[2023] KETAT 121 (KLR)

Equity Bank Kenya Limited v Commissioner of Domestic Taxes (Tribunal Appeal 314 of 2021) [2023] KETAT 121 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 121 (KLR)

Republic of Kenya

In the Tax Appeals Tribunal

Tribunal Appeal 314 of 2021

E.N Wafula, Chair, Rodney Odhiambo Oluoch, Robert M. Mutuma, D.K Ngala & Edwin K. Cheluget, Members

March 17, 2023

Between

Equity Bank Kenya Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company incorporated in Kenya and whose principal activity is the provision of banking, financial and related services and is licensed under the Banking Act and regulated by the Central Bank of Kenya.

2. The Respondent is a principal officer appointed under the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenues. Further, under Section 5 (2) of the Act with respect to the performance of its functions under subjection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in part 1 & 2 of the First Schedule of the Act for the purpose of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant was selected for a tax audit covering VAT and WHT on its card services for the period between January 2015 to December 2017. This was after the Court of Appeal delivered a judgment in favour of the Respondent in the case of Commissioner of Domestic Taxes versus Barclays Bank of Kenya (Civil Appeal No 915 of 2017)

4. Following the tax audit, the Respondent issued the Appellant with a Notice of Assessment dated December 14, 2020 (the assessment). The Respondent, through the assessment, alleged that the Appellant had not paid Value Added Tax (VAT) and withholding tax (WHT) on its card business amounting to Kshs 1,491. 957,187. 00 inclusive of penalties and interest for period between January 2015 to December 2017. The same was broken down as follows:Item Principal Tax Penalty Interest Total

Kshs Kshs Kshs Kshs

Value Added Tax 440,746,022 15,350,364 128,806,416 658,719,918

Withholding Tax 516,975,302 25,848,765 290,413,203 833,237,269

Total tax Payable 957,721,324 41,199,129 419,219,619 1,491,957,187

5. The Appellant lodged an objection disputing the assessment vide a letter dated January 13, 2021.

6. The Respondent subsequently issued an amended assessment for Kshs 551,449,316. 00 vide an objection decision dated April 30, 2021. The same was broken down as follows:Item Principal Tax Penalty Interest Total

Kshs Kshs Kshs Kshs

Value Added Tax 330,428,891 16,521,445 155,001,588 501,951,923

Withholding Tax 31,413,780 1,570,689 16,512,925 49,497,393

Total Tax Payable 361,842,670 18,092,134 171,514,512 551,449,316

7. In the objection decision, the Respondent explained that it vacated the following items:a.Assessments in respect of certain amounts extracted from the Appellant’s Balance Sheets; andb.Assessments in respect of credit card fees charged on card holders.

8. The Respondent also explained that it confirmed the assessments relating to VAT and WHT because of the following reasons, inter alia:a.Merchant service fees earned by the Appellant as an Acquiring Bank were vatable;b.Interchange fees earned by the Appellant as an issuing bank were vatable on the basis that the fees are earned for the provision of management and professional services which is taxable supply;c.Interchange fees paid by the Appellant to issuing banks were subjected to WHT on the basis that they were deemed to be consideration for management, technical, agency, contractual, professional or consultancy services rendered by issuer banks; andd.Interchange fee paid by the Appellant to the card companies were subject to WHT on the basis it was royalty for use of trademarks owned by the card companies for the cards issued by the Appellant.

9. The Appellant, being dissatisfied with the Respondent’s objection decision filed a Notice of Appeal dated May 28, 2021.

Appelant’s Case 10. The Appellant’s case is premised on the following documents and proceedings before the Tribunal: -a.The Memorandum of Appeal and Statement of Facts both dated the June 11, 2021 and filed on the June 15, 2021. b.The Witness Statements by Dr Fredrick Muema dated the May 9, 2022 and another one by Ms Christine Ogolla dated the June 20, 2022, that were both admitted in evidence on oath on September 20, 2022. c.The Written submissions dated the October 18, 2022 and filed on the October 21, 2022, together with the bundle of legal authorities filed therewith.

11. The grounds of Appeal as captured in the Memorandum of Appeal as follows:a.That the Respondent erred in law and fact by subjecting the merchant service commission to value Added Tax (VAT) under the provisions of the Value Added Tax Act, 2013;b.That the Respondent erred in law and fact by holding that local interchange fees earned by the Appellant constitute management and professional fees and thus subject to VAT;c.That the Respondent erred in law and fact by holding that local interchange fees retained by the Appellant as an issuer is a management and professional fee and thus subject to withholding tax (WHT) pursuant to the provisions of Section 35 (3) of the Income Tax Act;d.That the Respondent erred in law and fact by holding that the Appellant pays card interchange fees to international card companies which constitute payments for royalties and thus subject to WHT pursuant to the provisions of Sections 2, 10 and 35(1) (b) of the Income Tax Act;e.That the Respondent erred in law and fact by issuing tax assessments in respect to WHT assessment on interchange fees local as a management and professional fee and WHT on alleged interchange fees to card companies as a royalty contrary to provisions of Section 29 (2) and Section 31(8) of the Tax Procedures Act, 2015;f.That the Respondent erred in law and fact by failing to appreciate that the assessment for the period January 2015 to November 2015 is statutorily time barred as provided for under Section 29 and 31 (4)(b) of the Tax Procedures Act,2015;g.That the Respondent erred in law and fact by failing to appreciate that it had no powers to collect WHT from a payer for the period June 9, 2016 to November 7, 2019;h.That the Respondent erred in law and fact by demanding WHT on income already subjected to corporate income tax thus amounting to double taxation contrary to generally accepted principles of taxation; andi.That the Respondent erred in law and fact by demanding excessive penalties.

12. The Appellant argued its Appeal under the following broad sub-headlines:

i. Subjecting Merchant Service Commission to VAT 13. The Appellant averred that:a.Merchant services fees are earned in respect to provision of financial services and are therefore exempt from VAT as is provided for under Part II, Paragraph 1 of the First Schedule to the VAT Act, 2013. b.As an Acquiring bank, it offers the service of money transfer from cardholder account into the merchant’s bank under a two-party model. It also receives the fund from card companies in a four-party model to relay the same to merchants. The merchant can direct that the funds be remitted to the account for most of the merchants who have a point of sale machine (POS). That the related activities that it does with the card are ancillary to the payment solutions done electronically and not stand-alone services.c.In the absence of an electronic payment system, undertaken through the card payment network, a customer would have to withdraw money from a bank account either through an ATM or physically visiting the bank. The customer would then have to make payment for goods at a merchant’s premises using the cash withdrawn and subsequently, a merchant would have to physically visit the bank and deposit the cash collected into their bank account. This has been replaced by the card system and this points to the fact that the merchant service commission is a fee in relation to the money transfer.d.The services provided to merchants through the card payments network are financial services and are therefore exempt from VAT as is provided for under Paragraph 1 of Part II of the VAT Act, 2013 because they are equivalent to operating a bank account and money transfer. This is because money transfer from the card holder’s bank and settlement into the merchant’s accounts takes place through the card payment network.

14. The Appellant pointed out that some merchants do not hold accounts with it. In its view, this therefore, meant that its service which relate to merchants who hold accounts with the bank cannot be classified as 'managing a client’s account' service.

15. It was the Appellant’s further contention that:a.The money transferred from the card holder’s bank account and those that are used in credit settlement of the merchant’s account are exempt from VAT because they are money transfer services.b.Paragraph 1 of Part II of the First Schedule to the VAT Act, 2013, provides that exemption of financial services from VAT is not limited to instances where one is operating a bank account. One could still fall within this exemption provision in cases where the underlying transaction is a financial service.

16. The Appellant supported the foregoing position with the decision of the TAT in the case of Kenya Commercial Bank Limited vs Commissioner of Domestic Taxes, Appeal No 168 of 2018 ('the KCB case') where the Tribunal held that:'The Tribunal has carefully considered the arguments by both parties and is of the view that the services provided by the Appellant as an Acquirer or issuer are integral part of the buyer/seller transaction between customer and the merchant. Ultimately, the transaction involves the goods or service purchased by the customer. The backroom activities involving clearance, verification etc. are akin to those involved in dealing with cheques. Both do not involve direct exchange of cash between the customer and merchant. The services are therefore ancillary to financial services provided by the Appellant and are therefore financial in nature rather than management and advisory Merchant services charge falls under paragraph 1 of the Third Schedule to the VAT Act, Cap 476(repealed) and Part II paragraph 1 of the First Schedule to the VAT Act, 2013 and is therefore exempt.'

