2014] eKLR that:
“Those points in an appeal of the kind before us, being from an election court’s decision, are further circumscribed by Section 85A of the Elections Act which limits appeals to the Court of Appeal to matters of law only. It is therefore quite strange and improper that each of the seventeen grounds, without exception, commences with a standard expression “the judge erred in fact and law” or “the learned Judge erred in law and in fact.” Clearly the drafters of the memorandum did not have the legal provision in active contemplation. Had they done so, they would have found that by invoking factual errors, they were inviting jurisdictional objections to their entire appeal.”
46. As found by the Court of Appeal in the above case, it would appear that equally, in the present case, learned counsel for the Commissioner did not have the provisions of section 56(2) of the TPA when drafting the appeal.
47. The Court of Appeal in the case of M’Riungu v. Republic [1983] KLR 455, gave guidance on how to proceed in an appeal on points of law thus:
“where a right of appeal is confined to question of law, an appellate court has loyalty to accept the findings of fact of the lower court(s) and resist the temptation to treat findings of fact as holdings of fact and law and it should not interfere with the decision of the trial court or the first appellate court unless it is apparent that on evidence, no reasonable tribunal could have reached that conclusion, which would be the same as holding that the decision is bad in law”.
48. The appellate court may however, interfere with the findings of the trial court where it is demonstrated that there was no evidence at all upon which such findings were based or that the evidence relied upon was of such a nature that no reasonable tribunal, properly addressing its mind on it, could have made such findings as has been held in numerous decisions. (see for instance Bashir Haji Abdullahi v Adan Mohammed Nooru & 3 others [2014] eKLR.
49. Even then, I note that other than attacking the manner in which the grounds of appeal are set out as referring to both issues of law and fact, learned counsel for Inchcape has not pointed out in the submissions the particular issues of fact that the Commissioner is raising in its appeal. The submission therefore, only serves as a reminder to this court to bear in mind the statutory provisions to which the appeal is confined. That is still useful albeit to a limited degree.
50. Therefore, on any issue raised in the appeal that touches on facts, this court is not bound to upset the findings of the trial court unless it was a misapplication of the law to the facts.
51. I have considered the grounds of appeal as set out by the Commissioner in its memorandum and I find that all of them are on issues of law.
52. The issue of whether the Commissioner’s assessment of PAYE and VAT for the period before March 2018 were unlawful and not justified is one of law because the law under section 31(4) of the TPA provides for a time limit of five (5) years within which the same should be conducted. The issue of whether or not the amended assessment by the Commissioner fell within this timeframe is one of law.
53. The issue of whether or not the Commissioner’s evidence and submissions tendered before the Tribunal was or was not considered by the Tribunal is equally an issue of law because this court is required to consider whether the Tribunal properly appreciated and evaluated the evidence before it, before arriving at its conclusions.
54. Finally, the issue of whether the Tribunal properly applied the law to the facts before it is also an issue of law.
55. Consequently, I find that this court has jurisdiction to consider the appeal filed by the Commissioner.
56. For its appeal through the memorandum dated 25th December 2024, the Commissioner raised the following single issue for determination in its submissions:
a. Whether the Honourable Tribunal erred in law and fact in finding that the Appellant’s (Commissioner’s) assessment of PAYE and VAT for the tax periods before March 2018 were unlawful and unjustified.
57. In its submissions to the appeal by the Commissioner, Inchcape submits that, from the Commissioner’s memorandum of appeal dated 25th December 2024, the issues for determination are as follows:
a. Whether the Tribunal erred in law and fact in finding that the Appellant''s (Commissioner’s) assessment of PAYE and VAT for the tax periods before March 2018 were unlawful and unjustified.
b. Whether the Tribunal erred in law and fact by failing to consider the evidence adduced by the appellant.
c. Whether the Tribunal misapplied the law and facts therefore arriving at the wrong decision in setting aside the appellant''s decision.
d. Whether the Tribunal erred in law and fact in failing to consider the appellant''s response and submissions in its findings.
58. From their stated issues for determination, both parties agree that the main issue for determination in the Commissioner’s appeal is whether or not the TAT erred in law and in fact in finding that the Appellant''s (Commissioner’s) assessment of PAYE and VAT for the tax periods before March 2018 were unlawful and unjustified. Issues (b), (c), and (d) raised in Inchcape’s submissions are clearly within that main issue for determination.
