https://new.kenyalaw.org/akn/ke/judgment/ketat/2026/156

Kutuma Kenya Limited v Commissioner of Domestic Taxes (Tribunal Appeal E694 of 2025) [2026] KETAT 156 (KLR) (30 June 2026) (Judgment) Neutral citation: [2026] KETAT 156 (KLR) Republic of Kenya In the Tax Appeal Tribunal Tribunal Appeal E694 of 2025 RM Mutuma, Chair, G Ogaga, T Vikiru & JM Malla, Members June 30, 2026 Between Kutuma Kenya Limited Appellant and Commissioner of Domestic Taxes Respondent Judgment Background 1.The Appellant is a limited liability company incorporated in the Republic of Kenya. It carries on the business of food delivery service in Kenya. 2.The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws. 3.The Respondent issued to the Appellant Withholding tax (WHT) assessments in a notice of assessment dated 18th February 2025 covering the periods of 2020, 2021 and 2022. 4.The Appellant objected to the entire WHT assessments on 14th March 2025. 5.The Respondent rendered its Objection decision in a letter dated 12th May 2025, which was received by the Appellant on the same date, therein confirming the WHT assessments in their entirety. 6.The Appellant, being dissatisfied with the Respondent’s Objection decision, filed its Notice of Appeal dated 12th June 2025 and filed on the same date. The Appeal 7.The Appeal is premised on the Memorandum of Appeal dated 12th June 2025 and filed on 30th June 2025 which raised the following grounds: -a.That the Respondent erred in law and fact by issuing additional assessments of Withholding tax (WHT) without considering the facts around the nature of digital products paid for via subscription fees by the Appellant under the software expense and the kind of business they carry out by confirming the additional assessment arising out of alleged failure by the Appellant to deduct WHT on payments to their service providers in respect of the subscription fees paid to non-resident service providers.b.That the Respondent did not conclusively consider the crucial aspects of the matter in its interpretation that the subscription payments made by the Appellant to the various digital service providers as royalty-based transactions liable for WHT tax under Section 35 of the Income Tax Act.c.That it was not open in law and fact for the Respondent to blatantly disregard the nature of the software subscription payments since the digital products in question are commoditized off the shelf software, purchased for internal use from the various digital marketplaces and are consumed via limited end-user licences valid over a subscription period typically 1 month.d.That under the terms and conditions of use attached to the digital products, the nature of the end-user licence(s) granted to the subscription-based consumers for access to the respective digital products is such that the licences are royalty free, non-exclusive, non-transferable, non-sublicensable, revocable, non-distributive and non-modifiable. That the most critical consideration is that the subscription fees paid does not grant any right to the digital products’ source codes and intellectual property (IP) and any attempted access to them is outrightly prohibited and against policy on the terms of use.e.That taxation of digital products and solutions in Kenya is exhaustively covered under the Digital Service Tax (DST) Regulations, 2020 which places the obligation to account for the DST on the digital service provider. That the Respondent was misguided both in law and in fact in assessing WHT on the premise that some digital service providers had not registered for DST at the point of the Respondent’s compliance audit despite the obligation to account for DST resting on the service providers and the subscriptions not meeting the WHT threshold.f.That based on judicial precedent in Seven Seas Technologies Limited v Commissioner of Domestic Taxes (2021), Commissioner of Domestic Taxes v Dynasoft Business Solutions Limited (Income Tax Appeal E083 of 2023) [2024] KEHC 13980 (KLR) (11 November 2024), and Kenya Hospital Association v Commissioner of Domestic Taxes (Tax Appeal No. 1146 of 2022), the Appellant’s payments to the various digital service providers are not royalty but rather general sale of goods transactions.g.That the Respondent was fundamentally misguided in its decision to ignore the OECD Guidelines on Software Characterisation (the Guidelines). That these Guidelines provide that where limited access to copyright is granted just to enable one to operate a software product – as is the case with the Appellant’s payments for the digital products and solutions – then such payments are deemed as standard commercial transactions and not royalty transactions as such limited rights only facilitate effective operation by the user.h.That the Respondent erred in law and fact by disregarding the terms and conditions of use of the various digital products and solutions and, access to underlying source codes, software and intellectual property embedded in the digital products and solutions is specifically prohibited.i.That the Respondent erred in law and in fact by wilfully failing to consider relevant information availed by the Appellant, basing its facts on the relevant laws, the decided case from the High Court of Kenya and international guidelines. That the Appellant’s use of the digital products and solutions from the various vendors cannot be deemed to trigger a transaction for which WHT on royalties is due.j.That the Appellant’s position is reinforced by the KRA’s Digital Economy Office’s written response to the MTO Office on the matter that confirmed the applicability and relevance of the above case laws and OECD Guidelines.k.That there were inaccurate representations in the KRA demand notice. That the 2021 software licence costs have been erroneously indicated as Kshs. 12.5 million instead of Kshs. 8.4 million. That the Respondent has erroneously assumed that the subscription payments relate solely to non-residents and blanketly applied a 20% WHT rate, whereas some providers are residents and non-residents that enjoy a preferential rate due to DTA agreements. Appellant’s Case 8.The Appellant’s case is also premised on the following documents:a.The Appellant’s Statement of Facts dated 12th June 2025 and filed on 30th June 2025, and the documents attached thereto; andb.Its Written Submissions dated 21st April 2026 and filed on the same date. 9.The Appellant stated that it is a food delivery business and has invested its own in-house fleet management infrastructure to support its operations. It subscribes to various off-the-shelf digital products and solutions including data storage and web hosting, emails and workspace solutions, antivirus/security solutions, analytics/messaging/OTP and system notifications, geo-location solutions, analytics and integration solutions among other cloud computing products, which are the subject of the disputed Withholding tax (WHT) assessment of Kshs. 5,097,193, being principal tax, penalty and interest. 10.The Appellant submitted that these digital products are versions of commoditized technology just like physical products like phones and laptops and are consumed via end user consumer licences valid over a period of subscription which is typically one calendar month. 