[2023] KETAT 890 (KLR)

African Banking Corporation Ltd v Commissioner of Domestic Taxes (Tax Appeal 771 of 2022) [2023] KETAT 890 (KLR) (Civ) (24 November 2023) (Judgment)

Neutral citation: [2023] KETAT 890 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 771 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

November 24, 2023

Between

African Banking Corporation Ltd

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability Company incorporated in Kenya whose principal business activity is banking services.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated 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 those laws.

3. On 18th December 2020, the Respondent herein issued a notice of assessment for VAT and Withholding tax against the Appellant for the periods 2015, 2016 and 2017 through which the Respondent demanded settlement of the resulting principal taxes, late payment penalties and interest totaling to a tax liability of Kshs. 16,049,427.

4. The Appellant lodged its objection on 4th January 2021 vide electronic mail objecting to the said assessment in its entirety and seeking the withdrawal of the said assessments together with alleged accrued interest and penalties. The Respondent did not respond to the Appellant’s objection.

5. On 11th November 2021, the Respondent issued a demand which was received by the Appellant on 23rd November 2021, in respect of alleged assessment letters dated 12th June 2018 and 18th December 2020 demanding for taxes in respect of VAT and Withholding taxes in the sum of Kshs. 6,999,171. 00 and Kshs. 10,493,071. 00 respectively.

6. On 9th December 2021. the Appellant objected to the said tax demand in its entirety and on 17th January 2022, the Respondent invalidated the Objection on the basis that the Appellant failed to share supporting documents.

7. The Appellant, having failed to have the Objection validated filed a Notice of Motion dated 13th June, 2022 to be granted leave to file its appeal out of time. Leave to do so was granted by the Tribunal on 8th July 2022.

The Appeal 8. The Appeal as contained in the Memorandum of Appeal dated 22nd July, 2022 was filed on 5th August, 2022 and is premised on the following grounds:a.That the Respondent erred in law and fact in failing to validate the Appellant's objection dated 9th December 2021 yet the Appellant had duly notified the Respondent of its valid reasons for delay in submission of supporting documents in the timelines provided and proceeded to submit the additional documents on 24th January 2022. b.That the Respondent erred in law and fact in issuing a subsequent demand dated 11th November 2021 and yet it had failed to issue an Objection decision within the stipulated timelines under Section 51 (11) of the Tax Procedure Act in respect of its earlier initial assessment dated 18th December 2020 relating to the same period, tax heads and amount under contention.c.That the Respondent erred in law and in Appeal in making tax demands in respect of alleged demand letter dated 12th June 2018 and yet the same had never been served or notified upon the Appellant nor had it ever "been reflected on the Appellant's I-Tax system at all to enable it Object to the same as stipulated under the Tax Procedure Act No. 29 of 2015 (hereinafter ‘TPA’)d.That the Respondent erred in law and in fact by demanding for taxes in respect of VAT as per the demands dated 18th December 2020 and 11th November 2021 in respect of interchange fees in relation to the Appellant's provision of money transfer services which constitute an exempt supply by the Appellant under Paragraph l(b) of Part II of the First Schedule of the VAT Act 2013. e.That the Respondent erred in law and in fact by determining that the Appellant had failed to deduct and remit withholding tax on payments made in respect of card expenses by the Appellant to Mastercard yet the same do not constitute royalty payments.f.That in view of the foregoing, the Appellant is apprehensive that the actions of the Respondent lack in merit, are unlawful and manifestly unjust and that unless the orders sought are granted, the Appellant risks being unjustly compelled to pay for the alleged taxes to the prejudice of the Appellant.

The Appellant’s Case 9. The Appellant has set out its case in the Statement of Facts dated 22nd July, 2022 filed on 5th August, 2022.

10. The Appellant stated that on 18th December 2020, the Respondent herein issued it with a notice of assessment for VAT and Withholding tax against the Appellant for the periods 2015-2017. In the assessment, the Respondent demanded settlement of the resulting principal taxes, late payment penalties and interest totaling to a tax liability of Kshs. 16,051,317 .00.

