https://new.kenyalaw.org/akn/ke/judgment/kehc/2026/7036

Commissioner of Domestic Taxes v Qhala Limited (Income Tax Appeal E055 of 2025) [2026] KEHC 7036 (KLR) (Commercial and Tax) (7 May 2026) (Judgment) Neutral citation: [2026] KEHC 7036 (KLR) Republic of Kenya In the High Court at Nairobi (Milimani Commercial Courts) Commercial and Tax Income Tax Appeal E055 of 2025 F Gikonyo, J May 7, 2026 Between Commissioner of Domestic Taxes Appellant and Qhala Limited Respondent Judgment 1.This is an appeal against the Tax Appeals Tribunal’s judgment dated 24.1.2025 in Tax Appeal No. E112 of 2024. 2.The appeal consists in grounds of appeal in the memorandum of appeal dated 20.3.2025 namely: -1.That the Tribunal erred in law and fact in finding that the Appellant herein erred in treating Respondent’s service providers as employees instead of independent contractors and issuing additional assessment thereof for PAYE.2.That the Tribunal erred in law and fact by failing to consider the evidence adduced by the Appellant herein.3.That the Tribunal misapplied the law and facts and therefore arrived at the wrong decision in setting aside the Appellant’s decision.4.That the Tribunal erred in law and fact in failing to consider the Appellant’s response and submissions in its finding. 3.The respondent filed a statement of facts dated 8.5.2025 in opposition to the appeal. Directions of the court 4.The appeal was canvassed through written submissions dated 13.5.2025 and 29.5.2025 by the appellant and the respondent respectively. Appellant’s case 5.The appellant urged the court to allow its appeal with costs and to set aside the consequential findings and orders of the Tribunal subject to this appeal in entirety. 6.The appellant submitted that the Tribunal erred by finding that it erred in treating respondent’s service providers as employees instead of independent contractors and issuing additional assessment thereof for PAYE. 7.The appellant asserted that from the review of the contracts and iTax returns, an employer-employee relationship could be clearly identified. That the contracts clearly demonstrated the control that the respondent had on the service providers; how services were to be performed; the reporting lines for the said consultants; fixed remuneration and ownership rights of the work done; among other things. 8.The appellant submitted that the contracts clearly illuminate on the integral nature of the services provided by the consultants. That the contracts reveal that the respondent and the service providers had irreducible minimum of mutuality of obligations. That therefore they should not be considered as a mere accessory as the independent consultants are. 9.On the factors considered in determining whether one was an employee and therefore under a contract of service, the appellant relied on Kenya Hotels & Allied Workers Union v Alfajiri Villas (Magufa Ltd) [2014] eKLR, Christine Adot Lopeyio v Wycliffee Mwathi Pere [2013] eKLR, Omusamia v Upperhill Springs Restaurant [2021] eKLR and Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497 Response 10.The respondent submitted that the Tribunal did not err in its finding that the 43 individuals were engaged as consultants and not employees and further vacating the entire assessment of PAYE (KShs.20,494,705). It contended that it is the appellant who erred in concluding that the service provides were employees contrary to section 2 of the Income Tax Act as read together with section 2 of the Employment Act, 2007. 11.The respondent argued that the service providers cannot be classified as employees in the absence of such mutual obligations since they do not work under the condition that the Respondent will provide work nor do the workers guarantee future performance. It relied on Charles Juma Oleng v M/S Auto Garage Ltd & another [2014] eKLR on mutuality of obligation being mutual promises for future performance. 12.The respondent asserted that the consultants are not integrated into its business as they are only engaged in respect of specific projects in line with their areas of expertise. That the consultants utilize their own tools of trade and workstations to perform the work. It relied on Evveret Aviation Ltd v Kenya Revenue Authority (through the Commissioner of Domestic Taxes) [2013] eKLR on integrity test. 13.The respondent further submitted that the consultants are not subject to its control. It relied on the Omusamia case [supra] on the control test. 14.The respondent faulted the appellant for failure to consider that the relationship with the consultants does not meet the economic reality test. That the consultants utilize their own tools and bear the risk of their consultancy engagement by providing indemnity and/or procuring their own liability insurance policy at their own expense. 15.The respondent relied on Peter Adams Ludaava v Bonito Hotels Limited [2022] eKLR to the effect that integration test is only one of the factors for consideration and George Kamau Ndiritu & another v Intercontinental Hotel [2015] eKLR, that the previous test of integration and control were inconclusive without examining the totality of the relationship between the parties. 16.The respondent faulted the appellant’s finding that the consultants were employees based on the payments made to them are consistent and made monthly. It contended that the Appellant failed to consider that payments were made upon submission of invoices for services performed in the preceding month. 17.The respondent asserted that it discharged its burden of proof as envisaged under section 56(1) of the Tax Procedures Act by supporting its position that the 43 individuals were consultants and not employees by adducing evidence by way of contracts, invoices, on boarding policy etc 18.The respondent submitted that the appellant did not counter and disprove the evidence produced. That it only submitted its assessment, the respondent’s objection and the objection decision. That therefore, the Tribunal cannot be faulted for failing to consider the evidence adduced by the appellant. 19.The respondent further submitted that the Tribunal properly considered both parties’ pleadings, evidence and arguments in arriving at its decision. It added that the appellant did not specify which aspects in its response and submissions were disregarded in the judgment. 20.The respondent urged the court to dismiss the appeal with costs and to uphold the judgment and orders of the Tribunal. Analysis and Determination Duty of court 21.Section 56(2) of the Tax Procedures Act provides that “An appeal to the High Court or to the Court of Appeal shall be on a question of law only.” 22.The court’s mandate is limited to questions of law. However, it will also consider questions of fact to determine “whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them.” John Munuve Mati v Returning Officer Mwingi North Constituency & 2 others NRB CA EPA NO. 5 OF 2018 [2018] eKLR 23.The issue before the court is whether the respondent’s service providers were employees of the respondent or independent contractors for purposes of PAYE withholding obligations. 24.The issue is of mixed fact and law as the Tribunal had to apply the law and consider evidence to determine whether the service providers were employees or independent contractors. 25.The Tribunal’s findings relevant to the issue in controversy are reproduced below: -“ 69.The Tribunal has examined the contracts in evidence and is of the view that the said contracts do not contain salient features of contracts of service. For instance: -a.The agreements do not comply with the provisions of Section 10 (2) of the Employment Act.b.The agreements do not define aspects such as age and sex of the employee; and the hours of work; and scale or rate of remuneration, the method of calculating that remuneration and details of other benefits; the intervals at which remuneration is paid; annual leave; incapacity to work due to sickness or injury; provision for sick pay; pensions and pension scheme; length of notice which the employee is obliged to give and entitled to receive to terminate his contract of employment; any collective agreements among other factors.c.The agreement also provide for invoicing services which is a key feature of contract for services as was affirmed in the case Fredrick Byakika v Mutiso Menezes International Limited (2016) eKLR. Meaning that the costs for the services offered are not fixed or predictable like it would be in case of employees. 70.The agreements in issue also expressly stated that consultants are supposed to rely on their own tools, instruments and equipment. This is an important feature of contracts for service which indicate that the service provider is not subject to control from the principal. 71.The agreements also have clauses on consultancy fee, clauses on the need to tender invoices to facilitate payment, and provide that the consultancy fee is subject to 5% Withholding tax. Apart from that, the agreements indicates that the consultants were required to take out insurance policies at their expense covering their performance. All these do point that this was a contract for service.” 26.The appellant contended that the appellant’s service providers were employees based on the control test, the integral test and the mutuality of obligations. 27.I have examined the contracts. The contracts provide that the consultant would provide its own tools, instruments equipment and place of performing the services. The terms for each contract was distinct. One was for a term of 3 months. The consultant would submit a monthly invoice detailing services performed during the preceding month and the amount due within 30 days of approval of the invoice by the company. 28.The contracts also provide that the consultant would maintain at its sole expense liability insurance covering performance of services by the consultant. They could be terminated by the company through 7 days’ notice without cause or by either party giving 7 days’ notice in the event of a material breach. They further provide for invoicing by the consultant for work done each month. 29.The contracts further provide that the consultant is providing services as an independent contractor. That nothing in the agreement should be construed to place the consultant and the company in a relationship as partners, joint ventures, employer. Employee… 30.The test of integration and control are inconclusive without examining ‘the fundamental behaviour of the parties such as the form of documentation evidencing the relationship and the mode of payment is critical’. George Kamau Nderitu & another v Intercontinental Hotel [supra]. 31.The appellant has not demonstrated the control aspect as the contracts provide that the consultants would provide the place of performing the services. There is no evidence that the respondent controlled the consultant’s day to day activities or performance of their contractual obligations. 32.As regards mutuality of obligations, the court finds that the appellant has not shown the continuing relationship between the respondent and the service providers. As earlier noted, the contracts provided a range of terms from one provider to another. There is no demonstration of mutual promises for future performance. 33.Overall, the court finds that the Tribunal’s findings are in tandem with the evidence. The court finds therefore, that the finding by the Tribunal that the contracts were for services not of services were grounded in evidence provided before it. 34.Therefore, grounds 1 and 3 fail. Grounds 2 and 4: non-consideration of evidence 35.The appellant made two contentions: That the Tribunal erred in law and fact by failing to consider; i) the evidence adduced by it; and ii) the Appellant’s response and submissions in its finding. 36.The respondent’s submissions on these claims was that, the appellant; i) did not counter and disprove the evidence produced; and ii) only submitted its assessment, the respondent’s objection and the objection decision. Therefore, according to the respondent, the Tribunal cannot be faulted for failing to consider the evidence adduced by the appellant. 37.The respondent further submitted that the Tribunal properly considered both parties’ pleadings, evidence and arguments in arriving at its decision. It added that the appellant did not specify which aspects in its response and submissions were disregarded in the judgment. 38.From the record, the appellant only produced its demand notice for the assessments, the respondent’s objection and its objection decision. 39.An appellant bears the obligation to prove the grounds of appeal. As for ground 3, the appellant did not indicate in its submissions which parts of its response and submissions the Tribunal did not consider. 40.The Tribunal captured the appellant’s case as gleaned from the statement of facts and written submissions at paragraphs 43 to 53 of the impugned judgement. 41.Ground 2 and 3 are therefore not well founded or supported. They also fail. Conclusion 42.The upshot is that the appellant’s appeal is found to be unmerited. It is therefore dismissed. DATED, SIGNED AND DELIVERED THROUGH MICROSOFT TEAMS ONLINE APPLICATION THIS 7TH DAY OF MAY, 2026-----------------F. GIKONYO MJUDGEIn the presence of: -Muhoro for AppellantMs. Davine for RespondentCA-Ivan/Aggrey