[2024] KETAT 25 (KLR)

Kenya Ports Authority v Commissioner of Domestic Taxes (Tax Appeal 910 of 2022) [2024] KETAT 25 (KLR) (Commercial and Tax) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 25 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal 910 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

January 26, 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 the laws of Kenya. The Appellant’s primary activity 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 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 procurements of the Appellant of various port equipment and vide a letter dated 22nd April 2022 it issued Withholding income tax assessment amounting to Kshs 1,993,582,700. 00 inclusive of penalties and interest.

4. The Appellant objected to the assessment vide a letter dated 10th May 2022.

5. The Respondent subsequently issued its objection decision vide a letter dated 7th July 2022 confirming the assessments.

6. Aggrieved by the Respondent’s objection decision, the Appellant filed this Appeal on 29th August 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 17th August 2022: -a.The Respondent erred in law and in fact in determining that payments made by the Appellant for the equipment procured between 2018-2022 for the supply of cranes and a salvage tug boatwere in the nature of management and professional fees and that the payments were therefore subject to withholding tax amounting to Kshs. 1,993,582,700 (Inclusive of penalty and interest).b.The Respondent erred in law and in fact in finding that Withholding taxes are due for port equipment procured by the Appellant between 2018-2022 being cranes and a salvage 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 outside Kenya and delivered fully built by the respective manufacturers, to the Appellant's premises and for which customs entries were made and all requisite taxes paid for their importation to Kenya.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 as well as the Second Schedule of the Income Tax 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 Appellantg.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 2018-2022 being the supply of cranes and a salvage tug boat.h.The Respondent erred in law and in fact in demanding from the Appellant a sum of Kshs. 1,993,582,700 allegedly being the Withholding tax assessments inclusive of penalty and interest, for the years 2018-2022 in respect of the supply of cranes and a salvage tug boat to the Appellant, equipment of which was manufactured outside Kenya and delivered fully built to the Appellant.i.The Appellant prays that the Tribunal strikes out the objection decision contained in the letter dated 7th July 2022 with costs in favour of the Appellant.

Appellant’s Case 8. The Appellant’s case is premised on the following filed documents: -a.The Appellant’s Statement of Facts dated 17th August, 2022 and filed on 29th August, 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 26th May 2023 and filed on 29th May 2023 together with the legal authorities attached thereto.

9. The Appellant stated that its primary statutory mandate is to maintain, operate, improve and regulate the scheduled ports and inland container depots. That it is primarily a stevedore handling goods imported into Kenya by sea, as well as exports and transshipment cargo.

10. That to achieve its mandate and to satisfy the demands of its clients in the international maritime trade, the Appellant maintains an optimum availability of its resources, including cargo handling equipment. That it therefore procures such equipment as and when needed.

11. The Appellant submitted that the Respondent carried out an audit on some its procurements of various port equipment some of which were specifically flagged for Withholding tax assessment. That it is noteworthy that some procurements were subject of separate ongoing litigation before the Tribunal and Court. That the procurements the subject of the instant Appeal are:-a.Tender No. KPA/021/2016-17/ID for Design, Manufacture, Supply and Installation of Ship to Shore Gantry Cranes and Rubber Tyre Gantry Cranes; andb.Tender No. KPA/077/2018-19/ME for the Design, Manufacture, Supply and Commissioning of a Salvage Tugboat.

12. That vide its letter dated 22nd April 2022, the Respondent assessed Withholding income tax (plus penalty and interest) for the two suit contracts at Kshs 1,993,582,700, 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 to withholding tax under Section 35 of the Income Tax Act.

13. It was the Appellant’s contention that for all the foregoing procurement contracts, the equipment (gantry cranes and a salvage tugboat) was 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. The Appellant stated that the designs and specifications for the equipment were all determined by it internally and reduced to a tender document which was advertised in accordance with the Public Procurement and Asset Disposal Act, for the various manufacturers/bidders to compete. That the specifications tendered for and advertised by the Appellant were all within the range and standards of equipment ordinarily manufactured by the suppliers for any of their potential customers.

