[2023] KETAT 1005 (KLR)

Absa Bank Kenya PLC v Commissioner of Domestic Taxes (Tax Appeal 436 of 2022) [2023] KETAT 1005 (KLR) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 1005 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 436 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

September 15, 2023

Between

Absa Bank Kenya PLC

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act and licensed under the Banking Act and a registered taxpayer. Its principal activity is providing banking services and its main sources of income are interest, fees and commissions, foreign exchange and other income.

2. The Respondents is a principal officer appointed under the Kenya Revenue Authority Act, Cap 460 laws of Kenya, the Kenya Revenue Authourity is charged with the authority to administer and enforce all provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with the law.

3. The Respondent conducted an audit on the Appellant and issued an assessment notice relating to withholding tax (WHT) on transaction fees and interchange fees for the period between 2017 to 2020 on 24th December 2021 amounting to Kshs.1,108,302,922. 00.

4. The Appellant objected to the assessment vide a notice of objection dated 21st January 2022 and the Respondent issued an objection decision confirming the assessment on 18th March 2022.

5. The Appellant aggrieved by the objection decision filed its Notice of Appeal on 14th April 2022.

The Appeal 6. The Appeal is premised on the Memorandum of Appeal dated and filed on 28th April 2022 setting out the grounds of appeal as hereunder:a)That the Respondent erred in law and in fact in confirming an overstated and excessive assessment.b)That the Respondent erred in fact and in law in concluding that the Issuing Bank provides services to the Acquiring Bankc)That the Respondent erred in fact and in law in not concluding that it is the merchant that incurs the cost of and pays all the parties in a card payment transaction.d)That the Respondent erred in fact and law in concluding that the services offered by the Issuing Bank constitute managerial services.e)That the Respondent erred in concluding that the assessment/transaction fees constitute payment for a royalty.f)That the assessment with respect to the period 1st January 2017 to 7th November 2019 is without legal basis and is contrary to Article 210 of the Constitution.g)That the Respondent erred in only relying on the Court of Appeal decision in Civil Appeal No. 195 of 2017 (Commissioner of Domestic Taxes v Barclays Bank of Kenya) in raising the assessment.

The Appellant's Case 7. The Appellant’s case is premised on the following documents:-a)The Appellant’s Statement of Facts dated and filed on 28th April 2022 together with the document attached thereto.b)The Appellant’s written Submissions dated and filed on 23rd November 2022 together with the legal authorities filed therewith.

8. The Appellant averred that the entire assessment arose out of payments earned by the various players in a card payment transaction and it is therefore important to clarify the parties involved in a card payment transaction and the events that take place during a card payment transaction.

9. That in a card payment transaction, there are three principal parties involved, namely:i)The acquiring bank ("Acquiring Bank" or "Acquirer " or "Merchant Bank") this is a bank that signs up merchants and provides them with Point of Sale ("POS") equipment, commonly referred to as PDQ machines, which are used for processing credit or debit card payments. The acquiring bank also establishes and maintains the relationship with the merchant through the Merchant Service Agreement ("MSA") which sets out the terms of the arrangement;ii)The issuing bank ("Issuing Bank" or "Issuer") - this is any bank that issues credit and debit cards to its customers ("cardholders"). The issuing bank issues VISA, American Express or MasterCard branded cards to its customers depending on which Card Company the issuing bank is affiliated to;iii)The card companies, for example VISA, MasterCard or American Express ("Card Companies") which own and operate the data processing networks that transfer transaction data and facilitate payment flows between the issuing bank and the acquiring bank.

10. That the card payment transaction typically follows the process set out below:“The process starts when a cardholder goes to a merchant (for example a supermarket) and uses the card issued to him by the Issuing Bank to pay for goods or services he purchases from the merchant ("Purchase Transaction"). The merchant swipes the card on a PDQ machine supplied to it by the Acquiring Bank which has been configured to accept the relevant card.”

11. The Appellant set out the events that take place in a card payment transaction as below:Step 1-Authorisation:Authorization is the process of approving or declining a transaction before a purchase is finalized. If the payment is authorized, the merchant's sale is processed. Should there be no funds in a cardholder's bank account with the issuing bank, the issuing bank will not authorize the payment request and transaction and, accordingly, the card payment will be declined. In that case, no income accrues to either the issuing bank, the acquiring bank, or the card companies. Where the cardholder has sufficient funds or a credit limit with its issuing bank, the payment and thus the purchase transaction will be finalized and, accordingly, the merchant will allow the cardholder to take the goods purchased.Step 2-Batching:At the end of the day, the merchant collates all the day's authorized card sales and sends the information to the acquiring bank.Step 3-Clearing:The acquiring bank formats information received from the merchant into a settlement and clearing message which it- transmits to the card company. The card company in turn routes the clearing message to the respective issuing banks and calculates the settlement obligation of the Issuers and the amount due to the acquiring bank net of certain fees and obligations.Step 4-Funding/Settlement:The issuing bank subtracts its interchange fee and the assessment fee payable to card companies and remits the remaining amount to the acquiring bank. After receiving payment of the settlement amount from the issuing bank, less the interchange fee and assessment fees deducted by card companies, the acquiring bank subtracts its acquiring bank fee and remits the balance to the merchant.

12. The Appellant argued that it is evident from the process set out above that the primary beneficiaries of card payment transactions are the cardholder and the merchant and that the entity that incurs the cost of the card payment transaction is the merchant.

13. The Appellant added that there are three parties who facilitate the card payment transaction and for which they earn fees for their respective roles and the same being the issuing bank which earns interchange fees; the card companies which earn assessment fees; and the acquiring bank which earns the acquiring bank fee.

