[2024] KETAT 1300 (KLR)

M-Pesa Foundation Charitable Trust v Commissioner of Domestic Taxes (Appeal E433 of 2024) [2024] KETAT 1300 (KLR) (30 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1300 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal E433 of 2024

CA Muga, Chair, BK Terer, D.K Ngala & SS Ololchike, Members

August 30, 2024

Between

The M-Pesa Foundation Charitable Trust

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a charitable trust founded and funded by M-PESA Holding Company Limited as part of its contribution to the welfare of the people of Kenya in furtherance of its corporate social responsibility. The Appellant’s activities are geared towards the relief of poverty and distress of the public and furtherance of education. To this end, the entity has obtained an income tax exemption from the Respondent.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Respondent carried out an audit of the Appellant’s tax records for the period April, 2016 to February, 2023. The Respondent requested information through a letter dated 1st August, 2022 pursuant to section 59 of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”).

4. After various meetings and correspondence through which the Appellant and Respondent tried to resolve the issues, under audit, the Respondent issued an assessment letter dated 28th April, 2023 demanding payment of Kshs. 19,414,508. 00 relating to withholding tax, principal tax, interest and penalties.

5. The Appellant objected to the assessment in its entirety on 22nd May, 2023 and after due consideration of the notice of objection, the Respondent issued its objection decision on 23rd June, 2023 and amended its assessment from Kshs. 19,414,508. 00 to Kshs. 6,487,830. 00.

6. Aggrieved by the Respondent's decision, the Appellant lodged its notice of appeal dated 21st July, 2023 on even date.

The Appeal 7. The Appeal as contained in the Memorandum of Appeal dated 2nd August, 2023 and filed on 3rd August, 2023 is predicated on the ground that the Respondent erred by imposing withholding tax on staff cost reimbursements payable to Safaricom Plc (hereinafter “Safaricom”), yet the costs are not subject to withholding tax.

The Appellant’s Case 8. The Appellant set out its case in its statement of facts dated 2nd August, 2023 and filed on 3rd August, 2023 in which it stated as follows:

9. The Respondent sought to levy withholding tax amounting to KShs. 6,487,830. 00 on payments made to Safaricom. In its objection decision, the Respondent deemed the secondment arrangement between Safaricom and the Appellant to be that of service provider and service recipient, with the “resultant services” deemed to be management and professional in nature.

10. The Respondent contended that the employees seconded by Safaricom offer professional and management services to the Appellant since they remain employees of Safaricom during the duration of the secondment agreement.

11. The Appellant’s assertion was that it jointly employed the seconded employees and they did not provide the Appellant with professional and management services. The Appellant submitted that in accordance with the Secondment and Recharge of Staff costs Agreement (hereinafter “the Agreement”) the payments made by the Appellant to Safaricom represented reimbursements of the staff payroll costs pursuant to Clause 3. 2 of the Agreement.

12. Safaricom, being the primary employer, seconds staff to provide employment services to the Appellant on a part-time basis. As primary employer, Safaricom accounts for and remits PAYE, NSSF and other taxes on account of the seconded staffs' total employment emoluments as provided under Clause 3. 1 of the Agreement. Safaricom's invoices to the Appellant were for reimbursement of the prorated payroll charges, which are invoiced on a one-to-one basis i.e., without application of any mark-up.

13. The Appellant adduced as evidence, sample invoices which indicated that the the costs described are payroll in nature i.e., basic pay, annual bonus, pension, NSSF etc. It was also clear from the Appellant’s assertions on the invoices, that no mark-up is charged on the costs.

14. The Appellant asserted that Note 2 (h) of the extract of its audited financial statements for the periods ended 31st March, 2021 and 2022 confirmed the above position. The Appellant's share of employment costs reimbursed to Safaricom were therefore not in the nature of management fees.

15. According to the Appellant, the Respondent in reaching its objection decision, relied on clauses 2. 4 and 2. 5. of the Agreement which provides that the employees respective employment contracts with Safaricom are not severed.

16. The Appellant asserted that it was standard practice for a secondee to retain their contract of employment with their primary employer as the secondment is basically a temporary transfer of an employee to a different working station. The Appellant also asserted that secondment is neither a termination of employment nor a permanent transfer of an employee and that infact, upon conclusion of the secondment term, the employee resumed working at their primary office.

17. The Appellant stated that secondees must remain employed by their primary employer for the duration of their assignment for numerous reasons including:i.computing years of service; andii.continuing pension and insurance benefits.

18. The Appellant asserted that where secondees were compelled to sever their employment relationship with the primary employer for the duration of their secondment assignment, the same would act as a strong disincentive for such local secondment opportunities.

19. The Appellant stated that just because the employment relationship was not severed with Safaricom, it did not mean that the secondees were providing management or professional services as independent contractors. Additionally, since the secondment services are provided on a part time basis, it was practically impossible to sever the employment relationship with Safaricom.

20. The Appellant further asserted that whilst the Respondent had incorrectly concluded that the Appellant has no control over the secondees but was and is only a beneficiary of their services, it failed to appreciate that as a secondary employer, the Appellant retained control over the seconded staff for their portion of prorated time as confirmed by the following:i.Clause 5. 2(a) of the Agreement which states that “The Foundation shall have day-to-day control of the secondees' activities relating to the Foundation as agreed herein” .ii.The Appellant bore the costs of the seconded employees as highlighted in Clause 3. 2 of the Agreement which states as follows:“The Foundation shall reimburse to the employer a portioncof the total remuneration paid to the secondees under the employment agreement')”; andiii.The Appellant was involved in Safaricom's grievance or disciplinary procedures in relation to the secondees as highlighted in Clause 5. 3(c) of the Agreement.

21. The Respondent additionally concluded that since Safaricom charged VAT on the invoices to the Appellant, the payment made by the Appellant could not be termed as a reimbursement since they are not recharged at cost. This was however an incorrect statement since, Safaricom did not apply a mark-up on the payroll costs reimbursement. VAT chargeable by Safaricom was in line with the definition of a supply of a service pursuant to the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) which provides as follows:“anything done that is not a supply of goods or money, includinga)the performance of services for another person;b)the grant, assignment, or surrender of any right;c)the making available of any facility or advantage; ord)the toleration of any situation or the refraining from the doing of any act;”

22. From the foregoing the Appellant averred that the relationship between it and Safaricom is not one of service provider and service recipient respectively, but that of joint employers to the seconded staff as supported by the Agreement, invoices and the highlighted note 2(h) of its financial statements.

23. The Appellant buttressed its position by citing the Income Tax Act, CAP 470 of the Laws of Kenya (hereinafter “ITA”) which provides for the definition of the term “management or professional fee'” as follows:‘any payment made to any person, other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services however calculated.”

24. The Appellant’s view was that the definition specifically excludes payments made to employees by their employer. The seconded staff therefore acted in their capacity as the Appellant’s employees and hence the payroll costs reimbursed to Safaricom are a refund of the payroll costs incurred by the Appellant and to which the seconded employees were entitled to by virtue of their employment.

25. In reaching that conclusion, the Appellant was guided by the determination of the Tribunal in the Two Lakes Packaging Services Limited (Two Lakes Packaging) vs Commissioner of Domestic Taxes (Appeal Number 420 of 2021), wherein the Tribunal held as follows:“.. ... Looking at the definition of management or professional fees as stated in the Act, it is logical to conclude that services related to employee costs can indeed fall under the definition of professional services. However, the reimbursement for costs themselves cannot be deemed to be payments or consideration for any services rendered. By their nature, payroll costs, NSSF, NHIF and such costs were not payments to the contractor and therefore could not have been subject of withholding tax.”

26. The Appellant asserted that the Respondent additionally misguided itself by misinterpreting Clause 3. 4 of the Agreement to imply that it was required to withhold tax upon reimbursement to Safaricom but failed to do so. Firstly, the onus of determining deductibility of withholding tax always rests with payer, in this case, the Appellant. Secondly, Clause 3. 4 of the Agreement provided that the Appellant was to reimburse Safaricom the payroll costs without deducting any present and future taxes. The Appellant asserted that the Respondent incorrectly misread the clause and the Agreement did not refer to withholding tax under Section 35 of the ITA.

27. lt was therefore evident to the Appellant that the payroll cost reimbursement incurred by it could not be deemed to be payments for any services rendered and as such, no additional tax is due from the it on account of the staff emoluments reimbursed to Safaricom.

28. The Appellant made the following prayers to the Tribunal:a.That the Respondent's decision contained in the letter dated 23 June 2023 demanding payment KShs. 6,487,830. 00 be set aside in its entirety;b.That the Appeal be allowed;c.That the costs and incidentals to this Appeal be awarded to the Appellant; andd.Any other orders that the Tribunal may deem fit.

Respondent’s Case 29. The Respondent’s case was as set out in its statement of facts dated 29th August, 2023 and filed on 31st August, 2023 in which it stated that the Appellant entered into an Agreement requiring Safaricom to second its employees to the Appellant for purposes of providing services in managing its affairs. In return the Appellant was to reimburse Safaricom a portion of the remuneration paid to the secondees as stipulated in clause 3. 2 of the Agreement. Clause 3. 2 of the Agreement further stated that the fees recharged to Safaricom was inclusive of VAT.

30. The Respondent identified a single issue for determination which was whether it erred by imposing withholding tax on staff cost reimbursements payable to Safaricom yet the costs are not subject to withholding tax.

31. The response to the Appeal, by the Respondent was that Section 31 (4) (b) of the TPA provides that the Commissioner may amend an assessment within a period of 5 years for a self-assessment from the date the taxpayer submitted the self-assessment return to which the self-assessment relates unless the Commisisoner has information of gross or wilful neglect, evasion or fraud by or on behalf of the taxpayer.

32. The Respondent stated that the notice of assessment was dated 28th April 2023 and therefore the assessments relating to the periods prior to March, 2018 were time barred and were consequently vacated.

33. The Respondent took cognizance of the Appellant’s grounds of objection and concurred that the withholding tax on management and professional fees on the withholder as if due and payable by them was not supported by the law due to the deletion of section 35(6) of the ITA by the Finance Act,2016. However, payments made after 7th November, 2019 were not covered and therefore the Respondent could demand withholding tax on qualifying payments in accordance with the provisions of section 39A of the TPA.

34. The Respondent stated that the provisions of taxable supply pursuant to sections 2 and 5 of the VAT Act and those in respect to Clause 3. 2 of the Agreement stated and required that fees re-charged by Safaricom would be inclusive of VAT. This did not imply that it had raised withholding tax using the wrong sections of the Law.

35. The Respondent contended that the fact that invoicing was done inclusive of VAT indicated that Safaricom offered vatable supplies to the Appellant. Consequently, the payment made by the Appellant could not be termed reimbursement as the same were not at cost.

36. The Respondent further averred that the Appellant’s contention that the relationship between the Appellant and Safaricom was not one of service provider and service recipient respectively but that of joint employers to the second staff clearly contradicted clause 2. 4 and 2. 6 of the Agreement.

37. The Respondent stated that it observed that it was evident from the Agreement that the secondees were not the employees of the Appellant. Accordingly, the Respondent was of the view that the payment made in relation to the secondment agreement could not be “payment made to an employee by his employer”. Moreover, the Appellant had no control over the seconded employees and was only a beneficiary of their services. All employer decision making powers on the employees remained with Safaricom and therefore the contract between the Appellant and Safaricom is a contract for services.

38. The view of the Respondent was that it correctly demanded withholding tax payments made by the Appellant to Safaricom from November, 2019 to February, 2019 [sic] and it therefore partially accepted the Appellant’s objection and revised the tax due.

39. The Respondent’s prayers to the Tribunal were that its objection decision dated 23rd June, 2023 would be affirmed and that the amendment to the assessment of taxes from 19,414,507. 00 to Kshs. 6,487,830. 00 would be found to be due and payable by the Appellant.

Parties’ Submissions 40. Both parties were to file written submissions, those of the Appellant dated and filed on 11th December, 2023 will be considered by the Tribunal whilst those of the Respondent were expunged from the record, by the Tribunal on 5th February, 2024 for having been filed out of time.

41. In its submissions, the Appellant started by providing a brief background of the case and re-hashed part of its statement of facts. The Tribunal will not repeat paragraph the 1-5 of the Appellant’s written submissions.

42. The Appellant, in its submissions, identified the following single issue for determination and proceeded to analyse the same:Whether the Respondent erred in fact and in law in demanding withholding tax on staff cost reimbursements payable to Safaricom, yet the costs are not subject to withholding tax under Section 2, 10 and 35 (3) of the ITA.

43. The Appellant submitted that the withholding tax assessment in issue was erroneous and appealed against it based on the ground that the Respondent erred in fact and in law in demanding withholding tax on staff cost reimbursements payable to Safaricom, yet the costs are not subject to withholding tax. According to the Appellant, it was necessary for the Tribunal to determine a number of questions before answering the above question in the affirmative, the following questions had to be first determined:

What is the nature of relationship between the Appellant and the seconded staff? 44. On this issue the Appellant submitted that Safaricom, a related party to the Appellant, entered into the Agreement through which it agreed to second staff to provide employment services to the Appellant, on a part-time basis. The Appellant set out the provisions of Clause 2 and 5 of the Agreement which were as follows:“2. 1. The Employer shall second the Secondees to provide the services to the Foundation in such positions as the Foundation shall determine ("the Secondment').

2. 3. The Employer shall use its reasonable endeavours to ensure that the Secondees shall be available to provide the services to the Foundation on a part time basis.

2. 6. The Employer shall procure that each secondee accepts and acknowledges the terms of the Secondment by signing a secondment letter in the form set out in Schedule 3.

