[2023] KETAT 339 (KLR)

Mombasa Maize Millers Limited v Commissioner of Legal Services & Board Coordination (Appeal 541 of 2022) [2023] KETAT 339 (KLR) (9 June 2023) (Judgment)

Neutral citation: [2023] KETAT 339 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 541 of 2022

RM Mutuma, Chair, EN Njeru, RO Oluoch, D.K Ngala & EK Cheluget, Members

June 9, 2023

Between

Mombasa Maize Millers Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

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 manufacturing, milling, and distribution of maize and wheat flour, animal feeds, and salt products.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act Cap 469 Laws of Kenya. Under Section 5(1) of the Act, 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 function under subsection (1), it is mandated to administer and enforce all provisions of the written laws as set out Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

3. The Respondent conducted an inspection of the Appellant’s investment deductions claims through a letter dated 1st March 2021 to ascertain the propriety of the Appellant’s capital allowances claim.

4. On 27th August 2021, the Respondent issued the Appellant with an assessment for VAT Kshs 4,166,475. 00 on imported services and failure to account for additional withholding VAT Kshs 6,466,710. 00

5. The Appellant raised an objection to the assessment dated 30th August 2021 which was rejected by the Respondent confirming the assessment on 8th April 2022.

6. Being dissatisfied with the objection decision, the Appellant filed a Notice of Appeal dated and filed on 6th May 2022.

The Appeal 7. The Appeal is premised on the following grounds listed in the Memorandum of Appeal dated 25th May 2022 and filed on 26th May 2022:-a.The Respondent erred in law by imposing withholding tax on an approach that contravenes the applicable sections of the Income Tax Act, international instructions, best practices, and Kenyan jurisprudence.b.The Respondent erred in law and fact in charging reverse Value Added Tax on the supply, installation, and commissioning of wheat mill and maize mill as the Appellant was permitted to fully deduct input Value Added Tax and thus could claim the whole reverse Value Added Tax. Consequently, eliminating the reverse Value Added Tax.

The Appellant’s Case 8. The Appellant’s case was premised on its Statement of Facts dated 25th May 2022 and filed on 26th May 2022.

9. The Appellant stated that in the year 2017, it aimed to expand its business by introducing a new 500MT/24 hour’s production line for milling wheat.

10. It reiterated that it invited bids eventually contracting Buhler (Pty) Ltd, a company resident in South Africa, to supply the equipment and supervise installation and commissioning on 13th July 2016 wherein a total of USD 4,187,000. 00 purchase price for the equipment USD 4,031,330. 00 and installation USD 155,670. 00

11. It contended that the contract was later amended increasing the purchase price to USD 4,261,869. 00 effective 8th February 2018 with the payments made between the dates 19th September 2017 to 7th December 2017 through Gulf African Bank after which the engineering and supply of the equipment were done from South Africa with the installation and commissioning being done in Kenya after delivery from 30th August 2018.

12. It added that it contracted Ready Consultancy Company Ltd, a Company resident in Kenya to provide labour to provide maize and wheat flour and other related jobs for two years effective 14th May 2016 and 13th May 2018 and the contract was signed on 14th May 2016.

13. It averred that the employees were to be remunerated a mid-month advance and end-month salary and the contractor, was paid by cheque at a commission of Kshs 30 per employee with a withholding tax of 5% deducted from it.

14. It contended that it contracted a South African Company, Dynamic Africa (Pty) Limited in 2018 to provide an accounting package called Microsoft to be installed in Kenya at a fee of USD 2,349. 00 which was paid through Kenya Commercial Bank.

15. It relied on Article 2(6) of the Constitution of Kenya to aver that Kenya and South Africa entered into a Double Taxation treaty (DTA) on 26th November 2010 which was ratified and promulgated by the Kenyan National Assembly as Legal Notice No 141 of 2014 with the National Treasury putting up a Notice indicating that the same would be effective from 1st January 2015.

16. To buttress its position that the provisions of the tax treaty (in this case the DTA) take precedence over any provision of the Income Tax Act that is contrary to it, the Appellant relied on Section 41 of the Income Tax Act.

17. It contended that installation and commissioning activities are professional engineering services that involve a material degree of specialized qualifications, training, skill, and information.

18. It quoted Article 14 of the DTA averring that it stipulates that payments made for professional services and other independent personal services are taxable only in the Country of residence of the recipient of the payment unless where the recipient has a permanent establishment in the other country or provides services through individuals located in the other country for a duration longer than 183 days (6 months) in 12 months.

19. It relied on Article 5(2) of the DTA’s definition of permanent establishment and contended that Buhler (pty) Ltd neither has a permanent base in Kenya nor does it have a permanent establishment in Kenya and the engineers only took 2 months in the country and flew back.

20. It quoted Article 22 of the DTA and maintained that the Respondent was wrong in its interpretation of Article 22 of the DTA as it only deals with any other income not addressed in Articles 1 to 21 of the DTA and that independent personal services and professional services are provided for under Article 14 of the DTA.

21. It posited that Section 10(1) of the Income Tax Act cannot take precedence over Section 41 of the same Act which grants superiority to the DTA or Article 14 of the DTA, therefore the Withholding Tax should be set aside for being contrary to the applicable law.

22. The Appellant stated that under the terms of its agreement with Ready Consultancy Company Ltd signed on 14th May 2014 for casual labour on the installation of works at the site, the contractor was to be paid a Kshs 30 commission per day per employee which commission was subject to withholding tax. It added that it had the right to reject any employee and paid work injury insurance for them as is typical in most construction projects and the actual work rendered by the contractor is an agency activity.

