[2024] KETAT 1278 (KLR)

Kenya Ports Authority v Commissioner of Domestic Taxes (Tax Appeal E499 of 2023) [2024] KETAT 1278 (KLR) (23 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1278 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E499 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

August 23, 2024

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 of laws of Kenya discharging such functions as are bestowed on it under the statute.

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 conducted assessments relating to withholding tax for the years 2020 to 2022.

4. The Appellant objected to the assessments on 22nd June, 2023.

5. The Respondent issued an objection decision on 10th July, 2023.

6. The Appellant being dissatisfied with the objection decision, filed the instant Appeal on 8th August, 2023.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 21st August, 2023 and filed on 22nd August, 2023:a.The Respondent erred in law and in fact in determining that income earned by Japan Port Consultants Ltd (JPCL) for the years 2020-2022 amounting to Kshs.78,533,571. 00 (Inclusive pf penalty and intertest) on contractual consulting services (Detailed Design, Construction Supervision) was subject to withholding tax on income of a non-resident accrued and derived in Kenya.b.The Respondent erred in law and in fact by not factoring the Exchange of Notes, referenced MOF/ERD/11/79/38/01 dated 16th January, 2015, which is an International Treaty between the Government of Japan through the Japan International Cooperation Agency (JICA) and the Government of the Republic of Kenya specifically for the Mombasa Port Development Project (MPDP) Phase I &Il Loan KE-P30. The said Treaty between the two sovereigns exempted Japan International Cooperation Agency (JICA), the Contractor, Companies, Suppliers, Consultants, and employees of the Japanese companies from all fiscal levies, taxes and duties payable on income derived within Kenya during the implementation of the MPDP Phase II Project.c.The Respondent erred in law and in fact by computing withholding tax assessments for JPCL to the Appellant where it was not practically able to deduct said tax. The Respondent did not make any payments to JPCL for services provided. It's role was to provide completion certificates and the payments were made by JICA and not the Respondents.d.The Respondent erred in law and in fact in averring that the suit Exchange of Notes, referenced MOF/ERD/11/79/38/01 dated 16th January, 2015, which is an International Treaty between the Government of Japan through the Japan International Cooperation Agency (JICA) and the Government of the Republic of Kenya specifically for the Mombasa Port Development Project (MPDP) Phase l &Il Loan KE-P30, was superseded by a letter from the Principal Secretary (PS) National Treasury and Planning under reference number DFN 15/232/011 dated 10th August, 2018 addressed to the Commissioner and copied to the Appellant, thus rendering the said Exchange of Notes nugatory. The Appellant reiterates that the withholding tax assessments in this suit arose out of the said International Treaty between the two sovereigns which exempted Japanese companies, consultants and employees from domestic taxes and levies.e.The Respondent erred in law and in fact in rendering worthless the Exchange of Notes referenced MOF/ERD/11/79/38/01 and dated 16th January, 2015, an International Treaty producing obligatory legal effects between the two Governments, because a letter from the Principal Secretary (PS) National Treasury and Planning dated 10th August, 2018, advising that withholding tax on income is payable for the project, originated from the same office.f.The Respondent erred in law and in fact in rendering the Exchange of Notes referenced MOF/ERD/11/79/38/01 and dated 16th January, 2015, an International instrument with express consents to be bound a treaty, as inconsequential because the letter from the Principal Secretary (PS) National Treasury and Planning dated 10th August, 2018, advising that withholding tax on income is payable for the Mombasa Port Development Project (MPDP) Phase II project, was the most recent.g.The Respondent erred in law and in fact in determining that the Withholding tax assessments for the years 2020-2022 amounting to Kshs. 78,533,571. 00 (Inclusive of Penalty and Interest) on Contractual Consulting Services (Detailed Design, Construction Supervision) to Japan Port Consultants Ltd financed by the Japan International Cooperation Agency (JICA) falls under the purview of Section 3 and 35(1)(a) of the Income Tax Act (Cap 470) and not the exemption provisions stipulated in the Exchange of Notes referenced MOF/ERD/11/79/38/01 and dated 16th January, 2015. h.The Respondent erred in law and in fact in determining that the Appellant ought to have deducted and remitted to the Respondent the income earned by Japan Port Consultants Ltd (JPCL) for the years 2020-2022 amounting to Kshs. 78,533,571. 00 (Inclusive pf penalty and intertest) on contractual consulting services (Detailed Design, Construction Supervision). Further, the Cabinet Secretary for National Treasury and Planning directed that the income which accrued in or was derived from Kenya by Japanese companies, Japanese consultants and Japanese employees involved in projects including MPDP Phase II project, shall be exempt from income tax to the extent specified in the Exchange of Notes vide Legal Notice No.15 of 26th February, 2021.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:a.The Appellant’s Statement of Facts dated 21st August, 2023 and filed on 22nd August, 2023 together with the documents attached thereto.b.The Affidavit of Herbert Kachila filed to support the Appellant’s Memorandum of Appeal sworn on the 21st August, 2023 and filed on 22nd August, 2023. c.The Appellant’s witness statement of Herbert Kachila dated 6th March, 2024 and filed on 7th March, 2024 that was admitted in evidence under oath on 15th May, 2024. d.The Appellant’s written submissions dated 28th May, 2024 and filed on 29th May, 2024 together with the authorities attached thereto.

