[2024] KETAT 1013 (KLR)

Mwalimu National Sacco Society Ltd v Commissioner of Legal Services and Board Coordination (Tax Appeal E194 of 2024) [2024] KETAT 1013 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1013 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E194 of 2024

RM Mutuma, Chair, EN Njeru, M Makau, B Gitari & AM Diriye, Members

July 12, 2024

Between

Mwalimu National Sacco Society Ltd

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a savings and credit co-operative society (Sacco) registered under the Cooperatives Societies Act, registered under the Sacco Societies Regulatory Authority (SASRA), and established with the objective of uplifting its members ‘s economic wellbeing through savings and credit.

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

3. The Respondent conducted an audit of the books of accounts of the Appellant for the period 2017 to 2021 whose scope covered Excise Duty, following which the Respondent raised an assessment for the sum of Kshs. 416,214,629. 00 in excise tax, inclusive of penalties and interest for the years of income 2017 to 2021, vide its letter dated 23rd December 2022.

4. Dissatisfied with the Respondent’s decision, the Appellant lodged an objection notice to the assessment on 20th January 2023, upon which the Respondent issued its Objection Decision on 20th March 2023 confirming the assessment in its entirety.

5. Aggrieved by the Respondent’s Objection Decision, the Appellant appealed the said decision on 19th April 2023, by lodging its Notice of Appeal.

The Appeal 6. The Appellant filed its Memorandum of Appeal dated and filed on 3rd May 2023 and set out the following grounds of appeal;i.That during the period under review, there was full compliance with the tax provisions under the Excise Duty Act, 2015. The Appellant charged excise duty on all “other fees” and “commissions” and paid taxes to the Respondent on the due date. The demand for additional taxes is excessive and not supported by facts.ii.That the assessment is mainly on interest charged by the Appellant on its members. The Respondent has not taken into account provisions under Part iii of the First Schedule of the Excise Duty Act, 2015, which defines the term “other fees” to exclude “interest charged by financial institutions.”iii.That the Objection Decision disregards the nature of transactions as reflected in the supporting documents such as the loan forms which clearly denotes what members were clearly paying for is interest.iv.That contrary to the facts, The Respondent seeks to re-characterize bridging loan interest to fees. Bridging loan is offered as a product and arises where a member has sought monies to clear an existing loan or a higher loan. In financial accounting, the amount is recognized as interest. Therefore, members are charged interest which is exempt from excise duty.v.That contrary to facts, the Respondent seeks to re-characterize interest on dividend in advance to fees. Dividend in advance is a loan advanced to members in anticipation that it will be recovered after the Annual General Meeting (AGM) approves dividend/interest payable to members.vi.That contrary to facts, the Respondent seeks to reclassify interest on clearance (FOSA) advance loan to fees. This is interest earned from members with loans equivalent to their monthly net salary that goes through their FOSA salary account.vii.That contrary to the facts, the Respondent seeks to bring to charge the resultant variance after comparing the total excisable value as per the TB’s versus excise duty declared on iTax. The Appellant avers that all fees were subjected to excise tax as required under the law. It notes that the demand by the Respondent is factually and legally in error since it does not specifically point out the income item that was not subjected to excise tax.viii.That without prejudice to the foregoing, the Finance Act 2019, amended the Excise Duty Act to exclude fees and commissions earned in respect of a loan or any share of profit from the definition of “other fees” effectively exempting the same from excise duty for the period from 7th November 2019 to 30thJune2021. Contrary to fact and law, the Respondent seeks to subject exempt income earned in the indicated period to Excise Duty.

The Appellant’s Case 7. The Appellant has set out its case on its;a.Statement of Facts dated and filed on 3rd May 2023 together with the documents attached thereto;b.Written submissions dated and filed on 21st December 2023; and,c.Final Written submissions dated and filed on 30th April 2024.

8. The Appellant stated that the Respondent conducted an audit of books, records, and accounts of the Appellant relating to Excise Duty for the years 2017 to 2021, which involved a review of its tax affairs and the scope covered Excise Duty.

