[2023] KETAT 889 (KLR)

Crown Beverages Ltd v Commissioner of Domestic Taxes (Tax Appeal 1560 of 2022) [2023] KETAT 889 (KLR) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 889 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1560 of 2022

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

December 20, 2023

Between

Crown Beverages Ltd

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company whose principal business is the provision of bottling services for non-alcoholic beverages. It also manufactures plastic bottles and runs soft drinks and mineral water plants.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 of the laws of Kenya. Under Section 5 (1) of the Act the Respondent 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 performance of its functions under subsection (1), the Respondent 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 revenue in accordance with those laws.

3. In the accounting period ending December 2018, the Appellant filed and paid Withholding taxes in respect of technical fees and computer charges amounting to KShs 3,008,236. 00 and KShs 2,852,844. 00, respectively.

4. The amounts were withheld from payments made to Coca-Cola Sabco (Pty) Ltd, a company resident in South Africa that had offered services to the Appellant.

5. On 20th May, 2019, the Appellant sought a refund of these amounts from the Respondent pursuant to Section 47 of the Tax Procedures Act, 2015 (hereinafter ‘TPA’) and in line with Section 90(1) of the Income Tax Act (hereinafter ‘ITA’).

6. The Respondent rejected this application for refund through its letter dated 13th October 2021 basing its rejection on the ground that the facts of the transaction brought the payment under the purview of Section 41 (5) and (6) of the ITA which denies certain persons from enjoying the benefits of the Double Tax Agreement.

7. The Appellant objected to this rejection vide its letter dated 16th November, 2021 and the Respondent then invalidated the objection on the basis that it was late by 4 days. However, the Appellant was requested to provide grounds for late objection accompanied by documentation and evidence pursuant to the provisions of Section 51(7) of the TPA.

8. On 5th January, 2022 the Appellant proceeded to provide relevant information and evidence with regards to the grounds for the late objection as required under Section 51(7) of the TPA. The Appellant stated that the 4-day delay resulted from the sickness of the Single Point of Contact which was supported by evidence provided.

9. The Respondent issued an Objection decision on 11th November, 2022 regarding the refund of taxes withheld on technical fees and computer charges amounting in total to KShs. 5,861,080. 00. The Appellant, being aggrieved with the Respondent's decision, filed a Notice of Appeal on 7th December, 2022.

The Apppeal 10. The Appellant’s grounds of Appeal were stated in its Memorandum of Appeal dated 21st December, 2022 and filed on the same date on the following premise:(a)That the Respondent erred in law and fact by failing to acknowledge the provisions of the Kenya- South Africa Double Taxation Agreement (DTA) which came into force on 1st January 2016. (b)That the Respondent erred in law and fact by failing to acknowledge that the Appellant had met the requisite provisions of Section 41(5) and (6) of the ITA as at 2019 and therefore the benefit of exception of the services from withholding tax in Kenya was applicable.(c)That the Respondent erred in law by interpreting the provisions of the Income Tax Act in such a way that rendered the provisions and the benefits of the Kenya/South Africa DTA are deemed irrelevant and its objectives defeated.(d)That the Respondent erred in law and fact by failing to recognize that there is a non-resident individual or individuals that hold more than 50% of shares in Coca-Cola SabCo (Pty) Ltd.(e)That the Respondent erred in law and fact in failing to recognize that an individual means a natural person under the ITA.(f)That the Respondent erred in fact and in law in failing to acknowledge that the underlying ownership of Coca-cola Sabco (Pty) Ltd is the Coca-cola Company which does not qualify as a natural person as the company is mainly held by institutional investors.(g)That the Respondent erred in law and fact by failing to recognize that professional fees paid by the Appellant are business profits under Article 7 (1) of the Kenya-South Africa DTA.(h)That the Respondent erred in law by failing to appreciate Treaties form part of the laws of Kenya and the supremacy of DTAs is embodied in the Legislation of Kenya.(i)That the Respondent erred in law and fact by failing to appreciate that the Appellant had paid Withholding tax on technical fees and computer charges in error and that the refund is therefore due and payable.(j)That the Respondent erred in law in claiming that withholding tax was rightfully deducted under the provisions of Section 35 (1) ITA in respect to technical fees and computer charges paid to Coca-Cola SabCo (Pty) Ltd.

The Appellant's Case 11. The Appellant’s case is premised on its Statement of Facts dated 21st December, 2022 and filed on the same date.

12. The Appellant contended that during the period ending December 2018, the Appellant filed and paid withholding taxes in respect of technical fees and computer charges amounting to KShs 3,008,236. 00 and KShs 2,852,844. 00 respectively.

13. The Appellant further stated that these payments that it had made for technical fees and computer charges were to Coca-Cola SabCo (Pty) Ltd, a company resident in South Africa and were erroneously subjected to withholding tax.

14. The Appellant further stated that in a letter dated 13th October 2021 which was written by the Respondent 28 months from the date the Appellant made the application for refund, its application for refund of taxes withheld on technical fees was rejected despite the provisions for exemption of taxes based on Double Tax Agreements as outlined in Section 41 of the ITA. More particularly the Appellant stated that sub-sections 4I (5) and (6) provides that:“where an arrangement made under this section provides that income derived from Kenya is exempt or excluded from tax, or the application of the arrangement results in a a reduction in the rate of Kenyan tax, the benefit of that exemption, exclusion or , reduction shall not the available to a person who for the purposes of the arrangement, is a resident of the other contracting state if fifty per cent or more of the underlying ownership of that person is held by an individual or individuals who are not residents of that other contracting state for the purpose of the agreement .”

15. The Appellant stated that on 11th November, 2022, the Respondent issued an objection decision rejecting the refund of taxes withheld on technical fees and computer charges amounting to Kshs. 5,861,080. 00.