11. That it lodged its objection on 4th January 2021 vide electronic mail objecting to the said assessment in its entirety and seeking the withdrawal of the said assessments together with alleged accrued interest and penalties.

12. That the Respondent did not respond to the Objection dated 4th January, 2021. That on 11th November 2021, the Respondent issued a demand which was received by it on 23rd November 2021, in respect of alleged assessment letters dated 12th June 2018 and 18th December 2020 demanding taxes in respect of VAT and Withholding taxes in the sum of Kshs. 6,999,171. 00 and Kshs. 10,493,071. 00 respectively.

13. The Appellant stated that vide an Objection letter dated 9th December 2021, it responded to the said tax demand from the Respondent objecting to the said demand in its entirety and on 17th January, 2022 the Respondent invalidated its Objection as contained in the said letter dated 9th December, 2021 on the basis that it failed to share supporting documents on time.

14. That on 20th January 2022, it met a representative of the Respondent and explained that the reason for the delay for submission of the documents was that one of its contact persons had been hospitalized with Covid-19 and was not able to provide the requisite documentation. As a result of the meeting, it agreed that to submit the documents requested by the Respondent so that its objection would be validated.

15. That on 24th January, 2022 it submitted the documents requested but the Objection was not validated despite a follow up on the same. It was also notified of an assessment dated 12th June, 2018 which it never received. However, it filed an objection on 4th January, 2021 in respect of an assessment dated 18th December, 2020 but the Respondent has not responded to the same within the stipulated timelines.

16. The Appellant argued that following a meeting on 18th May, 2022, it emerged that the Respondent maintained its position that it had invalidated the objection lodged on 9th December, 2021 and as such the Respondent had no basis of dealing with the Objection dated 4th January, 2021. It however informed the Respondent that it objected to the assessment dated 18th December, 2020 vide electronic mail on 4th January, 2021 and the Respondent did not reply. According to it, there was no basis for the Respondent to demand additional taxes on 11th November, 2021 yet it hadn’t responded to its initial objection.

17. That on 19th May, 2022 it was advised by the Respondent to file an Appeal to resolve the dispute regarding the invalidation of its objection.

18. The Appellant noted that it supported the delay in submission of supporting documents with valid reasons as provided by section 51(7) of the TPA and that the Respondent’s decision to decline to validate the objection contravenes section 51 of the TPA. The Respondent acted contrary to the Law.

19. That it further noted that the issuance of the subsequent demand dated 11th November, 2021 was meant to cover the Respondent’s failure to issue an Objection decision in respect of the objection dated 4th January, 2021 and relating to the same amounts earlier and period earlier assessed for which timelines for the issuance of the Objection decision as stipulated under Section 51(11) of the TPA had lapsed.

20. That based on provisions of the Section 51(11) of the TPA the Respondent has Sixty days to issue its Objection decision and if it is not issued within the stipulated timelines the Objection is deemed as having been duly accepted. Accordingly, once it filed its objection on 4th January, 2021 in respect of the demand letter dated 18th December, 2020, the Respondent had Sixty days to issue an Objection decision and since it failed to do so the Objection was deemed to have been accepted.

21. That it was therefore untenable that the Respondent issued a tax demand on 11th November, 2021 requiring the Appellant to pay Kshs. 17,492,242. 00 in respect of ‘purported’ outstanding taxes in the absence of any objection decision determining the issues raised by it in its objection dated 4th January, 2021.

22. That since it was never served nor received any demand dated 12th June, 2018 for Kshs. 6,999,171. 00 as alleged in the Respondent’s demand letter dated 11th November, 2021, the said demand by the Respondent violated Section 31(8) of the TPA which stipulates as follows:“When the Commissioner has made an amended assessment, he or she shall notify the taxpayer in writing of the amended assessment and specify-(a)the amount assessed as tax or the deficit or excess input tax carried forward, as the case may be;(b)any amount assessed as late payment penalty payable in respect of the tax assessed;(c)any amount of late payment interest payable in respect of the tax assessed;(d)the reporting period to which the assessment relates;(e)the due date for payment of any tax, penalty or interest being a date that is not less than thirty days from the date of the taxpayer received the notice; and(f)the manner of objecting to the assessment.”