9. That the Mombasa Port Development Project's (MPDP) was conceived from a loan agreement between the Government of Japan and the Government of the Republic of Kenya signed in December of 2007 for the implementation of Mombasa Port Development Project (MPDP). The Project was to be implemented in two phases i.e Phase I and Phase Il.

10. That the MPDP Phase I project was implemented with terms and conditions agreed as set out in an Exchange of Notes that was signed between the Ambassador Extraordinary and Plenipotentiary of Japan to the Republic of Kenya, and the then Minister of Finance of the Republic of Kenya, on 20th November, 2007 as the representatives of the two Governments.

11. That an Exchange of Notes was signed on 20th November 2007 and the International Treaty indicated that the loan advanced to the Government of the Republic of Kenya amounted to JPY 26,711,000,000. 00 (Twenty-Six Billion Seven Hundred and Eleven Million Japanese Yen) was to be advanced by the Japan Bank for International Cooperation.

12. That the Japan Bank for International Cooperation, the Contractor, Companies, Suppliers, Consultants and employees of the Japanese companies were exempted from all fiscal levies, taxes and duties payable on income derived within Kenya during the implementation of the MPDP Phase I and II projects by the Ministry of Finance, as per the provisions of the Exchange of Notes dated 20th November, 2007.

13. That after the completion of MPDP Phase I project, a second Exchange of Notes was signed between the Government of the Republic of Kenya through the Cabinet Secretary for National Treasury and Planning and the Ambassador Extraordinary and Plenipotentiary of Japan to the Republic of Kenya on 16th January, 2015 and the International Treaty provided terms and conditions for the implementation of the Mombasa Port Development Project (MPDP) Phase ll.

14. That Clause 8 of the Exchange of Notes dated 16th January, 2015 provided as follows:“8. (1)The Government of the Republic of Kenya shall exempt:a)...b)Japanese companies operating as suppliers, contractors and/or consultants from all fiscal levies and taxed imposed in the Republic of Kenya with respect to the income accruing from the supply of products and/or services to be provided under the Loan.”

15. That the Government of Japan proceeded to gazette the Exchange of Notes dated 16th January, 2015 in Japan as is the procedure after signing of International Treaties between the Government of Japan and other countries.

16. That the Exchange of Notes dated 16th January, 2015 exempted the Japan International Cooperation Agency (JICA), the Contractor, Companies, Suppliers, Consultants and employees of the Japanese companies from all fiscal levies, taxes and duties payable on income derived within Kenya during the implementation of the MPDP Phase ll project.

17. That the terms and conditions provided for in the Exchange of Notes dated 16th January, 2015 for the implementation of MPDP Phase II project mirrored the terms and conditions previously agreed upon in the Exchange of Notes dated 20th November, 2007 including but not limited to the exemptions from all fiscal levies, taxes and duties because they were part of the same project.

18. That similar to the MPDP Phase I project, and after the commencement of the MPDP II contract, the Appellant sought a tax exemption from the Respondent based on the Exchange of Notes dated 16th January, 2015, which was declined with the Commissioner of Domestic Taxes then demanding withholding tax on income from the Appellant amounting to Kshs. 78,533,571. 00 (Inclusive of Penalty and Interest) on Contractual Consulting Services (Detailed Design, Construction Supervision) to Japan Port Consultants Ltd.

19. The Appellant further pleaded that with a guarantee from the Government of the Republic of Kenya received a Loan (Loan Agreement- P30 dated 9th March, 2015) from Japan International Cooperation Agency (JICA) under STEP loan package towards the cost of MPDP II.

20. That the Appellant submitted to the Tribunal a communication by the Appellant's Tender Committee confirming that the subject project was awarded to Consortium of Japan Port Consultants Ltd (JPC) and BAC/GKA JV Company Ltd. That the said exhibits confirmed that concurrence had been received from JICA for the award of contract to JPC.

21. That subsequently a contract dated 29th April, 2016 was signed between the Appellant and the Consultants. That the Consultant was a non-resident contractor and concurrence had to be obtained from JICA before the contract could be signed.

22. That the Consultants' Contract was anchored upon the Loan Agreement dated 9th March, 2015 between the Appellant and JICA as evidenced by Recital (c) of the Contract where JICA had agreed to make a loan to the Borrower for the purpose of financing Mombasa Port Development Phase II.