16. The Appellant further stated that the reason the Respondent gave in its Objection decision was that it was of the view that since Coca-Cola SabCo (Pty) Ltd is not listed in the South African stock exchange, and further, since 50% of its underlying ownership consists of an individual or individuals who are residents of South Africa its conclusion was that the Kenya -South Africa DTA is not applicable to income earned or derived from both entities.

17. The Appellant also indicated that the Respondent further averred that the question of whether the services offered were business profits or not is inconsequential since it had determined that the Kenya -South Africa DTA is not applicable as Coca-Cola SabCo (Pty) Ltd did not satisfy the conditions set out by Section 41 (5) and 41 (6) of the ITA.

18. The Appellant averred that Section 41 of the ITA provides for relief from double taxation between Kenya and South Africa with regard to taxation of income tax. This is due to the existence of the Kenya -South Africa DTA which was ratified in 2016. Section 41(5) and (6) of the ITA provide that the benefit of the DTA of reduction or exemption of the taxes is not available to a person resident in either contracting state whose underlying ownership is held by an individual or individuals who are not residents of either contracting state. The Appellant also stated that the benefits of the DTA are also not available if the resident of either contracting state is a company listed in the stock exchange in that other contracting state.

19. The Appellant argued that Section 2 of the ITA defines an individual as a natural person and that a natural person is an individual human being as opposed to a legal person. Further that the Blacks Law 4th Edition dictionary defines an individual as:“as single person as distinguished from the group or class, and also, very commonly a private or natural person as distinguished from a partnership, corporation or association”.

20. The Appellant further contended its position that the Coca-Cola Company does not qualify as a natural person as its shares are held mainly by institutional investors. Further the Appellant contended that no individual or individuals who are non-residents of South Africa hold more than 50% of the underlying ownership of Coca-Cola SabCo (Pty) Ltd.

21. The Appellant stated on a without prejudice basis that even if the Respondent's interpretation of Section 41(6) of the ITA is that the Treaty benefits do not accrue due to the ownership structure, (a position that the Appellant did not agree with) the decision of the Respondent to limit the application of the DTA renders the main objects of the DTA redundant and fails to appreciate the supremacy of the DTA as a source of law in Kenya. The Appellant relied on the preamble to the DTA which stated as follows:“In Exercise of the powers conferred by section 41 of the Income Tax Act, the Cabinet Secretary for Finance declares that the arrangements specified in the Schedule hereto, being arrangements made between the Government of the Republic of Kenya and the Government of South Africa in the articles of an agreement signed on the 26th November 2010, with a view of affording relief from double taxation in relation to income tax and any rates of similar character imposed by the Law of Kenya, shall, notwithstanding anything to the contrary in the Act or any other written law, have effect in relation to income tax under the Act.”

22. The Appellant further stated that an amendment of Section 41 (6) was effected through The Finance Act 2021 which now reads as follows:“(2) Subject to subsection (3), where an arrangement made under this section provides that income derived from Kenya is exempt or excluded from tax, or the application of the arrangement results in a reduction in the rate of Kenyan tax, the benefit of that exemption, exclusion, or reduction shall not be available to a person who, for the purposes of the arrangement, is a resident of the other contracting state fifty per cent or more of the underlying ownership of that person is held by a person or persons who are not residents of that other contracting state for the purposes of the agreement."

23. The Appellant stated that in light of the above amendment, the Respondent recognised that the law prior to this change was specific to limiting the treaty benefit where shareholding was by non-resident individuals or individual who owned more than 50%. With the subsequent amendment, the word individual has now been replaced by persons which includes individuals, companies and other entities. The Appellant further stated that the amendment effected through the Finance Act 2021 constituted a Treaty override as the DTA was signed in 2016 and Kenya has an obligation to abide to International Agreements and the same cannot be amended through domestic legislation.

24. The Appellant further averred that the management and professional fees paid is provided for in the Kenya-South Africa DTA. More particularly, it stated that Article 7 of the Kenya South Africa DTA provides for business profits which are defined as follows:“(1)The profits of an enterprise of a Contracting State shall be taxable only if that State unless the enterprise carries on business in the Contracting State through a permanent establishment situated therein. lf the enterprise carries out business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to:(a)that permanent establishment;(b)sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or(c)other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment"

25. The Appellant also stated that Article 3 (2) of the same DTA provides that any term that has not been defined under the DTA shall have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Agreement applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

26. The Appellant argued that Section 2 of the ITA defines business as any trade, profession or vocation, and every manufacture, adventure and concern in the nature of trade, but does not include employment. The same section further defines management and professional fees as 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. Accordingly, the Appellant stated that professional activities are business activities and as such, income from professional activities constitutes business profits.

27. The Appellant cited McKinsey and Company Inc. Africa Proprietary limited v Commissioner of Legal Services and Board Coordination (Tax Appeal No. 199 of 2020) which affirmed their position that income from professional activities constitutes business profits. As such, according to the Appellant the services received from Coca-Cola Sabco (Pty) relate to technical fees and computer charges which fall under the definition of management and professional fees captured by the contractual and consultancy fees. Subsequently, these services fall under the definition of a business. The Appellant, on this note, stated that the services offered by Coca-Cola Sabco (Pty) were not subject to withholding tax and that therefore the taxes paid were wrongfully withheld and should be refunded by the Respondent.

Appellant’s Prayers 28. The Appellant’s prayers were for judgement/orders against the Respondent that: -(a)The application for taxes withheld on technical fees and computer charges of KShs 5,861,080. 00 be allowed.(b)The Respondent be ordered to pay the refund of KShs 5,861,080. 00 to the Appellant.(c)The Appeal be allowed with costs to the Appellant; and(d)Any other remedies that the Honourable Tribunal deems just and reasonable.

