[2023] KETAT 496 (KLR)

C.I.C Life Insurance Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal 1031 of 2022) [2023] KETAT 496 (KLR) (19 October 2023) (Judgment)

Neutral citation: [2023] KETAT 496 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1031 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

October 19, 2023

Between

C.I.C Life Insurance Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The appellant is a limited liability company incorporated in Kenya under the Companies Act, 2015,(Cap. 486, Laws of Kenya). Further, the appellant is duly licensed under the Insurance Act (cap. 487, Laws of Kenya) and is regulated by the Insurance Regulatory Authority (IRA). The appellant's principal activity is to provide various long-term insurance services to the general public, including personal and group life insurance, pension administration, long term investments with an aspect of life insurance, inter alia, under the supervision of the IRA.

2. The respondent is a principal officer appointed under and in accordance with section 13 of the Kenya Revenue Authority (KRA) Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The respondent conducted a desktop audit on the appellant's operations for the 2016 to 2020 years of income and through a letter dated February 24, 2022 demanded from the appellant additional tax of Kshs. 115,736,234 consisting of Pay As You Earn ('PAYE'), Value Added Tax and Withholding Tax.

4. The appellant and respondent resolved the issues relating to VAT and WHT and only maintained one issue under dispute; PAYE relating to remuneration to tied agents.

5. The appellant filed a notice objection challenging the assessment vide a letter dated March 22, 2022.

6. The respondent issued an objection decision vide a letter dated August 8, 2022 confirming the PAYE tax assessment and proceeded to demand tax of Kshs. 82,968,775. 00.

7. Following its dissatisfaction with the respondent‟s decision, the appellant appealed by filing a notice of appeal to the tribunal dated 7th September. 2022 and filed on the same day.

The Appeal 8. The Appeal is premised on the following grounds as stated in the appellant‟s memorandum of appeal dated September 20, 2022 and filed on September 21, 2022:-a.That the respondent failed to take into consideration all the information provided by the appellant in its notice of objection while arriving at the objection decision.b.That the respondent confirmed the assessment having wrongly applied the provisions of the Income Tax (PAYE) Rules and the Employment Act.c.That the assessment is contrary to the law, founded on a material misrepresentation of facts, which disregards the Insurance Act and guidelines issued by the Insurance Regulatory Authority and attempts to re-characterize the relationship between the insurer and the insurance agents.d.That, the respondent has erred in principle by deeming insurance agents to be employees of an insurance company, contrary to section 69(1) and (3) of the Insurance Act, which bars employees of an insurer from acting as insurance agents.e.That the respondent erred in principle by not taking into consideration that the agents contracted, are duly licensed by the Insurance Regulatory Authority, and operate within the ambit of the Insurance Act.f.That the respondent erred in law and fact by not taking into consideration the peculiarity of the life assurance industry, as was in a decision issued by the High Court in Income Tax Appeal No. 22 of 2017, UAP Life Insurance Company Limited v Commissioner of Domestic Taxes and by Tax Appeals Tribunal in the matter Tax Appeal No. 356 of 2019 Liberty Life v Commissioner of Domestic Taxes. In both instances the decisions were in favour of the appellant (taxpayer).g.That the respondent erred in law and fact by assuming that all agents enjoy the benefits indicated in the objection decision. This resulted in the respondent overstating the appellant's tax assessment.h.That the respondent erred in law by failing to confirm the assessment within 60 days as required under section 51 of the Tax Procedures Act.

Appellant‟s Case 9. The appellant‟s case is premised on its statement of facts dated September 20, 2022 and filed on September 21, 2022 together with the documents attached thereto.

10. That the company duly complied with the requirements of the Income Tax Act (ITA) by charging WHT on agency commissions.

11. That the respondent failed to take into consideration all the information provided by the appellant in its preliminary findings response while arriving at the assessment.

12. That the assessment was erroneous since the information relied upon by the respondent did not consider the facts and circumstances of the arrangement between the insurance company and the agents. The agents contracted are duly licensed by the Insurance Regulatory Authority and operate within the ambit of the Insurance Act.

13. That the assessment was contrary to the law, founded on a material misrepresentation of facts, which disregards the Insurance Act and guidelines issued by the Insurance Regulatory Authority and attempts to re-characterize the relationship between the insurer and the insurance agents.