17. Flowing from the foregoing arguments, the Appellant urged the Tribunal to vacate VAT of Kshs 476,724,614. 00 inclusive of penalties and interest which was levied on its merchant service commission.

II. VAT on local interchange fees 18. The Appellant averred that:a.As an Issuing bank, it supplied a composite service to the Acquiring Bank who does not hold an account with it and it is also not its client.b.The interchange fees that it is paid is not a payment for operation of account for services offered.c.As an Issuing bank it issues its customers with debit and credit cards which its customers use to access money from their bank account and to make purchases at the Merchants PoS.d.When the cardholder makes a purchase at a PoS, the Appellant as an issuing bank, provides services in form of verification and confirmation of the customer’s account to confirm whether the customer has entered the correct details at the Merchants and whether there are sufficient funds available in the Cardholder’s account (for debit card) or that the balance is within the limit (for a credit card). Once the issuing bank confirms these details, the Appellant as an Issuing bank communicates the approval of the transaction through the card payment network which is owned by the card company. Thereafter, the issuing bank debits the cardholders account and transfers the money less interchange fee to card company for relaying to Acquiring Bank and finally to the Merchant.

19. The Appellant contended that it does not provide authorization and clearance services to the acquiring bank because it is an issuing bank which has no relationship with an acquiring bank. Its relationship is limited to its customers (Cardholder). That the verification and confirmation services that it carries through the card payment network is done on behalf of its customer (Cardholder) to facilitate the customer to conclude the purchase which he had initiated at a Merchant’s POS so as to access his money from the bank account.

20. The Appellant held the position that the Acquiring bank’s relationship in a card transaction is with the merchant while the issuing bank relationship is with its customer (card holder).

21. The Appellant surmised that as an issuing bank in a card payment transaction, it provides the following services to its customers;a.Issues debit and credit cards;b.Verifies customers’ accounts to confirm availability of sufficient funds;c.Communicates approval of the transaction through the card payment network which is owned and operated by the card company; andd.Transfers money from its customer’s account to the merchant’s accounts through the card payment network.

22. The Appellant further averred that it does not earn interchange fees under the four- party model because the medium of communication between the Issuing banks, acquiring Banks and merchants is provided, owned and operated by card companies and not the issuing bank. Its role is limited to providing money transfer services and operating a customer’s bank account. This therefore, limits its exposure to tax liability

23. It supported its position with the case of Hon Nicholas RO Ombija V Kenya Commercial Bank Ltd (2009) eKLR where the Court noted that;'At all material times he was a holder of KCB Serena Card No xxxx issued by Kenya Commercial Bank Ltd, defendant. There was a contract between the plaintiff and the defendant that the plaintiff maintains the authorized credit limit and to make payment due to the defendant in accordance with the said contract and for defendant to accept all transactions on the said card made at the plaintiff’s instance and request.'

24. Consequently, the Appellant argued that the services that it provides as an issuing bank to the customer (card holder) are financial services which are exempt from VAT as is provided for under Paragraph 1 of Part II of the First Schedule to the VAT Act, 2013. It supported this position with the following authorities:a.Barclays Bank of Kenya Limited v Commissioner of Domestic Taxes (2020) eKLRb.The Tax Appeals Tribunal case ofNIC Group & NIC Bank Kenya Plc vs Commissioner of Domestic Taxesc.The Tax Appeals Tribunal Appeal No 302 of 2018, Standard Chartered Bank Kenya Limited versus Commissioner of Domestic Taxes Appeal No 302 of 2018 where it was held that:d.The Tax Appeals Tribunal Appeal No 167 of 2018 Kenya Commercial bank Limited versus Commissioner of Domestic Taxes Appeal No 167 of 2018.

25. The Appellant was emphatic that it does not provide composite services to the acquiring bank. That it was the responsibility of the of the Respondent to identify and tax the alleged composite services that it had supplied. It supported this argument with the following case laws:a.Standard Chartered Bank and Others vs CST Mumbai (Misc Application No 93629 of 2015)b.Standard Chartered Bank Kenya Limited versus Commissioner of Domestic Taxes Appeal No 302 of 2018 (supra)

26. The Appellant affirmed that tax statutes ought to be interpreted in a strict manner as was held in the cases of:a.Mount Kenya Bottlers Limited & 3 Others v Attorney General & 3 Others (2019) eKLRb.Republic versus Commissioner of Domestic Taxes Large Taxpayers Officer; Exparte: Barclays Bank Limited (2012) eKLR

27. The Appellant stressed once more that interchange fees does not constitute management and professional fees. It should therefore be exempt from VAT as was affirmed in:a.The High Court case of Barclays Bank of Kenya Limited v Commissioner of Domestic Taxes (2020) e-KLR and NIC Group & NIC Bank Kenya Plc vs Commissioner of Domestic Taxes (Supra) where it was held that interchange fees are financial services and are thus exempt from VAT.b.The Supreme Court of India in the case of Siemens Limited -vs- Commissioner of Income Tax, ITA No 4356/MUM/2010 and Kotak Securities Limited, Civil Appeal No 3141 of 2016 which cases established the two tests that should be met in order for a service to amount to technical service which are that; the service provided must entail an element of human involvement and the service must cater to the special needs of a consumer /user and must be special and exclusive to the seeker of the service.

28. In conclusion the Appellant stated that local interchange fees earned by the Appellant do not constitute management and professional fees and should thus be exempt from VAT. Accordingly, the Respondent, had therefore erred when it charged VAT amounting to Kshs 25,227,309. 00 inclusive of penalties and interests on the Appellant’s interchange fees.

III. Withholding Tax on interchange fees 29. The Appellant contended that Section 35(3) of the ITA provides a wide range of payments which would attract WHT, key among them being management and professional services.

30. The Appellant stated that the Respondent had failed to appreciate that there was no service rendered by the issuing bank to the acquiring bank for which payment would be made and WHT liability triggered. It supported its position with the case of:a.NIC Group & NIC Bank Kenya Plc vs Commissioner of Domestic Taxes, (supra) where the Tribunal held that:'We find that the service provided by the Appellant is to its customers and not to the Acquiring Bank, it involves a money transaction.'b.Barclays Bank of Kenya Limited versus Commissioner of Domestic Taxes (2020) eKLR, where the Court held that interchange fee by issuing bank is not for any service rendered by issuing bank to the acquiring bank. Having made that conclusion, the Court held that:'Having answered the first issue in the negative there is therefore no need to proceed to determine whether the service is exempt from the charge of VAT because no service was offered by Issuing bank to BBK,'

31. The Appellant reiterated that:a.The entire card payment system is done by the card company which owns, operates and processes the payments through the network.b.The cardholder verifies and transfers money services provided by the Issuing bank through the card network in a card transaction that does not fall within the scope of management or professional fee.c.Its services are not provided to the acquiring bank but rather to the Issuing bank’s customer who intends to access funds from their bank account to pay for a purchase electronically from a merchant.d.Its verification process involved a mere check and confirmation process through the card payment network. It does this by verifying the details of the cardholder, his/her account, the credit card limit- and the details that the cardholder shall input at the P0S terminal. The outcome of the verification process from the acquiring bank would be either an approval or decline. The message received by the Appellant as an acquiring bank is then transmitted to the merchant signifying approval or decline of a transaction.e.In essence, the issuing bank only offers a response by way of confirmation through the card payment network as to whether it has indeed issued the card to the cardholder; and whether the PIN details as input by the cardholder is correct and the status of the cardholders account or credit card limit.f.All this is information that is gathered by the issuing bank at the time of opening the account or issuing the cardholder with a debit or credit card is part and parcel of the normal banking business of the Appellant which does not fall within the definition of management and professional fees under Section 2 of the ITA.

32. It was its further argument that interchange fee which is an amount accruing to a bank that has issued a card being used in a card transaction does notBinvolve or require the application of human skill, effort and judgment because its entire card system is automated by network that has been deployed by the card companies. Therefore, it does not involve human effort and or judgment.

