[2025] KETAT 2 (KLR)

KCB Bank Kenya Limited v Commissioner Legal Services & Board Co-ordination (Tax Appeal E023 of 2024) [2025] KETAT 2 (KLR) (17 January 2025) (Judgment)

Neutral citation: [2025] KETAT 2 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E023 of 2024

RM Mutuma, Chair, M Makau, Jephthah Njagi, T Vikiru & D.K Ngala, Members

January 17, 2025

Between

KCB Bank Kenya Limited

Appellant

and

Commissioner Legal Services & Board Co-ordination

Respondent

Judgment

1. The Appellant is a commercial bank incorporated in Kenya and duly licensed under the Banking Act to conduct banking business in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. 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 and 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 carried out an audit for the period 2018 to 2022 and issued assessments for Corporation tax, VAT, PAYE and Withholding Tax. The Respondent then issued a notice of assessment dated 31st August 2023 wherein it demanded a total of Kshs. 1,190,578,054. 00 in taxes. The Appellant objected to the assessments vide Notice of Objection dated 29th September 2023.

4. The Respondent issued its Objection Decision through a letter dated 27th November 2023 wherein the interest was revised upwards leading to a revised additional assessment of Kshs 1,216,775,932. 00.

5. The Appellant being dissatisfied with the Respondent’s Objection Decision, filed the instant Appeal vide the Notice of Appeal dated and filed on 27th December 2023.

The Appeal 6. The Appellant lodged Memorandum of Appeal dated and filed on 9th January 2024 highlighting the following grounds of appeal;a.That the Respondent erred in fact by disallowing penalties incurred by the Appellant from the Central Bank of Kenya (‘CBK’) in respect of Real Time Gross Settlement (‘RTGS’) transactions, despite the fact that the Appellant had no expenses of this nature in its books of account, copies of which are in the Respondent’s knowledge and possession;b.That the Respondent erred in law and fact by failing to appreciate that penalties arising from agreements between the Appellant and its transacting counterparts, namely MasterCard and Visa, area result of private contractual agreements necessary for conducting banking business, and thus constitute allowable expenditure wholly and exclusively incurred in the production of the Appellant’s income;c.That the Respondent erred in law and fact by disallowing the Appellant’s administrative expenses, inclusive of excise duty expensed, which expenditure was wholly and exclusively incurred in the production of the Appellant’s income and therefore allowable under the Income Tax Act (ITA);d.That the Respondent erred in law and in fact by concluding that the bad debt write-offs and movement in provision for bad debts as allowed by the Appellant did not meet the criteria for deductibility of bad debts under Section 15 (2) (a) of the ITA and Legal Notice No. 37 of 2011;e.That the Respondent erred in law and in fact by concluding that there was double claim of provisions in the 2019 and 2020 years of income despite the supporting schedules for both years as provided by the Appellant indicating otherwise;f.That the Respondent erred in law and fact by failing to appreciate that VAT is not chargeable on the disposal of seized assets as the seizure and auction of vehicles is intrinsically linked to the making of advances and granting of credit, which is a VAT - exempt service;g.That the Respondent erred in law and in fact by assessing taxes based on overstated and erroneous figures from the Appellant’s PAYE returns, notwithstanding the fact that the Appellant has provided reconciliations adequately explaining the purported variances; and,h.That the Respondent erred in law and in fact by classifying interchange fees paid to local banks as management or professional fees subject to WHT, and payments made to card companies e.g., Visa as royalties subject to WHT.

The Appellant’s Case 7. The Appellant premised its case on its;a.Statement of Facts dated and filed on 9th January 2024 together with its documents attached thereto; and,b.Written submissions dated and filed on 11th September 2024.

8. The Appellant stated that Respondent conducted an audit of the Appellant’s records for the years of income 2018 to 2021 with a view to ascertain its compliance with the applicable tax legislation. This culminated in the issuance of a formal additional assessment dated 31st August 2023 amounting to Kshs. 1,190,578,054. 00, inclusive of penalties and interest. The Appellant objected to the assessments vide a letter dated 29th September 2023 which prompted the Respondent to issue its Objection Decision dated 27th November 2023.

9. The Appellant filed this appeal raising issues as follows:Corporate Income Tax (‘CIT’)i.Whether the Appellant incurred any penalties from the CBK in respect of RTGS transactions during the Assessment Period.

10. The Appellant stated that the Respondent asserted in its Objection Decision that the Appellant incurred CBK RTGS penalties relating to the years 2018 and 2019, which penalties were not disallowed by the Appellant in arriving at the taxable income for these years. The Respondent maintains that such penalties are not allowable expenses for corporate tax purposes.

11. In response to this assertion, the Appellant stated that it neither incurred any CBK RTGS penalties in the year 2018, and 2019 nor was such an expense recorded in its books of account. In support of this, the Appellant relied on breakdowns of its expenses, which records it alleged to have shared with the Respondent at Objection stage.

12. The Appellant asserted that the descriptions in the breakdowns reveal that only charges for the RTGS transfers and the annual maintenance fee for the KEPSS system were booked in this account. Since CBK owns the system through which RTGS transactions are completed, such expenses for use of the system and annual maintenance fees are bona fide business expenses in line with Section 15 (1) of the Income Tax Act. The Appellant thus submitted that the Respondent’s conclusions in respect of this matter are based on a misapprehension of fact and lack merit in seeking to collect the corresponding tax. The Appellant therefore requested for vacation of the additional assessment in this regard in totality.

13. The Appellant averred that the Respondent in its Objection Decision asserted that the penalties incurred by the Appellant are akin to fines levied for contravening the laws of operation in the financial industry. The Appellant averred that this view is erroneous and has no factual basis. It argued that fines levied for contravening laws apply to all persons as a matter of public law and public policy, and by their very nature, are punitive and involuntary. In contrast, the charges and penalties that would have been levied by the CBK to the Appellant would have arisen from commercial arrangements entered into voluntarily by both parties, and in a private arrangement. The Appellant noted that it did not incur these penalties during the Assessment Period.

14. The Appellant submits that the distinction and characterisation of the CBK penalties is important to the issue in question, since for purposes of allowability of expenses under the Income Tax Act there is a distinction to be made between punitive penalties arising out of breaches of law, and penalties arising out of commercial or contractual arrangements. Specifically, the Appellant averred that while penalties arising out of breaches of law are not allowable for Corporate Tax purposes, charges and penalties arising from commercial arrangements are allowable to the extent that they are wholly and exclusively incurred in the production of income.

15. The Appellant argued that applying this to the extant circumstances, the CBK penalties would have been incurred as part of the Appellant’s day-to-day operations, without which they would not earn taxable income. It argued that this expenditure should thus be deemed as allowable, to the extent that it was incurred for the production of the Bank’s income for the years 2018 and 2019.