14. That together, the three fees constitute the merchant service commission, which is charged to the merchant and the fees earned by each party represent their share of revenue for their distinct roles in the card payment transaction; and that at various times, the Appellant plays the role of either an issuing bank or an acquiring bank.

15. That in a card payment transaction, the three parties (the Issuer, the Acquirer, and the Card Companies) do not provide services to each other. That in case of a merchant who has an MSA with the bank, and a cardholder who holds an ABSA debit/credit card, the Appellant would in such instance be both the issuer and the acquirer.

16. The Appellant argued its case as per the grounds setout in the Memorandum of Appeal.

i) That the Respondent erred in law and in fact in confirming an overstated and excessive assessment 17. The Appellant averred that in the objection letter, the Appellant explained to the Respondent that its assessment was overstated and excessive for the reasons that the Respondent factored in ledger accounts which do not relate to interchange fees and assessment fees and the Respondent based its 2019 and 2020 assessment on interchange fees and its 2020 assessment on transaction fees on arbitrary estimates, that are erroneous and excessive.

18. That despite the Appellant highlighting this relevant issue in the objection and providing the applicable ledger accounts, transactions, analysis and documents that would aid the Respondent correct the quantum of its assessment, the Respondent disregarded the explanations and the Appellant’s grounds of objection in confirming the overstated assessment.

19. That the fact that the Respondent has not considered these ledgers and has not made any attempt to interrogate its assessment clearly displays a hurried and preconceived mindset to issue an elevated assessment without due regard to arriving at a correct position. That this mindset is again demonstrated by the Respondent' s dogged reliance on the Court of Appeal’s finding and complete unwillingness to even consider or even provide a response to the Appellant’s grounds of objection and explanations.

20. The Appellant averred that in the Respondent's objection decision and assessment, some of the ledger accounts which the Respondent assessed WHT on did not relate to interchange fees and assessment fees. That notably, the name and description of the ledgers was very clear on the transactions posted in the respective ledgers. That this would not have been the case had the Respondent spent sufficient time understanding the ledgers and information shared. That below here is the table of the ledgers that the Appellant averred should not have been factored in the assessment.

a) Interchange FeesGeneral ledger account Amount for 2018 & 2019 (Kshs) Detailed description

413010401 – Retail Fee Dispensation & Waiver 58,315,838 The transactions in the ledge do not constitute interchange as they relate to fees which are refundable to customer, if wrongly collected or disputed.

b) Assessment FeesGeneral ledger account Amount for 2017 - 2019 (Kshs) Detailed description

314020904 - Cards 378,689,793. 00 That this amount is not scheme fees as it relates to credit card lending fees, also known as loan processing or arrangement fees. That lending fees charged upon use of a credit card are collected upfront and amortized in accordance with Accounting Standards in order to spread the amount over the credit card period allowed under the credit card used.

413010406 – Local Visa Cash adv. Costs 2,431,567. 05 That this amount relates to cash advance fees paid to other banks when ABSA customers holding credit cards access cash in other bank ATMs in Kenya and thus not scheme fees.

413010407 – International Visa Cash adv. Costs 1,616,175. 15 That this amount relates to cash advance fees paid to foreign banks when ABSA customers access cash through foreign banks ATMs and thus not scheme fees.

413010409 – Cash advances Cost – Debit Card 39,724,720. 50 That this amount relates to cash advance fees paid to banks in Kenya when ABSA customers holding debit cards access cash in other bank ATMs in Kenya and thus not scheme fees.

426070403 – OTH-Sub Bank Membership - Other 131,015,965. 15 That this amount relates to Bank subscriptions for staff such as ICPAK and Kenya Bankers Association (KBA).

426070404 – OTH – Misc. Individual Membership 10,178,560. 05 That this amount relates to staff membership subscriptions such as ICPAK and Kenya Bankers Association (KBA).

426070713 – OTH – License Fees 180,617,232. 00 This amount relates to Central Bank and County Government Licenses which are not subject to WHT.

21. That in arriving at its assessment, the Respondent based its 2019 and 2020 figures on estimates and arbitrary lumpsum figures. That the lumpsum figures for 2019 and 2020 were arrived at by adding a 30% mark up on the interchange fees for 2018 and 2019. That this is an illegality as tax can only be assessed on actual transactions.

22. That the Respondent's attempt to markup the prior period figures by 30% to arrive at the 2019 and 2020 interchange and the 2020 assessment fees figures has no factual or legal basis. That it is a well-known fact that the Appellant's card business declined significantly in 2019 and 2020 due to the Covid 19 pandemic. That interchange fees with respect to international transactions was completely eroded due to the travel restrictions yet KRA seeks to increase the interchange fee figures by 30%.

23. That in tax matters, it is manifestly unfair for a tax authority to levy tax based on estimates. That Courts in Kenya have deprecated tax assessments that are based on estimated unverified numbers as was held in the cases of Keroche Industries Limited vs. Kenya Revenue Authority & 5 Others [2007] eKLR (the Keroche case) and R v KRA Ex-parte Jaffer Mujtab Mohammed [2015] e KLR.

24. That in the objection decision, the Respondent claimed that the Appellant failed to provide primary documents to support the objection. That what the Respondent failed to understand is that interchange and assessment fees are recorded in balance sheet accounts from which the Appellant extracted the figures provided to the Respondent in the objection.

25. That the information provided to the Respondent in the objection was complete and accurate and there was no further information required from the Appellant.

26. That the Appellant has recomputed the assessment by eliminating the GL breakdowns that do not relate to interchange fees and assessment fees and by inserting the actual interchange fees and assessment fees for the period in dispute, including 2019 and 2020. That the effect of this corrections is that the assessment is overstated and excessive and ought to be reduced from Kshs. 1, 108,302, 922. 00 to Kshs.738,238,927. 00.