33. Based on the foregoing, the Appellant contended that the Respondent erred in law and fact by holding that the local interchange fees retained by the Appellant as an issuer are management and professional fees which are subject to WHT under Section 35(3) of the Income Tax Act.

IV. Withholding tax on interchange fees to card companies 34. The Appellant asserted that the interchange fees paid by the Appellant to card companies did not constitutes payments for royalties and should hence not be subject to withholding tax because:a.At no point in a card transaction, do international card companies earn interchange fee from the Appellant or any other bank that is a member of a card payment network;b.The interchange fee is money earned by issuing bank for all transactions done using cards issued by the issuing bank in the four-party model. A card company is not an issuer and as such never earn or retain interchange fee;c.The Respondent did not specify whether the Appellant paid the alleged interchange fees as an issuing bank or an acquiring bank and thus the assessment lacks clarity;d.The Respondent misunderstood the entire transaction by deeming interchange fee expense in the Appellant books as payment to card companies.e.The amounts assessed by the Respondent (as outlined in the table below) which are alleged to be interchange fees paid to card companies are net balances of money retained by other Issuing banks and money received by the Appellant as an Issuing bank. They are not payments made to card companies.Account Description Year Amount

63140 Amex interchange fee account 2015 11,391,085

63115 Visa interchange fee 2015 230,344,443

63132 Master interchange fee 2015 49,672,570

63115 Visa interchange fee 2016 118,516,511

63132 Master interchange fee 2016 24,369,211

35. It argued in the alternative, that even if the interchange fees were paid to a card company in a typical card transaction, these payments are not in the nature of royalty subject to WHT because Section 2 of the Income Tax Act defines royalty as:A payment made as consideration for the use of or right to use-a.The copyright of a literary, artistic or scientific work; orb.A cinematograph film, including film or tape for radio or television broadcasting; orc.A patent, trademark, design or model, plan, formula or process; ord.Any industrial or commercial or scientific equipment.'Or for information concerning industrial, commercial or scientific equipment or experience, and any gains derived from the sale or exchange of any right or property giving to that royalty.

36. The Appellant stated that the card companies have entered into License Agreements with the respective issuing banks with the objective of regulating and setting the terms of engagements governing the card transactions and use of the marks on the cards issued to customers.

37. Based on the foregoing, the Appellant affirmed that Respondent had misconstrued the contractual arrangement between it and the card companies because it does not pay card companies interchange fees which can be deemed to be constitute royalties. It buttressed its argument with the Indian case of Motorola Inc, Erisson Radio versus Deputy CIT (2005) 96 TTJ Delhi, where it was held that:'Copyright is distinct from material object, copyrighted the transfer of ownership of a physical thing in which copyright exists gives the purchaser the right to do with it (the physical thing), whatever he pleases, except the right to make copies and issue them to the public one cannot have the copyright without the copyrighted article but the same time just because one has a copyrighted article, it does not follow that one has the copyright in it.'

38. It concluded by stating that the Respondent erred in law and in fact by compelling the Appellant to pay WHT of Kshs 49,497,393 on interchange fees which were deemed to be in the nature of royalties and thus taxable under Section 2, 10 and 35(1) (b) of the Income Tax Act.

V. Clarity of tax assessed for interchange fees and royalty to card companies 39. Under this head, the Appellant asserted, in the alternative, that Respondent’s assessment lacks clarity for the following reasons:a.The WHT liability demand of Kshs 49,497,393 was not clear as to what portion of the assessment related to royalty and which portion related to management and professional fees; andb.That the assessment did not set out the particular amounts assessed in respect to WHT assessment related to interchange fees, management and professional fee paid to card companies as a royalty.

40. While relying on Sections 3, 29(1) and 31 of the TPA, the Appellant averred that the confirmed assessment issued by the Respondent in respect to WHT assessment on interchange fees which were alleged to be either management and professional or royalties contravened Sections 29 (2) and 31 of the TPA for failure to provide and specify the amount assessed as tax and the reporting period to which the assessed tax relates. It relied on the following case laws to support this argument:i.Republic verses Commissioner of Domestic Taxes ex-parte Barclays Bank of Kenya Limited (Misc application no 1223 of 2007).ii.Kenya Commercial Bank Limited versus Commissioner of Domestic Taxes (Tax Appeal No 167 of 2018).

41. It was thus its view that the absence of clarity on the basis for imposing tax should be determined in the Appellant’s favour.

II. Assessment covering the period January to November 2015 42. The Appellant contended that Section 29(5) of the TPA allows the Respondent to issue a taxpayer with a default assessment where a taxpayer has failed to submit a tax return, and that Section 31 of the TPA empowers the Respondent to exercise its best judgment when amending or making alterations an original assessment of a taxpayer.

43. Similarly, Section 31(4) (b) of the TPA provides that the Commissioner, may amend an assessment within five years of the date that a taxpayer submitted its self-assessment return and for any other assessment. The exception to the five-year period is in the case of gross or wilful neglect, evasion or fraud as provided for under Sections 29(6) and 31(4) (a) of the TPA.

44. The Appellant posited that the Respondent erred in its assessment because:a.It had sought to levy VAT and WHT for the period between January 2015 to December 2015 contrary to Section 29 (5) and 31(4) (b) of the TPA without any justifiable reason.b.It attempted to assess the affairs of the Appellant beyond the 5 year limit period without proving gross or wilful neglect, evasion, or fraud by or on behalf of a taxpayer.

45. Its view was that, based on the provisions of the VAT Act, 2013 and the TPA, the furthest amendment that the Respondent could make on its self-assessment was for the month of November 2015, whose specific reporting period was by the December 20, 2015.

46. The Appellant prayed that the assessment for the periods of January to November 2015 should therefore be vacated for illegality.

VII. Withholding tax for the period June 9, 2016 to November 7, 2019. 47. The Appellant argued that Section 35(6) of the ITA (now repealed), allowed the Respondent to collect WHT.

48. The said Section 35 (6) of the ITA was, however repealed by Section 9A of the Finance Act, of 2016 which became effective from the June 9, 2016. However, a provision similar to the repealed Section 35(6) of the ITA was re- introduced as Section 39A of the TPA by Section 29 of the Finance Act of 2019. The new Section 39A became effective from November 7, 2019.

49. The new Section 39A of the TPA provides as follows:'Where a person who is required under a tax law to deduct or withhold tax and remit the tax to the Commissioner fails to do so, the provisions of this Act relating to the collection and recovery of tax, and the payment of penalties and interest thereon, shall apply to the collection and recovery of that tax not deducted or withheld as if it were tax due and payable by that person and the due date for the payment shall be the date on which the amount of tax should have been remitted to the Commissioner.'

50. The Appellant stated that the Respondent, in seeking to collect WHT in the hands of Appellant, relied on Section 35(5) of the ITA which provides that where a person deducts tax under this Section, he shall on or before the twentieth day of the month following the month in which the deduction was made remit the amount so deducted to the Commissioner with a return in writing of the amount of the payment, the amount of tax deducted and such other information as the Commissioner may specify.

51. The Appellant argued that:a.The Respondent’s reliance on Section 35(5) of the ITA to charge tax was misguided because this provision deals with the issues on the time of filing the WHT returns and the payment of the tax deducted. It cannot therefore, be relied upon by the Respondent as a charging Section which empowers the Respondent to collect WHT.b.Between June 9, 2016 when Section 35(6) of the ITA was repealed and November 7, 2019 when Section 39 A of the TPA became effective, there was no provision either under the ITA or the TPA empowering the Commissioner to collect WHT. Further, Article 210(1) of theConstitution of Kenya provides that no tax or licensing fee may be imposed, waived or varied except as provided by legislation. Levying WHT during that lacuna period was thus unlawful. It relied on the Tax Appeals Tribunal of Pevans East Africa Limited v Commissioner of Domestic Taxes, Tax Appeal No 304 of 2019 to buttress this point. The said judgment stated as follows at paragraph 79:'Consequently, the Respondent (KRA) cannot demand withholding tax from the Appellant as if it was tax due from it. It is to be appreciated that when parliament intended withholding tax to be recovered from the withholding tax agent as if it was tax due, the legislation clearly stated so.'