9. Following the audit process, the Respondent raised a tax assessment vide a letter dated 23rd December 2022, related to excise duty for the period 2017 to 2021, and demanded additional Excise Duty of Kshs. 416,214,629. 00. made up as hereinunder: --Understated excisable income – Kshs. 36,791,394;- interest on bridging loan - Kshs. 1,030,240,578;-Interest on Dividend in advance - Kshs. 142,641,246;- Interest on clearance (FOSA Adv) - Kshs. 748,895,625;- Total - Kshs. 1,958,568,873;- Excise Duty payable - Kshs. 309,724,431;-Penalty - Kshs. 15,486,222;-Interest - Kshs. 91,003,976;- TOTAL - Kshs. 416,214,629. 00

10. The Appellant being dissatisfied with the Respondent’s assessment lodged an objection notice on 20th January 2023 , upon which the Respondent issued its Objection Decision on 20th March 2023 confirming the assessment in entirety for the period 2017 to 2021 .

11. The Appellant stated that the following formed the basis of the Respondent’s Objection Decision:i.That the High Court in Commissioner of Domestic Taxes -vs- Stima Sacco Society E090/ 2021 held that; “the Tribunal erred when it held that the charges for bridging loans, appraisal, boosting deposit, and a deferred appraisal are interest and exempt from excise duty.”ii.That the Appellant erred in characterizing interest on dividend in advance as interest. According to the Respondent, the nature of this transaction is that of “other fees” based on the understanding that this is a one-off commission charged to members for receiving their dividend in advance.iii.That the charge on clearance (FOSA Advance) is a pre-closure fee to compensate on interest amount lost and would therefore fall under the ambit of “other fees” rather than interest.iv.That the Appellant failed to address and reconcile the variances established from comparison of the total excisable value as per the TBs versus excise duty declared on iTax. The Respondent refers to the provisions of Section 56 (1) of the Tax Procedures Act on the burden of proof. In the Respondent’s view, the Appellant did not provide proof to demonstrate that the Respondent’s decision to charge excise duty on the variance was inappropriate. Additionally, the Respondent refers to the case of Commissioner of Investigations & Enforcement vs. Pearl Industries Ltd E086/2020 regarding the shifting of the burden of proof.v.That the Appellant did not provide documentary support to demonstrate that the interest income from bridging loan fee, dividends in advance, interest on clearance (Fosa Advance) for the period January to October 2019 was Kshs. 471,524,902. 00 and not Kshs. 629,544,632. 00. That the Appellant did not provide source documents to support the assertion that the figures were erroneous.

12. The Appellant stated that based on the foregoing the Respondent conferment the assessment in its entirety, and being dissatisfied with the said decision, the Appellant lodged this Appeal against the entire decision relating to Excise Duty on interest on bridging loans, interest on dividends in advance, interest on clearance (FOSA Advance), understated excisable income and interest income for the period November 2019 to 30th June 2021.

13. The Appellant in its submissions filed on 21st December 2023 stated that the parties agreed through ADR and settled the following issues set out in the Memorandum of Appeal;a.The Respondent had assessed an alleged variance in the total excisable value as per the TBs versus excise duty declared on iTax to excise duty;b.The Respondent had subjected exempt income to Excise Duty for the period November to December 2019. Consequently, the dispute relating to excise duty on fees on bridging loan, interest on dividend in advance and interest on clearance (FOSA Advance) amounting to Kshs. 367,429,941. 00 inclusive of penalty and interest were not settled and hence referred back to the Tribunal for determination.

14. The Appellant therefore canvassed its case under three heads as follows:

a.Interest on Bridging Loans; 15. The Appellant stated that the Respondent chose to charge Excise Duty on bridging loans earned by the Appellant during the period under review on the basis that they are fees and not interest. The Appellant disputes this position on the grounds that, compensation derived from bridging loans is interest and not fees.

16. It cited the cases the cases of Cape Brandy Syndicate vs. I.R Commissioners (1921)1KB;“in a taxing statute one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used “.

17. It also cited the case of Scott vs. Russell (Inspector of Taxes) (1948) 2 All ER, where Lord Simonds said;“there is a maxim in income tax law which, though it may sometimes be over-stressed, yet ought not to be forgotten. It is that, the subject is not to be taxed unless words of the taxing statute unambiguously impose the tax upon him.”