The Respondent's Case 29. In response to the grounds of Appeal, the Respondent countered the Appellant’s grounds through its Statement of Facts dated 20th January, 2023 and filed on 23rd January, 2023.

30. The Respondent stated that on 22nd May 2019, the Appellant made an application in line with Section 90(1) of the ITA for refund of taxes paid in error for the period December, 2018. The total refund requested amounted in total to the sum of Kshs. 5,861,080. 00. On 13th October, 2021 the Respondent rejected the application for a refund. The Appellant lodged a late objection on 16th November, 2021 which was invalidated on 13th January, 2022. The matter was resolved through the Alternative Dispute Resolution process and on 11th November, 2022 an Objection Decision was issued after which the Appellant filed this Appeal.

31. In its Statement of Facts, the Respondent reiterated the grounds of the Appellant’s Memorandum of Appeal as set out in Para 13 hereof and according to it, the Appeal evoked only one issue for determination which was that whether its decision to reject the Appellant's application for refund of taxes withheld on technical fees and computer charges should be upheld. It relied on Section 41 and the Ninth Schedule of the ITA as well as Section 51 of the TPA in making this determination.

32. In a rejoinder, the Respondent replied to grounds (a),(b) and (c) of the Appellant’s Memorandum of Appeal by referring to Section 41 (1)(5)(6) and (7) of the ITA. Whereas Section 41 (1) of the ITA provides relief from double taxation between Kenya and another country with regards to Income tax, sub-section (5) of the ITA limits relief from double taxation where more than 50% of the underlying ownership is held by an individual or individuals who are not residents of that other contracting states, sub-section 6 limits the application of sub-section 5 where a company that is a resident of the other contracting state is listed in a stock exchange in the other contracting state and sub-section 7 defines the meaning of the terms ‘person’ and ‘underlying ownership’ having a similar meaning as that assigned in the Ninth Schedule of ITA which states as follows:“underlying ownership", in relation to a person, means an interest in the person held directly, or indirectly through an interposed person or persons, by an individual or by a person not ultimately owned by the individuals."person" includes an individual, company, partnership, trust, government, or similar body or association.”

33. The Respondent’s assertion was that Section 41(5) and (6) of the ITA envisioned a situation where the benefits of exclusions of the Kenya - South Africa DTA would be enjoyed where:(i)A company is listed in the South Africa stock exchange as per Section 41(6) of the ITA above.(ii)A company holding 50% or more of the underlying ownership of that person is owned by individual or individuals who are residents of South Africa.

34. The Respondent further stated that Section 41(5) of ITA was introduced to curb 'treaty shopping/abuse" where entities would try to take advantage of benefits accorded by bilateral trade agreements between Kenya and other countries in order to pay less taxes even though the final beneficiary /beneficiaries may not be residents of the contracting states in such agreements. Furthermore, the Respondent stated that with regard to refund of taxes withheld on computer hardware and software costs, the Appellant had cited that these costs were not subject to withholding tax under the ITA; however, invoices provided did not clearly show that the payments made consisted of computer charges.

35. The Respondent also stated that the payments made related to Computer services provided in line with the Technical Assistance Service Agreement between each of the companies and Coca-Cola Sabco Proprietary Limited. Withholding tax would therefore be applicable subject to the DTA between Kenya and South Africa and the provisions of the ITA.

36. In response to grounds (d), (e ) and (f) of the Appeal, the Respondent averred that the definition of 'underlying ownership’ would require that it investigates more that the list of shareholders of the recipient entity and review any intermediary ownership entities in order to reveal the individuals who ultimately own the entity interest and as such the Respondent was therefore compelled to consider the underlying ownership of Coca-Cola Sabco (Pty) Ltd and more particularly determine who the shareholders are. Accordingly, the Respondent averred that its finding was that Coca-Cola Sabco (Pty) Ltd is not listed in the South Africa stock exchange and nor does its underlying ownership consist of an individual or individuals who are residents of South Africa.

37. The Respondent further delved into the ownership structure that was provided to it which indicated that Coca-Cola Sabco (Pty) Ltd is owned by Coca-Cola Beverages Africa (Pty) Limited. 67. 5% of Coca-Cola Beverages Africa (Pty) Ltd is owned by Coca Cola Company whilst Gutsche Family Investments owns 33. 5% of Coca-Cola Beverages Africa (Pty) Ltd.

38. According to the Respondent Coca-Cola Sabco (Pty) Ltd did not therefore pass the ‘underlying ownership’ test and the provisions of 41(5) and (6) of ITA did not apply and in extension the benefits accorded by the Kenya-South Africa DTA did not also apply and that therefore the taxes on payment to Coca-Cola Sabco (Pty) Ltd were correctly withheld as the Kenya-South Africa DTA did not apply.

39. In response to grounds (g) and (h) of the Appellant’s grounds of Appeal the Respondent stated that Section 35 of the ITA requires that tax is deducted from management, professional or training fees made to non-resident persons who do not have permanent residence in Kenya at the appropriate non-resident rate.

40. The Respondent further stated that pursuant to Article 2 of the Kenya-South Africa DTA as read in tandem with Article 7 of the Kenya-South Africa DTA, the profits or activities meant that, the profits derived from the sales or activities described in subparagraphs (b) and (c) [of Article 7 (1) of the Kenya South Africa DTA] shall not be taxable in the other Contracting State if the enterprise demonstrates that such sales or activities have been carried out for reasons other than obtaining a benefit under this Agreement.

41. The Respondent contended that although the Kenya-South Africa DTA does not provide for management, professional services, technical fees and computer charges, Coca-Cola Sabco (Pty) is a service hub based in South Africa which means its core mandate is to provide services to other members of the group. Accordingly, under Article 7 of the Kenya-South Africa DTA, business profits earned from Kenya by a South African company are taxable in South Africa except where the company provides the service through a permanent establishment in Kenya.