52. The Appellant was of the view that the re-introduction of the previously repealed Section 39A of the TPA was a clear indication that there was a statute gap that required rectification through legislation. It was therefore, illegal for the Respondent to rely on Section 35(5) of the ITA which was non-charging provision to demand for WHT.

53. Its conclusion was that the assessment of WHT for the period June 9, 2016 to November 7, 2019 should be vacated for illegality.

VIII. On whether demand for Withholding tax amounted to double taxation. 54. The Appellant averred that:a.The Respondent action in demanding for WHT on payments made to local banks amounted double taxation because corporate income tax had already been charged on these payments.b.The WHT regime is an advance tax regime. The taxpayer from whom tax is withheld is by right expected to utilize that credit and that where no tax is withheld, such credit would not be available for utilization.c.The Respondent’s assertion that a taxpayer may apply for a refund was misplaced because it was illogical for the Respondent to demand for taxes already paid from the Appellant under the excuse that the said Appellant was at liberty to seek for refund on the overpaid tax.

55. Based on the above, the Appellant stated that the Respondent had erred in law and fact by demanding for WHT on income already subjected to corporate income tax, an action that effectively sought to double the amount of tax payable by the Appellant where there was no revenue leakage.

IX. Penalties Under WHT and VAT 56. The Appellant averred that for purposes of levying penalty for failure to deduct or remit WHT, the applicable provision is Rule 14A of the Income Tax (Withholding Tax) Rules 2001 which provides that the Commissioner may impose a penalty equal to ten percent of the amount of the tax involved, subject to a maximum penalty of one million shillings.

57. In the Circumstances, it was the Appellant’s view that:a.The assessed penalty for WHT assessment of Kshs 1,570,689 by the Respondent exceeded the WHT penalty cap of Kshs 1,000,000 provided for under Rule 14A of the Income Tax (Withholding Tax) Rules 2001. b.Prior to the coming into force of Section 83A of the TPA, failure to charge VAT on a taxable supply did not attract a penalty. However, the Respondent in the objection decision has levied a penalty of Kshs 16,521,445 in respect of the alleged VAT assessment for a period when there was no penalty applicable for failure to charge VAT.

58. It thus affirmed that even if it were liable to pay any penalty, then the amount of penalty demanded by the Respondent in respect of WHT should be governed by the provisions of Rule 14A of the Income Tax (Withholding Tax) Rules 2010 which has an upper limit of Kshs 1,000,000 and Nil for VAT.

Appellant’s Prayers 59. Based on the foregoing the Appellant prayed for Orders that;:-a.The Respondent’s decision contained in the letter dated April 30, 2021 and demanding payment of Kshs 551,449,316 from the Appellant be vacated in its entirety;b.The Merchant Service Commission earned by the Appellant as an acquiring bank constitutes payments for operating a bank account and money transfer services which is a financial service and thus exempt from VAT as provided for under Paragraph 1 of Part II of the First Schedule to the VAT Act, 2013;c.The local interchange fees paid to the Appellant as an issuing bank constitute payments for operating a bank account and effecting money transfer which service is a financial service in nature and thus exempt from VAT as provided for under Paragraph 1 of Part II of the First Schedule to the VAT Act, 2013;d.Local interchange fees retained by the Appellant as an issuing bank do not constitute payments for management or professional fees and is thus not the subject to WHT;e.The Appellant does not pay an interchange fee to international card companies which would constitute a royalty subject to WHT;f.The Respondent’s assessment in respect to WHT assessment on interchange fees local as a management and professional fee and WHT on alleged interchange fees to card companies as a royalty lacks clarity and thus ambiguous;g.The assessment for the period January 2015 to November 2015 is statutorily time barred as provided for under Section 29(5) and Section 31(4) (b) of the TPA and should thus be vacated in its entirety;h.The Respondent has no legal authority to demand withholding tax for the period June 7, 2016 to November 9, 2019 and WHT assessment for the period June 7, 2016 to November 9, 2019 should be vacated in its entirety;i.The Respondent’s demand of WHT on income already subjected to corporate income tax amounts to double taxation contrary to generally accepted principles of taxation;j.The Respondent’s demand for penalty in Respect to WHT amounting to Kshs 1,570,689 and VAT penalty amounting to Kshs 16,521,445 is excessive and illegal and the said penalties should be vacated;k.The Appeal be allowed with costs to the Appellant; andl.Any other orders that the Honorable Tribunal may deem fit.

Respondent’s Case 60. The Respondent relied on its Statement of Facts dated and filed on July 16, 2021 in defending this Appeal where it stated that:

61. The Respondent stated that the Appellant:a.It is a member of various card companies like Visa, Master card and Amex. These card companies own global payments technologies through which they connect consumers, businesses, financial institutions and governments. On one hand, they serve cardholders, issuers and issuer processors. On the other side, they serve merchants, acquirers and acquirer processors.b.It is both an acquirer and an issuer, and that as an acquirer, the Appellant contracts with the merchants and performs functions like deployment of cards terminal, marketing activities, risk assessments and settlement of disputes.c.It provides the payment network connectivity to its merchants in line with transaction obligations and in consideration for the merchant services the Appellant charges a fee referred as merchant service commission.d.It issues credit cards to its customers and the Appellant’s customers use credit and debit card at a merchant, the Appellant becomes the issuer and provides services in form of authorization, settlement and clearance to the acquiring bank. In return for the services rendered, the Appellant earns interchange fee.

62. The Respondent responded to the issues identified by the Appellant for determination as follows:

i. Subjecting Merchant Service Commission to VAT 63. Under this head the Respondent stated that:a.That Merchant Service Commission is chargeable to VAT.b.That the Appellant as an acquirer, recruits and contracts with merchants and performs functions like deployment of cards terminals, marketing activities, risk assessment and settlement of disputes.

64. The Respondent explained that it had reviewed two copies of the Appellant’s merchant service agreements with West Side Real Estate and another one with Clemjos Enterprises. And that from these, Agreements, it noted that:a.Clause 1 defined the term merchant as:'Merchant means any individual or business recruited for purposes of facilitating payments of goods and services through the Equity point of sales terminal'b.Clause 4. 0 of the Agreement provided that for any individual or business to be a merchant, it is not a requirement for it to maintain a bank account with the Appellant. The said clause reads as follows:'The merchant shall have an option to open a collection account at the bank or any other bank of his/her choice.'

65. It argued that these two provisions of the agreement show that the merchant service provided by the Appellant do not amount to operating a customer account. In other words, any individual or business including those without an account with Appellant can be recruited as merchants.

66. It argued further that Section 2 of the VAT Act 2013 defines 'service' as anything that is not goods or money and therefore merchant provided by the bank qualifies as a taxable service under Section 5(1) of the VAT Act,2013.

67. Further, that the merchant service charge did not fall under Part II paragraph 1 of the First Schedule of the VAT Act, 2013 which outlines exempt financial services but excludes financial management and advisory services from financial services provided by banks and other financial institutions.

68. Based on the foregoing arguments, the Respondent concluded that the merchant fee earned by the Appellant is a taxable supply.

ii. VAT on local interchange fees 69. Under this head the Respondent stated that:a.The Appellant issues credit cards to its customers. When the Appellant’s customers use credit and debit cards to transact at any merchant’s business, the Appellant becomes the issuer and provides service in form of authorization, settlement and clearance to the acquiring bank.b.As an issuing bank, the services provided by the Appellant include receiving the transaction information from the acquiring bank through card system network, ensuring that transaction information is valid and checking to ensure that a customer’s account is in good standing.c.As an issuer the Appellant earns interchange fees because it provides services like facilitation fee for facilitating a medium of communication between the issuers, acquirers and merchants, and for confirmation of creditworthiness of cardholders to acquirer banks.d.The Appellant as an issuing bank supplies a composite service to the acquiring bank, which does not hold an account with the Appellant and is not their client. For that service, the Appellant is paid interchange fee, which is not payment for operation of account.e.This interchange fee earned constitutes fees earned for management and professional services and is therefore subject to VAT.f.The Appellant as an issuer renders clear coordination, managerial, professional and contractual services to the acquirers for which the latter pays. It relied on the Court of Appeal case in Commissioner of Domestic Taxes (Large tax Payer Office) vs Barclays Bank of Kenya Ltd ( Appeal No 195 of 2017) where the Honourable Judges noted that:'We are persuaded that the management and professional fee does not have to fall within only one of the services defined in Section 2; it can cover one or more. In our view, what is critical is whether looking at the totality of the evidence on record, there is clear explanation of what the appellant alleges to constitute management or professional fees, and whether that payment made by the respondent reasonably falls within the terms of the statute. That question cannot be answered by considering only how the parties have described or rationalized the payment'.