18. The Appellant contended that the Excise Duty Act does not define interest. The Black Law Dictionary defines it as;“The compensation fixed by agreement or allowed by law for the issue or detention of money, or for the loss of money by one who is entitled to its use; esp. the amount owed to a lender in return for the use of borrowed money.”

19. Halsbury Laws of England defines interest as;“The return or compensation for the use or retention by one person of a sum of money belonging to or owed to another.”

20. Collins Dictionary’s definition;“A charge for the use of credit or borrowed money, such a charge expressed as a percentage per unit of the sum borrowed or used.”

21. Oxford Dictionary’s definition,“Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.”

22. The Appellant asserted that from the foregoing definitions, it is established that interest is the compensation for the use of money lent, or for delaying the repayment of a debt.

23. The Appellant relied on the case of National Bank of Kenya vs. Commissioner of Domestic Taxes (2022) eKLR, where the High Court stated;“It is crystal clear that interest is the compensation paid in consideration of using someone else’s money. Or put differently, it is the consideration that is paid for keeping someone out of the use of his money. It is payable both when a lender lends money to a borrower or an institution takes a deposit from a depositor and puts its for its own use.”

24. It was averred by the Appellant that the Bridging loan was introduced by the Sacco to cater for the members who wished to clear their existing loans either with the Sacco or other Financial institutions to enable them to apply for a loan of higher amount to meet their financial needs.

25. It stated that the members are allowed to either clear the existing loan in cash or request the Sacco to assist in this regard. Members may opt to borrow from other institutions including shylocks and remit the cash to the Sacco to clear the loan balance.Where the members borrow the said amounts from other institutions, then they would pay interest on the amount advanced.

26. It further averred that it developed the bridging loan product to cater for its financial needs of its members. The bridging loan is a loan like any other loan product by the Appellant and that the members make an application for the loan via the loan form and are charged interest, christened “interest on bridging loan.”

27. The Appellant averred that the interest payment compensates the lender for the risk taken in lending the money, it is the opportunity cost of not investing the money elsewhere such as in Treasury Bills, Treasury Bonds and other interest earning investment plans.

28. The Appellant further averred that when a bridging loan is issued, the member’s loan statement is credited with the amount advanced thus retiring the initial loan. It asserted that the act of retiring the loan from the loan book implies that the Appellant loses out on interest that would have been earned over the remainder of the duration of the loan , and since the member has not introduced new money into the Sacco , then the Sacco also loses out on the income that it would earn from investing these funds since more cash has to be availed to the affected members for the new loan .

29. It further averred that interest on bridging loans is interest in form and manner since it is the compensation paid in consideration of keeping the Appellant’s funds away. Interest is not subject to excise duty since it is not a fee in accordance with Part III of the First Schedule to the Excise Duty Act, which defines fees as follows;“‘Other fees’ includes any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on loan, or an insurance premium, or premium based on related commissions.”

30. The Appellant in view of the foregoing contended that the Respondent erred in law and fact in computing Excise Duty on bridging interest which is not excisable.

31. In its submissions, the Appellant contended that compensation derived from bridging loans is interest and not fees and relied on the cases of Cape Brandy Syndicate -vs- I.R Commissioners (1921) 1K(supra), and Scott -vs- Russell (Inspector of Taxes) (1948)2 All ER (supra).

32. The Appellant further submitted on the different dictionaries’ definitions of the word “interest” which may be needless to rehash herein as the same has been stated hereinbefore. Accordingly, it submitted that interest on bridging loans is the compensation paid for using someone else’s money or for keeping them away from their money.

33. The Appellant buttressed its submissions with the case of National Bank of Kenya vs. Commissioner of Domestic Taxes (2020) eKLR, where the High Court stated;“It is crystal clear that interest is the compensation paid in consideration of using someone’s money. Or put differently, it is the consideration that is paid for keeping someone out of the use of his money. It is payable `both when a lender lends money to a borrower, or an institution takes a deposit from a depositor and puts it for its own use “.