15. It averred that none of the equipment procured was tailor-made uniquely or specially by the manufacturers, for the Appellant. In essence, the designs and specifications prepared internally and tendered for by the Appellant fit within those that are normally manufactured by the suppliers. That therefore the procurements cannot be termed as procurement of services since all designs and specifications are generated by the Appellant.

16. It averred that unlike ordinary equipment, construction of port equipment by manufacturers takes a relatively long time. That this fact does not convert the procurement of the equipment to a procurement of engineering services as purported by the Respondent in its impugned assessment and objection decision. That further, procurement of port machinery, being the equipment and sea-going vessel in this case, ought not to be misconstrued and equated to turnkey projects and/or engineering services. It added that it involves procurement of machinery within the description given under the Second Schedule of the Income Tax Act.

17. It submitted that in all the contracts the subject matter of this Appeal, the Appellant procured port equipment and not services which would otherwise have attracted payment of fees. That the equipment procured have 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 times of their import to Kenya.

18. That in fact, vide its letters dated 14th August 2018 and 9th February 2022, the National Treasury and Planning granted exemptions from import/excise duties and VAT for the equipment procured.

19. 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 the subject matter of this Appeal to Kenya. That this is further demonstrated in the exemptions granted by the National Treasury and therefore, Withholding tax do not apply in this case.

20. The Appellant stated that the Respondent's Withholding tax assessment and the objection decision were not based on any specific tax obligation nor any specific provision of the Income Tax Act. That rather, the Respondent misinterpreted the provisions of the said Act of Parliament, purportedly to found the tax assessment upon which it demands payment by the Appellant.

21. That although the heading of Section 35 of the Income Tax Act states: “Deduction of tax from certain income," nowhere in Sub-Section 1 of the said section requires any person to deduct taxes from payment made to any non-resident person not having a permanent establishment in Kenya,

22. The Appellant submitted that the Respondent's assessment was specifically based on the provisions of the Income Tax Act under Section 35.

23. It stated that construing what constitutes engineering works can only be done ejusdem generis, and not as a stand-alone provision of the paragraph. That it follows therefore that the use of "engineering works" should only relate to same works as building works and civil works provided in the said section, all of which do not relate to procurement of fully built port equipment as in the Appellant's case.

24. That the Appellant procured specific equipment, fully built from the respective suppliers. That further, such procurements of equipment do not fall within the meaning of building, civil or engineering works, upon which the assessment and the objection decision of the Respondent were based. That for the avoidance of doubt, the Appellant did not pay for the works done to manufacture the port equipment. It averred that it purchased the equipment itself, fully built and off-the-shelves of the respective suppliers in their ordinary conduct of business,

25. That Section 2 of the Income Tax Act defines "management or professional fee" to mean “any payment made to any person, other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services however calculated." It stated that such fee is paid in respect of services rendered and not in respect of procurement of goods, in this case port equipment.

26. That the Respondent unilaterally ignored the foregoing averments, and further ignored the fact that customs entries were made in respect of the equipment purchased, entries of which are reflective of the specific HS Code numbers of the equipment. That therefore, the Respondent ignored the fact that no service was procured by the Appellant against which fees would otherwise have been paid.

Appellant’s Prayers 27. The Appellant made the following prayers: -a.That the Tribunal reviews and sets aside the objection decision by the Respondent dated 7th July 2022 under the Reference P051094522S.b.That the Tribunal be pleased to declare that the Appellant ought not to remit Withholding tax of Kshs. 1,993,582,700 on account of Withholding tax assessments for the years 2018-2022 on contractual works for the supply of cranes, and a salvage tugboat.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 for engineering works which would otherwise attract management fee or professional fee or training fee whatsoever.d.Any other orders that the Tax Appeals Tribunal may deem fit.e.That the Respondent be ordered to bear the costs for this Appeal in any event.