70. The Respondent contended that by virtue of the above Court of Appeal Judgment, interchange fee earned by the Appellant constitute management and professional fee. The same therefore does not fall under Part II Paragraph 1 of the First Schedule to VAT Act, 2013 which outlines exempt financial services.

71. It affirmed that the services described above for which the Appellant earns interchange fees falls within Sections 5(1) (a) and 5(2) (b) of the VAT Act 2013.

72. The Appellant re-stated that based on the foregoing, the assessed VAT amounting to Kshs 25,227,309 is due and payable as per the Respondent’s objection decision dated the April 30, 2021.

iii. On Withholding Tax on interchange fees 73. In response to this issue, the Respondent maintained that:a.It did not err in law and fact by holding that local interchange fees retained by the Appellant as an issuer is a management and professional fee and thus subject to withholding tax (WHT) pursuant to the provisions of Sections 2 and Section 35(3) of the Income Tax Act.b.After analyzing trial balances and ledgers provided by the Appellant, it noted that the Appellant paid interchange fees to issuer banks. The fees were paid as consideration for managerial, technical, agency, contractual, professional or consultancy services rendered by the issuer banks.c.The services provided by the issuer banks to the Appellant as acquirer includes facilitation fee for facilitating a medium of communication between the issuers, acquirers and merchants, and for confirmation of creditworthiness of the cardholders. In its view these services amounted to clear co-ordination, managerial, professional and contractual services to the Appellant as acquirer who in turn paid an interchange fees for these services.

74. It was thus its view that the Appellant’s Appeal on this issue was contrary to the judgment of the Court of Appeal in the Commissioner of Domestic Taxes (large Tax Payer Office) vs. Barclays Bank of Kenya Ltd (Appeal No 195 of 2017) which held that interchange fees constitute management or professional fees which are liable to withholding tax under Section 35(3) of the Income Tax Act.

iv. Withholding tax on interchange fees to card companies 75. The Respondent stated that having reviewed copies of the agreements between the Appellant and card companies, it had noted that:a.For the Appellant to access and participate in any of the networks set up by the card companies, it was required to use the particular company’s cards which bear that company’s trademarks and logos. These marks and logos distinguished one card company from the other.b.The trademarks are intended for use in the identification of services and goods. For instance, the agreement between the Appellant and VISA on page 2 of the agreement was clearly titled ‘Membership and trademark License agreement’.c.Without the use of debit and credit card bearing those specific trademarks and logos from the authorizing card company, the Appellant cannot access or use the networks.

76. The Respondent argued that as a withholding tax agent, the Appellant was obliged to withhold and remit withholding tax on payments made to non- resident card companies in line with the Court of Appeal decision in Commissioner of Domestic Taxes (Large tax Payer office) vs Barclays Bank of Kenya Ltd (supra) which observed as follows in relation to interchange fees paid to card companies:'We are satisfied that, in the circumstances of the case giving rise to this appeal, the appellant was able to identify with clarity the basis upon which it was claiming withholding tax from the respondent based on payment of royalty, however disguised. The appellant was able to demonstrate that the transaction fee constituted, in the circumstances we have explained above, payment for the right to use the card companies’ trademarks and logos. The payment constituted royalty for trademark under Section 2(c) of the Act'.

77. The Respondent affirmed that interchange fees paid by the Appellant to non- resident card companies constituted royalty which is subject to withholding tax in line with Section 35(1) (b) of Income Tax Act.

78. The Respondent therefore urged this Honourable Tribunal to find that it did not err in charging Withholding tax of Kshs 49,497,393. 00 on interchange fees to card companies

v. On Clarity of tax assessed for interchange fees and royalty to card companies 79. The Respondent stated that:a.It had attached a schedule with clear figure showing amount assessed (principal tax), applicable penalty and interest in line with Section 29(2) and Section 31 of the Tax Procedures Act 2015 in its objection decision.b.It was clear to it from the ledgers and explanations provided by the Appellant that the payments made thereof related to interchange fees either to card companies or other issuing banks.c.The Appellant failed to provide detailed ledgers to support its operating expenses for the years 2015 and 2016 even after several reminders through emails.

80. That it charged WHT at the applicable rate of 5% for interchange fees leading to a total WHT liability of Kshs 49,497,393. 00.

81. That its tax assessment and the basis of its tax assessment for interchange fees on card companies was succinct and clear.

vi. Assessment covering the period January to November 2015 82. The Respondent’s view on this issue was that the assessment in issue was based on the information obtained in the Income tax returns, ledger details and trial balances of the Appellant.

83. It argued that the Appellant’s return (self-assessment) for the period 2015 was within the required 5 years considering that the assessment was raised on December 14, 2020, which is about 4. 5 years from the date of filing self-assessment relied on by the Respondent.

84. In light of the above, the Respondent averred that the assessment covering January to November 2015 as confirmed through its objection decision dated the April 30, 2021 is valid.

vii. Withholding tax for the period June 9, 2016 to November 7, 2019 85. The Appellant’s argument under this heading was that the Respondent had no legal authority to collect withholding tax from the Appellant for the period June 9, 2016 to November 7, 2019. It was also its argument that there was no provision either under the Income tax Act or the Tax Procedures Act which empowered the Commissioner to collect withholding tax in the hands of the Appellant for the period between June 9, 2016 when Section 35(6) of the Income Tax Act was repealed and November 7, 2019 when Section 39 A of the Tax Procedures Act became effective.

86. The Respondent interpreted Section 23(3)(b) of the Interpretation and General Provisions Act to mean that the repeal of Section 35(6) did not affect previous operation of Section 35(a) of the ITA.Section 23(3)(b) of the Interpretation and General Provisions Act, Chapter 2 of the Laws of Kenya) provides as follows in regard to repeal of laws:'Where a written law repeals in whole or in part another written law, then, unless a contrary intention appears the repeal shall not-(b)Affect the previous operation of a written law so repealed or anything duly done or suffered under a written law so repealed.'

87. In the alternative the Appellant argued that even with the repeal of Section 35(6) of the ITA, Rules 8,9,10 and 14 of the Income taxes (Withholding Tax) Rules 2001 were still in place and they supported the continual payment of the withholding tax.Rule 8 of withholding tax Rules 2001 provides as follows in regard to payment of withholding tax:'On or before the twentieth day of the month following the month in which the deduction is made or before such other day as may be notified to him by the Commissioner, a person shall, subject to subparagraph (3), pay to the Commissioner or to such other person as the Commissioner may direct,'

88. Based on the above provisions of the law, the Respondent averred that the Appellant had no excuse for failure to deduct and pay withholding tax of Kshs 49,497,393 as was confirmed in its objection decision dated April 30, 2021.

viii. Whether demand for Withholding tax amounted to double taxation 89. The Respondent averred that:a.The issue of overpaid withholding or double taxation on WHT payments was adequately taken care of under Section 47 of the Tax Procedures Act 2015. b.Rule 4(1) of the Withholding Tax Rules provide that WHT is charged on payment and not on income.Rule 4(1) of the Withholding Tax Rules provides as follows regarding payment of WHT:'A person who makes a payment of, or on account of, any income which is subject to withholding tax shall deduct tax therefrom in the amount specified'.c.Deduction and payment of withholding tax is meant to safeguard tax revenue and to enhance tax compliance. It asserted that the argument by the Appellant that withholding tax leads to double taxation was incorrect because the law allows a taxpayer to get a credit for withholding tax paid when computing tax due for a given tax period.

90. Based on the above, if affirmed that the withholding tax does not amount to double taxation because it has a self-deduction mechanism which allows a taxpayer to obtain tax credit for the tax paid.

ix. Penalties Under WHT and VAT 91. The Respondent was of the view that its demand for penalty in respect to withholding tax amounting to Kshs 1,570,689 and VAT penalty amounting to Kshs 16,521,445 was not excessive.