16. The Appellant also relied on the practice in other Commonwealth jurisdictions regarding the allowability of penalties arising out of contractual arrangements. It argued that in the United States, the Internal Revenue Service (‘IRS’) practice guidelines, published under “Publication 535 (2022), Business Expenses”, provides that penalties paid for late performance or non-performance of a contract are generally deductible. The guidelines further stipulate that no deduction is allowed for penalties and fines paid for the violation of any law. The Appellant also cited the practise in Canada where Canadian Revenue Agency, through its practice guidelines published under “Income Tax Folio S4-F2-C1, Deductibility of Fines and Penalties”, provides that penalties or damages paid under a private contract (for example, a penalty charged for late performance) are deductible for tax purposes. The Appellant thus prayed that the CIT assessment in respect of this issue be vacated in its entirety.ii.Whether the bad debts written off expenses in the years of income 2018 and 2019 meet the Commissioner's guidelines on deductibility of bad debts under Section 15 (2) (a) of the ITA and Legal Notice No. 37 of 2011 and whether time is a criterion in arriving at bad debts deductibility.

17. Regarding this issue, the Appellant noted that the bad debts written off relate entirely to unsecured mobile loans. These mobile loans were provided through KCB Bank's digital lending platforms mainly KCB MPesa and KCB Mobi and had a maturity period of one month.

18. It alleged that it provided for the non-performing mobile loans after six months since efforts to recover the loans through internal and external means had failed. Thereafter, the Appellant analysed the risks associated with the bad debts, business trends and past performance of similar loans and wrote off the amounts. It averred that for any bad debts recovered by third-party debt collectors after they were written off, CIT was duly accounted for on these amounts since the recoveries were reported as part of the Bank's income in the respective years.

19. It stated that considering the sequence of events, the time taken in following up the debts and the materiality of the amounts in question per debtor, it was sound, reasonable and justifiable for the Appellant to write off the bad debts.

20. Further the Appellant averred that the mobile loans are unsecured and in case of default, the Bank does not have recourse to recover its debts save for persistent follow ups with the loanee to settle the debts which also pose further cost implications to the Bank. It stated that it has a manual that governs the provisioning and write-offs with respect to nonperforming assets. It asserted that the criterion is in tandem with the Paragraph 2 (b) and (e) of Legal Notice No. 37 under the “Guidelines on the Allowability of Bad Debts”, bearing in mind that each ground for allowability of a bad debt as per the Guidelines is a complete defence on its own.

21. The Appellant stated that the Legal Notice provides that where a bad debt expense is uncollectable and thus allowable in a case where, inter alia, there is no form of security or collateral that is realizable whether partially or in full and the costs of recovering the debt exceeds the debt itself. The Appellant noted that the bad debts written off meet these criteria as the individual amounts have no securities and are immaterial and as such the costs of recovery would exceed the outstanding debt. Further, the Appellant argued that the criteria of time adopted by the KRA does not meet the Respondent’s guidelines on the allowability of bad debts.

22. Additionally, it averred that the decision to write off a debt is not solely dependent on the above criteria but also trends and analysis that the Appellant has observed over time on the collectability of bad debts. The Appellant also noted that timing of the taking of the deduction is merely a timing difference and therefore choosing to add it back in the 2018 year of income and taking a deduction in the subsequent year is zero-sum. As such, the Appellant prayed for the Tribunal to vacates the Respondent's decision in respect of this issue in its entirety.iii.Whether the Bank double claimed its provisions for bad debts in the years 2019 and 2020.

23. The Appellant alleged that it has reviewed the workings and confirms that there was no instance of double claiming. The Appellant thus submitted that the Respondent’s conclusions in respect of this matter are based on a misapprehension of fact and lack merit in seeking to collect the corresponding tax. The Appellant therefore requested for vacation of the additional assessment in this regard in totality.iv.Whether penalties arising from agreements between the Appellant and its transacting counterparts, namely MasterCard and Visa, which arise from private contractual agreements constitute allowable expenditure wholly and exclusively incurred in the production of income.

24. In relation to this issue, the Appellant averred that the Respondent contended that the non-compliance fees charged to the Appellant by its transaction counterparts, including MasterCard and Visa, are not allowable since the Appellant made a conscious decision to contravene the set policies. Resultantly, the penalties would not be incurred for business or the production of income, and therefore, it would be unjustifiable for the Appellant to obtain a tax benefit from non-compliance with contractual arrangements.

25. In response to the Respondent's assertions, the Appellant stated that the noncompliance penalties arose from commercial arrangements between the Bank and Visa and MasterCard, premised on the card transactions the Bank undertakes on account of facilitation by the two entities. Further, the Appellant averred that the penalties levied under this agreement are not pursuant to any legal or regulatory provisions but are a result of breaches of contractual terms in a commercial agreement between the Appellant and the two entities.

26. The Appellant cited the provisions of Section 15 (1) of the ITA which provides that;“For the purpose of ascertaining the total income of any person for a year of income there shall, subject to section 16 of this Act, be deducted all expenditure incurred in such year of income which is expenditure wholly and exclusively incurred by him in the production of that income...”

27. The Appellant submitted that the question for this Honourable Tribunal’s determination is whether the non-compliance penalties are connected to the Appellant's income earning operations. It stated that if the answer to this question is in the affirmative, then these expenses were wholly and exclusively incurred in the production should be allowable under Section 15 (1) of the Income Tax Act.

28. The Appellant argued that the non-compliance penalties are inextricably linked to the card transactions governed by the agreements with MasterCard and Visa. It added that there is no doubt that card transactions are a core part of banking business, which is the Appellant's principal income-generating activity.

29. It asserted that the non-compliance penalties are connected to the Appellant’s income earning operations and are therefore wholly and exclusively incurred in the production of income. It further submitted that for purposes of allowability of expenses under the Income Tax Act, there is a distinction to be made between punitive penalties arising out of breaches of law, and penalties arising out of commercial or contractual arrangements. Specifically, the Appellant averred that while penalties arising out of breaches of law are not allowable for corporate tax purposes, charges and penalties arising from commercial arrangements are allowable to the extent that they are wholly and exclusively incurred in the production of income.

30. The Appellant emphasised that the non-compliance penalties were incurred as part of the Appellant’s day-to-day operations, without which they would not earn taxable income. This expenditure should thus be deemed as allowable, to the extent that it was incurred to produce the Bank’s income for the years 2018 - 2021. The Appellant also relied on the practice in other Commonwealth of United States of America and Canada as highlighted herein above to support its position.