23. It quoted Section 2 of the Income Tax Act and averred that the meaning of management and professional fees comprises of:a.Consultancy fees paid to a person acting in an advisory capacity. It cited the case of Stanbic Bank of Kenya v Kenya Revenue Authority Civil Appeal No 294 of 2007 where it was held; “... consultancy is defined as… Expert advice that a company or person is paid to provide or a particular subject”b.Contractual fees paid for work done in respect of a building, Civil or engineering works;c.Training fees for training services designed to improve the work practices and efficiency of an organization;d.Professional fees to any person acting in a professional capacity as per the Fifth Schedule of the Income Tax Act;e.Managerial fees for services involving controlling things for people;f.Technical fees for services including the practical use of machinery or services connected to skills needed for a particular job, subject matter, or a set of laws and rules;g.Agency fees, under Section 2(1) of the Income Tax Act, are made to a person acting on behalf of another person, group of persons, or the government excluding payments made by an agent on behalf of a principal. It cited the case of Republic v Commissioner of Domestic Taxes, ex Parte SDV Transami (Misc. Civil Application No 212 of 2004) where it was held; “Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly consents that the other should act on his behalf, and the other of whom similarly consents so to act or so acts. The one on whose behalf the act or acts are to be done is called the principal. The one who is to act is the agent. Any person other than the principal and the agent may be referred to as a third party.”

24. It further averred that Ready Consultancy Company Ltd created a binding relationship between the labourers and the Appellant but did not perform any managerial or supervisory activity with the only fee it earned being a commission of Kshs 30 per labourer which should be subject to withholding tax under Section 35 of the Income Tax Act.

25. It asserted that payments made to the labourers do not constitute agency fees and tax cannot be charged on a labourer’s fees as the same is not featured in the definition of management and professional fees under Section 35 of the Income Tax Act. It relied on the case of Domestic Taxes v Tsavo Power Company Limited: High Court Income Tax Appeal No 10 of 2007.

26. It quoted Sections 5, 10, and 17 of the Value Added Tax Act contending that reverse VAT does not apply where one is supplying vatable supplies and zero-rated supplies, which it supplies, are considered vatable and thus not subject to reverse VAT. It further contended that reverse VAT does not apply to importation of goods as the tax on such goods is charged at the point of importation.

27. It further relied on Section 12 of the VAT act to posit that the contract dated 13th July 2016 stipulated the value of the installation, supervision/ commissioning which amounted to 0. 03% of the total purchase price with 99. 97% relating to the supply of goods that were imported.

28. The Appellant reiterated that the contract was revised on 8th February 2018 where the supplier offered an additional USD 74,869. 00 with a down payment of Kshs 100,000. 00 made as a commitment fee and relates to the goods component for mobilization of the design and engineering work before the materials are prepared and then installation becomes the last item for implementation.

29. It averred that the invoice for the advance payment which was settled on 12th August 2016 stipulates that it was for materials and not mobilisation or services and as such, reverse VAT should not be contemplated as import goods do not attract reverse VAT instead, Section 5(5) applies and such goods are taxed only at the point of entry.

30. It stated that through the Finance Act of 2017, maize and wheat flour became zero-rated from 3rd April 2017 thereby, as per Section 10(2)(b), reverse VAT on imported services was eliminated as it was entitled to full input VAT credit which treatment continued until the end of the installation and commissioning hence no reverse VAT existed therein.

The Appellant’s Prayers. 31. The Appellant prayed that the Tribunal finds for the Appellant and find that:-a.The Appeal be upheld; andb.The assessment of Kshs 11,163,785. 00 raised by the Respondent be set aside;

The Respondent’s Case 32. The Respondent’s case is premised on its Statement of Facts dated and filed on 22nd June 2022.

33. It stated that the Appellant did charge withholding income tax on fees charged for machinery installation and licenses amounting to Kshs 15,878,340. 00 supplied by Buhler (Pty) Ltd and Dynamics Africa Services (Pty) Ltd, both based in South Africa.

34. It averred the Appellant entered into a contract with Ready Consultancy Ltd for the provision of sub-contracted labour which split the invoices in two for wages and commission whereas the appellant charged withholding income for commission and not the labour.

35. It reiterated that under Paragraph 1, Article 22 of the Kenyan-South African Treaty income arising out in the contracting state may be taxed in the other state. It reiterated as well that as per Sections 10 (1) and 35 of the Income Tax Act, where a resident person makes a payment to any other person in respect of management or professional fees, the amount thereof shall be deemed as income which is accrued in or derived from Kenya thus the money paid to the South African companies attract Withholding Income Tax.

36. It averred that Buhler (pty) Ltd was retained to install and commission machinery whose services were like, among others, management and installation fee and subject to withholding tax on the consideration paid to Buhler (Pty) Ltd. It added that clause 8 of their contract states, inter alia, that installation shall be conducted following the stipulations of the technical documentation provided by the supplier and places the installation under professional fees as installation falls under technical services within the meaning of the Income Tax Act.

37. It stated that the Appellant was not paying wages under the labour sub-contract when invoiced by Ready Consultancy Ltd, but had contracted a management service that was provided by employees of Ready Consultancies with the total payable amount being billed by the subcontractor thus attracting Withholding Income tax for management fees since the staff provided by the sub-contractor were not the Appellant’s employees; thus the full cost of the labour sub-contract ought to have been subject to withholding tax as the supply of the sub-contracted labour was a contract between the Appellant and the sub-contractor to provide labour services.