14. That the appellant has three types of agents: ordinary agents, external agents and agency managers.

15. That ordinary and external agents have the primary responsibility of soliciting for business on behalf of the appellant in return for only a commission. That they do not enjoy any benefits in addition to their commissions.

16. That in addition to procuring business for the appellant, agency managers are also responsible for the coordination of the ordinary agents. That without prejudice, the respondent therefore erred in law and fact by contending that all these agents earn extra compensation which resulted in the respondent overstating the appellant's tax assessment. That the respondent has also deemed that all the commissions are taxable at 30%.

17. That the respondent wrongly applied the provisions of the Income Tax (PAYE) Rules. That by so doing, the respondent has assigned an artificial meaning to the term employee in total disregard of its statutory meaning and invariably wrongly considers the agents‟ earnings as salaries.

18. That the respondent deems insurance agents to be employees of an insurance company which is contrary to section 69 (1) and (3) of the Insurance Act, which bars employees of an insurer from acting as insurance agents.

19. That Section 69(1) provides that:“no insurer shall be directed or managed by, and no insurer shall employ in any capacity, a person whose remuneration or any part thereof takes the form of commission or bonus or of a share in the valuation surplus in respect of long-term insurance business”.

20. That Section 69(3) provides that:“A managing director or employee of an insurer shall not be a managing director or an employee of another insurer or of a bank or financial institution”.

21. That the agents contracted, are duly licensed by the Insurance Regulatory Authority, and operate within the ambit of the Insurance Act. That it is therefore direct contravention of the provisions of the Insurance Act for the respondent to deem agents to be employees.

22. That section 2 of the Insurance Act defines an “agent” to mean “a person, not being a salaried employee of an insurer who in consideration of a commission, solicits or procures insurance business for an insurer or broker”. That it is not in contention, that these agents have been contracted by the appellant to solicit and procure insurance business for the company, in consideration for a commission.

23. That the objection decision asserted that the insurance agents are employees merely because the appellant makes available a fixed place of business for them to work, gives them specific tasks to perform in coordinating other agents and payment of override commissions at prescribed rates.

24. That the objection decision disregards the fact that the appellant is required to comply with guidelines on registration of insurance agents issued by IRA which provides as follows:i.Paragraph 5. 1 requires an insurer to maintain an effective agency management system to manage the activities of its agentsii.Paragraph 5. 5 requires the insurer to provide sufficient training to the agents to be familiar with the requirements of the Insurance Act and the Guidelines and be able to competently undertake the duties of an insurance agentiii.Paragraph 5. 5 requires that the Agency Agreement shall stipulate the obligations and responsibilities of agents and the insurer.iv.Paragraph 5. 5 provides that the insurer shall be responsible for all actions of its agents in relation to agency services provided by the agents under the Agency Agreement.

25. That the objection decision asserted that insurance agents are employees since they have taken pension and life insurance from the appellant. That the appellant is in the life insurance business and the Insurance Act does not discriminate or preclude insurance agents from procuring such a cover from the insurers.

26. That section 73(4) of the Insurance Act provides that;“Nothing in this section shall prohibit a person obtaining the benefit of the commission payable by an insurer to a broker or agent under the relevant prospectus or agent's manual or broker's agreement where he takes out life assurance on his own life or on the lives of his dependents directly with the insurer without the services of an intermediary.”

27. That the respondent also asserts that insurance agents are employees on allegations that the contract provides for leave. That this disregards the factthat in practice, the appellant only accrued leave in the financial statements for employees and there is no accrued leave relating to insurance agents.

28. That payments to insurance agents are subject to withholding tax as per jurisprudence from courts of law. That this is based on a decision issued by the High Court in the matter Income Tax Appeal No. 22 of 2017, UAP Life Insurance Company Limited v Commissioner of Domestic Taxes and by the Tax Appeals Tribunal in the matter Tax Appeal No 356 of 2019 Liberty Life v Commissioner of Domestic Taxes. That in both instances, the decisions were in favour of the taxpayer.

