[2024] KETAT 649 (KLR)

Kenya Hospital Association v Commissioner of Domestic Taxes (Tax Appeal 1146 of 2022) [2024] KETAT 649 (KLR) (26 April 2024) (Judgment)

Neutral citation: [2024] KETAT 649 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1146 of 2022

E.N Wafula, Chair, E Ng'ang'a, EN Njeru, M Makau & AK Kiprotich, Members

April 26, 2024

Between

Kenya Hospital Association

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a company limited by guarantee which operates Nairobi Hospital. Nairobi Hospital provides a range of medical services including pharmacy, nursing, radiology, laboratory, specialized medical services as well as being an advanced diagnostic, treatment and referral centre.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. 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.

3. The Respondent conducted an audit on the tax returns of the Appellant. After audit the Respondent issued the Appellant additional assessments for Withholding tax, VAT and PAYE for the periods 2015 to 2020 totaling to Kshs. 862,732,072. 00.

4. The Appellant objected to the additional assessment amounting to Kshs. 862,732,072 on 27th June 2022.

5. The Respondent issued its objection decision on 25th August 2022 partially allowing the objection, allowing Kshs. 114,082,911 and confirming Kshs. 748,649,162. 00.

6. The Appellant being dissatisfied with the decision of the Respondent, filed its Notice of Appeal with the Tribunal on 23rd September 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 7th October 2022 and filed on the same date:a.That the Respondent erred in law and fact in failing to consider the erroneous calculation of taxes by the Respondent in respect of the taxes assessed and therefore misdirected itself in demanding the tax assessed on the basis of erroneous amounts used by the Respondent for principal taxes, penalties and interest under the various tax heads.b.That the Respondent erred in law and fact in confirming its assessment of PAYE in respect of the Appellant's engagement of the Clerk of Works and the resultant tax demand of Kshs. 3,263,524. 00 in this respect yet the Appellant had demonstrated that the Clerk of Works was engaged by the Appellant as an independent contractor.c.That the Respondent erred both in law and in fact in requiring the Appellant to pay taxes in respect of PAYE in the amount of Kshs. 195,419,498. 00 for the engagement of locum doctors by the Appellant on the basis that the doctors were engaged as part-time employees without providing any legal basis for this conclusion.d.That the Respondent erred in law and in fact in determining that the Appellant had underdeclared its VAT liability in the amount of Kshs.21,329,232. 00 on the basis of an alleged variance between the sales declared by the Appellant in the VAT returns and the sales declared in the audited financial statements yet the Appellant demonstrated that the Respondent had erroneously overstated the variance amounts and charged VAT on exempt and non-vatable items.e.That the Respondent erred in law and in fact in imposing VAT in the amount of Kshs. 9,480,152. 00 on management fees charged on doctors on the basis that the amounts constituted commissions earned by the Appellant, yet the fees were mere reimbursements of costs incurred by the Appellant in dispatching invoices to various parties including insurance companies.f.That the Respondent erred in law and in fact by determining that the Appellant had failed to deduct and remit Withholding tax in the amount of Kshs. 17,436,823. 00 due on royalties in respect of payments made in relation to acquisition of software by the Appellant, yet the Appellant demonstrated that the payments did not constitute royalty payments as the Appellant did not acquire any rights to commercially exploit the software.g.That the Respondent erred in law and in fact in construing that the payments made by the Appellant with respect to the purchase of equipment were payments for the provision of installation services and incorrectly subjected the cost of acquisition of machinery and equipment to withholding tax in the amount of Kshs.7,675,770. 00. h.That the Respondent erred in law and in fact in determining that the Appellant had underdeclared its Withholding tax liability in the amount of Kshs.4,482,035. 00 in respect of payments made to various healthcare service providers, yet the relevant service providers had already paid a final Corporation tax on the respective amounts hence further taxation of these amounts will result in double taxation.i.That the Respondent erred in law and in fact in determining that the Appellant had underdeclared its Withholding tax liability in the amount of Kshs. 274,611,108. 00 in respect of payments to doctors yet the Respondent subjected billings rather than payments made to Withholding tax and further erred in subjecting payments made by insurance companies and individual patients directly to various doctors Withholding taxes from the Appellant on the duty to withhold tax on the payments made to doctors lies with the various payers and not with the Appellant.j.That the Respondent erred in law and in fact in confirming its assessment of Withholding Tax in the amount of Kshs. 28,076,137 in respect of all payments made by the Appellant pertaining to contractual works including the supply of materials to the detriment of the Appellant as the Appellant had already duly withheld and remitted Withholding tax on payments made to Contractors as required by the Income Tax Act.k.That the Respondent erred in law and in fact in subjecting the payments made by the Appellant in respect of the purchase of spare parts for repair of medical equipment to Withholding tax in the amount of Kshs. 658,982 yet there were no services provided on which Withholding tax would be due.l.That in view of the foregoing, the Appellant is apprehensive that the actions of the Respondent lack in merit, are unlawful and manifestly unjust and that unless the orders sought are granted, the Appellant risks being unjustly compelled to pay for the alleged taxes to the prejudice of the Appellant.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:-a.The Appellant’s Statement of Facts dated and filed in 7th October 2022 together with the documents attached thereto.b.Appellant’s witness statement of Calvin Kamotho Wanjiru dated 15th October, 2023 and filed on 31st October 2023 that was admitted in evidence under oath on 23rd November, 2023. c.Appellant’s Witness statement of Dr. Samuel Odede dated 30th October, 2023 and filed on 31st October 2023 that was admitted in evidence under oath on 23rd November, 2023. d.The Appellant’s written submissions dated 7th December, 2023 and filed on 11th December, 2023.

9. The Appellant averred that on 26th May 2022, the Respondent herein issued a notice of assessment for VAT, PAYE and Withholding tax against the Applicant for the periods 2015,2016,2017,2018,2019and 2020. That in the assessment, the Respondent demanded settlement of the resulting principal taxes, late payment penalties and interest totalling to a tax liability of Kshs.862,732,072. 00.