38. It quoted Section 2 of the Income Tax Act, Cap 470 where the Contract of service is defined, and added that the Applicant engaged the contractor in a contract for services as opposed to a contract of service.

39. It reiterated that the Appellant’s contract with Buhler (Pty) Ltd dated 3rd July 2016 provided for the purchase price comprising of both the cost of the machinery and installation with the payment of the said purchase price done in 2016 before shipment. It maintained that the amended contract only varied the purchase price with the increased amount to be paid within a month as the contract provided for the upfront payment of the purchase price and not the machinery cost alone.

40. It averred that the contract stipulated that the purchase price was payable in two installments: the first payment was 20% to be made upon execution of the contract (13th July 2016) and 80% to be covered by an irrevocable letter of credit in favour of the supplier issued by a first-class South African bank until the end of August 2016.

41. It further averred that the Irrevocable Letter of credit amounts to a payment guarantee making it equivalent to payment and the amendment to the initial contract did not change the definition of the purchase price but only increased the purchase price from USD 4,187,000. 00 to USD 4,261,869. 00 therefore, since the payment of the Installation cost was included in the purchase price, reverse VAT crystalised upon part-payment and execution of the letter of credit in August 2016.

42. The Respondent reiterated that despite the amendments to the contract, the Appellant had already made a partial payment of the purchase price by July 2016 and that reverse VAT applied according to Section 12(1) (d) of the VAT Act.

The Respondent’s prayers 43. The Respondent prayed for orders that this Tribunal:-a.Upholds the Respondent’s assessment issued on 27th August 2021 and confirmed vide a letter dated 8th April 2022; andb.Dismisses this Appeal with costs.

The Parties Submissions On what the law stipulates on withholding tax on independent personal services rendered by a South African resident to a Kenyan resident person 44. The Appellant quoted Section 10 of the Income Tax Act and submitted that it paid Buhler professional fees for the installation and commissioning of wheat and maize mills.

45. It quoted Section 2 of the Income Tax Act which provides for the definition of management or professional fees asserting that the taxation of fees/income is subject to the Double Taxation Treaty (DTA) between Kenya and South Africa, Legal Notice 141 of 2014 which protects companies from discriminatory tax practices that would otherwise apply to non-resident persons or companies owned by non-resident persons in the other state and by extension, available for the Appellant’s protection.

46. It relied on Article 2(6) of the Constitution of Kenya, Section 41 of the Income Tax Act, and Section 35 of the Finance Act 2021(LN 6 of 2021) to submit that the provisions of a tax treaty take precedence over any contrary provisions of the Income Tax Act. It further relied on the case of Beta Healthcare International Ltd v The Commissioner of Customs Services (Miscellaneous Civil Application 4 of 2009) where the High Court held as follows:“Is the complaint by the applicant valid in light of their pledge that they would abide by the WCO Ruling? I do not think so. Under Section 122(6) of the East African Community Customs Management Act, the respondent is required to apply or interpret the section and the provisions of the Fourth Schedule of the Act after taking due regard to the decisions, rulings, opinions, guidelines, and interpretations given by the directorate, the World Trade Organization (WTO) or the Customs Corporations Council. The Fourth Schedule of the Act deals with the determination of the value of imported goods liable to ad valorem import duty.Kenya is a signatory to the International Convention on the Harmonized Commodity Description and Coding System. Kenya became a contracting party to the convention on 29th January 1988. The entry into force of the convention came into effect in Kenya on 1st January 1989. It was on the basis of this harmonized coding system that the applicant filed the customs declaration documents for the pharmaceutical products in issue. It was evident from correspondence exchanged between the applicant and the respondent that the respondent was aware of the requirements of the convention and the Act in regard to the manner in which the applicant was required to declare the code of the pharmaceutical products in question. It was the duty of the applicant in filing the import declaration documents, to correctly assign the customs code to the goods that it had imported. It appears that in filling the customs declaration forms in respect of the pharmaceutical products, the applicant assumed that because the Pharmacy and Poisons Board had registered the pharmaceutical products in question as medicaments, then, it followed that the said pharmaceutical products could be declared as medicaments when filing the customs declaration forms. With respect to the applicant, I think the determination in regard to whether a pharmaceutical product is a medicament or a food supplement for the respondent’s taxation purposes is of complete different consideration than the requirement that are taken into consideration when a pharmaceutical product is sought to be registered with the Pharmacy and Poisons Board.The opinion of WCO binds the applicant. It is the applicant who requested the respondent to refer the dispute between itself and the respondent to the WCO. Although the applicant questioned the procedure by which the respondent sought an opinion from WCO, it is evident that there is no requirement under the convention for an aggrieved party to make representations directly to the WCO when an issue has been referred for WCO to render its opinion. WCO does not deal with an aggrieved importer directly but through the customs administration of the contracting country. In this case that customs administration body is the respondent. The applicant was aware, or ought to have been aware of this limitation in terms of their capacity to make representations in regard to the customs tariff codification of the pharmaceutical products in question. The applicant having voluntarily submitted itself to this dispute resolution process, cannot later turn around when the decision has gone against them and claim that it had not been given an opportunity to make representations before the opinion was rendered by the WCO.”

On whether withholding tax applies [to] payments made by the Appellant to Buhler (Pty) Ltd, a South African resident person 47. The Appellant submitted that the installation work was executed by engineers and technicians who arrived in Kenya on 3rd April 2018 and that installation and commissioning activities are professional engineering services involving a degree of specialised training, skill, and information. It quoted the UNpaper on Selected Topics in Protecting the Tax Base of Developing Countries to buttress its position.

48. It further submitted that income earned from installation engineering activities and accounting packages is classified as business income under Article 7 of the DTA which expounds, under Article 14 on business income earned by independent service providers like engineering firms referring to them as independent personal services. It complemented the argument by relying on Section 2 of the Income Tax Act which defines “business”, Article 7(1) of the DTA which defines business profits, and the case of Mckinsey and Company Inc. Africa Company Ltd v Commissioner of Legal and Board Coordination (TAT 199 of 2020)

49. It quoted Article 14 of the Kenyan-South African DTA and reiterated that payments made for professional services and other independent personal services are taxable only in the Country of residence of the recipient of the payment unless where the recipient has a permanent establishment in the other country or provides services through individuals located in the other country for a duration longer than 183 days (6 months) in 12 months.

50. It further quoted the UN Paper on Selected Topics in Protecting the Tax Base of Developing Countries and contended that Buhler (pty) Ltd neither has a permanent base in Kenya nor does it have a permanent establishment in Kenya and the engineers only took 2 months in the country and flew back relying on Article 5(2) of the DTA’s definition of permanent establishment.

51. It quoted Article 22 of the DTA and maintained that the Respondent was wrong in its interpretation of Article 22 of the DTA as it only deals with any other income not addressed in Articles 1 to 21 of the DTA and that independent personal services and professional services are provided for under Article 14 of the DTA, therefore, making the Respondent’s contention that the income derived by Buhler (Pty) Ltd from the Appellant’s payment is not dealt with in the preceding Articles of the DTA inaccurate.

52. It further relied on the UN Paper on Selected Topics in Protecting the Tax Base of Developing Countries and the OECD Commentaries on the Articles of the Model Tax Conventions (paragraphs 1 and 2) together and argued that in as much as Article 21(3) is potentially applicable to income from services, that should not happen frequently because such income will usually be dealt with in another article of the UN model.

53. It posited that taxation of professional fees is provided under Article 14 of the DTA thus the same income cannot be classified under Article 22 of the DTA and Sections 10(1) and 35 of the Income Tax Act cannot take precedence over Article 14 of the DTA or Section 41 of the same Act which gives superiority to the DTA.

54. The Appellant relied on the case of Reserve Bank of India v Peerless General Finance and Investment Co. Ltd and others {1987} 1 SCC 424 where the Supreme Court of India observed that:“Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual.”

On whether withholding tax is applicable to the labour component of an agency contract. 55. The Appellant quoted Section 2 of the Income Act that defines management of professional fees and argued that agency fees are part of professional fees reiterating that the definition of management fees comprises of:a.Consultancy fees paid to a person acting in an advisory capacity. It cited the case of Stanbic Bank of Kenya v Kenya Revenue Authority Civil Appeal No 294 of 2007 where it was held; “... consultancy is defined as… Expert advice that a company or person is paid to provide or a particular subject”b.Contractual fees paid for work done in respect of a building, Civil or engineering works;c.Training fees for training services designed to improve the work practices and efficiency of an organization;d.Professional fees to any person acting in a professional capacity as per the Fifth Schedule of the Income Tax Act;e.Managerial fees for services involving controlling things for people;f.Technical fees for services including the practical use of machinery or services connected to skills needed for a particular job, subject matter, or a set of laws and rules;g.Agency fees which, under Section 2(1) of the Income Tax Act, are made to a person acting on behalf of another person, group of persons, or the government excluding payments made by an agent on behalf of a principal. It cited the case of Republic v Commissioner of Domestic Taxes, ex Parte SDV Transami (Misc. Civil Application No 212 of 2004) where it was held; ““Agency is the fiduciary relationship which exists between two persons, one of whom expressly or impliedly consents that the other should act on his behalf, and the other of whom similarly consents so to act or so acts. The one on whose behalf the act or acts are to be done is called the principal. The one who is to act is the agent. Any person other than the principal and the agent may be referred to as a third party.”

56. It further averred that Ready Consultancy Company Ltd created a binding relationship between the labourers and the Appellant but did not perform any managerial or supervisory activity with the only fee they earned being a commission of Kshs 30 per labourer which should be subject to withholding tax under Section 35 of the Income Tax Act.

57. It asserted that payments made to the labourers do not form agency fees and tax cannot be charged on an inference. It reiterated that Section 35 of the Income Tax Act only mentions management and professional fees to be subject to withholding tax. It relied on the case of Domestic Taxes v Tsavo Power Company Limited: High Court Income Tax Appeal No 10 of 2007. On what the law stipulates on reverse VAT

58. The Appellant quoted Section 5(1) and 10 (2) (b) of the VAT Act to make its case on this point

On whether reverse VAT applies to payments made by the Appellant 59. The Appellant submitted that at the time of services in question, it was a registered person supplying vatable goods (zero rated) and thus entitled to the entire claim of input therefore reverse VAT could not legally apply to the services it imported.

60. It reiterated that Section 12 of the Value Added Tax Act stipulates that the time of supply for imported services shall be earlier than when the taxable service is received, an invoice in respect of the service is received, or when payment is made in respect of all or part of the service. It added that the contract was signed on 13th July 2016 and amended on 11th January 2018 wherein it was stipulated that 20% of the purchase price was to be paid upon signing of the contract and 80% to be covered by an irrevocable letter of credit in favour of the supplier issued by a South African bank until the end of August 2016 with the earliest between the part of a payment or invoice date of 29th November 2019.