29. That in the above stated cases, it was held that an insurance agent is not an employee of an insurance company taking into consideration the Employment Act and Insurance Act. That this was despite the said agents receiving benefits including leave, medical aid, pension, group life cover and subsidized mortgages. The court held that the existence of clauses in the agency agreement which confer certain benefits which may be construed to be consistent with contracts of employment, does not necessarily qualify them to be employees of the insurance agents. That as a result, the High Court held that tied insurance agents are not salaried employees.

30. That additionally, the High Court of the Republic of Uganda in APA Insurance (U) Ltd & 22 others v Uganda Revenue Authority, Civil Appeal No. 23 of 2018 held that the relationship between the insurers and the insurance agents is defined by the Insurance Act (Uganda) which is an Act of Parliament and not by the contracts. That the Insurance Act unambiguously and expressly excludes employees of insurers and reinsurers from acting as agents. That since an Act of Parliament expressly excludes employees from acting as agents, it was held that it was not open to the respondent (URA) or the Tribunal to characterize them as employees for purposes of the Income Tax Act. That similarly in Kenya, section 69 of the Insurance Act, unambiguously precludes employees of an insurer from acting as the insurance agents.

31. That in that regard, the appellant submits that it acted in accordance with the law and deducted all the withholding tax payable on the commissions for the years in dispute.

32. That the objection decision disregards the fact that the appellant as a company does not allow its employees to be in employment of other insurance companies.

33. That the court in the case of Geoffrey Makana Asenyo v Nakuru Water & Sanitation Services Company (2014) eKLR established fours tests to determine whether a person is contracted as an employee or independent contractor as follows:a.Control test - whether an employee is a person who is subject to the command of the master as to the manner in which he or she shall do the work;b.The integration test - in which the employee is subjected to the rules and procedures of the employer rather than personal command;c.Economic or business reality test - which takes into account whether the employee is in the business of his or her own account or work for another person, the employer who takes the ultimate risk of loss or chance of profit; andd.Mutuality of obligation test - in which the parties make commitment to maintain employment relationship over time. Under this test, a contract of services is for essentially services in return for wages and secondly mutual future performance.

34. That the respondent‟s case is based on allegation that insurance agents are controlled by the appellant solely from review of contracts. That this is contrary to facts since the contracts are express that those agents areindependent contractors, there is no control by the appellant of the time for reporting hours of work, place of work, agents operate on their own, and some have employees in their agencies.

35. That further, the objection decision does not address the question of double taxation on the income earned by the insurance agents. That the appellant discharged its mandate under section 35 of the Income Tax Act, deducted and remitted to the respondent withholding tax on income earned by the insurance agents. That this is not disputed. That under the Income Tax Act, each person is responsible and accountable for his/her tax affairs. That the appellant is not responsible for the tax affairs of the insurance agents.

36. That the objection decision assumed that all the agents engaged by the appellant enjoyed the benefits stipulated in the objection decision.

37. The appellant reiterates that ordinary and external agents do not enjoy any benefits. That on a without prejudice basis, the respondent therefore erred in law and fact by including them as agents with benefits which resulted in the respondent overstating the appellant's tax assessment.

38. That therefore, the gross-up by the respondent is erroneous due to the following reasons: it assumes that all agents receive additional compensation while it is only the external agents; and in the event that their income was subject to PAYE, some of the ordinary agents receive amounts below the minimum threshold per month.

39. That section 51(9) of the Tax Procedures Act, 2015, (TPA) states:“The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.”

40. That section 51(10) of the TPA mandates that an objection decision shall include a statement of findings on material facts and the reasons for the decision. That section 51(11) of the Tax Procedures Act, 2015, provides:“Where the Commissioner has not made an objection decision within sixty(60) days from the date that the taxpayer lodged a notice for the objection, the objection shall be allowed”.

41. That having filed the objection on time, the respondent was bound by statute to respond to the said objections within sixty (60) days as provided for by section 51(11) of the TPA. It is the appellant‟s submission that the failure by the respondent to issue an objection decision within the statutorily prescribed time is fatal.

42. That this position has been supported by several High Court of Kenya decisions, including, Vivo Energy Kenya Limited v Commissioner of Customs & Border Control, Kenya Revenue Authority & another (2020) eKLR in which the court categorically stated:“... the provisions of the TPA are clear that where the Commissioner fails to make a decision on an objection within sixty days, the objection shall be allowed...”