10. That the Appellant lodged its objection on 24th June 2022 objecting to the said assessment of Kshs. 862,732,072. 00 in its entirety and seeking the withdrawal of the said assessments by the Respondent together with alleged accrued interest and penalties.

11. The Appellant averred that on 25th August 2022, the Respondent issued its decision in respect of the objection lodged by the Appellant confirming tax assessment of the principal tax, penalties, and interest in the amount of Kshs.748,649,162 in respect of PAYE, VAT and Withholding taxes for the period 2017, 2018, 2019 and 2020.

12. The Appellant averred that as per the said objection decision, the alleged principal tax payable in respect of PAYE, VAT and Withholding tax for the periods 2017 to 2020 was tabulated as follows: -Principal Penalty Interest Total

PAYE 148,540,539 37,135,135 42,300,715 227,976,388

VAT 22,964,252 1,148,213 6,696,919 30,809,384

WHT 400,189,182 20,009,459 183,747,659 603,946,299

Total 571,693,973 58,292,806 232,745,293 862,732,073

Time barred assessment 103,543,674 5,177,184 5,362,053 114,082,911

Total taxes due 468,150,299 53,115,623 227,383,240 748,649,162

13. That it is based on the said objection decision that the Appellant herein sets out its grounds of appeal as hereunder.

14. The Appellant submitted that the Respondent erred in overstating the penalties and interest on the taxes allegedly owed by the Appellant. The Appellant noted that the penalty and interest rates applied on the principal taxes in the Respondent's workings under individual tax heads do not tally with the final total assessment resulting in the Respondent incorrectly capturing the total penalties and interests leading to an overstatement of the tax assessed for the period under review.

15. That based on the review and analysis, the Appellant noted that the total amount of taxes assessed including the penalties and interests ought to have been Kshs. 562,433,263.

16. The Appellant noted that the overstatement of taxes was occasioned by the erroneous arithmetic calculation of all the penalties and interests in the tax assessment issued and subsequently confirmed by the Respondent. The Appellant stated that the correct arithmetic calculation based on each tax assessed by the Respondent for the period of 2017-2020 including the penalties and interests is captured as follows:-Tax Head Issue subject to Tax Principal Tax Penalty Interest Total

PAYE Clerk of works remuneration 2,073,707 518,427 671,390 3,263,524

PAYE Locums 146,466,832 7,323,342 41,629,325 195,419,498

Total PAYE 148,540,539 7,841,768 42,300,715 198,683,022

VAT VAT versus Financials variance 16,037,017 801,851 4,490,365 21,329,233

VAT Doctors payments 6,927,236 346,362 2,206,555 9,480,153

Total VAT 22,964,253 1,148,213 6,696,920 30,809,386

WHT Software 12,060,008 603,000 4,773,815 17,436,823

WHT Machinery 5,461,687 273,084 1,940,999 7,675,770

WHT Body Edge 115,950 5,798 60,294 182,042

WHT Metropolis Star 3,208,315 160,416 907,986 4,276,717

WHT AAR Health Care 17,480 874 4,922 23,276

WHT Doctors payments 256,555,144 12,827,757 5,228,207 274,611,108

WHT Contractual works 23,203,419 1,160,171 3,712,547 28,076,137

WHT Medical equipment repairs 617,721 30,886 10,375 658,982

Total WHT 301,239,724 15,061,986 16,639,145 332,940,856

Total Taxes 472,744,516 24,051,967 65,636,780 562,433,263

17. Based on the above workings, the Appellant asserted that the alleged correct tax computation inclusive of penalties and interest ought to be KShs. 562,433,263. 00. The Respondent overstated the amounts allegedly owed by the Appellant in respect of the penalties and interests leading to an overstatement of the tax amounts for the period of assessment.

18. With regard to PAYE the Appellant submitted that the Respondent failed to consider the supporting documents availed by the Appellant including the contract of engagement of the Clerk of Works and the sample invoices provided for services performed by the Clerk of Works which establish that the engagement constituted a contract for service rather than a contract of service as misconstrued by the Respondent.

19. The Appellant noted that the Respondent further erred in failing to consider the legal precedents applied by the Appellant which demonstrated that the Clerk of Works was engaged by the Appellant as an independent contractor and not an employee as the Appellant demonstrated that the Clerk of Works worked independently under minimal control and was not entitled to any benefits of an employee.

20. The Appellant submitted that the Respondent erred in disregarding the fact that for certain months, the Clerk of Works failed to issue invoices for work done but subsequently proceeded to issue lump sum invoices covering the specific months. That based on these invoices containing the lumpsum amounts, the Appellant proceeded to withhold and deduct the Withholding tax due and paid the net amounts thereto to the clerk of Works. However, the Respondent incorrectly determined that the Appellant had failed to withhold taxes in respect of the months worked for which the clerk of works had not invoiced yet the same had subsequently been provided for in the months where lump sum payment were made in respect of the invoices raised.

21. That based on the Respondent's workings, the Appellant further noted that the Respondent erred in its computation of the alleged outstanding taxes under this tax head by failing to include the withholding taxes already paid by the Appellant in respect of payments made to the Clerk of Works in its computation of the final taxes alleged to be due and payable.

22. The Appellant averred that in light of these facts, it was therefore untenable that the Respondent issued a tax demand requiring the Appellant to pay the amount of Kshs. 3,263,524. 00 in respect of purported outstanding taxes of PAYE for the engagement of the Clerk of works yet he was an independent contractor whose remuneration was duly subjected to withholding tax by the Appellant and remitted to the Respondent as required by Section 35(3)(f)of the Income Tax Act. The Appellant therefore submitted that the assessment by the Respondent in respect of PAYE in the amount of Kshs. 3,263,524 be set aside.