11.That the nature of end user consumer licences is similar to the ones that accompany any physical electronic devices such as phones, in the sense that they grant subscribers limited rights to access the digital products and solutions but not to the underlying technology and intellectual property that powers the product. 12.That the terms of use of the various digital products and solutions are available via the respective digital marketplaces and clearly document the rights and limitations attached to their end user licences granted to subscribers of their products. 13.The Appellant stated that the through a notice dated 6th March 2024, the Respondent notified it of its intention to conduct a compliance check. That the Respondent, in total disregard to the various engagements with the Appellant regarding the findings from the compliance exercise, raised additional assessments through iTax on 24th December 2024 in its pre-assessment notice. 14.That after a series of engagements between the Parties on diverse dates, the Respondent issued a tax assessment notice dated 18th February 2025 for the years 2020 to 2022 in respect of WHT on the balance of software licence payments. 15.That by a notice of objection dated 14th March 2025, the Appellant objected to the Respondent’s assessments based on the system generated assessments dated 4th March 2025. 16.That despite the fact that the Appellant had duly complied with all the Respondent’s requests, through the Objection decision dated 12th May 2025, the Respondent rejected the Appellant’s Objection application and confirmed the WHT assessment, which decision the Appellant appealed to the Tribunal. Appellant’s Submissions 17.The Appellant made its submissions under the following headings:(i)Issue 1: Whether the subscription payments made by the Appellant to the listed digital service providers constitute royalties within the meaning of Section 2 of the Income Tax Act and are accordingly subject to withholding tax under section 35.(ii)Issue 2: Whether, in any event, the 2021 software licence base of Kshs. 12,457,981 adopted by the Respondent double-counts the sum of Kshs. 4,010,370 previously assessed in the year 2020.(iii)Issue 3: Whether, in any event, the non-resident rate of 20% was correctly applied to payments made to Kenyan-resident vendors (HostAfrica EAC, Wingubox and Africa's Talking).(iv)Issue 4: Whether the Objection decision is vitiated for failure to give reasons in respect of Issues 2 and 3, contrary to Section 51(8) of the Tax Procedures Act, 2015, and the Fair Administrative Action Act, 2015. Issue 1: Whether the subscription payments made by the Appellant to the listed digital service providers constitute royalties within the meaning of Section 2 of the ITA and are accordingly subject to WHT under section 35. The nature of the digital products 18.The Appellant submitted that the nature of its business demonstrates that the digital tools are for use in the course of business rather than a transfer of intellectual property. That this distinction is critical under Section 2 of the Income Tax Act, which only taxes payments as royalties where there is a right to use intellectual property, not mere consumption of services. 19.The Appellant further submitted that in Seven Seas Technologies Ltd v Commissioner of Domestic Taxes [2024] KETAT 11 (KLR) and Commissioner of Domestic Taxes v Dynasoft Business Solutions Limited [2024] KEHC 13980 (KLR) the Court confirms that utilization of a copyright does not convert it into a royalty. 20.That further, payments for software do not constitute royalties where the user does not acquire rights to reproduce, modify, or distribute the software. It asserted that in every case, the terms and conditions of use of each of the vendors listed by the Appellant, the licence granted to the Appellant is royalty-free, non-exclusive, non-transferable, non-sublicensable, recoverable, and non-distributable. 21.It stated that access to source code and to the underlying intellectual property is expressly prohibited in every case. That under the circumstances, the bundle of rights under Sections 26 and 35 the Copyright Act of exclusivity and transferability did not convey upon the Appellant. Mapping of contractual terms to the statutory royalty test 22.The Appellant invited the Tribunal to apply the following test to each vendor in reference to the exclusive rights enumerated in Section 26 of the Copyright Act, 2001: has any of the reproduction, translation, adaptation, distribution, public performance or communication-to-the-public rights been transferred to the Appellant? That the answer in every case is no. 23.That on no view of the evidence has any of the exclusive economic rights comprising copyright been transferred to the Appellant, the payments in dispute are therefore payments for use of a copyrighted article, not payments for the use of copyright. Case law 24.The Appellant’s position was that it did not acquire any proprietary interest in the software and thus, the transaction does not constitute a royalty transaction as affirmed in Seven Seas Technologies Limited v Commissioner of Domestic Taxes (Income Tax Appeal No. E006 of 2019; [2021) KEHC 358 (KLR)). 25.The Appellant likewise cited other cases including Commissioner of Domestic Taxes v Dynasoft Business Solutions Limited (Income Tax Appeal No. E083 of 2023 [2024] KEHC 13980 (KLR) (11 November 2024), Kenya Hospital Association v Commissioner of Domestic Tues (Tax Appeal No. 1146 of 2022, Tax Appeals Tribunal) and Absa Bank Kenya PLC v Comn1issioner of Domestic Taxes (Supreme Court Petition No. 12 (E014) of 2022; [2024] KESC 43 (KLR)) to support its position. OECD Commentary on Article 12 26.The Appellant submitted that Paragraphs 12.2, 14 and 17.1-17.4 of the Commentary on Article 12 of the OECD Model Tax Convention (Condensed Version, 21 November 2017) state that where software is licensed only to allow the user to operate the program, payments are not royalties, and that limited reproduction - such as that required to install or operate the program on the user’s hardware - does not amount to a transfer of copyright. That Kenya is an active participant in the OECD/G20 Inclusive Framework and the Kenyan courts routinely rely on the OECD Commentary for the characterisation of cross-border payments. 27.That according to the Commentary on Article 12 of the OECD model tax convention, a clear differentiation has been established between the acquisition of a “copyright” and a “copyrighted article”. That copyright, being an intangible property right, is discernibly separate from the transfer of a "copyrighted article." That the OECD has classified payments for copyrighted articles as business profits rather than royalties. 