92. Section 83A of the Tax Procedures Act provides as follows in in regards to payment of penalties:'A person who fails to pay tax on the due date shall be liable to pay a late payment penalty of five percent of the tax due and payable'.

93. The Respondent argued that it relied on Section 83A of the TPA which allowed it to charge a penalty if a taxpayer fails to pay tax.

94. The Respondent concluded its argument by asserting that Section 83(A) of the TPA which became effective from July 1, 2018 was the correct provision of the law that was applicable in this case because the assessment notice was issued on December 14, 2020 and Rule 14 of the WHT Rules was a subsidiary legislation that is inferior to the TPA.

Respondent’s Prayer 95. The Respondent prayed that the Appellant’s Appeal be dismissed with costs, and its assessment amounting to Kshs 551,449,316. 00 be confirmed to be due and payable as per the objection decision dated the April 30, 2021.

Issues For Determination** 96. The parties identified and addressed the Tribunal on 9 issues that they had identified for determination in this dispute. The Tribunal hereby also adopts these 9 issues as falling for determination in this Appeal:a.Whether Merchant Service Commission is exempt from VAT.b.Whether local interchange fees are exempt from VAT.c.Whether withholding tax can be levied on Local interchange fees.d.Whether Withholding tax ought to be paid to international card companies in a card transaction.e.Whether the Assessment by the Respondent lacked clarityf.Whether the Respondent’s Assessment covering the period January to November 2015 was raised beyond the five-year period.g.Whether the Respondent could legally collect Withholding tax for the period June 9, 2016 to November 7, 2019. h.Whether the Respondent’s demand for Withholding tax amounted to double taxation.

i.Whether the Respondent’s demands for Penalties in respect to WHT and VAT was excessive.

a. Whether Merchant Service Commission is Exempt from VAT. 97. The issue in contention under this head is whether the fee earned by the Appellant for providing money transfer services to its various clients was exempt from VAT.

98. The question for the Tribunal’s determination under this issue was whether, the fees earned by the Appellant in the transaction constitute a taxable supply.

99. Section 2 of the VAT Act defines taxable supply to mean:'A supply, other than an exempt supply, made in Kenya by a person in the course or furtherance of a business carried on by the person, including a supply made in connection with the commencement or termination of a business.'

100. Section 5(1) of the VAT Act provides as follows regarding instances where VAT is chargeable:'A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on—a.A taxable supply made by a registered person in Kenya;b.The importation of taxable goods; andc.A supply of imported taxable services.'

101. The Appellant argued that the services it provided and for which it earned a MSC are financial services which constitute exempt supplies under Paragraph 1 Part II of the VAT Act.

102. Paragraph 1 Part II of the VAT Act provides as follows''The supply of the following services shall be exempt supplies-1. The following financial services—a.The operation of current, deposit or savings accounts, including the provision of account statements;b.The issue, transfer, receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking of cash machines, sorting or counting of money;c.Issuing of credit and debit cards;d.Automated teller machine transactions, excluding the supply of automated teller machines and the software to run it;e.Telegraphic money transfer services;f.Foreign exchange transactions, including the supply of foreign drafts and international money orders;g.Cheque handling, processing, clearing and settlement, including special clearance or cancellation of cheques;h.The making of any advances or the granting of any credit;i.Issuance of securities for money, including bills of exchange, promissory notes, money and postal orders;j.The provision of guarantees, letters of credit and acceptance and other forms of documentary credit;k.The issue, transfer, receipt or any other dealing with bonds, Sukuk debentures, treasury bills, shares and stocks and other forms of security or secondary security; (l) the assignment of a debt for consideration;m.The provision of the above financial services on behalf of another on a commission basis.n.Asset transfers and other transactions related to the transfer of assets into Real Estates Investment Trusts and Asset Backed Securities.o.Any services set out in items (a) to (n) that are structured in conformity with Islamic finance'

103. It is clear from the pleadings of the parties that the Appellant offered services which included but were not limited to transfer of money, issuance of debit and credit cards and provision of financial services. These services can easily fall under sub-paragraphs (b), (c), and (m) of Paragraph 1 Part II of the VAT Act. In other words, the combined services offered by the Appellant in the transactions between it, the merchants and the card companies fall within the definition of what constitutes exempt supplies under Paragraph 1 Part II of the VAT Act.

104. Based on the above reasons, the Tribunal hereby concludes that the services offered by Appellant to its merchants and for which it earned MSC falls under sub-paragraphs (a). (b), (c), (h) and (m) of Paragraph 1 Part II of the VAT Act, and are thus exempt from VAT.

b. Whether Local Interchange Fees are Exempt from VAT 105. It is not in dispute that interchange fees were earned when the Appellant provided services to acquiring banks.

106. However, the Appellant argued that local interchange fees that it earned as an issuing bank constituted payment for operating a bank account and effecting money transfer which services are financial in nature and are thus exempt from VAT as provided for under Part II, Paragraph 1 of the First Schedule to the VAT Act, 2013.

107. It asserted further that it does not earn interchange fees under the four- party model relationship because the medium of communication between the issuing banks, acquiring banks and merchants is provided, owned and operated by card companies and not the issuing bank. Its role is thus limited to providing money transfer services and operating a customer’s bank account.

108. It also argued that it does not have a relationship with the acquiring bank and therefore its commission income cannot be imputed to fall within the definition of professional and or management fees,

109. The issue of interchange fees that arise from a card transaction was discussed by the Tribunal in the case of NIC Group and Nic Bank Kenya Plc V Commissioner Of Domestic Taxes (tat) Appeal No 361 Of 2018 where it held that:'15. The foregoing definitions invariably negate the Respondent’s contention that the card services between the Appellant as the issuing bank and the acquiring bank do not amount to transfer or money or operation of bank account, and that they are subject to value added tax under section 5(1) & (2) of the VAT Act, 2013. We find that the service provided by the Appellant is to its customers and not to the acquiring bank, it involves a money transaction and it is not considered as a service subject to the value added tax. In fact, the service of money transfer is exempt from value added tax under the provisions of the paragraphs 1 of Part II of the First Schedule to the Value Added Tax Act 2013.

110. The High Court concurred with the decision of the Tribunal that intercehage fees are not subject to VAT in the case of Barclays Bank of Kenya Limited v Commissioner of Domestic Taxes [2020] eKLR, where the court stated as follows:'The issuing bank, as stated before and it was accepted by the parties before court, retains the interchange fee when remitting the payment through the card company’s infrastructure to pay for the goods purchased from the merchant by its customer, the cardholder. I am persuaded by the submissions of BBK, in as far as interchange fee is concerned, that it relates to the relationship between the different players in a card transaction is to enable the cardholder transfer money from the cardholder’s account to the merchant’s account. I will add to that submission that the acquiring bank is in a sense a conduit in that transfer of information relating to the transmitted in the network. It follows that the authorization of use of the card by the issuing bank is part and parcel of the issuing bank’s operation of its customers (the cardholder’s) account. That being the finding of this court it follows that the said service of authorizing the use of the card is a service which is exempt from VAT as provided under the definition of services, set out above, and as provided under the Third Schedule paragraph 1 (a) and (b) of Cap 476. '

111. The BBK Case that was relied on by the Respondent to support its assertion that VAT is payable on interchange fees only dealt with the issue of payment of WHT on interchange fees, and not whether VAT was payable on interchange. It is thus distinguished as inapplicable to this Appeal.

112. Flowing from the decision of the Tribunal in the NIC case and that of the High Court in Barclays Bank of Kenya Limited v Commissioner of Domestic Taxes [2020] eKLR the Tribunal similarly holds that the interchange fees earned by the Appellant from the card services is exempt from VAT. The Respondent’s decision to levy VAT on the said interchange fees is unlawful.

c. Whether Withholding Tax can be Levied on Local Interchange Fees. 113. The Appellant argued that that the Court of Appeal judges misunderstood the card transaction process in the BBK Case and it thus requested the Tribunal to disregard the decision of the Court of Appeal in BBK Case.