61. It further contended that at the time of payment, it is permitted to claim a full deduction of input VAT doing away with the reverse VAT, and that it was dealing with the supply of maize and wheat flour which was classified as an exempt supply per Part A of the First Schedule of the VAT Act, 2013. It added that upon the amendment of the Finance Act on 23rd June 2017, the products were declared as zero-rated supplies.

On whether the Respondent erred in imposing withholding tax on payments made by the Appellant to Buhler (Pty) Ltd and Dynamics Africa Services (Pty), South African resident persons 62. The Respondent submitted that the Appellant does not dispute that it obtained the services of entities in South Africa (Buhlers (pty) Ltd) and Dynamics Africa Services (Pty) for machinery installation and licenses.

63. It affirmed that these services were in their nature technical and professional services and payments made were to non-resident companies concerning the services rendered and contended that the dispute arises from a failure of the Appellant to impose withholding taxes on payments made to the non-resident companies.

64. It argued that contrary to the Appellant’s averment, such payments made and the income like professional/management fee is taxable fee taxable in Kenya under Section 10 as read together with Section 35 of the Income Tax Act under Article 22(3) of the Treaty.

65. It contravened the Appellant’s interpretation of the DTA, when assigning a taxing right of the contracting parties on payments made to a non-resident company and contended that the DTA Articles detail the persons and taxes to be covered and under Article 2(3), the Applicable taxes include the Income Tax Act under which the Income in dispute in the instant case falls and is provided for in Section 10 and 35 of the Act.

66. It submitted that Article 3(1) (j) of the DTA defines a ‘person’ to include an individual, a company, and any other body of persons treated as an entity for tax purposes. It added that income from professional services as provided under Article 14 reveals that income from professional services is for independent personal services and, under sub-Article 1, the services are limited to income derived by an individual who is a resident of the contracting state (South Africa) in respect to professional services rendered in the other contracting state (Kenya).

67. The Respondent asserted that whereas the DTA covers persons of different categories, Article 14 has limited that person to an individual, and Article 3 states that a person includes an individual, a company, and any other body of persons thus distinguishing between an individual, a company or the other body of persons.

68. It maintained that the income was derived by a non-individual, a Company (Buhler Pty Ltd) incorporated in South Africa therefore a discernment between the taxation of payments from services rendered in Kenya by a non-resident non-individual is specifically covered under the DTA.

69. It further asserted that the DTA has not provided for taxation of income from professional services by non-individuals in any of its Articles thus the service cannot be said to be taxable in South Africa under Article 14 of the DTA as they were not rendered by individuals but persons like a company within the meaning of Article 3 of the DTA. It then quoted Article 22(3) of the DTA maintaining that the same would be applicable in the instant case.

70. It was submitted by the Respondent that the Appellant misconstrued the character of the person who provided the commissioning and installation services of the machinery. It argued that taking into account the contract, the services were done by non-resident companies domiciled in South Africa.

71. The Respondent contended that the engineers and technicians who were present in Kenya for the commissioning of the machines were merely employees of the companies and did not provide such services in their personal capacity as independent contractors since the Company contracted by the Appellant is an engineering company that designed the machinery and equipment for the Appellant in a contract which included installation and commissioning, and, if the individuals were independent contractors, there would be evidence adduced showing their respective contract for services entered into between the engineers and Buhler Pty Ltd. It added that the invoices, and payment/fund remittance report stipulate that the companies were the ones that were paid, therefore, deriving income from the same rather than the engineers in their individual capacities.

72. It reiterated that it is the Company’s residency status in Kenya and not the individual employees’ status within the meaning of the Income Tax Act that matters as a company is an artificial person and when the company performs its duties through its employees, those services done by the employees are said to be performed by the Company thus according to Article 14 of the DTA, the services rendered were by the non-resident Company (not being individual) and not the technicians in their personal capacity, therefore, the income derived from it is not covered by Article 14 of the DTA which specifies income from professional services rendered by an individual.

73. It opined that the circumstances leading to the Tribunal’s decision in the case of Mckinsey and Company Inc. Africa Propriety Ltd v Commissioner of Legal Services Coordination Board (Tax Appeal No 199 of 2020) are distinguishable to the pleadings of the parties in the present case and the said judgment should be departed from as where the contention in the Mckinsey case was the applicability of Article 7, the Appellant’s case in the instant matter is premised on Article 14 of the DTA.

74. Additionally, the Respondent contended that parties are bound by their pleadings and relied on the case of Independent Electoral and Boundaries Commission &another v Stephen Mutinda Mule & 3others [2014] eKLR where it was held that:-“….it is now a very trite principle of law that parties are bound by their pleadings and that any evidence led by any of the parties which does not support the averments in the pleadings, or put in another way, which is at variance with the averments of the pleadings goes to no issue and must be disregarded.”

75. It further cited the case of Malawi Supreme Court in Malawi Railways Ltd v Nyasulu [1998] MWSC 3 where the court quoted with approval an Article by Sir Jack: “The Present Importance of Pleadings” [1960] where the Author stated as follows:-“As the parties are adversaries, it is left to each one of them to formulate his case in his own way, subject to the basic rules of pleadings…for the sake of certainty and finality, each party is bound by his own pleadings and cannot be allowed to raise a different or fresh case without due amendment properly made. Each party thus knows the case he has to meet and cannot be taken by surprise at the trial. The court itself is as bound by the pleadings of the parties as they are themselves. It is no part of the duty of the court to enter upon any inquiry into the case before it other than to adjudicate upon the specific matters in dispute which the parties themselves have raised by the pleadings. Indeed, the court would be acting contrary to its own character and nature if it were to pronounce any claim or defense not made by the parties. To do so would be to enter upon the realm of speculation. Moreover, in such event, the parties themselves, or at any rate one of them might well feel aggrieved; for a decision given on a claim or defense not made or raised by or against a party is equivalent to not hearing him at all and thus be a denial of justice….In the adversarial system of litigation, therefore, it is the parties themselves who set the agenda for the trial by their pleadings and neither party can complain if the agenda is strictly adhered to. In such an agenda, there is no room for an item called “Any Other Business” in the sense that points other than those specific may be raised without notice.”