28.That as such, payments made to grant the simple use of a software (copyrighted article), with no further rights to alter or exploit or modify, are regarded as business profits, and not as royalties. The Respondent’s own internal advisory 29.The Appellant submitted that the Respondent's own Digital Economy Tax Office has expressly adopted the Appellant’s position. That in an email forwarded to the Medium Taxpayers’ Office by Lilian Ondieki on 18 November 2024, Mr. Nickson Omondi of the Digital Economy Tax Office stated, in terms: “With respect to software, we are guided by the Seven Seas Case and the OECD/UN Model Tax Convention Commentaries on Article 12.11.” 30.The Appellant averred that it relied on that internal advisory for two purposes. That under the doctrine of legitimate expectation a taxpayer is entitled to rely on a settled position expressed by the specialist organ of the Authority, and that on ordinary principles of administrative review, an assessment that contradicts the Authority’s own specialist office is, prima facie, unreasonable. That the Respondent has not, in the Objection decision or otherwise, explained why the position of its own Digital Economy Tax Office should be departed from. The evidential burden has shifted and has not been discharged 31.The Appellant maintained that it has adduced, by way of the vendor Terms and Conditions, credible contemporaneous evidence that negates each element of the statutory royalty definition. That by operation of Section 56 of the Tax Procedures Act, 2015, the evidential burden has shifted to the Respondent to adduce evidence to the contrary. That the Respondent has led no contractual, expert or other evidence in response; the Objection decision proceeds on assertion alone. That in those circumstances, the Appellant has discharged its burden and the assessment cannot stand. Direct response to the Objection decision 32.The Appellant stated that the Objection decision rests on three propositions, each of which is respectfully submitted to be legally wrong. Proposition 1: 'That withholding tax applies to software payments irrespective of whether the software is acquired for resale or for own use.' 33.That under Kenyan tax law, where a transaction involves only the acquisition of a copyrighted article, whether for internal use or onward supply, without any transfer of underlying intellectual property rights, it does not meet the statutory threshold of a royalty. Proposition 2: 'That utilization of intellectual property protected by copyright is sufficient to render a payment a royalty, regardless of whether any rights are transferred.' 34.That this proposition conflates use of a product with use of copyright, which are distinct legal concepts. That the statutory definition of "royalty" under the Income Tax Act, read together with Sections 26 and 35 of the Copyright Act, is concerned specifically with the grant or transfer of exclusive economic rights (such as reproduction, adaptation, distribution). That mere consumption or utilization of a product that embodies intellectual property does not amount to the use of copyright. That to hold otherwise would lead to an absurd result whereby all consumption of copyrighted material -whether books, music, or software-would attract WHT as royalties. That such an interpretation is inconsistent with both statutory construction and established principles of tax law. Proposition 3: 'That software, by its nature as intellectual property, cannot be characterized as a good or a service, and therefore payments for its use must necessarily be royalties.' 35.That while software may embody intellectual property, software is delivered as a product or service without transferring any proprietary rights in the underlying intellectual property. That the mere fact that a product incorporates intellectual property does not transform every payment into a royalty. Issue 2 - Double-counting of Kshs. 4,010,370 in 2021 36.The Appellant submitted that independent of Issue 1, and without prejudice to the Appellant’s primary submission that no WHT is due at all, the 2021 software licence base of Kshs. 12,457,981 adopted by the Respondent is arithmetically wrong. That the correct 2021 figure is Kshs. 8,447,611. 37.That in the course of 2020/2021 the Appellant migrated from one accounting system to another. That the opening balance of Kshs 8,146,103.75 brought forward into the new system as at 30 June 2021 related to the full period from 2020 up to June 2021 (inclusive of the 2020 expenditure of Kshs. 4,010,370 that had already been assessed in the 2020 base). That the Respondent’s 2021 base was computed by taking the full opening balance without deducting the 2020 expenditure, with the result that the 2020 expenditure has been assessed twice, in both 2020 and 2021. 38.That the reconciliation is set out in Appendix 3 to the Notice of Objection, however the Objection decision does not address this objection at all. That accordingly, even if the Tribunal were to determine Issue 1 adversely to the Appellant (which is not conceded), the WHT base for 2021 should be reduced by Kshs. 4,010,370, with a consequential reduction in principal WHT, penalty and interest. Issue 3 - Blanket application of the 20% non-resident rate 39.The Appellant submitted that the Respondent has applied the non-resident royalty rate of 20% under Section 35(1)(i) of the ITA, read with paragraph 5 of the Third Schedule, to the entirety of the 2020-2022 soft ware licence expenditure. 40.That the approach is wrong in law, as three of the vendors listed in Table 1 of the Notice of Objection are Kenyan residents, namely: - HostAfrica EAC (resident, Kenya); Wingubox (resident, Kenya); and Africa's Talking (resident, Kenya). That payments to those vendors cannot, as a matter of statutory construction, be subject to the non-resident rate of 20% instead of 5%. 41.That the Objection decision is, again, silent on this objection although it was expressly raised at paragraph l(b) on page 9 of the Notice of Objection. That in the alternative to issues 1 and 2, the Tribunal is respectfully invited to order that the WHT on payments to resident vendors be recomputed at 5% (or, preferably, excluded from the WHT base altogether). Issue 4 - Failure to give reasons 42.The Appellant submitted that Section 51(8) of the Tax Procedures Act, 2015 requires the Commissioner to state the reasons for an Objection decision. That Section 4(3) of the Fair Administrative Action Act, 2015 and Article 47 of the Constitution impose the same obligation. 43.The Appellant stated that it raised three grounds in its Notice of Objection: the characterization ground (Issue 1); the double-counting ground (lssue 2); and the blanket-rate ground (lssue 3). That the Objection decision addressed only the first and contains no engagement at all with the computational grounds. 