23. That the Respondent incorrectly determined that its basis for issuing a tax demand on VAT on interchange fees earned by it is that the amounts paid constituted management and professional services and were therefore subject to VAT pursuant to the provisions of Section 5(1) (a) and 5(2) (b) of the VAT Act, 2013.

24. The Appellant stated that in view foregoing its prayer is that this Tribunal determines that the tax demand issues by the Respondent in respect of Value Added Tax and Withholding tax amounting to KShs. 17,492,242. 00 be vacated with costs to it. Nonetheless it failed to have the Objection validated and filed a Notice of Motion dated 13th June, 2022 seeking leave to file its Appeal out of time. Leave was granted by the Tribunal on 8th July 2022.

Respondent’s Case 25. The Respondent replied to the Appellant’s grounds through its Statement of Facts dated 22nd August, 2022 and filed on 23rd August, 2022.

26. The Respondent stated that it undertook a compliance check and established that the Appellant earned Interchange Fees which is management and professional fees on which they did not apply Withholding Tax. The Appellant also failed to remit Withholding Tax withheld on Royalty payments made to various card companies.

27. That the Respondent demanded a tax totalling Kshs. 17,492,242. 00 through a letter dated 11th November, 2022 and in addition invited the Appellant to the Voluntary Tax Disclosure programme which granted waiver of penalties on interest of 100% in the first year ,50% in the second year and 25% in the third year to the Appellant if it made full disclosure on their tax liability in respect of the period July 2015 to June 2020. The program was running from 1st January, 2021 to 31st December, 2023.

28. The Respondent averred that in its letter dated 11th November, 2021 it categorically stated that it would proceed to review the records and assess VAT and Withholding tax on income and payments relating to card business transaction within two weeks if the Appellant had opted not to take advantage of the Voluntary Tax Disclosure Program.

29. That on 9th December 2021 the Appellant objected to its letter dated 11th November, 2021 as if the same was an assessment, on grounds that the interchange fees received by the Appellant were not a consideration for a service provided by the acquirers.

30. That the Appellant further contended that the payments made to Card Companies did not amount to royalty as they do not have a contractual agreement for payment of royalties. For those reasons it objected the previous assessments dated 12th, June, 2018 of Kshs. 6,999,171. 00 and another dated 18th December, 2020 for the amount of Kshs. 10,493,071. 00.

31. That in electronic mails dated 21s and 22nd December, 2021 it requested the Appellant to validate its objection by providing supporting documents within Seven days. It requested the following documents in an electronic mail dated 21st December 2021:a.the demand letter objected to;b.contracts between African Banking Corporation and Mastercard; andc.The ledger for interchange fees paid and received.

32. That the Respondent requested the following documents in the electronic mail dated 22nd December, 2022:a.remittance to local and international bank;b.trial balance for the years under review; andc.any other relevant document.

33. That since the Appellant failed to provide the requested documents it invalidated the Appellant’s objection on 17th January, 2022 for failure to provide the requested documents and other information in support of the objection dated 9th December, 2021.

34. That on 24th January, 2022 it admits that the Appellant started to provide the supporting documents as requested. On 11th May 2022, the Appellant enquired on the status of its objection attaching the demand letter dated 18th December 2020, its notice of objection dated 4th January, 2021 and a pdf document with an email sent to legalservices@kra.go.ke dated 2nd March 2022.

35. That the notice of objection dated 4th January 2021 and sent on 7th January 2021 as alleged by the Appellant was not received by it. The only electronic mail received with regards to the notice of objection was dated 2nd March 2022. It therefore noted that the pdf document with an email sent to legalservices@kra.go.ke dated 2nd March, 2022 was not genuine since the email was received long after the Respondent issued the decision.

36. The Respondent asserted that the Appellant ignored the electronic mail addresses which were outlined in the assessments and to which any electronic mails were to be sent. It then requested a meeting with the Appellant to understand the circumstances around the said objection.

