[2024] KETAT 548 (KLR)

Bharti Airtel International (Netherlands) B.V. Kenya Branch v Commissinoer of Domestic Taxes (Tax Appeal 15 of 2023) [2024] KETAT 548 (KLR) (Civ) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 548 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 15 of 2023

RM Mutuma, Chair, EN Njeru, M Makau, AM Diriye & B Gitari, Members

April 26, 2024

Between

Bharti Airtel International (Netherlands) B.V. Kenya Branch

Appellant

and

The Commissinoer of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant which is duly incorporated under the Companies Act of the laws of Kenya is the registered branch of Bharti Airtel International (Netherlands) B.V (BAIN or the parent company), which is the holding company Bharti Airtel Africa B.V (BAA) which encompasses the African subsidiaries of Bharti Airtel Limited India (BALA), a leading telecommunications company globally.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and mandated with the responsibility of assessing, collecting and accounting for all tax revenue as an agent of the Government of the Republic of Kenya. The Respondent is also mandated with the responsibility of the administration and enforcement of the tax statutes set out under the Schedule to the said Act.

3. The Respondent conducted an audit on the Appellant following a refund claim made by the Appellant and issued an assessment on 25th August 2022, disallowing a refund claim of Kshs. 117,798,089. 00, and further demanded Withholding tax in the sum of Kshs. 12,358,329. 10.

4. The Appellant objected to the said assessment on 22nd September 2022, and the Respondent issued its objection decision on 17th November 2022 upholding its earlier demand.

5. The Respondent being aggrieved by the said decision filed the instant Appeal with the Tribunal.

The Appeal 6. The Appellant filed the Memorandum of Appeal dated 30th December2022 on 3rd January 2023, and set out the following grounds of appeal;i.That the Respondent has no legal basis to demand withholding tax from the Appellant for any period between 1st June 2016 to 7th November 2019 following the deletion of Section 35 (6) of the Income Tax Act which gave the Respondent power to demand withholding tax from the Appellant as if it was tax due and payable from the Appellant .ii.The Respondent erred in law and fact in demanding withholding tax on reimbursement of costs which are not listed as items qualifying for withholding tax under Sections 10 and 35 of the Income Tax Act.iii.The Respondent erred in law and fact by disregarding the terms of the contract between the Appellant and Sheer Logic Management Ltd and the invoicing arrangements thereunder.

The Appellant’s Case 7. The Appellant has set out its case on its;a.Statement of Facts dated 30th December 2022 and filed on 3rd January 2023, together with the documents attached thereto;b.Written submissions dated 17th July 2023 and filed on 19th July 2023; andc.Replying Submissions dated 30th August 2023 and filed on same date.

8. The Appellant stated that in the year 2014, its parent company entered into a contract with Sheer Logic Management Consultants Ltd pursuant to which the contractor company provided recruitment and employment agency services to the Appellant by recruiting employees and seconding them to the Appellant.

9. The Appellant further stated that on 24th November 2016, the Appellant’s parent company and the consultant company renewed the 2014 contract, pursuant to the terms of which, the contractor remained responsible for the management and remuneration of the seconded employees. It stated that the detailed scope of the services provided by the contractor to the Appellant were specified under clause 3 of the contract read together with schedule 1 to the contract.

10. The Appellant further stated that the employer-employee relationship between the contractor and the seconded personnel does not novate to the Appellant at any point during the tenure of the contract. The contractor undertook all the obligations imposed on an employer with respect to the seconded employees as demonstrated by clause 5. 5 and 5. 10 of the contract including being solely responsible of the following with respect to the seconded employee;5. 1. Compliance with applicable employment, tax, and other statutes including with regard to wage payments and deductions, overtime, annual leave, compassionate leave, sick leave and maintenance of all regulatory consents and or licenses;5. 2. Adequate insurance of the seconded personnel for health insurance and in case of accidents in the course of delivering services contemplated under the contract.