42. In response to grounds (i) and (j) of the Appeal, the Respondent also cited Mckinsey and Company Inc. Africa Proprietary Ltd v Commissioner of Legal Services and Board Coordination and was of the view that it did not apply to the Appellant’s case since the issue in the Mckinsey case was in regard to reclassification of services offered to a related party whilst the Appellant’s case was in relation to the application of the Kenya South Africa DTA where the interpretation of Section 41 (5) and (6) of the ITA is satisfied.

43. The Respondent stated that the services provided to the Appellant fall within the definition of business profits pursuant to the ITA and the ruling in Mckinsey and Company Inc. Africa Proprietary Ltd v Commissioner of Legal Services and Board, the same would not be considered under the Kenya - South Africa DTA as Coca-Cola Sabco (Pty) Ltd does not satisfy the conditions provided for by Section 41(5)(6) of the ITA (Rev. 2019). As such, according to the Respondent the question of whether the services offered were business profits or not is inconsequential having determined that the Kenya - South Africa DTA is not applicable as Coca-Cola Sabco (Pty) Ltd does not satisfy the conditions set out by Section 41(5) and (6) of the ITA.

44. Furthermore, the Respondent averred that Mckinsey and Company Inc. Africa Proprietary Ltd v Commissioner of Legal Services and Board Coordination was not an authority that was applicable in the Appellant’s case. The ITA provides for taxation of professional and management fees. More particularly, the Respondent stated that Section 10(1)(a) of the ITA provides that:“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)management or professional fee or training fee .... the amount thereof shall be deemed to be income which accrued in or was derived from Kenya.”

45. The Respondent stated that Paragraph 3(a) of the Third Schedule of the ITA provides for a 20% Withholding tax rate in respect of management or professional fees paid to non­residents. Accordingly, the Respondent, a person paying to a non-resident entity professional fees should deduct Withholding Tax and account for it in line with the provisions of ITA.

Respondent’s Prayers 46. From the foregoing, the Respondent maintains that the taxes were correctly withheld and as such the Respondent prayed that this Appeal be dismissed and that its objection decision dated 11th November, 2022 is upheld and that the Respondent is awarded the costs of the Appeal.

Submissions by the Parties 47. The Appellant submitted on four issues for determination in its Submissions dated and filed on 16th March, 2023 as follows:

(i) Does the Kenya South Africa DTA apply in respect to the technical charges and Computer charges? 48. On this issue, the Appellant submitted that the services received from Coca-Cola Sabco (Pty) Ltd relate to technical fees and computer charges which fall under the definition of management and professional fees captured under the contractual and consultancy fees, a position that the Respondent agreed with as outlined on page 8 of its Statement of Facts. The Appellant submitted further that the services also fall under the definition of a business and are sufficiently covered in the Kenya-South Africa DTA.

49. The Appellant submitted that Article 3(h) of the OECD Model Tax Convention on Income and on Capital (hereinafter ‘OECD Model’) includes professional activities in the definition of the term business and provides that ''the term "business" includes the performance of professional services and of other activities of an independent character". In addition, the Appellant, referred to the commentary in Article 3 of the Model tax convention which guides States on how to treat the definition of the term ‘business’.

50. The Appellant submitted that under the Kenya-South Africa DTA, management and professional fees paid are not directly provided for but that Article 7 of the Kenya South Africa DTA defined ‘business profits’ whereas Article 3 (2) of the Kenya South Africa DTA provides that any term that has not been defined under the DTA shall have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Agreement applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

51. In its submissions the Appellant reiterated that Section 2 of the ITA excluded employment from its definition of business and only excludes payments made by an employer to an employee from the definition of management and professional fees thus defining such payments as those made in consideration of any managerial, technical, agency, contractual, professional or consultancy services however calculated.

52. The Appellant further submitted that in its view, the position of the Government of Kenya is that management fees are considered as business profits and to buttress its position, it cited Tax Justice Network- Africa v Cabinet Secretary for National Treasury & 2 others [2019] eKLR, in which the Cabinet Secretary for National Treasury stated as follows, in its submissions concerning the Kenya - Mauritius DTA:-“That the taxing of services and management fees which the Petitioner is alleging is 0% was cleverly crafted and inserted under Articles 5 (3) (b) of the agreement while insurance Commissions are dealt with under Article 5 (7) Article 5 (permanent establishment) enables Kenya to tax services, management fees and insurance commissions since a permanent establishment is established to existent will be as provided in article 7[business profits] which tax shall be so much as is attributable to that permanent establishment.”

53. The Appellant averred that the Petitioner in that case argued that because there was no Article on management fees in the Kenya Mauritius DTA, the Government of Kenya relinquished its taxation rights on management fees to Mauritius. However, the Cabinet Secretary for National Treasury in their submissions stated that management and professional fees are taxable as business profits as stated above.

54. To reinforce its submissions, the Appellant again cited and referred to McKinsey and Company Inc. Africa Proprietary Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal No. 199 of 2020) in which it was affirmed that management and professional fees are covered under the Kenya-South Africa DTA. More particularly, the Appellant quoted paragraphs 75, 76 and 77 in the cited case in which the Tax Appeals Tribunal (TAT)stated as follows:“75. Since the Kenya-South Africa DTA does not provide for a definition of what amounts to a business, resort must be had to the domestic law. The Kenyan Income Tax Act defines a business to include: ... any trade, profession or vocation, and every manufacture, adventure and concern in the nature of trade but does not include employment.76. The services offered by the South African entity fall within the above definition and thus can be termed as income.77. Having determined that the services constitute a business, which is the appropriate Article that deals with this? In this regard, we are of the view that Article 7 of the DTA is the appropriate Article. The Article deals with profits of any enterprise. In this case, the South African entity is an enterprise and the income it is deriving from Kenya through the payments made to it by the Appellant is business profit.”