23. The Appellant emphasised that the terms and conditions provided for in the Exchange of Notes dated 16th January, 2015 for the implementation of the MPDP Phase II project mirrored the terms and conditions previously agreed upon in the Exchange of Notes dated 20th November, 2007 including but not limited to the exemptions from all fiscal levies, taxes and duties because they were part of the same Project.

24. The Appellant made reference to the exemptions issued on MPDP1 and in particular in the letter dated 29th August, 2011 in which the Permanent Secretary Treasury wrote to the Respondent noting as follows:“We studied the agreement signed by the Minister for Finance and provides that the government of the Republic of Kenya shall exempt:Japanese Companies operating as suppliers, contractors and/or consultants from all fiscal levies and taxes imposed in the Republic of Kenya with respect to the income accruing from the supply of products and/or services to be provided under the Loan.Accordingly, the withholding tax exemption that is being requested is covered.”

25. That it is very clear that the import of Clause 8 of the Exchange of Notes dated 16th January, 2015 is that the withholding tax was also exempted in MPDP II and the Appellant relied on such understanding in executing the contract with the consultants.

26. That subsequently, the Cabinet Secretary for National Treasury and Planning issued Legal Gazette Notice No. 15 of 26th February, 2021 exempting the income accrued in the Finance Agreements listed in the Schedule thereunder from income tax.

27. It was the Appellant's case that as per the wording of the said Gazette notice, the income tax was exempted from the date of the Finance Agreement and not just from the date of the Gazette Notice.

28. That the operating words used in the Legal Notice No. 15 i.e. “income which was derived in or was derived” means that, at the date of the Legal Notice the income had already been derived to the extent provided for in the Finance Agreement listed thereunder. That for clarity, the third column of the Schedule provided for the respective dates of the Finance Agreements.

29. That accordingly, the income derived from Kenya under Loan Agreement – P30 dated 9th March, 2015 by Japan International Cooperation Agency (JICA) was exempted from income tax and as such no withholding tax assessment against the Appellant can arise.

30. That subsequently, the subject Legal Notice No. 15 of 26th February 2021 was the subject of litigation in High Court Petition No. E280 of 2021 Eliud Karanja Matindi vs Cabinet Secretary National Treasury, Commissioner General KRA & Others and the coming into effect of declarations of the High Court were then suspended by the Court of Appeal in National Assembly, Republic of Kenya & Anor v Matindi & 3 Others (2023) KECA 1566 (KLR) (Court of Appeal Decision).

31. That the effect of the judgment of the High Court (which has now been suspended by the Court of Appeal) was that the Income tax that is collectible under the financing agreements which were covered by the impugned Gazette Notice, are taxes that accrued after the date of Judgment which was on 17th February, 2023.

32. The Appellant pleaded that the withholding tax assessment which is the subject of this Appeal was in respect to income which had long been derived in the periods between 2020 and 2022; way before the Gazette Notice was quashed and as such not collectable. That the Projects had long been concluded before the Gazette Notice was declared unconstitutional.

33. That similar to the MPDP Phase I project, after the commencement of the MPDP II contract, the Appellant sought a tax exemption from the Respondent based on the Exchange of Notes dated 16th January, 2015, which was declined. That in return, the Commissioner of Domestic Taxes then demanded withholding tax on income from the Appellant amounting to Kshs.78,533,571. 00- (inclusive of Penalty and Interest) on Contractual Consulting Services (Detailed Design, Construction Supervision) to Japan Port Consultants Ltd.

34. That the Appellant objected to the decision of the Respondent stating that Japan Port Consultants Ltd as consultants and construction supervisors for MPDP Phase Il project were exempt from the withholding taxes on income, as stated in the Exchange of Notes dated 16th January, 2015.

35. That on 10th July, 2023, the Respondent gave an objection decision to the Appellant's objection, demanding that the Appellant pay withholding tax on income earned by Japan Port Consultants Ltd amounting to Kshs. 78,533,571. 00 (inclusive of Penalty and Interest) to avert enforcement of the same.

36. That the Appellant did not receive any of the loan disbursement to be paid to the Consultants, Japan Port Consultants Ltd, in the implementation of the MPDP Phase II project. That it only received invoices for works rendered by the Consultants, approved the invoice against the works done and forwarded the approved invoice to JICA to remit the payments to the Consultants directly.

37. That the Appellant did not process any payments to the Consultants, Japan Port Consultants Ltd, therefore could not deduct and remit to the Respondent any taxes on payments in the implementation of MPDP Phase II contract, as alleged by the Respondent.

38. It was the Appellant's contention that, in rendering, the Exchange of Notes dated 16th January 2015 as nugatory, the Respondent breached Articles 7, 18, 26, 27 and 60 of the United Nations Vienna Convention on the Law of Treaties (1969).

