[2023] KETAT 269 (KLR)

Fivespot Kenya Limted v Commissioner of Domestic Taxes (Appeal 760 of 2021) [2023] KETAT 269 (KLR) (12 May 2023) (Judgment)

Neutral citation: [2023] KETAT 269 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 760 of 2021

E.N Wafula, Chair, RO Oluoch, RM Mutuma & EK Cheluget, Members

May 12, 2023

Between

Fivespot Kenya Limted

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company that is duly incorporated and registered in Kenya under the Companies Act. It engages in provision of a platform for payment transactions for a commission on behalf of merchants.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995(the Authority). Under Section 5 (1) of the Act, the Kenya Revenue Authority 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 the performance of its functions under subsection (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 to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent conducted compliance audit on the Appellant for the period 2016 to 2020. It thereafter issued an additional VAT assessment amounting to Kshs 46,453,542. 00

4. The Appellant lodged an objection to the additional assessments on 10th June 2021 and the Respondent issued an objection decision on the 28th of October 2021.

5. The Appellant was aggrieved by the Objection decision and it commenced an Appeal before the Tribunal vide its Notice of Appeal dated and filed on the 26th November 2021.

The Appeal 6. The Appellant filed its Memorandum of Appeal dated and filed on the 26th November, 2021 which was premised on the following grounds:-a.That the Respondent erred in fact and in law by failing to consider the documentary evidence, explanations, reconciliations and supporting documents submitted by the Appellant as required by Section 51(3) of the Tax Procedures Act, No. 29 of 2015. b.That the Respondent erred in fact and in law by handling the Appellant’s objection in an arbitrary, procedurally unfair and unjust manner thereby depriving the Appellant its right to fair administrative action and legitimate expectation of fair tax assessments as protected under Article 47 of the Constitution of Kenya, 2010 and theFair Administrative Actions Act No. 4 of 2015.

Appelant’s Case 7. The Appellant’s case is premised on its Statement of Facts dated and filed on the 26th November, 2021 and the written submissions dated and filed on the 9th September, 2022.

8. The Appellant stated that the Respondent handled the verification process in an arbitrary and unfair manner to the extent that the Respondent upheld the assessment in its Objection decision despite the fact that the Appellant had provided all the documents that were required of it including the company profile, Memorandum and Articles of Association, Sample agreement/contract with its clients, Diagrammatic representation of the movement of money and insurance cover.

9. The Appellant submitted that that iPay is not a software vendor because:-a.Its merchants acquire software from their own preferred vendors and integrate it with iPay payment system for collections purposes.b.It only provides payment processing services and as such, the contracts it holds with its merchants are for offering these services.c.The software vendors hold maintenance contracts with their customers, but iPay does not have such contracts.

10. The Appellant posited that it offers financial payment services to its clients and that it is regulated by the Central Bank of Kenya under the National Payment System Act, 2011 and the National Payment System Regulations, 2014.

11. It was the argument of the Appellant that it receives and /or collects “monies” on behalf of its registered merchants and then it remits or transfers these monies to its clients and or their account based on the instructions received from its clients.

12. The Appellant stated that it provides its clients with access and or visibility to their financial statements so that they can see their balances on the iPay dashboard. It insisted that it does not offer or install software or applications on its client’s website or mobile applications.

13. Flowing from the above justifications, the Appellant asserted that it does not offer information technology services. It argued that it offers financial services and hence the reason why it is regulated by the Central Bank of Kenya which has the sole mandate to regulate financial services and not information technology.

Appellant’s Prayer 14. The Appellant’s prayer to the Tribunal was for orders that:a.The Respondent’s decision vide a letter dated 28th October 2021 as outlined in its Objection decision be stuck out in its entirety.b.The Respondent’s action to demand Kshs37, 687, 608. 00 for assessment reference number KRAAP05134393B inclusive of penalties and interest be declared unreasonable, unfair and contrary to the administration of justice and legitimate expectation of the Appellant.