55. The Appellant further submitted that the Tribunal took a similar position in the case of Total Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal No. 151 of 2016), a case involving the Kenya- France DTA, whose wording of Article 7 (1) is similar to that of the Kenya South Africa DTA. The Tribunal stated as follows in paragraphs 113 and 114 of its Judgment:-“113. The supremacy of Article 7 of the DTA in relation to business profits is evident where income is not expressly provided for. A reading of the definition of business under the Kenyan Income Tax Act against Article 7 places the income from management fees and professional fees squarely under business profits.’114. The services rendered by TOM include technical and general services such as corporate affairs, general management, strategy development, human resource, logistics supply and commercial development. The Tribunal is of the view that the said services fall under professional services and as such within the definition of a business ..."

56. The Appellant in concluding on this issue for determination averred that in considering the above provisions of the law and the Respondent’s words as embodied in its Statement of Facts, it was not in dispute that the provisions of the Kenya- South Africa DTA apply to the services rendered to the Appellant.

(ii) Is the Appellant entitled to a relief from double taxation under Section 41 of the Income Tax Act? 57. The Appellant submitted that since it had determined that it was not in dispute that the provisions of the Kenya-South Africa DTA are applicable, the next question was to determine if the limitation of benefit clauses under Section 41 (5) and (6), would affect the enjoyment of the Treaty benefits by the Appellant. That Section 41 of the ITA provides for relief from double taxation between Kenya and South Africa with regard to taxation of income tax. This is pursuant to the existence of the Kenya- South Africa DTA which was ratified in 2016. Accordingly, Section 41 (5) of the ITA provides for the situations where certain arrangements would be excluded from benefiting from the Kenya South Africa DTA for the exclusion of certain arrangements.

58. The Appellant averred that it was the Respondent’s assertion that Coca - Cola Sabco (Pty) does not pass the “underlying ownership" test and therefore the provisions of Section 41(5) & (6) of the ITA do not apply and in extension the benefits accorded by the Kenya-South Africa DTA. Furthermore, the Appellant submitted that Section 2 of the ITA defines an individual as a natural person. A natural person is an individual human being as opposed to a legal person. In its submissions the Appellant reiterated that the definition of an individual according to Black's Law 4th Edition was that it meant a single person as distinguished from a group or class, and also, very commonly, a private or natural person as distinguished from a partnership, corporation, or association. This definition was also upheld in the case of Pennsylvania Railroad Company versus The Canal Commissioners.

59. The Appellant submitted that the Coca- Cola Company does not qualify as a natural person since there is no non-resident individual or individuals who hold more than 50% of the shares in Coca -Cola Sabco (Pty) Ltd. Therefore, the Kenya - South Africa DTA is applicable to the Appellant as it satisfies the conditions set out by Section 41(5) and 41(6) of the ITA. The Appellant further submitted on the definition of the terms ‘underlying ownership’ pursuant to the ninth schedule of the ITA.

60. The Appellant asserted that the underlying ownership of Coca-Cola Sabco (Pty) Limited is the Coca- Cola Company which does not qualify as a natural person as its shares are mainly held by institutional investors. Accordingly, the Appellant submitted that there is no individual or individuals who are non-residents of South Africa who hold more than 50% of the underlying ownership of Coca-Cola Sabco (Pty) Limited.

61. The Appellant further submitted that an amendment of Section 41 (6) was effected through the Finance Act 2021 which now reads as follows:“Subject to subsection (3) where an arrangement made under this sections provides that income derived from Kenya is exempt or excluded from tax, or the application of the arrangement results in a reduction in the rate of Kenyan tax, the benefit of that exemption, exclusion, or reduction shall not be available to a person who, for the purposes of the arrangement , is a resident of the other contracting state if fifty per cent or more of the underlying ownership of that person is held by a person or persons who are not residents of that other contracting state for the purposes of the agreement ..."

62. The Appellant avowed that in light of the above amendment, it seemed to it that the Respondent recognizes that the law prior to this change was specific to limiting the treaty benefit where shareholding was by non- resident individuals or individual who owned more than 50% of the Company. In view of the subsequent amendment, the word individual has now been replaced by persons which includes individuals, companies and other entities.

(iii) Does the limitation of benefit clause provided for under the Income Tax Act restrict the application of the Treaty benefits? 63. On the issue of the Limitation of the Benefit Clause (LOB), the Appellant cited a Ugandan case White Sapphire Ltd (WSL) and Crane Bank Ltd v Uganda Revenue Authority in which the Ugandan court held that the issue involved a dispute as to the application of the DTA and that the correct procedure for WSL would have been to resolve the matter through following the mutual agreement procedure (MAP) under Articles 10 and 26 of the DTA. Accordingly, the plaintiffs' action could not be filed in the High Court and the court in that case was unable to decide on the LOB point and sought to rely on the Mutual Acceptance Procedure set out in the DTA.

64. The Appellant’s submission on this matter for determination that it had identified is that it is entitled to relief from double taxation under Section 41 of the ITA since the limitation of benefit clause does not apply in its case as there is no individual or individuals who own more than 50% of the Company in South Africa.

(iv) Would limiting the application of the DTA constitute a Treaty override? 65. The Appellant submitted that according to its analysis, the Kenya-South Africa DTA applies to the technical fees and the computer charges that were payable by it. It was its further submission that the LOB clause would not apply in view of the ownership structure of the Appellant.

66. In the Appellant’s view, Double Tax Agreements form part of the laws of Kenya pursuant to Article 2(5) and 2(6) of the Constitution of Kenya, 2010 which provide as follows:“2(5)The general rules of international law shall form part of the law of Kenya.(6)Any treaty or convention ratified by Kenya shall form part of the law of Kenya under this Constitution."Accordingly, the Appellant asserted that the amendment effected through the Finance Act 202I constitutes a Treaty override as the DTA was signed in 2016 and Kenya has an obligation to abide to International Agreements as the same cannot be amended through domestic legislation.