2. 7. The Foundation acknowledges and accepts the terms and conditions of the letter set out in Schedule 3.

5. 1 (a).The Employer shall take no steps inconsistent with the provision of the services to the Foundation by the Secondees under the direction of the Foundation and the Employer as provided in this Agreement.

5. 2 (a).The Foundation shall have day-to-day control of the secondees' activities relating to the Foundation as agreed herein.

5. 2 (c).The Foundation shall cooperate with the Employer in any steps the Employer may legally propose to take under its grievance or disciplinary procedures in relation to a secondee."

Safaricom was referred to as ‘Employer’ in the Agreement.

45. The Appellant avowed that the Agreement and the secondment letter signed by the seconded staff established a secondment arrangement in which the secondees are attached to the Appellant (for the prescribed secondment duration) as the secondary employer. During this period, the secondees are under the direct control and supervision of the Appellant as supported by Clauses 2. 1, 5. 1 (a) and 5. 2 (a) of the Agreement.

Who is the employer? 46. The very nature of secondment agreements is that secondees remained attached to the primary entity (in this case Safaricom) whilst on secondment/temporary assignment to another entity (in this case the Appellant). The secondees work under the rules, regulations and direct supervision of the other entity which becomes and would be deemed to be their substantive employer during the secondment period.

47. To buttress its position, the Appellant cited the case Court of Appeal case of Kenya Methodist University vs Mary Kaungania & Another: Appeal No. 61 of 2017 stated as following while demystifying secondment arrangements;“In addition, while employment involves doing work for which one has been hired and is being paid by an employer, secondment is defined in Oxford Dictionary as the act of transferring a worker temporarily to another employment or position, and therefore under another employer. In effect, the employee does not undertake any work for the original employer during the period of secondment. Therefore, in a situation where a person is employed on secondment, the substantive and principal employer in our view is the person or entity that has assigned the employee specific duties which are remunerated by a salary or wages during that period of employment. The person or entity that seconds such a person is the residual employer whose powers and duties are reinstated once the secondment ends and are residual during the period of secondment."

48. The Appellant submitted that whilst under a secondment arrangement, the secondee is attached to it for the prescribed prorated duration, the principal relationship with Safaricom is considered dormant during the secondment period as the secondee is under active employment of the host employer. The Respondent in Paragraph 16 and 19 of its statements of facts stated that upon review of the Agreement, it found that the principal employer-employee relationship between the secondees and Safaricom was never severed upon being seconded to the Appellant.

49. The Appellant submitted that the Respondent specifically referred to clause 2. 4 and 2. 5 of the Agreement which it misconstrued to establish a service provider/service recipient relationship between Safaricom and the Appellant respectively. The clauses state as follows:'2. 4. During the Secondment, the secondees shall at all times remain employees of the Employer.'2. 5. Nothing in this Agreement will be construed to have effect as forming or recording any relationship of employer and employee between the Foundation and any Secondee and nothing in this Agreement shall constitute or be construed as constituting or establishing any partnership or joint venture between the parties to this Agreement for any purpose whatsoever."

50. The Appellant also submitted that the Respondent incorrectly misinterpreted the Agreement to imply that Safaricom was providing a management or professional service to the Appellant. The Appellant affirmed that the above clauses in the Agreement were designed to assure the secondees that at the end of the secondment term, they would return back to their primary employer, and their original posts and positions with Safaricom would still be available at the end of the secondment period.

51. The Appellant submitted that in secondment arrangements, one must infer an employer-employee relationship by determining where the fact of actual employment sits from the circumstances of each case. The Appellant averred that by the Respondent failing to read the Agreement in its entirety and solely relying on the wording of Clauses 2. 4 and 2. 5, it failed to establish the full intentions of the parties in the secondment arrangement.

52. The Appellant further averred that the Respondent failed to appreciate other clauses in the Agreement that demonstrated that the employer-employee relationship rested with the Appellant as the substantive employer during the duration of secondment. The Appellant submitted that the notable clause of the Agreement included the following:a.Clauses 5. 1 (a) and 5. 2(a) of the Agreement which were evidence of the direct control by the Appellant as provided above: "The Foundation shall have day-to-day control of the secondees' activities relating to the Foundation as agreed herein."b.The Appellant bears the costs of the seconded employees as highlighted in Clause 3. 2 of the Agreement which states that 'The Foundation shall reimburse to the employer a portion of the total remuneration paid to the secondees under the employment agreement'); andc.The Appellant is involved in Safaricom's grievance or disciplinary procedures in relation to the secondees as highlighted in Clause 5. 2(c) of the Agreement.