31. The Appellant submitted that by disallowing the non-compliance penalties, the Respondent disallowed expenses arising from breaches of specified contingencies in an agreement between two privately contracting entities, which breaches are exterior to any binding public legislation. Therefore, the Appellant asserted that the non-compliance penalties, to the extent that they emanate from agreements necessary for the conducting of banking business, constitute expenditure wholly and exclusively incurred in the production of the Appellant’s income. The Appellant thus prays that the CIT assessment in respect of this issue be vacated in its entirety.v.Whether excise duty expensed by the Bank can be considered as a non- allowable expense.

32. In relation to this issue, the Appellant submitted that excise duty is a tax charged on other fees that are charged by financial institutions that are not premium based and as such excise duty can be termed as consumption tax. Additionally, the Appellant asserted that as a Bank, the Appellant simply charge excise duty and remit the same to the KRA therefore, the amounts cannot be considered as a non- allowable expense to the Bank since it only acts as a collector of the tax before submission to the KRA.

33. The Appellant noted that where tax of any nature is to be treated as a disallowable expense, the ITA has specifically provided for the same. It cited Section 16 (2) (c) where the ITA expressly disallows “any income tax or tax of a similar nature, including compensating tax paid on income”. Accordingly, the Appellant averred that where any other tax is incurred by a taxpayer in the ordinary course of its business, the same qualifies as an allowable expense.

34. The Appellant further submitted that owing to the fact that the Bank had not accounted for excise duty when it had initially received the excisable income, the Appellant paid CIT on this income inclusive of excise duty. As such, the Appellant argued that assessing CIT on this amount would amount to charging CIT on the same income twice. Therefore, the Appellant prayed that the Respondent’s assessment in respect of this issue be vacated in its entirety.VATvi.Whether the sale of seized motor vehicles through auction by the bank to recover bad debts is subject to VAT.

35. The Appellant averred that Part 2 of the First Schedule to the VAT Act, under Paragraph 1 (h) exempts from VAT “the making of any advances or the granting of any credit.”

36. According to the Appellant, any bank offers credit and seeks to mitigate the risk of default by requiring the placement of security against the credit. It stated that this same principle applies where the bank secures car loans through the holding of special rights to repossess and auction vehicles to the extent that a customer defaults. The Appellant argued that in the Bank’s operations, the disposal of seized goods through auction is part and parcel of the provision of credit facilities and that the disposed goods are not intended to reap a profit; rather, the reserve price is specifically set in order to recover unpaid loan facilities that the bank has incurred/may incur owing to the default in the primary supply, which is the issuance of credit.

37. To support the position, the Appellant cited the case of Federal Bank limited vs. State of Kerala [2003] where the court cited the case of Lord Krishna Bank Limited vs. Assistance Commissioner (Assessment) Sales Tax Office [1999] to the effect that;“The business of a banking company... is not trading in goods; it mainly involves the accepting for the purpose of lending or investing of deposits of money from the public and also the granting of money with security; banks advance money or give loans to customers on the basis of security…one type of security that is accepted is the pledge of gold ornaments; when the gold ornaments are pledged, the bank stands in the shoes of a bailee; the bank does not become the owner of the goods; the bank has got a special right in the property or goods to retain it so long as the amount borrowed on its security is not paid...”

38. Further, the Appellant stated that it is an internationally accepted VAT principle that where a supply is incidental to another, the incidental supply assumes the VAT treatment of the principal supply. In this regard, the Appellant sought to rely on the practise in the United Kingdom’s Her Majesty's Revenue and Customs (‘HMRC’) Guidelines in its circular, VATSC80400 that considers incidental/ancillary costs as being one supply with the principal supply. It noted that the Guidelines provide that where a supply consists of more than one component, the supply is still a single supply if there is clearly one overall supply being made to which the remaining components are incidental, integral or ancillary. The Appellant argued that this is the spirit of Section 13 (5) of the VAT Act, 2013 which recognises the need to include the value of incidental costs when determining the consideration for a supply of services.

39. The Appellant therefore, stated that any supplies that are so closely related with a specifically exempt services so as to be indistinguishable from each other are considered to fall under the same category. It is the Appellant’s contention that debt recovery via auction is an inseparable component of the provision of credit services. It is incidental to the provision of credit and has no legs of its own to stand as a separate supply. Simply, there would not exist seizure and auction of motor vehicles on defaulting loans without the existence of the principal supply which is the advancement of credit.

40. The Appellant relied on Tribunal’s decision in Mayfair Insurance Company Limited vs. Commissioner of Domestic Taxes (TAT) No. 47 of 2016, where Tribunal held, at Paragraph 101 that, “the sale of salvages constitutes part of insurance services as opposed to insurance business and, thus, cannot constitute supply of goods for purposes of taxation.” The Appellant argued that this is similar to the instant case to the extent that the Bank seizes and auctions motor vehicles to recover defaulted loans.vii.Whether motor vehicles repossessed by the bank from loan defaulters constitutes a supply within the meaning of the word supply under Section 2 of the VAT Act.

41. With regard to this issue, the Appellant affirmed that the VAT Act defines a supply of goods under section 2 as “a sale, exchange, or other transfer of the right to dispose of the goods as owner...”

42. While in the case of loans for motor vehicles, the logbook is maintained in the names of both the customer and the bank pending settlement of the loan obligation, the Appellant contended that the bank's name on the logbooks is in no way an indication of ownership. Rather, it is a declaration that the property in question carries a charge, to which the bank has first rights on any default in its capacity as a secured creditor. To support this position, the Appellant cited the case of Ali Abdi Dere vs. Hash Hauliers Limited and Another [2018] eKLR wherein it was held, at page 6, that;“..a person in the position only of a financier to the acquisition of a motor vehicle and who is registered as a joint owner of the motor vehicle for the purpose of protecting his interest in the full payment of the funds that he has invested in the financing arrangement, without any interest in the operation of the motor vehicle by the purchaser of the motor vehicle, and therefore not vicariously liable for the use of the vehicle by the purchaser's agent/driver is not a necessary party to a suit for the recovery of damages in negligence arising from alleged negligent use of the motor vehicle.”

43. According to the Appellant, to contend that the Bank can transfer the right to dispose of seized motor vehicles in an ownership capacity is erroneous and points to the Respondent’s misapprehension of the relevant provisions of the VAT law. The Appellant asserted that in any case, the title in the motor vehicles transfers from a defaulting customer, being the owner of the vehicles to the highest bidder at auction. It argued that it is not a direct transfer of title from the Bank. The Appellant averred that the position in this respect is not any different from one where the Bank disposes of a security whose title is solely held in the name of a defaulting customer to a third party.PAYEviii.Whether the Respondent was justified in assessing taxes based on overstated and erroneous figures from the Appellant’s PAYE returns, notwithstanding the fact that the Appellant has provided reconciliations adequately explaining the purported variances.