59. In its submissions dated 17th June 2025, Inchcape raised the following issues for determination:
a. Whether the Tribunal erred in law in upholding the respondent''s Pay as You Earn (PAYE) assessment for the periods succeeding March 2018 in the sum of KShs. 1,538,745.
b. Whether expenses which the appellant had claimed input VAT on were incidental costs incurred by the appellant in its ordinary course of business and not costs incurred by its principal.
c. Whether the Tribunal erred in law in holding that the appellant failed to satisfy the requirements provided under section 17 of the Value Added Tax Act, 2013 in claiming input tax incurred on its purchases.
d. Whether the Tribunal erred in law in failing to uphold the distinctiveness of the purchases made by the appellant in the course of its business and as a distinct entity separate from its principal
60. On its part, the Commissioner raised the following issues for determination on Inchcape’s appeal:
a. Whether parties had consented to the issue of PAYE.
b. Whether the Application for VAT refund was validly rejected.
c. Whether the Respondent’s objection decision considered all the information presented by the Appellant.
61. Issues (b) and (c) above raised by the Commissioner seem to me to be misplaced and should have been for the TAT’s determination. The only issue for determination raised by the Commissioner is therefore whether parties had consented to the issue of PAYE. Considered together with issue (a) above raised by Inchcape, the issue becomes:
a. whether the Tribunal erred in law in upholding the respondent''s Pay as You Earn (P
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1. This judgment for the two appeals herein is consolidated as they arise from the same judgment of the Tax Appeals Tribunal (TAT) dated 25th October 2024 between the same parties. Inchcape Shipping Services Kenya Ltd (Inchcape) was the appellant while the Commissioner of Domestic Taxes (the Commissioner) was the respondent before the TAT. Each of the parties in the appeal before the Tribunal filed an appeal to this court.
2. On 25th October 2024 the Tax Appeals Tribunal determined the appeal by Inchcape Shipping Services Kenya Ltd (Inchcape) and made the following orders:
a) The Appeal be and is hereby partially allowed.
b) The Respondent''s objection decision dated 22nd June 2023 be
and is hereby varied in the following terms:
i. The Value Added Tax (VAT) assessments for the periods before March 2018 be and are hereby set aside.
ii. The Value Added Tax (VAT) assessments for the periods starting from March 2018 be and are hereby upheld.
iii. The Pay as You Earn (PAYE) assessments for the periods before March 2018 be and are hereby set aside.
iv. The Pay as You Earn (PAYE) assessments for the periods starting from March 2018 be and are hereby upheld.
v. The Respondent is hereby directed to recompute the tax
assessments based on the Tribunal''s findings under Orders (b) (i), (ii), (iii) and (iv) above within Thirty (30) days from the date of delivery of this Judgment.
3. Each party was dissatisfied with the part of the decision of the TAT that was not in its favour and separately filed an appeal to this court.
4. The Commissioner of Domestic Taxes, who was the respondent before the TAT was the first to file its appeal in the Milimani High Court, Income Tax Appeal No. E338 of 2024, through its memorandum dated 23rd December 2024 based on the following grounds that the TAT:
a. erred in law and fact in finding that the Commissioner’s assessment of PAYE and VAT for the tax periods before March 2018 were unlawful and unjustified.
b. erred in law and fact by failing to consider the evidence adduced by the Commissioner.
c. misapplied the law and facts and therefore arrived at the wrong decision in setting aside the Commissioner’s decision.
d. erred in law and fact in failing to consider the Commissioner’s response and submissions in its finding.
5. The Commissioner therefore prays that the appeal be allowed with costs to the Commissioner and that the consequential findings and orders of the Tribunal, subject to this appeal, be set aside in their entirety.
6. Inchcape in response to the appeal, filed its statement of facts dated 12th June 2025.
7. Both parties filed submissions urging their respective positions on the appeal, even though the appellant’s (Commissioner’s) submissions are titled “Respondent’s Submissions.”