27. The Appellant added that the re-computation does not amount to a concession that the re-computed amounts are subject to WHT.

ii) That the Respondent erred in fact and in law in concluding that the Issuing Bank provides service to the Acquiring bank. 28. That the Respondent contended in the assessment that the "the issuing banks provide to ABSA (acquiring bank) authorization, settlement and clearing services comprising of the following activities:i)Receiving the transaction information from the acquiring bank (or its processor) through the card systems network;ii)Checking to ensure, among others, that the transaction information is valid;iii)Checking to ensure the cardholder has sufficient balance to make the purchase;iv)Checking to ensure that the account is in good standing;v)Responding by approving or declining the transaction; andvi)Reimbursing the acquiring bank by sending funds to the acquiring bank

29. That the issuing bank does not provide the above stated services to the acquiring bank and the beneficiaries of the services provided by the Issuing bank are the issuing bank's customers i.e. the cardholder and the merchants.

30. That from the documents submitted by the Respondent in the Court of Appeal matter relied upon (by the Respondent), it is clear that it is the merchant that requests for authorization and it is the issuer who provides it. That the acquiring bank's role is to forward the merchant's request to VisaNet and once authorization is received to forward the response to the merchant which is the party that requested for authorization. That the Appellant does not originate the request for authorization, nor does it utilize it once received from the issuing bank. That it is therefore incorrect to allege that the authorization services are provided to the Acquiring Bank.

31. That the core function of an issuing bank in a card payment transaction is to operate its customers' accounts and instructions and this service commences when the issuing bank issues its customers with a card. That the service continues to when the issuing bank authorizes the transaction (initiated by its customer) and deducts funds from the cardholder's account to effect the payment to the merchant.

32. That there is also no contractual relationship between the issuing bank and the acquiring bank. That the interchange fees earned by the issuing banks are set by the card company and represent the share of the issuing bank's profit for the role performed in the card payment transaction. That there is no relationship between the issuing bank and the acquiring bank in respect of which a service can be said to be provided by the issuing bank to the acquiring bank.

33. That the above position was enunciated by the Tribunal in Barclays Bank of Kenya v Commissioner of Domestic Taxes, (Tax Appeal No. 137 of 2016) where the Tribunal stated that the services provided by the issuing bank are provided to its customers and not to the acquiring bank.

34. That the Respondent's contention that the issuing bank offers services to the acquiring bank for which it earns interchange fees is incorrect and is based on a misapprehension and/or misinterpretation of the issuing bank's role in a card payment transaction.

iii) The Respondent erred in fact and in law in not concluding that the merchant incurs the cost of and pays all the parties in a card payment transaction. 35. That the Respondent’s contention that the issuing banks earn interchange fees from the acquiring bank is wrong. That the acquiring bank will enter into an MSA with a merchant which will contain the merchant service commission comprising of the interchange fee (which is set by the card companies); the assessment fee (which is set by the card companies) and the acquiring bank fee (which is set by the acquirer).

36. The Appellant has annexed to its Statement of Facts a graphic illustration of the flow of transactions during a card transaction process and stated that a similar illustration was provided by the Respondent to the Court of Appeal in Civil Appeal No. 195 of 2017. That as per the Respondent’s illustration, it is clear that it is the merchant who pays all the parties and that the issuing bank first deducts its interchange fees before remitting the balance to the acquiring/merchant bank. That the acquiring bank in turn deducts its acquiring bank fee before remitting the funds to the merchant which will be less all the fees earned by the respective parties.

37. That from the above explanations, it is abundantly clear that the entity that incurs the entire cost of the various fees payable to the issuing bank, acquiring bank and the card company is the merchant and the bank is merely an agent and conduit of the amounts involved for which it should not be penalized with inapplicable taxes. That the amounts that the Respondent is seeking to tax are therefore paid by the merchant through the Merchant Service Commission.

iv) The Respondent erred in fact and law in concluding that the services offered by the issuing bank constitute managerial services. 38. That the Respondent's basis for the WHT assessment is set out in the assessment as follows:“We note that interchange fees amount to payment for managerial services since they constitute payment for sourcing cardholders, keeping their accounts and confirming the availability of credit to acquiring banks."

39. That the Respondent has then subjected the interchange fees earned by issuing banks to WHT as management or professional fees as per the provisions of Sections 35 (1) (a) and 35 (3) (f) of the Income Tax Act ("ITA").

40. That the Respondent's aforesaid conclusion is erroneous as the interchange fees earned by issuing banks are not in respect of any managerial services. That it is important to note that there is no contractual relationship between the issuing bank and the acquiring bank and the settlement of the transactions is governed by the specific card company rules.

41. That the ITA does not define the term "managerial fee". That one must adopt the plain meaning rule which provides that in the absence of contrary definition within the statute, words must be given their plain, ordinary, or literal meaning.

42. That the ordinary meaning of the term managerial services can be deduced from the following:i)In the Concise Oxford dictionary, the term managerial services is defined to mean rendering of services which involves controlling, directing, managing, or administering a business or part of a business or any other thing.ii)Justice Visram in his dissenting judgement in Stanbic Bank Kenya Limited v Kenya Revenue Authority [2009] eKLR, defined the term managerial services in a WHT dispute as follows:“A "manager", according to the Oxford English Dictionary is:“a person controlling or administering business; a person controlling activities of a person, team".The word "managerial" is, of course, the adjective to the noun Manager.Surely, it would be absurd to suggest that Reuters provided managerial services to Stanbic. It neither "controlled" nor "administered" Stanbic's business."iii)In Sunmatt Limited v Commissioner of Domestic Taxes [2020] eKLR the court defined Management services as follows: -“Management services herein would only arise if control or administration of the activities, of the Appellant was by somebody who was engaged to do so and was not an employee.”