39. The Appellant stated that the main issue for determination is whether withholding income tax is due and payable as assessed by the Respondent. That in submitting on this issue the Appellant consolidated the grounds of appeal into 3 main grounds:a.Whether the Appellant could withhold tax on money paid directly to the non-resident contractor from the non-resident development partnerb.What is the current legal effect of Legal Notice No. 15 of 26th February 2021?c.Whether the holding in Tax Appeal No. 105 of 2021 Kenya Ports Authority vs Commissioner of Domestic Taxes is applicable in this appeal

i. Whether the Appellant could withhold tax on money paid directly to the non-resident contractor from the non-resident development partner 40. That noting that the Appellant was not making any payments, it was thus not the proper person to deduct the withholding income tax as the same ought to be withheld at the point of making actual payment by the person making payment as per Section 35 of the Income Tax Act. That in this case the withholding would then have to be done by JICA and not the Appellant.

41. That Section 35 (1) (a) of the Income Tax Act provides that:“35. Deduction of tax from certain income:(1)Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of-(a)a management or professional fee or training fee except-(i)a commission paid to a non-resident agent in respect of flowers, fruits or vegetables exported from Kenya and auctioned in any market outside Kenya and audit fees for analysis of maximum residue limits paid to a non-resident laboratory or auditor; orSUBPARA(ii)a commission paid by a resident air transport operator to a non-resident agent in order to secure tickets for international travel;(b)...which is chargeable to tax, deduct therefrom tax at the appropriate non-resident withholding tax rate;”

42. That the import of Section 35(1)(a) of the Income Tax Act contemplates that the chargeable tax shall be deducted at the time payment of any amount is being made to any non-resident. That in this case the Appellant made no payment and the same was made by JICA.

43. The Appellant relied on the decision of this Tribunal in Tax Appeal No. 123 of 2022 Kenya National Highways Authority (KENHA) vs Commissioner of Legal Services & Board Coordination where it alleged that the facts of that appeal were similar to this case to the extent that the Appellant was not making any direct payment to the non-resident contractor and the same was done by the non-resident development partner.

44. That the Tribunal in the Kenya National Highways Authority case (supra) correctly held as follows:“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.”

45. That accordingly, the Appellant submitted that it was impossible for the Appellant to advise JICA who is a non-resident development partner to withhold income tax for the income earned by Japan Port Consultants Ltd (non-resident contractor). That the Appellant itself had no opportunity to withhold the tax on money paid directly to the non-resident contractor from the non-resident development partner.

46. The Appellant urged the Tribunal to follow its own decision as held in Kenya National Highways Authority case (supra) where at paragraph 54 it held that:“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”.

47. The Appellant submitted that the Respondent's argument that the Appellant should have advised JICA to withhold income tax would have resulted into an absurdity as held in the case of Palm Oil Research and Development Board of Malaysia & Another vs. Premium Vegetable Oils SDN BHD [2004]2 CLJ 265 which was relied upon in Primarosa Flowers Limited v Commissioner of Income Tax [2017] eKLR where it was held that:“The correct approach to be adopted by a court when interpreting a taxing statute is that set out in the advice of the Privy Council delivered by Lord Donovan in Mangin v Inland Revenue Commissioner [1971]AC 739:First, the words are to be given their ordinary meaning. They are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices...moral precepts are not applicable to the interpretation of revenue statutes. Secondly,...one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption so to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used...Thirdly, the object of the construction of a statute being to ascertain the will of the legislature, it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted. Fourthly, the history of an enactment and the reasons which led to its being passed may be used as an aid in its construction...Hence, the governing principle is this. When construing a taxing or other statute, the sole function of the court is to discover the true intention of Parliament .In that process, the court is under a duty to adopt an approach that produces neither injustice nor absurdity; in other words, an approach that promotes the purpose or object underlying the particular statute albeit that such purpose or object is not expressly set out therein.”

48. The Appellant submitted that, accordingly, there was no opportunity for it to withhold the income tax as all the payments were made by the non-resident development partner and not the Appellant

49. The Appellant further submitted that Section 13(1) of the Income Tax Act provides as follows:“(1)Notwithstanding anything in Part II, the income specified in Part I of the First Schedule which accrued in or was derived from Kenya shall be exempt from tax to the extent so specified.”

50. That the First Schedule, Clause II of the Income Tax Act then provides as follows:“The income of any person from any management or professional fee, royalty or interest when the Minister certifies that it required to be paid 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 exempted from tax.”

51. That it is an undisputed fact that pursuant to the Exchange of Notes which was executed by the Cabinet Secretary of the National Treasury of the Republic of Kenya, the income that is the subject of this Appeal was exempted from income tax and thus withholding tax was not applicable.

52. That it is also an undisputed fact that the loan was guaranteed by the Government of Kenya. That thus, pursuant to Section 13 (1) as read with the First Schedule Clause 11 of the Income Tax Act, noting that the Cabinet Secretary had executed the Exchange of Notes certifying that the income is free from any tax, the Respondent has no legal standing under the said provisions of the law to claim for withholding tax. That nonetheless, the Appellant reiterated that it was not possible for the Appellant to withhold any income tax as it was not making any payments to the consultants.