23. With regard to the demand of PAYE on engagement of locum doctors the Appellant noted that the Respondent failed to examine the elements of the relationship between the Appellant and the locum doctors relying on the basis of the legal precedents adduced by the Appellant which set out the tests relied on by courts in determining whether a person has been engaged as an employee or as an independent contractor and which conclusively established that the locum doctors engaged by the Appellant were not employees of the Appellant as they were not integrated to the Hospital operated by the Appellant, they work under minimal control of the Appellant and they do not derive any benefits of employment such as leave days, NSSF and NHIF payments from their engagement.

24. The Appellant further noted that the Respondent incorrectly determined that the payments made to locum doctors were subject to PAYE at thirty per cent (30%) yet the Appellant demonstrated that the locum doctors were independent contractors whose remuneration was paid based on invoices raised by the doctors and subjected to Withholding tax by the Appellant at the rate of five per cent (5%) which the Appellant duly withheld and remitted to the Respondent.

25. The Appellant stated that the Respondent erred in failing to consider that the engagement of locum doctors by the Appellant as independent contractors was as a result of the nature of the industry where the Appellant requires the availability of doctors to fill in the rota where the need arises which contrasts to the engagement of doctors as employees by the Appellant as the locum doctors are free to provide their services elsewhere and are not restricted to the Hospital operated by the Appellant.

26. The Appellant submitted that the Respondent erred in determining that this constituted a contract of service without any legal justification yet the engagement of locum doctors by the Hospital fails to meet the threshold provided within the meaning provided by the Income Tax Act and specifically Section 2 of the ITA which provides that-“contract of service" means an agreement, whether oral or in writing, whether expressed or implied, to employ or to serve as an employee for any period of time, and includes a contract of apprenticeship or indentured learnership, under which the employer has the power of selection and dismissal of the employee, pays his wages or salary and exercises general or specific control over the work done by him;and for the purpose of this definition an officer in the public service shall be deemed to be employed under a contract of service”

27. The Appellant therefore submitted that the Respondent erred in overlooking the criteria used to determine whether the locum doctors engaged by the Appellant were employees or independent contractors and consequently arrived at the incorrect conclusion that the payment to locum doctors was subject to PAYE for the period of 2017 to 2020 in the amount of Kshs.195,419,498. 00, is without legal justification and should be set aside.

28. The Appellant noted with regard to the assessment on VAT that the Respondent failed to consider that the calculation of VAT by the Respondent included the erroneous charge of VAT on exempt and non-vatable items including interest on late payment, third-party disbursements, and supplies with respect to the cafeteria operated by the Appellant on behalf of its employees which have been explained below-

a) Late penalties and late payment interests on returns 29. The Appellant submitted that the Respondent misdirected itself in subjecting the amounts pertaining to penalties charged by the Appellant for overdue library books and the late payment interest paid thereon to VAT, yet the amounts are not vatable as provided for by the Value Added Tax Act.

30. The Appellant further noted that the interest incurred by the Appellant with respect to late payments does not form part of the taxable value of supply hence the same is not subject to VAT as provided in Section 13(6) of the VAT Act which provides that:-“13. Taxable value of supply(6)The consideration for a supply shall not include-(a)any interest incurred for the late payment of the consideration for the supply.”

31. That considering the legal provision above, the Appellant submitted that the Respondent erred in failing to exclude these late payment interest amounts from the taxable value of supply in its computation.

b) Third-party disbursements 32. The Appellant submitted that the Respondent erred in failing to exclude disbursement amounts such as printing and binding amounts which are mere disbursements to third parties and are therefore not subject to VAT as per the Value Added Tax Act.

33. The Appellant further noted that the Respondent erroneously included amounts in respect of the disbursements in its calculation of VAT, yet the Appellant had supplied the Respondent with information on the disbursement amounts.

34. The Appellant submitted that the assessment of VAT by the Respondent in respect of disbursements is without legal basis and contrary to Section 13(5) of the VAT Act which provides that:-“13. Taxable value of supply(5)In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client:Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.”

35. The Appellant averred that in light of this legal provision, the Respondent erred in including the disbursement amounts in its computation of VAT allegedly owed by the Appellant, yet the amounts are excluded from the taxable value of supply.

c) Exempt Supplies - Catering services offered by the Appellant for the benefit of employees 36. The Appellant noted that the Respondent erred in including the amounts pertaining to the catering services provided by the Appellant for the benefit of its employees in the calculation of VAT owed by the Appellant contrary to Paragraph 13 of Part II of the First Schedule of the VAT Act which provides that-“The supply of the following services shall be exempt supplies-13. Accommodation and restaurant services provided within the following premises by the proprietors thereof-(c)canteens and cafeterias operated by an employer for the benefit of his employees.”

37. That based on the legal provision above, the Appellant submitted that the Respondent erred in including the restaurant services provided by the Appellant for the benefit of its employees yet the same constitutes an exempt supply under the VAT Act. Therefore, the Respondent erred in subjecting the amount of Kshs. 62,488,166. 74 being the value of the catering services to VAT without legal justification.

d) Bank charges 38. The Appellant submitted that the Respondent erred in failing to exclude the bank charges incurred by the Appellant in respect of bounced cheques to VAT yet the charges do not constitute taxable supplies as provided by the VAT Act.

39. The Appellant further submitted that the Respondent erred in subjecting bank charges to VAT without legal justification as the charges were ancillary costs incurred by the Appellant and not taxable supplies as provided for under Section 5 of the VAT Act which specifically provides the supplies subject to VAT as shown below-“5. Charge to tax1. 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 the registered person in Kenyab)The importation of taxable goods; andc)A supply of imported taxable services”

40. That in light of the legal provision above, the Appellant maintained that the Respondent erred in subjecting bank charges incurred on bounced cheques contrary to the provisions of the VAT Act.

41. The Appellant further submitted that the Respondent erred in failing to consider the overstatement in variance amounts by the Respondent and further erred in including exempt supplies and non-vatable items in its computation of VAT. As such, the Appellant submitted that the entire VAT assessment of Kshs.21,329,232 in respect of variances by the Respondent should be set aside.

42. With regard to the demand for VAT on management fees the Appellant submitted that the Respondent erred in determining that the amounts paid by doctors to the Appellant were commissions earned for administration of the doctors' transactions, yet the amounts paid to the Appellant in respect of doctors' transactions were reimbursements for costs incurred by the Appellant for dispatching the invoices through a third-party service provider engaged by the Appellant.

43. The Appellant further submitted that the Respondent erred in subjecting payments pertaining to costs incurred by the Appellant as a result of consultancy services engaged by the Appellant for purposes of dispatching invoices to individual patients, insurers or other third parties and forwarding payments to doctors.

44. The Appellant averred that the Respondent subjected the payments to VAT without legal basis and specifically in contravention of Section 13(5) of the Value Added Tax Act which provides as follows-“13. Taxable value of supply(5)In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client:Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.”

45. The Appellant therefore submitted that the Respondent failed to exclude third-party disbursements incurred by the Appellant from its calculation of VAT allegedly owed by the Appellant and the resultant assessment of Kshs. 9,480,152 by the Respondent in respect of disbursement costs is without legal basis and should be set aside.

46. The Appellant submitted as relates to the assessment on Withholding tax, that the Respondent erred in its decision that the payments made by the Appellant in respect of software acquired in the period of assessment constituted royalties subject to withholding tax, despite the Appellant demonstrating to the Respondent that the Appellant merely acquired a copyrighted article and not a copyright meaning that the Appellant did not acquire any rights in respect of the software.

47. The Appellant further submitted that the Income Tax Act strictly provides that withholding taxes are due and payable on royalty payments where royalties are expressly defined in Section 2 of the Income Tax Act as follows-“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; or(b)any cinematograph film, including film or tape for radio or television broadcasting; or(c)any patent, trademark, design or model, plan, formula or process; or(d)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.”

48. That in light of the legal provision above, the Appellant submitted that the amounts paid by the Appellant in acquiring the software do not amount to payments for the use of or the right to use any copyright of a literary, artistic or scientific work and therefore cannot be royalties subjected to Withholding tax.

49. The Appellant further submitted that the Respondent erred in failing to apply a strict interpretation to the provisions of the Income Tax Act pertaining to royalties and further erred in applying the wrong tax treatment and disregarding legal precedents set in Kenya which provide that software acquired for own use does not confer any rights over the underlying copyright of the software but is simply a sale of goods transaction.

50. The Appellant submitted that it applied the correct treatment of the software assets acquired by accounting for the software as capital expenditure as provided for in Paragraph 1(b)(vi) of the Second Schedule of the Income Tax Act which stipulates as thus:-“1. Deduction of investment allowance(1)Where a person incurs capital expenditure in respect of an item listed in the first column of the table, an investment allowance may be deducted in computing the gains or profits of that person at the corresponding rate specified in the second column,for each year of income”(vi)Computer and peripheral computer hardware and software, calculators, copiers and duplicating machines at 25% per year, in equal instalments.”

51. The Appellant further noted that the Respondent erred in disregarding the fact that the Appellant had capitalized the costs of acquiring the software and duly accounted for these costs as capital expenditure as provided for by Regulation 38 of the International Accounting Standards which stipulate that:-“Regulation 38Under this regulation the costs of acquisition and maintenance of an intangible asset such as a software should be capitalised in the cost of acquiring the asset. These costs include any other costs directly attributable to the preparation of the intangible asset for its intended use.Development costs of an intangible asset are equally capitalised after the technical and commercial feasibility of the asset for sale or use have been established. The entity must intend and be able to complete the intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits.”

52. The Appellant stated therefore that the acquisition of software assets by the Appellant which are used by the Appellant in providing various hospital services does not constitute payment of royalties and as such, the assessment by the Respondent of Withholding taxes in the amount of Kshs.17,436,823. 00 is without legal justification and should be set aside.

53. The Appellant submitted that the Respondent incorrectly applied Withholding tax at the rate of five per cent (5%) on the cost of equipment supplied to the Hospital on the unsubstantiated basis that the supply of equipment included a service component and therefore proceeded to charge Withholding tax on the alleged services provided inspite of the invoices showing that the supplies made were with respect to the actual cost of the machinery and equipment and not for services provided to the Appellant.

54. The Appellant further submitted that the Respondent erred in applying an arbitrary percentage of seven per cent (7%) on the total invoice amounts on the basis that the percentage was designated for service components of the Appellant's contracts for supply of equipment without providing any legal or factual basis for this conclusion.

55. The Appellant therefore submitted that the Respondent erred in issuing its assessment of Kshs.7,675,770. 00 in respect of Withholding tax due on the supply of machinery and equipment without providing any justifiable reasons and contrary to the provisions of Section 35 of the Income Tax Act.

a) Payments made to Body Edge Fitness 56. The Appellant submitted that the relevant service providers had already paid a final Corporation tax on income inclusive of the respective amounts paid by the Appellant hence further taxation will result in double taxation.

57. The Appellant further submitted that the Respondent erroneously determined that the Appellant had failed to deduct Withholding tax and was liable to pay Withholding tax yet there is no legal basis for retrospectively demanding Withholding tax from the Appellant and therefore the Respondent should not demand the taxes from the Appellant as though the tax was due from them. That as such, the assessment by the Respondent in this respect in the amount of Kshs. 182,042. 00 should be set aside.

b) Payments made to Metropolis Star 58. The Appellant submitted that the Respondent erred in concluding that the Appellant was liable to pay Withholding tax on payments made to Metropolis Star for provision of lab tests for patients of the Appellant as the amounts were thereafter subjected to Corporation tax at the rate of 30% by the service provider and therefore the tax demand on the Appellant would constitute double taxation.

59. The Appellant further submitted that the Respondent erroneously disregarded that the principles of taxation which preclude double taxation as Withholding tax operates as tax paid in advance and subsequently deducted from the payee's calculation of taxable income for the relevant year. Therefore, the Respondent failed to consider that the tax amounts should not be recovered from the Appellant and the resultant tax demand of Kshs.4,276,717. 00 should be set aside.

c) Payments made to AAR Healthcare Kenya 60. The Appellant submitted that the assessment issued by the Respondent in respect of the payments made to AAR Healthcare in respect of ambulance services provided to patients of the Appellant was incorrect as the Appellant was not liable to deduct Withholding tax but merely acted as an agent for the clients of the Hospital by issuing letters of undertaking to the service provider that the clients would settle the invoices promptly thereafter.

61. The Appellant submitted that the Respondent erred in subjecting ambulance services to Withholding tax without any supporting legal provision as the provision of ambulance services does not constitute professional services liable to Withholding taxes as provided by the Income Tax Act.

62. The Appellant further submitted that the Respondent failed to consider that the services were provided externally, and the payments were made to the service provider by insurers or individual clients for the provision of the ambulance services therefore, the Appellant was neither the payer nor the payee and cannot be liable to deduct and remit Withholding tax on these payments.

63. That therefore the Appellant noted that the Respondent disregarded the settled principle that Withholding tax should be deducted and remitted by the payer and the Appellant is not the payer in respect of these transactions. That as such, the entire assessment of Withholding taxes in respect of ambulance services in the amount of Kshs. 23,276. 00 should be set aside.

a. Billings considered by the Respondent instead of actual payments 64. The Appellant submitted that the Respondent incorrectly calculated Withholding taxes on billings instead of payments therefore the Respondent failed to consider that the amounts shown in the billings were the amounts raised by the consultant doctors but did not reflect the payments made to the Appellant by third parties as it did not delineate between the amounts settled and the payments made by patients and insurance companies to consultant doctors directly and the payments made to the Appellant.

b. Obligation to withhold tax on payments made directly by third parties to doctors 65. The Appellant submitted that the Respondent erroneously determined that the Appellant was obligated to withhold on all the payments made to consultant doctors whereas the Appellant had duly deducted and remitted Withholding tax on the payments received by the Appellant from third parties for onward remittance to the doctors.

66. The Appellant further submitted that the Respondent failed to consider the payers involved in various transactions and payments made to consultant doctors. The process of billing and payment for the services provided by the consultant doctors at the Hospital operated by the Appellant is explained below -i.The patient will walk into the Hospital for treatment by the Admitting Consultant. In such circumstances, the Appellant will recognize and bill for Hospital revenue from the medical services offered, that is, laboratory, bed, medicine, x-rays, surgical procedures, inpatient registrar fees.ii.On the other hand, the Admitting Consultant bills and recognizes the revenue for the professional services offered.iii.The bills by the Hospital and the Admitting Consultant are thereafter dispatched by the Appellant for payment by the respective insurance companies.iv.The insurance companies will thereafter undertake either of the following actions:-(a)Pay to the Appellant both the hospital bill and the Admitting Consultant professional fees, or(b)Pay directly to the Appellant its Hospital bill and directly to the Admitting Consultant his professional fees.v.Where the insurance companies make the payment directly to the Appellant in respect of both bills, that is, the Hospital bill and the bill for the Doctor's professional fees, the Appellant duly withholds and remits the amounts in respect of the Doctor's professional fees thereto at the applicable rate and subsequently pays the net amount to the Doctors.vi.Where the payments are made directly from the insurance companies to the doctor's directly, the Hospital has no control over the payment of Withholding tax as the payer is the insurance company and not the Hospital as envisaged by the Respondent.

67. The Appellant submitted that the Respondent erred in determining that the obligation to deduct and remit Withholding tax lies with the Appellant with respect to payments made by third parties directly to the consultant doctors. The Respondent misdirected itself in its interpretation of the obligation to pay Withholding tax as provided in the Income Tax Act, specifically Section 10 of the Income Tax Act which stipulates as follows; -“Income from Management or professional fes, royalties, interest and rents (1) For purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of;-(a)A management or professional fee or training fee, the amount thereof shall be deemed to be income which accrued in or was derived from Kenya”

68. That based on the provision of Section 2 of the ITA, the same defines paid as follows;-“paid" includes distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person and "pay", "payment" and "payable" have corresponding meanings".

69. The Appellant submitted that in the circumstances, the invoices from the Admitting Consultants were addressed to the specific patients for payment to be effected by their insurance companies. The said invoices were not captured anywhere in the books of the Appellant but were dispatched to the insurance companies for payment. Therefore, at this point, the said amount cannot be deemed to have been paid as the invoices are merely dispatched to the insurance companies with no reflection in the books of the Appellant. That as such, the Respondent erroneously determined that the tax point is on the Appellant yet no payments or deemed payments were made by the Appellant.

70. The Appellant further submitted that whereas the correct tax treatment of fees paid to the doctors is to impose Withholding tax, the obligation to deduct and remit the tax lies with the payer as stated in the provisions of Paragraph 4(1) of the Income Tax (Withholding Tax)Rules which specifically provide that;-“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.”

71. That consequently, and in consideration of the above legal provisions, the Appellant submitted that the obligation to withhold on payments made by other parties directly to the doctors lied with the payer, in this case being the insurance companies and individual patients.

72. To this end therefore the Appellant submitted that the entire assessment of KShs.274,611,108. 00 in respect of Withholding taxes on doctors' payments should be set aside.

c. Withhold tax on payments on contractual works on development projects 73. The Appellant submitted that the Respondent reviewed the Hospital's development projects and established alleged variances between the contract sum and the amounts subjected to Withholding tax leading to the imposition of Withholding tax of KShs.26,596,394. However, the Appellant noted that the said assessment were erroneous based on the following grounds:-

74. That in respect of certain contractual works, the Appellant averred that the Respondent applied the wrong rate of Withholding tax at 5% instead of 3% as stipulated by the Income Tax Act. That this in effect led to the overstatement of the principal Withholding tax.