67. The Appellant averred that the Respondent’s decision, to limit the application of the Kenya-South Africa DTA based on its interpretation of Section 41 (5) and (6) of the ITA renders the main objects of the Kenya South Africa DTA redundant and fails to appreciate the supremacy of the DTA as a source of law in Kenya. The Appellant also relied on the preamble to the DTA that states as follows:“In Exercise of the powers conferred by section 41 of the Income Tax Act, the Cabinet Secretary for Finance declares that the arrangements specified in the Schedule hereto, being arrangements made between the Government of the Republic of Kenya and the Government of South Africa in the articles of an agreement signed on the 26th November 2010, with a view of affording relief from double taxation in relation to income tax and any rates of similar character imposed by the Law of Kenya, shall, notwithstanding anything to the contrary in the Act or any other written law, have effect in relation to income tax under the Act."

68. The Appellant submitted that the term ‘Treaty override’ generally referred to a situation which would arise where there is a subsequent tax legislation that is in conflict with the terms of a treaty. According to the Appellant, it is common doctrine that a subsequent general law does not override a prior special law. The tax treaty is viewed as a special law. This conflict has manifested itself in disputes in several countries where a later law has been in conflict with a treaty, as is the case at hand.

69. To buttress its position, the Appellant cited the Canadian case of Alta Energy Luxembourg v The Queen S.A.R.L., 2021 SCC 49 in which the Supreme court in Paragraph 96 of the judgement held that domestic GAAR could not be used to reword tax treaties to prevent alleged treaty shopping when it was not explicitly provided for in the tax treaty. The Kenya-South Africa DTA does not explicitly contain anti-abuse provisions. The court stated that parties to a Treaty are presumed to know each other's tax regime when entering into a treaty. Use of the Treaty in the case at hand was therefore not unforeseen.

70. The Appellant also submitted that the OECD has expressed strong disapproval of treaty override, citing Articles 26 and 27 of the Vienna Convention on Law of Treaties, 1969. The Appellant emphasised that OECD is strongly opposed to overriding legislation and urges countries to avoid using this. OECD states that the only internationally acceptable way to address treaty provisions that conflict with later domestic tax policy is by way of negotiating appropriate amendments to tax treaties and not by unilateral overriding legislation.

71. The Appellant further cited Supreme Court of Kenya Petition No.2 of 2015, Karen Njeri Kandie v Alassane Ba & another [2O17J eKLR, in which the supremacy of International treaties was held. In its judgement, the court stated as follows;“Given the sentiments we have already expressed and the holdings we have already made, the conclusion is inescapable that the immunity that attaches to the 2nd respondent and to its officers such as the 1st respondent finds recognition and legitimacy from international treaties entered into by Kenya including the Vienna Convention which had express validation by the clear constitutional text found in Article 2(6) of the 2010 Constitution. In so far as they impact and implicate Article 48 of the right to access to justice, they constitute a legitimate limitation to the right. Moreover, they are not, in all the circumstances of the case, disproportionate to the legitimate aims of conferment of state immunity. As regards the 1st respondent, we find and hold that whatever doubts, restrictions, qualifications and erosion may have attended State Immunity from its former hallowed perch of absolute sway, he remains invested with diplomatic immunity which is wider and has not suffered any diminution since the coming into force of the Vienna Convention. He is therefore quite completely immunized from criminal or civil proceedings before Kenyan Courts no matter how desirable or expedient such proceedings may seem..."

72. The Appellant in conclusion to its final issue that it had identified for determination, concluded that the Supreme Court of Kenya upheld the supremacy of the treaty. In the same way, the DTA between Kenya-South Africa is supreme to the provisions of the ITA.

73. In concluding its submissions, the Appellant was of the view that taxes were erroneously withheld on technical fees and computer charges and that it is therefore entitled to a refund. Holding the tax was unfair to the taxpayer and would be against the law.

74. The Respondent in its written submissions filed on 28th April 2023 identified two issues for determination namely:

(i) Whether the Respondent's decision rejecting the Appellant's application for refund of Kshs.5,861,080 withheld on technical fees and computer charges was legal and justifiable. 75. The Respondent submitted that the Appellant’s application for refund was made on the ground that taxes were withheld on the fees in error since there exists a Kenya-South Africa DTA that exempts the same.

76. In its submissions the Respondent referred to Section 41 of the ITA which specifies the conditions under which the Kenya-South Africa DTA would apply and the circumstances under which the benefits are not available to a taxpayer. According to the Respondent the benefit of the exemption under the said Section would not be available to Coca-Cola Sabco (Pty) Limited if an individual or individuals not resident in South Africa hold 50% percent or more of its underlying ownership.

77. The Respondent submitted that whereas the Appellant contended that the ownership of Coca-Cola Sabco (Pty) is in South Africa since it is owned by Coca-Cola beverages Africa, the Respondent's position was that in applying the definition of 'underlying ownership' as provided in the Ninth Schedule of the ITA and the review of the availed records and information, the underlying ownership of Coca-Cola Sabco(Pty) limited is held by the Coca-Cola Company which indirectly holds more than 50% through ownership of Coca-Cola Beverages Africa (Pty).

78. The Respondent averred that the exception created by Section 41(6) of the ITA, does not apply in this case since Coca-Cola Sabco (Pty) limited was found not to be a listed company in South Africa. Consequently, the taxes were correctly withheld and remitted to the Respondent and were not refundable. In regards to application for refund of taxes withheld on computer charges, the Respondent submitted that the said application was premised on the fact that the payments were in relation to computer hardware and software costs which were not subject to withholding tax under the ITA.