53. The Appellant submitted that Section 13(1) is still in operation as only Section 13 (2) of the Income Tax Act was declared unconstitutional.

ii. What is the current legal effect of Legal Notice No. 15 of 26th February 2021? 54. That under paragraph 2 of the objection decision dated 10th July, 2023, the Respondent provided the basis of the assessment as follows:“The Commissioner charged withholding tax on income earned by Japan Port Consultants Limited (JPCL) on Mombasa Port Development Project (MPDP)- Phase 2 for the years of income 2020 to 2022 under section 3 of Income Tax Act (ITA) Cap 470. This was necessitated by the Tax Appeals Tribunal (TAT) Judgement in Petition No. E280 of 2021 Eliud Karanja Matindi Vs Cabinet secretary- National Treasury, Commissioner General- Kenya Revenue Authority, Attorney General, National Assembly and Speaker of National Assembly.”

55. That Section 13 (2) of the Income Tax Act empowers the Cabinet Secretary to issue tax exemptions from income which accrued in or was derived from Kenya by notice in the Gazette.

56. The Appellant submitted that it is an undisputed fact that the Cabinet Secretary issued Gazette Notice No. 15 of 2021 which read as follows:“In exercise of the powers conferred by Section 13 (2) of the Income Act, the Cabinet Secretary for National Treasury and Planning directs that the income which accrued in or was derived from Kenya by Japanese companies, Japanese Consultants and Japanese employees involved in the Projects under the Finance Agreements specified in the second column of the Schedule that were signed on the corresponding dates specified in the second column of the schedule shall be exempt from income tax to the extent specified in the Financing Agreements.”

57. That the language of the Legal Notice was that the income which accrued pursuant to the respective Finance Agreements had been exempted to the extent specified in the Financing Agreement. That as such the exemption granted was as per the specifications outlined in the Finance Agreements and the respective dates of the Financing Agreement.

58. The Appellant thus disagreed with the Respondent's contention that the exemption under Legal Notice 15 was never backdated. That the Legal Notice was clear that the exemption of the income tax was to the extent specified in the Financing Agreements and not just from the date of the Legal Notice.

59. That the Respondent in its Statement of Facts argued that the withholding tax assessment was issued following the declaration by the High Court that the subject Legal Notice No. 15 was declared unconstitutional. That however, the Appellant argued that the Respondent should look at the entire Judgment holistically and not just part of it.

60. That the Appellant is in agreement that the subject Legal Notice was the subject of litigation in High Court Petition No. E280 of 2021 Eliud Karanja Matindi vs Cabinet Secretary National Treasury, Commissioner General KRA & Others.

61. The Appellant however submitted that that even though the Learned Judge went on to declare the Legal Notice unconstitutional he observed that the exemptions under the Legal Notice were to the extent specified in the financing agreements as stated under paragraph 81 of the Judgment:“The Legal Notice No. 15 of 2021 dated 15/2/2021 and published on 26/2/2021 as issue No. 17, states “...the extent specified in those financing agreements”

62. That additionally, in making the finding whether the income tax exempted under the Legal Notice No. 15 was thus collectable, the High Court made the finding at paragraph 131 of the Judgment as follows:“The court declines to compel the Kenya Revenue Authority to do its duty since there is no evidence that they have failed to carry out their duties. This is because, they were not under obligation to collect the income tax before this declaration was made. Their duty starts today.”

63. That on the same issue, the Learned Judge thus went on to make the following declaration under order (1):“Income Tax covered under legal notice dated 15/2/2021 published on26/2/2021 as issue no. 17 is collectable with effect from the date of quashing of the impugned unconstitutional Legal Notice No. 15 of 2021”

64. That the import of paragraph 81 as read pursuant to the Legal Notice No. 15, the income tax had been exempted to the extent provided in the Finance Agreement. That the income that is collectable is one that accrued from the date of the Judgment which was 17th February, 2023 and not prior.

65. That the income that is the subject of this Appeal had been earned in the years 2020 to 2022 and not after the date of the Judgment which was 17th February, 2023 and thus no income tax was collectable.

66. That following that Judgment, the National Assembly appealed the High Court decision to the Court of Appeal and sought for stay of implementation of the High Court declarations.

67. That the Court of Appeal rendered its Ruling on an application for conservatory orders in National Assembly, Republic of Kenya & Anor v Matindi & 3 others (2023) KECA 1566 (KLR) (Court of Appeal Decision).

68. That similarly, in light of the Ruling by the Court of Appeal, the argument by the Respondent that the tax exemptions could not be backdated noting that the Legal Notice No. 15 was dated 25th February 2021 seemed to be incorrect.