44. Whereas the Respondent asserted in its Objection Decision that the Appellant did not provide the proposed amendments nor the documents to sufficiently explain the purported variances in staff costs between the Appellant’s PAYE returns and the staff costs in the Company’s CIT return, the Appellant stated that it provided a detailed reconciliation of the purported variances, as well as explanations on errors made by the Respondent in its computation of the alleged variances, vide the Appellant’s Objection.

45. The Appellant thus submitted that the Respondent's conclusions in respect of this matter are based on a misapprehension of fact and lack merit in seeking to collect the corresponding tax therefrom. The Appellant therefore requested for vacation of the additional assessment in this regard in totality.WHTix.Whether interchange fees paid to local issuing banks are management or professional fees and therefore subject to WHT.

46. The Appellant submitted that the Respondent's classification of interchange fees paid to local İssuing banks as management or professional fees is erroneous, non-factual and has no basis in law. It relied on Section 2 of the ITA which defines management or professional fees as “payments made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated.”

47. Based on the foregoing definition, the Appellant summarises below the workings of a typical card transaction, to aid the Tribunal in determining whether the local issuing banks’ and card companies’ roles qualify as “managerial, technical, agency, contractual, professional or consultancy services” within the meaning of management or professional fees under Section 2 of the ITA;a.A customer applies to an Issuer (a financial institution that issues credit card to its customer) for a credit card and the Issuer issues a VISA, American Express or MasterCard to its customer depending on which card the customer holds.b.The card holder goes to a Merchant and uses the card to make a purchase. The merchant swipes the card on a machine configured to accept a card. The merchant is any establishment that allows for payment of goods or services through the use of a credit card.c.By swiping, the card, the merchant seeks authorization through the Acquirer; the institution that honours payments to a merchant based on the credit transactions made with a credit card, who then seeks authorisation through the particular network in this case Visanet.d.Since it is only the Acquirer that has an agreement with the Merchant, the network switches the transactions from the Acquirer to the Issuer in order to enable the latter verify the card holder's data and credit status before issuing an authorisation message back through the Acquirer.e.The Acquirer sends authorisation to the merchant and once the Merchant receives authorisation, a charge slip is generated in duplicate and the customer signs the slip and thereafter takes possession of the goods so purchased.f.When payment is made using a debit or credit card, the Card Companies such as VISA play the role of a clearing and settlement house very much like the CBK does in the process of clearing cheques.g.Upon settlement and clearing, the Merchant receives the amount spent by the cardholder less an amount known as Merchant Discount. The Merchant Discount has three components: the interchange fee, the dues and assessment fee and the acquirer processing fee. The network allocates the Interchange Fee to the Issuing Bank, the network retains the fee referred to as dues and assessment fees and the remaining amount known as Acquirer Processing Fee is then allocated to the Acquiring Bank.

48. In view of the above breakdown of a typical card transaction, the Appellant submitted that the issuing bank’s role is to issue credit or debit cards to its customers through which payment can be effected by cardholders for goods and services. Where the issuing bank has confirmed that the cardholder has sufficient funds or credit to settle the transaction, the issuing bank then transfers funds from the card holders account to the network so that payment can be effected. For its role in the transaction, the issuing bank earns interchange fees which are calculated by the VISA network at the clearing stage. The interchange fee serves to incentivise issuing banks to issue more cards and compensate it for the administrative costs incurred in issuing cards.

49. Based on the foregoing, the Appellant submitted that the local issuing bank's role as enumerated above does not qualify as “managerial, technical, agency, contractual, professional or consultancy services” within the meaning of management or professional fees under Section 2 of the ITA. In support of this position, the Appellant submitted the existence of management or professional fees as used in Section 2 of the ITA is dependent on the provision of services by one party to a recipient, pursuant to which the recipient should deduct WHT when making the payment related to such services.

50. Consequently, the Appellant disputed the Respondent’s classification of interchange fees paid to local banks on the basis that there is no relationship between the bank and the issuers in card transactions, as the bank has no control over the acts of the issuer and the issuers do not perform any services on behalf of the bank. Therefore, Appellant argued that the transaction is not captured by the definition of “management and professional fees.”

51. The Appellant also took cognizance that the terms “managerial” and “technical” services are not defined in the ITA. It added that where the law is inadequate in providing such clarity, it is trite law that definitions ensuing in alternative lexicons are adopted. In this regard, the Appellant relied on the Cambridge Dictionary which defines “management” as ‘the control and organization of something’. It further defines “managerial” as ‘relating to a manager or management’. Additionally, the Appellant relied on the Business Dictionary which defines “managerial skill’ as ‘the ability to make a business decision and lead subordinates within a company.”

52. The Appellant relied on the Mumbai Income Tax Appellate Tribunal in the case of Director of Income Tax vs. TUV Bayren (India) Ltd [2015] 61 443 where the Tribunal noted that ‘managerial services is used in the context of the running and management of the business of the client’.

53. From the above definitions, the Appellant contended that the issuing bank’s role, being the issuance of credit or debit cards and confirmation that cardholders have sufficient funds or credit to settle the transactions, are not managerial services.

54. Regarding technical services, the Appellant relied on Cambridge Dictionary which defines “technical” as ‘relating to knowledge, machines or methods: used in science and industry; of a particular subject or job; that are used in a particular activity.’

55. The Appellant also cited the Court of Appeal in Stanbic Bank 95 Kenya vs. Kenya Revenue Authority [2009] eKLR, where the Court noted that the use of machinery is not in itself enough to constitute a technical service. Rather, for a service to qualify as technical, special skills or knowledge relating to a technical field are required. In this regard, the Appellant submitted that the issuing bank’s role does not require special skills or knowledge related to a technical field, but rather, they are automated services that enable the proper functioning of the card network by enabling debit/credit card payments. Consequently, the Appellant maintained that they do not qualify as technical services.

56. As regards “agency” services, the Appellant submitted that there is no agency relationship between the Appellant and issuing banks. Similarly, the Appellant averred that the issuing banks’ role would not qualify as “contractual, professional or consultancy services”, owing to their very nature as juxtaposed against the definition of “contractual services” and “consultancy fees” under the ITA, as well as the ordinary meaning of the term “professional”. The Appellant also stated that the ITA defines “contractual fee” as “payment for work done in respect of building, civil or engineering works”; while “consultancy fees” are defined as “payments made to any person for acting in an advisory capacity or providing services on a consultancy basis.”