44.That the failure is, in itself, a freestanding ground on which the Objection decision falls to be set aside, or in the alternative, reduced to reflect the computational grounds to which no response has been given. Appellant’s Prayers 45.The Appellant prayed for the following from the Tribunal:a.That the Honourable Tribunal be pleased to set aside the Respondent’s decision dated 12th May 2025 and the assessment dated 4th March 2025.b.That the Tribunal finds that the Respondent erred in fact and law by failing to adhere to the ruling in the Seven Seas Technologies Limited vs Commissioner of Domestic Taxes.c.That the Tribunal finds that the Respondent erroneously indicated the 2021 tax software licence costs as Kshs. 12,457,981 instead of Kshs. 8,447,611.d.That the Honourable Tribunal finds that the Respondent erred in fact and law by going against their own Guidelines on Digital Service Tax (DST) Regulation, 2020 and rules that it is the service provider who should account for the Digital Service Tax.e.That the costs of this Appeal be provided for. Respondent’s Case 46.The Respondent’s case is premised on the following documents filed before the Tribunal:a.The Respondent’s Statement of Facts dated 21st July 2025 and filed on 29th July 2025;b.The Respondent’s Supplementary Statement of Facts dated 22nd September 2025 and filed on 9th October 2025; andc.Its Written Submissions dated 20th April 2026 and filed on 22nd April 2026. 47.The Respondent stated that the Appellant was subjected to a tax audit for the period 2020 - 2022 in respect of Withholding Income Tax (WHT) and Value Added Tax (VAT), which revealed certain discrepancies, leading to the issuance of an assessment dated 18th February 2025, in the sum of Kshs. 5,580,788, comprising principal tax, penalties, and interest. 48.That the Appellant objected to the said assessment via a notice of objection dated 14th March 2025, and the Respondent issued an Objection decision dated 12th May 2025, confirming the assessment. 49.That dissatisfied with the Objection decision, the Appellant filed a Notice of Appeal dated 12th June 2025 and filed on 12th June 2025. 50.The Respondent stated that the dispute herein relates to failure by the Appellant to deduct and remit WHT on payments of software licenses paid to non- Resident service providers. That this was after the Respondent took cognisance of the fact that some of the service providers had accounted for Digital Service Tax (DST) and had adjusted for the same. 51.The Respondent referred to the definition of “royalty” under Section 2 of the Income Tax Act (ITA) which states as follows: - “royalty” means a payment made as a consideration for the use or the right to use— (a) any copyright of a literary, artistic or scientific work;” 52.That further, Section 35(1)(b) of ITA provides for WHT as follows: - “35.(1) Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of– (b) a royalty or natural resource income which is chargeable to tax, deduct therefrom tax at the appropriate resident withholding tax.” 53.The Respondent averred that it reviewed the Appellant’s grounds of objection and noted that the Appellant is granted commercial rights to use digital products and solutions. 54.The Respondent submitted that payment for software was taken as a payment of royalty as it is consideration for the use and right to use digital products and solutions, that are the literary work of another person as per the definition of “royalty” under Section 2 of the ITA. It was the Respondent’s case that whether software was purchased for resale or for own use, WHT would still be collected as per the definition of royalty under Section 2 of ITA. 55.The Respondent stated that it notified the Appellant that the use of copyright does not necessarily mean reproduction. That the fact that the Appellant utilized the intellectual property of another entity which is protected by a copyright then made the payment thereof a royalty as per the definition of “royalty” as per the ITA. 56.That in light of the above, the Respondent notified the Appellant that software is not a good neither is it a service but it is an intellectual property belonging to the inventor. That software can only be sold by way of the developer selling the right that he has over the invention otherwise he stands not to gain economically for his invention. 57.The Respondent submitted that the proceeds from sale of intellectual property is royalty. That likewise, the subscription payments the Appellant made are treated as royalties under ITA and are subject to WHT under Section 35 of ITA. That therefore, the Appellant’s Objection application was rejected and the assessment in relation to WHT confirmed. 58.The Respondent maintained that the tax assessment issued was properly founded in fact and law, and that the objection decision was fair, reasonable, and made in accordance with statutory provisions. Respondent’s Submissions 59.The Respondent considered that its issue for determination is: Whether the Respondent erred in confirming the additional Income Tax –Withholding assessments of Kshs. 5,097,193. 60.The Respondent relied on Sections 2 and 35 of Income Tax Act which defines “royalty” and subjects royalties to WHT. 61.The Respondent averred that it notified the Appellant that it was aware of the High Court decisions on the issue of software where the Court ruled that payments in respect of software procured for resale as well as for own use does not constitute payments for royalties and therefore not subject to WHT and which have since been appealed. It was the Respondent’s submission that the facts of the cases are not entirely similar to this case which relates to payment for software licences. 62.The Respondent averred that the Appellant is granted commercial rights to use digital products and solutions. According to the Respondent, the payment for software was taken as a payment of royalty as it is consideration for the use and right to use copyright of the literary work of another person as per Section 2 of the Income Tax Act. 63.That in addition, whether software was purchased for resale or for own use, WHT would be collected based on the definition of the term royalty as per Section 2 of the Income Tax Act. 64.The Respondent submitted that the fact that the Appellant was utilising the intellectual property of another entity which is protected by a copyright then made the payment thereof a royalty as per the definition of “royalty” in the Income Tax Act. That furthermore, the Appellant was paying for an intellectual property belonging to the inventor and not for a good or service. 65.It averred that the Appellant confirms in its Statement of Facts that it subscribes to various off the shelf digital products and solutions which are the intellectual property of third parties and that is why it has to subscribe. 66.The Respondent contended that the software can only be sold by way of the developer selling the right that he has over the invention otherwise he stands to gain economically for the invention and the proceeds from the sale of intellectual property is royalty. 67.That therefore, the subscription payments that the Appellant made are treated as royalties under the Income Tax Act and are subject to WHT. 68.The Respondent also faulted the Appellant in its interpretation of the law at Paragraphs 4 and 5 of its Memorandum of Appeal since Section 35 of the Income Tax Act does not provide any exemptions when it comes to WHT in relation to a royalty. 69.The Respondent further relied on Section 3(1) of the Income Tax Act, which imposes tax on all income accruing in or derived from Kenya by both residents and non-residents. 