43. That from the foregoing dictionary definitions and judicial interpretations of the term, a managerial service is one where a person controls another person's business or affairs.

44. That the services for which the issuing bank earns the interchange fee are performed for and on behalf of its customers as well as merchants and entail the transfer of money from a customer (cardholder) to a merchant over a network. That the issuing bank does not provide any service, including managerial services to the acquiring bank.

45. That in addition to the fact that an issuing bank's services are not provided to an acquiring bank, the issuing bank's authorization services do not constitute managerial functions. That consequently, the interchange fees earned by the issuing bank do not constitute a payment for a managerial service.

46. That arising from the foregoing, it’s clear that the issuing bank does not provide any service to the acquiring bank; the acquiring bank does not pay the issuing bank; and the services provided by the issuing bank are not managerial services. That the Respondent's principal WHT demand of Kshs. 287,312,554. 00 recomputed to Kshs. 188,047, 331. 00 is erroneous and ought to be set aside.

v) The Respondent erred in fact and law in concluding that the assessment/transaction fees constitute payment for a royalty. 47. The Appellant stated that the Respondent demanded WHT on the assessment fees earned by card companies. That the basis for the WHT assessment on the assessment fees is set out in the tax decision as follows:“Under the above agreements, ABSA pays the card companies' transaction fees to enable it to access the Card Companies' network through its systems. ABSA benefits from access to technical know-how, and the formula or process through which it conducts its business. Therefore, the transaction fees amount to payments for the use or right to use a patent, trademark, or the card companies' network. In view of this, the transaction fees paid by ABSA to card companies constitute royalty as defined under Section 2 of the ITA.”

48. That the Respondent's contention that issuing banks or acquiring banks pay card companies transaction fees for accessing the network is incorrect. That the role of a card company in a card payment transaction is to facilitate the transfer of money between merchants and card issuer and in so doing the card companies have created a payment platform and infrastructure for processing consumers' credit or debit card transactions. That the assessment fees earned by a Card Company is its share of the fees for the roles it plays in the card payment transaction and which primarily entails transferring payment and settlement instructions and process between the issuing bank and acquiring bank and clearing of transactions.

49. That the term “royalty" is defined in Section 2 of the ITA to mean a payment made as a consideration for the use of or the right to use-(a)any copyright of a literary, artistic, or scientific work; or(b)any cinematograph film, including film or tape for radio or television broadcasting; or(c)any patent, trademark, design or model, plan, formula, or process

50. That it is clear from definition (c) above that in order to be classified as a royalty, a payment must be for the use of or the right to use a trademark. That the assessment fees earned by the card companies are not payments for the use or the right to use trademarks but are the card companies' share of profits for their roles in the card payment transaction.

51. That the card companies logos are pre-printed on the debit/credit cards issued to customers and they merely serve as identifiers of the payment network processing the transaction. That the acquiring bank and the issuing bank do not utilize or require use of the card companies' trademarks in the card payment transactions and the Respondent's contention that the trademarks allow the Appellant access and use of the card company's networks is therefore erroneous.

52. The Appellant also argued that without prejudice to the foregoing, the Trademark License- Agreement between the Bank and AMEX and the Card Member License Agreement with Mastercard, the agreements explicitly state that the respective card companies will not charge a royalty for the use of their trademarks. That the Respondent's assessment is tantamount to the Respondent re-writing the contracts between the parties and is therefore an affront to the principle of freedom of contract which allows parties to decide on the terms and obligations that will guide their relationship.

53. The Appellant also averred that it is common ground that the issuing bank earns an interchange fee for its role in a card payment transaction. The Respondent's argument that it pays the assessment fee to the card company would imply that the assessment fee is a component of and is paid out of the interchange fee and which is incorrect. That both the assessment fee and the interchange fee are separate and distinct components of the merchant service commission, and therefore the Respondent's contention is erroneous.

54. The Appellant argued that from the foregoing submissions, it is evident that the assessment fees paid to the card companies are the card companies' share of profits for their role in the transaction and not payments for the use of the trademarks. That the assessment fees are not royalty payments and the Respondent's WHT assessment on royalties should be vacated accordingly.

vi) The assessment with respect to the period 1st January 2017 to 7th November 2019 is without legal basis and is contrary to Article 210 of the Constitution. 55. The Appellant also averred that without prejudice to its earlier grounds of the Appeal that WHT is not due on interchange fees and assessment fees at all, the assessment is illegal.

56. The Appellant argued that in the objection decision, the Respondent has relied on the repealed Section 35 (6) of the TPA and the WHT Rules. That the only provision in the ITA that allowed the Respondent to recover WHT not purportedly deducted by a person, as if it was tax due from that person was Section 35 (6) which was repealed in 2016.

57. That the Tribunal has pronounced itself on the issue of whether the Respondent can rely on Section 35 (6) in Pevans East Africa Limited v Commissioner of Domestic Taxes (Tax Appeal No. 304 of 2019). That the Tribunal held that WHT could not be collected from the person required to make the deduction in the absence of Section 35 (6) of the ITA.

58. That in the objection decision, the Respondent has attempted to rely on the Interpretation and General Provisions Act to justify its attempt to collect WHT from the Appellant. That the Respondent failed to realize that the specific provision relates to acts that occurred during the pendency of the said provision and cannot be used as a basis for invoking the powers of a provision that has already been repealed. That the Respondent cannot use the provisions of the Interpretations and General Provisions Act to assess tax using a non-existent provision.

59. The Appellant added that tax statutes are to be interpreted strictly and that pursuant to Article 210 of the Constitution, taxes can only be imposed as provided by legislation. That in the absence of legislation empowering the Respondent to collect WHT from the person deducting it as if it were tax due from the Appellant, the Respondent cannot collect tax from the Appellant.

60. That the Respondent's reliance on the WHT Rules to attempt to justify its assessment is also misplaced. That the WHT Rules were issued under Section 130 of the ITA which provides as follows:“The Minister may make rules prescribing anything, which is to be prescribed under, and generally carrying out the provisions of this Act.”

61. That the purpose of the rules are to aid in carrying out the provisions of the Act. That without the relevant substantive provision of the Act, which Parliament repealed, the rules became spent and without any force of law. That any attempt therefore to rely on the WHT rules, which have no force of law without the relevant provision of the Act, is without legal basis.

62. That the only other provision the Respondent could have relied upon to collect WHT from the Appellant is Section 39 A of the Tax Procedures Act (“TPA"), but it could only do so from 7th November 2019 when the provision was introduced. That it could not however, rely on this or any other provision to demand tax from the Appellant for the period January 2017 to 6th November 2019 when no law supporting such action existed.

63. That the legal framework was introduced by dint of an amendment by Finance Act, 2019 which introduced Section 39 A of the TPA with effect from 7th November 2019. That any attempt to apply Section 39 A to a period before 7th November 2019 is therefore unconstitutional as it runs contrary to Article 2010 of the Constitution.

64. That the Respondent cannot therefore seek to recover the alleged deficit withholding taxes from the Appellant for any period before 7th November 2019 and the assessment for the period January 2017 to 7th November 2019 should be vacated.

vii) The Respondent erred in only relying on the Court of Appeal decision in Civil Appeal No. 195 Of 2017 (Commissioner of Domestic Taxes vs Barclays Bank of Kenya) in raising the assessment. 65. That the Respondent's assessment and objection decision is based entirely on the findings of the Court of Appeal in its judgement in Civil Appeal No. 195 of 2017 (Commissioner of Domestic Taxes v Barclays Bank of Kenya).

66. That the Appeal giving rise to the above decision emanated from the judgment of the High Court in Miscellaneous Civil Application No. 46 of 2013. That the same being judicial review proceedings, the High Court expressly stated that it was concerned with the decision-making process and not with the merits of the decision. That the determination by the High Court was therefore limited to considering whether KRA had specified in its decision which category of service was being provided by the issuing banks. That the High Court did not consider or make a finding on the nature of the said payments and whether they amounted to professional or management services or royalties that would be subject to WHT.

67. That in the High Court judicial review proceedings, the Judge faulted the Respondent for failing to distinguish which category the services fell into within the meaning of "professional or management fees" as set out in the ITA. That on this basis, and without going into the merits of the decision, the High Court Judge held that the Respondent erred in raising the assessment and quashed the same. That the Respondent appealed against the said decision to the Court of Appeal.

68. That in the Court of Appeal, the Court went beyond the issue determined by the High Court and made a finding on the merits.

69. That is trite law that the Court of Appeal in exercise of its appellate jurisdiction can only determine issues which have gone through the hierarchy of Courts (doctrine of ripeness).That to the the extent that the Court of Appeal dealt with matters which had not been determined on merit by the High Court, its decision that the payments made to card companies were royalties and interchange fees paid to issuing banks were for management or professional services is per incuriam as the said issues were not determined by the High Court. That the decision therefore does not reflect the position in law and ought not to be relied upon by the Respondent.

70. That it should also be noted that the proceedings in the High Court were judicial review proceedings and in view of the limited scope of judicial review, not all material relating to the processes, functions, and obligations of various parties in a card payment transaction was availed to the Court as the proceedings were limited to the process and not the merits of the assessment. That had the Court of Appeal had the benefit of all information relating to the card payment process, it would have likely reached a different conclusion.

71. That without prejudice to the foregoing, the scenario contemplated in the- Judgment of the Court of Appeal can be distinguished from the present case since the issues arising here include novel and distinct issues which were not the subject matter of Civil Appeal No. 195 of 2017. The additional issues for consideration in relation to the present objection decision include;a)Who are the beneficiaries of the services rendered by the issuing bank?b)Whether the Respondent's conclusion that the issuing bank renders a service to the acquiring bank is correct?c)Who incurs the cost of the assessment and interchange fees?d)Whether there is a legal relationship giving rise to tax liability between the issuing bank and the acquiring bank?

72. That the Court of Appeal did not consider or make a final or conclusive determination on the aforesaid issues which if considered. may have had a material effect on the finding and its decision cannot be binding on issues that were not determined. That the Respondent's objection decision confirming the WHT assessment on interchange fees and assessment fees ought to be quashed.

Appellant’s Prayers 73. The Appellant prayed that:a)The Appeal be allowed.b)The Tribunal be pleased to find:i)That the Respondent's assessment is overstated and excessive and issue an order compelling the Respondent to amend the assessment.ii)That the issuing bank does not provide any service to the acquiring bank;iii)That it is the merchant who pays all the parties in a card payment transaction;iv)That the services offered by the issuing bank do not constitute managerial services and therefore are not subject to withholding tax (WHT);v)That the assessment/transaction fees do not constitute payment for a royalty;vi)That the assessment with respect to the period 1st January 2017 to 7th November 2019 is without legal basis and is contrary to Article 210 of the Constitution; andvii)That the Respondent erred in only relying on the Court of Appeal decision in Civil Appeal No. 195 of 2017 (Commissioner of Domestic Taxes vs. Barclays Bank of Kenya) in confirming the Assessment.c)The costs of the Appeal be awarded to the Appellant.

The Respondent's Case 74. The Respondent’s case is set on the following documents;a)The Respondent’s Statement of Facts dated and filed on 26th May 2021. b)The Respondent’s written submissions dated and filed on 23rd November 2022.