Respondent’s Case 28. The Respondent’s case is premised on the hereunder filed documents: -a.The Respondent’s Statement of Facts dated 28th September 2022 and filed on 30th September 2022 together with the attachments thereof.b.The Respondent’s written submissions dated 24th May 2023 and filed on 25th May 2023 together with the legal authorities attached therewith.

29. The Respondent contended that the contracts that the Appellant entered into were all lump sum contracts and contained specific requirements for the design and construction works. That further, 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 contract milestones as approved by the Respondent's Engineer or appointed representative.

30. It averred that that for purposes of covering the defect liability period, a retention of 5% of the contract value was maintained. That additionally, there existed extensive consultation during the procurement stage.

31. The Respondent submitted that with the above, it relied on Income Tax Act Sections 2,3,10 and 35 and raised withholding tax assessments amounting to Kshs 1,993,582,700 inclusive of penalties and interest.

32. That from the review of the documents provided, it established that the Appellant entered into lump sum contracts which contained specific requirements for the design and construction works. That all the contracts observed were turnkey projects where the contractor agrees to fully design, construct and equip a facility or business and turn the project/contact when its ready for operation.

33. The Respondent stated that the Appellant engaged various contractors to undertake the contracts to design, manufacture, supply, install, test and commission the operation of a tug boat, a multipurpose boat and cranes at the port of Mombasa. That these works fall under the scope of building, civil and engineering works hence subject to withholding tax.

34. That Section 3 (1) of the Income Tax Act brings to charge all income of a person whether resident or non-resident which is accrued in or is derived from Kenya.

35. The Respondent contended that payments made to suppliers contracted to design, manufacture, supply, install, test and commission the subject boats and cranes at the port of Mombasa are in the ambits of management and professional fees as defined under Section 2 of the Income Tax Act.

36. It averred that contractual fees are payments for work done in respect of building, civil or engineering works.

37. That as established, all the suppliers mentioned were non-residents of Kenya. That payments made in respect of management and professional fees as defined above are governed by Section 10(1) (a) of the Income Tax Act.

38. The Respondent submitted that Section 35(3) (f) of the Income Tax Act gives direction on the chargeability of such payments to income tax.

39. The Respondent stated that a review of the supplier ledgers as provided by the Appellant established that even though all the tenders had been fully settled, no withholding tax on contractual fee was charged nor remitted by the Appellant as provided under Sections 2,3,10 and 35 of the Income Tax Act.

40. The Respondent thereby submitted that as per the assessment:a.All the subject multinational companies derived income from Kenya and thatb.The contracts fall under the scope of building, civil and engineering works hence subject to withholding tax at respective withholding tax rates as per Section 35 (3) (f) of the Income Tax Act.c.The Appellant has to date not provided details of the tax withheld and paid on the service (training) rendered by the suppliers.

41. That the technical specifications of each of the tenders provided a breakdown of these contracts. The cost breakdown of the contracts covered design, manufacture, supply, testing and commissioning costs, costs of accompanying spares(for preventive maintenance, strategic and operational) and costs of training both locally in Mombasa and at the manufacturers yards.

42. The Respondent referred the Tribunal to the Judgment in TAT Appeal No. 105 of 2021: Kenya Ports Authority v Commissioner of Domestic Taxes wherein the Tribunal upheld the Commissioner's objection decision to a demand for withholding tax, on payments made to Toyo Construction Company Limited for similar contracts.

Respondent’s Prayers 43. The Respondent made the following prayers to the Tribunal:-a.The Tribunal to dismiss this Appeal and uphold the Respondent's assessment.b.The Appellant be ordered to pay costs of this Appeal.

Issue for Determination 44. Having reviewed the pleadings, documentation and the submissions of the parties, the Tribunal is of the considered view that the only issues for its determination is;Whether the Respondent erred by charging Withholding tax on the subject contracts undertaken by the Appellant.