70.The Respondent maintained that the subscription fees paid by the Appellant to non-resident entities constitute royalty which is subject to withholding tax as per Section 35(1) of Income Tax Act. 71.The Respondent also relied on the recent decision of this Tribunal in Kirin Pipes Limited v Commissioner Intelligence Strategic Operations Investigations and Enforcement (Tribunal Appeal E1116 of 2024) [2025] KETAT 259 (KLR) (22 August 2025) (Judgment) wherein the Tribunal also held that the Taxpayer had failed to discharge its burden of proof that the Respondent’s Objection decision was incorrect. 72.The Respondent cited Section 59(1) of the Tax Procedures Act which provides as follows: -“(1)For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to—(a)produce for examination, at such time and place as may be specified in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person;(b)furnish information relating to the tax liability of any person in the manner and by the time as specified in the notice; or(c)attend, at the time and place specified in the notice, for the purpose of giving evidence in respect of any matter or transaction appearing to be relevant to the tax liability of any person.” 73.That Section 56(1) of the Tax Procedures Act states that: -“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.” 74.The Respondent submitted that the Appellant in its Appeal has failed to prove that the Respondent’s tax decision confirming the additional assessments is incorrect. That further, the Appellant has failed to discharge its evidential burden of proof under Section 107 (1) of the Evidence Act in demonstrating that the assessment by the Respondent was in any reasonable manner incorrect or excessive. 75.The Respondent relied on the Tribunal’s decision in Frikah Investments Limited v Commissioner of Domestic Taxes (Tax Appeal 127 of 2023) [2024] KETAT 757 (KLR) (Commercial and Tax) (17 May 2024) (Judgment) where the Tribunal held that the Appellant had failed to discharge its burden of proof regarding the issue of whether it had supplied the documents that it had been requested to supply under Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act. 76.The Respondent argued that although the law recognizes the self-assessment regime, the Respondent is empowered by Section 31 of the Tax Procedures Act to amend such assessment if it has available information. The Respondent submitted that it exercised his best judgement appropriately in the circumstances thereby arriving at the tax assessment it did. 77.That in TAT No. 28 of 2018 - Joycott General Contractors Limited v Kenya Revenue Authority, the Tribunal in dismissing the appeal held that: -“We find that the Appellant seems to forget that it bears the burden of proof, in law, to demonstrate to this Tribunal that the Respondent’s assessment was wrong. Especially with regards to the under declarations and variance in respect of VAT and income sales. On the contrary, the Appellant has not bothered to substantially traverse the assessment raised. All it has done is to make sweeping and expansive accusations without substantial support.” Respondent’s Prayers 78.The Respondent prayed that the Tribunal:a.Dismisses the Appeal in its entirety;b.Upholds the tax assessment as confirmed by the Objection decision; andc.Orders the Appellant to pay the costs of the Appeal. Issue for Determination 79.The Tribunal has considered the pleadings and the submissions made by the Parties, and considers the issue for determination as follows:Whether WHT was applicable to the Appellant’s payments for software licences for the periods 2020, 2021 and 2022. Analysis and Findings 80.Having identified the issue for determination, the Tribunal proceeds to analyse the same as hereunder. 81.The Appellant is a food delivery business. It subscribes to various off-the-shelf digital products and solutions including data storage and web hosting, emails and workspace solutions, antivirus/security solutions, analytics/messaging/OTP and system notifications, geo-location solutions, analytics and integration solutions among other cloud computing products. It made payments for these products and solutions and recorded the transaction as software licences in its ledgers. The Respondent assessed WHT on these payments on the premise that they constitute royalties under Section 35 of the Income Tax Act (ITA), read with the definition of “royalty” in Section 2 of the ITA. 82.The Appellant disputed this characterisation, additionally raising significant issues regarding computational errors in the Respondent’s WHT assessment: that the Respondent applied WHT on the incorrect cost base for 2021 by charging an excess of Kshs. 4,010,370 which was already accounted for in 2020; that the Respondent in its findings and computation assumed that all the vendors in the Appellant’s software licence ledger were non-residents; that the Respondent applied a blanket WHT rate of 20% regardless of the residency of the Appellant’s suppliers. In addition, the Appellant asserted that these issues formed part of its grounds of objection and that the Respondent did not address the issues in its Objection decision. 83.The Tribunal reviewed the Appellant’s concerns and the documents the Appellant provided to prove its claims, and finds merit in the Appellant’s assertions of the computational errors which the Respondent failed to rebut in its Objection decision and pleadings before the Tribunal. The Appellant demonstrated with its ledgers that the Respondent applied an excess cost base in the year 2021, and the Tribunal noted from the notice of assessment and Objection decision that the Respondent applied a WHT rate of 20% on the software licence costs despite the Appellant having demonstrated that some of its suppliers were residents and others were non-residents from jurisdictions with double-taxation avoidance agreements with the Republic of Kenya. 84.Therefore, the Tribunal, being satisfied that the Appellant proved the incorrectness of the computation, proceeds to analyse the applicability of WHT on the software licence costs on the cost bases of Kshs. 4,010,370 in 2020, Kshs. 8,447,611 in 2021 and Kshs. 7,722,795 in 2022, while observing the relevance of the residency status of the Appellant’s suppliers. 