53. The Appellant further asserted that from the foregoing highlighted clauses, it was evident that the employer-employee relationship during the secondment period was between the Appellant and the secondees and not between the secondees and the Safaricom.

54. The Appellant relied on the following cases: Court of Appeal case of Commissioner of Domestic Taxes v Ocean Freight East Africa Limited.

Court of Appeal case of Simmons v Health Laundry Company [1910] 1 KB 543.

55. The Appellant submitted that in view of the outlined cases, the Respondent has erred in selectively reading clauses 2. 4 and 2. 5 of the Agreement, rather than appreciating the substance of the entire agreement, such as; deciding on where the control, integration and place of service arose. The services were undertaken wholly and exclusively for the benefit of the Appellant who are under its control as outlined in clauses 3. 2 and 5 of the Agreement above.

56. In determining this matter, the Appellant’s submission was that reliance was to be placed on the cited authoritative texts and case to provide guidance on the indices of employment and indicators of how to determine whether employment existed in line with the pointers on whether formal and/ or substantive employment exists between an employee and the host employer. The Appellant confirmed that during the pendency of the secondment services exclusively to the Appellant; worked under the direct control and supervision of the Appellant; were well integrated into the operations and affairs of Appellant; and worked for the economic benefit of the Appellant, as opposed to the primary employer.

57. The Appellant submitted that in the second case that it cited to buttress its position, the court sought to distinguish between a person who is an employee, i.e.; a contract of service, as opposed to a person who is engaged as a consultant, i.e.; a contract for service. The Appellant’s submission was that the case directed that in making such a distinction, a party is guided by the amount of direct control exercised over that person, as opposed to the degree of independence the person has in the agreement.

Do payments made to Safaricom constitute an income that ought to have been subjected to withholding tax? 58. The Appellant’s submission was that as a primary employer, Safaricom accounted for and remitted PAYE, NSSF and other taxes on account of the seconded staffs ' total employment emoluments as provided under Clause 3. 1 of the Agreement. Clause 3. 2 of the Agreement subsequently required the Appellant to reimburse Safaricom a prescribed portion of the total remuneration paid to the secondees under their respective employment contracts.

59. The Appellant also submitted that in line with Clause 3. 5 of the Agreement, Safaricom invoiced it the agreed prorated payroll charges without application of any mark-up, but inclusive of VAT. The costs described are payroll in nature i.e.; basic pay, annual bonus, pension, NSSF. Further, the Appellant submitted that Note 2(h) of its extract of audited financial statements for the period ended 31st March 2022 confirmed the above position.

60. The Appellant further submitted that the evidence it had provided including the extract of Note 2(h) of its extract of audited financial statements for the period ended 31st March 2021 and support workings for costs invoiced for the periods March and May 2022 demonstrated that Safaricom did not indeed apply a mark-up on the staff cost reimbursements. The Appellant's share of employment costs was therefore not in the nature of income earned by Safaricom as the amounts paid were refunds utilised to offset against employment emoluments paid by Safaricom to the parties' joint employees. Such payments could not therefore be construed to be management or professional fees.

61. The Appellant relied on the provisions of section 3 and 10 (1) of the ITA.

Are the payments made by the Appellant really an income to Safaricom such that they ought to be subjected to the withholding tax? 62. The Appellant submitted that the answer to the above question is ‘NO’. As stated earlier, the Respondent was seeking to charge withholding tax under the Agreement, in particular under the following clause:“3. 2. The Foundation shall reimburse to the Employer a portion of the total remuneration paid to the Secondees under the employment contract as follows:a)For Secondees within 'Band F, G, H or I' of the Employer's job grade, the Foundation shall reimburse 30% (thirty percent) of the remuneration;b)For Secondees within 'Band E' of the Employer's job grade, the Foundation shall reimburse 15% (fifteen percent) of the remuneration; andc)For the Secondee designated as the executive director of the Foundation, the Foundation shall reimburse 100% (one hundred percent) of the remuneration.”

63. The Appellant further submitted on two additional issues namely whether a reimbursement can be treated as income and the meaning of the term ‘reimburse’. Under the Agreement, Part 3 (Remuneration Arrangements) of the Agreement states as follows:“3. I.During the Secondment, the Employer will be legally responsible for the payment of the Secondees salary and any benefits and/or allowances under the Employment Contract and account to the appropriate authorities for all sums payable under this Agreement by way of income tax and employer's social security contributions and other taxes.

3. 2. The Foundation shall reimburse to the Employer a portion of the total remuneration paid to the Secondees under the employment contract ... "

64. The Appellant asserted that Agreement referred to the term "reimbursement" since Safaricom, being the primary employer undertook to pay salaries and account for any corresponding statutory deductions on behalf of the Appellant, whereas the Appellant in Clause 3. 2 of the Agreement agreed to reimburse a portion of the total remuneration paid to the Secondees.

65. The Appellant also submitted that according to the Cambridge Dictionary, the word reimburse has the following meaning:“the act of paying back money to someone who has spent it for you or lost it because of you, or the amount that is paid back"

66. Accordingly, the view of the Appellant was that the synonym for the word reimburse is to; compensate, recompense, repay, square accounts with, restore or refund. The word "refund " means to give back, restore. The Appellant therefore submitted that a reimbursement of money, being a refund made to restore someone back to the position there were before they made a payment on behalf of the person who owed the refund could not be construed to be an income never become an income to the person who is merely being paid back to restore them back to the position they were.

67. The Appellant also submitted on the misleading nature of paragraph 15 of the Respondent’s statement of facts highlighting the statement by the Respondent that: “the payment made by the Appellant cannot be termed as reimbursement since they are not at cost."

68. The Appellant’s view was that the statement was misleading as it had demonstrated that Safaricom does not charge a mark up on the staff costs reimbursed by the Appellant. Section 35(l) the ITA read together with the Third Schedule of the ITA provides for the charging of a sum payable towards management and professional fees. This means that withholding tax can only be charged on the amount as far as it relates to an income, and that income is a management and professional fees. It was the Appellant's position that the amounts that the Respondent sought to charge did not fall within the definition of management and professional fees, and as demonstrated earlier, a reimbursement or re-payment cannot be an income as it was merely compensation for what the receiver sought to restore.

69. In its submissions, the Appellant delved into the provisions of Section 35 (3) of the ITA on the requirement for the deduction of withholding tax in respect of management or professional services fees paid to a resident person. Section 2 of the ITA on the other hand defines management or professional fees to mean: "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 consulting services, however calculated;"

70. The seconded staff acted in their capacity as the Appellant's employees and therefore the payroll costs reimbursed to Safaricom were a refund of the payroll costs incurred by the Appellant and to which the seconded employees were entitled by virtue of their employment. The cost reimbursement constituted "payments made to an employee by his employer" as defined in the ITA. It should be noted, with great emphasis, that these "payments made to an employee by his employer" are excluded from the definition of management or professional fees in section 2 of the ITA.

71. The Appellant reiterated the findings of the Tribunal in the case Two Lakes Packaging Services Limited (Two Lakes Packaging) vs Commissioner of Domestic Taxes (Appeal Number 420 of 2021). The Appellant also relied on the holding in DC/Tv. DLF Projects Ltd (/TA No. 5178/Del/2014) where the Indian Income Tax Appellate Tribunal held that withholding of taxes under section 195 of the Indian income tax was limited to the mark-up portion of the consideration received under a manpower supply agreement. The Tribunal held that a reimbursement of salaries for seconded employees was not subject to withholding. The Tribunal noted that before thrusting liability on withholding taxes, the following pre-conditions must be satisfied: (i) there must be an income element in the hands of the recipient; and (ii) the income must be earned/derived in India. The Tribunal held that since the reimbursement of actual manpower expenses had no element of any income in the case of the service provider, no tax was required to be withheld. The Tribunal further noted that the salaries were subject to tax when the payments were made to the employees and as such there was no loss of revenue.

72. The Appellant, in view of the cases it had cited made a comparable analysis and stated that no mark-up had been applied by Safaricom on the reimbursements and the income of the employees in question was earned and derived in Kenya, hence the reason the employees' salaries were subjected to PAYE by Safaricom, in accordance with the ITA. The Appellant therefore submitted that there is no loss of revenue to the Respondent.

73. To buttress its position further, the Appellant cited the case of Burt Hill Design (P.) Ltd. v. DDIT (International Taxation) Ahmedabad [2017] 79 taxmann.com 459 where it was held as follows:“Be that as it may, in any event, when undisputedly the payments are in the nature of the reimbursements, and, particularly when even the income embedded in these payments has already been brought to tax in India in the hands of ultimate beneficiaries- i.e., the seconded employees, there cannot be any tax withholding obligations under section 195. "

74. The Appellant’s final submission was that the Respondent erred in application of fact and law in computing the withholding tax assessment on payments which were composed of payroll costs reimbursements. Such an application of the law lacked legal merit and was unjustified.

Issues For Determination 75. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions has identified three issues for determination as follows:a.Whether re-charge of costs is a consideration for supply.b.Whether the consideration paid to Safaricom by the Appellant was management and professional fees.c.Whether the objection decision dated 23rd June, 2023 was justified.

Analysis And Findings 76. Having identified the three issues for determination the Tribunal will proceed to analyse them as follows:

Whether re-charge of costs is a consideration for supply. 77. The dispute herein arose when the Appellant who having entered into an arrangement with Safaricom, was assessed by the Respondent for withholding taxes on the re-charge costs or reimbursement it was paying to Safaricom on the basis that the same were payments for management and professional services.

78. The Appellant entered into an Agreement with Safaricom through which Safaricom was to second its employees to it and it was to re-charge the costs of the employment or reimburse Safaricom for the costs it incurred.

79. The Tribunal having reviewed the Agreement and Variation of the Agreement dated 1st September, 2017 and 7th July, 2020 respectively [hereinafter together referred to as “the Agreement”], notes that an Agreement was entered into between Safaricom and the Appellant to formalise the arrangement between them and to ensure that Safaricom would second its employees to the Appellant in exchange for the Appellant, reimbursing it for the salaries and staff costs it had incurred. The reimbursement as outlined in paragraph 3. 2 of the Agreement was to be carried out on the basis of the employment bands as follows:“The Foundation shall reimburse to the Employer a portion of the total remuneration paid to the Secondees under the Employment contract as follows:a.The Secondees within ‘B and F, G, H or I’ of the Employer’s job grade, the Foundation shall reimburse 30% (thirty per cent) of the remuneration;b.For Secondees within “B and E” of the employer’s job grade, the Foundation shall reimburse 15% (fifteen percent) of the remuneration; andc.For the Secondee designated as the executive director of the Foundation, the Foundation shall reimburse 100% (one hundred per cent) of the remuneration.”

80. The Tribunal notes that according to the 10th Edition of the Oxford Advanced Learner’s Dictionary, 10th Edition “second” means “to send an employee to another department, office etc, in order to do a different job for a short period of time”. From this definition and the facts presented, by the Appellant the Tribunal can infer that Safaricom seconded its employees to the Appellant on the basis of an Agreement which met all the elements of a contract including consideration.

81. The Tribunal notes the assertions by the Appellant in Clause 16 of its statement of facts, that the employees who were seconded did not sever their respective employment relationships with Safaricom. The Appellant further asserted in Clause 19 of its statement of facts, that it was a secondary employer retaining control over the employees that had been seconded. The Respondent however noted the Appellant contradicted itself upon a review of Clauses 2. 4 and 2. 5 of the Agreement which stated first that the secondee remained the employees of the Safaricom and that the existence of the Agreement did not have the effect of recording any relationship of “employer and employee” between the Appellant and the secondee. The Appellant therefore contradicted itself in its pleadings by referring to itself as a secondary employer or joint employer. The factual position was that the Appellant operated for all intents and purposes as a joint employer. However, the Agreement did not create an employer/employee relationship between Safaricom and the Appellant and that is the substratum of this matter.

82. The Tribunal further notes the provisions of section 56(1) of the TPA which requires that the Appellant to discharge its burden of proving that a tax decision is incorrect. The Appellant being a secondary employer, as it asserted should have adduced evidence of a contract letter between it and the secondee, creating the relationship of secondary employer. The court in Alfred Kioko Muteti v Timothy Miheso & another [2015] eKLR held that a party can only discharge its burden upon adducing evidence. Merely making pleadings is not enough. In reaching its findings, the court stated as follows:“Thus, the burden of proof lies on the party who would fail if no evidence at all were given by either party…. Pleadings are not evidence and it is not enough to plead particulars of negligence and make no attempt in one’s testimony in court to demonstrate by way of evidence how the accident occurred and how the 1st defendant was to blame for the said accident. It is trite law that he who alleges must prove and that burden does not shift to the adverse party even if the case proceeds by way of formal proof and or undefended.”

83. The Tribunal is of the view that since the Agreement was between the Appellant and Safaricom, it will restrict itself to that relationship in deciding on whether the re-charge of costs or reimbursements was consideration. The observation of the Tribunal is that the Agreement was for re-charge of costs and secondment of employees. It was a contract and the consideration paid to Safaricom seconding its employees was a re-charge of costs that it had already incurred.

84. The Tribunal finds that is that there was a supply for a service for which there was an Agreement and a payment for service provided by the recipient of the service. Though the Tribunal will not delve into the categorisation of the payment under this issue for determination, the finding of the Tribunal on this issue for determination is that the re-charge of the costs was a consideration for supply.

Whether the consideration paid to Safaricom by the Appellant was management and professional fees. 85. Section 2 of the ITA, outlines the following as the meaning of management or professional fee:“management or professional fees means any payment made to any person, other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services however calculated”.

86. The Tribunal notes as outlined earlier that the Agreement was a formalisation of the arrangement between the Appellant and Safaricom. The Agreement outlined each party’s obligations and benefits in the arrangement. Under the Agreement, the duty of Safaricom was to provide the employees whilst that of the Appellant was to reimburse Safaricom for its costs. The payment for the services was in the form of the reimbursement of costs pursuant to Clause 3. 2 of the Agreement.

87. The Tribunal has also reviewed the samples of the invoices that were adduced as evidence and notes that the entire re-charge was subjected to VAT at 16%. The Tribunal notes that the payment to Safaricom depended on a single variable which was the band or job-grade under which the secondee was employed. The amount differed according to the job grades with reimbursement ranging from 15% to 100% of the remuneration. The view of the Tribunal is that clause 3. 2 of the Agreement outlined the formula for calculation of the re-charge of costs to Safaricom. The sums paid were not marked up but included VAT at 16% since the payments could be construed to be a supply of services pursuant to section 2 of the VAT Act which provides as follows:“supply of services" means anything done that is not a supply of goodsor money, including—(a)the performance of services for another person;(b)the grant, assignment, or surrender of any right;(c)the making available of any facility or advantage; or(d)the toleration of any situation or the refraining from the doing of any act;”

88. The Tribunal notes the Appellant’s reference to the case Two Lakes Packaging Services Limited vs. Commissioner of domestic Services [TAT Appeal No. 402 of 2021] but notes that the facts of the cited case were not similar to the instant Appeal for the following reasons:i.The Appellant in that case had hired an independent contractor to carry out its duties involving payment of employees;ii.That agent was entitled to a management fee of Kshs. 1,000. 00 per employee over and above the re-charged costs; andiii.The Respondent was found to have erred in charging withholding tax on NSSF and other statutory payments as the same were not paid or due to the independent contractor.

89. In the instant case, the Tribunal notes that the Appellant did not pay Safaricom any amount over and above the re-charge costs or reimbursements. However, the consideration was subject to VAT as outlined by section 2 of the VAT Act and the Appellant alludes to this fact pursuant to the inclusion in Clause 3. 2 of the Agreement, of the paragraph stating that reimbursement was to be inclusive of VAT. There VAT chargeable was not disputed and accordingly there was no dispute as to whether there was a supply of a service.

90. The Tribunal notes that the Appellant in citing Two Lakes Packaging Services Limited vs. Commissioner of domestic Services [TAT Appeal No. 402 of 2021] was of the view that this case was only similar in some respects but the facts were not the same as in the instant case. The remuneration or portion of the remuneration that was to be reimbursed on the 20th of each month. This is long after statutory deductions on salaries are made. Accordingly, the Appellant paid for a supply of service and was not responsible for remitting any amounts directly in respect of statutory deductions to the relevant Government authorities. The Tribunal upon a review and perusal of the invoices noted that in some instances the Appellant itemized the payments and subjected the reimbursement including the ones itemized as NSSF and other statutory deductions, to VAT. The Tribunal is of the view that the reimbursement was infact a payment to Safaricom for its service and such payments are subject to withholding taxes pursuant to section 10 (1) of the ITA which provides as follows:“(1)For the purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment [emphasis ours] to any other person in respect of—(a)a management or professional fee or training fee;”

91. The finding of the Tribunal is that the consideration or payment made to Safaricom was management and professional fees since Safaricom, as the Appellant had indicated in paragraph 8 of its submissions, was providing employment services to it. The payment was as made as consideration for a service which was the supply of employees on secondment. There was no mark-up but the fact remains that a payment was made in exchange for the service.

92. The view of the Tribunal is that the payment was correctly treated as an income to Safaricom since it was a payment made in exchange for Safaricom providing a service. Withholding tax was therefore deductible on the payment. Further as established under the first issue for determination, the relationship between Safaricom and the Appellant was one of service provider and service recipient Accordingly, the finding of the Tribunal was that the consideration paid to Safaricom by the Appellant was management and professional fees pursuant to the provisions of the ITA.

Whether the objection decision dated 23rd June, 2023 was justified. 93. The Tribunal having found that the re-charge costs were consideration for supply and that the consideration is construed to be management and professional fees finds that the Respondent did not err and that the taxes demanded are due and payable since the objection decision dated 23rd June, 2023 was justified.

Final Decision 94. The upshot of the foregoing is that the Appeal is not meritorious and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The objection decision dated 23rd June, 2023 be and is hereby upheld.c.Each party to bear its own costs.

95. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 30TH DAY OF AUGUST, 2024. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERDELILAH K. NGALA - MEMBEROLOLCHIKE S. SPENCER - MEMBER