114. The Tribunal is guided on this request by Article 163(7) of theConstitution which has concretized the vertical binding nature of precedent from superior courts unless it is distinguishable. It is also guided by the decision of superior courts inChris Munga N. Bichage v Richard Nyagaka Tong’i & 2 others [2016] eKLR, where the Supreme pronounced itself as follows (para 28):'What it boils down to, according to the authors, is: certainty, predictability, reliability, equality, uniformity, convenience: these are the principal advantages to be gained by a legal system from the principle of stare decisis. Observance of the doctrine has been insisted upon, both by this Court and by the Supreme Court of Appeal. And I believe rightly so. The doctrine of precedent not only binds lower courts but also binds courts of final jurisdiction to their own decisions. These courts can depart from a previous decision of their own only when satisfied that that decision is clearly wrong. Stare decisis is therefore not simply a matter of respect for courts of higher authority. It is a manifestation of the rule of law itself, which in turn is a founding value of our Constitution.'

115. Article 163(7) of theConstitution and the decision of the Supreme Court in Chris Munga case (Supra) embody the principle of law and Constitutionalism which the Tribunal is duty bound to enforce. The current Appeal however falls within the four corners of the BBK Case and the Tribunal is therefore duty bound to abide by this decision from the Court of Appeal where the learned judges stated as follows:'We are persuaded that the evidence on record properly established that the payments paid by the respondent to the card companies were royalty as defined in the Act and further that the interchange fees it paid to issuer banks were for management and professional services as defined in the Act, and therefore both payments were subject to withholding tax under the Act.'

116. Accordingly, just like it was in the BBK case, the Tribunal agrees that interchange fees are fees for provision of management or professional fees which are subject to WHT under Sections 10 and 35 of the ITA.

d. Whether Withholding Tax Ought to be paid to International Card Companies in a Card Transaction. 117. The judges of Appeal reproduced the transactions involved in the BBK case as thus:‘Upon application, an issuer provides a credit or debit card to a customer. The customer uses the card to purchase goods or services from a merchant. The merchant swipes the card on a machine configured to accept that card. By swiping the card, the merchant seeks authorisation from the acquirer, who in turn seeks authorisation for the transaction through the credit or debit card’s network. At that point the network gets to the issuer to confirm and verify the customer’s credit status, before confirming the transaction to the merchant through the acquirer. Once the merchant receives the authorisation, a charge slip is generated and the customer receives his goods or services. The merchant next uploads the transaction for payment by the acquirer and the acquirer, after payment, sends details of the transition to the card company’s network. The network transmits that information to the issuer, who dispatches a statement to the cardholder. The cardholder then pays the issuer, who in turn pays the acquirer through the network’.

118. Based on the foregoing facts, the Judges of Appeal concluded as thus:‘We are persuaded that the evidence on record properly established that the payments paid by the respondent to the card companies were royalty as defined in the Act and further that the interchange fees it paid to issuer banks were for management and professional services as defined in the Act, and therefore both payments were subject to withholding tax under the Act’.

119. The foregoing transactions is similar and falls on all fours to the card transaction in this Appeal which has been described by the Appellant to be as follows:a.The entire card payment system is done by the card company which owns, operates and processes the payments through the network.b.The cardholder verifies and transfers money services provided by the Issuing bank through the card network in a card transaction that does not fall within the scope of management or professional fee.c.Its services are not provided to the acquiring bank but rather to the Issuing bank’s customer who intends to access funds from their bank account to pay for a purchase electronically from a merchant.d.Its verification process involved a mere check and confirmation process through the card payment network. It does this by verifying the details of the cardholder, his/her account, the credit card limit- and the details that the Cardholder shall input at the P0S terminal. The outcome of the verification process from the acquiring bank would be either an approval or decline. The message received by the Appellant as an Acquiring Bank is then transmitted to the merchant signifying approval or decline of a transaction.e.In essence, the issuing bank only offers a response by way of confirmation through the card payment network as to whether it has indeed issued the card to the cardholder; and whether the PIN details as input by the cardholder is correct and the status of the Cardholders account or credit card limit.f.All this is information that is gathered by the issuing bank at the time of opening the account or issuing the cardholder with a debit or credit card is part and parcel of the normal banking business of the Appellant which does not fall within the definition of management and professional fees under Section 2 of the ITA.

120. Guided by the doctrine of the binding nature of vertical precedent the Tribunal is hereby guided by the BBK case where it was held that the payments made by the Appellant to card companies were royalty and therefore subject to WHT.

121. Accordingly, the Tribunal holds that the Respondent did not err when it held that payments made by the Appellant to card companies were royalty and therefore, subject to WHT.

e. Whether the Assessment by the Respondent Lacked Clarity 122. Section 51(10) of the TPA provides as thus:‘An objection decision shall include a statement of findings on the material facts and the reasons for the decision’.

123. The Appellant relied on Section 29(1) of the TPA to urge this issue. It is however clear to the Tribunal that Section 29(1) of the TPA deals with issues of default assessment. The present case arose from a desktop compliance check and not from the taxpayer’s failure to submit tax return for any reporting period.

124. The argument that the Respondent’s assessment did not comply with the rigours of Section 29(1) of the TPA when issuing its assessment is therefore misplaced and unfounded.

125. Moreover, Section 51(10) TPA requires the Commissioner to include a statement of its findings and the reasons for that decision. A look though the impugned objection decision makes it clear that the Commissioner provided a statement of its findings at paragraph 7(d) and the reasons why it arrived at its findings at paragraphs 7(a) to (c). This was all that was required of it, and it duly complied. The Commissioner was thus not duty bound to provide more details than what the law dictates.

126. Consequently, the Tribunal hereby dismisses this ground of Appeal for lack of merit.

f. Whether the Respondent’s Assessment Covering the Period January to November 2015 was Raised Beyond the Five-year Period. 127. Section 29(5) and (6) of the TPA provides as thus:'(5) Subject to sub-Section (6), an assessment under sub-Section(1)Shall not be made after five years immediately following the last date of the reporting period to which the assessment relates.(6)Sub-Section (5) shall not apply in the case of gross or wilful neglect, evasion or fraud by a taxpayer.'

128. The reporting period for VAT is the 20th of every month as is provided for under Section 44(1) of the VAT Act which reads as thus:‘Every registered person shall submit a return, in the prescribed form and manner, in respect of each tax period not later than the twentieth day after the end of that period’.

129. The reporting period for WHT is also the 20th of every subsequent month as is provided in Rule 8(1) of the Withholding Tax Rules which provides that:‘On or before the twentieth day of the month following the month in which the deduction is made or before such other day as may be notified to him by the Commissioner, a person shall, subject to subparagraph (3), pay to the Commissioner or to such other person as the Commissioner may direct, all amounts of tax deducted in accordance with the Act and these rules’.

130. The five-year statutory assessment period would therefore run from the last date of the reporting period to which this assessment relates. In this Appeal the last reporting period would be the 20th day of the of the subsequent month from which the VAT in contention relates.

131. Based on the assessment letter dated the December 14, 2020, basic arithmetic calculation shows that the five years upper limit in which the Appellant’s tax affairs could be assessed is the December 14, 2015. This would cover the transaction done between the November 14, 2015 to December 14, 2015.

132. The Respondent’s assessment however runs from January 2015 to December 2017. It is therefore, apparent that the Respondent’s assessment for the reporting period between the January 2015 to November 2015 fell outside the statutory limitation period.

133. The Respondent has not explained, shown and or particularized any fraud, wilful neglect or evasion on the part of the part of the taxpayer to justify the decision to carry out an assessment for a period that is beyond the statutory five years’ limit period.

134. Based on the foregoing analysis, it follows that any tax assessment for VAT and WHT whose submission dates falls between the January 20, 2015 and November 20, 2015 are time barred and therefore invalid and unlawful.

g. Whether the Respondent could Legally Collect Withholding tax for the period June 9, 2016 to November 7, 2019. 135. The Appellant argued that the Respondent had no legal basis to demand for WHT from it for the period between June 9, 2016 and November 7, 2017 because of the following reasons:a.WHT is borne by the supplier and not the person who makes the payment.b.Prior to 2016, Section 35(6) of the ITA allowed the Respondent to collect WHT in the hands of the WHT agent, the agent was thus liable for tax any uncollected tax.c.The repeal of Section 35(6) of the ITA on June 9, 2016 relieved the taxpayer of this obligation from the taxpayer.d.The content of the repealed Section 35(6) of the ITA was re- introduced on the November 7, 2016 as Section 39A of the TPA vide Finance Act, 2019.