The Respondents’s Case 15. The Respondent opposed this Appeal vide its Statement of Facts dated 22nd December, 2021 and filed on 23rd December 2021, the witness statement of Beatrice Kosgey dated and filed on 24th August, 2023 that was admitted in evidence on oath on the 25th August, 2022 and the written submissions dated 8th September, 2022 and filed on 9th September 2022 from which the Respondent stated that the Appellant offers services by installing systems for its customers to enable it in processing their payments.

16. The Respondent averred that Section 2 of the VATAct 2013 defines a supply of service as anything done that is not a supply of goods or money including:-a.The performance of services for another person;b.The grant, assignment or surrender of any right;c.The making available of any facility or advantage;d.The toleration of any situation or the refraining from the doing of any act.

17. It also averred that Section 2 of the VAT Act defines information technology as any equipment or software for use in storing, retrieving, processing, or disseminating information.

18. It was its position that the Appellant provides a payment processing platform/software (iPay transaction processing engine) which is installed on the merchant’s website or mobile application to facilitate transactions for its clients.

19. The Respondent averred that the services provided by the Appellant are information technology services which are taxable under the VAT Act.

20. The Respondent asserted that it reviewed all the documents provided by the Appellant and arrived at the conclusion that the Appellant was not offering financial services but was providing software services which its merchants could use to process payments.

21. The Respondent averred that Part II of the First Schedule of theVAT Acthas listed the exempted financial services. In its view, the Appellant in this Appeal was providing payment processing service which falls under information technology not financial service as is envisioned under Part II of the VAT Act.

22. The Respondent maintained that the Appellant is offering a service that provides a software/platform from where the merchant’s transactions are completed.

23. The Respondent maintained that it was up to the Appellant to demonstrate how it failed to review the Appellant’s documents which burden it has not discharged.

24. The Respondent argued that the contract dated 21st December 2020 between EMD Financials LLC and the Appellant stated under the recitals that the Appellant was in the business of design and implementation of enterprise productivity systems and digital branding under the registered of iPay which is a payment processing system.

25. Based on the above analysis, the Respondent submitted that the wording of the contract made it clear that the Appellant’s activities do not fall under exempted financial services that fall under Paragraph 1 of Part II of the First Schedule to the VAT Act, 2013 due to the following reasons.i.The Appellant does not operate accounts; neither does it receive deposits. The moneys being issued and received belong to financial services customers.ii.The Appellant was providing essential links in the financial chain by connecting merchants, consumers, card brand networks and financial institutions to the broader financial system so they can accept credit and debit card payments from customers.iii.The Appellant’s platform also brought all financial parties together to deliver a simple payment for merchants and their customers by processing payments quickly and efficiently through the iPay platform (iPay transaction processing engine), a platform which is installed on the merchant’s website or mobile application) to facilitate transactions for their clients.

Respondent’s Prayer 26. The Respondent’s prayer was that the Appeal be dismissed for lack of merit.

Issues For Detremination 27. Having gleaned through the parties pleadings, the evidence adduced and the written submissions filed the Tribunal has arrived at the conclusion that the single issue that presents itself for determination in this matter is:a.Whether the Respondent erred in charging VAT on the services rendered by the Appellant

Analysis And Findings 28. The Appellant alleged that the Respondent did not consider all the documents that were presented to it before arriving at its Objection decision. The Appellant however did not offer tangible prove to support this allegation. Section 30 of the TAT Act requires the Appellant to demonstrate or prove that its documents were not considered, and it reads as follows:‘Burden of proofIn a proceeding before the Tribunal, the Appellant has the burden of proving—(a)Where an appeal relates to an assessment that the assessment is excessive; or(b)In any other case, that the tax decision should not have been made or should have been made differently’.

29. The fact that the Respondent has arrived at a different conclusion from what the Appellant had hoped for does not mean that its documents were never considered. This allegation is thus dismissed for want of merit.

30. The Appellant similarly alleged that its objection was handled in an arbitrary, unjust and procedurally unfair manner. Section 51 of the TPA generally provides the manner in which the Respondent is required to handle an objection by a taxpayer.

31. Considering that the burden of proving this allegation lies on the Appellant, it was required to particularize and provide proof on which particular sub-Section of Section 51 of the TPA had been breached by the Respondent. This was not done and therefore the Tribunal hereby dismisses it for lack of merit.

32. The Tribunal has looked at the agreement signed between the Appellant and EMD Financials LLC where the Appellant described itself as a transaction processor involved in the business of design and implementation of enterprise productivity systems and digital branding and it’s registered under the trademark iPay, payment processing system. The scope of the works to be provided is not clearly stated in the said contract.

33. However, from the recitals to the contract it is clear that the Appellant is involved in the business of design, implementation of enterprise productivity systems, digital branding and payment processing system.

34. On its part the Appellant states that it only provides payment processing services and that it is regulated by the Central Bank of Kenya, this being the a requirement by the National Payment Systems Act,2011 and the National Payment systems Regulations 2014 for all financial payment service providers.

35. As such the Appellant pleads that it offers financial service for which it is exempt from VATunder the Paragraph 1 Part II of the First Schedule of the VAT Act 2013 which states 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.”

36. The Appellant did not state where it falls in the list of exempt financial services enumerated above. However, the business of design, implementation of enterprise productivity systems, digital branding and payment processing system as described in the contract between it and EMD Financials LLC has not been listed in Paragraph 1 Part II of the First Schedule of the VAT Act 2013.

37. The burden of proving that it falls within the bracket of exempt supplies fell on the Appellant. It was therefore up to it to provide the documents to prove that it offers financial services that are recognised as exempt within the Act. Unluckily, the document available for scrutiny by the Tribunal, which is the agreement signed between the Appellant and EMD Financials LLC, has superficially described it as an entity that is offering branding services, enterprise productivity systems and payment processing system. Whereas the former two functions have nothing to do with the offer of financial services, the Appellant should have tabled tangible evidence of what its role in offering payment services entails and where it falls within Paragraph 1, Part II of the Second Schedule to the VAT Act. This was not done and therein lay the achilles heel of this Appeal.

38. The Articles of Association dated the 6th of May 2010 and provided by the Appellant is generic and it depicts a company that is registered to carry out and offer all services under the sun. It does not pin point to the fact that the Appellant is specifically registered to offer financial services.

39. An analysis of the pleadings by both parties also brings out the picture that the payment processing system/platform which the Appellant has been registered by the Central Bank to provide amounts to provision of an information technology system that is intended to facilitate payments for its clients. It does not in any way amount to provision of financial service.

40. The activities that the Appellant is carrying out is therefore, in tandem with the license that was issued to it. Section 1 of the National Payment System Act has defined payment system as follows:‘payment system’ means a system or arrangement that enables payments to be effected between a payer and a beneficiary, or facilitates the circulation of money, and includes any instruments and procedures that relate to the system;

41. By its own admission the Appellant has conceded to being licensed under the NPS Act and produced evidence to that effect. It cannot therefore purport that it is licensed to carry out activities, like the provision of financial services, which are beyond the scope of the NPS Act.

42. The preamble of the National Payment System (NPS) Act, under which the Appellant was licensed explains the purpose and reason for the enactment of theNPS Act as follows:‘AN ACT of Parliament to make provision for the regulation and supervision of payment systems and payment service providers, and for connected purposes’.

43. It is thus clear that an entity that obtains a license under the NPSis licensed to as service provider for payment systems. Such a license does not give such an entity the power to offer financial services. The only way through which the Appellant could qualify to offer financial service would be if it were to be registered as financial institution under Section 5 of the Banking Act.

44. For the reasons set out above, the Tribunal holds that the payment services offered by the Appellant do fall within the bracket of financial services which are exempt from VAT under the Paragraph 1 Part II of the First Schedule of the VAT Act.

Final Decision 45. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated the 21st of October 2021 for additional VATassessment of Kshs37,687,608. 00 for the years 2016 to 2020 be and is hereby upheld.c.Each party to bear its own costs.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF MAY, 2023. ERIC N. WAFULACHAIRMANRODNEY O.OLUOCH ROBERT M. MUTUMAMEMBER. MEMBER.EDWIN K. CHELUGETMEMBER.