8. Inchcape Shipping Services Kenya Limited (Inchcape) filed its appeal in the Milimani High Court, Income Tax Appeal No. E340 of 2024 through a memorandum of appeal dated 24th December 2024 and raised the following grounds of appeal:
a. The Tribunal erred in law in upholding the respondent''s Pay As You Earn (PAYE) assessment for the periods succeeding March 2018 despite the issue being settled through a consent dated 22nd May 2024 which was subsequently adopted as an order of the Tribunal on 24th June 2024 contrary to Section 55(1) of the Tax Procedures Act, 2015, Section 28(2) of the Tax Appeals Tribunal Act, 2013 and Regulation 9 of The Tax Procedures (Settlement of Tax Disputes Out of Court or Tribunal) Regulations.
b. The Tribunal misconstrued itself in holding that the expenses which the appellant had claimed input Value Added Tax (VAT) on were disbursements incurred on behalf of its principal, Inchcape Shipping Services Dubai (ISSD), rather than incidental costs incurred by the appellant in its ordinary course of business as an entity making taxable supplies as contemplated by Section 13(5) of the Value Added Tax Act, 2013.
c. The Tribunal erred in law in holding that the appellant had not satisfied the requirements of claiming input tax incurred on its purchases under Section 17 of the Value Added Tax Act, 2013 for want of documentation despite the appellant having provided the necessary documents underlying the supplies leading to the incurrence of the input VAT claimed.
d. The Tribunal erred in law in failing to uphold the distinctiveness of the purchases made by the appellant in the course of its business and as a distinct entity separate from its principal contrary to the definition of the term person under Section 2 of the Value Added Tax Act, 2013.
e. Inchcape thus prays to this court for orders that its appeal be allowed with costs and the judgment of the Tribunal dated 25th October 2024, but delivered to the appellant on 25th November 2024, upholding the respondent''s PAYE assessment and the decision of the respondent to disallow input VAT claimed for the periods succeeding March 2018 be set aside.
9. The appeal was disposed of on the written submissions of the parties.
10. I have considered the grounds of appeal in both cases, the judgment of the TAT, the statement of facts by both parties and the submissions of the parties herein. The appeals raise cross-cutting issues arising from the judgment of the TAT and therefore, in this judgment, the submissions are considered as such in the analysis that follows.
11. The case as discerned from the statement of facts by both the parties before before the TAT is that it arose from an objection decision delivered by the Commissioner dated 22nd June 2023 against Inchcape’s objection dated 20th April 2023 to the Commissioner’s amended assessment of tax for Inchcape to pay KShs 14,530,990/= as PAYE and disallowing Inchcape’s input VAT claim of KShs 208,536,905/=.
12. The claim for these taxes by the Commissioner against Inchcape arose from a tax audit the Commissioner conducted of Inchcape on 23rd March 2023. Following the tax audit, the Commissioner issued Inchcape with a notice of audit findings covering the period of January 2015 to December 2020. In the said notice, the Commissioner notified Inchcape of an amended assessment in respect of Pay As You Earn (PAYE) amounting to KES 14,530,990/- for the period 2016 to 2018. Further, the appellant proceeded to disallow the respondent''s input Value Added Tax (VAT) claim of KES 208,536,905/- for the period 2015 to 2019.
13. The Commissioner submits that the facts of the case are well captured in Inchcape’s statement of facts filed before the TAT.
14. It was Inchcape’s case before the TAT that the Commissioner erred in law and fact in failing to vacate the assessments made in respect of PAYE and VAT for the periods 2015, 2016 and 2017 as the same were time-barred under section 31(4)(b) of the Tax Procedures Act (Cap. 349B) Laws of Kenya which provides as follows:
(4) The Commissioner may amend an assessment—
a) in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or
b) in any other case, within five years of—
i. for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; or
ii. for any other assessment, the date the Commissioner notified the taxpayer of the assessment:
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.
15. It was Inchcape’s position that having done a self-assessment, in the years 2015, 2016 and 2017, the five-year limit within which the Commissioner could do amendments of the same lapsed in 2020, 2021 and 2022 respectively. It further pointed out that, section 23 of the Tax Procedures Act provides for the taxpayer to maintain documents required under any tax law for a period of five years after the end of the reporting period.
16. It was Inchcape’s contention, therefore, that the Commissioner’s objection decision confirming the amended assessment in respect of PAYE and disallowing input VAT for the stated periods was time-barred and therefore, unlawful and the Commissioner had misdirected itself in its objection decision by stating that the assessment was within the five-year period.