136. The repeal of Section 35(6) of the ITA was not contested by the Respondent. It instead relied on Section 35(5)(a) of the ITA to justify its decision to charge tax.

137. Section 35(5)(a) of ITA deals with the obligation of a taxpayer who is liable to pay penalty and interest, and the order in which a taxpayer is required to pay for the penalty and interest due. It does not prescribe penalties that could accrue to a person who defaults in performing its tax obligations in the same manner as is contained in Section 39A of the TPA.

138. More importantly, Section 35(5) does not impose penalty and or interest on the payer (the Appellant) if the tax due and payable by it is not honored. It merely speaks in generalities on orders of making payments, without providing penalties for non-compliance. Therefore, this provision could not have been intended to be a charging provision for tax and this explains why the legislature found it necessary to re-introduce Section 39A of the TPA on the November 7, 2019 to fill the lacuna.

139. It is now trite that a taxpayer can only be taxed if the statute clearly and unambiguously provides for such taxation. If the letter of the law fails to bring a taxpayer within the tax statute, then such a person shall be free from tax obligations, however unfair and unjust that maybe. This view was supported by the Court of Appeal in Commissioner of Domestic Taxes (Large Taxpayers Officers) v Barclays Bank of Kenya Ltd NRB CA Civil Appeal No 195 of 2017 [2020] eKLR (BBK Case) where it observed as follows:‘There is no doubt in our minds that the decisions in Adamson v Attorney General [1933] AC 247, Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64, TM Bell v Commissioner of Income Tax [1960] EA 224, Republic v Commissioner of Income Tax ex parte SDV Transami [2005] eKLR and the first judgment represent a correct statement of the law, namely strict construction of tax legislation, so that the tax demand must fall within the terms of the statute without ambiguity. If there’s any ambiguity in the legislation, it is not to be rectified by considerations of intendment, but by amending the legislation. However, determination of whether there is clarity or ambiguity in the legislation or whether a tax demand is precise and within the terms of the legislation, is not an abstract or pedantic exercise. It must be based on the evidence and the circumstances of each case. We agree with the majority of this Court in Stanbic Bank Ltd v Kenya Revenue Authority [2009] eKLR that meaning of words should not be strained so as to find ambiguity.'

140. The Tribunal has plainly read Section 35(6) of the ITA that has been relied on by the Respondent to charge tax for the period under contention and it has arrived at the conclusion that the repeal took away the Commissioner’s power to enforce a penalty against taxpayers for failure to withhold tax. The Appellant cannot thus not be faulted for trying, with success, to benefit from what the law provides. The role of Courts and Tribunals like the TAT is to facilitate parties in the enforcement and compliance with the tax Statutes as they are.

141. It follows from the above analysis that the Tribunal agrees with the Appellant that the repeal of Section 35(6) of the ITA denied the Commissioner the statutory right and wherewithal to demand for WHT from the Appellant during the repeal period running from the June 9, 2016 to November 7, 2019.

h. Whether the Respondent’s Demand for Withholding Tax Amounted to Double Taxation. 142. Section 35 (3) of the ITA provides as follows in regard to WHT:'Subject to subsection (3A), a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of –(a) Which is chargeable to tax, deduct therefrom tax at the appropriate resident withholding tax.'

143. Section 76 A of ITA provides as follows in regard to taxation of WHT:‘76A. The Commissioner shall not assess any person for any year of income on that portion of income which has been subject to withholding tax which is also a final tax’.

144. The foregoing provision of the ITA confirms that the WHT is a legal taxation regime that is permitted by Kenyan statutes.

145. It is also commonplace, that by its very nature, the WHT regime has self- correcting mechanisms within it to ensure that double taxation does not occur in cases where it is implemented. This can for example be found in:a.Section 47 of the TPA that allows the taxpayer to apply for refund if he has overpaid tax. In other words, double taxation which could result in tax over-payment would justify the taxpayer to make an application for refund.b.Rule 4(1) of the WHT Rules entitles a taxpayer who makes a payment of or on account of any which is subject to WHT the right to deduct tax equivalent to the amount specified. In effect, this provision allows a taxpayer the right to credit its WHT obligation as against its income tax obligation as of right.

146. The Appellant has not demonstrated how the Commissioner has applied the WHT legal regime in a contra-statute manner or how its implementation by the Commissioner has made it difficult for the taxpayer to apply the self- correcting mechanisms within the law to help it obtain credit against its corporate income tax from the WHT that had been previously paid.

147. The Appellant has also not explained and or demonstrated how or whether it has applied these self-correcting mechanisms to obtain credits for WHT without success, or whether it has been frustrated by the Commissioner in the course of its lawful endeavor to obtain credits for WHT that it has paid. In other words, the Appellant has invited the Tribunal to decide on an academic question whose effect on the Appellant has not been demonstrated by any evidence is respectfully declined.

148. Accordingly, the Tribunal holds that the Respondent did not err in law or in fact in demanding for WHT on the Appellant’s income.

i. Whether the Respondent’s Demands for Penalties in Respect to WHT and VAT was Excessive. 149. It is trite law that a subsidiary legislation must abide to the Act. A subsidiary legislation cannot make a provision which contradicts its mother statutes. This position is buttressed by:i.Section 31(b) of the Interpretation and General Provisions Act Cap 2. That Section provides-'General provisions with respect to power to make subsidiary legislation. Where an Act confers power on an authority to make subsidiary legislation, the following provisions shall, unless a contrary intention appears, have effect with reference to the making of the subsidiary legislation-ab.No subsidiary legislation shall be inconsistent with theprovisions of an Act.'ii.High Court decision in Cook 'N' Lite Limited v Silvester Mutia Jonathan [2015] eKLR, where Justice Mary Kasango abided by the Court stated thus-‘It is an established principle of construction of statutes that no subsidiary legislation shall be inconsistent with the provisions of an Act (See Section 31(b) of the Interpretation and General Provisions Act – Cap 2 Laws of Kenya). A subsidiary legislation cannot repeal or contradict express provisions of an Act from which they derive their authority.’

150. The Tribunal is guided by the foregoing authority and statute in arriving at the conclusion that Section 83A of the TPA is supreme to rules 17A and 14A of the Withholding Rules, 2001.

151. This means that the Respondent acted lawfully in invoking Section 83A of the TPA in levying penalty and interest against the Appellant for its tax defaults. However, the fact that Section 83A of the TPA came into effect in July 2018 through Section 45 of the Finance Act, 2018 means that penalty for late payment shall not be applied to WHT and VAT that were due and unpaid before the July 9, 2018.

Final Decision 152. Accordingly, the Appeal succeeds partially and the Tribunal proceeds to make the following Orders:-i.The Appeal succeeds partially;ii.The VAT assessment in relation to Merchant Service Commission of Kshs 476,724,614. 00 inclusive of penalties and interests be and is hereby set aside.iii.The VAT assessment in relation to interchange fees amounting to Kshs 25,227,309. 00 inclusive of interests be and is hereby set aside.iv.The Withholding tax assessments on local interchange fees retained by the Appellant constituted management and professional fees. The WHT arising thereof be and is hereby upheld.v.The interchange fees paid by the Appellant to international card companies constituted payment for royalties and is thus subject to VAT.vi.The Appellant’s objection decision was clear, unambiguous and lawful.vii.The Respondent’s VAT and Withholding tax assessments for the period between January 2015 and November 2015 be and is hereby set aside.viii.The Respondent’s demand to collect withholding tax from the Appellant for the period between the June 9, 2019 and November 7, 2019 is statutorily barred and is therefore set aside for illegality.ix.The Respondent’s demand for late payment penalty of five percent related to the prospective tax period running from the July 10, 2018 be and is hereby upheld.x.The Respondent’s demand for late payment penalty of five percent related to the retrospective period running from the July 9, 2018 be and is hereby set aside.xi.Each party to bear its own costs.

153. Orders accordingly.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023………………………….ERIC N. WAFULACHAIRMAN…………………………RODNEY OLUOCHMEMBER…………………………ROBERT M. MUTUMAMEMBER…………………………DELILAH K. NGALAMEMBER…………………………EDWIN CHELUGETMEMBER