43. That in Republic v Commissioner of Domestic Taxes ex parte Fleur Investments Limited (2020) eKLR, Mativo. J. was also categorical in stating:“..As stated above, the respondent never filed a replying affidavit to rebut the averments that it never rendered a decision following the applicant's objection. There is nothing before me to show that the respondent made an objection decision as the law requires. By virtue of the clear provisions of section 51(8) and (11) of the TPA, the respondent is deemed to have allowed the applicant's objection. I find backing in Republic v Commissioner of Customs Services Ex-Parte Unilever Kenya Limited in which the court stated that if the Commissioner does not render a decision within the stipulated period, the objection is deemed as allowed by operation of the law. The act requires that where the Commissioner has not made an objection decision within 60 days from the date the taxpayer lodged the notice of objection, the objection shall be allowed. This means that the issues that the taxpayer had raised in the notice of objection will be accepted. In case of a tax assessment, it will be vacated. On this ground alone, the applicant's application succeeds.”

44. That from the submissions, the appellant has complied with the Income Tax Act and paid to the respondent all the withholding taxes deducted from income earned by insurance agents. That the respondent has failed to avail to the appellant tax records of taxes paid by the agents deemed to be employees and this could lead to double taxation.

Appellant‟s Prayers 45. The appellant prayed that the Tribunal:a.Allows this Appeal;b.Sets aside the objection decision;c.Awards costs to the appellant; andd.Issues any other orders it deems fit.

Respondent‟s Case 46. The respondent‟s case is premised on the hereunder filed documents and proceedings before the Tribunal: -a.The respondent‟s statement of facts dated and filed on October 19, 2022 together with the documents attached thereto.b.The respondent‟s written submissions dated March 13, 2023 and filed on the same date together with the legal authorities filed therewith.

47. That the appellant was selected for review following an industry wide review on treatment of tied up life agents for PAYE and that the main issue in contention is whether tied up agents engaged as unit managers and agency managers are under contract of service or contract for service.

48. That section 2 of The Income Tax Act defines Contract of service as:“...an agreement, whether oral or in writing, whether expressed or implied, to employ or to serve as an employee for any period of time, and includes a contract of apprenticeship or indentured learnership under which the employer has the power of selection and dismissal of the employee, pays his wages or salary and exercises general or specific control over the work done by him; and for the purpose of this definition an officer in the public service shall be deemed to be employed under a contract of service. ”

49. That Section 3(2)(a) provides that:-“...Subject to this Act, income upon which tax is chargeable under this Act is income in respect of-a.gains or profits from-i.a business, for whatever period of time carried on;ii.employment or services renderediii.a right granted to another person for use or occupation of property;”

50. That further Section 5(2) provides that:“..For the purposes of section 3(2)(a)(ii),"gains or profits" includes –(a)wages, salary, leave pay, sick pay, payment in lieu of leave, fees, commission, bonus, gratuity, or subsistence, travelling, entertainment or other allowance received in respect of employment or services rendered and any amount so received in respect of employment or services rendered in a year of income other than the year of income in which it is received shall be deemed to be income in respect of that other year of income. ”

51. That section 2 of The Insurance Act, 2020 defines an agent as“...a person, not being a salaried employee of an insurer who in consideration of a commission, solicits or procures insurance business for an insurer or broker...” while section 69(1) provides that “...Subject to subsection (2), no insurer shall be directed or managed by, and no insurer shall employ in any capacity, a person whose remuneration or any part thereof takes the form of commission or bonus or of a share in the valuation surplus in respect of long term insurance business...”