37. That the Appellant was dissatisfied with its decision dated 17th January, 2022 and appealed to the Tribunal on the grounds outlined in its Memorandum of Appeal and it responded to each ground as outlined below:-

i. Whether the Respondent legally invalidated the objection 38. That despite issuing several reminders to the Appellant it failed to provide the requested documents and information in support of its objection dated 9th December, 2021 pursuant to the provisions of Section 51 (3) of the TPA which state as follows:“(3)3) A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if:a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision and the reason for the amendments;b.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1); andc.all the relevant documents relating to the objection have been submitted.”1. That the Appellant's objection was not valid as it failed to meet the criteria stipulated in Section 51(3) of the TPA. The Appellant was given 39 days to validate the objection but they did not provide the requested documents which would have enabled the it to review the objection. Furthermore, Section 56(1) of the TPA clearly places the burden of proof on the taxpayer to prove that its decision is incorrect and provides as follows:“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

40. That it therefore prays that the Tribunal dismisses this ground it acted within the law by invalidating the Appellant's objection which was unsupported.

41. The Appellant stated that according to it, the only objection that was raised was that on 9th December, 2021 and not any other purported objection which evidence of service to the correct office is not provided. It issued an invalidation of Objection dated 17th January 2022 in regards to the Appellants objection dated 9th December 2021, 39 days after the notice of objection was raised. Accordingly, the Appellant acted outside the premise of Section 51(11) of the TPA which relate to a validly lodged objection for which documentation to support the same has been provided and it prays that the Tribunal dismisses this ground on the basis that the Respondent's action was within the law.

(ii) Failure to issue an objection decision within the stipulated timelines. 42. The Respondent reiterated that the only objection from the Appellant that it was aware of was that dated 9th December, 2021. It therefore issued an invalidation of objection 39 days after the notice of objection was raised on 9th December, 2021. Accordingly, it is only required to make an objection decision where a valid objection has been lodged in compliance with Section 51(3) of the TPA.

43. That it cannot therefore be said to have acted outside the premise of Section 51 (11) of the TPA and prays that the Tribunal dismisses this ground on the basis that their action was within the law.

(iii) Tax Demand Letter not notified to or served on the Appellant. 44. That it was of the view that this ground of Appeal by the Appellant was not validly before the Tribunal as it did not form the basis of the decision, which was being appealed against. The only issue that the Tribunal should consider is whether the Respondent lawfully invalidated the objection.

45. That the Respondent duly notified the Appellant in the demand letter dated 11th November 2021 on the tax assessments raised on 12th June 2018 and 18th December, 2020 of Kshs. 6,999,171. 00 and Kshs. 10,493,071. 00 respectively. The same having been served upon the Appellant through their official email addresses.

46. That the Appellant never contested the validity of the assessment of 2018 as regard to service and further the TPA has salient provisions that one who has gone ahead to comply with an assessment cannot contest the service of the same.

47. That the Respondent prays that the Tribunal dismisses this ground on the basis that the Respondent duly notified the Appellant on the tax assessments raised on 12th June 2018.

(iv) Value added tax on interchange fees. 48. That it is of the opinion that the matter before the Tribunal is not based on the merits of whether interchange fees is subject to VAT but only whether a valid objection had been lodged. As such it is of the view that the Tribunal should refrain from allowing the Appellant to raise issues, which do not form part of the decision for which an appeal has been preferred.

49. That without prejudice to the above, The Appellant is a member of networks established by various card companies one of them being MasterCard. There exist agreements with the card companies that provide infrastructure which enables credit and debit card transaction to take place. The Court of Appeal held in the case of Commissioner of Domestic Taxes versus Barclays Bank of Kenya Ltd ( Civil Appeal No. 915 of 2017) that interchange fee earned and or paid by banks in card business transactions to other banks in the scheme is a management or professional fees and thus subject to VAT.

50. That from the above ruling by the Court of Appeal and the Supreme Court assenting to the same, it justly demanded the VAT tax on interchange fees from the Appellant and it therefore prays that the Tribunal dismisses this ground and find that the Respondent rightfully demanded VAT on interchange fees.

v. Withholding tax on payments made in respect of card expenses to Mastercard. 51. In response to grounds of the Memorandum of Appeal that it erred in law and in fact in demanding withholding tax on payments made in respect of card expenses by the Appellant to MasterCard, it restated its position as captured in the demand letter dated 11th November 2021 by indicating that the issue before the Tribunal is not the merit of whether interchange fees are subject to VAT but whether a valid objection had been lodged by the Appellant.

