[2023] KETAT 214 (KLR)

Kipeto Energy PLC v Commissioner of Domestic Taxes (Appeal 233 of 2022) [2023] KETAT 214 (KLR) (Civ) (5 May 2023) (Judgment)

Neutral citation: [2023] KETAT 214 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Appeal 233 of 2022

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

May 5, 2023

Between

Kipeto Energy PLC

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya and whose principle business activity is the development of the Kipeto wind power project and supply of electricity to Kenya Power and Lighting Company.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, the 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 a review of the Appellant’s tax records for the period January 2016 to September 2020 and thereafter issued its preliminary audit findings vide a letter dated April 6, 2021. In the letter, the Respondent demanded VAT of Kshs 14,506,934. 00 inclusive of penalties and interest and Withholding tax of Kshs 2,667,235. 00 inclusive of penalties and interest in respect of contractual fees and professional fees.

4. The parties engaged through meetings and exchange of documents in an effort to resolve the issues. The Appellant vide a letter dated May 25, 2021 objected to the Respondent’s findings but conceded to tax amounting to Kshs 231,741. 00 in relation to Withholding tax on professional fees.

5. The Respondent issued an assessment through a letter dated October 25, 2021 for additional taxes amounting to Kshs 653,070,100. 00 being Withholding VAT (WHVAT) of Kshs 15,502,585. 00, WHT on payments to Dice Concepts of Kshs 1,054,465. 00, Kshs 636,280,909. 00 being WHT on payments to CMEC China and WHT on professional fees of Kshs 231,741. 00 (all inclusive of penalties and interest).

6. The Appellant lodged its notice of objection vide a letter dated November 24, 2021 after making payment of the undisputed taxes. Thereafter, the Respondent rendered its objection decision vide a letter dated January 21, 2022 confirming taxes amounting to Kshs 652,838,359. 00 inclusive of penalties and interest.

7. The Appellant being dissatisfied with the objection decision lodged a Notice of Appeal dated February 18, 2022 and filed this Appeal on March 4, 2022.

The Appeal 8. The Appeal as stated in the Memorandum of Appeal dated and filed on 4th March, 2022 was premised on the following grounds:-i.That the Respondent erred in law and fact by failing to distinguish between the onshore and offshore component of the EPC contract and thereby imposing withholding tax (“WHT”) on the entire EPC contract between the Appellant and CMEC China & CMEC Kenya.ii.That the Respondent erred in law and fact by assessing WHT on payments made by the Appellant to CMEC China, contrary to its earlier written confirmation that the payments qualify for exemption from WHT under law and in breach of the principle of legitimate expectation.iii.That the Respondent erred in law and fact by concluding that CMEC China had created a PE in Kenya without providing any reasons or justification for the assertion and in contravention of Section 2 of the Income Tax Act (now amended effective July 1, 2021).iv.That the Respondent erred in law and fact by imposing WHT on materials, equipment and land lease payments arising from the Dice Concepts contract.v.That there is no revenue loss occasioned to the Respondent given that all the suppliers accounted for the full VAT payable on the payments made by the Appellant at all times.vi.That the Respondent erred in law in imposing penalties and interest on Withholding VAT yet there was no amount due or outstanding since the suppliers paid the principal VAT demanded.vii.That the Respondent erred in law and fact by disregarding the supporting information and documents provided by the Appellant in making its decision.

The Appellant’s Case 9. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal;a.The Appellant’s Statement of Facts dated March 4, 2022 and filed on the same date together with the documents attached thereto.b.Witness statement of Amyn Mussa dated July 12, 2022 and filed on July 14, 2022 that was admitted in evidence on oath on October 12, 2022. c.The Appellant’s submissions dated the October 26, 2022 and filed on October 27, 2022.

10. The Appellant submitted that for the purposes of developing the project and subsequent supply of power to KPLC, it entered into a Power Purchase Agreement (“PPA”) with KPLC dated June 17, 2016. That under the PPA, the Appellant would construct, own, operate and maintain the project while KPLC would purchase the power generated from the project. The Appellant also received a letter of support from the Government of Kenya acting through the National Treasury for the implementation of the project.

11. The Appellant averred that the Respondent carried out a review of the Appellant’s tax records for the period January 2016 to September 2020. That following the review, the Respondent issued its preliminary audit findings vide a letter dated April 6, 2021. That in the letter, the Respondent contended that the Appellant had been appointed as withholding VAT agent on December 19, 2019.

12. It averred that the Respondent further alleged that the Appellant had not withheld and remitted VAT and proceeded to demand VAT of Kshs 14,506,934. 00 (inclusive of penalties and interest). In addition, the Respondent alleged that the Appellant had not deducted withholding tax of Kshs 2,667,235. 00 (inclusive of penalties and interest) in respect of payments for contractual fees and professional fees.

13. That following receipt of the Respondent’s preliminary tax audit findings it responded through its tax consultants vide a letter dated 19th April 2021. It added that on the issue regarding withholding VAT (WH VAT), the Appellant explained that there was no revenue loss occasioned to the Respondent as the Appellant’s suppliers had accounted for the full VAT payable on the payments made by the Appellant.

14. That additionally, in respect to WHT, it explained that the Respondent had erroneously computed WHT on materials, equipment and land lease payments contrary to the provisions of the ITA.

15. The Appellant submitted that the Respondent responded vide a letter dated 11th May 2021 and reiterated its finding that the Appellant was liable to pay WHVAT of Kshs 14,506,934. 00 (inclusive of penalties and interest) computed until the November 20, 2020.

16. That the Respondent made a further finding that the Appellant failed to withhold WHT payable on engineering, procurement and construction contract (EPC Contract) it had entered into with China Machinery Engineering Corporation of China (CMEC China), a company registered under the Laws of the Republic of China and CMEC Africa Development Limited (CMEC Kenya), a company incorporated under the Laws of Kenya, which is a subsidiary of CMEC China. That as a result, the Respondent made a finding that WHT of Kshs 636,280,909. 00 (inclusive of penalties and interest) was due and payable by the Appellant.

17. The Appellant stated that the Respondent also maintained that the Appellant failed to account for WHT on some payments for contractual services rendered by Dice Concepts and as such made a finding that WHT to the tune of Kshs 993,205. 00 was due and payable. That the Respondent also sought to disallow expenses to the tune of Kshs 20,250,200. 00 relating to Gifan Enterprises for corporate income tax on the basis that the same were addressed to a different entity, Hidco Limited, and as such not wholly and exclusively incurred in the generation of income by the Appellant.

18. The Appellant averred that it held several meetings with the Respondent in a quest to assist the Respondent to best understand the issues in dispute. That the Respondent further sought additional information on multiple occasions. That not only did the Appellant furnish the same to the Respondent but explained the same in subsequent meetings with the Respondent’s representatives.

19. The Appellant further stated that it responded to the Respondent’s letter of May 11, 2021 vide a letter dated May 25, 2021. That in the letter, it objected to KRA’s findings but agreed to settle taxes not in dispute in relation to WHT of Kshs 231,741. 00 assessed on professional fees paid to Messrs. Tom Ojienda and Irura Nguchuga & Co. Advocates.

20. That subsequently, the Respondent issued an assessment against the Appellant through a letter dated October 25, 2021 seeking additional taxes to the tune of Kshs 653,070,100. 00.

21. That pursuant to Section 51 of the Tax Procedures Act, it lodged its notice of objection against the Respondent’s entire assessment vide a letter dated November 24, 2021.

22. That in lodging the objection, it also provided proof of payment of the taxes not in dispute consisting of WHT assessed on professional fees paid to Messrs. Tom Ojienda and Irura Nguchuga & Co Advocates amounting to Kshs 231,741. 00, in compliance with Section 51(3)(b) of the TPA.

23. The Appellant submitted that the Respondent subsequently rendered its objection decision vide a letter dated January 21, 2022 wherein it confirmed an assessed amount of Kshs 652,838,359. 00 as summarized in the table below;

Tax Head Description Principal Tax Penalty Interest Total

WH VAT VAT not withheld 12,450,638 622,532 2,429,815 15,502,985

WHT Dice Concepts 765,743 76,574 212,147 1,054,464

CMEC payments 491,233,230 49,123,323 95,924,357 636,280,910

Total

504,499,611 49,822,429 98,566,319 652,838,359 24. It was the Appellant’s submission that on the 24th of January 2016, it entered into an EPC Contract with CMEC China and CMEC Kenya. That the EPC Contract was for the engineering, procurement, construction, testing and commissioning of 60 wind turbines, the connection facilities, auxiliary items and all related and ancillary works, equipment and facilities for the project to be located in Kajiado County, Kenya.

25. It averred that the contract was performed through onshore services provided in Kenya and offshore services provided outside Kenya. That Clause 1. 2 of the EPC Contract defines the term ‘Works’ as follows:“Works'' means the Permanent Works and the Temporary Works, or either of them as appropriate. For the avoidance of doubt but without prejudice to the generality of the foregoing definition:a.the portion of the Works related to services to be performed outside the Country and the equipment, Materials and Plant to be imported into the Country (the Offshore Works) shall be performed by and invoiced by CMEC China; andb.the portion of the Works related to services to be performed inside the Country and the equipment, Materials and Plant sourced within the Country (the Onshore Works) shall beperformed by and invoiced by CMEC Kenya”.1. That as stated in the above definition, CMEC Kenya was exclusively responsible for the portion relating to services to be performed in Kenya and the equipment, materials and plant sourced from within Kenya (the Onshore Portion). CMEC Kenya would therefore carry out its obligations and invoice for the Onshore Portion only.2. That on the other hand, CMEC China was also exclusively responsible for the portion of the works related to services to be performed outside Kenya and the equipment, materials and plant to be imported into Kenya (the Offshore Portion). Similarly, CMEC China would perform its obligations as described and invoice for the Offshore Portion only.3. The Appellant stated that the total EPC Contract price was USD 208,804,900 broken down as follows:i.USD 177,484,165 for the Offshore Portion to be performed by CMEC China (that the parties subsequently agreed to variations which increased the costs for the Offshore Portion by an additional USD 165,850).ii.USD 31,320,735 for the Onshore Portion to be performed by CMEC Kenya (the parties subsequently agreed to variations which increased the costs for the Onshore Portion by an additional USD 233,534. 00. 4.That it was important to note that the EPC Contract price for the Onshore Portion and Offshore Portion were invoiced and paid to CMEC Kenya and CMEC China respectively as set out in the EPC Contract. That this demonstrates that the value of the offshore and onshore components of the EPC Contract were not only divisible but also distinguishable.5. The Appellant further averred that both the onshore and offshore components of the EPC Contract consisted of separate components of goods on one hand and services on the other. That as per clause 1. 2 of the EPC contract highlighted above, the onshore and offshore works comprised of two main components namely:i.Services to be performed inside/outside the country.ii.Equipment, materials and plant to be imported/exported into the country (“goods”).6. That based on the above, it was clear that the parties to the EPC Contract entered into the EPC Contract with the mutual understanding and meeting of minds that:i.the EPC Contract was a split and divisible contract as evidenced by the clear split between goods and services; andii.the obligations of each party (CMEC Kenya and CMEC China) were distinct and separate such that the works would be performed separately, i.e, the Onshore Works and the Offshore Works, respectively. That indeed, the works were performed separately, invoiced separately, and paid for separately, as envisaged under the EPC Contract.7. The Appellant averred that WHT was only deductible on the onshore component of the EPC Contract, which related to provision of services by CMEC Kenya. That the Appellant therefore withheld tax at the rate of 3% for the onshore component of the EPC Contract that related to provision of services.8. It submitted that on the other hand, WHT is not applicable to goods i.e. supply of plant and equipment, and on that basis the Appellant did not therefore withhold tax on the goods component relating to the entire EPC Contract.9. The Appellant also averred that it did not impose WHT on the offshore component of the EPC Contract on the basis that the payment by the Appellant for the offshore services related to services that were performed by a non-resident person outside Kenya and were therefore not taxable in Kenya pursuant to an exemption granted under Legal Notice 165 of 2015 (the “Legal Notice”).10. That in a bid to impose WHT, the Respondent disregarded the split between the goods and services components of the EPC Contract, the offshore and onshore components of the contract as well as the WHT exemption granted under the Legal Notice. It was therefore erroneous for the Respondent to assert that the Appellant should have withheld tax on the entire EPC Contract, including the exempt offshore portion and the equipment portion, which are not subject to WHT.11. The Appellant asserted that the foregoing interpretation by the Respondent was not only erroneous, but without merit or basis in law, for the following reasons:a.The Respondent disregarded the split and divisibility nature of the EPC Contract by demanding WHT on the entire contract amount.b.That the Respondent disregarded the WHT exemption under Legal Notice 165 of 2015 by imposing WHT on the offshore components of the EPC Contract.c.That the Respondent is in contravention of Section 10 and Section 35 of the ITA by demanding WHT on equipment and machinery component of the EPC Contract.d.The Respondent erred by imposing WHT on the local portion of services rendered pursuant to the EPC Contract despite WHT having already been accounted for on the same.