52. That the following tests were carried out to determine the nature of relationship (terms of engagement) between CIC Life Assurance Limited and it's tied up agents.a.Terms:The sampled agreements revealed that the tied agents have specific terms and conditions “...the company engages you as an Agency Manager for its Westlands Branch....”, “....Your appointment shall be subject to satisfactory reference checks and the completion of a six months probationary period "b.Right to terminate:- The agents and CIC Life have the right to end the relationship at any time without incurring liability. The contract states that “During the probationary period, either party may terminate this contract by giving to the other party one (1) weeks‟ notice or paying one (1) week's month's retainer in lieu of notice.”b.Control:a.The sampled agreement revealed that the taxpayer exercised considerable control over its tied agents, which is consistent with a contract of service.b.They are appointed and are expected to work in a specific office (branch) and perform specific tasks. They also report to their superiors (Company's area manager) while providing services. The Contract states that “. you shall be required to meet the performance objectives set out in the company's annual manpower and sales budget, comply with company's standards, policies and procedures, comply with the reasonable directives of the national sales manager ...”, “ .... Unless prevented by ill health you are required to devote the whole of your time and attention and abilities to the acquisition of life insurance business by the unit managers and agents under your supervisory control”.b.Fixed Place of Work - the tied agents are restricted in the location where they can operate and are not allowed to provide services in another location without the taxpayer's permission. Part of the sampled contract states “...the company reserves the right to allocate and redistribute branches/ territories/areas as it deems fit”, “ ...You will be required to provide the services at the branch/ territory /area that the company deems fit and you shall not be entitled to carry on your duties in another location without the company's permission.”b.Remuneration:a.The tied agents get monthly retainers and override commissions at prescribed rates pegged on performance of their units.b.Medical scheme: the taxpayer provided a medical scheme similar to those of its employees “...the company shall provide you and your immediate family members with a medical cover in accordance with the company's policy.”c.Group schemes: the taxpayer provided group schemes similar to those of its employees “....you will be eligible to join the company's group life and group last expense policies. ”d.Loan schemes: The taxpayer provided benefits similar to those of its employees: “....You will be eligible to take a car loan and/or mortgage loan from the company subject to the company's eligibility requirements. "

53. That the respondent arrived at the conclusion that these terms are consistent with those of contract of service i.e Employer-Employee relationship between CIC Life Assurance Limited and it's tied up agents.

54. That the Employment Act defines an employee as a person employed for wages or a salary and includes an apprentice and indentured learner. That a director is defined by the Income Tax Act as a member of the board of directors of a body corporate including a single director. That it also includes members of the corporation where those members run the affairs of the company. That a director holds an office and position in the company. That the director may have a service contract.

55. That the Income Tax Act defines a contract of service as follows:-“„Contract of service‟ means an agreement, whether oral or in writing, whether expressed or implied, to employ or to serve as an employee for any period of time and includes a contract of apprenticeship or indentured leadership under which the employer has the power of selection and dismissal of the employee, pays his wages or salary and exercises general or specific control over work done by him; and for the purpose of this definition an officer in the public service shall be deemed to be employed under a contract of service.”

56. That in the case of Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance, the Court put forth conditions required to establish a contract of service which are:(i)The servant agrees to provide his own work and skill by providing services for their master, in consideration of a wage or other remunerations.ii.The servant agrees that in the performance of that service they will be subject to the master's control. Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time, and the place where it shall be done.iii.The contract of service complies with the terms of an employment agreement. This entails complying with the statutory requirements in the Employment act including minimum wage, provision for leave and payment of income tax.”

57. The respondent submits that from the review carried out, the sampled agreements between the appellant and the tied-up agents revealed that the tied-up agents have specific terms and conditions. That some of these specific terms includes the facts that the appointment of the tied-up agents is subject to satisfactory reference checks and completion of a six-month probationary period and that the parties reserve the right to terminate the agreement at any time without incurring any liability.

58. The respondent submits that the above terms of agreement are precise and fall within the ambit of a contract of service. The mere fact that the tied-up agents have an employment agreement with the appellant makes them employees of the appellant; as such, the appellant is liable to pay PAYE for the tied-up agents.

59. That with reference to exercise of control, the respondent submits that from the sampled agreements between the appellant and its tied-up agents, it is evident that the appellant exercises considerable control over its tied-up life agents which is consistent with a contract of service. That this in itself illustrates an employer-employee relationship between the appellant and its tied-up life agents.

60. The respondent submits that since the tied-up life agents are appointed by the appellant with the expectation that it will work in a specific office (Westlands branch), perform specific tasks and report to their supervisors, the appellant has some level of control over how the tied-up life agents go about performing their duties.

61. That the appellant has gone ahead to set a precise set of objectives that the tied-up life agents are supposed to meet to the satisfaction of the appellant. That additionally, the tied-up life agents have to comply with the appellant‟s standards, policies, procedures as well as comply with the reasonable directives of the appellant's National sales manager.

62. The respondent quotes part of the said agreement between the appellant and its tied-up life agents that states that; “... unless prevented by ill health, you are required to devote the whole of your time and attention and abilities to the acquisition of life insurance business by the unit managers and agents under your supervisory control.”

63. The respondent adds that the appellant provides a fixed place of work for its tied-up life agents that restricts them with reference to location to the extent that the tied-up life agents are not allowed to provide services in another location without the appellant‟s permission. That part of the sampled agreements state that the appellant reserves the right to allocate and redistribute branches/territories/areas as it deems fit which goes to show the extent of control that the appellant exercises on its tied-up life agents.

64. The respondent submits that the level of control exercised by the appellant upon its tied-up life agents as established above shows that the nature of relationship between the appellant and its tied-up life agents is that of a contract of service. That the respondent therefore rightfully charged the appellant for PAYE due.

65. That finally, on the element of remuneration, the respondent submits that the terms mirror that of an employment relationship. That the tied-up life agents get monthly retainers and override commissions at prescribed rates pegged on performance of their units. That this is consistent with a contract of service.

66. The respondent submits that the parameters of the appellant‟s relationship with its tied up life agents in this case meets the conditions set out in the case above thus qualifying as a contract of service.

67. Further, the respondent submits that the appellant treated its tied-up life agents in the same regard as its insurance employees. That for instance, the appellant provided the tied-up life agents a similar medical scheme to the one it provided for its employees. Similarly, the appellant provided the tied-up life agents with group schemes (policies) and benefits such as loans similar to those of employees. That this goes to show that the appellant considered its tied up life agents as insurance employees as well.

68. That in the case of Gilbert Sule Otieno v Seventh Day Adventist Church (East Africa) Limited, the Court ruled against the Claimant on the basis that the contract did not meet the essentials of a contract of service as below:“The contract provided for the obligations, duties and responsibilities of each party. None of the obligations, duties and responsibilities accruing to the claimant are of the genre which constitute the fundamental rights or basic conditions and terms of employment of an employee such as entitlement to a wage/salary, which is an essential of a contract of service, hours of work, entitlement to annual leave, public holidays, accommodation or in lieu housing allowance, pensions and protection against unfair or wrongful dismissal.”

69. That in the matter of Benjamin Joseph Omusamia v Upperhill Springs Restaurant [2021] eKLR, the Court held in favour of the claimant that the relationship between the parties was that of employer- employee. That the court was persuaded on the same as a result of documents produced by the claimant. The respondent submits that in this case, the sampled agreement between the appellant and its tied-up life agents as well as the payment of the tied-up life agents in salary/wages and commission is equally substantial proof of an employer-employee relationship.

70. That from the foregoing, it is evident that the nature of relationship between the appellant and its tied-up agents is that of a contract of service. That as such, the respondent was well within its lawful mandate in charging the appellant with PAYE.

Respondent‟s Prayers 71. The respondent prayed that:a.The appeal be dismissed with costsb.The objection decision and confirmation of additional assessments dated August 8, 2022 be upheld.

Issues For Determination 72. The Tribunal having considered the pleadings and documentation filed by both parties is of the respectful view that the issues falling for its determination are:a.Whether the appellant‟s objection was allowed by operation of the lawb.Whether tied up insurance agents licensed under the Insurance Act are subject to PAYE

Analysis And Determinationa.Whether the appellant‟s objection was allowed by operation of the law

73. The appellant submitted that it lodged its notice of objection on March 22, 2022 in response to the respondent's notice of assessment dated February 24, 2022. That the respondent issued its objection decision on August 8, 2022 after a lapse of 60 days required by law.

74. That section 51 (11) of the Tax Procedure Act 2015 provides that:-''Where the Commissioner has not made an objection decision within sixty days from the date that the taxpayer lodged a notice of objection, the objection shall be allowed.”

75. That the 60 days period started running from the March 22, 2022 when the respondent received the objection from the appellant. The appellant submitted that the respondent failed to make its decision within the statutory period of 60 days by virtue of section 51(11) (b) of the TPA and thus the appellant‟s objection was deemed to have been allowed by operation of the law.