75. The Respondent stated that in response to grounds one and two of the Memorandum of Appeal, the Respondent averred that the assessment was based on trial balances provided by the Appellant. That the Appellant was on several occasions requested to produce the records for review including trial balances and schedules of merchant services earned, interchange fees paid, assessments and dues paid to card companies and evidence of payment of excise duty, withholding income taxes and value assessed tax on the above transactions. That the Appellant only provided the trial balances and the rest of information was not availed despite several reminders.

76. That the Court of Appeal in the case of Domestic Taxes (Large Tax Payer Office) v Barclays Bank of Kenya Ltd (Appeal No. 195 of 2017), pronounced judgement on the applicability of withholding income tax ("WHT") and held as follows:“In the transactions we have described above, there are clear coordination, managerial, professional, and contractual services rendered by the issuer to the acquirer, for which the Iatter pays. In our view, the Appellant proved that those payments by the Respondent in its capacity as acquirer to the issuer banks, satisfy the definition of management and professional fees as defined in section 2 of the Act."

77. That in the judgement, the Court of Appeal held that withholding tax (WHT) is applicable on transaction fees (broadly referred to as payments to card companies in the judgment) paid by acquiring and issuing banks to global credit and debit card companies, such as Visa International Card Services Association, MasterCard, Inc., and American Express Limited ("the Card- Companies") on the basis that they amount to royalty payments pursuant to Section 2 of the Income Tax Act ("ITA").

78. That the Court further held that interchange fees payable by acquiring banks to issuing banks constitute management or professional fees, as defined under Section 2 of the ITA, and are therefore subject to WHT in Kenya pursuant to Section 35 of the ITA.

79. That the Court held that both transaction fees and interchange fees ought to be subjected to WHT in Kenya as royalty payments and management or professional fees, respectively. That the definition of royalties per Kenyan tax legislation was wide and without ambiguity, and appropriately captured, transaction payments made by the bank to card companies.

80. That the transaction fees afforded the bank the use of the card companies' trademarks and logos through which it gained access to the card companies' network for the benefit of its business, therefore falling squarely within the confines of royalty payments.

81. That the interchange fees paid by the bank to issuing banks fell within the ambit of management or professional fees and was therefore subject to WHT in Kenya. That the Court was of the view that services provided by acquiring banks that give rise to interchange fees encompass all aspects of management or professional fees including managerial, technical, agency, contractual, professional, and consultancy services which are subject to WHT in Kenya pursuant to Section 35 of the Income Tax Act. That the Court further held that payments made by ABSA to credit card companies were royalties thus subject to a 20 per cent withholding tax.

82. The Respondent in response to the ground that the Respondent erred by concluding that it is the merchant that incurs the cost of and pays all the parties in a card payment transaction, the Respondent noted that when a transaction takes place, the Appellant pays the retailer the value of the transaction after deduction of merchant service charge that will include several components including interchange fees, processing costs, terminal and rental.

83. That the merchant only enters into an agreement with the acquiring bank (Appellant) and is not privy to information about the other parties in the transaction. That the information on the other parties in the transaction is under the custody of the Appellant, the acquiring bank. That the responsibility to deduct and remit withholding tax on payments to these other parties squarely rests with the Appellant. That the Respondent therefore disagrees with the Appellant's contention that it is the merchants who pay all the parties in a card payment transaction.

84. In response to the ground that the Respondent erred by concluding that the services offered by the issuing bank constitute managerial services, the Respondent averred that issuing banks provide authorization, settlement and clearing service to the Appellant. That the services comprise a composite service in the form of authorization, clearing and settlement service that begins from when an authorization request is sent by the Appellant to the issuing bank and is completed when the issuing bank settles the account with the Appellant. That from the performance of the above services, the issuing bank earns interchange fees from the Appellant.

85. The Respondent also noted that the interchange fee is a transaction governed by the operating rules of various card schemes companies and is paid as part of the payment processing fee by the acquirer to the issuer. That consequently, the interchange fee amounts to management or professional fees as defined under Section 2 of the Income Tax Act.

86. The Respondent in response to the ground that it erred in concluding that the assessment/transaction fees constitute payment for a royalty; the Respondent assertted that the debit and credit cards issued by the Appellant and issuing banks to their customers bear the logo and trademarks of the respective card companies which allows the bank access and use of the card company's networks.

87. The Respondent argued that the Appellant benefits from access to technical know-how, and the formula or process through which it conducts its business. That the transactions fees amounts to payments for the use or right to use a patents, trademark or the card companies' network. That the transaction fee paid by the Appellant to card companies constitute royalty as defined under Section 2 of the Income Tax Act as correctly pointed out by the Respondent.

88. The Respondent in response to the ground that the assessment for the period 1st January 2017 to 7th November 2019 is without legal basis and is contrary to Article 210 of the Constitution, the Respondent averred that the repeal was only on part of Section 35 (a subsection). That Section 23 (3) (b) of the Interpretation and General Provisions Act, (Chapter 2 of the Laws of Kenya) provides that:“Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears the repeal shall not –(b)affect the previous operation of a written law so repealed or anything duly done or suffered under a written law so repealed"

89. That after repealing of Section 35 (6) of the ITA in 2016, Section 35 (5) of the Act was retained with clearly stated obligations to the Appellant in relation to Withholding tax. That Rules 8,9,10 and 14 of the Income Tax (Withholding Tax) were still in force. That the Appellant was therefore under statutory obligation to withhold and account for tax withheld.

90. The Appellant in response to the ground that the Respondent erred on relying on the Court of Appeal decision in Civil Appeal No. 195 of 2017 (Commissioner of Domestic Taxes v Barclays Bank of Kenya) the Respondent averred that the decision is binding as it has not been overturned.

