The Court of Appeal has set aside a Sh37.7 million tax demand against BTB Insurance Brokers, ruling that the company was denied its constitutional right to a fair hearing when it challenged the demand by the Kenya Revenue Authority (KRA).
A three-judge bench ordered the dispute to be heard afresh before the Tax Appeals Tribunal, saying the tribunal determined the substantive tax appeal without allowing the parties to argue the issues raised by the insurance broker.
The appellate judges held that the tribunal had only heard arguments on a preliminary objection over whether the case was barred by the doctrine of res judicata, but instead proceeded to determine the entire appeal on its merits.
The doctrine of res judicata (Latin for “a matter judged”) is a legal rule stopping parties from re-litigating a claim or issue that a court of competent jurisdiction has already decided.
Clients seeking services at KRA headquarters, Times Tower, Nairobi.
Photo credit: File | Nation Media Group
"As we have confirmed from the proceedings, and as alluded to by the learned judge herself, it is apparent that the substantive appeal was not heard before the tribunal delivered its judgment," the judges said.
The court added that the parties had expected a ruling on the preliminary objection but "instead received an answer on an appeal that they had not argued."
According to the judges, the tribunal's actions violated both Section 26 of the Tax Appeals Tribunal Act and Article 50(1) of the Constitution, which guarantees every person the right to a fair hearing.
"Failure to give the appellant an opportunity to submit and be heard on the substantive appeal not only contravened the express provisions of section 26 of the Tax Appeals Tribunal Act but also the constitutional right to a fair hearing," the court said.
The judges faulted the High Court for failing to recognise the violation when it upheld the tribunal's decision in April 2020.
"Given that the action of the tribunal violated the sacrosanct right to a fair hearing, we see no need to delve into the merits of the other grounds of appeal. The only recourse at this point is to return the matter to the tribunal for hearing and determination of the substantive issues on merit," the court ruled.
The dispute stems from a KRA audit covering the period between July 2013 and September 2014. The tax authority concluded that BTB Insurance Brokers earned commission income of Sh293.7 million that had not been subjected to excise duty and issued an assessment demanding Sh37.8 million in unpaid taxes.
After the Tax Appeals Tribunal dismissed the company's appeal in 2016, the High Court upheld the decision, prompting the appeal.
The case revolves around who bears the legal obligation to charge and remit excise duty on insurance transactions.
BTB argued that the liability rests with insurance companies because they issue premium invoices to customers, collect the premiums, and are therefore the suppliers of the excisable service under the Customs and Excise Duty Act and the Finance Act, 2013.
The broker maintained that it merely earns commissions after insurers collect premiums and does not invoice customers or collect the excise duty. It warned that KRA's interpretation could result in double taxation by requiring brokers to pay tax on transactions where insurers have already accounted for the duty.
The company further argued that, as a licensed insurance broker, it does not fall within the category of financial institutions contemplated by the Finance Act amendments imposing excise duty on fees charged for financial services.
KRA, however, maintained that the amendments to the law placed the obligation to account for excise duty on the broker.