76. It also cited the case of Adetoun Oladeji (NIG) Ltd v Nigeria Breweries PLC S.C. 91/2002, where Judge Pius Aderemi J.S.C. expressed himself as follows:“….it is now a very trite principle of law that parties are bound by their pleadings and that any evidence led by any of the parties which does not support the averments in the pleadings, or put in another way, which is at variance with the averments of the pleadings goes to no issue and must be disregarded.”

77. Other judges on the case expressed themselves in similar terms, with Judge Christopher Mitchell J.S.C. rendering himself thus;“In fact, that parties are not allowed to depart from their pleadings is on the authority's basic as this enables parties to prepare their evidence on the issues as joined and avoid any surprises by which no opportunity is given to the other party to meet the new situation.”

78. It further cited the case of Raila Amollo Odinga &another v Independent Electoral and Boundaries Commission & 2others [2017] eKLR

On whether the Respondent erred in imposing withholding tax on the full cost of sub-contracted labour 79. The Respondent submitted that the Appellant had contracted a management service that was provided by employees of Ready Consultancy and quoted Section 2 of the Income Tax Act that defines ‘professional fees’ to pivot its point.

80. It asserted that the total payable amount billed by the subcontractor attracts Withholding Income Tax according to Section 5(f) of the Income Tax Act.

81. It argued that the staff provided by the subcontractor were not the Appellant’s employees as the Appellant engaged the contractor in a contract for services which is distinct from a contract of service under Section 2 of the Income Tax Act.

82. It reiterated that the Appellant had divided the invoice into two parts and charged Withholding tax on income tax on the part indicating the commission leaving out the wages portion. It added that full labour costs are subject to withholding tax with no reason to separate the declaration of the invoice into two.

On whether the Respondent erred in imposing VAT on imported services supplied to the Appellant. 83. The Respondent quoted Section 2 of the VAT Act defining “supply of imported service” and relied on Section 10 of the VAT Act to buttress its point that services rendered to the Appellant by a South African Entity (Buhler Pty) are in the nature of imported services.

84. It submitted that taking into consideration the facts of the case, reverse VAT is due and payable and that the same was not eliminated by dint of the Appellant being entitled to a credit of input tax on its supplies. It added that reverse VAT would only be eliminated if it is demonstrated that at the time of supply, the Appellant was entitled to the full input VAT claim on the supply of its vatable products which supplies must be for zero-rated goods with a claim lodged within 6 months.

85. It argued that in as much as the Appellant’s ordinary course of business is the supply of maize and wheat flour, at the time of supply, maize, and wheat flour were not zero rated neither was input VAT on supplies made claimed within 6 months thus the Appellant cannot be said to be entitled to full credit of input tax.

86. It relied on Section 12 of the VAT Act, 2013 to contend that the time of supply is determinable at the point of the part-payment of the supply of imported services or raising of the invoice, whichever is earlier, and that, according to Clauses 4 and 5 of the Agreement between the parties, the purchase price for the supplies amounts to USD 7,000,000 (excluding VAT) and includes an accumulation of both the sale price of the equipment and subsequent installation and commissioning.

87. It argued that under Article 5 of the Agreement, a 20% deposit is paid on the total purchase price upon execution of the contract agreement which means that the partial payment for the imported services was made on 13th July 2016 when the contract was executed. Conversely, it contended that the invoice for part payment of the services amounting to Kshs 1,400,000 was issued on 24th June 2016.

88. It was submitted that the earlier between the dates of the invoice and part payment for the services is 24th June 2016 when the invoice was issued thus becoming the time of supply, in which time the maize and wheat flour was not zero-rated as the same was zero-rated through Section 10 of the Finance Act, 2017 and effected on 3rd April 2017.

89. It asserted that before 3rd April 2017, maize and wheat flour was exempt under the 1st Schedule of the VAT Act 2013 thus the VAT on imported services cannot be eliminated by the Appellant being entitled to full credit of input VAT on its supply. It quoted Section 17(2) of the VAT Act to argue that, should the maize and wheat flour be said to have been zero-rated, the Appellant would still not be entitled to input VAT as input VAT is only claimable within 6 months from the time of supply.

90. It contended that the time of supply was 24th June 2016 and there is no evidence that claims were made or would have been claimable within the 6 months allowed by law.

Issues For Determination 91. After perusing the Memorandum of Appeal and the parties' Statements of Facts together with their submissions and documentation attached therewith, the Tribunal believes that the following are the main issues for its determination:a.Whether withholding tax is due and payable by the Appellant;b.Whether the Respondent was right in charging withholding tax on the labour component of the contract with Ready Consultancy; andc.Whether the reverse VAT is due and payable by the Appellant.

Analysis And Findings 92. The Tribunal wishes to analyse the issues as hereinunder.

a. Whether withholding tax is due and payable by the Appellant. 93. The Appellant contends that the services provided by its contractor Buhler (Pty) Ltd, a South African-based company fall under Article 14 of the Kenyan-South African Double Tax Agreement (hereinafter the DTA).