17. Inchcape cited the case of Paragon Electronics Limited -vs- Commissioner of Domestic Taxes (TAT 709 OF 2015), decided by the TAT on the five-year limitation period.
18. Inchcape stated that even though it had made payment of KShs. 14,530,989/= for the amended assessment of PAYE, it maintained that the assessment was time-barred under section 31(4) of the Tax Procedures Act. and thus, it maintained its objection through the notice of objection to the Commissioner.
19. It therefore prayed to the TAT to find that the amended assessments by the Commissioner for the periods 2015, 2016 and 2017 in respect of VAT and PAYE were time-barred and should be set aside.
20. Inchcape’s second to fifth grounds of appeal before the TAT on the objection decision rendered by the Commissioner was that the Commissioner erred in law and fact in confirming its amended assessment which disallowed input VAT claimed by Inchcape by incorrectly treating the expenses incurred by the Inchcape as disbursements instead of incidental costs contrary to the provisions of section 13 (5) of the Value Added Tax Act.
21. Inchcape provided the background of the transaction that its principal, Inchcape Shipping Services Dubai (ISSD), entered into a contract on 1st September 2012 for the supply of foodstuff to the United Nations Support Office for AMISOM (UNSOA) in Somalia. Inchcape then entered into a contract with Inchcape Shipping Services Dubai (ISSD), as its principal to provide it with assistance in the form of logistical and administrative services. The supply of foodstuffs to Kenya was then handled by the Inchcape until the same was delivered to various locations of the AMISOM forces in Somalia. In the discharge of its contractual obligations with ISSD, Inchcape contracted other entities to provide various services namely Southern Shipping Services Limited (SSSL), Buri Transporters, Dodwell, Gateway Marine Limited and Almar Containers East Africa. Inchcape stated that having been contracted these entities they billed it directly for the supplies made and not ISSD as implied by the Commissioner in its objection decision. Further, that the costs were borne by Inchcape to ensure delivery of goods to the AMISOM locations as evidenced by the contracts, invoices and payment confirmations.
22. It was therefore Inchcape’s contention that the Commissioner erred in considering the input VAТ as disbursements and thereby disallowed the claims by Inchcape. According to Inchcape, the claims constituted incidental costs which form part of the taxable value of supply as provided for under section 13(5) of the VAT Act.
23. Inchcape’s contention before the TAT against the Commissioner’s objection decision on the issue of incidental costs versus disbursements was that the expenses incurred by Inchcape were not disbursements but incidental costs incurred in the course of making the supply in the meaning of section 13(5) of the VAT Act.
24. It stated that the transaction between Inchcape and ISSD was a related party transaction subject to transfer pricing rules and in accordance with Inchcape’s transfer pricing policy, in billing other related parties for provision of services, including ISSD, the charges were calculated as Aggregate costs + Net Cost-Plus Markup. Inchcape stated that under paragraph 1.4.3 of its transfer pricing policy, which it provided to the TAT, the price charged for the provision of agency services to ISSD for the UNSOA project was provided for and the transfer price determined as Net Cost-Plus Markup of 5% on the basis of a benchmark analysis.
25. Inchcape stated further that it acts as the agent to various unrelated shipping lines in Kenya similar to ISSD and the costs it incurs in respect of those contracts it claims input VAT on the basis that the said claims were in respect of incidental costs incurred in the provision of services by the suppliers.
26. Consequently, that the Commissioner erred in its treatment of the Inchcape’s transactions in respect of third-party service providers in the provision of agency services to ISSD which was inconsistent with input VAT claims allowed in respect of similar transactions between the Inchcape and unrelated entities as principals.
27. Inchcape thus invoked the principle of legitimate expectation as enunciated in the case of Republic -vs- Attorney General & another ex-parte Waswa & 2 others (2005) 1KLR 280, where the Court pronounced itself as follows: -
"The principle of a legitimate expectation...is a principle, which should not be restricted because it has its roots in what is gradually becoming a universal but fundamental principle of law namely the rule of law with its offshoot principle of legal certainty. If the reason for the principle is for the challenged bodies or decision makers to demonstrate regularity, predictability and certainty in their dealings, this is, in turn enables the affected parties to plan their affairs, lives and businesses with some measure of regularity, predictability, certainty and confidence. The principle has been very ably defined in public law in the last century but it is clear that it has its cousins in private law of honoring trusts and confidences. It is a principle, which has its origins in nearly every continent. Trusts and confidences must be honoured in public law and therefore the situations where the expectations shall be recognised and protected must of necessity defy restrictions in the years ahead. The strengths and weaknesses of the expectations must remain a central role for the public law courts to weigh and determine.”
28. Inchcape’s third ground of appeal before the TAT was that the Commissioner objection decision to disallow input VAT was in error because of the Commissioner’s interpretation of the business arrangement between Inchcape and its principal, ISSD. That the Commissioner misdirected itself in concluding that the input VAT claimed by Inchcape was in relation to costs fully borne by the principal and not directly related to the production of agency income and therefore that the input VAT claimed by Inchcape was contrary to section 17(1) of the VAT Act 2013, and that the affected supplies related to costs fully borne by the principal hence they were not directly related to the production of agency income as they were disbursements.
29. Inchcape referred to section 2 of the Value Added Tax Act (Cap. 476) Laws of Kenya, on the interpretation of "input tax", and submitted that the Commissioner erred in failing to consider that the input VAT claims made by the Inchcape were in respect of supplies used by it for the purpose of their business of logistical coordination for the main supply to UNSOA. Further that section 17(1) of the VAT Act provides for the deduction of input VAT incurred on a taxable supply from output VAT payable provided that the taxable supply was acquired for purposes of making taxable supplies. According to Inchcape, it claimed input VAT on purchases made by the it which were directly related to its agency business and in the coordination of logistical works for ISSD in its supply of foodstuff to UNSOA for which it earned agency income hence it qualified to claim input VAT for the period 2015 to 2020 and the same should therefore be allowed by the Commissioner.
30. The fourth ground of appeal by Inchcape against the Commissioner’s objection decision before the TAT was that in spite of the Commissioner disallowing input VAT claimed by Inchcape on the basis that the supplies were not directly related to the production of agency income as they related to disbursements, it nonetheless allowed the same expenses claimed by Inchcape as expenses wholly and exclusively incurred in the production of income under section 15 the Income Tax Act, (Cap. 470), Laws of Kenya. It was Inchcape’s contention that for that reason, the Commissioner’s decision disallowing its input VAT claims was inconsistent with its position that the corporation tax was fully reconciled wherein the same expenses were allowed as being "wholly and exclusively incurred" in the production of agency income and therefore, the same should be allowed for VAT purposes.
31. The final ground of appeal was that the Commissioner erred in law and fact in disallowing input VAT claimed by Inchcape on the misconception that the same relates to costs fully borne by the principal ISSD and were therefore disbursements as Inchcape and not ISSD was billed directly by the suppliers hence proceeded to claim input VAT incurred for the purpose of provision of services in relation to goods in transit. Inchcape stated that in billing ISSD, it charged for VAT together with disbursements incurred in the supply in accordance with section 13(5) of the VAT Act which provides as follows:
S. 13(5). In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client:
Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.
32. Inchcape summoned to its aid the provisions of Public Notice No. 13 of 1999 on VAT issued by the Commissioner in respect of clearing and forwarding services and stated that the same provides clarity on the tax treatment of payments received by clearing and forwarding agents in the course of supplying clearing and forwarding services. It explains that the Notice provides that costs purely incurred by Inchcape as an agent in servicing the principal, ISSD, form part of the costs incurred by the agent in offering the services and thus a taxable supply for VAT purposes.
33. In response to the appeal before the TAT through its statement of facts dated 8th September 2023, the Commissioner stated that with respect to the Inchcape’s objection regarding the amended assessments for the period 2015, 2016 and 2017, being beyond the five-year limitation period, as provided for under section 31(4) of the TPA, the Commissioner had stated in its notice of assessment that the adjustments resulted in a VAT credit adjustment from KShs 274,970,507/= to KShs 91,559,057 as at February 2023 and therefore the amended assessment was raised in the period February 2023 and not for the period 2015, 2016 and 2017 to adjust the VAT credit running balance. The Commissioner therefore stated that the amended assessment, which should be of KShs 91,559,057/= was within the five years as provided for under the law.
34. On the relationship between Inchcape and its principal ISSD, the Commissioner stated that it had noted that the contract between the parties provided that Inchcape would be reimbursed all costs incurred in the performance of the contract by ISSD as the principal. That, Inchcape was only offering facilitative and logistical services to the main supply contract and only earned agency income. The Commissioner maintained that the purchases by Inchcape were disbursements and Inchcape ought not to have claimed them in their VAT returns.
35. Further that the said purchases did not satisfy the provisions of section 17(1) of the VAT Act, which provides as follows:
S. 17(1). Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.
36. The Commissioner averred further that Inchcape was requested to provide supporting documents being sales invoices issued to its principal ISSD and it only provided sales invoices for management fee and no sales invoices showing a breakdown of costs recharged to ISSD. The Commissioner therefore made the amended assessment based on the only available information, and relying on the best judgment principle.
37. Upon reviewing the purchase invoices, the Commissioner noted that the suppliers would bill Inchcape directly and not the principal, ISSD for the services offered and Inchcape would proceed to claim input VAT in its returns.
38. The Commissioner therefore maintained that the amended assessments conformed to the law and were correctly issued and Inchcape had provided evidence otherwise that would have altered the amended assessments, thereby failing to discharge its burden under section 56(1) of the TPA to prove that the Commissioner’s tax decision was incorrect.
39. The Commissioner therefore prayed that its objection dated 23rd June 2023 be upheld and Inchcape’s appeal be dismissed.
40. Upon considering the facts as outlined above and the submissions of the parties, the TAT came to the decision as set out in paragraph 2 above.
41. Before considering the substantive issues above, this court has to consider a preliminary issue of jurisdiction raised by Inchcape in its statement of facts and submissions, that the Commissioner’s appeal raises issues of fact in an otherwise appeal restricted by law under section 56(2) of the Tax Procedures Act (Cap. Cap. 469B) Laws of Kenya (TPA), to issues of law and so the same should not be considered.
42. In support of its submissions on the issue of the court’s jurisdiction being circumscribed by the constitution, statute or both, Inchcape has cited the case of Macharia & another v Kenya Commercial Bank Limited & 2 others [2012] KESC 8 (KLR) and on the adherence to section 56(2) of the TPA the cases of Commissioner of Domestic Taxes v Sketchers Limited [2024] KEHC 5569 (KLR) and Commissioner of Investigations & Enforcement v Doshi Enterprises Limited [2025] KEHC 4501 (KLR)
43. The Commissioner did not respond to that submission by Inchcape.
44. Section 56(2) of the TPA provides that an appeal to the High Court or to the Court of Appeal shall be on a question of law only.
45. In all four paragraphs of the grounds of appeal laid out in the memorandum of appeal by the Commissioner, the learned counsel for the Commissioner keeps adverting to the honourable tribunal having “erred in law and fact,” or “misapplied the law and facts.” Learned counsel would do well to refer to and be guided by the Court of Appeal’s observation in the case of Independent Electoral and Boundaries Commission & another v Stephen Mutinda Mule & 3 others [2014] eKLR that:
“Those points in an appeal of the kind before us, being from an election court’s decision, are further circumscribed by Section 85A of the Elections Act which limits appeals to the Court of Appeal to matters of law only. It is therefore quite strange and improper that each of the seventeen grounds, without exception, commences with a standard expression “the judge erred in fact and law” or “the learned Judge erred in law and in fact.” Clearly the drafters of the memorandum did not have the legal provision in active contemplation. Had they done so, they would have found that by invoking factual errors, they were inviting jurisdictional objections to their entire appeal.”
46. As found by the Court of Appeal in the above case, it would appear that equally, in the present case, learned counsel for the Commissioner did not have the provisions of section 56(2) of the TPA when drafting the appeal.
47. The Court of Appeal in the case of M’Riungu v. Republic [1983] KLR 455, gave guidance on how to proceed in an appeal on points of law thus:
“where a right of appeal is confined to question of law, an appellate court has loyalty to accept the findings of fact of the lower court(s) and resist the temptation to treat findings of fact as holdings of fact and law and it should not interfere with the decision of the trial court or the first appellate court unless it is apparent that on evidence, no reasonable tribunal could have reached that conclusion, which would be the same as holding that the decision is bad in law”.
48. The appellate court may however, interfere with the findings of the trial court where it is demonstrated that there was no evidence at all upon which such findings were based or that the evidence relied upon was of such a nature that no reasonable tribunal, properly addressing its mind on it, could have made such findings as has been held in numerous decisions. (see for instance Bashir Haji Abdullahi v Adan Mohammed Nooru & 3 others [2014] eKLR.