52. That in Commissioner of Domestic Taxes versus Barclays Bank of Kenya Ltd (Civil Appeal No. 915 of 2017) the Court of Appeal held that fees paid by the bank to the card companies are royalties and subject to withholding tax. On the basis of the cited precedents, it prays that the Tribunal dismisses this ground and find that its demand for outstanding payment of Withholding Tax in respect of the card expenses to MasterCard was proper.

53. That the Appellant has failed to provide any evidence that it was unreasonable but rather it was guided by the law in demanding both the VAT and withholding tax on card business transactions from the Appellant. It prays that the Tribunal dismisses this ground on the basis that it acted within the law.

54. That in view of the foregoing it prays that the Tribunal finds that its decision dated 17th January 2022 and tax demand were property issued as provided under law.

Submissions of the Parties 55. In its written submissions dated and filed on 10th August, 2023 the Appellant identified five issues for determination. The Respondent did not file any submissions. The issues for determination raised by the Appellant are as analysed below:-

i. Whether the Respondent erred in failing to validate the objection lodged by the Appellant. 56. The Appellant submitted as follows in respect to this issue that it had identified for determination:

57. The tax assessment which is the basis of this appeal was previously issued by the Respondent in respect of VAT and Withholding tax for the same period of assessment on 18th December 2020.

58. It objected to the said assessment vide electronic mail and did not receive a response. It further noted that the Respondent proceeded to issue a subsequent notice of assessment dated 11th November 2021 seeking to recover the taxes previously assessed without having given an objection decision in respect of the first assessment which was duly objected to.

59. The Respondent erred in failing to validate the objection by it dated 11th November 2021 due to the delay in provision of requested documentation yet it provided reasonable grounds for delay. It explained to the Respondent that the delay in provision of documentation in the period of December 2021 was due to the lack of access to the electronic mails which had been addressed to its contact who was ill and unable to access them. Once it became aware of the Respondent’s decision invalidating the objection, it acted promptly to furnish the documentation and further engaged the Respondent with a view to validate the objection before proceeding to appeal before this Honourable Tribunal.

60. Additionally, it demonstrated that the delay in providing supporting documents while inadvertent was not inordinate as it furnished the Respondent with the requisite documents within seven days from the date of the Respondent’s notice invalidating its objection. It further notes that the reasons for delay in providing documentation in support of its objection were valid hence the Respondent’s decision to invalidate its objection even after it supplied documentation was unjust and should be set aside

ii. Whether the Respondent erred in failing to validate the objection lodged by the Appellant and in failing to issue an objection decision with respect to the objection lodged by the Appellant dated 4th January 2021 within the timelines provided by the Tax Procedures Act. 61. The Appellant submitted as follows in respect to this issue that it had identified for determination:

62. The Respondent erred in failing to issue a decision with respect to the first objection lodged by it and instead issuing a second notice of assessment.

63. That Section 51 (11) of the TPA provides that:“the Commissioner shall make the objection decision within sixty days from the date of receipt of a valid notice of objection failure to which the objection shall be deemed to be allowed.”

64. To buttress its position, it cited the case of Consolbase Limited -vs- Commissioner of Investigations and Enforcement (TAT NO. 138 OF 2020) where the Tribunal held as follows:“Further, it is puzzling how the Respondent waited a record two years upon requesting for “books of three related companies” which were not provided. The Respondent ought to have issued its objection decision citing the failure to provide the requested documents as the basis of its objection decision. The Tribunal finds it untenable for the Respondent to zealously posit that it delivered its objection decision on 13th April 2017 whereas on 24th September 2019 it was calling upon the Appellant to provide documents (namely sales ledgers and VAT 3B samples), in respect of the same assessment issued on 28th January 2017 and indication that the investigations were still ongoing and no decision had been made. The Respondent is expected to act timeously and in a fair manner to give a taxpayer such as the Appellant some certainty with regard to its obligation.”