57. Therefore, the Appellant submitted that the issuing banks’ functions do not amount to management or professional services to the extent that they do not fall within the statutory definitions provided under the ITA nor within any of the extrapolated definitions.x.Whether the payments on card transactions made by the Bank to card companies are for right to or license to use the card companies' intellectual property hence qualifying for WHT as royalty under Section 35 (1) of the ITA.

58. The Appellant stated that the Respondent asserted that payments made by the Appellant to card companies are for the right or license to use the card companies’ intellectual property, such as trademarks and logos, and are therefore royalties subject to WHT. The Appellant affirmed that payments made to Visa within the period under review are payments for the use of, and access to, the Visa network. As such, the Appellant asserted that to the extent that the payments are not consideration for the right to or license to use the card companies' intellectual property, the Appellant maintained that the payments do not constitute royalties.

59. The Appellant relied on Section 2 of ITA which provides that;“royalty” means ‘a payment made as a consideration for the use of or the right to use:a.Any copyright of a literary, artistic or scientific work; orb.Any cinematograph film, including film or tape for radio or television broadcasting: orc.Any patent, trademark, design or model, plan, formula or process; ord.Any industrial, 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 rise to that royalty.”

60. Based on the foregoing definitions, the Appellant asserted that the fees paid by the Bank to card companies should be evaluated against parts (a) and (c) of the definition above because from a plain reading of the above provision, the payments would, by their very nature, be excluded from falling within definition (b) and (d), since they are made by the Appellant for the access and use of Visa's network to facilitate its customers' transactions, as described under issue (x) hereinabove.

61. The Appellant also argued that with reference to part (c) of the definition of royalty in the ITA, the Appellant submitted that the terms “patent”, “design”, “model”, “plan” or “formulas” are not defined in the ITA. As such, the definition of these terms in other legislation would apply mutatis mutandis, in the absence of which, the plain and ordinary meaning must be adopted to discern the meaning of these terms.

62. Further, the Appellant stated that under the Industrial Property Act, No. 3 of 2001, a “patent” is a specific intellectual property right relating to novel, inventive and industrially applicable inventions. It stated the Appellant affirms that payments made to Visa within the period under review are payments for access to the Visa network, and not for any inventions. Accordingly, the Appellant averred that payments made by the Bank to the card companies do not qualify as consideration for any “patent”, and therefore, are not royalties subject to WHT under part (c) of the definition of royalty in the ITA.

63. The Appellant reiterated that the subject payments are payments for access to the Visa network. As such, the granting of access to a network by one party to another does not fall within the ordinary meaning of the terms “design”, “plan” and “formula” as denoted hereinabove. Accordingly, the Appellant maintained that the fees paid to card companies cannot be considered as royalties subject to WHT under part (c) of the definition of royalty in the ITA, since these payments only serve to compensate the card companies for facilitating and supporting card transactions, and do not relate to tangible items.

64. Apart from the foregoing, the Appellant maintained that for a payment to constitute a royalty, it should grant the payer an immutable right to the access, control, transfer and use of the item under royalty. In support of this position, the Appellant relied on the High Court's holding in Seven Seas Technologies Limited vs. Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021] wherein the court reiterated that to be taxable as a royalty, the payment should have been “for the use of or right to use.”, inclusive of the right to commercially exploit the item in question. In this respect, the Appellant opined that payments to Visa do not in any way imply transfer of any right or know-how. The Appellant also submitted that it can only convey data/information via the network and its access to Visa’s network is only in so far as its customers’ transaction data may be transmitted via the network thereby facilitating payment for goods or services purchased.

65. Based on the foregoing, the Appellant insisted that the fees paid to card companies cannot be considered as royalties subject to WHT under part (c) of the definition of royalty in the ITA, since these payments only serve to compensate the card companies for facilitating and supporting transactions by providing, maintaining and improving card networks that enable authorization, verification, switching, clearing and settlement by the Bank's customers. They do not, in any way, grant the Appellant the use of, or the right to use, the underlying copyright in the network.

66. In support of the foregoing, the Appellant relied on the case of Republic vs. Commissioner of Income Tax ex-parte SDV Transami (Kenya) Limited, wherein the Commissioner claimed WHT on payments made by SDV Transami to SITA for the purposes of accessing information about the movement of parcels on its website. The Commissioner argued that the payments made were royalties. In its judgement, the court disagreed with the Commissioner and held thusly:“It is my understanding that a royalty is a payment made to the creator of an industrial or artistic work or design or contraption which bears a certain “capital” quality and which will serve intellectual or reproduction or entertainment purposes. It is for the clear benefits flowing from such works, that their authors or creators are paid royalties... Does this state of the law capture the payments made by the applicant to SITA, so that the applicant may log on to SITA’s website and access information lodged thereon, regarding the movement of containers worldwide? I do not think so and, with respect, I would consider the Commissioner of Income Tax wrong in point of law, in treating payment for mere access to neutral information as payment for are generative scientific formula. Payment of such a kind cannot constitute royalties.”

67. Similarly, the Appellant relied on the High Court decision in Seven Limited vs. Commissioner of Domestic Taxes (income Tax Appeal 8 of 2017) [2021], wherein the court reiterated that to be taxable as a royalty, the payment should have been “for the use of or right to use of any copyright”, inclusive of the right to commercially exploit the software or network.

68. The Appellant therefore, reiterated that the payments it makes to the card companies do not confer upon the Bank the right to the underlying copyright in the companies’ network, and neither does it grant the Appellant the right to commercially exploit the network.

69. The Appellant therefore requested for vacation of the additional assessment in totality.

70. In its written submissions the Appellant narrowed down issues for determination to VAT and Withholding Tax. The submissions are as summarised hereunder.

71. With regards to VAT, the Appellant submitted that in the Appellant's operations, the disposal of seized goods through auction is part and parcel of the provision of credit facilities. The disposed goods are not intended to reap a profit; rather, the reserve price is specifically set to recover unpaid loan facilities that the bank has incurred/may incur owing to the default in the primary supply, which is the issuance of credit. To support this position, the Appellant relied on Indian Case of Federal Bank limited v State of Kerala (2003). The Appellant also relied on the case of Mayfair insurance Company Limited vs. Commissioner of Domestic Taxes (TAT) No. 47 of 2016 in further support of its position.

72. The Appellant submitted motor vehicles repossessed by the bank from loan defaulters does not constitutes a supply within the meaning of the word supply under Section 2 of the VAT Act. It relied on the case of Ali Abdi Dere vs. Hash Hauliers Limited and Another [2018] eKLR to submit that the bank has interest in the vehicles repossessed.

73. With regard to withholding tax, the Appellant submitted that interchange fees paid to local issuing banks are not management or professional fees and therefore not subject to WHT. To support its position, the Appellant cited the cases of Director of lncome Tax vs. TUV Bayren (India) Ltd [2015] 61 443 and Stanbic Bank Kenya vs. Kenya Revenue Authority [2009] eKLR. The Appellant submitted that whereas the Court of Appeal in Commissioner of Domestic Taxes vs. Barclays Bank of Kenya Ltd [2009] eKLR held that interchange fees paid to issuer banks were for management and professional services and therefore were subject to WHT, the matter is now at Supreme Court pending final determination.

74. Finally, the Appellant submitted that payments made to Visa within the period under review are payments for the use of, and access to, the Visa network. It submitted that the payments are not consideration for the right to or license to use the card companies' intellectual property. It maintained that the payments do not constitute royalties. To support this position, the Appellant cited cases of Seven Seas Technologies Limited vs. Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021], Republic vs. Commissioner of Income Tax ex-parte SDV Transami (Kenya) Limited.

Appellant’s Prayers 75. The Appellant urged this Tribunal to allow the Appeal, and the Objection Decision be set aside with costs.

The Respondent’s Case 76. The Respondent founded its response to the Appeal on its;a.Statement of facts dated and filed on 28th March 2024 together with the documents attached thereto; and,b.Written submissions dated 19th September 2024 and filed on 20th September 2024.

77. The Respondent stated that it carried out an audit for the period 2018 to 2022 and issued assessments for Corporation Tax, VAT, PAYE and Withholding Tax. The basis of assessment was given in detail in the Respondent’s notice of assessment dated 31st August 2023 to which the Appellant objected.

78. The Respondent made the following observations and deductions upon review of the Appellant’s grounds of objection and evidence adduced:Corporation TaxCBK RTGS Charges & Penalties and Visa and MasterCard Non-Compliance Fees.

79. The Respondent observed that penalties levied by CBK, being the industry regulator, is synonymous to fines levied for contravening the laws of operation in the financial industry.

80. The Respondent also made the observation that the bank had added back Kshs. 26,182,888. 00, being CBK Charges and RTGS penalties in the income tax return for the period ending December 2020. This was in recognition that penalties and fines are not tax deductible. The Appellant argued that the non-compliance fees levied by its service providers should be allowable since they are incidental to normal business operations.

81. The Respondent observed that the cost of upgrading the system would meet the provision of Section 15 (1) of the ITA and therefore, allowable. In some instances, this cost would then be amortized over a period of time and where possible capital and deductions would be applicable as allowable deductions.

82. As for the fine, the Respondent stated that this would not be allowable since the Appellant would have made a conscious decision to infringe the set policy and therefore, it would not be incurred for business. It would therefore, be incorrect to ride a tax benefit from infringement of set rules and policies and non-compliance with contractual arrangements. In view of the above, the adjustments made by the Respondent relating to CBK charges and penalties and Visa and Mastercard non-compliance fees were sustained.Bad Debts Expense and Provision for Bad Debt amounting to Kshs. 149,860,061. 00.

83. The Respondent stated that it acknowledged that the debts under review were unsecured since they are mobile and consumer loans. Further, the average debt as explained by the Bank is under Kshs. 5,000. 00. However, the Respondent observed that the transactions are voluminous and the bank is able to make profit due to volumes and high interest rate and diversify the risk of defaulting over millions of customers who borrow the mobile loans. Based on the reason that the debts are numerous and at high interest rate, the bank can allow those debts after monitoring the performance of the debts over a reasonable period of time. It is was the Respondent’s view that this period should be at least 1 year.

84. Furthermore, the Respondent observed from the Bank’s Non-performing Debt Management Manual, clause 5. 11. 7 which states that;“All Loans/advances categorized as ‘loss’ (asset class 50) must be written off within 180 days of them being classified as loss if no recoveries are made within the period.Exemptions may be made in the following circumstances;i.Where realizable security is still held and process is on-going.ii.Where legal action is in progress and there is a reasonable likelihood of recovery part or in full.”

85. The Respondent averred that the Bank’s own set threshold of asset grade 50 and above being eligible for write-off. These are outstanding debts over 12 months which fits the Respondent's expected wait period.

86. The Respondent stated that in as much as time is not a factor defined in the Legal Notice, it is incorrect to write off debt in the same year of income going by the Bank’s internal threshold as provided in the non-performing Debt Management Manual. The Respondent maintained that its action was therefore justified.

Double claim of provisions in the year 2019 and 2020. 87. The Respondent noted that the Appellant claimed some bad debts provision in the returns for both 2019 and 2020. A provision of Kshs. 1,198,737,488. 00 claimed in both years was allowed in the year 2019 but disallowed in 2020.

88. The Respondent alleged that it requested the Appellant to provide the breakdown for both years to establish whether some entries had been double claimed. The Respondent alleged that the Appellant did not provide the supporting documents as provided under Section 56 of the TPA and as such the assessment was sustained.Bad debts write off in year 2020 amounting to Kshs. 41,607,589. 00.

89. The Respondent disallowed bad debts written off on secured loans amounting to Kshs. 41,607,589. 00. The Appellant explained that even though it held security for the specific debts, it had difficulty in disposing the properties and that there were court injunctions on some properties. The Appellant submitted that with the inconclusive legal process, the debts were practically irrecoverable and hence allowable for deduction.

90. From the review of the debtors provided, the Respondent established that the Appellant still holds the securities used to secure the loans and the effort to collect the debts have not been abandoned for any reasonable cause. Additionally, the Respondent stated that the Appellant did not provide any documents to demonstrate that the securities were released. In light of the above, the Respondent’s assessment was upheld.Consumer loan provisions of Kshs. 2,199,497,126. 00 claimed in the year 2020.

91. Whereas the Appellant submitted that these were loans the Bank advanced to its employees and other individuals employed in different organizations and that the loans were unsecured, in working meetings held on 3rd November 2023 and 24th November 2023, the Respondent expressed its concern that loans advanced to employees are secured by virtue of that employment relationship.

92. The Respondent averred that the Appellant was to provide a breakdown of adjustments to be made. It stated that the Appellant failed to provide the requested the breakdown and as such the adjustment of Kshs. 204,207,692. 00 was upheld.

Other Administrative Expenses. 93. The Respondent’s disallowed excise duty provision of Kshs. 320,000,000. 00 claimed under miscellaneous expenses on grounds that the excise duty provision was expensed contrary to provisions of Section 16 (1) (a) of Income Tax Act, CAP 470.

94. The Respondent added that in grounds of objection, the Appellant submitted that the Bank paid CIT on this income inclusive of excise duty as such assessing CIT on this amount would amount to charging CIT on the same income twice. On the other hand, the Respondent noted that the bank was not the bearer of the excise duty burden but rather the clients were. In this light, this was not the bank’s expense and hence not allowable. The Respondent’s assessment was upheld.

VAT on sale of Motor Vehicles. 95. Whereas the Appellant argued that VAT is not chargeable on the disposal of seized assets as the seizure and auction of vehicles is intrinsically linked to the making of advances and the granting of credit, a VAT exempt financial service and that no supply of goods is present between the loan defaulters and the bank at any point throughout the transaction rather, the bank only exercises a special right of repossession, the Respondent noted that the bank is co-registered in the vehicle titles with the loans and that the Respondent assessed on sale commercial vehicles.

96. The Respondent found that the primary supply in this transaction is the sale of a motor vehicle to a non-related third party by the bank, a VAT registered person. The Respondent added that the VAT Act does not expressly provide an exemption for this kind of supply and as such the supply is taxable as provided under the VAT Act. Consequently, the Respondent maintained that it was right in charging VAT on the same and hence the assessment is upheld.

PAYE 97. The Respondent noted that during objection review, the Appellant did not provide the proposed amendments nor the documents to support it as provided under Sections 51 and 56 of the TPA. In light of this, the Respondent’s upheld the assessments.Withholding Tax (WHT)Withholding income tax on fees paid to local Banks.

98. It was the Respondent’s finding that payment of interchange fees to local issuer banks for facilitation, authorization and clearing services falls under management or professional fees and subject to withholding tax as per Section 35 (1) (a) and 35 (3) of Income Tax Act (ITA) as read with Section 39 A of the TPA. Consequently, the assessment was confirmed as issued.

Withholding income tax on interchange fees paid to card companies. 99. It was the Respondent’s finding that payments by the bank to card companies is for right or licence to use the card company’s intellectual property such as trademarks and logos and hence a royalty which is subject to withholding tax AT 20% as per Section 35 (1) of the ITA.

100. The Respondent cited the Barclays Bank of Kenya case, Civil Appeal No. 915 of 2017 and civil application (sup) No E005 of 2020, the judges ruled that payments made by the Appellant to card companies were royalty and therefore, subject to WHT. Consequently, the assessment was confirmed as issued.

101. Consequently, the Respondent maintained that the Objection Decision is proper in fact and in law.

102. The Appellant also relied on its written submissions. In summary, the Respondent submitted that the sale of repossessed motor vehicles does not constitute part of the banking business as alleged by the Appellant. The Respondent relied on the case of Card Protection Plan Limited vs. Customs and Excise Commissioners [1999] where it was clarified that services related to insurance can be subject to VAT if they can be considered separate supplies. The House of Lords held that, “VAT is chargeable on services ancillary to insurance if those services can be separated from the insurance cover itself.”

103. The Respondent also relied on the legal principle that ancillary services, such as the sale of repossessed motor vehicles ought to be seen as separate taxable supplies at the general rate of 16%. To support this position, the Respondent relied on the case of Kenya Airways Limited vs. Commissioner of Domestic Taxes [2019] eKLR and Commissioner of Domestic Taxes vs. Barclays Bank of Kenya Limited [2020] eKLR wherein the Court held that;“VAT is a consumption tax aimed at end-users and transactions that involve supply of goods and services should generally attract VAT unless specifically exempted.”

104. The Respondent also relied on the case of Kenya Revenue Authority vs. Republic (Ex parte Fintel Limited [2001] 1EA36 (CAK); Republic vs. Kenya Revenue Authority Ex-parte Bata Shoe Company (Kenya) Limited [2014]; National Bank of Kenya Ltd vs. Commissioner of Domestic Taxes Tax Appeal E155 & 533 of 2020; and Cape Brandy Syndicate vs. ILR Commissioners (1921) 1KB where the Courts emphasized that tax statutes should be interpreted strictly according to their wording and exemptions should be narrowly construed.

105. The Respondent also cited the decision by the Supreme Court in Stanbic Bank Kenya Limited vs. Kenya Revenue Authority [2020] eKLR where it held that VAT is a consumption tax intended to be paid by the end consumer on all taxable supplies unless specifically exempted.

106. The Respondent therefore, prayed that the Objection Decision is valid.

Respondent’s prayers 107. The Respondent prayed that;a.The Tribunal dismiss the Appeal;b.uphold the Respondent’s Objection Decision; and,c.Award the Respondent the cost of the Appeal.

Issues For Determination 108. The parties having engaged in ADR, they filed a partial consent dated 9th May 2024 and filed on 6th June 2024 and adopted by the Tribunal on the same date, wherein the parties referred back to the Tribunal two issues for determination, the Tribunal upon consideration identified the following as the issues for determination;i.Whether the Respondent erred in VAT assessments for the periods 2018 to 2021 amounting to Kshs. 67,539,788. 03 (inclusive of penalties and interest); and,ii.Whether the Respondent erred in assessing withholding tax on Card Business Interchange fees for the period 2019 to 2021 amounting to Kshs. 369,023,956. 00 (inclusive of penalties and interest).

Analysis And Findings 109. The issues for determination shall be analyzed as herein under;i.Whether the Respondent erred in VAT assessments for the periods 2018 to 2021 amounting to Kshs. 67,539,788. 03 (inclusive of penalties and interest).

110. The Appellant maintained that VAT is not chargeable on the disposal of seized assets as the seizure and auction of vehicles is intrinsically linked to the making of advances and the granting of credit, a VAT exempt financial service. The Appellant argued that no supply of goods is present between the loan defaulters and the bank at any point throughout the transaction rather, the bank only exercises a special right of repossession. On the other hand, the Respondent stated that the logbooks indicated that the Appellant and the debtors owned the vehicle jointly, that the Appellant is registered for VAT, and that there is nothing under the VAT Act that exempt this type of transaction from VAT.

111. The Appellant cited Part 2 of the First Schedule to the VAT Act to argue under Paragraph 1 (h) exempts from VAT, “the making of any advances or the granting of any credit.” The Appellant also argued that the disposal of seized goods through auction is part and parcel of the provision of credit facilities because the disposed goods are not intended to reap a profit; rather, the reserve price is specifically set to recover unpaid loan facilities that the bank has incurred/may incur owing to the default in the primary supply, which is the issuance of credit.

112. Part 2 of the First Schedule Paragraph 1 (h) to the VAT Act provides as follows:‘‘The supply of the following services shall be exempt supplies—1. The following financial services—h.The making of any advances or the granting of any credit.’’

113. The Tribunal takes the view that Part 2 of the First Schedule Paragraph 1 (h) to the VAT Act exempts loan amount from VAT. The said paragraph does not exempt from VAT the process of recovery of credit from the debtor. Therefore, the Appellant’s assertion that disposal of seized goods through auction is part and parcel of the provision of credit facilities amounts to stretching the provisions of Paragraph 1 (h) to areas that the Parliament did not provide for.

114. Tax laws are to be interpreted strictly. In Republic vs. Commissioner of Domestic Taxes Large Tax Payer’s Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR the High Court stated as follows;“The approach to this case is that stated in the oft cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB as applied in T.M. Bell v Commissioner of Income Tax [1960] EALR 224 where Roland J. stated, “ …in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it to be implied. One can only look fairly at the language used… If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

115. Consequently, strict interpretation of Part 2 of the First Schedule Paragraph 1 (h) simply means that what is exempt from VAT is the making of any advances or the granting of any credit. Since methods of recovery of the credit are not listed thereunder, the Tribunal will not purport or deem to place them there through interpretation.

116. The Appellant also referred the Tribunal to Section 2 (1) of the VAT Act which defines “supply of goods” to mean—a.a sale, exchange, or other transfer of the right to dispose of the goods as owner.”

117. It is vital to note that sale by auction is referred to as ‘a hostile sale’ where the property of the debtor is sold by force. The creditor steps in the foot of the debtor to effect the sale for the debtor. It then follows that the creditor has to discharge all duties that debtor would have discharged and that includes paying taxes and levies on the property in issue. The creditor then ought to recover the debt and any balance remitted to the debtor. Secondly, the Appellant herein being the creditor and the vehicles being charged in favour of the Appellant, it means that the Appellant acquired the right to sale the vehicles to recover loan amounts. The Appellant became a seller within the meaning of Section 2 (1) of VAT.

118. Apart from the foregoing, Section 2 (1) of the VAT Act defines “taxable supply” as;“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.’”

119. Pursuant to the foregoing, the Tribunal noted that there exists no proviso under the VAT Act that exempts sales by auction in recovery of credit from VAT. It then follows that the Appellant being registered for VAT had a duty to remit VAT to the Respondent.

120. Flowing from the above, sale by auction is a hostile sale. The person intending to recover the debt (in this case the bank) steps in the shoe of the owner of the property and instructs the auctioneer to sale the property. The bank owes the debtor a duty of care to ensure that sale by auction is done in accordance with the provisions of the law and in particular, in accordance with the provisions of Auctioneers Act (Cap. 526) as read together with the Auctioneers Rules and the Auctioneers (Practice) Rules.

121. There is no doubt that properties were sold to recover advanced credit. However, The Appellant did not file documentary evidence to demonstrate how the properties were sold and under what terms. The Appellant did not file any document to demonstrate that the auction complied with Section 21 of the Auctioneers Act therefore, the Tribunal was not able to examine terms and conditions of the sale. One of the terms of sale ought to have captured matters of tax.

122. Pursuant to Rule 5 of the Auctioneers Rules, the Appellant as the issuer of instructions to the auctioneer, had a duty in law to ensure that all statutory conditions precedent to seizure/repossession and sale were complied with. Unfortunately, there is no documentary evidence on record from the Appellant to demonstrate compliance with Auctioneers Rules.

123. Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015 provides as follows in relation to documentary evidence:‘‘1. Statement of fact signed by the appellant shall set out precisely all the facts on which the appeal is based and shall refer specifically to documentary evidence or other evidence which it is proposed to adduce at the hearing of the appeal.2. The documentary evidence referred to in paragraph (1) shall be annexed to the statement of fact.’’

124. The Tribunal examined the Appellant’s pleadings and established that the Appellant did not file documentary evidence to support of this issue. Under the circumstances, the Appellant’s Appeal in relation to this issue does not conform with the provisions of Rule 5 of the Tax Appeals Tribunal (Procedure) Rules, 2015.

125. Section 56 (1) of the TPA provides that,“in any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”Similarly, Section 30 of TATA provides that,‘‘In 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; orb.In any other case, that the tax decision should not have been made or should have been made differently.’’

126. In Singapore Motors Limited vs. Commissioner of Domestic Taxes (Income Tax Appeal E039 of 2021) [2024] KEHC 2443 (KLR), the High Court held as follows:‘‘This Court has remained emphatic that under section 30 of the Tax Appeals Tribunal Act (TATA) and section 56 of the Tax Procedures Act (TPA), the burden of proving that an assessment is wrong or excessive remains upon the taxpayer.’’

127. Consequently, the Tribunal finds and holds that the Appellant failed to discharge its burden of proof and failed to demonstrate that the Respondent erred in its VAT assessments for the periods 2018 to 2021 amounting to Kshs. 67,539,788. 03. ii.Whether the Respondent erred in assessing withholding tax on Card Business Interchange fees for the period 2019 to 2021 amounting to Kshs. 369,023,956. 00 (inclusive of penalties and interest).

128. The Appellant in relation to this issue submitted as follows;‘‘The appellant is cognizant of the Court of Appeal’s judgment in Commissioner of Domestic Taxes vs. Barclays Bank of Kenya Ltd [2009] eKLR where the Court held that interchange fees paid to issuer banks were for management and professional services and therefore were subject to WHT. Cognizant that the appeal is still awaiting the decision of the Supreme Court, the Appellant maintains the view that the Court of Appeal erred in fact, by not considering that the services provided are automated.’’

129. Pursuant to the doctrine of stare decisis, and bearing in mind that the decisions of the Court of Appeal are binding upon this Tribunal, the decision of the Court Appeal in Commissioner of Domestic Taxes vs. Barclays Bank of Kenya Ltd [2009] eKLR is applicable to this case until such a time that the Supreme Court delivers a decision in the contrary.

130. Consequently, the Tribunal finds and holds that the Respondent was justified in assessing withholding tax on Card Business Interchange fees for the period 2019 to 2021 amounting to Kshs. 369,023,956. 00, the Appeal thus fails.

Disposition 131. The upshot to the foregoing is that the Tribunal finds and holds that the Appeal is not meritorious and makes the following ordersa.The partial consent signed and dated 9th May 2024, filed and adopted as an order of this Tribunal on 6th June 2024 be and is hereby confirmed.b.The Appeal on the outstanding issues for determination thereof, be and is hereby dismissed; and,c.Each party to bear its own cost.

132. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF JANUARY 2025ROBERT M. MUTUMACHAIRPERSONMUTISO MAKAU JEPHTHAH NJAGIMEMBER MEMBERDR. TIMOTHY B. VIKIRU DELILAH K. NGALAMEMBER MEMBER