[2024] KETAT 99 (KLR)

Mawingu Networks Limited v Commissioner of Domestic Taxes (Tax Appeal 1179 of 2022) [2024] KETAT 99 (KLR) (2 February 2024) (Judgment)

Neutral citation: [2024] KETAT 99 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1179 of 2022

RM Mutuma, Chair, EN Njeru, BK Terer, M Makau & W Ongeti, Members

February 2, 2024

Between

Mawingu Networks Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited liability company incorporated in Kenya under the Companies Act. Its main form of business is in the provision of internet data services.

2. The Respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is mandated with the responsibility for the assessment, collection, receipting, and accounting for all tax revenue as an agent of the Government of Kenya. The Respondent is also mandated with the responsibility for the administration and enforcement of the statutes set out under the schedule to the said Act.

3. The Respondent conducted a compliance review of the appellant’s returns and found a variance between the Appellant’s business turnover varied from its declared turnover for Excise duty for the period October 2018 to October 2021.

4. The respondent subsequently raised assessments for Excise tax manually on December 15, 2021 followed by an online assessment via iTax on April 20, 2022.

5. The appellant raised an objection to the assessment on July 4, 2022 which was acknowledged by the Respondent on July 15, 2022 and upon further communication and deliberation between the parties, the Appellant provided documents to the Respondent.

6. The Objection was fully rejected by the respondent in its objection decision of 29th August 2022.

7. Being dissatisfied with the objection decision and having paid over half of the total assessed amount of Kshs. 41,710,581, the appellant filed a notice of appeal on September 28, 2022.

The Appeal 8. The appeal is premised on the following grounds listed in the memorandum of appeal dated October 12, 2022 and filed on 13th October 2022: -a.The respondent erred in fact and law in demanding Excise duty on infrastructure based on Paragraph 1 of part II of the First Schedule to the Excise Duty Act 2015. b.The Respondent erred in fact and in law by deeming that under paragraph i part ii of the first schedule to the Excise Duty Act, 2015, infrastructure constitutes internet services.c.The Respondent erred in law and fact in finding that Excise duty was due on infrastructure.d.The Respondent erred in fact and law in determining that the appellant under-declared the excisable value on internet services for the period October 2018 to October 2021.

The Appellant’s Case 9. The Appellant’s case was premised on its;a.Statement of Facts dated October 13, 2022 and filed on October 14, 2022 together with the documents annexed thereto;b.Written submissions dated and filed on September 14, 2023.

10. The Appellant cited Paragraph 1 of Part II of the First Schedule to the Excise Duty Act and stated that only the service component for the provisions of the internet attracts Excise duty and the Act does not cover infrastructure, which is the hardware component and is charged separately from internet data services.

11. It relied on the case of Republic v Kenya Revenue Authority ex parte Bata Shoe Company (Kenya) Limited [2014] and reiterated that the Excise Duty Act does not define the term ‘internet data services’ or ‘telephone services’ thus infrastructure (i.e network of towers, fibre lines, and local wireless equipment installed for the customer) and internet data services are separate components of its services just like telephone hardware are needed for telephone services.

12. It contended that in demanding Excise duty, the respondent’s consideration of infrastructure required for the provision of data services as within the definition of ‘internet data services’ is an overreach and is equivalent to saying that the telephones that will be required for telephone services are also subject to Excise duty since telephone services are excisable. It reiterated that the two components are different since whereas there are telephones (infrastructure) which are used to support the provision of telephone services, infrastructure supports the provision of internet services.

13. It asserted that without prejudice to its arguments, in the event that there is ambiguity, tax law shall be interpreted in favor of the taxpayer but since infrastructure does not fall within the definition of internet data services and is accorded a different line on its invoices, in the event that it is unclear whether infrastructure would be captured under the definition, then the question must be determined in favour of the Appellant.

14. It averred that it has charged Excise duty on internet data services only as provided in law and it has not separated internet and infrastructure to reduce taxes.

15. It contended that it has entered into numerous infrastructure lease agreements with lower/fibre infrastructure components and internet data wholesalers wherein the companies that provide infrastructure to it do not charge Excise duty on infrastructure but on internet data services.

16. It reiterated that internet capacity is subject to Excise duty which the Appellant has charged and remitted to the Respondent, who does not contend the same.