65. That the Appellant lodged its objection with the Respondent vide electronic mail on 7th January 2021 and since it did not receive a response, it concluded that the objection was deemed allowed based on the decision cited above.

66. That the demands made by the Respondent vide its subsequent notice of assessment dated 11th November 2021 in respect of a demand dated 12th June 2018 were neither served on it nor did it reflect on iTax to enable it to effectively object to the issues raised in the assessment.

67. That it equally relied on the Court’s decision in the case of Equity Group Holdings Limited v Commissioner of Domestic Taxes [2021] eKLR where the Court held as follows at paragraph 60 of its judgment:“Section 51 (11) of the TPA is couched in peremptory terms. Having correctly found that the decision was made after the expiry of 60 days, the TAT had no legal basis to proceed as it did and to invoke article 159(2) (d). First, there was no decision at all. The decision had ceased to exist by operation of the law. Second, the provisions of section 51 (11) (b) had kicked in. The Objection had by dint of the said provision been deemed as allowed.”

68. That its position was that the Respondent ought not to have issued a subsequent assessment where the previous assessment had been objected to yet no decision was rendered by the Respondent. In line with Section 51 of the TPA, the previous objection had been deemed allowed upon the lapse of time hence the subsequent assessment and decision given by the Respondent should be set aside.

iii. Whether the Respondent erred in demanding VAT in respect of interchange fee in relation to the provision of money transfer services being an exempt supply under Paragraph 1(b) of the First Schedule of the VAT Act. 69. The Appellant submitted as follows in respect to this issue that it had identified for determination:

70. That the Respondent erred in demanding VAT on interchange fees yet the fees constituted money transfer services being an exempt supply in the meaning of Paragraph 1(b) of the First Schedule of the Value Added Tax Act. The Respondent’s tax assessment of VAT in the amount of KShs.1,288,251 in respect of interchange fee was erroneous. The Respondent’s statement that the said fees constituted fees earned for management and professional services was incorrect as the fees were in respect of provision of financial services and the same are exempted from VAT.

71. That the Appellant acted as the issuer in the card transactions involving the acquirer, the issuer, the Card Network (such as Visa, Mastercard) and the Cardholder/Customer. In facilitating the money transfer in cardholder transactions, it provides services such as verification of information such as the cardholders identity and eligibility to complete the transaction. That Paragraph 1(b) of the First Schedule of the Value Added Tax Act provides for exempted supplies as follows:“FIRST SCHEDULE [s. 2]EXEMPT SUPPLIESPART II - SERVICESThe supply of the following services shall be exempt supplies –1. The following financial services –a.the operation of current, deposit or savings accounts, including the provision of account statements;b.the issue, transfer, receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking of cash machines, sorting or counting of money;c.issuing of credit and debit cards;….”

72. It cited the High Court’s determination in the case of Bank of Africa Kenya Limited -vs- Commissioner of Domestic Taxes (Civil Appeal E127 of 2020) [2023] KEHC 1036 (KLR) where the Court affirmed the decision of the Tribunal that interchange fees was in respect of provision of a financial service. The Court specifically stated as follows at Paragraph 42:“In the circumstances, I agree with the TAT that Bank of Africa rendered a financial service to cardholders when verifying their identities and eligibility to use the cards when purchasing goods or services and eventually deducted money from their accounts which was a financial service exempted from VAT.”

73. That its position is therefore that interchange fees are in relation to money transfer services as classified under Paragraph 1(b) of the First Schedule of the VAT Act as a financial service exempted from VAT.

iv. Whether the Respondent erred in concluding that the payments made by the Appellant being card expenses constitute royalties and were therefore subject to Withholding Tax. 74. The Appellant submitted as follows in respect to this issue that it had identified for determination:

75. That the Respondent erred in its treatment of payments made by it in respect of card transactions being card expenses constitute royalty. The Respondent’s position that the payments made by it as an affiliate of the Mastercard network were royalty payments is tenuous, as it makes payments to Mastercard being fees for purposes of accessing the Card Company’s network. The payments made were in respect of clearing and settlement undertaken by Mastercard hence the same cannot be classified as “royalty”.

76. That Section 2 of the Income Tax Act, CAP 470 of Kenya’s laws (hereinafter ‘ITA’) provides the meaning of “royalty” as follows:“royalty" means 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, trade mark, design or model, plan, formula or process; or(d)any industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific equipment or experience, and any gains derived from the sale or exchange of any right or property giving rise to that royalty;

77. That it noted that the Respondent sought to tax the fees paid by treating the same as royalties. The Respondent sought to bring the same to charge of withholding tax under section 35(2) of the ITA which provides for withholding tax on the income of a non-resident person in respect of a royalty. It further noted the Respondent sought to rely on the decision given by the Court of Appeal in the case of Commissioner of Domestic Taxes -vs- Barclays Bank Kenya Limited which decision is pending determination before the Supreme Court.

78. That it is therefore the Appellant’s position that the Respondent incorrectly concluded that payments made by the Appellant were royalty payments. The assessment of withholding tax on this basis is therefore unlawful and should be set aside.

v. Whether the Respondent acted unlawfully in demanding withholding tax from the Appellant during the period of assessment. 79. The Appellant submitted as follows in respect to this issue that it had identified for determination:

80. That notwithstanding the foregoing statements, the Respondent incorrectly demanded withholding tax from it after reaching the conclusion that it ought to have withheld taxes on payments that it made to Mastercard for accessing the card network.

81. That in line with its sixth ground for Appeal, the Respondent acted unlawfully in claiming the withholding taxes assessed as though they were owed by it upon concluding that it failed to deduct and remit the same to the Respondent. During the period of assessment of 2016 to 2017, there was no empowering provision which allowed the Respondent to claim the taxes from it following the deletion of section 35(6) of the ITA by the Finance Act 2016 until a similar provision was introduced by the Finance Act, 2019.

82. That it cited the case of of Commissioner of Domestic Taxes -vs- Pevans East Africa Limited (2022) eKLR, in which the High Court affirmed the Tax Appeals Tribunal’s decision in determining that the Respondent erred in demanding withholding tax from the payer during the period of assessment as though it were due from them in the absence of a legal provision empowering the Respondent to do so. The High Court in cited case determined that the Respondent was not entitled to demand or collect withholding tax as if it were due from it. The Court specifically stated at Paragraph 42 of its judgment that:-“I am in agreement with the Tribunal that prior to 2016, section 35(6) of the ITA provided that the commissioner could claim taxes from a payer who fails to make a deduction as though the taxes were due from them. However, the amendment introduced by the Finance Act, 2016 deleted the said section 35(6) of the ITA meaning that the Commissioner could no longer demand taxes not withheld from the person who should have withheld the same and that this position remained until the enactment of the Finance Act, 2019 came into force on November 7, 2019 when the previously deleted provisions of section 35(6) of the ITA were now reintroduced and reproduced as a new section 39A under the TPA.”

83. That in view of the High Court’s decision above, the Respondent was estopped from demanding withholding taxes from it from the time when the Finance Act, 2016 came into force, 20th September 2016 to 7th November 2019 when the Finance Act, 2019 was assented to thereby reintroducing the provision that the Respondent may collect withholding tax from payers or agents that ought to have been withheld as though they were due from them.

84. That additionally, it submits that the only recourse which the Respondent had during this period was to seek taxes directly from the recipient. The Court held a similar view in the Pevans E.A. Case (supra) where the Court held that the Respondent could no longer demand taxes not withheld from the person that ought to have withheld the same until the provision was reintroduced in law but could seek the withholding taxes on winnings from the punters directly.

85. That in conclusion, the withholding taxes as assessed on it by the Respondent for the period 2016 to 2017 and confirmed vide its objection decision was without legal basis as there was no provision empowering the Respondent to demand or collect withholding tax from it and should therefore be set aside.

Issues for Determination 86. The Tribunal having carefully considered the parties’ pleadings, documentation and Submissions finds that two issues call for its determination as follows;i.Whether the Appellant’s objection dated 4th January, 2021 was valid pursuant to Section 51(3) of the TPA.ii.Whether the tax assessments in respect of VAT and Withholding Tax were justified.