34. The Appellant submitted that flowing from the foregoing, interest on bridging loans is interest in form and manner since it is compensation paid in consideration of keeping the Appellant ‘s funds away. It further submitted that interest is not subject to Excise Duty since it is not a fee in accordance with Part iii of the First Schedule to the Excise Duty Act, which defines “other fees” as;“Other fees include any fees, charges or commissions charged by financial Institutions relating to their licensed activities, but does not include interest on loan or return on loan, or an insurance premium or premium based on related commissions.”

b.Interest on Dividends in Advance. 35. The Appellant stated that it disagreed with the Respondent’s decision to charge excise duty on interest on dividends in advance loans earned during the period under audit of Kshs. 142,641,276. 00, whereon the Respondent contended that interest on dividend in advance are fees, not interest.

36. The Appellant contended that the compensation received from dividend in advance loans constitutes interest not fees. Dividend in advance is a loan advanced- to members in anticipation that it will be recovered after the AGM approves dividends/interest payable to members. It is disbursed to allow a member to get the value of a certain receivable earlier than its due date (such as dividend receivable.)

37. It stated that the product enables members to meet their interim financial needs as they wait for approval of dividends /interest rebates through an AGM resolution. The loan granted being estimated based on a member’s prior year’s dividend/interest entitlement allowing for variation in case the AGM approves less dividends.

38. It further stated that the loan is generally issued from July to March or the earlier of when the AGM resolution is passed, whereas the dividend/interest rebates are declared and approved in March.

39. The Appellant averred that to compensate the Sacco for the time taken before a recovery of the loan is done, the Sacco charges an internally agreed interest based on the period members are allowed to take the loan.

40. It further stated that interest on dividends in advance is interest in form and manner since it is the compensation paid to the Appellant in consideration of the time taken before a recovery of the loan is done, reiterating that interest is not subject to Excise Duty since it is not a fee in accordance with part III of the First Schedule to the Excise Duty Act which defines ‘other fees.’

41. The Appellant therefore contended that the Respondent erred in law and fact by computing excise duty on dividend in advance loans which is not an excisable revenue.

42. The Appellant submitted that interest on dividend in advance is interest in form and manner since it is the compensation paid to the Appellant in consideration of the time taken before a recovery of the loan is done. It submitted that interest is not subject to Excise Duty since it is not a fee in accordance Part iii of the First Schedule to the Excise Duty Act which defines “other fees” as,“other fees include any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on loan or return on loan, or an insurance premium or premium based on related commissions.”

43. The Appellant therefore submitted that the Respondent erred in law and fact in computing Excise Duty on dividend in advance loan which is not an excisable stream of income. Further the Appellant submitted that the definition of the dividend in advance loan meets the ordinary definition of interest as it has demonstrated.

c. Interest on clearance (FOSA Advance) 44. The Appellant stated that the Respondent assessed and demanded excise duty based on the understanding that this is a pre-closure fee to compensate on interest amount lost and as such would be categorized as “other fees” and not interest.

45. The Appellant referred to Section 62 (1) of the Consumer Protection Act, which provides;“A borrower is entitled to pay full outstanding balance under a credit agreement at any time without any prepayment charge or penalty”,And asserted that indeed the charge on this loan is interest and not fees.

46. The Appellant asserted that interest on clearance (FOSA Advance) is earned from members of the Sacco. The Appellant through FOSA will advance the member a loan equivalent to their net salary that goes through their Fosa salary account.

47. It stated that members may be required to clear outstanding Fosa loan in order to access higher amounts, and at times may not have the funds to clear. In such instance the members may be allowed to clear the existing loans in cash or borrow from the Sacco, or other financial institutions.

48. It further stated that where the members borrow the amount from other financial institutions, they would be required to pay interest on the amount borrowed.

49. The Appellant stated that the Sacco has to reorganize its cashflow hence foregoing income that would have been earned had the member cleared the loan in cash. The Sacco therefore would charge interest on the amount advanced at a given interest rate as compensation for the foregone interest income.

50. The Appellant averred that when a clearance FOSA advance loan is issued, the member’s loan statement is credited with the amount advanced thus retiring the initial loan. It stated that the act of retiring the loan from the loan book implied that the Appellant loses out on interest that would have been earned over the remainder duration of the loan, and since the member has not introduced new money into the Sacco, then the Sacco also loses out on the income that it would earn from investing these funds since more cash has to be availed to the affected members.

51. The Appellant contended that from the foregoing, it is clear that interest on FOSA Advance is interest in form and manner since it is the compensation paid in consideration of keeping the Appellant’s funds away. Interest is not subject to Excise Duty Act which defines “other fees”.

52. The Appellant submitted that Section 62 (1) of the Consumer Protection Act, 2012 provides, “A borrower is entitled to pay the full outstanding balance under a credit agreement at any time without any prepayment charge or penalty”, and therefore the charge on this loan is interest free.

53. The Appellant submitted that the foregoing is clear that interest on clearance (Fosa Advance) is interest in form and manner since it is the compensation paid in consideration of keeping the Appellant’s funds away. Interest is not therefore subject to excise duty since it is not a fee in accordance with Part iii of the first schedule to the Excise Duty Act.

54. The Appellant averred that based on the foregoing, the Respondent erred by bringing to charge income that was exempted from Excise Duty.

Appellant’s Prayers 55. By reason of the foregoing, the Appellant prayed that;a.The decision contained in the Respondent’s letter dated 20th March 2023 demanding Excise Duty of Kshs. 416,214,629. 00 be and is hereby vacated;b.This Appeal be allowed;c.The Excise Duty liability and returns be amended to reflect the correct tax position; and,d.The cost of and incidental to this Appeal be awarded to the Appellant.

The Respondent’s Case 56. The Respondent has set out its case on its;a.Statement of Facts dated 2nd May 2023 and filed on 5th June 2023 together with the documents thereto,b.Witness statement of Dave Mukabi dated & signed and filed on 18th January 2024, and adopted in evidence in chief by the Tribunal on 26th March 2024. c.Written submissions dated 26th April 2024 and filed on 29th April 2024.

57. The Respondent stated that it conducted an audit into the tax affairs of the Appellant with a view of establishing whether the Appellant was collecting and remitting all the excise as required by law, and noted that the Appellant had been classifying various revenue streams as interest whereas some of them were one off settlements in form of either commission, loan processing or negotiating fees. Subsequently the Respondent issued additional assessments on 23rd December 2022, amounting to Kshs. 416,214,629. 00, which the Appellant objected to.

58. The Respondent further stated that vide a letter dated 20th March 2023 it confirmed the assessment on account that the revenue streams that had been classified as interest were not interest but another fees subject to excise duty.

59. The Respondent averred that it took into account the provisions under Part iii of First Schedule of the Excise Duty Act, which excludes interest from the definition of other fees, and as well equally took into account the amendments that had had taken place since the introduction of Excise Duty on financial services through the Finance Act ,2012.

60. It stated that some of the changes included, change in Excise Duty rate from 10% to 20 % through the Finance Act, 2018, the change in the definition of other fees to exclude loan related fees by the Finance Act 2019, and removal of fees and commissions earned in respect of a loan from excise duty through the Finance Act, 2021.

61. The Respondent also averred that the period under review was 2017 to 2021 and therefore the Excise Duty Act, 2015 and its amendments over time were considered relevant.

62. The Respondent posited that though the definition of the term interest is not provided for either in the Excise Duty Act, or the repealed Customs & Excise Act, Part III of the First Schedule to the Excise Duty Act, 2015 defines “other fees” to include;“include any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on a loan or return on a loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder.”

63. The Respondent averred that in the absence of a definition of interest in the Excise Duty Act, the general canons of statutory interpretation are applicable including the plain meaning rule which called for an ordinary interpretation of the language used.

64. It stated that Black’s Law Dictionary, 10th Ed. 2014 page 935 defines interest as“The compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use; esp., the amount owed to a lender in return for the use of borrowed money.”

65. In the Oxford Dictionary, 8th ED. Interest is defined as;“the extra money that you pay back when you borrow money or that you receive when you invest money; to pay interest on a loan.”

66. In Halsbury’s Laws of England, interest is defined as;“the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another.”

67. The Respondent averred that from the foregoing definition of interest above, what remains outstanding is that the the owner of the money is kept away from that money for a certain duration, and it is that duration that the compensation applies to, and that the interest is charged.

68. The Respondent relied on the case of Commissioner of Domestic Taxes vs. Stima Sacco E090 of 2021, in which the High Court held;“The term interest should have been given its plain and literal meaning before seeking its legal meaning or definition in statutes. The cases relied on by the Tribunal are inapplicable in the present case.That the literal meaning of the term interest is the consideration payable for keeping one away from his money or for using someone else’s money. The definition of interest in the Income Tax Act should not have been resorted to in ascertaining the intention of parliament in the Excise Duty Act. The term interest is used in the Income Tax Act for the purposes of charge, assessment, and collection of income Tax; for the ascertainment of income to be charged; for the administrative and general provisions relating thereto and for matters incidental to and connected therewith. Not for excise duty. “

69. On the issue of Interest on Bridging Loan, the Respondent averred that though the Appellant has used the term loan, these are basic charges, as there no money that is passed on to the members. It contended that these are merely book entries that are made to enable the Appellant members either borrow more from the Appellant or mere administrative expenses, and at this point the Appellant is not kept away from its money for interest to be charged.

70. The Respondent stated that Loan Bridging is not interest but are charges and not interest hence as of the time of the assessment they were not exempt from excise duty. The Respondent relied on Cape Brandy Syndicate vs. I.R Commissioners (1921) 1 KB9 (supra).

71. In light of the above, and with reference to the Stima Sacco case, it was asserted by the Respondent that it was right in holding that the bridging loan interest was not interest per se but fell squarely under another fees subject to excise duty.

72. On the issue of Interest on Dividend in Adverse, the Respondent averred that contrary to the Appellant characterization of Advance dividends as interest. The character of this transaction is that of “other fees.” It averred that this is a one-off commission charged to members for receiving their divided in advance.

73. The Respondent further averred that the Appellant is not kept from its money because this is money that is due to its members anyway.

74. It was also averred by the Respondent that the Appellant has not produced the instruments creating this facility to demonstrate that a member is required to pay interest for receiving their dividends in advance.

75. On the issue of Interest on Clearance (Fosa Advance), the Respondent averred that contrary to the Appellant’s assertion, the interest on clearance is a pre-closure fee to compensate on interest amount lost and would therefore fall under category of “other fess” rather interest.

76. It further averred that the interest accrues on a monthly basis and what is bought off is the principal, meaning the Appellant foregoes or loses the interest that could have accrued and in such a case it would charge a penalty/fee for denying them the interest that could have accrued had the facility gone through the entire period.

77. The Respondent stated that Section 56 (1) of the TPA places the burden on the Appellant to demonstrate that the assessment is inaccurate;“In any proceedings under this part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

78. It stated that in the absence of proof to the contrary, the Appellant’s assertions are just mere averments, and that the Appellant’s allegations as laid out in the Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence and are expressly denied.

79. The Respondent’s witness Mr Dave Mukabi during the hearing held on 26th March 2024 testified that during the audit on the Appellant, it was noted that loan administration, arrangement and facilitation fees in nature were mischaracterized by the Appellant as interest. As a result, the Appellant failed to charge and account for the excise duty on these fees as required by law. He testified that the items mischaracterized were; charges on bridging loans, charges on Dividend in Advance, and charges on clearance (Fosa Advance).

80. The witness further testified that the law is that any fees, commissions or charge that is not interest earned by a financial institution as defined by the amendments of the finance Act, 2012 and 2013, is subject to excise duty.

81. The Respondent submitted that in demystifying the terms and transactions in question it was guided by the case of Commissioner of Domestic Taxes (Large Taxpayers Office) vs. Barclays Bank of Kenya Ltd [2020] eKLR, where the court held;“In our view, what is critical is whether looking at the totality of the evidence on record, there is clear explanation of what the Appellant alleges to constitute management or professional fees, and whether that payment made by the respondent reasonably falls within the terms of the statute. That question cannot be answered by considering only how the parties have described or rationalized the payment “.

82. The Respondent submitted that a Bridging Loan is also known as interim financing, gap financing or swing loans, bridge the gap, which in reality is a facility acquired for short term usage under urgent circumstances to finance an urgent need or purchase. A short-term loan used until a person or company secures permanent financing or pays an existing obligation. It allows the borrower to meet current obligations by providing immediate cashflow. It is also used during times when financing is needed but not yet available, the Respondent further submitted.