76. That the respondent has not submitted on the above averment in its pleadings.

77. The Tribunal perused the documents filed by the parties and noted that after the appellant issued its notice of objection on March 22, 2022, there was no further communication between the parties.

78. The Tribunal however noted that in the respondent‟s objection decision dated August 8, 2022 , it stated that it received final documents from the appellant on July 18, 2022. This averment was not rebutted by the appellant. The Tribunal therefore could only conclude that indeed there must have been documents submitted by the appellant on or about the said date.

79. The Tribunal further concluded that the objection decision in response to the appellant‟s objection dated March 22, 2022 was issued by the respondent on August 8, 2022 after receipt of the final document from the appellant on July 18, 2022. This was within the 60 day timeline provided under section 51(11) of the TPA.

80. Section 51(11) states as follows regarding the timeline for an issuance of objection decision:-“The Commissioner shall make the objection decision within sixty days from the date of receipt of-a.the notice of objection; orb.any further information the Commissioner may require from the taxpayer, failure to which the objection shall be deemed to be allowed.”

81. The Tribunal having determined that the appellant‟s objection was not allowed by operation of the law proceeded to deal with the second issue falling for its determination as hereunder.b.Whether tied up insurance agents licensed under the Insurance Act are subject to PAYE

82. It is the appellant's case that the respondent wrongly applied the provisions of the Income Tax (PAYE) Rules to override the statutory definition of an employee under the Employment Act. That by so doing, the respondent erroneously concluded that the agents‟ earnings were salaries.

83. The appellant averred that the relationship between the insurer and the insurance agents is statutory since it is defined and regulated by the Insurance Act, cap. 487 of the laws of Kenya and Guidelines issued by the Insurance Regulatory Authority.

84. That the entire objection decision is contrary to the law since it disregards the Insurance Act and guidelines issued by the Insurance Regulatory Authority and attempts to re-characterise this relationship.

85. The appellant argued that payments to insurance agents are subject to withholding tax as per jurisprudence from courts of law and that the appellant duly deducted and remitted the same to the respondent; a fact that is not in dispute.

86. The respondent, on its part argued that it sampled agreements between the appellant and the tied-up agents which revealed that the tied-up agents have specific terms and conditions. That some of these specific terms include the fact that the appointment of the tied-up agents is subject to satisfactory reference checks and completion of a six-month probationary period and that the parties reserve the right to terminate the agreement at any time without incurring any liability.

87. The respondent submitted that the above terms of agreement are precise and fall within the ambit of a contract of service. That the tied-up agents have an employment agreement with the appellant which makes them employees of the appellant and that as such, the appellant is liable to pay PAYE for the tied- up agents.

88. The Tribunal has carefully reviewed the opposing arguments and authorities cited by each of the parties. The Tribunal after careful consideration, confirms that it is clear to it that the bone of contention is whether in regard to insurance, tied up agents are employees or not and whether they are subject to PAYE provisions under the Income Tax Act.

89. It is important therefore to appreciate that for matters insurance, the Insurance Act is key in the same way the Income Tax Act is important in governing matters tax. Accordingly, the Tribunal‟s analysis of the issue in contention will flow from a harmonised understanding of the two statutes while recognising the primacy of each in insurance matters and tax matters, respectively.

90. It is worth noting that the Income Tax Act neither defines the terms agent nor employee but defines the term “employer” to include any resident person responsible for the payment of, or on account of, emoluments to an employee, and an agent, manager or other representative so responsible in Kenya on behalf of a non-resident employer. The Income Tax (PAYE) Rules define an employee to include an individual receiving emoluments in respect of any employment, office, appointment or past employment.

91. Additionally, the Employment Act of Kenya is the substantive and primary legislation governing employment matters, and at section 2 defines an “employee” to mean a person employed for wages or a salary and includes an apprentice and indentured learner and “employer” to mean any person, public body, firm, corporation or company who or which has entered into a contract of service to employ any individual and includes the agent. foreman, manager or factor of such person, public body, firm, corporation or company.