11. The Appellant also stated that the contractor invoices the Appellant for the services provided under the contract with the invoiced amount comprising two components;6. 1 The salary costs of the employees seconded to the Appellant. This component is a reimbursement to the contractor for the salary costs attributable to employees seconded to the Appellant.6. 2. An agency or management fee which is set at 10 % of the salary costs of the employees seconded to the Appellant.

12. The Appellant further stated that the invoices clearly delineate the salary costs and the agency or management fee component, and these invoices were availed to the Respondent during the audit.

13. The Appellant further stated that it was uncontested that the contractor accounts for employment taxes and other statutory deductions on the salary costs element invoiced to the Appellant on account of the seconded employees. It is also uncontested that the subjects the 10% agency fee component to Withholding tax at the rate of 5% since it qualifies as an agency fee which fits within the scope of management or professional fees.

14. It was stated by the Respondent that it conducted a VAT refund audit for the period 2017 to 2020, and at the conclusion of the audit issued a notice of assessment vide its letter dated 25th August 2022 for WHT in the sum of Kshs 12,358,329. 10.

15. It was also stated that the Respondent’s WHT assessment was premised on the allegation that the contract between the Appellant and the contractor was a contract for service and WHT should have been applied on the entire contractual sum, not just the agency fee component.

16. The Appellant submitted that the Respondent has no legal basis to demand WHT from the Appellant for any period between 1st June 2016 to 7th November 2019 following the deletion of Section 35 (6) of the Income Tax Act, which gave the Respondent power to demand WHT from the Appellant as if it was tax due and payable from the Appellant.

17. The Appellant submitted that the Finance Act, 2016 amended Section 35 of the ITA by deleting Section 35 (6) of the ITA, which was the basis which gave the Respondent power to demand WHT from taxpayers who had failed to deduct WHT on payments as if the WHT was due and payable from the taxpayers who had failed to deduct WHT.

18. The Appellant further submitted that a provision equivalent to the deleted Section 35 (6) of the ITA was proposed by the Finance Bill 2019 on 7th November 2019, and introduced through the Finance Act 2019, which amended the Tax Procedures Act , by introducing the current section 39 A of the TPA.

19. The Appellant to buttress its submission cited the case of Pevans EA Ltd & 6 others vs. the Commissioner of Domestic Taxes TAT 304 of 2019, where this position was upheld by the Tribunal.

20. The Appellant further submitted that the same position has been upheld by the High Court in the case of Commissioner of Domestic Taxes vs. Pevans E.A. Ltd & 6 others HCCOMMITA/E003/2019.

21. It was the submission of the Appellant that the Respondent’s WHT assessment squarely falls within the impugned period when the Respondent did not have powers to demand WHT from taxpayers who had failed to deduct WHT, and submitted that on this ground alone the Appeal ought to be allowed.

22. The Appellant also submitted that the Respondent has no power to demand WHT on reimbursement of costs which are not listed as items qualifying for WHT under Sections 10 and 35 of the ITA.

23. It submitted that the Respondent in its assessment and Objection decision, alleges that the entire payment made by the Appellant under the contract qualified for WHT and that the Appellant had an obligation to account for WHT on the entire contract sum and not just on the agency fee component.

24. It submitted that the provisions of Clause 5. 10 of the contract clearly demonstrate that the contractor is responsible for the remuneration of employees seconded to the Appellant. For the salary costs attributable to the seconded employees, the contractor invoices the Appellant on the basis of the actual salary costs, and the payment made by the Appellant to the contractor on the salary costs therefore translates to reimbursement of salary costs. The only income the contractor earns from the invoiced amount is the agency fee which is set at 10 % of the salary costs.

25. The Appellant cited the case of TAT No. 420/2021 Two Lakes Packaging Services Ltd vs. Commissioner of Domestic Taxes, where it was held;“Looking at the definition of management or professional fees as stated in the Act, it is logical to conclude that services related to employee costs can indeed fall under the definition of professional services . However , the reimbursement for costs themselves cannot be deemed to be payments or consideration for any services rendered . By their very nature , payroll costs, NSSF, NHIF, and such costs were not payments to the contractor and therefore could not have been subject of withholding tax.”

26. It was therefore a submission of the Appellant that in demanding WHT on the entire contract sum, the Respondent is demanding WHT on reimbursement of costs.

27. It was a further submission of the Appellant that not every payment qualifies for WHT. Payments qualifying for WHT are exhaustively listed under Sections 10 and 35 of the ITA , and there is no room, express or implied, for the Respondent to expand the scope of the list to cover other non-listed payments.

28. The Appellant also submitted that the Respondent cannot disregard terms of contract between the Appellant and its contractor, and the invoicing arrangement thereunder.

29. It submitted that the Respondent disregarded the terms of the contract and the invoicing arrangements between the Appellant and its contractor which conjunctively demonstrate that payments made by the Appellant under the contract are broken down into two distinct components – reimbursement of salary costs and an agency fee . Consequently, the Respondent alleged that the entire contractual sum should have been subjected to WHT.

30. The Appellant submitted that the aforesaid assertions by the Respondent amounts to rewriting of the contractual arrangement between it and the contractor, and the invoicing arrangements thereunder, hence going against the principle of freedom of contract and contractual autonomy.

31. The Appellant cited National Bank of Kenya Ltd vs. Pipeplastic Samkolit (K) Ltd & Anor (2001) eKLR, where it was held;“A court of Law cannot rewrite a contract between the parties. The parties are bound by the terms of their contract, unless coercion, fraud or undue influence are pleaded and proved.”

32. It was a further submission of the Appellant that the principle of the freedom of contract and contractual autonomy entitles parties to freely determine for themselves with whom, how and on what terms to contract. In the absence of illegality or issues touching on contractual validity, the Respondent can only give effect to the contracting terms of the agreement. The Appellant submitted that this position was upheld in the case of Attorney General of Belize vs. Belize Telecom Ltd (2009) UKPC 10, which was cited by the Court of Appeal with approval in Ushago Diani Investment Ltd vs. Jabeen Manan Abdulwahab (2018) eKLR.“The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means “.

33. In its replying Submissions to the Respondent’s submissions in respect of the validity of its Appeal, the Appellant submitted that it objected to the WHT in its entirety and therefore its notice of objection is valid.

34. It stated that in the context of the Respondent’s assessment dated 25th August 2022, the assessment covered VAT and WHT as follows;i.Principal WHT of Kshs. 8,723,377. 00 and penalties and interest thereof of Kshs. 436,169. 00 and Kshs. 3,024,316. 00 respectively on account of reimbursements of salary costs made by the Appellant to Sheer Logic during the period 2017 to 2020. ii.Reduction of VAT credit in the Appellant’s VAT credit to the tune of Kshs. 1,148,686. 00 on account of prohibited inputs under Section 17 (4) of the VAT Act.iii.Reduction in the Appellant’s VAT credit to the tune of Kshs. 11,748,242. 00 on account of disallowed input VAT overclaimed with respect to invoice No. 36818 from Parapet Cleaning.

35. The Appellant submitted that though it conceded to the VAT amounts, it was not supposed to pay as the only effect was reduction of its VAT credit to the tune of Kshs. 11,748,242. 00.

36. It submitted that the Respondent recommended a VAT refund claim of Kshs 117,798 ,089 for processing on account of excess input VAT relating to the Appellant’s zero-rated supplies .

37. The Appellant submitted that in its notice of objection dated 22nd September 2022, the Appellant objected to the entire WHT assessment by the Respondent. It stated that it clearly and expressly objected to the entire principal WHT assessment as follows:-“Based on the above, BAIN BV notes that the WHT on the said payments was appropriately paid and objects to the Kshs. 8,723,377. 00 demand in its entirety .”

38. It submitted that the Principal WHT amount had been assessed for the years 2017 to 2020 as broken down in the Respondent’s objection decision.

39. The Appellant further submitted that the Appellant has failed to specify the alleged undisputed amount that the Appellant ought to have paid.

40. On the issue of the Respondent’s lack of legal basis to demand WHT for the period 1st June 2016 to 7th November 2019, as the issue was not raised in the objection, the Appellant submitted that the TPA is not the primary statute that governs the procedures at the Tribunal and in the event of a conflict between the provisions of the TPA Act and the TAT Act, and the Regulations made thereunder, the provisions of the TPA have to give way to the procedural legislation. Being the statute guiding on the procedural aspects of the Tribunal, the provisions of Section 13 (6) of the TAT Act cannot be subservient to the Section 56 of the TPA as regards the procedural aspects of the Tribunal. In addition, Section 52 of the TPA states that an appealable decision is appealed in accordance with the provisions of the TAT Act.

Appellant’s Prayers 41. By reason of the foregoing the Appellant prayed that the Respondent’s assessment for Kshs. 12,358,329. 10 and its Objection decision be set aside, and its Appeal be allowed with costs.

The Respondent’s Case 42. The Respondent’s case is set out on its;a.Statement of Facts dated 25th January 2023 and filed on 26th January 2023 together with the documents annexed thereto; andb.Written submissions dated 8th August 2023 and filed on 10th August 2023.

43. The Respondent stated that on 25th August 2022, the Respondent issued a notice of assessment based on a VAT refund audit conducted for the period 2017 – 2020 disallowing Kshs. 53,438,372. 00, and recommending VAT refund claim of Kshs. 117,798,089. 00 and WHT of Kshs. 12,358,329. 10.

44. It stated that Sheer Logic Management Consultants is in the business of seconding or providing seconded employees to other companies. On 24th November 2016 it entered into a contract with the Appellant for the recruitment and staff management services.

45. The Respondent further stated that the Appellant makes payments to Sheer Logic for various staff depending on the level of staff and the rates agreed. Sheer Logic being the employer of the seconded staff pays the salaries to the employees after deducting the PAYE due.

46. The Respondent also stated that Sheer Logic is paid an agency fee of 10% of the staff cost paid by the Appellant every month after it has issued an invoice to the Appellant for the salaries for the seconded staff and the 10% agency fee.

47. It also stated that the Appellant makes payment to Sheer Logic and deducts WHT at 5 % on the agency fees paid to Sheer Logic pursuant to Section 35 (3) (f) of the ITA.

48. The Respondent further stated that the services offered under the contract fall within the definition of “Management or professional fees” as per Section 2 of the ITA which provides;“Management fees or professional fees 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.”

49. The Respondent also stated that the WHT rate applied was 5% as per Paragraph 5 (f) (ii) of the Third Schedule to the ITA, on the invoices availed by the Appellant. The Appellant only charged WHT on the management portion of 10 % and not the total contractual sum.

50. The Respondent further submitted that this being a contract for management services, the total amount billed by the contractor was chargeable to WHT at 5 %. The total invoice amount billed by the contractor is chargeable to WHT. The Respondent therefore asserted that the portion amounting to Kshs. 174,467,538. 00 was subjected to WHT at 5 % resulting to principal WHT of Kshs. 8,723,377. 00.

51. The Respondent also stated that without prejudice, the assessment includes the assessment for the period 2020 which the Appellant is not contesting, and was not paid making the Appeal invalid as provided for by Section 52 (3) of the TPA.

52. The Respondent submitted that any tax that was not disputed in the grounds of objection filed by the Respondent was not in dispute. Further it stated that as provided in Section 51 (2) of the TPA, any tax that is not disputed within 30 days of notification of the decision remain uncontested.

53. That Section 51 (3) of the TPA provides;“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if –(ii)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)”

54. It submitted that the Appellant objected to the additional assessment and the Respondent’s legal basis of demand of the taxes for the years 2017-2019. It therefore followed that the tax assessment for the year 2020 were uncontested.

55. The Respondent also submitted that Section 52 (2) provides that;“A Notice of Appeal to the Tribunal relating to an assessment shall be valid if the taxpayer has paid the tax not in dispute or entered into arrangement with the Commissioner to pay the tax not in dispute under the assessment at the time of lodging the notice.”