69. That at paragraph 33 of the Court of Appeal Judgment the Learned Judges of the appellate court held as follows:“Having considered the respective positions of the parties on the nugatory aspect, we take the view that in this case, great hardship and inconvenience would be occasioned to the applicants, against the public interest, should the orders sought not be granted. The 4th respondent would be required to put in place mechanisms for recovery of taxes exempted, over a period in excess of ten years-noting that the exemptions to Japanese companies commenced in August 2010, under bilateral country-country arrangements with the government of Kenya.”

70. The Appellant posited that the Court of Appeal thus clearly appreciated that the tax exemptions by Legal Notice No. 15 goes back to August 2010 under various financing agreements and not just from the date of the Legal Notice.

71. That in conclusion, the Court of Appeal suspended the coming into effect of the declarations made by the trial court and held as follows at paragraph 38 of its Ruling:“We believe that the circumstances of this case warrant the grant of an order, which we hereby grant, temporarily suspending the coming into effect of the declarations made by the trial court with respect to Legal Notice No. 15 of 2021 and section 13 of the Income Tax Act. The suspension of the said declarations shall remain in force for a period of six (6) months from the date hereof, pending hearing and determination of the applicants' appeal, which counsel for the applicants and the 2nd and 3rd respondents informed the Court had already been filed.”

iii. Whether the holding in Tax Appeal No. 105 of 2021; Kenya Ports Authority vs Commissioner of Domestic Taxes is applicable in this appeal? 72. That the Respondent in its response relied on the decision of this Tribunal in Tax Appeal No. 105 of 2021 Kenya Ports Authority vs Commissioner of Domestic Taxes. That on the onset, the Appellant submitted that even though the contract in Tax Appeal No. 105 of 2021 was financed under the same Finance Agreement of 9th March, 2015; the circumstances that prevailed at the time of filing that Appeal was different from the circumstances in the present Appeal for two major reasons.a.In Tax Appeal No. 105 of 2021, the withholding tax assessment was issued vide the letter dated 17th December 2020 which was objected to vide the letter dated 8th January 2021. That subsequently, the objection decision was then issued vide the letter dated 26th January, 2021. That the appeal was then filed on 24th February 2021. b.That at the time the Respondent was issuing the objection decision on 26th January, 2021 (in TAT No. 105 of 2021), the Legal Notice No. 15 dated 25th February 2021 and published on 26th February 2021 had not been issued. That the Tribunal in that Appeal went on to observe that as much at paragraph 53 as follows:“The impugned assessment was issued by the Respondent on the Appellant on 17th December, 2020 and since the respective income tax exemption was effective from 25th February, 2021, the assessment, in our respectful view remains.”

73. That additionally, the Tribunal went on to consider the effect of the subject Legal Notice in TAT No. 105 of 2021 at paragraph 52 of its decision and held that the effective date of tax exemption was the date of the Legal Notice being 25th February, 2021.

74. The Appellant submitted that such holding was erroneous in view of the interpretations now issued in the recent decisions in High Court Petition No. E280 of 2021 Eliud Karanja Matindi vs Cabinet Secretary National Treasury, Commissioner General KRA & Others and thereafter the Court of Appeal decision in National Assembly, Republic of Kenya & Anor v Matindi & 3 others (2023) KECA 1566 (KLR) (Court of Appeal Decision) as highlighted herein above.

75. That simply put, in the High Court decision of 17th February, 2023, the Learned Judge was of the view that tax was collectable from the date of the Judgment when declaration was made quashing the subject Legal Notice. That in the Court of Appeal decision of 19th December, 2023, the Learned Judges of the Appellate Court at paragraph 33 of the Ruling held that tax exemptions commenced August 2010 under the bilateral country-country arrangements with the Government of Kenya.

76. The Appellant submitted that the decision of this Tribunal in Tax Appeal No. 105 of 2021 that the tax exemption was effective from 25th February, 2021 was incorrect and should not be relied upon in view of the new jurisprudence.

77. That this Tribunal in a recent decision of 29th June, 2023 in Tax Appeal No. 123 of 2022 Kenya National Highways Authority (KENHA) vs Commissioner of Legal Services & Board Coordination (supra), correctly held that there was no way the Appellant could withhold the tax on money paid directly to the non-resident contractor from the non-resident development partner.

78. That in rendering its Judgment, this Tribunal in TAT No. 105 of 2021, noted that the Appellant had raised a ground that payment was made directly by the non-resident developing partner to non-resident contractor at paragraph 27 and 28 of its decision while analyzing the Appellant's case. That however, in rendering its determination from Paragraphs 40 to 56 of the Judgment, the Tribunal made no finding on that issue. That the Tribunal's decision largely dealt with effect of the Legal Notice No. 15 which issue is now settled by the High Court as well as the Court of Appeal.