Respondent’s Prayers 91. The Respondent prayed that the Tribunal do:a)Uphold the Respondent’s objection decision dated 18th March 2022. b)Awards the costs of the Appeal to the Respondent.

Issues for Determination 92. The Tribunal has considered the evidence presented in the matter, pleadings and submissions by the parties and determined that there are three issues for determination as hereinunder.a)Whether the Interchange Fees and the Transaction Fees are subject to WHT.b)Whether the Appellant was liable for WHT for the period between 1st January 2017 and 7th November 2019. c)Whether the Respondent’s assessment on the Appellant for WHT was justified.

Analysis and Findings 93. The Tribunal having identified the issues for determination proceeds to analyze the same as herein under;

a) Whether the Interchange fees and the Transaction fees are subject to WHT. 94. The objection decision issued in the matter comprised of WHT on interchange fees and transaction fees as a liability of the Appellant.

95. The Appellant argued that it was not liable to pay the tax on the two heads and offered various reasons in support of its case as can be clearly seen from its Statement of Facts and submissions.

96. The Respondent in asserting that the Appellant is liable for WHT as per the objection decision relied mainly on the Court of Appeal’s decision in its case No. 195 of 2017 (Commissioner of Domestic Taxes v Barclays Bank of Kenya). The holding of the case was to the effect that the two fees are subject to WHT. The holding which reiterated the holding in Stanbic Bank Ltd v KRA was as follows:“the Court reiterated that where there is ambiguity in the legislation, the same must be construed in favour of the taxpayer. Conversely, where the meaning of legislation is clear, courts will give effect to the law. In this appeal, we have come to the conclusion that there is no ambiguity in the law and that the Appellant has sufficiently demonstrated that the payments made by the Appellant to the card companies are "royalty" under the Act and further that the interchange fees made by the Respondent in its capacity as acquirer to issuer banks were for management and professional services within the meaning of the Act. The confusion or lack of clarity that was obvious on the part of the tax authority regarding what it claimed constituted royalty and management of professional fees in Republic v Commissioner of Income Tax ex-parte SDV Transami (K) Ltd. (supra) and in the first case between the parties in this appeal (before Majanja, J), is not evident in the present appeal. We are persuaded that the evidence on record properly established that the payments paid by the respondent to the card companies were royalty as defined in the Act and further that the interchange fees it paid to issuer banks were for management and professional services as defined in the act, and therefore both payments were subject to withholding tax under the Act.”

97. The Tribunal has also taken into consideration the binding principle of “ratio decidendi” from which it cannot depart without good reasons. The necessity to abide by the principle was laid out clearly in the High Court Petition No. 471 of 2017 (Constitution and Human rights Division between Dr. Ekuru Aukot v I.E.B.C and Others) where it was held as follows:“The doctrine of precedent is widely recognized in developed legal systems. It has been described as a manifestation of the general human tendency to have respect for experience. Its importance is captured in the following passage:-In the legal system the calls of justice are paramount. The maintenance of certainty of the law and of equality before it, the satisfaction of legitimate expectations, entail a general duty of judges to follow the legal rules in previous judicial decisions. The individual litigant would feel himself unjustly treated if a past ruling applicable to his case were not followed where the material facts were the same. This authority given to past judgments is called the doctrine of precedent.It enables the citizen, if necessary with the aid of practicing lawyers, to plan his private and professional activities with some degree of assurance as to their legal effects; it prevents the dislocation of rights, particularly contractual and proprietary ones, created in the belief of an existing rule of law; it cuts down the prospect of litigation; it keeps the weaker judge along right and rational paths, drastically limiting the play allowed to partiality, caprice or prejudice, thereby not only securing justice in the instance but also retaining public confidence in the judicial machine through like being dealt with alike ... Certainty, predictability, reliability, equality, uniformity, convenience: these are the principal advantages to be gained by a legal system from the principle of stare decisis.”

98. The Appeal Court’s decision is binding on all the parties and states very clearly that Interchange fees and transaction fees are subject to WHT.

b) Whether the Appellant was liable for WHT for the period between 1st January 2017 and 7th November 2019. 99. The Appellant had been assessed for WHT for the period between 2017 to 2020.

100. The Appellant stated that as per the provisions of Article 210 of the Kenyan Constitution and Section 35(6) of the Income Tax Act (ITA) it was not bound to pay WHT for the period 2017 to 7th November 2019. That the Respondent’s demand of the same was illegal. That the only provision of the ITA that allowed the Respondent to recover WHT not purportedly deducted by a person, as if it was tax due from that person, was Section 35 (6) which was repealed in 2016.

101. The Respondent argued on its part that the provisions of Section 23 (3) (b) of the Interpretation and General provisions Act (Cap 2 of the laws of Kenya) allowed it to levy WHT from the Appellant

102. The Respondent urged that after the repeal of Section 35 (6) of the ITA in 2016, Section 35 (5) of the Act was retained with clear obligations on the Appellant in relation to WHT and that Rules 8, 9, 10 and 14 of the ITA WHT were still in force. That the Appellant was still under statutory obligation to withhold and account for tax withheld.

103. The Tribunal noted that neither Section 35 (5) of the ITA nor Section 23 (3) of the Interpretation and General Provisions Act imposed on the Appellant the obligation to collect and remit WHT to the Commissioner as though that was a tax due from the Appellant.

104. Section 35 (5) of the ITA principally instructed a tax payer who deducted WHT to remit it to the Commissioner before the twentieth day of the month following the month in which the deduction was done. It does not provide for the Respondent to recover the same from the Appellant should the latter fail to collect it from the person obliged to pay the same.