85.Turning to the crux of the dispute, the term royalty according to Section 2 of the Income Tax Act had the following meaning in the period of assessment: -“"royalty" means a payment made as a consideration for the use of or the right to use –(a)any copyright of a literary, artistic or scientific work; …” 86.The Tribunal therefore, sought to establish whether the payments for the software licences were consideration for the use of or the right to use a copyright of a literary, artistic or scientific work. 87.The Tribunal is guided by the holdings in Seven Seas Technologies Limited v Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021] KEHC 358 (KLR), (Seven Seas case), to determine whether the payments constituted royalties in the period of assessment. The Court held: -“75.The court finds that it is not disputed that that copyright is transmittable by license, that payment of license Fees as consideration of the right to use software falls within the definition of a royalty. However, an agreement would spell out the terms of any right to use or reproduce the copyright work or the license is to access copyrighted article. The annual subscriptions of licences do not confirm payment as royalty[royalty] as defined refers to some device, formula or contraption which the user applies to make something else and in return for that advantage, the user must pay the original creator of the capital asset as described in Republic v Commissioner of Income Tax & another [2005]eKLR supra.76.In the absence of the Software Sales agreement signed between Callidus Software Inc and the respondent, Software Supply Contract has no restrictions. The terms of the license are not stipulated so as to confirm whether rights were transferred or it was only for the purposes of accessing software or not. Secondly, if the license was restricted for software to be used internally only or for resale without transfer. For these reasons, it has not been proved that funds paid to Callidus Software Inc were royalty so as to attract Withholding Tax.77.What then is the difference between copyright and copyrighted material? The Tribunal established in its holding that the appellant is primarily into the business of provision of integrated business and technology solution procured from various Enterprise Resource Planning software manufacturers & Developers. The software procured is mainly sold to end users who are their clients, and the appellant is merely a distributor of the software in Kenya.78.In the Organization for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital Paragraphs 13.1 and 14.4 of article 12 provide that;…79.The International guidelines are part of the law in respective countries but are international best practices that guide in interpretation of laws and regulate the international business transactions.80.In this regard, the Tribunal erred in concluding that by buying and selling computer software, which is a copyrighted item, the appellant was commercially exploiting the copyright in that copyrighted item. Contrary to the above definition of a license, and in the absence of the Agreement(s) that set out the terms of the license, in the instant case the appellant was a vendor of a copyrighted item and was therefore copyright was not transmissible.81.…82.Taking into consideration that the Tribunal held that the appellant was merely a distributor of the software in Kenya, and by the case of Engineering Analysis Centre for Excellence Private Ltd vs Commissioner of Income Tax (supra), where the dispute was whether payments for use and resale of computer software made to foreign suppliers or manufacturers through End User License Agreements (EULA) and distribution agreements could be characterized as royalty payments. The Supreme Court of India held such payments could not be considered payments for the use of underlying copy rights in software and were instead sale of goods. Similarly, in the instant case, the TAT found the Appellant a distributor, and at the same time ‘exploiting the computer software commercially which is the very essence of a copyright.’ As a distributor one purchases and resells as is without tampering or modification right as is exercised by copyright holder so if as stated the Appellant was a distributor then it is not compatible with exploiting the copyright.83.The issue of whether it was sale of goods or assignment or license of copyright remains hotly contested, the issue of the appellant having purchased copyright or copyrighted article is debatable and the issue of whether the license transferred a right to the appellant or merely facilitated the access to software is also unproven. All these issues center on the proof that the appellant paid royalty to non-resident so as to attract Withholding tax. The experts gave relevant information that guided the court and parties but the principles and processes were/are subject to proof which from the facts of the matter remain contested.84.The upshot of the above excerpts and the case is that the appellant in this case paid the license fee did not acquire any partial rights in copyright and thus not subject to royalty as argued by the respondent.85.In addition to the above, the OECD Model Tax Convention on Income and on Capital provides that in such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Therefore, payments in these types of transactions should be dealt with as business profits and not as royalties.86.The Tribunal erred in failing to consider that the appellant is a vendor of copyrighted material and not the user of a copyright and in this regard does not receive any right to exploit the copyright.” 88.As the Court in the Seven Seas case stated in part, the payment for subscriptions of licences does not by itself automatically confirm payment as royalty. The Income Tax Act provides that "royalty" means a payment made as a consideration for the use of or the right to use any copyright of a literary, artistic or scientific work. The question, therefore, is whether, as an end-user of the products purchased, the Appellant’s subscription payments met this criterion. 89.In the Seven Seas case, the Court considers the importance of reference to the terms of the licence to confirm whether rights of use of copyright were transferred, or it was only for the purposes of accessing software. The Appellant presented the terms of the licences of the digital products purchased from all the 15 vendors covered in the assessment period, and the Tribunal perused each one and established that: 90.Google Inc: Google’s terms grant users a limited, personal, non-exclusive, royalty-free, non-assignable licence solely to use Google's software as delivered. All intellectual property in the services remains Google’s. Users access the service as a hosted platform; no copyright in the underlying software is transferred or licensed for exploitation. The subscription payment is for access to a service, not for the right to use a copyright. 91.HostAfrica EAC: HostAfrica's Terms vest all intellectual property rights, including copyright, trademarks, designs, and patents, exclusively in HostAfrica or its suppliers. Customers are expressly prohibited from reverse-engineering, modifying, or decompiling any software. The customer obtains only a limited, revocable licence to use the brand for co-marketing purposes. Subscription payments are for hosting infrastructure services. 92.Intuit-QB: Intuit grants users only a limited right to install and use the downloaded software, with all IP rights retained by Intuit. Users cannot access source code, create derivative works, or sublicense the software. The arrangement is a Software as a Service (SaaS) subscription where the user pays for access to an online platform. No copyright is conveyed or licensed for exploitation. 