83. It submitted that in its grounds of appeal, the Appellant characterized that the BL is a product that arises when a member has sought monies to clear existing or higher loans, however, what the Appellant is referring to or has characterized as Bridging Loan, for purposes of avoiding payment of taxes on “other fees” is a buy off of the existing loan for another loan for an extended period.

84. It was further submitted by the Respondent that the Appellant as a SACCO charges a fee for the following reasons;i.Penalty for returning the funds before maturity period hence denying the Sacco the income that could have accrued from interest had the facility gone full term as per the previous agreement;ii.Administrative costs for processing the facility e.g. paper, human resources, system maintenance among other hidden charges.

85. It was therefore the Respondent’s submission that the Appellant has crafted and arranged- its affairs and products in such a manner that protects them from remitting Excise Duty on other fees by giving the charges the name bridging loan, whereas the character and nature of the said charges does not meet and match in any way the character of a bridging loan.

86. On Interest on Dividend Advance the Respondent submitted that though the Appellant has named the commission paid by members for receiving their dividends before time as interest, the Respondent differs with that school of thought, and submits that the money being given to the members of the Appellant is money already due to them just awaiting the formal announcement. In any event, it was the members of the Appellant who were separated from their money and not the vice versa.

87. It further submitted that at no point is the Appellant separated from its finances since the said funds belong to its members who are simply to take the same in advance.

88. The Respondent also submitted that this is a one-off commission charged to members for receiving their dividends in advance, and that the charge is a commission for receiving the dividends before time, but it is not interest on loans as the members are simply receiving what is due to them in advance.

89. On Clearance of FOSA Advance, the Respondent submitted that the Appellant has characterized charges related to FOSA clearance advance as interest, but going by the canons of statutory interpretation and the Dictionary definitions of interest cited earlier, what remains outstanding is that the owner of the money is kept away from that money for a certain duration, and it is that duration that the compensation applies to and that is the interest charged.

90. The Respondent posited that the question that follows the foregoing is, where a party has returned the money advanced to them before time, why would they be subjected to interest yet they have retuned the money to the owner? Or why would one benefit on interest when they already have their money back, where is the risk? Interest is only chargeable when one is separated from their money.

91. The Respondent buttressed its submission with the case of Commissioner of Domestic Taxes vs. Stima Sacco Appeal No, E090 of 2021, where the High Court held;“that the literal meaning of the term interest is the consideration payable for keeping one away from his money or for using someone else’s money.”

92. It submitted that guided by the afore cited case, the moment the money is returned it is available for lending to another person where interest will now accrue. Subjecting both the new borrower of the returned money, and the one who just returned the money will amount to the Appellant earning interest twice and that is why the Respondent maintains that once a party returns the FOSA Advance, they cannot be charged interest as the Appellant will have already been re-united with their funds.

93. The Respondent further submitted that the Appellant can charge a fee or penalty for its members returning the money earlier than the anticipated period therefore denying them some revenue already projected, however the returned money is available for borrowing by another person and would still attract the same interest. It submitted that Pre-closure fees is more of a penalty for paying the loan earlier contrary to the agreed terms.

94. It was also a submission of the Respondent that though the Excise Duty Act, 2015 or the repealed Customs and Excise Act did not define the term interest, the First Schedule to the Excise Duty Act, 2015, has defined “other fees” as;“include any fees, charges or commissions charged by financial institutions relating to the licensed activities, but does not include interest on a loan, or return on a loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder.”

95. The Respondent submitted that interest is what is excluded from excise duty under the Excise Duty Act, Other fees on the other hand are subject to Excise Duty.

96. The Respondent therefore concluded its submissions by asserting that it had demonstrated that the three sets of charges were indeed fees and penalty, and fall under the categorization of “other fees” and the Respondent was therefore justified to subject the same to a charge for excise tax liability.

Respondent’s Prayers 97. By reason of the foregoing the Respondent prayed that;a.The Respondent’s Objection Decision dated 20th March 2023 be upheld; and,b.The Appeal be dismissed with costs.

Issues For Determination 98. The Tribunal having considered the pleadings, testimony and submissions made by the parties is of the considered view that the appeal distils into one issue for determination as follows: -Whether the Respondent was justified in recategorizing the Appellant’s interest on bridging loans, dividend in advance and Clearance FOSA Advance, to fees, and subjecting the same to excise duty.