75. The Appellant submitted that it duly paid the contractors and withheld the relevant withholding tax amounts which were subsequently remitted to the Respondent in respect of each of the forty-four (44) contractors.

76. The Appellant submitted that the Respondent erred in its computation as the Respondent failed to consider that a significant portion of the payments made by the Appellant to the Contractors related to the supply of materials for which are not subject to the imposition of Withholding tax.

77. The Appellant further submitted that the Respondent erred in considering the contract sum paid in totality without ascertaining whether the same related to the supply of materials or the supply of services as only the latter is subject to Withholding tax.

78. The Appellant submitted that Withholding tax would only be chargeable on the amount proportionate to the supply of services under the contracts and not chargeable on the supply of materials. In this respect, the Appellant submitted that the entire assessment by the Respondent of Kshs.26,596,394. 00 in respect of Withholding tax on the contractual works be set aside in its entirety.

d. Witholding tax on acquisition of equipment and spare parts for medical equipment 79. The Appellant submitted that the Respondent erred in its assessment of Withholding tax on payments allegedly made to suppliers who provided repair services for the Appellant's medical equipment. The Respondent proceeded to issue an assessment in this respect in the amount of KShs. 658,982. 00. The Appellant submitted that the Respondent erred in its assessment based on the following issues; -

80. The Appellant noted that in its assessment, the Respondent relied on the arbitrary threshold of twelve percent (12%) of the total amount expensed for purposes of delineating the amounts in respect of payments made to suppliers as the total amounts thereto included spare parts costs. However, the Respondent failed to explain its reasons for reaching the said taxable amounts based on an arbitrary percent of 12% for purposes of computing the cost of repairs.

81. The Appellant further noted that the Respondent had been duly provided with the relevant invoices by the Appellant for purposes of determining if any withholding tax was due and therefore, the reliance on the said arbitrary percentage was without any legal basis.

82. Further, the Appellant submitted that the resultant tax liability determined by the Respondent was based on the amounts paid by the Appellant which were wholly incurred as the actual cost of the spare parts and had no repair service component.

83. That in light of the foregoing, the Appellant averred that the Respondent erred in issuing its assessment of Kshs. 658,982. 00 in respect of Withholding taxes on payments made in respect of purchase of equipment parts and not repair services therefore,- no withholding taxes are due in respect of these transactions by the Appellant.

84. It was therefore the Appellant's case that the issuance of the assessment dated 26th May 2022 and the subsequent objection decision dated 25th August 2022 in respect of the demand of PAYE, VAT and Withholding taxes was without legal basis.

85. The Appellant therefore prayed that this Honourable Tribunal finds in favour of the Appellant and vacates the tax demand issued by the Respondent on 25th August 2022 in the amount of Kshs.748,649,162. 00 with costs to the Appellant.

Appellant’s Prayers 86. The Appellant prayed for the following orders:-a.That the Respondent’s Objection decision dated 25th August 2022 be hereby set aside:b.The tax demand issued by the Respondent in respect of PAYE, Withholding tax and Value Added Tax in the total principal amount of Kshs. 748,649,162 and the accrued penalties and interest thereon is without legal basis and is hereby vacated; andc.Cost of the Appeal be awarded to the Appellant.

Respondent’s Case 87. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal: -i.The Respondent’s Statement of Facts dated on 4th November, 2022 and filed on the even date together with the documents attached thereto.ii.The Respondent’s written submissions dated 28th February 2023 and filed on 2nd March, 2023.

VAT 88. The Respondent stated that VAT was charged pursuant to the provisions of the VAT Act, 2013. Section 5(1) (a)provides:“(1)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;

89. The Respondent further stated that Section 2 of the Value Added Tax Act, 2013 provides that:“taxable supply" means 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;”

90. The Respondent further stated that it was not bound by the tax returns filed by the Appellant. The Respondent may assess a taxpayer's tax liability using any information available. Section 24(2) of the Tax Procedure Act, 2015 provides that:-“The Commissioner shall not be bound by a tax return or information provided by, or on behalf of, a taxpayer and the Commissioner may assess a taxpayer's tax liability using any information available to the Commissioner.”

91. The Respondent averred that it was further empowered to amend returns under Section 31(b) of the Tax Procedure Act, 2015 based on available information and to the best of the Commissioner's judgement.

92. The Respondent averred that it established variances between Vatable sales in the audited financial statements (AFS) and VAT declarations.

93. The Respondent stated that the variances between vatable sales in the audited financial statements (AFS) and VAT3 declarations were not supported or reconciled. The Respondent stated that the VAT charged was on management fees/commissions charged on doctors' fees for administration.

94. The Respondent stated that the Appellant failed to demonstrate and support that the payments subjected to VAT as management fees were not disbursements under Section 35(3) of the Income Tax Act.

95. The Respondent stated that the Appellant further failed to support its grounds of objection that cost of software was all in regards to actual cost of acquisition and that the cost did not constitute a royalty which is subject to VAT.

Paye 96. The Respondent stated that it assessed PAYE on remunerations to the Clerks of Works. That the Appellant had deducted WHT at 5% for a contract that the Respondent found to be a contract of service.

97. The Respondent asserted that the Appellant had deducted WHT at 5% for contracts for locum doctors that the Respondent found to be contracts of service hence assessed the PAYE.

98. The Respondent claimed that the contract of the Clerk of works and locum Doctors were found to be a contract of service as defined under Section 2 of the Income Tax Act. Contract of service is defined as:“means an agreement, whether oral or in writing, whether expressed or implied, to employ or to serve as an employee for any period of time,and includes a contract of apprenticeship or indentured learnership, under which the employer has the power of selection and dismissal of the employee, pays his wages or salary and exercises general or specific control over the work done by him;and for the purpose of this definition an officer in the public service shall be deemed to be employed under a contract of service”

99. The Respondent stated that the Appellant was under a legal obligation to deduct the PAYE from the Employees and remit to the Respondent. Section 37(1) and(2) of the Income Tax Act,provides that:“Deductions of tax from emoluments(1)An employer paying emoluments to an employee shall deduct therefrom,and account for tax thereon, to such extent and in such manner as may be prescribed.(2)If an employer paying emoluments to an employee fails-(a)to deduct tax thereon;(b)to account for tax deducted thereon;or(c)to supply the Commissioner with a certificate provided by rules prescribing the certificate,the Commissioner may impose a penalty equal to twenty-five per cent of the amount of tax involved or ten thousand shillings whichever is greater, and the provisions of this Act relating to the collection and recovery of that tax shall also apply to the collection and recovery of the penalty as if it were tax due from the employer:"

100. The Respondent stated that the Appellant was correctly assessed for the PAYE which ought to have been remitted.

WHT 101. The Respondent claimed that the Appellant failed to support its grounds of objection that cost of installation of machinery and equipment was all in regards to actual cost of acquisition of machinery and equipment not subject to WHT.

102. The Respondent claimed that the Appellant failed to support its grounds that the amounts were received on behalf of the consultant doctors.

103. The Respondent further claimed that the Appellant failed to support its grounds that payments subjected to WHT as contractual fees related to supply of materials.

104. The Respondent stated that the Appellant failed to support its grounds that amounts paid for repair of equipment were actually in regards to purchase of spare parts.

105. The Respondent asserted that the Appellant was under obligation to deduct WHT on various service providers as per the provisions of Section 35 of the Income Tax Act. That the provision uses the word “shall" making it mandatory for the Appellant to deduct the WHT and remit to the Respondent. The Respondent stated that it correctly assessed the Appellant in respect of Withholding tax.

106. The Respondent stated that the burden lies with the Appellant to proof that the assessments and objection decision is wrong pursuant to Section 56 of the Tax Procedures Act. Section 56(1)of the Tax Procedures Act,2015 provides that:-“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

Respondent’s Prayers 107. The Respondent prayed that this Honourable Tribunal to:-i.Dismiss the Appeal with costs.ii.Uphold the objection decision dated 5th September 2022.

Issues For Determination 108. The Tribunal notes that subsequent to the filing of the Appeal, the parties entered into a Partial Consent dated 30th October, 2023 and filed on the same date and endorsed as a Part Judgment on the 23rd November, 2023, which stated that the additional PAYE, VAT and Withholding tax liability for the years of income 2017 to 2020 relating on PAYE Locums and WHT on doctors payments amounting to Kshs. 403,021,975. 00 was to be referred back to the Tribunal for its determination.

109. The Tribunal has considered the pleadings and documentation filed by both parties as well as the Partial Consent filed and it shall deal with the issue that was referred to it by both parties for determination; Whether the additional PAYE, VAT and Withholding Tax liability for the years of income 2017 to 2020 relating to PAYE Locum and WHT on doctors payments was justified.

Analysis And Findings 110. The Tribunal having determined the issue falling for its determination proceeds to analyse it as hereunder.

111. The crux of this matter is on PAYE for the locum doctors and Withholding tax on consultant doctors. The Appellant submitted that the locum doctors would be engaged solely based on their availability wherein the Appellant would send out the available timelines (duty rota) within which particular doctors with specific specialization are required by the Appellant. That the locum doctors would then fill in the specific times that they would be available wherein they would be allocated the specific timelines.

112. The Appellant further submitted that the allocation of when a locum doctor would be in the Hospital would solely be based on their availability at the specific time that they select on the duty rota. That in the instance where such doctors are unavailable on the selected time, they would have the discretion of cancelling their availability.

113. The Appellant further submitted that for Radiologist and Pathologists for example, their engagement mostly dependent on the case issues that they are handling and hence allocated certain hours to operate in the Hospital for which they undertake their duties within those hours. The Appellant further noted that specific timelines are solely based on the availability of said specialists within the referenced time.

114. Further, it was the Appellant’s case that in certain instances taking into consideration that majority of the specialist run their own practices or are engaged in other Hospitals, the specialist doctors would be engaged on call basis solely for the purpose of interpreting either the lab or radiology reports and in such circumstances, their billings would be based on the examination done rather than the hours worked.

115. The Appellant posited that in terms of the medical officers, the applicable procedure for onboarding and engagement was as follows; -a.Conduct of interviews for qualified candidates by the Human Resource Department;b.Upon completion of the interview process, the successful candidates are issued with contracts for a specific period ranging from six months to one year;c.Thereafter, they are incorporated into the Hospital's database which consists of other locum doctors. It is this database that makes it possible for a doctor to be considered in case there are any hours that need to be filled;d.In instances that there are hours that need to be filled, the same are updated in the WhatsApp Groups or the Google Doc notifying the doctors to select based on their availabilitye.The doctors thereto select the hours they are available with priority being given on first come basis

116. The Appellant postulated that as relates to payment of specialist doctors including the radiologist and pathologists, their payments were based on the number of times they attended to their duties at the specialized departments. That moreover, and so as to ensure that the said specialists are available on call, a specific retainer is normally paid to some of the specialists so as to create an obligation to attend to calls for services from the Hospital any time a need arose. This meant that when they are called by the Hospital, they are available to interpret the reports as generated.

117. The Appellant submitted that in terms of how the locums work, the specialist doctors have full control of how, when and the manner in which they work without the Appellant having any control over them as they are specialized doctors.

118. That Appellant further averred that as evidenced by the contracts signed by the locums, the Appellant does not pay for the licensing or certification of the said doctors but the same is procured individually by them.

119. It was the Respondent’s case that it assessed PAYE on remunerations to the Clerks of Works. The Appellant had deducted WHT at 5% for a contract that the Respondent found to be a contract of service.

120. The Respondent submitted that the Appellant had deducted WHT at 5% for a contracts for Locum doctors that the Respondent found to be a contracts of service hence assessed the PAYE.

121. The Respondent stated that the contract of the Clerk of works and Locum Doctors were found to be a contract of service as defined under Section 2 of the Income Tax Act.

122. The Tribunal notes that the locum doctors were not entitled to whatever benefits that accrue to the employees of the Appellant including payments for NSSF, NHIF, leave days and holidays.

123. The Tribunal also notes that the mode of payment of locum doctors is by way of invoicing. That the invoices are issued by the locum doctors to the Appellant for quantifiable services rendered based either on hours worked per month or based on reports interpreted.

124. The Tribunal further notes that the consideration that the locum doctors get for the services rendered is not a standard amount and is not remitted via the Appellant's payroll but just like any other supplier of services to the Appellant, they are paid based on objectives met and time spent in the work i.e. hours that they worked or the magnitude of tasks undertaken in terms of clients of the Appellant attended to by the locum doctors.

125. The Tribunal notes that the number of hours the locum doctors take up roles at the Hospital, are duly issue invoices to the Appellant like any other supplier of a professional services.

126. The Tribunal notes that the Iocum doctors were not integrated as part of the Appellant like the other doctors who are employees and that locums were treated purely as Consultants.

127. The Tribunal notes that considering the locum doctors are subject to minimal control by the Appellant and are engaged without integration with the Appellant unlike an ordinary employee. These doctors are not engaged as employees of the Appellant but are consultants.

128. The Tribunal is guided by the case of Kenya Hotels and Allied Workers Union-V-Alfajiri Villas (Agufa Ltd).Cause No. 229 of 2013 eKLR, where the court drew a distinction between an independent contractor and an employee. It stated that“drawing a distinction between an employee and an independent contractor depends on statute and tests which have been set out in case law.”

129. The Tribunal relies on the organization/integration test in context of the professional worker who was conceived in case of Cassidy-V- Ministry of Health [1951] 2KB343 where the Court of Appeal held that the doctor was indeed a servant of the Hospital and the Ministry was vicariously liable because the doctor was integrated into the health organisation. Denning UJ argued that however, where a patient selects the doctor, then the doctor will not be employed by a hospital.

130. Further, in the case of Ready Mixed Concrete -V-Ministry of Pensions [1968] 2QB497 McKenna J held that:“A contract of service exists if these three conditions are fulfilled.(i)The servant agrees that, in consideration of a wage or other remuneration, he will provide his own work and skill in the performance of some service for his master.(ii)He agrees, expressly or impliedly, that in the performance of that service he will be subject to the other's control in a sufficient degree to make that other master.(iii)The other provisions of the contract are consistent with its being a contract of service.”

131. The Tribunal notes that the contracts between the Appellant and the locum doctors clearly stipulate that the engagement is that of a consultancy agreement. As such, from the inception of the engagement between the parties, it is very clear between them it the Respondent are in consultancy agreement and any rights or obligations that accrue from an employment relationship were not available to them.

132. The Tribunal notes that the locum doctors have retained their own indemnity policies which contrasts with the nature of engagement of employees retained by the Appellant. Unlike for the locum doctors, the Appellant caters for the indemnity of doctors who are its employees.

133. The Tribunal is also guided by the case of Gilbert Sule Otieno -V-Seventh Day Adventist Church (EA) Ltd. Cause No.455 of 2014 where the Court drew a distinction between contract for service and contract of service. These are common law terms that are used to distinguish between the nature of the service provided by a worker to employer. While the contract of service refers to a person who is in employment, contract for service refers to a person who provides services to his clients. Justice Radido Stephen held that:“An independent Contractor's contract in my view is a contract of work (Contract for service) and not a contract of service, or to use the ordinary language,a contract of employment. The hallmarks of a true independent contractor are that the contractor will be:a)registered taxpayerb)will work for his own hoursc)runs his own businessd)will be free to carry out work for more than one employer at the same timee)will invoice the employer each month for his/her services and be paid accordinglyf)will not be subject to usual “employment'" matters such as the deduction of PAYE (tax in income), work injury damages, right to join unions, will not get annual leave, sick leave, minimum wages, maternity/paternity leave, redundancy payments, 13th Cheque, public holidays, accommodation in lieu of housing allowance, pensions and protection against unfair or wrongful dismissal.”

134. The Tribunal further relies on StanleyMungai-V- National Oil Corporation of Kenya [2012] eKLR where the Court adopted the test in Everret Aviation limited- V-Kenya Revenue Authority (Through the Commissioner of Domestic Taxes) [2013] eKLR which it set out the test to be applied when determining whether a person is an employee or an independent contractor.

135. The Tribunal finds that the test in Everret case (supra) is a four-pronged approach which should be applied holistically and requires the existence of:(a)Mutuality of obligations.(b)Integration of the activities of the contractor and the business activities, that is, whether the person's work is the primary business of the Appellant?(c)Control of the employer; and(d)Economic or business reality which considers whether the worker is in business on his or her own account, as an entrepreneur, or works for another person as an employee.

136. In light of the foregoing, the Tribunal is persuaded that the locum doctors are independent contractors and therefore not subject to payment of PAYE. This therefore follows that the additional assessments of PAYE, VAT and Withholding Tax liability for the years of income 2017 to 2020 were not justified.

Final Decision 137. In view of the foregoing the Tribunal, save for the Part Judgement entered on 23rd November, 2023 following the Partial Consent executed by the parties on 30th October, 2023, finds that the Appeal is merited and accordingly makes the following orders:-a)The assessment in relation to PAYE on locums and WHT tax on doctors payments covering the years 2017 to 2020 is hereby set aside.b)Each Party to bear its own costs.

138. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF APRIL, 2024ERIC NYONGESA WAFULA - CHAIRMANEUNICE NG’ANG’A - MEMBERELISHAH NJERU - MEMBERMUTISO MAKAU - MEMBERABRAHAM K.KIPROTICH - MEMBER