105. Section 23 (3) (b) of the Interpretation and General provisions Act provides as follows:“Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears the repeal shall not (b) affect the previous operation of a written law so repealed or anything duly done or suffered under a written law so repealed.”

106. Section 23 (3) (b) as stated above clearly provides that a repeal shall not affect the operation of the specific law in the previous period when the law was in operation. Once the repeal is effected the period thereafter is not covered by a repealed law. It also means therefore that once Section 35 (6) of the ITA was repealed, the Appellant was no longer bound by the provisions of the same unless the period in issue was before the repeal.

107. The repealed Section 35 (6) provided as follows:“Where a person who is required under this section, in accordance with the rules made under Section 130 to deduct tax(a)fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted; or(b)fails to remit the amount of a deduction to the Commissioner on or before the twentieth day following the month in which the deduction was made or ought to have been made, the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of tax and the payment of interest thereon, shall apply to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by that person and the due date for the payment of which was the date on which the amount of tax should have been remitted to the Commissioner.”

108. Upon the repeal of Section 35 (6) of the ITA, the Appellant was no longer obligated to collect and remit WHT from the person liable for the same. This was the same position held by the Tribunal in the case of Pevans East Africa Limited v Commissioner of Domestic Taxes (Tax Appeal No. 304 of 2019) where it was held that:“The import of the aforesaid section was that in cases where a person failed to make a deduction or deducted only part of what he was required to deduct, the whole amount of what should have been deducted and remitted were recoverable from the person who had failed to deduct as if it were tax due from him. Consequently, during the pendency of this Section, any amounts of withholding tax on winnings that the Appellant might have failed to collect would have been recoverable from the Appellant as if it was tax due from it.The Tribunal is alive to the fact that the Finance Act (2016) amended Section 35 of the ITA by deleting Paragraph 35 (6). The import of this amendment was that where a person failed to withhold tax as prescribed, the commissioner cannot demand tax not withheld from the person who should have withheld. Consequently, the Respondent cannot demand withholding tax from the Appellant as if it were tax due from it.”

109. The Finance Act of 2019 introduced Section 39 A of the TPA with effect from 7th November 2019 and which Section brought back the Appellant’s legal obligation to collect and remit WHT from persons liable to pay the same. The Appellant was therefore not liable for WHT for the period from 2017 to 7th November 2019 and this tax was not due from it. The period ought not to have been taken into account in the assessment.

c) Whether the Respondent’s assessment of the Appellant for WHT was justified. 110. The Appellant argued that the Respondent in its assessment had factored in ledger accounts that did not relate to interchange fees and transaction fees. The Appellant also averred that the Respondent had based its 2019 and 2020 assessments on interchange fees and its 2020 transaction fees on arbitrary estimates that are erroneous and excessive.

111. The Appellant averred that the specific ledgers in issue are laid out in Paragraph 18 of the Appellant’s Statement of Facts and are indicated in the table therein and were presented to the Respondent by the Appellant. That the same had specific names and descriptions and that the Respondent disregarded the information and did not spend sufficient time to understand the ledgers and the information shared.

112. The Respondent in response to the Appellant’s arguments submitted that the Appellant failed to provide the primary documents in support of its case and it only relied in its assessments on the trial balances that the former supplied.

113. The Tribunal has perused the assessment notice by the Respondent dated 24th December 2021. The notice stated that the Respondent had relied on the details in the documents it referred to as ABSA1 and ABSA2 on interchange fees and transaction fees, respectively, to make its assessment. The said ABSA1 and ABSA 2 documents are summarily identified, clearly set out and annexed to the assessment notice. The annexures in issue include all the ledgers set out in the Appellant’s table in paragraph 18 of the Statement of Facts together with the other ledgers presented to the Respondent. The Respondent’s averments therefore that the Appellant did not provide the primary documents required for the exercise are not true.

114. The Tribunal noted that the Respondent in the circumstances should not have used estimates to assess the Appellant. The final assessment made by the Respondent therefore maybe erroneous and not justified in the circumstances.

115. The Tribunal has also taken into consideration its decision on item (b) above which is to the effect that the Appellant was not liable to pay WHT for the period between 1st January 2017 to 7th November 2019.

116. The Respondent’s assessment in the circumstances is not accurate. This does not mean that the Appellant has no liability whatsoever and in the spirit of the Cape Brandy Case the right position on liability ought to be set out clearly. The Cape Brandy case held as follows:“In a taxing Act clear words are necessary in order to tax the subject ... one has to look merely on what is clearly said. There is no reason for any intendment ... Nothing should be read in, nothing should be implied. One can only look at the language used ... ”

117. The accurate assessment can only be achieved by the Respondent examining the evidence in its possession and reworking the applicable figures. The matter ought therefore to be referred back to the Respondent to determine the appropriate amount of tax payable on the part of the Appellant.

Final Orders 118. On the basis of foregoing findings, the Appeal is partially merited and the Tribunal accordingly proceeds to make the following Orders:a)The Appeal be and is hereby partially allowedb)The Respondent’s objection decision dated the 18th March 2022 be and is hereby varied in the following terms;i)The Respondent’s assessment relating to WHT on interchange fees and transaction fees be and is hereby upheld.ii)The Respondent to undertake a re-computation or re-assessment of the WHT taking into consideration the deductable tax for the period between 1st January 2017 to 7th November 2019 when the Appellant was not liable for WHT.c)Each party to bear its own costs.

119. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER, 2023ERIC NYONGESA WAFULA .......................CHAIRMANCYNTHIA B. MAYAKA ............................MEMBERGRACE MUKUHA .................................MEMBERABRAHAM KIPROTICH ............................MEMBERJEPHTHAH NJAGI ...............................MEMBER