Analysis and Findings i. Whether the Appellant’s objection dated 4th January, 2021 was valid pursuant to Section 51(3) of the TPA. 87. One of the Appellant’s grounds of Appeal was that the Respondent had erred in law and fact by failing to validate its objection dated 9th December, 2021 in spite of it providing reasons for the delay in submissions of its additional documents. It nonetheless submitted additional documents on 24th January, 2022.

88. The Respondent contended that its letter dated 11th November, 2021 was not an assessment but a demand for outstanding taxes on card business transactions and also served to inform the Appellant of the Voluntary Disclosure Programme given that it had tax exposure of KShs. 6,999,171. 00 in respect of 12th June, 2018 and Kshs. 10,493,071 in respect of 18th December, 2020. The reason for the tax exposure was emanating from the Court of Appeal judgement delivered on 6th November, 2020 in which it was held that interchange fees earned or paid by banks were management or professional fees and also royalty and were therefore subject to VAT and Withholding Tax.

89. Having reviewed the letter dated 11th November, 2021 the Tribunal takes the view that the Respondent indeed made a demand on that date in respect of assessments for the periods 2018 and 2020 and the Appellant objected to the same on 9th December, 2021.

90. The Tribunal however finds that having made the objection, the Appellant, rather than attach documents in support of its objection, merely made explanations and outlined various legal provisions in its objection and then went ahead to promise to enable the Respondent to have access to the relevant documents.

91. The Appellant averred that on 21st and 22nd December, 2021 the Respondent gave the Appellant an opportunity to validate its objection by requesting the Appellant to provide documents as outlined in paragraphs 31 and 32 hereof. The Appellant having not complied, the Respondent proceeded to invalidate its objection on 17th January, 2022.

92. The Tribunal having reviewed the said letter, finds that the Respondent, invalidated the Appellant’s objection pursuant to Section 51(3) of the TPA which provides as follows regarding the threshold that ought to be met in order for an Objection to be valid:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-a.the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; andb.in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute, or has applied for an extension of time to pay tax not in dispute under Section 33(1).c.all the relevant documents relating to the objection have been submitted.” (Emphasis added).”

93. The Respondent is required by law to immediately notify the Appellant of an invalidly lodged objection pursuant to under Section 51(4) of the TPA which provides as follows: -“Where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall immediately notify the taxpayer in writing that the objection has not been validly lodged.” (Emphasis added).

94. The Tribunal notes that before deciding on whether or not to validate the objection, the Respondent requested the Appellant to provide specific additional documentation and the Appellant failed to provide the information requested on citing instead that the contact person was afflicted by COVID-19 and had been hospitalised. However, the Appellant never provided to the Respondent, the evidence of the affliction of the contact person.

95. On 24th January, 2022 when the Appellant finally decided to provide the documents that the Respondent had requested, the decision to invalidate its objection had already been made and it was consistently informed by the Respondent of this decision in electronic mails dated 13th and 19th May, 2022.

96. On the basis of the correspondence reviewed by the Tribunal it is evident that the Respondent tried as much as possible to assist the Appellant and give the Appellant time to provide documents, in view of its electronic mails dated 21st and 22nd December, 2021. The Tribunal also notes that the Respondent was very specific about the documentation that it required and it was the Appellant who did not provide the information on time and in fact waited until the Respondent had made the decision to invalidate its objection to provide the requested documentation.

97. In the circumstances the Tribunal having considered the matter finds that the Objection dated 4th January, 2021 was not validly issued pursuant to Section 51(3) of the TPA.

ii. Whether the tax assessments in respect of VAT and Withholding Tax were justified. 98. Having determined the first issue and having found that the Respondent correctly invalidated the objection, the Tribunal will not delve into this second issue as the same has been rendered moot.

Final Decision 99. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 17th January, 2021 be and is hereby upheld.c.Each party to bear its own costs.

100. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 24TH DAY OF NOVEMBER, 2023ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA - MEMBERGEORGE KASHINDI - MEMBERABDULLAHI M. DIRIYE - MEMBERSPENCER S. OLOLCHIKE - MEMBER