92. Section 2 of the Insurance Act defines an “agent” to mean a person not being a salaried employee of an insurer who, in consideration of a commission, solicits or procures insurance business for an insurer or broker. This definition is further supplemented by the provisions Section 69 (1)(3) of the Insurance Act which stipulates as follows:(1)Subject to subsection (2), no insurer shall be directed or managed by, and no insurer shall employ in any capacity, a person whose remuneration or any part thereof takes the form of commission or bonus or of a share in the valuation surplus in respect of long-term insurance business.(2)...(3)A managing director or employee of an insurer shall not be a managing director or employee of another insurer or of a bank or financial institution.”

93. From the foregoing, it is clear that while the Income Tax Act and PAYE Rules subject employee emoluments to PAYE; it does not consider or bring agents within the ambit of employment. On the other hand, it is also clear that the Insurance Act in its definition of agent qualifies that an agent cannot be a salaried employee of the insurer.

94. The respondent has based its assessment on what it terms an employer- employee relationship between the tied agents and the appellant not on the basis of the unambiguous definitions in the two statutes but on the basis that agents‟ contracts afford the agent benefits that form the hallmark of contracts of services. The Tribunal finds this imputation of employer-employee relationship erroneous for a number of reasons.

95. In the first instance, Parliament being the same body that passed both the ITA and Insurance Act, in its wisdom deemed it fit to exclude insurance agents from the scope employees and everything that this pertains. The Insurance Act being the governing primary law applicable to insurance agents offers a way of treating these agents i.e. that they are not salaried persons and in turn the insurance companies that procure their services shall not employ these agents; but rather compensate them for their services through commissions and bonus. In contrast, the distinctive feature of employment is the presence of a salary. which is the primary element that attracts PAYE in the Income Tax Act.

96. The Tribunal finds that the respondent erred in law by failing to read the provisions of the Income Tax Act and the Insurance Act harmoniously in the light of the fact that the Income Tax Act fails to provide for treatment of insurance agents. The respondent‟s argument that it can assign an artificial definition to a term as opposed to the statutory meaning is not tenable.

97. The Tribunal associates itself with the High Court judgment in UAP Life Assurance Company Limited v Commissioner of Domestic Taxes [2019] eKLR wherein it was held as follows:“In my considered opinion for all intent and purpose and with due respect to the Tribunal's decision, the provisions of the Income Tax (PAYE) Rules cannot override the statutory provisions on the definition of an employee. The distinctive feature of an employee is payment of a salary or wage. The evidence herein reveals that the tied agents were being paid subsidy per month stated to be In the form of an allowance. The agents were not salaried employees. Therefore, the provisions of Employment Act were relevant.In this regard the arguments by the respondent that the Income Tax Act, can assign an artificial definition to a term as opposed to the statutory meaning is not tenable. Neither Is the argument that the term employeeis defined In a peculiar way for the purpose of assessing tax of an employee as defined under the Act.”

98. The Tribunal, having found that insurance agents are not employees of the insurance company, was also disinclined to accept the respondent‟s arguments as the same are purely conjectures and baseless implications into the agent contracts of the appellant. The respondent noted some of the benefits accruing to the agents resemble those that employees get under contract of service and on this basis the respondent implied an employee-employer relationship leading to the assessment for PAYE.

99. The Tribunal finds that this is a violation of a key principle of taxation; that taxes are levied by clear word and not by implication or intendment. In this regard, the Tribunal places reliance on the case of Cape Brandy Syndicate v Inland Revenue Commissioner [1921] 1 KB 64, where the court held as follows: “In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing Is to be read in, nothing is to be implied.

One can only look fairly at the language used...” 100. The Tribunal therefore concludes that tied up agents are not liable to PAYE in line with the decision by the High Court in UAP Life Assurance Company Limited v Commissioner of Domestic Taxes [2019] eKLR and therefore the PAYE assessment was not justified.

Final Decision 101. In view of the foregoing, the Tribunal finds that the Appeal is merited and accordingly proceeds to make the following Orders: -a.The appeal be and is hereby allowed.b.The respondent‟s objection decision dated August 8, 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 THIS 19TH DAY OF OCTOBER, 2023ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY OLUOCH - MEMBEREUNICE NG‟ANG‟A - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER