A High Court has rejected a Sh943.14 million tax claim by the Kenya Revenue Authority (KRA) against oil marketer, Libya Oil Kenya (presently Ola Kenya), saying it is ‘not anchored in law’.
High Court judge Josephine Mongare said KRA’s tax demand on product gains on petroleum import products by Libya Oil was improper because there is no provision for the levy in law.
“It is the court’s view that indeed both parties acknowledge that there are product gains and losses resulting from the petroleum products after the duties and taxes have been paid when the goods are imported for home use,” said the judge.
“However, the court finds that there is no law upon which the product gains are anchored. In a nutshell, the import duty and levies on product gains are not anchored in law and this goes against the rules of statutory interpretation when interpreting a taxing statute.”
Product gains and losses are the difference between deliveries and receipts, adjusted for inventory changes, experienced by a system over a given period. Losses may be caused by leaks, evaporation, theft, admixture, or shrinkage. On the other hand, gains could be product expansion due to temperature changes or the entry of previously unmeasured products.
The court decision follows a tussle between KRA and the oil marketer, which began after the taxman conducted a transfer pricing review on the firm for the years 2012 to 2014 and issued preliminary audit findings on December 5, 2016.
Subsequently, Libya Oil received a notice of assessment of tax for the years 2010 to 2016, amounting to Sh10,074,047,904 in line with Section 31 of the Tax Procedures Act.
Court records show that a partial settlement was reached by both parties on some tax issues, leading to an agreement on November 30, 2020, to submit the principal tax assessment of Sh943,142,856 on product gains to the Tax Appeals Tribunal (TAT) for determination.
The tribunal rendered its judgment in favour of Libya Oil. Aggrieved by the TAT’s judgment, the KRA filed an appeal on June 25, 2021, claiming the tribunal erred in law and did not appreciate the difference between customs entry and clearance.
KRA further claimed that the tribunal erred in law and failed to note that the product gains are entered under a new manifest called a zero manifest and a new entry made that is different from the original entry and hence is subject to import duties.
“The tribunal erred in law and fact in not appreciating that the duty was paid based on the declared volumes and the same released and the new entry was subject to duty,” the KRA also said in its submissions.
Justice Mongare, however, said the taxman failed to state the law under which the product gains would be taxed.