93.3 Degrees: The Terms explicitly state that users will not receive any object code or source code, and that 3 Degrees Limited and its licensors retain all rights, title, and interest in the software and all associated IP. The licence granted is worldwide, non-exclusive, royalty-free, personal, and non-assignable. Subscription fees are for hosted SaaS platform access only. No copyright is licensed to the user. 94.GoDaddy/WebFaction: GoDaddy’s Hosting Agreement grants access to hosted services with all underlying IP retained by GoDaddy or its third-party licensors. Users are expressly prohibited from removing or modifying copyright notices in the software. Third-party software (e.g. Acronis, Norton) is governed by separate end-user licence agreements that similarly restrict use to personal or business purposes only. Payments are for hosting services. 95.DigitalOcean: DigitalOcean’s terms grant a limited, non-exclusive, non-transferable, non-sublicensable, revocable licence to access and use its websites and services. DigitalOcean retains all ownership of the services and related IP. Some materials are made available under open-source licences, but this does not constitute a copyright licence to the paying subscriber. The subscription is for cloud infrastructure services. 96.Tookan (JungleWorks): JungleWorks’ terms state clearly that the services and software are proprietary products protected by patents, copyright laws, and international treaties. The licence granted is limited, non-exclusive, and non-transferable for internal use only, with no rights conveyed to the underlying software. All improvements and derivative works remain JungleWorks’ property. Subscription payments are for access to the SaaS dispatch management platform. 97.Wingubox: Wingubox’s terms state that Wingubox Ltd and its suppliers own all intellectual property rights in all protectable components of the service, including the interface, features, and documentation. Users are expressly prohibited from copying, modifying, reverse-engineering, or decompiling any aspect of the service. The subscriber obtains only access to the platform as a service. Critically, no licence to use any copyright is granted. 98.Africa’s Talking: Africa’s Talking grants a limited, revocable, non-exclusive, non-transferable, non-sublicensable licence to access and use the services solely for lawful internal business operations. Africa's Talking retains all rights, title, and interest in its IP, including software, APIs, platforms, and user interfaces. Nothing in the agreement grants the client rights beyond this narrow access licence. Payments are for API-based communications services. 99.Appfigures: Appfigures’ terms assert that all code, software, scripts, graphics, and materials are the sole property of Appfigures, protected by copyright and trademark law. Users are granted only a limited-use, non-exclusive, revocable licence to use the analytics engine for the purpose of interacting with the service. No reproduction, distribution, or exploitation rights are granted. Subscription payments are for access to the analytics reporting platform. 100.Approval Donkey: The terms are relatively sparse on IP detail but confirm that any software provided as part of the services may include open-source components under separate licences. The arrangement is a standard SaaS subscription model with billing on a recurring basis and no grant of rights to underlying copyright. Users pay for access to workflow automation functionality as a service. 101.Twilio (SendGrid & Segment): Twilio’s terms characterise its services as commercially available off-the-shelf items and "Commercial Computer Software." Users are prohibited from transferring, reselling, leasing, or otherwise licensing the services to third parties. Twilio retains all IP, and users must separately obtain any export licences required. The subscription is for access to communications API services; no copyright in the underlying software is licensed to the user. 102.Intuit-Mailchimp: Mailchimp’s API Use Policy grants a non-exclusive, non-transferable, non-sublicensable, revocable, limited right to access and use the APIs solely to build integrations. Mailchimp owns all rights, title, and interest in the service and APIs, including all IP, marks, code, and features. No right to distribute the standalone API is granted. Any feedback provided by the user may be freely exploited by Mailchimp. Payments are for API access as a service. 103.Hawkstone-Instabug: The Instabug website terms of Use protect all website content, software, features, and functionality under copyright, trademark, patent, and trade secret law. Users may download a single copy of any application solely for personal or non-commercial use, subject to a separate end-user licence agreement. Commercial use of the website or materials is expressly prohibited without permission. Subscription payments are for access to a mobile app testing and feedback platform. 104.WAMA Cloud: WAMA Cloud’s terms state that the service and all original content, features, and functionality are and will remain the exclusive property of WAMA and its licensors, protected by copyright, trademark, and other laws. No licence to the underlying IP is granted to subscribers. Payments are made on a recurring subscription basis for access to the warehouse management system as a SaaS product, not for any right to exploit the service's copyright. 105.The Tribunal observes that across all 15 vendors, the subscription payments are consistently structured as consideration for access to a hosted service, and not for the use of, or right to use, any copyright in the underlying software or platform. In every case: all intellectual property rights are expressly retained by the vendor or its licensors; access to source code is denied; the licence granted is narrow, personal, non-exclusive, non-transferable, and revocable; and no exploitation rights (reproduction, distribution, creation of derivative works) are conferred. Accordingly, the Tribunal finds that none of the 15 subscription payments made by the Appellant in the assessment period satisfy the definition of a royalty under Section 2 of the Income Tax Act. 106.In further corroboration to the Tribunal’s finding above, the Tribunal also refers to the Commentary on Article 12 of the OECD Model Tax Convention on Income and On Capital, relied on by the Court in the Seven Seas case, and referred to by the Appellant and the Respondent’s own internal advisory on the matter. 107.Article 12(2) of the OECD Model Tax Convention (2017) defines "royalties" as payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific work, any patent, trademark, secret formula, process, or know-how. The critical interpretive guidance lies in the Commentary on Article 12, in paragraphs 11 through 17, which address software and digital transactions. 108.Paragraph 12.1 of the Commentary defines computer software as a program or series of programs containing instructions for a computer, and distinguishes between the copyright in the program – which is the protectable intellectual property – and the medium or copy on which the program is delivered to the user. This distinction is foundational: merely receiving and using a copy of software is categorically different from acquiring any right in the copyright itself. 