37. The Appellant submitted that although the EPC Contract is embodied in a single document, as described above, the same was divisible and split into; Onshore and Offshore works; as well as goods and services components. That the Respondent’s allegation that the EPC Contract was not divisible was a misapprehension of law and facts.

38. The Appellant stated that offshore and onshore components of the EPC Contract were distinguishable by the place of performance as well as the entity responsible for the performance of the specific component. The Appellant reiterated that CMEC China was responsible for the performance of the offshore works outside Kenya while CMEC Kenya was responsible for the performance of the onshore works in Kenya. That the split between the offshore and onshore components clearly demonstrated that the EPC Contract was divisible.

39. The Appellant further reiterated that the EPC Contract was further divisible into the goods component and services component. Based on the divisibility of the goods and services components, the Appellant was able to obtain tax exemptions on the goods imported under the EPC Contract. That this was best illustrated by the letter dated 2 November 2017 issued by the Principal Secretary, National Treasury exempting various materials and equipment imported by the Appellant from VAT, Railway Development Levy and Import Declaration Fee. The said letter listed the specific equipment and materials subject to the tax exemptions including the respective cost. These listed equipment and materials included: wind turbine generator system equipment, embedded foundation parts for wind turbines, box type transformer assembly, substation equipment amongst several other equipment.

40. That the Respondent played a key role during the process of the application for the specific tax exemptions. It averred that the Respondent was therefore aware that the goods imported under the EPC Contract were granted an exemption status by the National Treasury. That it was therefore surprising for the Respondent to allege that all the payments made to CMEC China were in relation to services yet it was involved in the issuance of tax exemptions for the same goods under the EPC Contract. The Respondent’s classification of the payments under the EPC Contract as payments for services was therefore unjustified.

41. That it was also not disputed that indeed there was a service component to the EPC Contract. In particular, the designing, engineering, commissioning, installation and testing were indeed services. As such, a clear distinction is evident between the equipment component of the EPC Contract from the service component of the EPC Contract.

42. The Appellant submitted that the principle of divisibility of contracts was pronounced by the Indian Supreme Court in the case of State of Madras v Gannon Dunkerley and Co. 1958 AIR 560, 1959 SCR 379 where the court stated as follows:“…It is possible that the parties might enter into distinct and separate contracts, one for the transfer of materials for money consideration, and the other for payment of remuneration for services and for work done. In such a case, there are really two agreements, though there is a single instrument embodying them…”

43. That further, in the case of Karnataka Power Transmission Corporation Ltd v The Assistant Commissioner of Income Tax, ITA Nos. 112 to 115 & 162 to 165 Bang/2010, the following principles on divisibility of contracts were established:a)It is an accepted practice for the parties to the contract to enter into a consolidated contract with the split up of consideration for various elements viz., supply of materials, erection services and civil construction service… It goes to say that if there is a split of consideration towards material and labour, it cannot be said that the entire contract is an indivisible works contract; andb)In order to divide the composite or turnkey contract, the essential attributes are as follows:i.The liability of the parties to the contract arises at several stages.ii.The obligations under the contract are distinct ones. The supply obligation is distinct and separate from the service obligation.iii.The price for each of the component of the contract is separate. In other words, the price payable for the supply of material is distinct from the consideration payable for the erection and civil construction.”

44. The Appellant averred that the Respondent had asserted that the EPC Contract was a composite one for the delivery of the Project and for that reason, the EPC Contract was not divisible. The Indian case of Ishikawajma - Harima Heavy Industries Ltd. v DIT (2007) 288 ITR 408 (SC) provides guidance on the tax obligations of contracts where the supplies and services are provided in turnkey (EPC) projects. That in particular, the Court stated as follows:“The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of the contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service of obligation. Price for each of the components of the contract is separate. Similarly, offshore supply and onshore services have separately been dealt with. Prices in each segment are also different. The very fact that in the contract, the supply segment and service have been specified in different parts of the contract is a pointer to show that the liability of the Appellant thereunder would also be different. We would in the aforementioned context consider the question of division of taxable income of offshore services. Parties were ad idem that there existed a distinction between onshore supply and offshore supply. The intention of the parties, thus, must be judged from different types of services, different types of prices, as also different currencies in which the prices are to be paid.”

45. That further, in the case of the East African Marine Systems Limited (TEAMS) v Commissioner of Domestic Taxes (2018) eKLR (the TEAMS case), the Respondent had alleged that the contract entered into by TEAMS with Alcatel Lucent for the laying of a submarine cable was a “single contract”. In reaching the conclusion that the contract had both a goods and services components, and these had to be taxed separately and individually, the Tax Appeals Tribunal held as follows:“…the Tribunal has painstakingly perused the entire contract which is not only elaborate but quite detailed and has no hesitation in determining that the supply of the said cable system is substantially a “Supply of Goods”. We agree with the Appellant that the goods in the contract accounted for approximately 81% whilst the services accounted for roughly 19% as can be easily discerned from the price schedule which is an integral part of the said contract…The Tribunal makes a finding in concurrence with the position of both the Respondent and the Appellant that the installation of the cable system was characterized as a “Multiple” and/or “Split” contract for the “Supply of Goods” and “Services”

46. That similarly, the Tax Appeals Tribunal pronounced itself on the issue of divisibility of contracts in the case of Man Diesel and Turbo SE Kenya v Commissioner of Domestic Taxes (Appeal No 26 of 2017) by stating as follows:“In the instant dispute, the sale of offshore equipment by MAN DT Germany cannot be said to be the same or similar to the services offered by MAN DT Kenya. Moreover, the sale of the equipment did not occur in Kenya where MAN DT Kenya existed. Furthermore, the Permanent Establishment (“PE”) had not been established for sale of equipment. Indeed, the activity of supply of equipment cannot be considered same or similar to the activity of installation”

47. The Appellant averred that in line with the principles established in the cases above, the EPC Contract is divisible because:a.As demonstrated in the cases set out above, there is no requirement under Kenyan law for a multiple or split contract to be treated as a single contract for taxation purposes. That on the contrary, Kenyan law recognizes the freedom of parties to contract and to enter into divisible contracts. That this freedom is best described by the Tribunal in the TEAMS case where it was held that:“The Tribunal is of the view that the doctrine of freedom to contract by and between the parties must be upheld in all cases unless the said freedom is abused by the contracting parties as the said doctrine forms a fundamental tenet in a free economy like Kenya’s.”b.That by disregarding the divisibility of the offshore and onshore components as well as the goods and services components, the Respondent was attempting to re-write the terms of the EPC Contract and was thus violating the parties’ freedom to contract. That the Respondent should not be allowed to disregard the express contractual terms in a bid to impose WHT where the same is not payable.c.That further, in JGC Corporation v Federal Inland Revenue Service (Appeal No. FHC/L/4A/14), the IRS had attempted to re-write a contract, and the first-tier tribunal had erred in agreeing with the IRS’s position. On appeal, the court in that case held in arriving at its decision ruled as follows:-“In failing to give a holistic consideration of the contracts undertaken by the parties involved in the project the Tribunal disregarded the actual transaction undertaken by the parties and substituted the same for another in determining the tax liability of the Appellant.”That on this basis, the Appeal was allowed.d.The obligations and liability of CMEC Kenya and CMEC China arose at several and distinct stages as evidenced by the EPC Contract. The performance of the Offshore works is done outside Kenya while the Onshore works are performed in Kenya.e.That there is a clear description of the equipment to be supplied (including their costs) from the service components of the EPC Contract. That further, evident from Schedule 2 of the EPC Contract, there is a clear split of the consideration paid for the Onshore Works and the amount to be paid for the Offshore works. In particular, $177,484,165 corresponding to the Offshore Works performed is to be invoiced by CMEC China; and $31,320,735 corresponding to the Onshore Works performed is to be invoiced by CMEC Kenya.1. The Appellant therefore submitted that its EPC Contract with CMEC Kenya and CMEC China is indeed divisible, contrary to the Respondent’s assertions. That as demonstrated in the judicial decisions highlighted above, turnkey contracts, though composite in nature, can be split and divisible contracts which should not be looked at as a whole for tax purposes, but rather in their split components.2. The Appellant averred that the Respondent erred in law and in fact by disregarding the split and divisible nature of the EPC Contract and subjecting the entire contract sum to WHT. The Respondent’s assessment and objection decision disregards the fact that the Appellant correctly accounted for WHT on the Onshore portion of the EPC Contract (in particular payments it made to CMEC Kenya) and ignores the provisions of the Legal Notice which exempts payments made to CMEC China from WHT.3. It was the Appellant’s contention that the Respondent disregarded Legal Notice 165 of 2015 by imposing WHT on the offshore components of the Contract. The Appellant submitted that the Respondent’s assessment and objection decision seeking to impose WHT on the whole of the EPC Contract between the Appellant, CMEC Kenya and CMEC China is in contravention of the Legal Notice.4. That the Legal Notice expressly provides that “Payments made to a non-resident for services rendered under a Power Purchase Agreement” are exempt from tax under the ITA.5. The Appellant contended that pursuant to the provisions of the ITA, CMEC China is a non-resident person for tax purposes. That Section 2 of the ITA defines a resident in relation to a body of persons to mean:(i)that the body is a company incorporated under a law of Kenya; or(ii)that the management and control of the affairs of the body was exercised in Kenya in a particular year of income under consideration; or(iii)that the body has been declared by the Minister, by notice in the Gazette, to be resident in Kenya for any year of income;”

53. It averred that CMEC China is a non-resident company incorporated under the laws of the People’s Republic of China, with its registered office located at Beijing. CMEC China’s management and control of its affairs is equally exercised in China, not Kenya. In addition, there is no Gazette Notice from the Cabinet Secretary declaring it to be resident in Kenya. CMEC China therefore qualifies as a non-resident meeting the first test for applicability of the exemption under the Legal Notice.