56. The Respondent submitted that the Appellant filed its Notice of Appeal on 14th December 2021, and at the time of filing the Notice of Appeal and the Memorandum of Appeal, the Appellant had neither paid the undisputed tax nor filed an application for extension of time to pay the same.

57. The Respondent further submitted that the Notice of Appeal filed by the Respondent was not valid and the appeal before the Tribunal is therefore invalid, fatally defective and incompetent and therefore not properly before the Tribunal.The Respondent cited the cases of ITA No. 12 of 2018 Hewlett Packard EA Ltd -vs – Commissioner of Domestic Taxes (2019) eKLR and ITA EO44 of 2021; Kaluworks Ltd -vs – Commissioner of Domestic Taxes .

58. The Respondent raised an objection to the Appellant raising the issue of whether the Respondent had any legal basis to demand WHT as it did not raise the same in its objection notice and therefore it was not addressed in the Objection decision, which offends the provisions of Section 56 ( 3) of the TPA. For that reason, it submitted that the same ought not be an issue for determination.

59. The Respondent also submitted that it had the legal basis to demand WHT from the Appellant. It cited Section 35(3) (f) which provides;“Subject to section 3A, a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respectof –(f)management or professional fee or training fee , the aggregate value of which is twenty -four thousand shillings or more in a month.”

60. The Respondent submitted that the TPA came into effect in the year 2015, and the WHT in issue were for the period 2017-2019 and the law applicable as far as payment of taxes that were not deducted was the TPA.

61. The Respondent also submitted that the relationship between the Appellant and its contractor was that of a consultancy and the entire amount payable by the Appellant was subject to WHT and cited Section 5 (f) (i) of ITA.

62. It submitted that from the strict interpretation of the law, for any amount paid as management or professional fees irrespective of how the amount is stated, broken down or paid, WHT shall be deducted on the amount paid or payable.

63. It further submitted that the contract between the Appellant and Sheer Logic is for management services and management fees paid are taxable in accordance with Section 35 (3) (f) of the ITA.

64. The Respondent also submitted that while it agrees that it should not meddle into the terms of contract between the Appellant with its consultants, it is trite law that parties cannot contract to evade taxation as tax evasion is illegal.

65. The Respondent submitted that as the Appellant has the burden of proof that the assessments made by the Respondent were wrong, specifically that the total invoice should not be subjected to WHT, the Appellant failed to discharge its burden of proof.

66. The Respondent further submitted that the Appeal is not valid and is bad in law and the Tribunal should proceed to dismiss the same.

Respondent’s Prayer 67. By reason of the foregoing, the Respondent prayed that the Appellant’s Appeal be dismissed with costs.

Dissues For Determination 68. The Tribunal having carefully considered the filings and submissions made by the parties, is of the view that the Appeal distils into the following three (3) issues for determination;i.Whether the Appellant’s appeal is validly lodged.ii.Whether the Respondent had a legal basis for assessing and demanding WHT for the period 1st June 2016 to 7th November 2019. iii.Whether the Respondent erred in demanding WHT on gross payments to the Appellant’s contractor.

Analysis And Determination 69. The Tribunal having identified the issues for determination, it proceeds the analyze the same as herein under;i.Whether the Appellant’s appeal is validly lodged.

70. It has been submitted that the Appellant did not object to the tax assessments for the year 2020 thereby rendering the same undisputed.

71. The Respondent submitted that any tax that was not disputed in the grounds of Objection filed by the Respondent was not disputed. Further, that as per the provisions of Section 51 (2) of the TPA, any tax that is not disputed within 30 days of notification of the decision remains uncontested.

72. The Respondent further submitted that the Appellant submitted to the additional assessment and the Respondent’s legal basis for demand of the taxes for the years 2017 to 2019, and left those for the year 2020 uncontested.

73. The Respondent submitted that the procedure of filing an appeal before the Tribunal is to first pay any taxes not in dispute then file the Notice of Appeal. As at the date of filing the Appeal, the Appellant had not paid the taxes not in dispute or made an application for extension of time to pay.

74. The Respondent therefore submitted that in view of the foregoing, the Appellant’s Appeal was rendered invalid.

75. The Appellant on the other hand submitted that the Appellant in its Memorandum of Appeal, expressly stated that it was appealing against the entire WHT assessment of Kshs. 12,358,329. 10. In its Memorandum of Appeal, notice of objection, Statement of Facts or submissions, there is nowhere it has conceded or admitted to the WHT amount relating to the year 2020.

76. The Respondent further submitted that in its MOA dated 30th December 2022 , and Statement of Facts dated 30th December 2022 , the Appellant raised three grounds of appeal with ground 2 and 3 applying to and challenging the entire WHT assessment for the period 2017 to 2020.

77. It asserted that these grounds are not mutually exclusive to the first ground of appeal in the MOA which relates to the decision in Commissioner of Domestic Taxes vs. Pevans EA Ltd & 6 others HCCITA/E003/2019.

78. Gleaning through the filings made by the parties it is apparent that the Respondent issued its objection decision, which triggered this Appeal, on the basis that the Appellant had objected to the assessment in entirety. Indeed, at the time of the Objection decision, the objection notice was deemed validly lodged in line with Section 51 (3) (b) of TPA thus the issue of payment of an undisputed amount did not arise. It is therefore contrived to for the Respondent to claim under Section 52 (2) of TPA that there is an amount of tax that is not in dispute.

79. It is noteworthy that the Respondent in making this demand has failed to specify the amount not in dispute, thus leaving the same to conjecture and doubtful.

80. In view of the above the Tribunal comes to the conclusion that the Respondent has failed to establish that there was an amount of tax not in dispute capable of payment subject to Section 51 (3) (b) and 52 (2) of the TPA.

81. The Tribunal finds that the Appellant’s Appeal was validly lodged and is competently before this Tribunal.ii.Whether the Respondent had any legal basis for assessing and demanding- WHT for the Period 1st June 2016 to 7th November 2019.

82. It has been submitted by the Appellant that the Respondent had no legal basis to demand WHT from the Appellant for any period between 1st June 2016 and 7th November 2019 following the deletion of Section 35 (6) of the ITA, which gave the Respondent power to assess and demand WHT from the Appellant as if it was tax due and payable from the Appellant.

83. The Appellant submitted that the Finance Act, 2016 amended Section 35 of the ITA by deleting Section 35 (6) of the ITA, which was the basis which gave the Respondent power to demand WHT from taxpayers who had failed to deduct WHT on payments as if the WHT was due and payable from the taxpayers who had failed to deduct WHT.

84. The Appellant further submitted that a provision equivalent to the deleted Section 35 (6) was proposed by the Finance Bill 2019, which amended the TPA, by introducing the current section 39 A of the TPA.

85. It was submitted for the Respondent that the Commissioner has the legal basis under Section 35(3) (f) of the TPA to demand WHT from the Appellant. Section 35(3)(f) of the TPA provides;“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 -thousand shillings or more in a month.”

86. The Respondent submitted that the TPA came into effect in the year 2015 , and the WHT in issue were for the period 2017 to 2019 and the law applicable as far as payment of taxes that were not deducted was the TPA. The Respondent stated that the Appellant was indeed mandated to withhold and remit the withholding tax from the payments subject to Withholding tax and penalty for the late submissions.

87. The Tribunal having gleaned the documents adduced and the submissions made is satisfied that the Finance ACT, 2016 amended Section 35 of the ITA by deleting Section 35 (6) of the ITA. As a consequence, and effective from June 2016, the Respondent no longer had a basis for demanding WHT from taxpayers who had failed to deduct and account for WHT on qualifying payments as if the WHT was due and payable from them.

88. It was only from 7th November 2019 that a provision equivalent to the deleted Section 35 (6) of the ITA was reintroduced through the Finance Act 2019 which amended the TPA by introducing the current Section 39A.