17. It averred that it facilitates the provision and usage of internet connectivity by building/leasing a network of infrastructure by building of towers, leasing them from the tower infrastructure companies, and also leasing pipe infrastructure to transfer data; and then it buys, installs, maintains, and replaces customer premises equipment thus transmitting the internet data from wholesalers for distribution to the customers using the same infrastructure.

18. It contended that it has installed a radio device to specific towers where other networks companies like Jamii Telecom, Safaricom, and Telecom Kenya have installed/connected their fibre optic cables which radio device sends out a signal received on different routers owned by the Appellant to the customers allowing the customers to access the internet in places where the fibre optic cable is not available.

19. It added that it receives additional income in the nature of installation fees and provision of hardware by charging to install kits for the HSB product which varies per package and promotional offering and providing bespoke installation that require additions to the standard kit billed to the client.

20. It explained that it therefore invoices its products comprising of infrastructure that entails the cost for investing in the telecommunication tower or fibre infrastructure and customer premises equipment used to transmit the internet data and it bills the internet data which is the data the customer receives thus the provision of data on internet services and infrastructure are two distinct components that require separation on its invoices to its clients.

21. The Appellant relied on paragraph 1 of part II of the first schedule to the Excise Duty Act and submitted that the plain meaning of the provision is that the costs of telephone services and internet data services are subject to Excise duty and the Excise duty does not define the terms “telephone services” and “internet data services”.

22. It relied on the cases of Mount Kenya Bottlers Ltd & 3othersv Attorney General & 3others [2019] eKLR; and Republic v Kenya Revenue Authority ex parte Bata Shoes Company (Kenya) Limited (2014) in its submission that in the absence of the definition of the term “telephone and internet data services,” the language imposing tax must receive a strict interpretation.

23. It argued that an item shall only be subject to tax if the law unambiguously subjects such an item to tax and since the term internet data services is not defined, a taxpayer would only be required to charge Excise duty strictly on what would amount to internet data services.

24. It contended that infrastructure and internet data services are separate components of its services just like telephones are hardware needed to support the provision of telephone services, network towers fibre lines and local wireless equipment installed at the customers’ premises are infrastructure needed for the provision of internet data services.

25. It asserted that therefore, the Respondent demanding Excise duty on infrastructure required to provide internet data services is an attempt to deem infrastructure to fall within the definition of internet data services which is an overreach as the two components are different and only the service components attract Excise duty per the literal wording of Paragraph 1, Part II of the First Schedule to the Act.

26. It argued that it has further reviewed the National Assembly’s original report where the introduction of Excise duty on internet services was discussed and noted no statement was made by the Legislature to assist in determining what the term ‘internet services’ entails.

27. It relied on the following cases to buttress its position that in the event there is an ambiguity, tax law shall be interpreted in favour of the taxpayer and while in the instant case it is clear that infrastructure does not fall within the definition of Internet data services and is accorded a different line in the Appellant’s invoices, in the event the same is unclear, the same must be determined in favour of the Appellant. The cases are;a.Keroche Industries Limited v Kenya Revenue Authority & 5 others [2007]2 KLR 240;b.Kenya Bankers Association v Kenya Revenue Authority [2018] eKLR;c.Republic v Commissioner of Domestic Taxes (Large Taxpayers Office) & another Ex Parte British American Tobacco Kenya Limited [2015] eKLR 240.

28. The Appellant submitted that it derives revenue from internet data services and investment in infrastructure used in the provision of internet connectivity where for internet data services it provides public hotspot facilities by installing routers and engaging merchants who assist users to log into the internet across Nyeri, Laikipia, and Meru. it added that it also provides a subscription product for home and business Wi-Fi where users lease transmission equipment from the Appellant and subscribe to their preferred bundle capacities

29. It asserted that it purchases internet capacity mainly from Liquid Telecom and Angani who subject the costs of internet data to Excise duty and the Appellant’s customers subscribe to one of the Appellant’s internet data packages and pay a subsequent monthly internet data subscription which payments are subjected to Excise duty.

30. The Appellant submitted that it facilitates the provision and usage of Internet connectivity by building/leasing a network of infrastructure by building of towers, leasing them from the tower infrastructure companies, and also leasing pipe infrastructure to transfer data; and then it buys, installs, maintains, and replaces customer premises equipment thus transmitting the internet data from wholesalers for distribution to the customers using the same infrastructure.

31. It contended that it has entered into various infrastructure lease agreements with tower/fibre infrastructure companies like Jamii Telecom, Safaricom Limited, Telecom Kenya and internet wholesalers such as Liquid Telecom and Angani where the companies do not charge Excise duty on the Appellant on infrastructure.

32. It added that it receives additional income in the nature of installation fees and provision of hardware by charging to install kits for the Home and Small Business product which varies per package and promotional offering and also by providing bespoke installation that require additions to the standard kit and is billed to the client. It reiterated that these costs are billed to the client as infrastructure costs and excise duty is not charged.

33. It explained that it therefore invoices its products comprising of infrastructure that entails the cost for investing in the telecommunication tower or fibre infrastructure and customer premises equipment used to transmit the internet data and it bills the internet data which is the data the customer receives thus the provision of data on internet services and infrastructure are two distinct components that require separation on its invoices to its clients.

34. The Appellant submitted that it is trite that a person is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him and relied on article 210 of the Constitution of Kenya (2010).

35. It further relied on the Black’s Law Dictionary (Ninth Edition)’s definition of burden of proof and the case of British American Tobacco Ltd (supra) and submitted that the Respondent has not cited the law in which its assessment is premised upon and as such the assessment is erroneous and attempts to collect taxes that have no basis in law.

The Appellant’s prayers. 36. The Appellant prayed that the Tribunal finds for the Appellant’s case and order that: -a.The Appellant properly charged Excise duty on internet services;b.The Respondent misapplied the law;c.The Objection decision dated August 29, 2022 and the demand for Kshs. 41. 710,581. 35 contained in the Respondent’s letter dated December 15, 2021 be set aside;d.The overpaid taxes of Kshs. 21,000,000. 00 be immediately refunded to the Appellant; ande.Costs of this Appeal be awarded to the Appellant.

The Respondent’s Case 37. The Respondent’s case is premised on its;a.Statement of Facts dated and filed on 11th November 2022 together with the documents annexed thereto.b.Written submissions dated 18th September 2023 and filed on the 20th September 2023.

38. It averred that it is allowed by section 24 (2) of the Tax Procedures Act to assess a taxpayer’s liability using any information available to it and it operated within the confines of the law by using the data available following a return review which revealed under-declaration of excisable value for October 2018 to October 2021.

39. It averred that it is allowed by sections 24 and 59 of the Tax Procedures Act to embrace the range of methods and techniques for determining and verifying a taxpayer’s income to make assessments based on the available information to the best of its judgment.

40. It cited section 56 (1) of the Tax Procedures Act and reiterated that the Appellant failed to prove that the income not charged to Excise was infrastructure charges since the cost of the equipment was borne separately by the customers.

41. It averred that the Appellant’s act of giving a breakdown to customers was meant to reduce the Excise fees payable by apportioning the internet service invoices by adjusting for cost of hardware, installation and other miscellaneous income and having no excise duty charged on them.

42. It stated that data and data infrastructure are vital components of internet data services and the two cannot be separated as there is no ambiguity to the meaning of internet data services but the Appellant seeks to create one as Excise duty on data services is certain and not arbitrary.

43. It relied on section 42 and Part II of the First Schedule of the Excise Duty Act 2015 and averred that the Appellant’s attempt to split data infrastructure is an apparent act of tax avoidance whose effect is to reduce the liability of the Appellant to pay Excise duty and create an entitlement for refund and added that the demand for taxes in question is lawful.

44. It reiterated that the Appellant did not pay the correct Excise duty over the period under review and penalties and interests relating to the assessments remain due per sections 38 and 85 of the Tax Procedures Act.

45. It maintained that the assessment and subsequent Objection decision are per section 51 of the Tax Procedures Act. It further reiterated that the Appellant has not laid down the reasons why its Objection should be upheld but the Respondent has demonstrated that it considered all the documents adduced by the Appellant and even called for further documentation before it finally issued its Objection Decision.

46. The Respondent relied on Part II Paragraph 1 of the First Schedule to the Excise Duty Act and the definition of infrastructure under the Open Data Institute in submitting that infrastructure being internet transmission equipment and radio devices are housed in the law and the data and infrastructure cannot be separated in completing the internet service circuit.

47. It argued that the Appellant’s attempt to split date and infrastructure is an apparent act of tax avoidance whose effect is to reduce the Appellant’s tax liability as just like the Respondent cannot separately charge water and the bottle container it comes in, the same cannot be done for the internet and its infrastructure.

48. It cited Section 42 of the Excise Duty Act and Section 85 of the Tax Procedures Act and asserted that the Appellant did not pay the correct Excise duty over the period under review and that penalties and interest relating to the assessments remain due.

49. The Respondent relied on Section 51 of the Tax Procedures Act and submitted that the Objection decision complied with the requirements in the law and the same was communicated to the Appellant and called for further documents.

50. It reiterated that the Appellant having failed to provide documents that showed that the assessment was either erroneous or invalid, the Respondent was proper in exercising its best judgment in issuing the decision.

51. It placed its reliance on the cases of TAT No. 70 of 2017 Afya X-Ray Centre v Commissioner of Domestic Taxes; and Pierson Belcher CH. M Inspector of Taxes (Tax Cases Volume 38 referred to by Justice D.S Majanja in the case of PZ Cussons East Africa Limited v Kenya Revenue Authority (2013) eKLR in maintaining that the Appellant has failed to discharge its burden of proof by not proving that the Respondent’s tax decision is incorrect as per the provisions under section 56 (1) of the Tax Procedures Act.

The Respondent’s prayers 52. The Respondent prayed for the Tribunal to find that:a.The Objection decision dated August 29, 2022 confirming the tax liability is proper in law and be upheld; andb.The Appeal be dismissed with costs to the Respondent.

Issues For Determination 53. After perusing the Memorandum of Appeal and parties' Statements of Facts, and the Appellant’s witness statement, together with their submissions and documentation attached therewith, the Tribunal opined that the issue for determination is:Whether the Appellant’s infrastructure used in the provision of internet data services is subject to Excise Duty.

Analysis And Findings 54. The Tribunal wishes to analyse the issue as hereinunder.

55. For determination by the Tribunal is whether the internet services provided by the Appellant is inclusive of the infrastructure which the Appellant charges separately in its invoice to its client with the effect of deeming the same as separate from the data service fee which is liable for Excise duty.

56. The appellant contended that its infrastructure fee charged to its client is separate from the internet data fee as the term ‘Telephone and internet data service’ provided under paragraph 1 part ii of the second schedule to the Excise Duty Act is not clearly defined to include infrastructure used to facilitate the provision of such services to the client such as fibre optic cables and towers.

57. The appellant further submitted an analogy that likened the respondent’s act of charging its infrastructure to that of charging excise duty the telephones (hardware) used to provide telephone services to people which is wrong.

58. The Respondent was of the submission that the Appellant’s action of separately charging the infrastructure fee from the data service fee in its invoices to its clients is a blatant act of trying to evade tax in the form of Excise duty and that the infrastructure used to facilitate the provision of data services to the Appellant’s clients are so intertwined that it is impossible to separate one from the other thus both are chargeable to excise duty

59. It is not controverted by the parties to this dispute that the ensuing matter falls under Paragraph 1 of Part II of the Second Schedule to the Excise duty Act which provides for excisable services and states thus:“Telephone and internet data services shall be charged excise duty at a rate of twenty percent of their excisable value.”

60. In concurrence with the Appellant’s analogy, the Tribunal further draws another analogy of transport services provided by a transport company. Since a motor vehicle is used to provide transport services to the company’s clientele, the Respondent cannot purport to charge excise duty on the motor vehicle using the argument that the two cannot be distinguished from each other. Without a motor vehicle, a transport service cannot be effected yet the service provider can charge separately for infrastructural items such as fuel.

61. Infrastructure used to provide the internet data services are very distinct from the internet data services provided by the Appellant. Thus the Tribunal finds that the Appellant’s has satisfactorily proven that its charge for infrastructure is distinct and separate from the provision of internet data service.

62. The Tribunal therefore finds that the infrastructure as provided by the Appellant in its invoices are not subject to excise duty.

Final Decision 63. The upshot to the foregoing is that the Appeal is meritorious and the Tribunal consequently makes the following orders; -a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 29th August 2022 be and is hereby set aside.c.Any monies paid to the Respondent in respect to the Respondent’s decision be refunded to Appellant forthwith.d.No orders as to costs.

64. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 2ND DAY OF FEBRUARY, 2024ROBERT MUTUMA - CHAIRPERSONELISHAH N. NJERU- MEMBERBONIFACE K. TERER - MEMBERMUTISO MAKAU - MEMBERDR. WALTER ONGETI - MEMBER