54. The Appellant submitted that the second test is that the payment ought to relate to services rendered under a Power Purchase Agreement (“PPA”). That it was not in question that the Appellant indeed does have a PPA in place with KPLC, a fact acknowledged in the Respondent’s letter conveying the assessment. That under paragraph 5. 1 of the PPA, the Appellant has an obligation to ‘’design, finance, construct and install the Plant’’. The term ‘’Plant’’ is defined to comprise up to 60 generating units (wind turbines), metering equipment, connection facilities, auxiliary items and all related and ancillary equipment, fixtures, fittings, works and machinery for collecting and transporting the generated power to KPLC.

55. The Appellant stated that in order for it to meet its obligations under the PPA, the Appellant engaged CMEC China, pursuant to the EPC Contract, to undertake the Offshore Portion, defined under the EPC Contract as ‘’services to be performed outside the Country [Kenya] and the equipment, materials and plant to be imported into the Country [Kenya]’’. That the Offshore Works undertaken by CMEC China have therefore been rendered under the PPA as they have been provided to enable the Appellant to meet its obligations under the PPA. As such, the offshore services rendered by CMEC China under the EPC Contract are exempt from WHT under the Legal Notice.

56. The Appellant added that in imposing WHT on the entire contract amount, the Respondent attempted to tax the offshore works under the EPC Contract contrary to the express exemption granted by the ITA. That on the basis that all the requirements set by the ITA for the tax exemption have been met, the Respondent’s imposition of WHT is ultra vires and without basis in law.

57. The Appellant further stated that its PPA price was determined and fixed in consideration and based on the tax position and circumstances at the time of signing the PPA. That this included consideration of the split contract and the exemptions granted by the Legal Notice. That the proposed finding by the Respondent imposing WHT on the entire EPC Contract attempts to alter the terms of the PPA significantly without the consent or consideration of the position of all the parties to the PPA.

58. The Appellant averred that it is trite law that one can only be taxed against clear provisions of the taxing law. That the rationale behind this doctrine is that levying of tax is burdensome and tax should only be imposed if the language of the statute unequivocally says so. That Rowlatt J in the famous case of The Cape Brandy Syndicate –v- The Commissioner of Inland Revenue (1) (1930) 12 TC 358 expressed as follows:“In a taxing Act 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 as to a tax. Nothing is to be read in, nothing is to be implied’ and ‘subsequent legislation, if it proceeded on an erroneous construction of previous legislation, cannot alter the previous legislation”.

59. That the above position was upheld by the Courts and in the case of Mount Kenya Bottlers & 3 Others v The Attorney General & 3others (2019) eKLR, where the Court of Appeal held that:-“There should be no room for presumption or assumption in this case… As stated earlier, nothing is to be read in or implied in tax law and a strict constructionist interpretation must be adopted.”

60. The Appellant asserted that the provisions of the Legal Notice are clear on the WHT exemption available on payments made to non-resident services providers under a PPA. The Legal Notice remains in force and unless it is withdrawn, the WHT exemption has been and will continue being applicable on all payments made to a non-resident person pursuant to a PPA.

61. That the WHT demanded by the Respondent, in disregard of the WHT exemption set out under the Legal Notice, would be deemed to constitute a change in the tax position under the provisions of the PPA, as it would be seeking to change the interpretation of or modify the requirements with which the Appellant is required to comply with in relation to taxes. The Appellant explained that Clause 9. 6 of the PPA allows a mechanism for the parties to seek an adjustment of the tariff payable to the Appellant under the PPA in order to place the Appellant in the same financial position as it would have been had the change in tax not occurred.

62. That it should also be noted that the Appellant has been afforded further rights under the letter of support issued by the Government of Kenya (“the GoK”) dated August 4, 2017 (“the LoS”). The LoS entitles the Appellant to trigger a compensation mechanism where a change in tax arises. That consequently, the disapplication of the WHT exemption applicable pursuant to the Legal Notice in respect of the payments made by the Appellant to CMEC China would constitute a change in tax under the PPA and the LoS.

63. The Appellant thus averred that the Respondent indeed erred in law and fact in disregarding the Legal Notice by imposing WHT on the offshore components of the EPC Contract.

64. The Appellant submitted that the Respondent was in contravention of Section 10 and Section 35 of the ITA by demanding WHT on the equipment component of the EPC Contract. The Appellant contended that the Respondent erred in law and fact by demanding WHT on the equipment component of the EPC Contract contrary to express provisions of the law. That as stated earlier, a significant portion of the EPC Contract related to the supply of machinery, equipment and goods.

65. The Appellant further submitted that WHT as stipulated in the ITA is a tax on services and not on goods, such as equipment. Section 10(1) of the ITA provides that:“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 the amount shall be deemed to be income which accrued in or derived from Kenya.”

66. That Section 35(1) of the ITA further states as follows in reference to payments made to non-resident persons or persons not having a permanent establishment in Kenya;“A person shall, upon payment of an amount to a non-resident person not having a permanent establishment in Kenya in respect of -a.a management or professional fee or training fee...”

67. That the foregoing position is reiterated by Section 35(3) of the ITA in relation to payments made to residents or non-residents with a permanent establishment in Kenya.

68. The Appellant added that management or professional fee is defined under Section 2 of the ITA to mean:“a payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, agency, contractual, professional or consultancy services however calculated”

69. That based on the above provisions, it is clear that WHT does not apply on equipment.

70. The Appellant averred that it is trite law that any demand for tax has to be made on the basis of an express statutory provision. That in Vestey v Inland Revenue Commissioners [1979] 3 All ER at 984, this position was set out categorically as follows:“Taxes are imposed on subjects by parliament. A citizen cannot be taxed unless he is designated in clear terms by a taxing Act as a taxpayer and the amount of his liability is clearly defined.”

71. That the foregoing position was further reiterated in Keroche Industries Limited v Kenya Revenue Authority & 5others [2007] 2 KLR 240 where Justice Nyamu held that:“taxation can only be done on clear words and cannot be on intendment. Linked to this is that a penalty must be imposed in clear words. Finally even where the inclination of the legislature is not clear or where there are two or more possible meanings, the inclination of the court should be against a construction or interpretation which imposes a burden, tax or duty on the subject...Nothing summarizes the above position better than Brooms Legal Maxims: ‘a remedial statute therefore shall be construed so as to include cases which are within the mischief which the statute was intended to remedy; whilst, on the other hand, where the intention of the Legislature is doubtful, the inclination of the court will always be against that construction which imposes a burden, tax or duty or the subject.”

72. In light of the foregoing, the Appellant averred that the Respondent indeed erred in law and fact in demanding WHT on the contract amount paid in respect of the equipment component of the EPC Contract.

73. The Appellant therefore asserted that the decision by the Respondent to impose WHT on the entire EPC Contract, including on the equipment component, is erroneous and should be vacated in its entirety with its attendant penalties and interest.

74. It was the Appellant’s contention that the Respondent erred by imposing WHT on the local portion of services rendered in the Contract despite WHT having been already accounted for.

75. The Appellant further submitted that as per the ITA, WHT was due and payable on the payments it made to CMEC Kenya in respect of the onshore contractual services rendered under the EPC Contract. That the Appellant therefore withheld and remitted WHT payable on the relevant payments made to CMEC Kenya. The Appellant further attached proof of the payment of the said WHT.

76. That therefore, a demand for WHT on the same income which had already been subjected to WHT was not only baseless in law but was tantamount to double taxation, which is illegal, oppressive, and discriminatory.

77. The Appellant submitted that the High Court of Kenya sitting at Nyahururu in the case of Republic v County Government of Nyandarua; County Assembly of Nyandarua (Interested Party), Nyandarua Recreational & Entertainment Self Help Group & 12 others (Ex-parte) [2019] eKLR stated the following in relation to double taxation:“Double taxation is illegal, oppressive and discriminatory in nature. It is also oppressive and hence contrary to rules of natural justice and in my view, an order of certiorari must issue to call for the decision to pay for the license twice to be quashed. The provisions for licensing must be contained in either the Finance Act or the Nyandarua County Alcoholic Drinks Control Act and one of the acts must be quashed.”

78. In light of the foregoing arguments, the Appellant asserted that the Respondent’s Objection decision on WHT in respect of the EPC Contract was erroneous and should be vacated in its entirety.

79. According to the Appellant, the Respondent erred in law and fact by assessing WHT on payments made by the Appellant to CMEC China, contrary to its earlier written confirmation that the payments qualify for exemption from WHT under law and in breach of the principle of legitimate expectation.

80. That the Respondent issued a pre-assessment notice dated March 20, 2020 (the Pre-Assessment Notice) to the Appellant where the Respondent sought to levy WHT on payments that the Appellant had made to CMEC China in respect of the offshore services.

81. That in its response, it provided detailed explanations on why the payments to CMEC China were not subject to WHT. That in particular, the Appellant explained that the payments were exempt from WHT by virtue of the Legal Notice. The Legal Notice provides for an exemption from WHT in respect of payments that are made to a non-resident person for services rendered under a PPA.

82. The Appellant further argued that the Respondent issued its response via a letter dated May 19, 2020 in which the Respondent concurred with the Appellant’s arguments and further confirmed that the payments that were made to CMEC China, a non-resident contractor, were indeed exempt from WHT pursuant to the Legal Notice and that the Appellant was not required to charge WHT on the same.

83. That based on the Respondent’s response, the Appellant had a legitimate expectation that the payments it made to CMEC China were not subject to WHT as confirmed by the Respondent and there was a reasonable expectation that the matter had been closed. The Appellant submitted that the WHT assessment issued by the Respondent on the payments made to CMEC China, barely five (5) months after the Respondent’s confirmation that the payments were exempt from WHT, is a breach of the Appellant’s legitimate expectation.

84. The Appellant averred that in the case of Communications Commission of Kenya & 5 others v Royal Media Services Limited & 5 others [2014] eKLR, the Supreme Court of Kenya explained the concept of legitimate expectation as follows:“Legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil. Therefore, for an expectation to be legitimate, it must be founded upon a promise or practice by a public authority that is expected to fulfil the expectation.”

85. That the Supreme Court went on to hold that legitimate expectation arises where the following conditions are met:a.there must be an express, clear and unambiguous promise given by a public authority;b.the expectation itself must be reasonable;c.the representation must be one which it was competent and lawful for the decision-maker to make; andd.there cannot be a legitimate expectation against clear provisions of the law or theConstitution.