Analysis and Findings 45. Having established the issue for its determination, the Tribunal proceeds to analyse the issue as hereunder:

46. The genesis of this dispute was the Respondent’s decision to subject two procurements by the Appellant to withholding tax. The subject procurements are:a.Tender No. KPA/021/2016-17/ID for Design, Manufacture, Supply and Installation of Ship to Shore Gantry Cranes and Rubber Tyre Gantry Cranes; andb.Tender No. KPA/077/2018-19/ME for the Design, Manufacture, Supply and Commissioning of a Salvage Tugboat.

47. It was the Respondent’s contention that from the review of the documents provided, it established that the Appellant entered into lump sum contracts which contained specific requirements for the design and construction works. That all the contracts observed were turnkey projects where the contractor agrees to fully design, construct and equip a facility or business and turn the project/contact when its ready for operation.

48. The Respondent stated that the Appellant engaged various contractors to undertake the contracts to design, manufacture, supply, install, test and commission the operation of a tug boat, a multipurpose boat and cranes at the port of Mombasa. That these works fall under the scope of building, civil and engineering works hence subject to withholding tax.

49. The Appellant on the other hand contended that for all these procurement contracts, the equipment (gantry cranes and a salvage tugboat) was 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.

50. The Appellant stated that the designs and specifications for the equipment were all determined by it internally and reduced to a tender document which was advertised in accordance with the Public Procurement and Asset Disposal Act, for the various manufacturers/bidders to compete. That the specifications tendered for and advertised by the Appellant were all within the range and standards of equipment ordinarily manufactured by the suppliers for any of their potential customers.

51. It averred that none of the equipment procured was tailor-made uniquely or specially by the manufacturers, for the Appellant. That in essence, the designs and specifications prepared internally and tendered for by the Appellant fit within those that are normally manufactured by the Suppliers. That therefore the procurements cannot be termed as procurement of services since all designs and specifications are generated by the Appellant.

52. In support of its pleadings, the Tribunal noted that the Appellant had attached several documents including the agreements with the suppliers and drawings for the equipments. In particular, the Tribunal noted one of the agreements in relations to Tender No. KPA/077/2018-19/ME dated 19th February 2020 was indicated to be for the ‘Design, Manufacture, Supply and Commissioning of One (1 No.) New Salvage Tug Boat’

53. From the above agreement it was clear to the Tribunal that the procurement contract was for an equipment that was to be manufactured by the supplier/manufacturer and delivered to the Appellant as a complete unit. It is also clear from the contracts that all design and manufacturing was to be done in the country of origin and delivered fully built.

54. The Appellant had further submitted that in all the contracts the subject matter of this Appeal, it procured port equipment and not services which would otherwise have attracted payment of fees. That the equipment procured have 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 times of their import to Kenya.

55. That in fact, vide its letters dated 14th August 2018 and 9th February 2022, the National Treasury and Planning granted exemptions from import/excise duties and VAT for the equipment procured.

56. The Tribunal indeed noted in the import documents and the letters of exemption from The National Treasury as attached by the Appellant that what was entered into the Country were gantry cranes and salvage tug boat together with their respective accessories.

57. The Tribunal further noted 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 a clear indication that these were equipment that were being procured by the Appellant from outside Kenya and not services.

58. Additionally, Section 3 (1) of the Income Tax Act provides as follows regarding charge to tax under Income Tax Act: -“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.”

59. The Tribunal has looked at Section 3(1) of the Income Tax Act and is of the view that since the equipment was imported complete by the Appellant it is clear that income tax cannot be charged as the income was not accrued or derived from Kenya.

60. The Tribunal reiterates the words of Lord Simonds in Russell v. 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."

61. Having established that the contracts were for equipment, the Tribunal finds that no Withholding tax was chargeable. In light of this, the Tribunal finds that the Respondent erred by charging withholding tax to the subject contracts.

Final Decision 62. The upshot of the above is that this Appeal is merited and consequently the Tribunal makes the following Orders:-a.The Appeal be and is hereby allowed.b.The Respondent’s objection decision dated 7th July 2022 be and is hereby set aside.c.Each party to bear its own costs.

63. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBEREUNICE NG’ANG’A - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER