[2023] KETAT 579 (KLR)

Kenya National Highways Authority (KENHA) v Commissioner of Legal Services & Board Coordination (Appeal 123 of 2022) [2023] KETAT 579 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 579 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 123 of 2022

RM Mutuma, Chair, EN Njeru, D.K Ngala, EK Cheluget & RO Oluoch, Members

June 29, 2023

Between

Kenya National Highways Authority (Kenha)

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a statutory body established under the Kenya Roads Act of 2007 and inaugurated in September 2008. Its mandate is in the development, rehabilitation, and maintenance of the country’s National Trunk Roads.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya. The Kenya Revenue Authority (“KRA”) is an agency of the Government of Kenya for assessing, collecting, and accounting for all revenue.

3. The Appellant embarked on two projects for road works which were:a.The Multinational Kapchorwa-Saum-Kitale and Eldoret Bypass which was a project under the Department of Infrastructure implemented by the Appellant, China State Construction Engineering Corporation, China Wu Yi Limited, Abdul Mullick Associates, and Sari Consulting; andb.The Nuno-Modogashe Road under the Department of Infrastructure was implemented by KeNHA, Zhongmei Engineering Group Limited, and Abuljebain Engineering Consulting Office.

4. The Respondent issued the Appellant with a Notice of Preliminary Findings dated 19th May 2021 demanding tax due of Kshs 670,404,634. 00 which included Withholding VAT of Kshs 532,317,846. 00 Withholding Income tax on a foreign consultant of Kshs 12,890,161. 00 and Reverse VAT of Kshs 68,923,196. 00.

5. On 5th July 2021, the Respondent issued the Appellant with additional assessments for the period 1st January 2017 to 31st December 2020 for the Kapchorwa-Saum-Kitale and Eldoret Bypass project totaling Kshs 265,268,981. 00 as principal taxes and Kshs 473,938,691. 00 on the Nuno-Modogashe Road project for the period 2016 to 2020 being Withholding tax VAT, Withholding tax Income tax, and Reverse VAT.

6. The Appellant raised an objection to the assessment dated 3rd August 2021 which was partly allowed by the Respondent dropping the taxes on the Multinational Kapchorwa-Saum-Kitale and Eldoret Road Project together with the Reverse VAT on the Nuno-Modogashe Road project while confirming Withholding income tax amounting to Kshs 74,747,323. 00 including penalties and interests on 24th December 2021.

7. Being dissatisfied with the objection decision, the Appellant lodged a Notice of Appeal dated and filed on 21st January, 2022.

The Appeal 8. The Appeal is premised on the following grounds as listed in the Memorandum of Appeal dated 3rd February, 2022 and filed on 7th February, 2022:-a.The Respondent erred in law and fact by taxing Withholding Income tax for foreign consultants providing services to the Nuno-Modogashe Road Project an official aid-funded project jointly financed by the Government of Kenya and a consortium of Middle East-based banks consisting of Kuwait Fund for Arab Economic Development (KFAED), Saudi Development Fund (SDF), Arab Bank for Economic Development in Africa (BADEA), OPEC.b.The Respondent erred in law and fact by tasking the Appellant with the responsibility to collect Withholding Income tax for foreign consultants when the Appellant was not in a position to withhold any taxes with respect to payments made to the supervising consultant as the funds were within full control of the Kuwait Fund for Arab Economic Development (KFAED) and the Appellant could not instruct the financier on the application of funds.c.The Respondent misapprehended the provisions of Section 35 of the Income Tax Act read together with the National Treasury Circular No. 15/2019 on the Guidelines for payments made to contractors or other persons engaged in the implementation of official Aided Funded Projects as the Withholding Income tax for Foreign consultant is exempted by virtue of an express provision within the agreement between the Republic of Kenya and Kuwait Fund for Arab Economic Development (KFAED) in respect to the project.d.The Respondent erred in law and fact by failing to appreciate the provisions of an express provision within the Agreement between the Republic of Kenya and the Kuwait Fund for Arab Economic Development (KFAED) with respect to the project which emphasises that:-“The principal of, and interest on the loan and all other charges shall be paid without deduction for and free from any tax in force or charges under the laws of the borrower (Republic of Kenya) or laws in effect in its territories whether at present or in future… this Agreement shall be free from any taxes, imposts, levies, fees, and dues of any nature imposed under the laws of the borrower or the laws in effect in its territories, whether at present or in the future or in connection with the execution, issue, delivery, or registration thereof and the borrower shall pay or cause to be paid all such taxes, imposts, levies, and duties, if any, imposed under the laws of the country or countries in whose currency the loan may be repaid.”e.The Respondent erred in law by failing to appreciate that the Government of Kenya had entered into a binding legal obligation in which any form of taxes including withholding taxes could not be subject to taxation within the jurisdiction of Kenya.

The Appellant’s Case 9. The Appellant’s case was premised on its Statement of Facts dated 3rd February 2022 and filed on 7th February 2022.

10. The Appellant stated that the project it implemented was an officially declared aid-funded project through a letter dated 12th January 2016 by the National Treasury to the Respondent and the contested tax is the withholding tax under the Income Tax Act which requires to be deducted at the source emanating from payments made to the supervising consultant Abduljebain Engineering Consulting Office (AECO) by the Kuwait Fund for Arab Economic Development (KFAED).

11. It reiterated that as per the Income Tax Act read together with the National Treasury Circular No. 15/2019 on the Guidelines for payments made to contractors or other persons engaged in the implementation of official Aided Funded Projects Withholding tax under the Income tax is exempted if it is expressly provided for under the financing agreement.

12. It contended that the contested tax is exempted under an express provision within the Agreement between the Republic of Kenya and the Kuwait Fund for Arab Economic Development (KFAED) with respect to the project.

13. It quoted Sections 4. 17 and 4. 18 of the Agreement and asserted that the project being an official aid funded project with the financing agreement clearly exempting all forms of taxes, the contested tax should be set aside.

14. It averred that the Kuwait Fund for Arab Economic Development (KFAED) as one of the financiers fully funded and paid the supervising consulting AECO as such the Appellant was not in a position to withhold any taxes with respect to payments made to the supervising consultant as the funds were within the full control of the Kuwait Fund for Arab Economic Development (KFAED) and the Appellant could not instruct the financier on the application of funds.

The Appellant’s prayers 15. The Appellant prayed that the Tribunal finds for the Appellant and hold that:-a.This Appeal be allowed;b.A declaration that the Respondent wrongfully imposed on the Appellant an obligation to get withholding tax for foreign consultants under the project;c.The decision of 24th December 2021 with respect to withholding Income tax for a foreign consultant be set aside; andd.The Appellant be awarded costs of the Appeal

The Respondent’s Case 16. The Respondent’s case is premised on its Statement of Facts dated and filed on 9th March 2022.

17. It stated that the National Treasury on 12th January 2016 advised the Respondent that the construction of Nuno Modogashe Road was an official aid-funded project only financed by Arab Bank for Economic Development in Africa (BADEA), OFID, the Kuwait Fund for Arab Economic Development (KFAED), SFD, and ADFD.

18. It averred that the National Treasury exemption letter dated 12th January 2016 did not exempt Withholding income tax or income tax.

19. It reiterated that the National Treasury Circular No. 15/2019 guided that in a scenario similar to the Appellant where the payer of the funds is not the taxpayer, then the Appellant should have issued instructions to the payer or the National Treasury to deduct the Withholding income tax to the Respondent.

20. It averred that Section 35 and the 1st Schedule Paragraph 10 of the Income Tax Act CAP 470 does not expressly exempt official aid funded projects from Withholding Tax.

21. It stated that it is trite law that in a taxing act one has to look merely at what is clearly stated, and, there being no provision in the Income Tax Act exempting the official aid funded projects from Withholding tax, the Appellant ought not to have made any presumptions and failed to withhold the income tax.

22. It contended that the Appellant’s claim that it was not in a position to withhold any taxes with respect to payments made to the supervising consultant as the funds were within the full control of the Kuwait Fund for Arab Economic Development (KFAED) and thus could not instruct the financier on the Application of funds.

23. It cited the National Treasury Guidelines issued under the Treasury Circular No. 15/2019 under Paragraph 9 (b) and averred that it is clear that the payer of the services that attract Withholding Income tax should deduct Withholding income tax and the Appellant should have advised the financiers to withhold.

The Respondent’s prayers 24. The Respondent prayed for orders that this Tribunal:-a.Dismisses the Appeal for lack of merit;b.Upholds the Respondent’s confirmed assessment of Kshs 74,747,322. 00 as proper and in conformity with the provisions of the law;c.Awards the Respondent the cost of the Appeal.

The Parties Submissions On whether Withholding Income Tax was due or became payable from the project 25. The Appellant cited Section 13(1) and Part 1 of the First Schedule of the Income Tax Act and submitted that when the minister certifies that any income of any person from any management or professional fees, royalty, or interest to be free of tax by the terms of an agreement to which the Government is a party either as principal or guarantor and that it is in the public interest that such income shall be exempt from tax.

26. It submitted that the source of the funds to the supervising consultant AECO was directly paid by the Kuwait Fund for Arab Economic Development (KFAED) and not the Appellant.

27. It cited Sections 4. 17 and 4. 18 of the Loan Agreement and submitted that the Agreement falls within the tax exemption of Section 13 of the Income Tax Act as read together with Paragraph 11 of Part I of the First Schedule of the Income Tax Act. It further relied on the case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64 where the case of T.M. Bell v Commissioner of Income Tax [1960] EALR 224 was applied in which Rowlatt J. held as follows:“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 is to be implied. One can only look fairly at the language used… if a person who ought 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.”

28. The Appellant submitted that the loan agreement was signed between the Republic of Kenya and the Kuwait Fund for Arab Economic Development and the tax exemption was granted by the Minister certifying the matter as exempt making it reasonable for the financiers and the Appellant who was assigned the responsibility for the project holds the legitimate expectation that any procedural technicalities needed to be fulfilled by the Government, were fulfilled.

29. It relied on the case of Communications Commission of Kenya & 5 others v Royal Media Services Limited and 5 others where the Supreme Court held that:- “Legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation would arise when a body, by representation or by past practice has aroused an expectation that is within its power to fulfill. Therefore, for an expectation to be legitimate, it must be founded upon a promise or practice by a public authority that is expected to fulfill the expectation.”

30. It also relied on National Director of Public Prosecutions v Phillips where it was held that:- “(i) that there must be a representation which is clear, unambiguous and devoid of relevant qualification; (ii) that the expectation must be reasonable in the sense that a reasonable person would act upon it; (iii) that the expectation must have been induced by the decision-maker; and (iv) that it must have been lawful for the decision-maker to make such representation.”

31. It argued that legitimate expectation ought not to be frustrated because it is the root of the constitutional principle of the rule of law which requires predictability and certainty in Government dealings with the public. It added that the Agreement between the Republic of Kenya and the Kuwait Fund for Arab Economic Development (KFAED) together with the Cabinet Secretary for Treasury who certified the project as an aid-funded project on 12th January 2016 set the expectation that the project was to be exempted from any tax including WHIT which is being impugned.

32. It maintained that the agreement and the certification meet the requirements of Section 13 and Part 1 Paragraph 11 of the First Schedule of the Income Tax Act thus making the Nuno-Modogashe Project exempt from all taxes including Withholding Income Tax.

On Whether the Appellant is the Withholder tasked with ensuring WHIT is withheld 33. The Appellant argued that even if withholding income tax was deductible from the project, the Appellant is not a proper person to deduct the WHIT in the present matter which WHIT is required to be deducted at the point of actual payment by the person making the payment per Section 35 of the Income Tax Act as AECO was directly paid by the Kuwait Fund for Arab Economic Development (KFAED) who should be the withholder and not the Appellant.

34. The Appellant further argued that the Income Tax Act does not delegate the authority of the withholder to another person as the withholder has to compute and deduct withholding tax at the required rate at the point of payment and the Appellant was not in a position to withhold any taxes from payments made to the supervising consultant since it was neither the source of the funds nor had access to the funds used to pay the project supervising consultant.

35. The Appellant reiterated that to create responsibility and accountability across Government Ministries, Departments, and Agencies, the National Treasury issued the National Treasury Circular No. 15/2019 dated 11th December 2019 on the Guidelines for payments made to contractors or other persons engaged in the implementation of official Aided Funded Projects which was introduced well after AECO had been paid in full hence its effect of transferring Withholder’s duty under Section 35 of the Income Tax Act from foreign withholders to the relevant Ministries, Departments, and Agencies had no effect on the income tax status of the consultant in respect to the present project.

36. It added that the circular as a guideline to the Income Tax Act cannot be interpreted retrospectively in imposing tax liability to the Appellant. It relied on the case of Republic v Joe Mucheru, Cabinet Secretary Ministry of Information Communication and Technology & 2 Others; Katiba Institute & Another in which the court cited the case of Secretary of State For Social Security v Tunnicliffe [1991] 2 All ER 712, 724f-g where it was held as follows:- “that Parliament is presumed not to have intended to alter the law applicable to past events and transactions in a manner which is unfair to those concerned in them unless a contrary intention appears. It is not simply a question of classifying an enactment as retrospective or not retrospective. Rather it may well be a matter of degree - the greater the unfairness, the more it is to be expected that Parliament will make it clear if that is intended.”

37. It further cited the case of Samuel Kamau Macharia and Another v Kenya Commercial Bank Ltd & 2 Others, [201] eKLR where the court stated that:- “ As for non-criminal legislation, the general rule is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or evidence are prima facie prospective, and retrospective effect is not to be given to them unless, by express words or necessary implication, it appears that this was the intention of the legislature.”

Issues for Determination 38. After perusing the Memorandum of Appeal and parties' Statements of Facts, and witness statements, together with their submissions and documentation attached therewith, the Tribunal is of the considered view that the following is the only issue for determination:

SUBDIVISION - a. Whether withholding income tax is due and payable by the Appellant.

Analysis and Findings 39. The Tribunal wishes to analyse the issues as hereinunder.

a. Whether withholding tax is due and payable by the Appellant. 40. The Appellant contends that the project it implemented was an officially declared aid-funded project through a letter dated 12th January 2016 by the National Treasury to the Respondent and the withholding tax requires to be deducted at the source emanating from payments made to the supervising consultant Abduljebain Engineering Consulting Office (AECO) by the Kuwait Fund for Arab Economic Development (KFAED).

41. It reiterated that Withholding tax under the Income Tax is exempted if it is expressly provided for under the financing agreement and that the contested tax is exempted by an express provision within the Agreement between the Republic of Kenya and the Kuwait Fund for Arab Economic Development (KFAED) in respect to the project under Sections 4. 17 and 4. 18 of the Agreement.

42. It averred that the Kuwait Fund for Arab Economic Development (KFAED) as one of the financiers fully funded and paid the supervising consulting AECO and it was not in a position to withhold any taxes with respect to payments made to the supervising consultant as the funds were within the full control of the Kuwait Fund for Arab Economic Development (KFAED) and the Appellant could not instruct the financier on the application of funds.

43. The Respondent reiterated that the National Treasury on 12th January 2016 advised it that the construction of Nuno Modogashe Road was an official aid-funded project only financed by Arab Bank for Economic Development in Africa (BADEA), OFID, the Kuwait Fund for Arab Economic Development (KFAED), SFD, and ADFD and the letter dated 12th January 2016 did not exempt Withholding income tax nor income tax.

44. It was the Respondent’s position that the National Treasury Circular No. 15/2019 guided that in a scenario similar to the Appellant where the payer of the funds is not the taxpayer, then the Appellant should have issued instructions to the payer or the National Treasury to deduct the Withholding income tax to the Respondent.

45. It further averred that Section 35 and the 1st Schedule Paragraph 10 of the Income Tax Act CAP 470 do not expressly exempt official aid funded projects from Withholding tax and under the Treasury Circular No. 15/2019 under Paragraph 9 (b), the payer of the services that attract Withholding income tax should deduct Withholding income tax and the Appellant should have advised the financiers to withhold.

46. Under the National Treasury Circular No. 15/2019 dated 11th December 2019 on the Guidelines for payments made to contractors or other persons engaged in the implementation of official Aided Funded Projects, Part III provides as follows:“3. OAFPs are exempt from direct taxes such as Value Added Tax, Import Duty, fees, and levies imposed by the Government. However, unless exempt under the Income Tax and expressly provided for in the Financing agreements, income earned by contractors or other persons engaged in the execution of the projects is subject to tax.4. The Income Tax Act require that the withholding Income Tax be deducted at the appropriate resident or non - resident rate, as the case may be, on any payments made to contractors and other persons engaged in the implementation of the OAFPs. In this case, the Implementing MDAs and County Governments are withholding Income Tax Agents. Development Partners, by virtue of being non-residents, are not withholding income tax agents under the said Acts.”

47. From the foregoing, the Appellant’s reliance on Paragraph 3 of the Guidelines falls short as it requires that, together with the express wording of the Financing Agreements, the use of the word “and” connotes that the Income Tax Act should also expressly exempt the Withholding tax due. Whereas the Agreement under paragraphs 4. 17 and 4. 18 clearly exempt the taxes due, the Appellant has not shown the part of the Income Tax Act that exempts Withholding income tax from MDAs.

48. This part also provides under Paragraph 4 that the Implementing Ministry, Departments, and Agencies, in this case, the Appellant are Withholding Tax Income Tax Agents of the payments made to contractors as the non-resident development partners are not tax agents. The submission by the Appellant that it is not a Withholding Tax Agent, therefore, fails by dint of Paragraph 4 provided.

49. The Guidelines were proffered by the National Treasury because, per Paragraph 5 of the Guidelines, “it was established that MDAs/County Governments, who are Withholding Income Tax Agents, have been facing challenges in withholding income tax on direct payments on direct payments made by Development Partners to contractors or other persons engaged in the implementation of the projects.”

50. Part IV Paragraph 9 (b) provides as follows:-“After the processing of the payments, the Ministries, Departments, and Agencies (MDAs)/County Governments shall, where:-(a)…(b)Development partners make payments in respect to the contract sum directly to contractors or other partners involved in the OAFPs, submit the processed payment request to the National Treasury and Planning for further processing. The request shall be accompanied by proof of exemption or payment of Withholding Tax relating to the Payment Certificate/Fee Note for which the payment is being requested.

51. The Tribunal observes however that the Circular by the National Treasury perceives a situation where the contract sum is directly paid by a non-resident development partner directly to a contractor who is resident in Kenya. The Circular does not provide for a scenario where the contractor is also a non-resident legal person that is directly paid by a development partner who is a non-resident.

52. The Respondent’s argument that the Appellant ought to have “advised” the contractor and/or the development partner to withhold from the partner borders on an absurdity as the failure by the Appellant to “advise” a development partner who has not been established as an agent to withhold income paid to a non-resident contractor is not enough reason for the Respondent to demand the same from the Appellant. No part of the law or the Circular from the National Treasury on the Guidelines for Withholding Income Tax on Officially Aid Funded Projects or the Income Tax Act provides that the Appellant ought to have “advised” a foreign non-resident development partner to withhold income tax on money paid to a non-resident contractor or implementor of the OAFP.

53. This has been clearly set in the oft-cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB 64 where the case of T.M. Bell v Commissioner of Income Tax [1960] EALR 224 was applied in which Rowlatt J. held as follows:“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 is to be implied. One can only look fairly at the language used… if a person who ought 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.”

54. To this end, the Tribunal agrees with the Appellant in the sense that there was no way for the Appellant to withhold the tax on money paid directly to the non-resident contractor from the non-resident development partner. The Tribunal, therefore, finds that the Respondent erred in charging Withholding income tax on the Appellant.

Final Decision 55. The upshot to the foregoing is that the Appeal has merit and the Tribunal consequently makes the following Orders;-i.The Appeal be and is hereby allowed.ii.The Respondent’s objection decision dated 24th December, 2021 be and is hereby set aside.iii.Each party to bear its own costs.

56. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE, 2023. ROBERT M. MUTUMACHAIRPERSON………………………………………..ELISHAH N. NJERU DELILAH K. NGALAMEMBER MEMBER………………………….EDWIN K. CHELUGET RODNEY O. OLUOCHMEMBER MEMBER