86. The Appellant contended that it had met all the conditions for legitimate expectation in relation to the Respondent’s response as set out below:a.The representation made by the Respondent was clear, unambiguous and without any qualification. Specifically, the Respondent stated that, “we wish to confirm that pursuant to legal notice number 165 of 2015, the income of non-resident contractors is exempt from tax and therefore you are not required to charge withholding tax to your non-resident contractors”;b.The representation was made within the Respondent’s mandate and authority and as such, a reasonable person/taxpayer would have relied on the representation;c.The legitimate expectation was induced by the Respondent upon the Appellant providing a detailed explanation on the Pre-Assessment Notice; andd.The Respondent’s response was issued lawfully and within the realm of its powers.

87. The Appellant averred that a legitimate expectation ought not be frustrated because it is the root of the Constitutional principle of the rule of law which requires predictability and certainty in Government dealings with the public.

88. That in the case of Keroche Industries Limited v Kenya Revenue Authority & 5 Others [2007] eKLR, the High Court stated that:“…the court will be sending out a clear signal that legitimate expectation is based not only on ensuring that legitimate expectations by the parties are not thwarted, but on a higher public interest beneficial to all including the respondents, which is, the value or the need of holding authorities to promises and practices they have made and acted on and by so doing upholding responsible public administration. This in turn enables people affected to plan their lives with a sense of certainty, trust, reasonableness and reasonable expectation.

89. That further, in the case of Vivo Energy Kenya Limited v Commissioner of Customs & Border Control, Kenya Revenue Authority & Another [2020] eKLR , the High Court relied on the principle explained in Kenya Revenue Authority & 2 others v Darasa Investments Limited [2018] eKLR, where the Court of Appeal stated that:“Legitimate expectation refers to the principle of good administration or administrative fairness that, if a public authority leads a person or body to expect that the public authority will, in the future, continue to act in a way either in which it has regularly (or even always) acted in the past or on the basis of a past promise or statement which represents how it proposes to act, then, prima facie, the public authority should not, without an overriding reason in the public interest, renege from that representation and unilaterally cancel the expectation of the person or body that the state of affairs will continue..."

90. The Appellant submitted that the Respondent, in its objection decision, stated that when issuing its response, it was not aware of the Permanent Establishment (“PE”) that CMEC China created and therefore neither the Legal Notice nor the principle of legitimate expectation is applicable. The Respondent has not provided any basis in law to support the allegation that CMEC China had created a PE in Kenya. Consequently, the Respondent has not provided any overriding reason in the public interest to renege from the representation made to the Appellant to justify its attempt to disregard the legitimate expectation created.

91. The Appellant further stated that no new evidence or new information was provided to the Respondent to warrant the Respondent’s decision to issue the additional assessment relating to WHT on payments made to CMEC China. That full information and a suite of documents had already been provided to the Respondent before it issued its response confirming that WHT was not applicable to the payments.

92. The Appellant averred that considering the Respondent had all the evidence and information at the time of issuing the response, this created a legitimate expectation on the interpretation on the non-residency status of CMEC China with regards to the Legal Notice. That having created this expectation, the Respondent is not permitted, 5 months later, to give a contrary interpretation of the non-residency status of CMEC China with regards to the Legal Notice.

93. To support its arguments, the Appellant cited the case of Commissioner of Domestic Taxes v Lewa Wildlife Conservancy Limited [2019] eKLR, where the High Court stated that:“…But where I differ with the Appellant’s submission is where it implied that the letter was either a waiver or variation. Not at all. The letter was giving interpretation of the provision of the Third Schedule. The letter therefore was not contra Article 210 of theConstitution.It is my finding that indeed the Appellant’s letter of 16th February 2001 created a legitimate expectation of the interpretation of Third Schedule of the repealed Act. Having created that expectation the Appellant was not permitted, 12 years later, to give a contrary interpretation of that schedule.”

94. In this regard, the Appellant asserted that the Objection decision relating to WHT on payments made to CMEC China was erroneous and should be vacated as the same had already been considered, vacated and the matter closed by the Respondent.

95. The Appellant submitted that the Respondent erred in law and fact by concluding that CMEC China had created a PE in Kenya without providing any reasons or justification for the assertion and in contravention of Section 2 of the ITA (now amended effective 1 July 2021).

96. That the Respondent alleged that CMEC China created a PE in Kenya on the basis that the project was for a duration of 22 months and therefore the project was a PE of CMEC China for tax purposes. It is not clear from the Respondent’s assertion how CMEC China created a PE in Kenya since CMEC China did not undertake any services in Kenya.

97. That as rightly noted by the Respondent, the term PE was defined in Section 2 of the ITA as follows:“permanent establishment in relation to a person, means a fixed place of business and includes a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a building site, or a construction or installation project which has existed for six months or more where that person wholly or partly carries on business:Provided that the permanent establishment of the person shall be deemed to include the permanent establishment of the person’s dependent agent;the expression “dependent agent” means an agent of the person who acts on the person’s behalf and who has, and habitually exercises, the authority to conclude contracts in the name of that person.”

98. It averred that in alleging that CMEC China had created a PE in Kenya, the Respondent was asserting that CMEC China had “a fixed place of business … where that person [CMEC China] wholly or partly carries[ed] on business” in Kenya. The Appellant averred that CMEC China did not have a fixed place of business in Kenya in which it wholly or partly carried on any business in Kenya.

99. The Appellant asserted that the Respondent had not demonstrated how CMEC China created a PE in Kenya for the following reasons:a.That the Respondent had not demonstrated that CMEC China had a fixed place of business in Kenya where it carried on business either wholly or partly; andb.That the Respondent had not demonstrated that CMEC China had a dependent agent in Kenya, acting on its behalf, who had, and habitually exercised, the authority to conclude contracts in the name of CMEC China.

100. The Appellant added that the Respondent had not demonstrated how CMEC China created a PE in Kenya through a fixed place of business in Kenya. It asserted that the Respondent had not demonstrated that CMEC China had a fixed place of business in Kenya where it carried on business either wholly or partly. That the presence of a PE is a question of fact which would need to be proved.

101. That Section 2 of the ITA sets out the following conditions that must be met for a person to create a PE through a fixed place of business:a.there must exist a place of business;b.the place of business must be fixed and includes a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a building site, or a construction or installation project which has existed for six months or more; andc.the person must wholly or partly carry on business in such a fixed place.

102. The Appellant further explained that the definition of the term ‘permanent establishment’ in the ITA is similar to the definition set out in double tax agreements that have adopted the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention (including Kenya) (OECD Convention). It referred to the 2017 OECD Model Tax Convention on Income and Capital and particularly the commentary on Article 5 which deals with PE (the OECD Commentary).

103. That the OECD Convention has often been applied in Kenya for transactions where the domestic law provisions are silent. It averred that this position was laid out in the case of Unilever Kenya Limited v Commissioner of Income Tax [2005] eKLR. That the case related to transfer pricing adjustment as provided under Section 18(3) of theITA. That however, at the time, the Income Tax (Transfer Pricing) Rules of 2006 had not yet been introduced and therefore the Appellant relied on theOECD Guidelines for Multinational Enterprises to determine the appropriate method for determining the arm’s length price. It added that in determining the case, the court held that where the ITA is silent on certain matters the provisions of the OECD will apply. In particular, the court held that“… and especially because of the absence of any such guidelines in Kenya, we must look elsewhere. We must be prepared to innovate, and to apply creative solutions based on lessons and best practices available to us. That is indeed how our law will develop and our jurisprudence will be enhanced. And that is also how we shall encourage business to thrive in our country.”

104. The Appellant added that Paragraph 6 of the OECD Commentary provides that a fixed place of business is satisfied for purposes of the definition of a PE when the following conditions are met:a.the existence of a “place of business”, i.e., a facility such as premises or, in certain instances, machinery or equipment;b.this place of business must be “fixed”, i.e., it must be established at a distinct place with a certain degree of permanence; andc.the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the state in which the fixed place is situated.

105. That the Respondent had not demonstrated how any of the above conditions have been satisfied by CMEC China in respect of the Project. In particular, the Appellant emphasised the following:a.CMEC China did not perform any services in Kenya in relation to the Project. If it were the case, CMEC China would have been required to obtain various regulatory licences in Kenya to undertake the services. The Onshore Portion of the Project was implemented by CMEC Kenya; andb.CMEC Kenya or its employees and agents did not undertake any functions or act for and on behalf of CMEC China in Kenya in relation to the Project. CMEC Kenya undertook the services awarded to it under the EPC Contract.

106. The Appellant further contended that Paragraph 39 of the OECD Commentary further provides that a business of an enterprise may be carried on through the fixed place of business by persons who are in a paid-employment relationship with the enterprise, which includes employees and other persons receiving instructions from the enterprise in a dependent agent relationship. That the Respondent had not demonstrated if and how CMEC Kenya or its employees acted as dependent agents of CMEC China in relation to the project.

107. That under Clause 1. 2 of the EPC Contract, CMEC China was exclusively responsible for the Offshore Portion of the works related to services that were performed and the equipment, materials and plant to be imported into Kenya. That on the other hand, CMEC Kenya was exclusively responsible for the onshore portion that related to services that were performed and the equipment, materials and plant sourced from within Kenya.

108. That based on the above facts, CMEC China had not fulfilled the conditions for creating a PE in Kenya by way of a fixed place of business in Kenya through which it carried on any business wholly or partly in Kenya.

109. To buttress its arguments, the Appellant cited the case in the Indian Supreme Court in the case of DIT-II (International Taxation), New Delhi v Samsung Heavy Industries Co. Ltd. [Civil Appeal No. 12183 of 2016] which it averred provided guidance on creating a PE through a fixed place of business. That the Supreme Court stated as follows:“A reading of the aforesaid judgments makes it clear that when it comes to “fixed place” permanent establishments under double taxation avoidance treaties, the condition precedent for applicability of Article 5(1) of the double taxation treaty and the ascertainment of a “permanent establishment” is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment.”

110. That further, with respect to a turnkey project, the High Court in India in the case of Nortel Networks India International Inc. v. DIT (2016) 386 ITR 353 (Del), stated that:“The Assessing Officer’s conclusion that there is an installation PE in India, is also without any merit. A bare perusal of the Services Contract clearly indicates that the tasks of installation, commissioning and testing was contracted to Nortel India and Nortel India performed such tasks on its own behalf and not on behalf of the Assessee (Nortel Networks India International Inc. formerly known as Nortel Networks RIHC Inc was incorporated under the laws applicable in the State of Delaware) or Nortel Canada. Undisputedly, Nortel India was also received the agreed consideration for performance of the Services Contract directly by Reliance.

111. The Appellant asserted that based on the aforementioned facts and judicial decisions, CMEC China cannot be said to have created a PE in Kenya through a fixed place of business in Kenya while performing its services relating to the Offshore Works. That the Respondent had not demonstrated how CMEC China created a PE in Kenya as provided for in the ITA.

112. The Appellant further contended that the Respondent had not demonstrated how CMEC China created a PE in Kenya through a dependent agent. The Appellant asserted that Respondent had not demonstrated that CMEC China created a PE in Kenya through a dependent agent acting on its behalf and who had, and habitually exercised, the authority to conclude contracts in the name of CMEC China and the Respondent had not provided any information that would suggest that this was the case.

113. That Section 2 of the ITA provides that a dependent agent can create a PE in Kenya as follows:“Provided that the permanent establishment of the person shall be deemed to include the permanent establishment of the person’s dependent agent.”

114. That the term ‘dependent agent’ was defined in the ITA to mean:“an agent of the person who acts on the person’s behalf and who has, and habitually exercises, authority to conclude contracts in the name of that person.”

115. The Appellant asserted that in order to create a dependent agent PE under Section 2 of the ITA, a person (i.e. the agent – which could be an individual or a company), must have acted on behalf of CMEC China (i.e. the principal) and concluded contracts in the name of CMEC China. That however, CMEC China and CMEC Kenya independently concluded the EPC Contract, in their own respective names. That CMEC Kenya did not conclude any contract in the name of CMEC China and there was no principal and agent relationship between the two entities.

116. The Appellant submitted that Paragraph 84 of the OECD Commentary provides that for a foreign enterprise to be deemed to have created a PE in another state through a dependent agent, the following conditions must be met:a.a person acts in another state on behalf of the enterprise;b.in doing so, that person habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, andc.these contracts are either in the name of the enterprise or for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or for the provision of services by that enterprise.

117. The Appellant asserted that none of the conditions set out above have been satisfied by CMEC China. That under Clause 1. 2 of the EPC Contract, CMEC China was exclusively responsible for the offshore portion of the works related to services that were performed and the equipment, materials and plant to be imported into Kenya. CMEC Kenya, was exclusively responsible for the Onshore portion that related to services that were performed and the equipment, materials and plant sourced from within Kenya.

118. The Appellant averred that CMEC China did not perform any services in Kenya nor did CMEC Kenya undertake any services or enter into any contractual arrangements as a dependent agent for and on behalf of CMEC China in Kenya. That CMEC China was responsible for performance of the offshore portion of the EPC contract while CMEC Kenya was responsible for the performance of the onshore portion of the EPC Contract. Both CMEC China and CMEC Kenya acted independently in performing their responsibilities under the EPC Contract.

119. That the High Court in India, while deciding on the issue of a dependent agent PE in a turnkey project in the case of Nortel Networks India International Inc. v DIT(2016) 386 ITR 353 (Del), stated that:“The Assessing Officer has also held that Nortel India constituted Dependent Agent PE of the Assessee in India. The aforesaid conclusion was premised on the finding that Nortel India habitually concludes contracts on behalf of the Assessee and other Nortel Group Companies. In the present case, there is no material on record which would indicate that Nortel India habitually exercises authority to conclude contracts for the Assessee or Nortel Canada. In order to conclude that Nortel India constitutes a Dependent Agent PE, it would be necessary for the Assessing Officer to notice at least a few instances where contracts had been concluded by Nortel India in India on behalf of other group entities. In absence of any such evidence, this view could not be sustained.”

120. The Appellant therefore asserted that CMEC China did not create a dependent agent PE in Kenya in relation to its performance of its offshore portion of the EPC Contract. That the Respondent’s conclusion that CMEC China created a PE in Kenya is unmerited, not factual and has no basis in law.

121. It was the Appellant’s submission that the Respondent erred in law and fact by imposing WHT on materials, equipment and land lease payments arising from the Dice Concepts contract. That the Respondent further made a finding to the effect that the Appellant did not withhold payments to Dice Concepts (“Dice”) for work done as well as for the supply of materials and services in the course of rendering their services. That the Respondent pursuant to Section 35(3)(f) of the ITA imposed WHT at the rate of 3% for the payments made by the Appellant to Dice Concepts.

122. It averred that in particular, the Respondent’s assessment in relation to Dice Concepts is as shown below:

Vendor Taxable Amount(KES) WHT@ 3%(KES) Penalty(KES) Interest(KES) Total(KES)

Dice Concepts 25,524,765 765,743 76,574 212,147 1,054,465 123. The Appellant stated that Dice Concepts was contracted by the Appellant to complete its housing construction works in Kajiado. That the completion of housing construction works involved; external and internal finishing of fifty-eight (58) houses to be occupied by families affected by the project in Kajiado, remedying defects in twenty-three (23) completed houses, construction of three (3) large water tanks, external and internal finishing of 36 ablution blocks, upgrading the abandoned construction camps as well as decommissioning after completion.

124. The Appellant averred that Appendix 2 of the Appellant - Dice Concepts contract shows a clear split between plant, materials and equipment from the services component of the contract. In line with the contract, the Appellant confirmed that Dice Concepts not only performed services but also supplied equipment and materials to the Appellant.

125. The Appellant confirmed that it withheld and remitted WHT at the appropriate rate for the payments it made to Dice Concepts for the services component of the contract.

126. The Appellant further reiterated its earlier position that the Respondent in contravention of the law imposed WHT on equipment, materials and lease payments which are not subject to WHT under Section 35(3)(f) of the ITA. That Section 35(3)(f) of the ITA provides as follows:(3)Subject to subsection (3A) a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of -(f)management or professional fee or training fee the aggregate value of which is twenty-four thousand shillings or more in a month:Provided that for the 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;”

127. That in accordance with the foregoing legal provision, a contractual fee must be construed within the meaning of a management or a professional fee as provided under Section 2 of the ITA.

128. That read together with the definition of a management or professional fee, a contractual fee will only arise where a contractual service has been rendered. That the provision is specific to services and not equipment, material or lease payments.

129. The Appellant submitted that the specific components against which the Respondent had made a finding that they constitute contractual fees are not in fact services. That the services do not qualify as management or professional services.

130. The Appellant averred that the respective amounts highlighted by the Respondent relate to goods, materials, equipment, cages amongst others. That none of the said goods qualify as a contractual service and as such no WHT is chargeable.

131. The Appellant argued that taxation can only be done on clear words not intendment and in this regard, WHT cannot be charged on the supply of equipment. That contrary to the Respondent’s claim, a clear reading of the ITA shows that equipment is not subject to WHT.

132. The Appellant insisted that it at all times paid the WHT payable under the law where it made a payment in relation to services and that there is no WHT due and payable in this case as the respective components do not qualify as contractual services.

133. That based on the foregoing arguments, the Appellant prayed that the Respondent’s imposition of WHT on materials, equipment and land lease payments arising from the Dice Concepts contract was erroneous and should be vacated in its entirety.

134. In regards to VAT assessment, the Appellant insisted that there was no revenue loss occasioned to the Respondent given that its suppliers paid and accounted for the full VAT payable on the payments made by the Appellant at all times.

135. It averred that the Respondent asserted that the Appellant was appointed as a WH VAT agent. That further, in accordance with Section 42 A(1) of the TPA the Respondent averred that the Appellant had an obligation as a WH VAT agent to withhold and remit 2% of the taxable value incurred on purchasing taxable supplies at the time of paying for the supplies. That in particular, the Respondent, while placing reliance on Section 39A of the TPA, argued that the amount not withheld should be due and payable by the Appellant.

136. The Appellant asserted that when a WH VAT agent remits the 2% WH VAT charged on supply, the iTax System generates a withholding VAT certificate. That the iTax system makes the certificate available to the supplier indicating the VAT withheld. That this certificate entitles the supplier to claim back the withheld VAT to avoid double taxation since the same tax is declared and paid for by the supplier through VAT returns.

137. That therefore, in absence of the 2% WH VAT being withheld and remitted by the WH VAT agent, the supplier has no withholding VAT credits to claim back while filing its VAT returns. That as such, the supplier must account for the full VAT payable being 16% of the taxable supply made (or 14% as was for the year 2020). That in conclusion, the net effect of the foregoing is that at the end of the transaction involving a taxable supply, the Government would have received the total VAT payable on the supply.

138. The Appellant submitted that despite not withholding and remitting the WH VAT payable, its suppliers accounted for the full VAT payable on taxable supplies. In support of this position, the Appellant attached a breakdown of the payments it made to the respective suppliers between the period January 2020 and December 2020. The Appellant averred that the significant payments were made to CMEC Africa Development Limited, Worley Parsons Kenya Limited and Anjarwalla & Khanna Advocates.

139. The Appellant averred that the suppliers paid the full VAT payable and at no point was a WH VAT certificate used to reduce the VAT liability. That the total VAT payable under the law for the various supplies was fully paid.

140. The Appellant further submitted that whether or not VAT was charged on the whole amount or not by the suppliers is a question of fact which it had answered positively by production of the corresponding evidence.

141. The Appellant also submitted that a demand for WH VAT on taxable supplies whose full VAT had been paid is tantamount to double taxation which is frowned upon in law. That suffice it to say, the Appellant had no way of recharging the cost to the respective suppliers.

142. The Appellant stated that the Black’s Law Dictionary 5th Edition, 1979 defines double taxation in the following terms:“To constitute ‘double taxation’, that tax must be imposed on the same property by the same governing body during the same taxing period and for the same taxing purpose.”

143. That the foregoing definition was affirmed by Mativo J. in Kenya Pharmaceutical Association &anotherv Nairobi City County and the 46 Other County Governments &another[2017] eKLR, where he held that a double tax is the taxing of the same income twice.

144. It was the Appellant’s contention that imposing WH VAT on income which has already been subjected to full VAT payable under the law offends the principle of a good taxation system enshrined under Article 201(b)(i) of theConstitution which provides that:“public finance system in Kenya shall promote an equitable society and in particular the burden of taxation shall be shared fairly” in relation to taxation.

145. It added that the Court in Kenya Flower Council v Meru County Government[2019] eKLR expressed itself on double taxation as follows:“TheConstitution is alive to the fact that the burden of taxation should be shared fairly, as the national and county government raise revenue through imposition of taxes and charges. This is to avoid double taxation or creating a heavier burden of taxation on concerned taxpayers. Therefore, there is absolute necessity of a mechanism that does not produce unnecessary duplication of taxes and one that averts creation of unduly heavy burden of taxation on a particular category of taxpayers.”

146. That the High Court in Stanley Waweru - Chairman & 3 others (Suing as Officials of Kitengela Bar Owners Association) v National Assembly & 2 Others, Constitutional Petition Nos. E005 of 2021 (Consolidated with petition No 1. of 2021) reiterated the foregoing position wherein Odunga J stated as follows:“I agree that it is not only unconstitutional and unlawful to subject one to double taxation but the same is also economically punitive in nature. In Keroche Industries Limited v Kenya Revenue Authority and 5 others HC Misc. Civil Appl No. 743 of 2006 [2007] eKLR it was observed that: “It is of course regarded as penal for a person to be taxed twice over in respect of the same matter.”

147. In light of the foregoing, the Appellant submitted that the principal WH VAT of Kshs 12,450,638. 00 was not due and payable and prays that the Respondent’s decision be vacated accordingly.

148. The Appellant further stated that the Respondent erred in law in imposing penalties and interest on WH VAT yet there was no amount due or outstanding since the suppliers paid the principal VAT demanded. That the Respondent further computed interest on the WH VAT amounts at the rate of 1% in accordance with Section 38(1) of the Tax Procedures Act. That arising from the foregoing computation the Respondent made a finding that the Appellant was liable to pay interest totalling to Kshs 2,429,815. 00

149. It submitted that Section 38 (1) of the Tax Procedures Act provides as follows;“(1) Subject to subsection (2), a person who fails to pay a tax on or before the due date for the payment of the tax shall be liable for late payment interest at a rate equal to one per cent per month or part of a month on the amount unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid.”

150. That the Respondent had also imposed a penalty of 5% (totalling to Kshs 622,532. 00) on the principal WH VAT assessed against the Appellant. It stated that this was in accordance with the stipulations of Section 83A of the Tax Procedures Act which provides as follows:“A person who fails to pay tax on the due date shall be liable to pay a late payment penalty of five percent of the tax due and payable”

151. It was the Appellant’s contention that the foregoing provisions of law are categorical that the late payment interest and penalty shall be calculated in reference to the outstanding amount. The Appellant submitted that in line with its ground of appeal explained above, there is no VAT outstanding. That the full VAT payable on the taxable supplies being 16% and 14% in other occasions were made by the suppliers. It explained that the WH VAT is a constituent amount of the VAT payable which had been duly paid and accounted for by the Appellant’s suppliers.

152. It was therefore the Appellant’s submission that there was no outstanding principal tax in respect of which the penalty and late payment interest would be calculated. As such, the penalty and late interest payment should not be imposed and that the Respondent’s assessment and objection decision should be varied accordingly.

153. The Appellant emphasised that taxation can only be done on clear words not intendment. That in this regard, the penalty and late interest payment should not be imposed as there is no outstanding principal tax. That contrary to the Respondent’s claim, a clear reading of the TPA shows that, in this instance, penalties and interest shouldn’t have been imposed where there is no outstanding principal tax.

154. The Appellant further asserted that the Respondent erred in law and fact by disregarding the supporting information and documents provided by the Appellant in making its decision. It averred that when filing its notice of objection, it furnished the Respondent with relevant, valid and sufficient documents in support of its grounds of objection.

155. On the issue assessed by the Respondent on WHT on the entire contract between the Appellant and CMEC China & CMEC Kenya, the Appellant stated that it had provided the following documents:a.Copies of the Pre-Assessment Notice dated March 20, 2020, the Appellant’s Letter dated 3 April 2020 and the Respondent’s response dated May 19, 2020;b.The EPC contract;c.Letter of exemption issued by the Principal Secretary, National Treasury dated November 2, 2017;d.Schedule 2 of the EPC Contract showing a clear split of the consideration paid for the Onshore Works and the amount to be paid for the Offshore works;e.the Legal Notice; andf.Proof of WHT, withheld and remitted, at the appropriate rate for the payments made to CMEC Kenya by the Appellant in respect of the Onshore contractual services rendered in accordance with the ITA.

156. The Appellant averred that the above documents were relevant and sufficient to satisfy the Respondent on the Appellant’s position that the Respondent:a.had created a legitimate expectation that the payments to CMEC China qualify for exemption from WHT;b.had contravened Section 2 of the ITA (now amended effective 1 July 2021) in concluding that CMEC China had created a PE in Kenya;c.had disregarded the divisibility nature of the EPC Contract between the Appellant, CMEC China and CMEC Kenya;d.had disregarded the Legal Notice by imposing WHT on the offshore components of the EPC Contract; ande.had imposed WHT on the local portion of services rendered in the EPC Contract despite WHT having been already accounted for.

157. On the issue assessed by the Respondent on WHT relating to payments made to Dice Concepts, the Appellant stated that it had provided the following documents:a.Contract between the Appellant and Dice Concepts;b.Appendix 2 of the Contract above showing a clear split between plant, materials and equipment from the services component of the contract;c.Proof of WHT, withheld and remitted, at the appropriate rate for the payments made to Dice Concepts by the Appellant for the services component of the contract; andd.Invoices relating to the payments made to Dice Concepts.

158. The Appellant submitted that the above documents were relevant and sufficient to satisfy the Respondent on the Appellant’s position that the Respondent had contravened Section 35(3)(f) of the ITA in imposing WHT on equipment, materials and lease payments which are not subject to WHT.

159. On the issue assessed by the Respondent on WH VAT not withheld by the Appellant, the Appellant stated that it had provided the following documents:a.Payments made by the Appellant to the respective suppliers between the period January 2020 and December 2020; andb.Proof of VAT payment on the above payments by the respective suppliers (on a sample basis) at the rate(s) of 16% (and 14% where applicable).

160. The Appellant submitted that the above documents were relevant and sufficient to satisfy the Respondent as to the Appellant’s position that no revenue loss was occasioned to the Respondent given that the Appellant’s suppliers paid and accounted for the full VAT payable on the payments made by the Appellant at all times.

161. It averred that Section 51(3) of the TPA provides as follows with regard to a valid notice of objection:-“A notice of objection shall be treated as validly lodged by a taxpayer under subsection (2) if-(a)the notice of objection states precisely the grounds of objection, the amendments required to be made to correct the decision, and the reasons for the amendments; and(b)in relation to an objection to an assessment, the taxpayer has paid the entire amount of tax due under the assessment that is not in dispute or has applied for an extension of time to pay the tax not in dispute under section 33(1)”(c)all the relevant documents relating to the objection have been submitted.

162. That the Appellant, having lodged a valid notice of objection, in accordance with Section 51(3) of the TPA, the Respondent was obliged to consider the same including the documents in support thereof.

163. It contended that failing to consider the supporting documentation provided by the Appellant, the Respondent was in contravention of Section 51(8) of the TPA and breached the Appellant’s right to fair administrative action as provided for under Article 47 of theConstitution.

164. To support its arguments, the Appellant relied on the case of Nizaba International Trading Company Limited v Kenya Revenue Authority [2000] eKLR, where the High court held that failure to consider material facts presented by a party against whom an assessment had been raised amounts to an abuse of legislative provisions and such an assessment cannot be acted upon.

165. That the High court in Republic v Kenya Revenue Authority ex-parte Amsco Kenya Limited [2014] eKLR held as follows:“Further an administrative action cannot be said to be procedurally fair where a decision is arrived at based on an opinion formed as a result of the consideration of the version of only one side since by a consideration of one side one cannot be said to have felt certain about the truth of the matter in dispute.”

166. That further, the High Court in the case of Kenya Medical Association Housing Cooperative Society Limited v Attorney General & another [2016] eKLR held that it was a breach of the rules of natural justice to fail to give consideration to the person against whom a decision is made. Citing Lord Reid in Ridge v Baldwin [1963] 2 ALL ER 66 at page 81 the Court emphasized the effect of this as follows:“Time and again in the cases I have cited it has been stated that a decision given without regard to the principle of natural justice is void.”

167. The Appellant submitted that the Respondent had acted in a manner that is procedurally unfair and in contravention of the law and prayed that the Respondent’s objection decision be vacated accordingly.

The Appellant’s Prayers 168. The Appellant prays for orders that:a.This Appeal be allowed.b.The Respondent’s objection decision dated 21 January 2022 be set aside in its entirety.c.The principal tax and attendant penalties and interest demanded by the Respondent amounting to Kshs 652,838,359. 00 vide its decision date January 21, 2022 be vacated forthwith in their entirety.d.The costs of and incidental to this Appeal be awarded to the Appellant.e.Any other orders that the Tribunal may deem fit.

The Respondent’s Case 169. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated and filed on April 14, 2022 together with the documents attached thereto.ii.The witness statement of Donald Mbeche filed on July 27, 2022 and admitted in evidence under oath on October 12, 2022.

170. The Respondent stated that the dispute arose from an audit conducted with notice on the Appellant for period January 2016 to September 2020. That the Appellant was required to respond to the following issues;a.Failure by the Appellant to withhold VAT of Kshs 14,506,934. 00 for the periods December 2019 to September 2020. b.Withholding tax of Kshs 993,205. 00 on fees paid to a contractor, Dice concepts.c.Withholding tax of Kshs 636,280,909. 00 on fees paid to CMEC for an EPC contract.d.Withholding tax of Kshs 231,741. 00 assessed on professional fees paid to Messrs Tom Ojienda & Co and Irura Nguchuga & Co. for services rendered.e.Add back of expenditure of material costs of Kshs 20,250,000. 00 incurred by sub-contractor but booked in the Appellant’s ledger.

171. The Respondent stated that the Appellant provided the response to the pre-assessment letter vide a letter dated May 25, 2021 and only conceded on the issue of withholding tax on professional fee of Kshs 231,741. 00 and contested the other issues.

172. It was the Respondent’s submission that the Appellant was contracted to deliver a functioning wind farm project in Kenya. That the Appellant divided the contract to onshore and offshore contract. The onshore activities were to be performed by a local company CMEC Africa Development Limited while the offshore activities were to be performed by CMEC China. That the Appellant charged WHT on the payments for local component but failed to charge WHT on payments for foreign component.

173. The Respondent averred that the Appellant also entered into a power purchase agreement with Kenya Power & Lighting Company for 100MW power generating plant on June 17, 2016. That as per the contract, the Appellant was to construct 60 wind turbines generating 1. 7MW each to deliver the required capacity. Consequently, the Appellant engaged CMEC China & CMEC Africa Development to provide engineering, procurement, construction, testing and commissioning of the 60 wind turbines, the connection facilities, auxiliary items and all related and ancillary works, equipment and facilities for the wind power project located in Kajiado County. That the amended contract was signed on 5th March 2018 replacing the original contract signed on 24th January, 2016.

174. That it assessed withholding tax of Kshs 636,280,909. 00 on offshore payments made by the Appellant to the contractor in relation to work done on the basis that the project was supplied and delivered in Kenya.

175. The Respondent averred that as per the amended contract signed on 5th March, 2018, the offshore and onshore elements of the contract are so inextricably linked that the breach of the offshore element would result in the breach of the whole contract. That each component of the contract directly relates to the performance of the integrated contract and as such violation and/or breach on the part of the parties thereto would affect the entire contract.

176. It contended that according to Schedule 2 of the EPC contract, milestone dates had been taken care of, the breach of any of the terms thereof would result in the breach of the entire contract and not just the particular obligation.

177. That materials and equipment supply whether offshore or onshore were attributable to the project which was to be delivered in Kenya. It added that in Alstom Transport Sa v Director of Income Tax (InternationalTaxation) Delhi, AAR No. 958 of 2010; Bangalore Metro Rail Corporation Limited (BMRC) floated a tender for “design, manufacture, supply, installation, testing & commissioning of signaling/train control and communication system” on 04. 06. 2009. Alstom Transport Sa along with, Alstom Project India Limited (ÁPIL’), Thales Security Solutions & Services, SA, Portugal (“Thales”) and Sumitomo Corporation, Japan (“Sumitomo”) entered into a Consortium Agreement 1. 9.2009. the same was executed and registered in Bangalore in India. It was recited in the said Consortium Agreement that “the parties wish to cooperate on an exclusive basis in the submission of a joint tender to the employer for the project and if the tender was accepted, in the negotiation and performance of the ensuing contract”. The agreement specified that the parties were coming together to prepare and submit a tender and to negotiate for securing the award of the contract. Nothing in addition to the contract was to be taken up by any of the parties in respect of the work for which the tender was floated. The parties were to be jointly and severally bound by the terms of the tender and were to be jointly and severally liable to the employer for the performance of all obligations under the contract. the bid submitted by the consortium was accepted by BMRC. The contract between BMRC and the consortium of four, was entered into on 16. 9.2009. The consortium was jointly and severally responsible for the work tendered.

178. That the contract was “to implement the design, manufacture, supply, installation, testing and commissioning of signaling/train-control and communication system” for BMRC project. That it was contended that the design and supply of equipment by the applicant took place outside India. That title to the goods passed outside and payment was received outside India and no part of the income either arose in India or can be deemed to arise in India, the Tribunal ruled that there was no contract for off-shore supply of any equipment but a contract to design, manufacture, test, deliver, install and commission a wind power plant.

179. That in the above case, the contract was to “implement the design, manufacture, supply, installation, testing and commissioning of signaling/train control and communication system” for BMRC project. That it was contended that the design and supply of equipment by the applicant took place outside India and being an offshore transaction, income therefrom was not chargeable to tax in India and no part of the income either arose in India or can be deemed to arise in India. The Tribunal ruled that there was no contract for off-shore supply of any equipment but a contract to design, manufacture, test, deliver, install and commission a wind power plant.

180. The Respondent contended that as per the definition of the term “completion” within Article 1. 2 of the EPC contract, it was envisaged that the contractor was duty bound to perform all works up to the point when it is fully operational and interconnected with the KPLC system. That at no point was CMEC China discharged from the contract after dispatching machinery to the site. That this clearly illustrated in the schedule of payments for Milestones 20-25 yet CMEC China had already delivered the equipment. That this showed that both parties were jointly and severally liable for delivery of the project.

181. The Respondent averred that the project duration was 22 months hence making the contractor a permanent establishment (PE) for purposes of Section 2 of the Income Tax Act.

182. That Section 3(1) of the Income Tax Act, provides for tax to be charged for each year of income whether resident or not, on income accrued or derived from Kenya.

183. The Respondent further averred that the project was supplied and delivered in Kenya thus gains and profits were derived in Kenya. That Section 4(a) of Income Tax Act, Cap 470 further provides that for any business carried partly within and outside Kenya, whole gains or profits shall be deemed to have been accrued or derived in Kenya. That the Section provides as follows“For the purposes of section 3(2)(a)(i)— (a) where a business is carried on or exercised partly within and partly outside Kenya by a resident person, the whole of the gains or profits from such business shall be deemed to have accrued in or to have been derived from Kenya;”

184. That Section 10(1) of the Income Tax Act stipulates that if a resident person makes a payment that relates to contractual payment, the income shall be deemed to be accrued in or derived from Kenya and proviso 1 of the same Section provides that the payment has to be incurred in production of income accrued or derived in Kenya for a business carried on or to be carried on wholly or partially in Kenya.

185. The Respondent submitted that it did not compute taxes on the payments made to CMEC Kenya since withholding taxes had already been accounted for CMEC Kenya’s portion.

186. That delivery and supply of the turnkey project was done in Kenya and following the precedent in Vodafone International Holdings vs Union of India and Another, the Respondent cannot split the transactions for the sole purpose of taxation.

187. It averred that the Appellant was composite entity; not one to supply equipment and another to perform civil works but a turnkey project to deliver 100MW into the national grid.

188. The Respondent stated that the contractor had insurable interest on the equipment as shown in the freight forwarding contract between the contractor and East Global Logistics Kenya Limited for delivery of turbines to the site. That in the light of the foregoing analysis, the contractor was to bear the risk of responsibility for the goods at all times till completion of the project and mere split of payments into onshore and offshore activities was not sufficient for the employer to escape taxability.

189. The Respondent averred that Article 7. 6 of the EPC contract emphasizes this position where it states as follows;“…Despite the transfer of ownership of any plant or materials, the responsibility for care and custody together with the risk of loss or damage to such Plant or Materials shall remain with Contractor until Employer has issued the Taking-Over Certificate.”

190. That in the High Court case of Ansaldo Enrgia SPA v Income Tax Appellate Tribunal it was held that passing of title of ownership and property to the employer shall not in any way absolve, or dilute or diminish the responsibility and obligations of the contractor under a contract including loss or damage and all risks, which shall vest with the contractor till the successful commissioning as per the contract.

191. It was the Respondent’s considered view that the assessment of income tax together with the interest and penalties were raised in conformity with the provisions of the applicable laws and they were due and payable by the Appellant.

192. The Respondent averred that the objection decision against the Appellant be confirmed due to the aforementioned reasons.

Respondent’s Prayers 193. Based on the above, the Respondent prayed to the Tribunal to:a.Dismiss the Appeal.b.Uphold the objection decision dated January 21, 2022.

Issues For Determination 194. The Tribunal upon due consideration of the pleadings, documents and the written submissions filed on the part of both parties and the evidence adduced before it was of the view that the issues that crystalized for its determination were as follows: -a.Whether the Respondent erred in assessing WH VAT on the Appellant’s payments to its suppliers.b.Whether the Respondent erred in its assessment of WHT on payments to Dice Concepts.c.Whether the Respondent erred in assessing WHT on the Appellant’s payments to CMEC China.

Analysis And Determination 195. The Tribunal having appropriately ascertained the issues that fell for its determination shall proceed to make an analysis on the issues as hereafter.a.Whether the Respondent erred in assessing WH VAT on the Appellant’s payments to its suppliers.

196. The Appellant submitted that in the absence of the 2% WH VAT being withheld and remitted by the WH VAT agent, the supplier has no withholding VAT credits to claim back while filing its VAT returns. That as such, the supplier must account for the full VAT payable being 16% of the taxable supply made (or 14% as was for the year 2020). That the net effect of the foregoing is that at the end of the transaction involving a taxable supply, the Government would have received the total VAT payable on the supply.

197. It was the Appellant’s contention that there was no revenue loss occasioned to the Respondent as the Appellant’s suppliers had accounted for the full VAT payable on the payments made by the Appellant.

198. The Tribunal noted that although the Respondent did not submit on this issue in its Statement of Facts, in its witness statement, it averred that the Appellant was appointed as a WH VAT agent and had an obligation to withhold and remit 2% of the taxable supplies at the time of paying for the supplies which obligation the Appellant did not perform.

199. From the pleadings, the Appellant was not disputing that it did not withhold the VAT. Its argument is that its suppliers subsequently accounted fully in their returns to the Respondent and therefore there was no loss.

200. To support its arguments, the Appellant attached a breakdown of the payments made by the Appellant to its suppliers for the period January 2020 and December 2020 together with copies of proof of VAT payment by the Appellant’s suppliers. The same was not controverted by the Respondent. However, it was the Respondent’s assertion that it was the Appellant’s obligation to withhold the 2% having been appointed a withholding VAT agent.

201. Withholding VAT was introduced in Kenya as a reinforcement measure to ensure that all the VAT charged reaches the Government. Once an individual has been appointed a withholding VAT agent it becomes an offence if it fails to withhold the VAT while making payment for supplies made to it.

202. The Respondent in this case assessed the Appellant for Kshs 15,502,985. 00 being Kshs 12,450,638. 00 principal tax, Kshs 622,532. 00 penalty and Kshs 2,429,815. 00 Interest. It was the Tribunal’s view that since the Appellant had demonstrated that the actual VAT had been accounted for and remitted to the Respondent by the respective suppliers, which fact hasn’t been challenged, the Respondent cannot seek to collect the same tax from the Appellant. The Respondent ought to have only pursued the Appellant for failure to collect the tax on its behalf as provided for under Section 4(C) & 4(D) of the VAT Act.

203. Section 4(C) and 4(D) of the VAT Act provides as follows regarding failure by a withholding VAT agent to collect the Withholding VAT on behalf of the Commissioner;“(4C) A person who is required under this section to withhold tax commits an offence if the person —(a)fails to withhold the whole amount of the tax which should have been withheld; or(b)fails to remit the amount of the withheld tax to the Commissioner by the twentieth day of the month following that in which the deduction was made.(4D) A person who commits an offence under subsection (4C) is liable on conviction to a penalty of ten per cent of the amount involved.”(Emphasis added)

204. In this regard, the Tribunal finds that as per the aforestated provision of the law, the Respondent should have instituted criminal proceedings against the Appellant if it found it to have breached the law.

205. Consequently, although the Appellant had proved that the suppliers subsequently accounted fully for the VAT, it was within the Respondent’s right to institute criminal proceedings against it for the offence committed as provided in the VAT Act.

b. Whether the Respondent erred in its assessment of WHT on payments to Dice Concepts. 206. It was the Appellant’s contention that the Respondent erred in law and fact by imposing WHT on materials, equipment and land lease payments arising from the Dice Concepts contract. That the Respondent further made a finding to the effect that the Appellant did not withhold payments to Dice Concepts (“Dice”) for work done as well as for the supply of materials and services in the course of rendering their services.

207. Although the Respondent did not submit on this item in its Statement of Facts, it had stated in the objection decision that there was no separate contract for materials and one for services and therefore payments for Dice concept were for the contract price. That the Appellant was required by law as per Section 35(3)(f) of the Income Tax Act to have withheld taxes on all payments made to Dice Concepts for the work done.

208. The Appellant stated that Dice Concepts was contracted by the Appellant to complete its housing construction works in Kajiado. That the completion of housing construction works involved; external and internal finishing of fifty-eight (58) houses to be occupied by families affected by the Project in Kajiado, remedying defects in twenty-three (23) completed houses, construction of three (3) large water tanks, external and internal finishing of 36 ablution blocks, upgrading the abandoned construction camps as well as decommissioning after completion

209. The Appellant averred that Appendix 2 of the Appellant-Dice Concepts contract shows a clear split between plant, materials and equipment from the services component of the contract. That in line with the contract, the Appellant confirmed that Dice Concepts not only performed services but also supplied equipment and materials to the Appellant.

210. The Appellant further reiterated its earlier position that the Respondent in contravention of the law imposed WHT on equipment, materials and lease payments which are not subject to WHT under Section 35(3)(f) of the ITA. Section 35(3)(f) of the ITA provides as follows:“Subject to subsection (3A) a person shall, upon payment of an amount to a person resident or having a permanent establishment in Kenya in respect of –a.–b.–c.–d.–e.–f.management or professional fee or training fee the aggregate value of which is twenty-four thousand shillings or more in a month:Provided that for the 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;”

211. The Appellant had averred that the respective amounts highlighted by the Respondent relate to goods, materials, equipment, cages amongst others. That none of the said goods qualify as a contractual service and as such no WHT is chargeable.