49. Even then, I note that other than attacking the manner in which the grounds of appeal are set out as referring to both issues of law and fact, learned counsel for Inchcape has not pointed out in the submissions the particular issues of fact that the Commissioner is raising in its appeal. The submission therefore, only serves as a reminder to this court to bear in mind the statutory provisions to which the appeal is confined. That is still useful albeit to a limited degree.
50. Therefore, on any issue raised in the appeal that touches on facts, this court is not bound to upset the findings of the trial court unless it was a misapplication of the law to the facts.
51. I have considered the grounds of appeal as set out by the Commissioner in its memorandum and I find that all of them are on issues of law.
52. The issue of whether the Commissioner’s assessment of PAYE and VAT for the period before March 2018 were unlawful and not justified is one of law because the law under section 31(4) of the TPA provides for a time limit of five (5) years within which the same should be conducted. The issue of whether or not the amended assessment by the Commissioner fell within this timeframe is one of law.
53. The issue of whether or not the Commissioner’s evidence and submissions tendered before the Tribunal was or was not considered by the Tribunal is equally an issue of law because this court is required to consider whether the Tribunal properly appreciated and evaluated the evidence before it, before arriving at its conclusions.
54. Finally, the issue of whether the Tribunal properly applied the law to the facts before it is also an issue of law.
55. Consequently, I find that this court has jurisdiction to consider the appeal filed by the Commissioner.
56. For its appeal through the memorandum dated 25th December 2024, the Commissioner raised the following single issue for determination in its submissions:
a. Whether the Honourable Tribunal erred in law and fact in finding that the Appellant’s (Commissioner’s) assessment of PAYE and VAT for the tax periods before March 2018 were unlawful and unjustified.
57. In its submissions to the appeal by the Commissioner, Inchcape submits that, from the Commissioner’s memorandum of appeal dated 25th December 2024, the issues for determination are as follows:
a. Whether the Tribunal erred in law and fact in finding that the Appellant''s (Commissioner’s) assessment of PAYE and VAT for the tax periods before March 2018 were unlawful and unjustified.
b. Whether the Tribunal erred in law and fact by failing to consider the evidence adduced by the appellant.
c. Whether the Tribunal misapplied the law and facts therefore arriving at the wrong decision in setting aside the appellant''s decision.
d. Whether the Tribunal erred in law and fact in failing to consider the appellant''s response and submissions in its findings.
58. From their stated issues for determination, both parties agree that the main issue for determination in the Commissioner’s appeal is whether or not the TAT erred in law and in fact in finding that the Appellant''s (Commissioner’s) assessment of PAYE and VAT for the tax periods before March 2018 were unlawful and unjustified. Issues (b), (c), and (d) raised in Inchcape’s submissions are clearly within that main issue for determination.
59. In its submissions dated 17th June 2025, Inchcape raised the following issues for determination:
a. Whether the Tribunal erred in law in upholding the respondent''s Pay as You Earn (PAYE) assessment for the periods succeeding March 2018 in the sum of KShs. 1,538,745.
b. Whether expenses which the appellant had claimed input VAT on were incidental costs incurred by the appellant in its ordinary course of business and not costs incurred by its principal.
c. Whether the Tribunal erred in law in holding that the appellant failed to satisfy the requirements provided under section 17 of the Value Added Tax Act, 2013 in claiming input tax incurred on its purchases.
d. Whether the Tribunal erred in law in failing to uphold the distinctiveness of the purchases made by the appellant in the course of its business and as a distinct entity separate from its principal
60. On its part, the Commissioner raised the following issues for determination on Inchcape’s appeal:
a. Whether parties had consented to the issue of PAYE.
b. Whether the Application for VAT refund was validly rejected.
c. Whether the Respondent’s objection decision considered all the information presented by the Appellant.
61. Issues (b) and (c) above raised by the Commissioner seem to me to be misplaced and should have been for the TAT’s determination. The only issue for determination raised by the Commissioner is therefore whether parties had consented to the issue of PAYE. Considered together with issue (a) above raised by Inchcape, the issue becomes:
a. whether the Tribunal erred in law in upholding the respondent''s Pay as You Earn (P
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