94. The Respondent reiterated that whereas the services provided by Buhler Pty Ltd are professional services, the same is not governed by Article 14 of the DTA as the services were not provided by an individual and Article 14 provides for “individual” contractors and not companies. It argued therefore that Sections 10 and 35 of the Income Tax Act would apply in this case.

95. It was the Respondent’s position that the terms “individual” and “company” have been clearly distinguished in Article 3 of the DTA and as such, the same cannot be used interchangeably to mean the same thing.

96. Article 14 of the Kenyan-South African Double Tax Agreement provides as follows:-“1. Income derived by an individual who is a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State except in the following circumstances, when such income may also be taxed in the other Contracting State:a.if the individual has a fixed base regularly available in the other Contracting State for the purpose of performing the individual’s activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State; or(b)if the individual’s stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from the activities performed in that other State may be taxed in that other State. 2. The term “professional services” includes especially independent scientific, literary, artistic, educational, or teaching activities as well as the independent activities of physicians, engineers, lawyers, dentists, architects, and accountants.”

97. Article 3(1)(j) of the DTA provides that:-“1. For the purposes of this Agreement, unless the context otherwise requires:

(a)…(j)the term “person” includes an individual, a company and any other body of persons that is treated as an entity for tax purposes.”

98. The crux of the dispute in the instant case under this issue seems to be whether in adding the word individual and company, the same are distinguishable from each other to mean two different entities. To this, the Tribunal applies and is guided by the rule of noscitur a sociis which generally states that when two words are listed together in a statute, they are to be interpreted to be of the same meaning unless the contrary is stated in the statute.

99. Mativo J. while citing the decision in K. Bhagirathi G. Shenoy and others v K.P. Ballakuraya and another {1999} 4 SCC 135 in the case of Council of County Governors v Attorney General & another [2017] eKLR held that:-“A word in a statutory provision is to be read in collocation with its companion words. The pristine principle based on the maxim noscitur a sociis (meaning of a word should be known from its accompanying or associating words) has much relevance in understanding the import of words in a statutory provision”

100. The Judge further held that:-“The Supreme Court of India in Reserve Bank of India v Peerless General Finance and Investment Co. Ltd. and others {1987} 1 SCC 424 observed that:- “Interpretation must depend on the text and the context. They are the bases of interpretation. One may well say if the text is the texture, context is what gives the colour. Neither can be ignored. Both are important. That interpretation is best which makes the textual interpretation match the contextual.”

101. It is therefore the Tribunal’s position that Article 3(1) (j) of the DTA does not make a distinction between the words “individual” and “Company” in the legal sense and the same are used to mean the same. As such, as it is not in dispute that the engineers were non-resident persons providing professional services to the Appellant, the same is governed by Article 14 of the DTA and excluded from Sections 10 and 35 of the Income Tax Act.

102. The Tribunal, therefore, finds that the Respondent erred in charging Withholding tax under Sections 10 and 35 of the Income Tax Act as the same are not applicable in the instant case.b)Whether the Respondent was right in charging withholding tax on the labour component of the contract with Ready Consultancy

103. The Appellant stated that under the terms of its Agreement with Ready Consultancy Company Ltd for casual labour on the installation of works at the site, the contractor was to be paid a Kshs30 commission per day per employee which commission was subject to withholding tax wherein it had the right to reject any employee and that it also paid work injury insurance for them as is typical in most construction projects adding that the actual work rendered by the contractor is an agency activity.

104. It also averred that Ready Consultancy Company Ltd created a binding relationship between the labourers and the Appellant but did not perform any managerial or supervisory activity with the only fee they earned being a commission of Kshs 30 per labourer which should be subject to withholding tax under Section 35 of the Income Tax Act.

105. It asserted that payments made to the labourers do not constitute agency fees and tax cannot be charged on a labourer’s fees as the same is not featured in the definition of management and professional fees under Section 35 of the Income Tax Act.

106. The Respondent reiterated that the total payable amount billed by the subcontractor attracts Withholding Income tax under the Income Tax Act and the staff provided by the subcontractor were not the Appellant’s employees as the Appellant engaged the Contractor in a contract for services that is distinguishable from a contract of service under the Income Tax Act.

107. It further reiterated that the Appellant had divided the invoice into two parts charging Withholding Income tax on the commission leaving out the wages portion. It added that full labour costs are subject to withholding tax with no reason to separate the declaration of the invoice into two.

108. Section 2 of the Income Tax Act provides as follows:-“"contract of service” means an agreement, whether oral or in writing, whether expressed or implied, to employ or to serve as an employee for any period of time, and includes a contract of apprenticeship or indentured learner ship under which the employer has the power of selection and dismissal of the employee, pays his wages or salary and exercises general or specific control over the work done by him; and for the purpose of this definition an officer in the public service shall be deemed to be employed under a contract of service;”

109. In the instant case, the Appellant asserts that the labourers provided by the contractor were under its full control and that the Contractor was only but an agent who provided the labour taskforce at a fee adding that the fee being a commission was the one subject to withholding tax. It added that it was the one in charge of the labourers.

110. Upon a perusal of the contract between the Appellant and Ready Consultancy Company Ltd, there is a clear mention of the labourers as “the contractor’s employees” in Clauses 4, 6(b), 7(a) (e), and (f) of the Contract.

111. There is rampant inference and an indication that, in as much as the Appellant was to pay the labourers’ wages, the employees would still be under the control of the contractor and management of the contractor who was to remain responsible for the labourers’ legal requirements including all statutory payments, ensure the discipline of the labourers with any issues of indiscipline being referred to the contractor; and supply safety materials for the labourers.

112. By dint of Section 2 of the Income Tax Act, it is evident that it shall be the contractor, and not the Appellant who has the general power of selection and dismissal of the employees, pay wages or salary, and exercises general or specific control over the work done by them.

113. The Tribunal, therefore, finds that the labourers were the Contractor’s employees thus the Respondent was right in charging withholding tax on the labour component of the contract with Ready Consultancy.

c) Whether Reverse VAT is due and payable by the Appellant. 114. The Appellant submitted that at the time of services in question, it was a registered person supplying vatable goods (zero rated) and entitled to the entire claim of input therefore reverse VAT could not legally apply to the services it imported. It added that the contract with Buhler (Pty) Ltd was signed on 13th July 2016 and amended on 11th January 2018 wherein 20% of the purchase price was to be paid upon signing of the contract and 80% to be covered by an irrevocable letter of credit in favour of the supplier issued by a South African bank until the end of August 2016 with the earliest between the part of the payment or invoice date of 29th November 2019.

115. The Appellant further contended that it was dealing with the supply of maize and wheat Flour which was classified as an exempt supply per Part A of the First Schedule of the VAT Act, 2013, and upon the amendment of the Finance Act on 23rd June 2017, the products were declared as zero-rated supplies thus the Respondent erred in charging it reverse VAT.

116. The Respondent on its part reiterated that reverse VAT was not eliminated by dint of the Appellant being entitled to a credit of input tax on its supplies as reverse VAT would only be eliminated if it is demonstrated that at the time of supply, the Appellant was entitled to the full input VAT claim on the supply of its vatable products, which supplies must be for zero-rated goods with a claim lodged within 6 months which, at the time of supply, maize and wheat flour were not zero rated neither was input VAT on supplies made claimed within 6 months thus the Appellant cannot be said to be entitled to full credit of input tax.

117. It maintained that the time of supply is determinable at the point of the part-payment of the supply of imported services or raising of the invoice, whichever is earlier, and that, according to Article 5 of the Agreement, a 20% deposit is paid on the total purchase price upon execution of the contract which means that the partial payment for the imported services was made on 13th July 2016 when the contract was executed. Conversely, it contended that the invoice for part payment of the services amounted to Kshs 1,400,000. 00 was issued on 24th June 2016.

118. The Respondent submitted that the earlier between the dates of the invoice and part payment for the services is 24th June 2016 when the invoice was issued thus becoming the time of supply, in which time the maize and wheat flour was not zero-rated as the same was zero-rated through Section 10 of the Finance Act, 2017 which was effected on 3rd April 2017.

119. It further argued that should the maize and wheat flour be found to have been zero-rated, the Appellant would still not be entitled to input VAT as input VAT is only claimable within 6 months from the time of supply.

120. It contended that the time of supply was 24th June 2016 and there is no evidence that claims were made or would have been claimable within the 6 months allowed by law.

121. Section 12 of the VAT Act provides as follows:-“(1)Subject to subsection (3), the time of supply, including a supply of imported services, shall be the earlier of—a.the date on which the goods are delivered or services performed;b.the date a certificate is issued by an architect, surveyor or any other person acting as a consultant in a supervisory capacity;c.the date on which the invoice for the supply is issued; ord.the date on which payment for the supply is received, in whole or in part.”

122. Further Section 17 of the VAT Act provides that:-“(1)Subject to the provisions of this Act and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person in a return for the period, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies.(2)If, at the time when a deduction for input tax would otherwise be allowable under subsection (1)—(a)the person does not hold the documentation referred to in subsection (3), or(b)the registered supplier has not declared the sales invoice in a return, the deduction for input tax shall not be allowed until the first tax period in which the person holds such documentation:Provided that the input tax shall be allowable for a deduction within six months after the end of the tax period in which the supply or importation occurred.”

123. A perusal of the documentation provided shows that though the Appellant’s agreement with Buhler (Pty) Ltd stipulates that 20% of the purchase price was to be paid upon execution of the document, the earliest payment made to Buhler from the Appellant was done on 25th August 2017.

124. It is noted that the earliest invoice issued by the Appellant’s contractor was dated 23rd June 2016.

125. It is not in dispute that maize flour and wheat flour were zero-rated by the Finance Act of 2017 assented to on 21st June 2017, which amended the Second Schedule to the VAT Act to include the same.

126. It has not been proven by the Appellant that it had applied for a deduction on Input VAT at any moment, thus, the argument by the Appellant is defeated.

127. The Tribunal, therefore concurs with the Respondent that reverse VAT was due and payable by the Appellant by dint of the earliest among when the supply was made, invoice provided, and payment made upon the issuance of the invoice on 23rd June 2016.

Final Decision 128. The upshot to the foregoing is that the Appeal has some merit and the Tribunal consequently makes the following Orders;-i.The Appeal is hereby partially allowed.ii.The Respondent’s demand for Withholding Income tax be and is hereby set aside;iii.The Respondent’s demand for withholding tax on the labour component of the contract with Ready Consultancy be and is hereby upheld;iv.The Respondent’s demand for reverse VAT be and is hereby upheld;vEach party to bear its own costs.

129. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF JUNE, 2023. …………………………………ROBERT M. MUTUMACHAIRPERSON…………………………………ELISHAH N. NJERUMEMBER…………………………………RODNEY O. OLUOCHMEMBER…………………………………DELILAH K. NGALAMEMBER…………………………………EDWIN K. CHELUGETMEMBER