109.Paragraph 14 draws the essential line between two classes of software payment. Where a payment is made for the acquisition of partial copyright rights – such as the right to reproduce, modify, or distribute the software – the payment is a royalty because the payer is obtaining a right to exploit the copyright. Conversely, where the payment is made only for the right to operate the software for personal or business use, without any right to reproduce or exploit the copyright commercially, the payment is not a royalty. It is instead consideration for services or for a supply of a product, taxable under Article 7 (Business Profits) or, where applicable, Article 15, and not subject to withholding tax at source. 110.Paragraph 14.2 reinforces this by clarifying that payments made under a licence where the user is permitted only to load and run a program for their own internal use, and the licence restricts reproduction to incidental technical copying required for that use, do not constitute royalties. The right granted is purely functional and operational; it does not touch on the economic substance of the copyright. 111.Paragraph 14.4 addresses distributors who receive software copies with a limited right to distribute them to end users, but without the right to reproduce the program itself. The Commentary states that such payments should be treated as business profits rather than royalties, because no copyright exploitation right passes to the distributor. The payment is compensation for a commercial act of distribution, not for the use of intellectual property. 112.Paragraphs 17 and 17.1 - 17.4 extend these principles to technology services and cloud computing. They make clear that where a vendor provides access to a database, platform, or service hosted on its own infrastructure – and the customer merely queries or uses the functionality without receiving a copy of the underlying software or any copyright right – the payment is remuneration for a service, governed by Article 7. The Commentary expressly cautions against treating payments for services that happen to involve software or IP as royalties simply because a technology element is present. The decisive question is always what the payer actually acquired, not what technology underlies the service. 113.The SaaS and cloud delivery model, which is the predominant structure among the 15 vendors, is the scenario addressed in the Paragraphs 17 et seq. of the Commentary. The Commentary clarifies that where software functionality is delivered entirely through a vendor’s own infrastructure, and the customer receives no software copy and no rights to copyright, the payment is unambiguously a service fee characterisable under Article 7. This applies paradigmatically to vendors such as DigitalOcean (cloud infrastructure), Africa’s Talking (API-delivered communications), Twilio (API services), Mailchimp (API access), Appfigures (analytics engine), and WAMA Cloud (hosted warehouse management), all of which operate as pure SaaS providers with no software copy delivered to the subscriber. 114.None of the 15 subscription payments constitute royalties under Section 2 of the Income Tax Act is fully corroborated by the Commentary on Article 12 of the OECD Model Tax Convention. The Commentary establishes at paragraphs 14, 14.2, 14.4, and 17 that a payment for access to a hosted digital service, made under a non-exclusive, operational-use licence that confers no right to reproduce, modify, distribute, or otherwise exploit the copyright in the underlying software, is a service payment governed by Article 7, not a royalty governed by Article 12. Each of the 15 vendor arrangements falls squarely within this category. The vendor retains the copyright, and the subscriber uses the service. 115.The Tribunal is further guided by the principle of strict construction of fiscal statutes articulated by Mativo J. in Equity Group Holdings Limited v Commissioner of Domestic Taxes [2021] KEHC 25 (KLR), where it was held that: -“11.In construing fiscal statutes and in determining the liability of a subject to tax one had to have regard to the strict letter of the law. If the revenue satisfied the court that the case fell strictly within the provisions of the law, the subject could be taxed. If, on the other hand, the case was not covered within the four corners of the provisions of the taxing statute, no tax could be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter.” 116.The Tribunal also takes cognisance that the Finance Act, 2026 which was assented to on 23rd June 2026, amended Section 2(1) of the Income Tax Act by deleting the definition of “royalty” and substituting it for the following definition: -““royalty” means a payment made as a consideration for the use or the right to use—(a)any copyright of a literary, artistic or scientific work;(b)any software, proprietary or off-the-shelf, whether in the form of licence, development, training, maintenance or support fees;(c)any cinematograph film including a film or tape for radio or television broadcasting;(d)any patent, trademark, design or model, plan, formula or process;(e)any industrial, commercial or scientific equipment;(f)information concerning industrial, commercial or scientific equipment or experience, and any gains derived from the sale or exchange of any right or property giving rise to that royalty; or(g)a proprietary digital payment card network or platform, including access, participation or usage rights in such system through a card, whether the consideration is periodic or transaction-based and whether or not the payment is described as a service fee, transaction fee, network fee, assessment fee, processing fee or similar charge.” 117.It is evident that the legislative addition of the new definition of royalty in the Income Tax Act sustains the Tribunal’s finding that the framework that existed prior to the amendment by the Finance Act, 2026 rendered the Appellant’s transactions to be outside the ambit of royalty as it stood during the periods assessed. 118.The interpretation of fiscal statutes applies with equal force to both the Commissioner and taxpayers. In this instance, burden of proof shifted to the Respondent when the Appellant presented evidence supporting its case, but the Respondent failed to show that the subject transactions were subject to WHT in the periods assessed. On the other hand, the Appellant discharged its burden of proof and demonstrated that WHT did not apply to the transactions. 119.In light of the foregoing, the Tribunal finds and holds that WHT was not applicable to the Appellant’s payments for software licences for the periods 2020, 2021 and 2022. Final Decision 120.The upshot of the above analysis is that the Tribunal finds that the Appeal is meritorious. The Tribunal accordingly proceeds to issue the following Orders:a.The Appeal be and is hereby allowed.b.The Objection decision dated 12th May 2025 be and is hereby set aside.c.Each party to bear its own costs. 121.It is so ordered. DATED AND DELIVERED AT NAIROBI THIS 30TH DAY OF JUNE 2026.………………………………ROBERT M. MUTUMACHAIRMAN………………………………GLORIA A. OGAGAMEMBER………………………………DR. TIMOTHYMEMBER………………………………B. VIKIRUMEMBER………………………………JIMMY M. MALLAMEMBER