79. On this issue of determination, the Respondent submitted that from the review of the availed records, information and subsequent correspondence relating to payment, there was no evidence to show that the payment was in fact for computer hardware and/or software and that the infact the payments were made in line with technical Assistance Service Agreement between Crown Beverages Limited, the Appellant and Coca-Cola Sabco (Pty) Limited. As such this payment was a payment of technical fees on which tax was correctly withheld and hence not refundable.

(ii) Whether the assessments and subsequent Objection Decision made by the Respondent were proper in law. 80. The Respondent submitted that Section 41(1)(5)(6) and (7) of the ITA provides for special arrangements for relief from double taxation and that although Section 41(1) of the ITA provides for relief from double taxation between Kenya and another country with regards to Income tax, Section 41(5) of the ITA limits the relief from double taxation where more than 50% of the underlying ownership is held by individual or individuals who are not residents of that other contracting state.

81. The Respondent further reiterated, in its submissions, its understanding of the meaning of the terms "underlying ownership" and ''person" as provided by Section 41(7) of the ITA as well as the Ninth Schedule to ITA. The Respondent further submitted that Section 41(5) and (6) of the ITA envisioned a situation where the benefits of exclusions of the Kenya-South Africa DTA would be enjoyed under two (2) circumstances namely:-(a)A company is listed in the South Africa stock exchange as per Section 41(6) of the ITA above.(b)A company holding 50% or more of the underlying ownership of that person is owned by individual or individuals who are residents of South Africa.

82. Accordingly, the Respondent submitted that Section 41(5) of ITA was introduced to curb "treaty shopping/abuse" where entities would try to take advantage of benefits accorded by bilateral trade agreements between Kenya and other countries in order to pay less taxes even though the final beneficiary/beneficiaries may not be residents of the contracting states in such agreements.

83. In regards to the applicability of Kenya-South Africa DTA, the Respondent submitted on Articles 2 and 7 of the Kenya-South Africa DTA which refer to the taxes for which the Kenya-South Africa DTA provides relief and the definition of business profits respectively.

84. The Respondent submitted that Coca-Cola Sabco (Pty) Ltd is a service hub based in South Africa, which means its core mandate is to provide services to other members of the group. According to the Respondent Article 7 of the Kenya South Africa DTA, business profits earned from Kenya by a South African company are taxable in South Africa except where the company provides the service through a permanent establishment in Kenya. From the foregoing, the Respondent was of the view that the question of whether the services offered were business profits or not is inconsequential having determined that the Kenya-South Africa DTA is not applicable as Coca-Cola Sabco (Pty) Ltd does not satisfy the conditions set out by Section 41(5) and 41(6) of the ITA. Accordingly, the Respondent averred that the applicable laws are domestic laws where Kenya-South Africa DTA do not provide for taxation.

85. The Respondent, cited the case of Mckinsey and Company Inc. Africa proprietary Ltd v Commissioner of Legal Services and Board Coordination and argued that it was not applicable to this Appeal by submitting that the two cases had fundamental differences namely: -(a)The Mckinsey case argues in line of reclassification of the services offered to a related party.(b)The case in hand relies on application of The Kenya -South Africa DTA if the interpretation of Section 41(5) and (6) of the ITA will be satisfied.

86. The Respondent further submitted that as much as the services provided to the Appellant fall within the definition of business profits as per the ITA, the same would not be considered under the Kenya -South Africa DTA as Coca-Cola Sabco (Pty) Ltd does not satisfy the conditions provided for by Section 41(5) and (6) of the ITA (Rev. 2019). Therefore, the Respondent assertted that the question of whether the services offered were business profits or not is inconsequential having determined that the Kenya -South Africa DTA is not applicable as Coca-Cola Sabco (Pty) Ltd does not satisfy the conditions set out by Section 41(5) and (6) of the ITA.

87. The Respondent further submitted that the Appeal has been lodged against the Tribunal’s decision in the Mckinsey case and it does not therefore form a precedence, which would be relied on in this case.

88. The Respondent averred that Section 10(1)(a) of the ITA provides for taxation of professional and managements fees; Section 35 of the ITA provides that payment of management and professional or training fees to a non-resident person who does not have a permanent establishment in Kenya was subject to Withholding tax. Further the Respondent referred to Paragraph 3(a) of the Third Schedule of the ITA which provides that the Withholding tax rate in respect of management or professional fees paid to non-resident is 20%. Thus, the Respondent averred that a person paying to a non-resident entity professional fees should deduct Withholding tax and account for it in line with the provisions of ITA.

89. The Respondent submitted that the encapsulation of the assertions that had been made by it was that the Appellant had failed to discharge the burden of proving that the taxes assessed are excessive as provided under Section 56(1) of the TPA. Accordingly, under the quoted Section of TPA, the Respondent averred that the Appellant had the burden of supporting its objection to the reasonable satisfaction of the Respondent by providing the requisite documents.

90. The Respondent asserted that due to the Appellant's failure to provide supporting documents, the Respondent relied on available information that it had as well its best judgement in making the assessment order and confirming the assessment in accordance with the mandate bestowed on it by section 31 (1) of the TPA.

91. The Respondent submitted that although the Appellant was asking the Tribunal to decide in its favour based on the fact that the Respondent's assessments are wrong, inaccurate and excessive from a reasonable point of view, it noted that the Appellant was unable to assist it to determine the accurate tax liability without good reason. It further averred that the Appellant failed to provide the necessary documents to support its application for refund of taxes.