212. The Tribunal noted from the submissions that the Appellant had attached a Deed of Variation dated June 10, 2019 of its agreement with Dice Concepts in relation to the appointment of the later as consultant Architect. In the Deed of Variation, the Tribunal noted that at Clause 2 it stated in part as follows;“……..2. 1.3. by inserting the following new definition under clause 1 of the agreement as sub-clause 1. 1.16A:“1. 1.16A Initial Services means the Pre-Tender Services and the Post Tender Services”2. 1.4 ………2. 1.5 by amending the following definitions under Clause 1 of the agreement:“1. 1.8 Contract Price means the aggregate of the initial Services Contract Price and the Additional Services Contract Price (exclusive of value added tax);”“1. 1.23 Services means the Initial Services, the Additional Services, the provision of Materials for the Housing Project, the services set out in Clause 4. 1 as well as any other services required to be performed by the Consultant pursuant to terms of this agreement”2. 1.6……….”

213. From the above agreement it is clear to the Tribunal that the Deed of Variation provided for additional works to the consultant which included construction materials, plant, equipment and vehicles, and labour for the additional contract. Additionally, the Tribunal noted that the Appellant attached a detailed schedule of materials, plant and equipment, costs schedule and invoices.

214. The Appellant further attached proof of payments for WHT it withheld and remitted to the Respondent in relation to payments to Dice Concepts for the services component of the contract which were subject to WHT.

215. With the above evidence presented by the Appellant, the Tribunal was convinced that not all the payments by the Appellant to Dice Concepts were subject to Withholding tax as stated by the Respondent. On the other hand, the Respondent did not attempt to challenge this evidence as provided by the Appellant.

216. The Tribunal reiterates the finding in McMillan v Canada 2012 FCA 126 where the Court of Appeal held that:“In our respectful view, it is settled law that the initial onus on an appellant taxpayer is to "demolish" the Minister's assumptions in the assessment. This initial onus of "demolishing" the Minister's assumptions is met where the taxpayer makes out at least a prima facie case. Once the taxpayer shows a prima facie case, the burden is on the Minister to prove, on a balance of probabilities, that the assumptions were correct.”

217. Consequently, the Tribunal finds that the Respondent erred in its assessment of WHT on payments to Dice Concepts.c.Whether the Respondent erred in assessing WHT on the Appellant’s payments to CMEC China.

218. It was the Appellant’s contention that CMEC China was exclusively responsible for the portion of the works related to services to be performed outside Kenya and the equipment, materials and plant to be imported into Kenya (the Offshore portion of the contract). That Similarly, CMEC China would perform its obligations as described and invoice for the Offshore portion only.

219. That it was important to note that the EPC Contract price for the onshore portion and offshore portion were invoiced and paid to CMEC Kenya and CMEC China respectively, as set out in the EPC Contract. That this demonstrates that the value of the offshore and onshore components of the EPC Contract were not only divisible but also distinguishable.

220. The Appellant further averred that both the onshore and offshore components of the EPC Contract consisted of separate components of goods on one hand and services on the other. That as per Clause 1. 2 of the EPC contract, the onshore and offshore works comprised of two main components namely:a.Services to be performed inside/outside the Country.b.Equipment, materials and plant to be imported/exported into the Country (“goods”).

221. The Respondent on its part submitted that the Appellant was contracted to deliver a functioning wind farm project in Kenya. That the Appellant divided the contract to onshore and offshore contract. That the onshore activities were to be performed by a local company CMEC Africa Development Limited while the offshore activities were to be performed by CMEC China. That the Appellant charged WHT on the payments for local component but failed to charge WHT on payments for foreign component.

222. The Respondent averred that it assessed withholding tax of Kshs 636,280,909. 00 on offshore payments made by the Appellant to the contractor in relation to work done on the basis that the project was supplied and delivered in Kenya.

223. From the parties’ pleadings the Tribunal noted the dispute relates to payments to CMEC China which the Appellant had contracted to perform the offshore portion as per the contract. There was no dispute in relation to the payments to the onshore portion which was contracted to CMEC Africa Development Limited which is a company registered in Kenya.

224. It was the Appellant’s contention that it did not impose WHT on the offshore component of the EPC Contract on the basis that the payment by the Appellant for the offshore services related to services that were performed by a non-resident person outside Kenya and were therefore not taxable in Kenya pursuant to an exemption granted under Legal Notice 165 of 2015.

225. The Appellant explained that CMEC China was a non-resident company incorporated under the laws of the People’s Republic of China, with its registered office located at Beijing. That CMEC China’s management and control of its affairs is equally exercised in China, not Kenya. That in addition, there is no Gazette Notice from the Cabinet Secretary declaring it to be resident in Kenya. That CMEC China therefore qualifies as a non-resident meeting the first test for applicability of the exemption under the Legal Notice.

226. The Respondent did not dispute this, however, it averred that the project duration was 22 months hence making the contractor a permanent establishment (PE) for purposes of Section 2 of the Income Tax Act.

227. It added that as per the amended contract signed on 5th March, 2018, the offshore and onshore elements of the contract are so inextricably linked that the breach of the offshore element would result in the breach of the whole contract. That each component of the contract directly relates to the performance of the integrated contract and as such violation and/or breach on the part of the parties thereto would affect the entire contract.

228. Section 2 of the Income Tax Act defines permanent establishment as follows;“permanent establishment” in relation to a person means a fixed place of business and includes a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a building site, or a construction or installation project which has existed for six months or more where that person wholly or partly carries on business: Provided that —(a)the permanent establishment of the person shall be deemed to include the permanent establishment of the person's dependent agent;(b)in paragraph (a), the expression "dependent agent" means an agent of the person who acts on the person's behalf and who has, and habitually exercises, authority to conclude contracts in the name of that person;”

229. The Tribunal however noted that the Act then did not consider the duration of a project as a condition to determine presence of a PE as averred by the Respondent. The Respondent in this case was however also seeking to rely on the contract to prove that the payments to CMEC China were subject to WHT in Kenya.

230. The Appellant on the other hand insisted that the parties to the EPC Contract entered into the EPC Contract with the mutual understanding and meeting of minds that:a.the EPC Contract was a split and divisible contract as evidenced by the clear split between goods and services; andb.the obligations of each party (CMEC Kenya and CMEC China) were distinct and separate such that the Works would be performed separately, i.e, the Onshore Works and the Offshore Works, respectively. That indeed, the Works were performed separately, invoiced separately, and paid for separately, as envisaged under the EPC Contract.

231. It was not in dispute that the Appellant entered into two different contracts; one for onshore activities with CMEC Kenya and the other for offshore supplies with CMEC China. The Respondent had however averred that the Appellant was a composite entity; not one to supply equipment and another to perform civil works but a turnkey project to deliver 100MW into the national grid.

232. It was the Appellant‘s contention that in a bid to impose WHT, the Respondent disregarded the split between the goods and services components of the EPC Contract, the offshore and onshore components of the contract as well as the WHT exemption granted under the Legal Notice. That it was also therefore erroneous for the Respondent to assert that the Appellant should have withheld tax on the entire EPC Contract, including the exempt offshore portion and the equipment portion, which are not subject to WHT.

233. It submitted that on the other hand, WHT is not applicable to goods i.e. supply of plant and equipment, and on that basis the Appellant did not therefore withhold tax on the goods component relating to the entire EPC Contract.

234. The Tribunal noted that the Appellant had entered into two separate and distinct contracts that were to be performed in two different jurisdictions; one with CMEC Africa domiciled in Kenya and the other with CMEC China a company domiciled in China.

235. The case of Ishikawajma-Harima Heavy Industries Ltd. v DIT (2007) 288 ITR 408 (SC) in India provides guidance on the tax obligations of contracts where supplies and services are provided especially turnkey projects. In this case the courts recognized the fact that the obligations pertaining to the supplies and the service activities of a turnkey contract arise in different stages and therefore the tax liabilities corresponding to each activity have to be considered at the appropriate stage. The court stated as follows in the judgement:“The fact that it has been fashioned as a turnkey contract by itself may not be of much significance. The project is a turnkey project. The contract may also be a turnkey contract, but the same by itself would not mean that even for the purpose of taxability the entire contract must be considered to be an integrated one so as to make the appellant to pay tax in India. The taxable events in execution of a contract may arise at several stages in several years. The liability of the parties may also arise at several stages. Obligations under the contract are distinct ones. Supply obligation is distinct and separate from service obligation. Price for each of the components of the contract is separate. Similarly, offshore supply and offshore services have separately been dealt with. Prices in each of the segment are also different. The very fact that in the contract, the supply segment and service segment have been specified in different parts of the contract is a pointer to show that the liability of the appellant thereunder would also be different.”

236. Guided by the above case and the fact that CMEC China was not found to have established a PE in Kenya, the Tribunal was of the view that the two contracts the Appellant entered into for onshore and offshore ought to be considered separately for the purposes of taxation.

237. Regarding Legal Notice No 165 of 2015 dated August 17, 2015, the Tribunal noted that under the notice the Cabinet Secretary for the National Treasury exempted from tax any payments made to a non-resident company for services rendered under a Power Purchase Agreement.

238. In its witness statement, the Respondent agrees that payments made to a non-resident for services rendered under a power purchase agreement were exempt under the Income Tax Act. However, the witness stated that in as much as the CMEC China did not meet the requirements of a resident company thereby being regarded as a non-resident company, in this particular circumstance it qualified for a permanent establishment. That CMEC China had a building site, construction, assembly or installation project that ran for a period of 22 months hence making the contractor a permanent establishment for tax purposes.

239. The Tribunal noted that apart from this mention in the witness statement, the Respondent did not provide any evidence to demonstrate that the CMEC China had a building site construction, assembly or installation project. Indeed, during cross examination, the Respondent’s witness stated that the Respondent was not in a position to confirm that CMEC China had any physical presence in Kenya. The witness stated that there was nothing to show that the buildings at site were owned by CMEC China or CMEC Africa for that matter.

240. The Tribunal reiterates the court’s position in Trust Bank Limited v Paramount Universal Bank Limited & 2others [2009] eKLR where the court observed that:“It is trite that where a party fails to call evidence in support of its case, that party’s pleadings remain mere statements of fact since in so doing the party fails to substantiate its pleadings.”

241. Given the foregoing analysis, case laws, Legal Notice No 165 of 2015 and the provisions of the law, the Tribunal finds that the Respondent erred in its assessment of WHT on the payments relating to CMEC China Contract.

Final Decision 242. Based on the foregoing analysis the Tribunal determined that the Appeal is merited and the Orders that accordingly recommend themselves are as follows:i.The Appeal be and is hereby allowed.ii.The Respondent’s objection decision dated the January 21, 2022 be and is hereby set aside.iii.Each party to bear its own costs.

243. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 5TH DAY OF MAY, 2023. …………………………………ERIC N. WAFULACHAIRMAN…………………………………CYNTHIA MAYAKAMEMBER…………………………………GRACE MUKUHAMEMBER…………………………………ABRAHAM KIPROTICHMEMBER…………………………………JEPHTHAH NJAGIMEMBER