79. The Appellant urged the Tribunal to be guided by its own decision in Tax Appeal No. 123 of 2022 Kenya National Highways Authority (KENHA) vs Commissioner of Legal Services & Board Coordination (supra) on the issue of payments being made by the development partner to non-resident contractor and that the Appellant has no way of withholding such income tax.

Appellant’s Prayers 80. The Appellant prayed that this Tribunal:a.Review and set aside the objection decision by the Respondent dated 10th July, 2023. b.Declare that the Appellant ought not to remit any withholding tax on income earned by Japan Port Consultants Ltd amounting to Kshs. 78,533,571. 00. c.Be pleased to issue any other orders that it may deem fit.

Respondent’s Case 81. The Respondent’s case is premised on its Statement of Facts dated 21st September, 2023 and filed on 22nd September, 2023 together with the documents attached thereto.

82. That the Respondent charged Withholding tax on income earned by Japan Port Consultants Limited (JPCL) on Mombasa Port Development Project (MPDP) - Phase 2 for the years of income 2020 to 2022 under Section 3 of Income Tax Act CAP 470 of the laws of Kenya.

83. That the withholding tax due was Kshs. 25,582,365. 00 for the year 2020, Kshs. 20, 536,243. 00 for year 2021 and Kshs. 32,414,864. 00 for year 2022.

84. That this was necessitated by the outcome in the Judgment in High Court Petition No. E280 of 2021 Eliud Karanja Matindi -vs-Cabinet Secretary National Treasury, Commissioner General KRA and Others.

85. The Respondent contended that Legal Notice No. 15 which the Appellant relied upon, came into effect on 25th February, 2021 and therefore does not apply to periods prior to the Notice. That the Legal Notice can therefore not apply retrospectively.

86. The Respondent further submitted that there was no evidence supplied by the Appellant that the exemption under Legal Notice 15 was ever backdated.

87. The Respondent reiterated this position on the basis of the finding of the Tax Appeals Tribunal in Tax Appeal No. 105 of 2021 Kenya Ports Authority versus Commissioner of Domestic Taxes, where, while dismissing the Appellant's Appeal, the Tribunal affirmed the objection decision and found that there was no evidence that the effective date of the exemption relied upon by the Appellant was backdated.

88. The Respondent relied on the finding of the High Court in High Court Petition No. E280 of 2021 Eliud Karanja Matindi -vs- Cabinet Secretary National Treasury, Commissioner General, KRA and Others, where the Court found Legal Notice No. 15 to be unconstitutional and that the same did not undergo public participation as is required by the Constitution.

89. The Respondent contended that based on the above, it follows that the Income earned by JCL on the Mombasa Port Development Project - Phase 2 for the years of income 2020 to 2022 is chargeable to tax as per the provisions of Section 3 of the Income Tax Act.

90. That Section 3 of the Income Tax Act brings to charge all income of a person whether resident or non-resident, which accrues or is derived from Kenya. That Sections 10 and 35 of the Act provide for charging of Withholding tax on such income.

91. That in response to the Appellant's contention that it did not make any payments directly to the contractors and hence could not withhold any taxes, the Respondent contended that the payments were made on account of the Appellant and for the Appellant's benefit.

92. The Respondent further stated that the monies expended on behalf of the Appellant were in fact in form of a loan which would become payable by the Appellant under the relevant contractual agreements. That it is the Respondent's position that the Appellant owes and should therefore pay the Withholding tax not withheld since the Appellant can recover the same during repayment of the loans.

Respondent’s Prayers 93. The Respondent prayed for orders that in light of the foregoing, the Appeal herein be dismissed for lack of merit with costs to the Respondent.

Issues For Determination 94. The Tribunal has considered the pleadings, submissions and witness statement filed by the parties and is of the view that the single issue falling for its determination is:-Whether the Respondent’s assessment was justified

Analysis And Findings 95. The Tribunal having established the issue falling for its determination, proceeds to analyse it as hereunder.

96. This dispute arose from the Respondent’s action of determining that income earned by Japan Port Consultants Ltd (JPCL) for the years 2020-2022 amounting to Kshs.78,533,571. 00 on contractual consulting services was subject to withholding tax on income of a non-resident accrued and derived in Kenya. In this regard, the Respondent demanded this tax from the Appellant stating that it was due from the Appellant as payments were made on behalf of the Appellant.

97. The Appellant on its part argued that the withholding tax was not due as it did not make any payment and that the income that is the subject of this Appeal was exempted from income tax and thus withholding tax was not applicable. That further, a Gazette Notice was issued to this effect.

98. That further, as a result of the tax exemptions that had been granted being valid up to the date of the said Judgment, the income that is the subject of the instant Appeal was exempted from income tax up to 17th February, 2023 and thus withholding tax was not applicable.