92. The Respondent submitted that the Tribunal had in a number of cases maintained the position that, where the Appellant fails to provide the requisite documents, the Respondent is justified in confirming the assessments earlier issued to the Appellant. To buttress its position, it cited Ngurumani Traders Limited v Commissioner of Investigations and Enforcement, [TAT No.125 of 2017], in which the Honorable Tribunal held as follows in paragraph 40 of its Judgment:-“From the foregoing, the Appellant's failure to lodge a proper objection meant that the Respondent was at liberty to confirm the assessment. Measured against the provisions of section51(3) of the Act, the Appellant's conduct and manner of lodging the objection fell considerably short of the permissible statutory requirements under section 51(3) of the Tax Procedures Act, 2015. It would be fundamentally non-justifiable for this Tribunal to entertain this preliminary objection, taking into account the Appellant's flagrant non-compliance with the law on raising objections.”

93. The Respondent submitted that the position of the Tribunal in Ngurumani Traders Limited v Commissioner of Investigations and Enforcement, [TAT No.125 of 2017] was further reinforced in Digital Box Limited versus Commissioner of Investigations and Enforcement (2020) where it was held that it is the taxpayer who has the burden of proving that a tax decision is incorrect.

94. The Respondent averred that the Appellant did not discharge its burden of proof by providing the documents/evidence to show that the payment on which the Appellant was applying for refund was in fact for computer hardware and/or software. The Respondent submitted that it had demonstrated before the Tribunal, what was considered in arriving at the assessment demonstrated and subsequently the objection decision which are within the law. The Respondent further submitted that it had explained in detail reasons for its findings and prayed that the Tribunal would uphold the objection decision.

Issues for Determination 95. The Tribunal has considered the parties’ pleadings, submissions and documentation availed and is of the view that this Appeal raises a single issue for its determination which is:Whether the Appellant is entitled to the withholding tax refund.

Analysis and Findings 96. The Appellant herein based in Kenya entered into a business relationship with Coca-cola Sabco (Pty) Limited an entity based in South Africa where the Appellant was offered technical and computer services. It therefore paid Coca-cola Sabco (Pty) Limited for the services it enjoyed. However, it withheld tax amounting to KShs.5,861,080. 00 and which it indicates to have erroneously remitted the same to the Respondent. Accordingly, it has applied for a refund, which is the subject of this Appeal.

97. There exists a Double Taxation Agreement between Kenya and South Africa whose purpose is to ensure that resident persons and resident companies avoid double taxation on their income and further that fiscal evasion with respect to income taxes is avoided. The said DTA which was entered into in 2010 came into force in January 2016.

98. The Tribunal notes that both parties agree that the payment made by the Appellant to Coca-cola Sabco (Pty) Limited were for technical fees and computer charges that fall under the definition of management and professional fees, and that the same services also fall under the definition of business profits as covered in the Kenya-South Africa DTA. Section 41 (1) and (2) of the ITA guides on the special arrangements for relief from double taxation as reinforced in the Double Taxation Agreement entered into between the Kenyan and South African Governments. It provides as follows;“41. (1)Every special arrangement for relief from double taxation made with the government of any country outside the Republic of Kenya with a view of offering relief from double taxation in relation to income tax and any taxes of similar character imposed by the laws of that country shall, subject to subsection (2) but notwithstanding any other provision to the contrary in this Act or in any other written law, have effect in relation to income tax, and every such agreement shall be subject to the provisions of the Treaty Making and Ratification Act, 2012. (2)Subject to subsection (3), where an arrangement made under this section provides that income derived from Kenya is exempt or excluded from tax, or the application of the arrangement results in a reduction in the rate of Kenyan tax, the benefit of that exemption, exclusion, or reduction shall not be available to a person who, for the purposes of the arrangement, is a resident of the other contracting state if fifty percent or more of the underlying ownership of that person is held by a person or persons who are not residents of that other contracting state for the purpose of the agreement”.

99. The Tribunal has noted that the Appellant received services from Coca-cola Sabco (Pty) South Africa and that this fact is not in dispute. Further, the Tribunal finds that the payment formed part of the business profits of the South African entity and by virtue of Section 41 (2) of the ITA and in consideration of the terms of the Kenya-South Africa DTA this payment was exempt from tax.

100. The Tribunal is of the view that the tax was indeed withheld erroneously and does not agree with the view of the Respondent that the tax ought to have been withheld under the DTA. However, the Tribunal has to determine whether the Appellant is entitled to a refund with the Respondent having erroneously withheld the taxes.

101. The Respondent submitted that Coca-Cola Sabco (Pty) Limited was not entitled to relief from the Kenya-South Africa DTA. The Tribunal has found that the Kenya- South DTA applies in this case and that there ought not to have been withholding tax on the payments made by the Appellant to Coca-Cola Sabco (Pty) Limited. However, Coca-Cola Sabco (Pty) Limited being the actual payee of the taxes is the entity that is entitled to the refund of taxes.

102. The Tribunal, having perused the documentation adduced as evidence by the Appellant has not found any claim by Coca-cola Sabco (Pty) for a refund of the erroneously withheld taxes.

103. The Tribunal in the circumstances finds that a claim for a refund for withheld taxes is exercisable by the Party that offered the services. In this case, Coca-Cola Sabco (Pty) Limited is the party that can exercise a claim for a refund of the taxes withheld.

104. In view of the foregoing, the Tribunal holds that the Appellant is not entitled to the refund and for that reason only, the Respondent is justified in rejecting the Appellant’s refund application.

Final Decision 105. The upshot of the above is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following final Orders:(a)The Appeal be and is hereby dismissed.(b)The Respondent’s Objection decision dated 11th November, 2022 be and is hereby upheld.(c)Each party to bear its own costs.

106. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023ERIC NYONGESA WAFULA.....................CHAIRMANDELILAH K. NGALA............................MEMBERCHRISTINE A MUGA...........................MEMBERGEORGE KASHINDI............................MEMBERSPENCER S. OLOLCHIKE...................MEMBERABDULLAHI M. DIRIYE......................MEMBER