[2023] KETAT 569 (KLR)

Almasi Bottlers Limited v Commissioner Domestic Taxes (Tax Appeal 1155 of 2022) [2023] KETAT 569 (KLR) (19 October 2023) (Judgment)

Neutral citation: [2023] KETAT 569 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1155 of 2022

RM Mutuma, Chair, EN Njeru, M Makau, BK Terer & W Ongeti, Members

October 19, 2023

Between

Almasi Bottlers Limited

Appellant

and

Commissioner Domestic Taxes

Respondent

(An Appeal against the Respondent's Objection decision dated 31st January 2022)

Judgment

Background 1. The Appellant is a private limited company duly incorporated and registered under the Companies Act within the Republic of Kenya. The main form of business is bottling soft drinks under the Coca Cola Franchise.

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. The Appellant installed a new PET line for processing and packaging soft drinks which project was contracted by a local resident company, Krones LCS Center E. A. Limited for installation and commissioning of the bottle line.

4. The Respondent conducted an audit into the Appellant‘s tax affairs to validate the investment deduction claim for the period between 2017 to 2019 by the Appellant‘s self-assessment tax return and issued the Appellant with additional withholding tax assessments amounting to Kshs. 11,447,198. 76 on 31st January 2022.

5. The Appellant objected to the additional assessments vide a letter dated 1st March 2022 after which the Respondent issued an objection decision rejecting the objection on 30th August 2022.

6. On receiving the objection decision and being aggrieved by the same, the Appellant filed a Notice of Appeal on 22nd September 2022.

The Appeal 7. In its Memorandum of Appeal dated and filed on 11th October 2022, the Appellant premised its Appeal on the following grounds.a.The Respondent erred in material facts by charging Withholding tax on accommodation and traveling costs on the basis that they form part of the contract value of professional fees.b.The Respondent did not consider or appreciate that the contract expressly provided for what constituted the value of the professional fee and separately obligated the Appellant to cater for other related non- professional fees.c.The Respondent did not consider or appreciate that the traveling and accommodation services were contracted and paid to separate suppliers with no benefit to the techniciansd.The Respondent did not consider or appreciate that the said costs do not qualify for withholding tax within the provisions of Sections 2, 10, and 35 of the Icome Tax Act as claimed by the Respondent.e.Sections 10 and 35 of the Income Tax Act expressly provide for withholding tax on all payments spelt thereunder and do not include payment for traveling and accommodation costs, therefore not subject to Withholding tax.f.In the Respondent‘s objection decision, it deemed the said costs to constitute the contract value of the professional fees to the supplier. Section 2 of the Income Tax Act clearly defines what constitutes professional fees. The definition does not include accommodation and traveling costs and if it was the aim of the statute to so include it then it would have expressly done so.g.It is a strict principle of law that there is no taxation without express legislation and that a tax cannot be imposed by intendment, interpretation, presumption or implied.

The Appellant‘s Case 8. The Appellant set down its case on:-a.Its Statement of Facts dated and filed on 11th October 2022 together with the documents annexed thereto.b.Its written submissions dated 11th May 2023 and filed on the 12th May 2023.

9. It stated that in 2015, it installed a new PET line for processing and packaging soft drinks, and the whole project of installation and commissioning of the bottling line was contracted to Krones LCS Center E.A Limited, a local resident company which provided all expertise/manpower required for the engagement and was responsible for their input in the project.

10. It averred that the contract provided that incidental costs (traveling and accommodation) to the contract shall be met by the Appellant which the Appellant engaged and paid all local suppliers for the services rendered.

11. It stated that in the Respondent‘s audit findings, withholding tax was charged on accommodation and traveling costs incurred on technicians involved in the installation of the PET line on the basis that these costs formed part of the contract value for the installation and thus chargeable to Withholding tax therefore an assessment of Kshs. 11,447,198. 76 was raised by the Appellant.

12. It asserted that the traveling and accommodation costs are not subject to withholding tax as claimed by the Respondent as the imposition of income tax is provided for under Section 10 (a) (a) and not Sections 2, 10 (1) (a), and 35 of the Income Tax Act as contended by the Respondent in its objection decision.

13. It cited Sections 10 (1) and 35 of the Income Tax Act and averred that payment with respect to traveling and accommodation are not subject to withholding tax.

14. It relied on Section 2 of the Income Tax Act and reiterated that the definition of professional fees does not include traveling and accommodation costs or any other incidental costs.

15. It contended that the Respondent‘s claim does not have any basis in law as the payments for traveling and accommodation were directly paid to the suppliers for the services, not the contractor, and payments were made to resident suppliers thus the Respondent subjecting the payments to 20% withholding tax is improper.

16. The Appellant submitted that the Respondent charging withholding tax on traveling and accommodation costs is erroneous and has no basis in tax law either under Sections 2, 10, or 35 of the Income Tax Act which it cited.

17. It argued that the Respondent did not take into consideration that the contract with the contractor expressly provided for the contractual fees and the responsibility for any logistical costs arising in the engagement.

18. It maintained that the traveling and accommodation costs were directly paid to third party suppliers engaged directly by the Appellant therefore there was no benefit to the contractor and given the terms of the contract and circumstances of the transaction, costs that qualify for withholding tax were clearly stipulated leaving no room for assumption, implication or association of reimbursable costs as part of the contractual fee.

19. It reiterated that withholding tax was correctly deducted at the resident rate of 3% on the contract price which constituted professional services.

20. The Appellant submitted that the contractor and the service providers involved in the project are resident persons thus the basis of charging withholding tax at 20% is erroneous and excessive.

21. It argued that it is not practical to withhold tax on payments directly made to the hotel where the technicians were accommodated and taxis offering traveling service as these payments do not constitute income to the contractors.

22. The Appellant submitted that the issue of availability of supporting documents was never up for determination from the onset as the same documents provided by the Appellant were relied upon in determining the amount of withholding tax and the validity of the costs have never been in doubt but the qualification of these costs for withholding tax.

23. It asserted that payments in respect of accommodation and transport are expenditure and not gains or profits and therefore not taxable relying on the case of CKL Africa Ltd vs. Commissioner of Domestic Taxes.

The Appellant‘s Prayers 24. The Appellant prayed that the Tribunal allow the Appeal and the demand and/or assessment by the Respondent be set aside.

The Respondent‘s Case 25. The Respondent‘s case is premised on.a.Its Statement of Facts dated and filed on 7th November 2022 together with the document annexed thereto.b.Its written submissions filed on 29th May 2023.

26. The Respondent stated that the Appellant installed a new PET line for processing and packaging soft drinks at its plant in Nyeri in 2015.

27. It averred that the Appellant engaged Krones LCS Center East Africa Limited (KLCSEA) to carry out the installation, start-up and commissioning of the PET filling line.

28. It reiterated that it established that the taxpayer despite having invoices for accommodation in Greenhill‘s Hotel and BCD Travel for transport services had not accounted for Withholding tax on the payments paid on behalf of these consultants for the services.

29. It stated that it relied on Sections 2, 10, and 35 (1) of the Income Tax Act and charged Withholding tax on amounts paid for accommodation and transport on behalf of the consultants.

30. It relied on the abovementioned Sections and stated that the payments made on behalf of the consultants are deemed to be a benefit to the consultants thus withholding tax should have been deducted.

31. It averred that the decision dated 30th August 2022 demanding withholding taxes was due and proper in law.

32. The Respondent submitted that Section 2 of the Income Tax Act defines paid and professional fees as the amount paid for traveling costs and accommodation and are subject to withholding tax which the Appellant failed to account for and the accommodation and traveling costs which were under a contractual capacity fell under the meaning of professional fees.

33. It cited Sections 10 and 35 of the Income Tax Act and reiterated that any person who makes a payment that counts as interest shall be deemed as income in terms of professional fees and the amount paid to the consultants was subject to deduction of withholding tax based on the fact that KCLSEA is a local business operating in Kenya and the fee paid to facilitate their transport and accommodation amounted to professional fees since the work done was in line with Civil and engineering works.

34. The Respondent relied on the case of Motaku Shipping Agencies Limited vs. Commissioner of Income Tax [2014] and Sections 51 (3) (c) and 51 (6) of the Tax Procedures Act and submitted that the cost paid by the Appellant directly to the suppliers in terms of accommodation and travel was not sufficiently supported by relevant invoices or documents.

The Respondent‘s prayers 35. The Respondent, therefore, prayed for the Tribunal to find that:a.The Appeal by the Appellant lacks merit;b.The Appellant has been guided by the law to refer to money paid to consultants as non-professional fees;c.The Respondent herein will be prejudiced if the orders sought are granted;d.This Appeal be dismissed and the Respondent‘s Objection decision dated 30th August 2022 upheld with cost to the Respondent.

Issues For Determination 36. Gleaning through the Memorandum of Appeal, the parties‘ Statements of Facts, and the Respondent‘s submissions, the Tribunal puts forth the following issue for determination:Whether the Respondent erred in charging Withholding Tax on accommodation and transport costs paid for contractors as management and professional fees.

Analysis And Findings 37. The Tribunal proceeds to analyze the issue as herein-under.

38. The Respondent submitted that the amount paid for traveling costs and accommodation was subject to withholding tax which the Appellant failed to account for and the accommodation and traveling costs that were under a contractual capacity fell under the meaning of professional fees as defined under Section 2 of the Income Tax Act.

39. It added that any person who makes a payment that counts as interest shall be deemed as income in terms of professional fees and the amount paid to the consultant was subject to deduction of withholding tax based on the fact that KCLSEA is a local business operating in Kenya and the fee paid to facilitate their transport and accommodation amounted to professional fees since the work done was in line with civil and engineering works

40. The Appellant averred that the contract provided that incidental costs to the contract shall be met by the Appellant which the Appellant engaged and paid all local suppliers for the services rendered.

41. It asserted that the traveling and accommodation costs are not subject to withholding tax as claimed by the Respondent and the definition of professional fees does not include traveling and accommodation costs or any other incidental costs.

42. The Respondent further contended that it conducted an audit and found that the Appellant had not deducted Withholding tax on payments made on behalf of the consultants and that the Appellant in its assertions that it paid for transport and accommodation fees to suppliers directly were not substantiated by the Respondent through receipts and invoices.

43. The Appellant averred that it used the same documents and information the Respondent relied on in raising the outstanding Withholding tax to make its point.

44. Section 2 of the Income Tax Act defines management/professional fees as; -Management or professional fee" means any payment made to any person, other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services however calculated.

45. Further, Section 10 of the Income Tax Act provides as follows;-For the purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of—a.a management or professional fee or training fee;b.…c.interest and deemed interest; Provided that—i.this subsection shall not apply unless the payment is incurred in the production of income accrued in or derived from Kenya or in connexion with a business carried on or to be carried on, in whole or in part, in Kenya;ii.this subsection shall not apply to any such payment made, or purported to be made, by the permanent establishment in Kenya of a non-resident person to that non-resident person except for deductions provided for by agreements under section 41;iii.for the avoidance of doubt, the expression "non-resident person" shall include both head office and other offices of the non-resident person

46. Section 35 of the Income Tax Act also provides as follows:-Subject to subsection (3A), a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of—(f)Management or professional fee or training fee, the aggregate value of which is twenty-four thousand shillings or more in a month:Provided that for the purposes of this paragraph, contractual fee within the meaning of "management or Professional fee" shall mean payment for work done in respect of building, civil or engineering works;‖

47. The Tribunal has had occasion to review the above legal provisions relied on by the Respondent and could not find the basis on which it based its assessment on. Indeed, in its response to the Appeal, the Respondent pointed the Tribunal to the grounds set out in its objection decision, however, on checking the basis in the objection decision, the Tribunal found that the objection decision stated the basis to be as ‗explained in the Commissioner‘s Notice of Assessment Dated 31. 01. 2022‘. The said assessment was not provided.

48. The Tribunal is left to wonder what the Respondent, in the infinite of its wisdom, would base an assessment of Withholding tax for payments made to transport providers and for accommodation services on, not the least the application of a rate of 20%.

49. It is therefore, the Tribunal‘s finding that the Respondent erred in charging Withholding tax on the payments to transport providers and hotel accommodation by deeming them to be management or professional fee or even as interest so as to charge the same at a rate of 20%.

Final Decision 50. The upshot to the foregoing analysis is that the Appeal is meritorious and the Tribunal consequently makes the following Orders; -a.The Appeal be and is hereby allowed.b.The Objection decision dated 31st January 2022 be and is hereby set aside.c.Each party to bear its own costs.

51. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF OCTOBER, 2023. ROBERT M. MUTUMA - CHAIRPERSONELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBERBONIFACE K. TERER - MEMBERDR. WALTER ONGETI - MEMBER