99. The Tribunal gleaned through Legal Notice No. 15 of 2021 and notes that it provided as follows:“In exercise of the powers conferred by Section 13 (2) of the Income Act, the Cabinet Secretary for National Treasury and Planning directs that the income which accrued in or was derived from Kenya by Japanese companies, Japanese Consultants and Japanese employees involved in the Projects under the Finance Agreements specified in the second column of the Schedule that were signed on the corresponding dates specified in the second column of the schedule shall be exempt from income tax to the extent specified in the Financing Agreements.”

100. Further, the Tribunal has established that in a Judgment delivered by the High Court on 17th February 2023 in Constitutional Petition No. E280 of 2021, the High Court in Mombasa declared that Section 13(2) of the Income Tax Act, Chapter 470 of the Laws of Kenya (Income Tax Act) is unconstitutional to the extent that it authorizes income tax waivers through a notice in the Gazette and for specified persons without regard to the provisions of Article 210 of the Constitution of Kenya, 2010.

101. The above Judgment found, inter alia, that:“Section 13(2) of the Income Tax Act is unconstitutional to the extent that it authorizes income tax waivers through a notice in the Gazette and for specified persons as opposed to by way of legislation without regard to the provisions of Article 210 of the Constitution.b.An exemption or waiver of income tax can only be granted by the National Assembly through national legislation after it passes as a money bill as provided under Article 114(3) of the Constitution after public participation and in strict compliance with Article 210 of the Constitution, which legislation will require that there be:i.a public record of each waiver and the reason for the waiver;ii.each waiver and the reason for it shall be reported to the Auditor General; andiii.in compliance with Article 27 of the Constitution, there should be no waiver based on national origin, race, colour, marital status, health status, ethnic society, religion, conscience, belief, culture, dress, language or birth.c.Legislation on tax waiver involving country-by-country agreements must comply with the Constitution and must be on the basis of reciprocity, non-discrimination, equity and tax neutrality;d.the National Assembly has no power to authorize waivers of tax other than through legislation as contemplated under Article 210 of the Constitution; ande.the National Assembly breached the Constitution by waiving public participation.”

101. The import of the above ruling of the Court is that to the Japanese companies who are involved in the projects financed under the financing agreements in Legal Notice No. 15 of 2021, the tax exemptions ceased.

102. Additionally, the Tribunal relies on the decision in Otieno & another v Council of Legal Education (Civil Appeal 38 of 2018) [2021] KECA 349 (KLR) (17 December 2021) (Judgment) where the Court found as follows:“However, if a court has declared a piece of legislation or a section of an Act to be unconstitutional, that Act or law became a nullity from the date of inception or enactment and not from the date of the judgment. But it would not apply to actions already crystallized whilst the expunged law was in force.” (emphasis added)

101. Section 35 (1) (a) of the Income Tax provides that:“35. Deduction of tax from certain income:(1)Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of-(a)a management or professional fee or training fee except-(i)a commission paid to a non-resident agent in respect of flowers, fruits or vegetables exported from Kenya and auctioned in any market outside Kenya and audit fees for analysis of maximum residue limits paid to a non-resident laboratory or auditor; or(ii)a commission paid by a resident air transport operator to a non-resident agent in order to secure tickets for international travel;(b)...which is chargeable to tax, deduct therefrom tax at the appropriate non-resident withholding tax rate;”

101. The import of Section 35 (1) (a) of the Income Tax Act contemplates that the chargeable tax shall be deducted at the time payment of any amount is being made to any non-resident.

102. Further, Rule 4 of the Income Tax (Withholding Tax) Rules 2001 provides as follows:“4. (1)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 –(a)under paragraphs 3 and 5 of Head B of the Third Schedule; and(b)where the Government of Kenya has double taxation agreement with the Government of another country, in the terms of that agreement;….”

101. The aforementioned rule requires that the payer, defined to mean a person who deducts withholding tax for the purposes of these Rules to be the person making payments and withholding the tax. The Appellant in the instant case did not make any payments as the payments were made directly to the non-resident contractor by the non-resident development partner.

102. The Tribunal posits that 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 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.

103. The position of the Tribunal as stated in the foregoing paragraph 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.”

101. 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.

102. The Tribunal reiterates its decision in Tax Appeal No. 123 of 2022 Kenya National Highways Authority (KENHA) vs Commissioner of Legal Services & Board Coordination (supra) where it pronounced itself on the issue of payments being made by the development partner to non-resident contractor where it found that the Appellant has no way of withholding such income tax.

103. As a result of the foregoing and the case law from the appellate courts guiding the interpretation of Legal Notice 15 of 2021, the Tribunal concluded that the Respondent was not justified in raising the withholding tax assessment on the Appellant.

Final Decision 101. The upshot of the foregoing analysis is that the Appeal is merited. Consequently, the Tribunal proceeds to make the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 10th July, 2023 be and is hereby set aside.c.Each Party to bear its own costs.

101. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 23RD DAY OF AUGUST, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA- MEMBERDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERDR. TIMOTHY B. VIKIRU - MEMBER