Cipla Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E620 of 2024) [2025] KETAT 230 (KLR) (9 May 2025) (Judgment)

Key Facts

Tax Type

Issues

• Whether the Respondent contravened Section 31(8) of the Tax Procedures Act (TPA) by failing to specify penalties and interest in the amended assessment, thereby rendering it defective.
• Whether the Appellant discharged its burden of proving that the Respondent's objection decision dated 6th May 2024 was incorrect or ought to have been made differently under Section 56(1) of the TPA.

Tax Years

• 2022
• 2021

Holdings

• The Respondent admitted erroneously including vacated corporate income tax on marketing costs (Kshs. 24,683,209.00) in its objection decision. The Tribunal corrected this by vacating the amount, acknowledging the Respondent's own admission of error.
• The Respondent's disallowance of employment costs (Kshs. 116,047,841.00 and Kshs. 157,878,471.00) for 2021 and 2022 was set aside. The Appellant provided employee lists, PINs, and payroll details, which the Respondent failed to review adequately.
• The Appellant's operating expenses (Kshs. 32,076,539.00) for destroying expired stock were deemed allowable. The Respondent did not verify the provided certificates of disposal and invoices from the logistics partner.
• The Tribunal found the Appellant's costs of sales (Kshs. 122,893,297.00) were incurred and supported by provided import declarations and inventory reconciliation. The Respondent's disallowance was based on failure to review these documents.
• The PAYE assessment on consultancy costs (Kshs. 39,124,068.00) to Martin Sweeney and Ben Walker was upheld. The Appellant only provided a consultancy agreement with a South African entity, not sufficient proof that the individuals were consultants rather than employees.
• The Tribunal set aside assessments related to intercompany cross charge income, revenue, marketing costs, cost of sales, operating expenses, and VAT. The Appellant provided evidence of these expenses, and the Respondent failed to review the supporting documentation. However, the PAYE assessment on consultancy costs was upheld due to insufficient proof that the individuals were consultants rather than employees.

Remedies

• The Appeal be and is hereby partially allowed.
• The Respondent's objection decision dated 6th May 2024 be and is hereby varied: assessments in relation to intercompany cross charge income, revenue, marketing costs, cost of sales, operating expenses and VAT be and are hereby set aside.
• The PAYE assessment of Ksh 39,124,068.00 in relation to consultancy costs be and is hereby upheld.
• Each party to bear its own cost.

Tax Issue Category

• Deductibility / Allowances
• Other
• Transfer Pricing
• Withholding-Tax Characterisation
• Input Vs. Output Vat

Legal Principles

• Under Section 56(1) of the Tax Procedures Act, the Tribunal emphasized that the taxpayer bears the burden of proving the Commissioner's decision was incorrect or ought to have been made differently. This principle was central to evaluating the Appellant's claims.
• The Tribunal found that the Respondent's assessments dated 13th February 2024 complied with Section 31(8) of the Tax Procedures Act. The principle of the rule of law was applied to ensure administrative actions adhered to mandatory statutory requirements.
• The Tribunal referenced Article 47 of the Constitution of Kenya, 2010, which guarantees the right to administrative action that is expeditious, efficient, lawful, reasonable, and procedurally fair. The Appellant argued the Respondent's overlapping audits and failure to review documents violated this principle.
• The Tribunal cited the principle of res judicata in TAT Appeal No. 338 of 2024, noting that the refund decision dated 7th February 2024 had already been determined as final, and thus the Appellant's current appeal could not re-litigate that decision.
• The Tribunal applied the principle of substance over form to determine whether costs of sales, operating expenses, and intercompany cross-charge income were allowable deductions, focusing on actual incurred expenses rather than mere classification.

Disputed Tax Amount

Precedent Name

• Sukari Investments Limited vs Commissioner of Domestic Taxes
• Eldoret Aviation Limited vs Kenya Revenue Authority
• Rooser Roofing East Africa Limited v Commissioner of Investigations
• Anne Wanjiku Kahwai & another v Kenya Revenue Authority
• Kollengode Venkatachala Laksminarayan vs Intex Construction Limited
• Mulherin v Commissioner of Taxation
• William O'Dwyer and Sloan O'Dwyer v Commissioner of Internal Revenue
• Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya

Cited Statute

• Tax Procedures Act, CAP 469B
• Value Added Tax Act, CAP 476
• Income Tax Act, CAP 470
• Kenya Revenue Authority Act, CAP 469
• Constitution of Kenya, 2010

Judge Name

• Christine A. Muga
• Eunice N. Ng'ang'a
• Boniface K. Terer
• Elishah N. Njeru
• Spencer S. Ololchike

Passage Text

• The Tribunal notes that the Respondent disallowed charges relating to employee payroll costs amounting to Kshs. 30,471,679.00 on the basis that documentary support was not provided by the Appellant. However, the Tribunal has sighted the Agreement that the Appellant has with Surgipharm as well as the invoices through which it reimbursed Surgipharm for its staff costs.
• The Tribunal cites the cases of Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR; William O'Dwyer and Sloan O'Dwyer v Commissioner of Internal Revenue 266 F.2d 575; and Mulherin v Commissioner of Taxation [2013] FCAFC 115 where courts held that the Appellant has a duty to prove that an assessment was incorrect.
• The Tribunal finds that the Appellant in the instant Appeal partially discharged its burden of proving that the Respondent's objection decision dated 6th May, 2024 was incorrect or ought to have been made differently.