[2023] KETAT 986 (KLR)

Kenya Ports Authority v Commissioner of Domestic Taxes (Tax Appeal 247 of 2022) [2023] KETAT 986 (KLR) (Civ) (15 September 2023) (Judgment)

Neutral citation: [2023] KETAT 986 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 247 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

September 15, 2023

Between

Kenya Ports Authority

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a body corporate established under Section 3 of the Kenya Ports Authority Act, Cap 391 laws of Kenya, discharging such functions as are bestowed on it under the Statute. The Appellant’s primary statutory mandate is to maintain, operate, improve and regulate the scheduled ports and inland container depots.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent carried out an audit on some of the Appellant’s procurements of various port equipment for the period between 2016–2020. The Respondent specifically flagged out five procurements for withholding tax assessment.

4. Vide its letter dated 27th September 2021, the Respondent assessed Withholding income tax for the five contracts at Kshs. 1,545,942,429,00.

5. The Appellant objected to the withholding tax assessment vide a letter dated 25th October 2021, specifically giving reasons why the equipment procured was not subject to Withholding income tax for purposes of the Income Tax Act.

6. Vide a letter dated 24th January 2022 Ref. P051094522S, the Respondent gave an objection decision to the Appellant’s objection, confirming the assessments raised with amendments, thereby demanding Withholding tax of Kshs. 1,516,374,095. 00.

7. Aggrieved by the Respondent’s objection decision, the Appellant filed this Appeal on 9th March 2022.

The Appeal 8. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 7th March 2022 and filed on 9th March 2022: -a.The Respondent erred in law and in fact in determining that payments made by the Appellant for the equipment procured between 2016-2020 for the supply of cranes, a multipurpose boat and tug boat were in the nature of management and professional fees and that the payments were therefore subject to withholding tax amounting to Kshs. 1,516,374,095. 00. b.The Respondent erred in law and in fact in finding that withholding taxes are due for port equipment procured by the Appellant between 2016-2020 being cranes, a multipurpose boat and tug boat all of which were manufactured outside Kenya and whose customs entries reflective of the specific HS Code Numbers were made and import duties paid against those entries for purposes of importation to Kenya.c.The Respondent erred in law and in fact in determining that the Appellant ought to have withheld Withholding tax for purchase of equipment wholly manufactured outside Kenya and delivered fully built by the respective manufacturers, to the Appellant’s premises.d.The Respondent erred in law in interpreting and determining that Section 35 (1) of the Income Tax Act compels the deduction of taxes from a management and/or professional fee and/or training fee.e.The Respondent erred in law and fact in interpreting what constitutes “building, civil or engineering works” under the Income Tax Act, specifically under Section 35 (1) of the said Act.f.The Respondent erred in law and fact in interpreting and determining that the manufacture of equipment procured by the Appellant constituted engineering works under Section 35 (1) of the Income Tax Act for which management or professional fee or training fee was allegedly paid by the Appellant.g.The Respondent erred in law and in fact in determining that the Appellant ought to have deducted and remitted to the Respondent the Withholding taxes in respect of equipment procured between 2016-2020 being the supply of cranes, a multipurpose boat and tug boat.h.The Respondent erred in law and in fact in demanding from the Appellant a sum of Kshs. 1,516,374,095. 00 allegedly being the Withholding tax assessments inclusive of penalty and interest, for the years 2016-2020 in respect of the supply of cranes, a multipurpose boat and tug boat to the Appellant, equipment of which was manufactured outside Kenya and delivered fully built.

Appellant’s Case 9. The Appellant’s case is also premised on the following: -a.The Appellant’s Statement of Facts dated 7th March, 2022 and filed on 9th March, 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 30th January 2023 and filed on 1st February 2023 together with the legal authorities attached thereto.

10. The Appellant averred that the Respondent carried out an audit on some of the Appellant’s procurements of various port equipment for the period between 2016–2020. That the Respondent specifically flagged the following five procurements for withholding tax assessment:a.Tender No. KPA/050/2016-17/ME for Design, Manufacture, Supply and Commissioning of one new Tugboatb.Tender No. KPA/051/2016-17/ME for the Design, Manufacture, Supply and Commissioning of one new Multi-purpose boatc.Tender No. KPA/067/2016-17/TE for Design, Manufacture, Supply, Installation and Commissioning of Six (6) Fully Built Rail Mounted Gantry Cranesd.Tender No. KPA/032/2016-17/TE for Design, Manufacture, Supply, Installation and Commissioning of Two (2) Fully Built 100 Tonne Mobile Harbour Cranese.Tender No. KPA/117/2012-13/TE for Design, Supply, Installation, Testing and Commissioning of Three (3) Fully Built Ship to Shore Gantry Cranes

11. That the contracts signed between the Appellant and the respective suppliers for these procurements together with all documents relied upon by the Appellant were submitted to the Tribunal.

12. That vide its letter dated 27th September 2021, the Respondent assessed Withholding income tax for the five contracts at Kshs. 1,545,942,429,00 asserting that payments made to the suppliers were in the nature of management or professional fee or training fee allegedly because work done by the suppliers were engineering works and therefore subject of withholding tax under Section 35 of the Income Tax Act.

13. That for all the procurement contracts of the Appellant, the equipment were manufactured in their respective countries of origin and delivered to the Appellant in Kenya, fully built. That this was done by the respective suppliers in their ordinary conduct of business of selling the equipment off-the-shelf, to any of their potential customers.

14. That whenever the Appellant tenders for the procurement of equipment as in this case, it strictly procures the equipment fully built. That it does not procure services for the manufacture of the equipment because such manufacture is in the routine conduct of business by the suppliers of the equipment.

15. That the equipment specifications tendered for by the Appellant and given to the respective suppliers by the Appellant for the equipment it procured, were all within the range and standards ordinarily manufactured by the suppliers for any of their potential customers. That none of the equipment procured was tailor-made uniquely or specially for the Appellant.

16. That in all the 5 contracts the subject matter of this Appeal, the Appellant procured port equipment and not services which would otherwise have attracted payment of fees.

17. The Appellant averred that the equipment procured had specific HS Code Numbers which were used to make Customs entries for purposes of determination of their respective import duty in accordance with the prevailing legal regime at the time of their import to Kenya. The Appellant averred that specifically, it strictly complied with all the prevailing statutory requirements at the time the importation of the equipment was made.

18. That the payments made by the Appellant to its suppliers for procurement of port equipment as per the contracts were not in the nature of management or professional fee or training fee whatsoever, because what was being procured were fully built equipment and not services.

19. That these would have been engineering works if what was being procured and paid for were services. That the design aspects had already been settled by the Appellant itself, long before the contractors were procured to undertake the supplies as per the contract.

20. The Appellant stated that the inspection of the progress of construction of equipment could not be construed as inspecting engineering services but building the equipment. That the inspection of the construction was purely to ensure that the contractors met the technical specifications captured in the contracts, taking note of the complex nature of the equipment that was being procured.

21. That the designs had already been developed by the Appellant and the inspection of the progress of construction was only to confirm that the suppliers complied with the specifications already agreed upon. That the suppliers were not required to develop the designs but just to implement the designs developed by the Appellant beforehand, designs which were within the range of normal manufacture of equipment by the suppliers.

22. That the only service rendered by one supplier in Kenya to the Appellant, was training of the technicians at the Port of Mombasa where applicable, specifically with respect to Tender No. KPA/032/2016-17/ME. That the Appellant paid withholding tax in respect of this training.

23. That the Appellant objected to the withholding tax assessment vide a letter dated 25th October 2021.

24. That vide a letter dated 24th January 2022 Ref. P051094522S, the Respondent gave an objection decision to the Appellant’s objection, confirming the assessments raised with amendments, thereby demanding Withholding tax of Kshs. 1,516,374,095. 00.

25. That the contracts being for procurement of equipment by the Appellant, Customs Entries were made, reflective of the specific HS Code Numbers, for purposes of importing the equipment. That save for the component of local training conducted at Mombasa, no other service was procured by the Appellant.

26. That if the contracts were for engineering works as purported by the Respondent, then the Appellant wouldn’t have made Customs Entries for the equipment for purposes of their importation.

27. The Appellant identified the following issues for determination and submitted widely on the same.a.Whether the subject contracts were turnkey contracts;b.Whether the subject procurement contracts entered into by the Appellant between 2016 and 2020 were contracts of multiple supplies comprising of partly supply of goods and partly supply of services;c.Whether the Withholding tax is chargeable to the subject contracts and to what extent;d.Whether the Appellant’s Appeal is merited;

28. The Appellant submitted that Section 3 (1) of the Income Tax Act provides as follows: -“Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

29. That from the plain reading of the above provision, it is very clear that income tax would only be charged on income accrued or derived from Kenya.

30. The Appellant relied on the case of Motaku Shipping Agencies Limited vs. Commissioner of Income Tax [2014] eKLR where Lady Justice Kasango commented on Section 3 (1) of the Income Tax as follows: -“From section 3(1) of the Income Tax Act, it is clear that subject to the provisions of the Act, income of a person, whether resident or non-resident, is chargeable to income tax provided the income accrued in or was derived from Kenya. Therefore, income of a person cannot be subject to income tax unless it is income “which accrued in or was derived from Kenya”.

31. The Appellant also relied on the words of Lord Simonds in Russell vs. Scott [1948] 2 AllER1 who stated that:“...there is a maxim of income tax law which, though it may sometimes be over-stressed, yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax on him."

32. The Appellant submitted that the language of Section 3 (1) of the Income Tax Act does not impose an income tax on income not derived from Kenya and therefore the Respondent should have been guided accordingly.

33. The Appellant further submitted that nobody should impose an obligation where none is imposed by statute.

34. The Appellant submitted that for the supply of goods (water vessels and cranes), no income tax is chargeable as there is no single provision that exists imposing income tax on supply of goods. That further, the Respondent did not point out any provision to that effect.

35. That in the absence of an express provision imposing income tax on supply of goods, the Appellant submitted that no income tax was chargeable for the supply of goods component of the contract.

36. The Appellant submitted that Section 10 (1) of the Act provides as follows: -“For the 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;(b)a royalty;(c)interest and deemed interest;(d)the use of property;(e)an appearance at, or performance in, a public or private place for the purpose of entertaining, instructing, taking part in any sporting event or otherwise diverting an audience; or(f)an activity by way of supporting, assisting or arranging an appearance or performance referred to in paragraph (e) of this section; the amount thereof shall be deemed to be income which accrued in or was derived from Kenya: Provided that—i.this section shall not apply unless the payment is incurred in the production of income accrued in or derived from Kenya or in connexion with a business carried on or to be carried on, in whole or in part, in Kenya;ii.this section shall not apply to any such payment made, or purported to be made, by the permanent establishment in Kenya of a non-resident person to that non-resident person.”

37. That proviso (i) comes back to the issue of ‘accrued in and derived from Kenya’. That in the instant matter, the production, manufacturing and assembly of the equipment was wholly done outside Kenya in that what was imported into the Country was a fully-built equipment ready for use.

38. The Appellant submitted that the vessels and the cranes having been purchased subject to the turnkey contracts, the purchase transactions took place in the countries of origin of the various contractors. That consequently, it cannot be sustained in argument of whichever nature that the profits emanating from any such sales by the contractors accrued in or were derived from Kenya as envisaged under Section 3 (1) of the Income Tax Act, with the consequence that the Income Tax Act was inapplicable to the said purchase transactions.

39. That the sales were in the nature of turnkey contracts with the effect that what was deliverable was the end product for which purchase payments were made. That any schedule of payment agreed by parties cannot change the nature of a contract. That the payment schedule was simply to ensure the purchaser, in this instance, the Appellant met its obligation under the subject contracts.

40. The Appellant further stated that having submitted that the component of supply of goods of the contract was not subject to income tax, and that no payment of management and professional fee was made by the Appellant to the suppliers, Sections 10 and 35 (1) of the ITA are not applicable and no withholding tax was due from the Appellant.

41. That for the service component of the contracts, which were performed in Kenya, the Appellant remitted to the Respondent all the taxes due and that is not in dispute.

42. The Appellant also submitted that the Respondent’s claim that Withholding tax is chargeable for the entire contract without specifically pointing out which of the categories provided under Section 35 (1) as well as with no guidance on how the final figure was arrived at is ambiguous both to the Appellant and the Tribunal as well.

43. That in construing a contract, the terms and conditions thereof are to be read as a whole. That a contract must be construed keeping in view the intention of the parties. That no doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions.

44. The Appellant submitted that the Respondent was casting a broad net on a series of transactions and payments resulting to lack of clarity and uncertainty in the taxes charged.

45. The Appellant further submitted that payment of taxes is a matter of law and which has to be expressly provided for. That it is not dependent on the Respondent’s whims and/or wishes. That the applicable taxes to the subject contracts ought to be provided for by law and the provisions of the contract. That in this instance, the only component to which withholding of any income tax was applicable was on the limb of services rendered in the nature of trainings and for which the same was duly complied with.

46. The Appellant relied on the following cases.a.Ishikawajma-Harima Heavy vs. Director of Income Tax, Mumbai on 4 January, 2007 (Case No. Appeal (civil) 9 of 2007).b.Kenya Revenue Authority vs. Man Diesel & Turbo Se, Kenya [2021] eKLR.c.Motaku Shipping Agencies Limited vs. Commissioner of Income Tax [2014] eKLR.d.Republic vs. Kenya Revenue Authority, ex parte Bata Shoe Company (Kenya) Limited [2014] eKLR,e.Palm Oil Research and Development Board of Malaysia & Another vs. Premium Vegetable Oils SDN BHD [2004] 2 CLJ 265. f.Republic vs. Commissioner of Domestic Taxes Large Taxpayers Office Ex parte Barclays Bank of Kenya Limited (2012) eKLR.g.Keroche Industries Limited vs. Kenya Revenue Authority & 5 others (2007).h.East Africa Cables Limited vs. SMB Bank (K) Limited [2020] eKLR.i.Taib vs. Minister for Local Government & 4 others (2008) 3 KLR (EP) 433. j.Mount Kenya Bottlers Ltd & 3 others vs. Attorney General & 3 others [2019] eKLR.k.Cape Brandy Syndicate vs I.R. Commissioners [1921] 1KB.

Appellant’s Prayers 47. The Appellant made the following prayers: -a.That the Tribunal reviews and sets aside the objection decision by the Respondent dated 24th January 2022. b.That the Tribunal be pleased to declare that the Appellant ought not to remit Withholding tax of Kshs. 1,516,374,095. 00 on account of Withholding tax assessments for the years 2016-2020 on contractual works for the supply of cranes, a multipurpose boat and tug boat.c.That the Tribunal be pleased to declare that the payments made by the Appellant to its suppliers for procurement of port equipment were not in the nature of engineering works to attract management fee or professional fee or training fee whatsoever.d.Any other orders that the Tribunal may deem fit.e.That the Respondent be ordered to bear the costs for this Appeal.

Respondent’s Case 48. The Respondent’s case is premised on the hereunder filed documents: -a.The Respondent’s Statement of Facts dated 6th April 2022 and filed on 7th April 2022 together with the attachments thereof.b.The Respondent’s written submissions dated and filed on 16th December 2022 together with the legal authorities attached therewith.

49. The Respondent averred that the Appellant carried out a number of infrastructure expansive programs and part of the assets procured included rubber tired gantry cranes, shore gantry cranes, rail mounted cranes, a multipurpose boat and a tug boat.

50. That the contracts were awarded to various multinational enterprises based on a competitive procurement process.

51. That the contracts were for design, manufacture, supply, installation, testing and commissioning of the assets.

52. That the Appellant issued a notice of objection on 25th October 2021 to the Respondent’s decision to issue withholding tax assessments on the contractual works for the supply of cranes, a multipurpose boat and a tug boat at the Port of Mombasa amounting to Kshs. 1,545,942,429. 00.

53. That upon review of the objection, the Respondent issued its objection decision 24th January 2022.

54. The Respondent stated that upon considering the contractual works for the design and manufacture, supply, installation, testing and commissioning of the assets to be in the nature of management and professional fees, raised assessments for withholding tax which the Appellant ought to have withheld upon payment to the Contractors.

55. That the Respondent raised assessments on withholding tax for the period of 2019-2020 for the sum of Kshs. 1,545,942,429. 00 inclusive of penalty and interest.

56. That the Appellant aggrieved by the Respondent’s decision communicated vide a decision dated 24th January 2022 appealed against the decision at the Tribunal.

57. The Respondent submitted that the issue for determination in this Appeal is “Whether the Assessment raised by the Respondent on Withholding Tax of Kshs. 1,545,942,429 is due and payable.”

58. The Respondent submitted that it placed its reliance on Section 3 of the Income Tax Act which brings to charge for a year of income all income of a person whether resident or non–resident which accrues in or is derived in Kenya.

59. The Respondent submitted that Section 10 of the Income Tax Act further deems payment by a resident person or a person having a permanent establishment in Kenya to any other person in respect of management or professional or training fee to be income which is accrued in or derived from Kenya and is subject to withholding tax provided for under Section 35 (1) of the Income Tax Act.

60. The Respondent placed reliance on Sections 10 and 35(1) of the Income Tax Act. That Section 35 (1) of the ITA provides that:-“Every person shall upon payment of any amount to any non -resident person not having a permanent establishment in Kenya in respect of-a.Management or professional fee or training feeb........Which is chargeable to tax, deduct therefrom tax at the appropriate non­resident rate;Provided that for purposes of this paragraph, contractual fee within the meaning of management or professional fee shall mean payment for work done in respect of building, civil or engineering works”.

61. The Respondent submitted that the assessments are well within the law.

62. The Respondent stated that a review of the technical specifications of each contract revealed the detailed description of the works that were to be undertaken by each contractor with respect to the desired design, materials, equipment and the construction works. That the subject contracts the Appellant entered into were turnkey contracts.

63. That a turnkey contract is contract under which a firm agrees to fully design, construct and equip a manufacturing/business/service facility and turn the project over to the purchaser when it is ready for operation.

64. The Respondent averred that the incomes earned by all the non-resident companies in respect of the contracts awarded by the Appellant for the offshore work in respect of a Kenyan turnkey contract were and are subject to tax in Kenya as per Section 10 of the Income Tax Act provided that 'the off-shore component of a contract is intimately related and intertwined with the on-shore components that without the collaborative execution of the components the contract cannot be fully and duly executed.

65. The Respondent submitted that the payments made to the multinational contractors for the design, manufacture, supply, installation, testing and commissioning of the assets at the Port of Mombasa were of the nature of management and professional fees as defined under Section 2 of the Income Tax Act. That it is therefore follows that the Appellant ought to have deducted withholding tax upon payment to the contractors in compliance with Section 35 (1) of the Income Tax Act.

66. The Respondent disagreed with the Appellant’s assertion that the equipment was bought off-the-shelf, as any potential customers would purchase because the contracts between the parties were turnkey contracts where the firm agrees to fully design, construct and equip and turn the project over to the purchaser when it's ready for operation.

67. The Respondent submitted that from the review of the Contracts entered into by the Appellant, these lump sum contracts contained specific requirements for design and construction works.

68. That the payments to the contractors were staggered with an advance payment of 20% of the contract value upon signing of the contract and issuance of a bank guarantee and the remaining 80% being payable in installments upon achievement of various milestones as approved by the Appellant's engineer or appointed representative.

69. That additionally and for the purposes of covering the defect liability, a period retention money (or an equivalent warranty bond), was pegged at 5% of the contract value. That there was also extensive consultation at procurement stage hence the structure of each contract by the Appellant was similar to the structured model of the Silver book.

70. The Respondent submitted that the payments made to the multinational contractors for the design, manufacture, supply, installation, testing and commissioning of the assets at the Port of Mombasa were of the nature of management and professional fees as defined under Section 2 of the Income Tax Act.

71. That the Appellant ought to have deducted Withholding tax upon payment to the contractors in compliance with Section 35 (1) of the Income Tax Act.

72. The Respondent submitted that the technical specifications of the contracts revealed that the contracts contained both aspects of onshore (local) performance and offshore (foreign) performance. That the local performance centered on training and commissioning while offshore performance centered on manufacturing of the subject assets hence this presented a direct attribute to a single contact for each of the suppliers.

73. That the Oxford Advanced Learner's Dictionary defines engineering as“the activity of applying scientific knowledge to the design, building and control of machines, roads, bridges, electrical equipment, etc.”

75. That from the above definition the design, manufacture to commissioning falls within the meaning engineering works. That further, a turnkey contract is a contract under which a firm agrees to fully design, construct and equip a business, service facility and turn the project over to the purchaser when it is ready for operation.

76. The Respondent submitted that the claim by the Appellant that engineering works is in relation to construction of buildings is unfounded. That the express provisions of the statute provide for building, civil or engineering works. That the statute used the word or which makes “engineering works” independent of the other words. That from the above definitions, engineering is defined as the activity of applying scientific knowledge to the design, building and control of machines, roads, bridges and electrical equipment.

77. The Respondent submitted that in the named contracts what was important was not the commodities but the nature or condition in which the commodities were needed. That to achieve that purpose, the contractors were required to design the products in a specified manner, manufacture in a specified manner where the Appellant would monitor the progress before delivery, training and commissioning.

78. The Respondent relied on the following cases: -a.Kenya Revenue Authority vs. Republic (Ex-parte Fintel Ltd) [2019] eKLR.b.Ocean Freight (E.A) Limited vs. Commissioner of Domestic Taxes [2020] eKLR.c.Phoenix Motors Ltd vs. National Provident Fund Management Board (1993) 1 NWLR (PT 272) 18. d.State of Gujarat vs. M/s. Kailash Engineering Co. (Pvt.) Ltd. [30].e.Saipem Contracting Nig. Ltd & 2 Ors. vs. Federal Inland Revenue Service & 2 Ors 2018. f.Cape Brandy Syndicate vs. I.R.C 1KB 64,71.

Respondent’s Prayers 79. The Respondent made the following prayers to the Tribunal: -a.The Appeal be dismissed with costs.b.The Respondent’s objection decision dated 24th January 2022 be upheld.

Issues for Determination 80. Having reviewed the pleadings, documentation and the submissions of the parties, the Tribunal is of the considered view that there are two issues for its determination. The issues are as follows: -a.Whether the contracts were on-shore or off-shore projects.b.Whether the Respondent erred in law and fact by charging Withholding tax to the subject contracts.

Analyisis and Findings 81. Having established the issues for its determination, the Tribunal proceeds to analyse the issues as hereunder:-

a. Whether the contracts were on-shore or off-shore projects. 82. The main dispute on this issue is whether the procurements consisted of on-shore and off-shore components.

83. The Appellant on its part submitted that for all the procurement contracts, the equipment was manufactured in their respective countries of origin and delivered to the Appellant in Kenya, fully built.

84. That in all the 5 contracts the subject matter of this Appeal, the Appellant procured port equipment and not services which would otherwise have attracted payment of fees.

85. The Appellant submitted that the equipment procured had specific HS Code Numbers which were used to make Customs entries for purposes of determination of their respective import duty in accordance with the prevailing legal regime at the time of their import to Kenya. The Appellant averred that specifically, it strictly complied with all the prevailing statutory requirements at the time the importation of the equipment was made.

86. That the payments made by the Appellant to its suppliers for procurement of port equipment as per the contracts were not in the nature of management or professional fee or training fee whatsoever, because what was being procured were fully built equipment and not services.

87. That the only service rendered by one supplier in Kenya to the Appellant, was training of the technicians at the Port of Mombasa, specifically with respect to Tender No. KPA/032/2016-17/ME. That the Appellant paid withholding tax in respect of this training.

88. That the Contracts being for procurement of equipment by the Appellant, Customs Entries were made, reflective of the specific HS Code Numbers, for purposes of importing the equipment. That save for the component of local training conducted at Mombasa, no other service was procured by the Appellant.

89. That, if the contracts were for engineering works as purported by the Respondent, then the Appellant wouldn’t have made Customs Entries for the equipment for purposes of their importation.

90. On the other hand, the Respondent disagreed with the Appellant’s assertion that the equipment were bought off-the-shelf, as any potential customers would purchase because the contracts between the parties were turnkey contracts where the firm agrees to fully design, construct and equip and turn the project over to the purchaser when it's ready for operation.

91. The Respondent submitted that from the review of the Contracts entered into by the Appellant, these lumpsum contracts contained specific requirements for design and construction works.

92. The Respondent submitted that the payments made to the multinational contractors for the design, manufacture, supply, installation, testing and commissioning of the assets at the Port of Mombasa were of the nature of management and professional fees as defined under Section 2 of the Income Tax Act.

93. The Respondent submitted that the technical specifications of the contracts revealed that the contracts contained both aspects of onshore (local) performance and offshore (foreign) performance. That the local performance centered on training and commissioning while offshore performance centered on manufacturing of the subject assets hence this presented a direct attribute to a single contact for each of the suppliers.

94. The Tribunal has carefully looked at each of the five contracts. As their title clearly communicate, they were for design, manufacture, supply and commission the following:a.Tender No. KPA/050/2016-17/ME for design, manufacture, supply and commissioning of one new tugboat.b.Tender No. KPA/051/2016-17/ME for the design, manufacture, supply and commissioning of one new multi-purpose boat.c.Tender No. KPA/067/2016-17/TE for design, manufacture, supply, installation and commissioning of six (6) fully built rail mounted gantry cranes.d.Tender No. KPA/032/2016-17/TE for design, manufacture, supply, installation and commissioning of two (2) fully built 100 tonne mobile harbour cranes.e.Tender No. KPA/117/2012-13/TE for design, supply, installation, testing and commissioning of three (3) fully built ship to shore gantry cranes.

95. From the above, it is clear that the boats to be supplied were new and the that the cranes to be supplied were fully built.

96. It is also clear from the contracts that all design and manufacturing was to be done in the countries of origin of the boats and the cranes.

97. It is also clear from the documents submitted by the Appellant and not contested by the Respondent that importation documents were completed and duties paid at the Port of entry. This was done because it is equipment that was being imported.

98. The Appellant had submitted, and which was not denied by the Respondent, that the only on-shore aspect of the contracts was training of technicians in Mombasa on which it paid the Withholding tax to the Respondent.

99. Since no evidence was provided that showed that any of the aspects of the contracts other than the isolated training were performed in Kenya, the Tribunal finds that the Appellant has discharged its burden of proving that the contracts were off-shore projects.a.Whether the Respondent erred in law and fact by charging withholding tax to the subject contracts.

100. Section 3 (1) of the Income Tax Act provides as follows with regard to income tax:-“Subject to, and in accordance with, this Act, a tax to be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.”

101. The Appellant submitted that from the plain reading of the above provision, it is clear that income tax would only be charged on income accrued or derived from Kenya.

102. The Appellant relied on the case of Motaku Shipping Agencies Limited vs. Commissioner of Income Tax [2014] eKLR where Lady Justice Kasango commented on Section 3 (1) of the Income Tax Act as follows:-“From Section 3(1) of the Income Tax Act, it is clear that subject to the provisions of the Act, income of a person, whether resident or non-resident, is chargeable to income tax provided the income accrued in or was derived from Kenya. Therefore, income of a person cannot be subject to income tax unless it is income ‘which accrued in or was derived from Kenya’”.

103. The Appellant submitted that the language of Section 3 (1) of the Income Tax Act does not impose an income tax on income not derived from Kenya and therefore the Respondent should have been guided accordingly.

104. The Appellant further urged that nobody should impose an obligation where none is imposed by statute.

105. The Appellant maintained that for the supply of goods (water vessels and cranes), no income tax is chargeable as there is no single statutory provision that exists imposing income tax on supply of goods. That further, the Respondent did not point out any provision to that effect.

106. That in the absence of an express provision imposing income tax on supply of goods, the Appellant submitted that no income tax was chargeable for the supply of goods component of the contract.

107. The Appellant equally submitted that the Respondent’s claim that Withholding tax is chargeable for the entire contract without specifically pointing out which of the categories is provided under Section 35 (1) as well as with no guidance on how the final figure was arrived at is ambiguous both to the Appellant and the Tribunal as well.

108. On the other hand, the Respondent stated that upon considering the contractual works for the design and manufacture, supply, installation, testing and commissioning of the assets to be in the nature of management and professional fees, it raised assessments for withholding tax which the Appellant ought to have withheld upon payment to the contractors.

109. The Respondent submitted that the payments made to the multinational contractors for the design, manufacture, supply, installation, testing and commissioning of the assets at the Port of Mombasa were of the nature of management and professional fees as defined under Section 2 of the Income Tax Act.

110. The Tribunal has looked at Section 3(1) of the Income Tax Act and it is clear that income tax can only be charged on income accrued or derived from Kenya.

111. The Tribunal is bound by the holding of Lady Justice Kasango in Motaku Shipping Agencies Limited vs Commissioner of Income Tax [2014] eKLR (supra)

112. Having established that the five contracts were off-shore projects that were all implemented in the countries of origin, other than the training conducted in Mombasa for which withholding tax was paid, the Tribunal finds that no income accrued or was derived from Kenya. It therefore follows that no income tax should have been levied in relation to the five contracts entered into by the Appellant.

113. In light of the above, the Tribunal finds that the Respondent erred in law and fact by charging withholding tax to the subject contracts.

Final Decision 114. The upshot of the foregoing analysis is that this Appeal is merited and the Tribunal accordingly proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 24th January 2022 be and is hereby set aside.c.Each party to bear its own costs.

115. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 15TH DAY OF SEPTEMBER, 2023ERIC NYONGESA WAFULA...........CHAIRMANCYNTHIA B. MAYAKA...................MEMBERGRACE MUKUHA............................MEMBERJEPHTHAH NJAGI...........................MEMBERABRAHAM K. KIPROTICH...........MEMBER