89. The Tribunal notes that this position was upheld in the case of TAT 304 of 2019 Pevans EA Ltd & 6 0thers vs. Commissioner of Domestic Taxes which held;“Consequently, it is clear to the Tribunal that the introduction of the aforesaid provision in the TPA is proof that a similar provision has not been in existence. In this regard, it is evident to the Tribunal that the Respondent is casting the net too wide by demanding WHT from the Appellant as if it was due from it.”This position was also upheld by Justice D.Majanja in the High Court appeal HCCITA/E003/2010 Commissioner of Domestic Taxes -vs – Pevans EA Ltd & 6 others.

90. Given the foregoing, the Tribunal is satisfied that the Respondent did not have powers to collect the WHT for the period 2017 to 2019 from the Appellant (that ought to have been deducted by the Appellant from its contractors), and that what the Respondent ought to have done was to assess and demand from the contractors directly.

91. In view of the foregoing, the Tribunal holds that the Respondent’s WHT assessment covers the years 2017 to 2020, and therefore includes the impugned period when the Respondent did not have the requisite statutory mandate to demand WHT from taxpayers who had failed to deduct WHT.

92. The Tribunal consequently finds that the Respondent erred in assessing and demanding WHT for the period 1st June 2016 to 7th November 2019 as it had no requisite legal basis enabling the same.

iii.Whether the reimbursement of costs is subject to WHT 93. It has been submitted that in its assessment and Objection decision, the Respondent has contended that the entire payment made by the Appellant under the contract qualified for WHT and that the Appellant had an obligation to account for WHT on the entire contract sum, and not just on the agency component.

94. The Appellant has submitted that under the express terms of its contract with its contractor, the contractor is responsible for the remuneration of employees seconded to the Appellant. For the salary costs attributable to the Appellant, the contractor invoices the Appellant on the basis of the actual salary costs. The payment made by the Appellant to the contractor on salary costs therefore amounts to a reimbursement of the salary costs. The effect of this is that the only income the contractor earns from the invoiced amount is the agency fee which is set at 10% of the salary costs.

95. The Appellant therefore submitted that the only earning capable of a charge to WHT is the 10% agency fee, the salary costs being reimbursement of the Contractor’s actual costs on employees it has seconded the Appellant which are already subjected to PAYE, and other statutory deductions payable by the contractor for its employees.

96. On the other hand the Respondent submitted that the relationship between the Appellant and its contractor was that of a consultancy and the entire amount payable to the contractor was professional/management fees and was subject to WHT.

97. The Tribunal notes that in the case of TAT 420 of 2021 Two Lakes Packaging Services Ltd -vs- Commissioner of Domestic Taxes , this Tribunal made a finding that reimbursement of costs does not amount to a payment or consideration and cannot qualify for WHT. The Tribunal held;“Looking at the definition of management or professional fees as stated in the Act, it is logical to conclude that services related to employee costs can indeed fall under the definition of professional services. However, the reimbursement for costs themselves cannot be deemed to be payments or consideration for any services rendered. By their nature, payroll costs, NSSF, NHIF and such other costs were not payments to the contractor and therefore could not have been subject of withholding tax.”

98. Therefore, guided by the aforecited decision, the Tribunal is satisfied that the facts presented in the instant Appeal are on all fours with the said decision. In light of this, the Tribunal finds that the contractor’s reimbursement for costs of its employees seconded to the Appellant should not have been subjected to WHT by the Respondent.

99. In view of the aforesaid the Tribunal holds that the Respondent erred in subjecting the gross payments made by the Appellant to its contractor, part of which was reimbursement of employee payroll costs, in its assessment on the Appellant for the period 2017 to 2020.

100. The upshot of the foregoing is that the Appellant’s Appeal is found meritorious and hereby succeeds.

Final Decision 101. The Appeal having succeeded the Tribunal makes the following Orders:-a.The Appeal be and is allowed.b.The Respondent’s Objection decision dated 17th November 2022 be and is hereby set aside.c.Each party to bear its own costs.

102. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF APRIL, 2024ROBERT M. MUTUMA - CHAIRPERSONELISHA N. NJERU - MEMBERMUTISO MAKAU - MEMBERMOHAMED A. DIRIYE - MEMBERBERNADETTE M. GITARI - MEMBER