99. The dispute subject of this Appeal arose out of a compliance audit conducted on the Appellant by the Respondent, with a view to establishing whether the Appellant was collecting and remitting all excise duty as required by law. The Respondent stated that it was noted that the Appellant had been classifying various revenue streams as interest where else some of them were one off settlements in form of either commission, penalty, loan processing or negotiating fees.

100. Consequently, the Respondent issued additional assessments in the sum of Kshs. 416,214,629. 00 on 22nd December 2022, to which the Appellant objected on 20th January 2023. Thereafter the Respondent confirmed the assessments on 20th March 2023.

101. The parties have stated that subsequently they engaged in ADR on the two grounds of appeal hereunder;i.That the Respondent had assessed an alleged variance in the total excisable value as per the TBs versus excise duty declared on iTax to excise duty.ii.The Respondent had subjected exempt income to excise duty for the period November to December 2019.

102. The dispute relating to excise duty on interest on bridging loan, interest on dividend in advance, and interest on clearance (FOSA Advance) amounting to Kshs. 367,429,941. 00 inclusive of penalties and interest was not settled in ADR thus referred bac to the Tribunal for determination.

103. The underlaying strata of the dispute is to whether the subject three facilities offered by the Appellant are charged interest or other fees, thus determining whether they are chargeable to Excise Duty. It was not in contention that interest is exempt from Excise Duty, the contention was whether the charges levied on the subject items ought to be classified as interest or other fees.

104. On the first substratum on bridging loans, the Appellant averred that it was aggrieved by the Respondent’s decision to charge excise duty on bridging loans earned by the Appellant during the period under review on the basis that they are fees and not interest. The Appellant contended that compensation derived form bridging loans is interest and not fees

105. The Appellant submitted that the Excise Duty Act does not define the term interest, and went on to lay out the various Dictionaries’ definitions set out in its case above, which the Tribunal does not wish to rehash herein. The upshot being that interest is the compensation paid in consideration of using someone else’s money, or put differently, it is the consideration that is paid for keeping someone out of the use of his money.

106. The Appellant further averred that the bridging loan was introduced by the Sacco to cater for the members who wished to clear their existing loans either with the Sacco or other financial institutions to enable them apply for a loan of higher amount to meet their financial needs. Where members borrow the said amounts from other institutions, then they would pay interest on the amount advanced.

107. The Appellant also averred that the interest payment compensates the lender for the risk taken in lending the money, it is the opportunity cost of not investing the money elsewhere such as in Treasury Bills, Treasury Bonds and other interest earning investment plans.

108. The Appellant further averred that interest on bridging loans is interest in form and manner since it is compensation paid in consideration of keeping the Appellant’s funds away. The Appellant contended that the Respondent erred in law and fact in computing excise duty on bridging loans interest which is not excisable. The Appellant buttressed its submissions with the case of National Bank of Kenya Ltd vs. Commissioner of Domestic Taxes [2020] eKLR (supra).

109. On the other hand, the Respondent submitted that a bridging loan, also known as interim financing, swing loan, gap financing, bridging the gap, in reality is a facility acquired for short-term usage under urgent circumstances to finance an urgent need or purchase. A short term- loan used until a person or a company secures permanent financing or pays an existing obligation, allowing the borrower to meet current obligations by providing immediate cashflow. Also used during times when financing is needed but not yet available.

110. The Respondent also averred that though the Appellant has used the term loan, these are basic charges and there is no money that is passed to the members. It contended that these are merely book entries that are made to enable the Appellant’s members either to borrow more from the Appellant or mere administrative expenses, and at this point the Appellant is not kept away from its money for interest to be charged.

111. The Respondent further submitted that loan bridging is not interest but are charges and not interest hence as of the time of the assessment, they were not exempt from excise duty.

112. The Tribunal notes that the Finance Act 2012, introduced an amendment relating to excise duty on other fees. Which provided;“Excise duty on other fees charged by financial Institutions shall be ten percent.”

113. The issue arising is whether the item called Charges on Bridging Loans is interest or fees. The Appellant contends it is interest, while the Respondent contends it is other fees.

114. In the case of Cape Brandy Syndicate vs. I, R Commissioners (1921) 1KB, the court stated that tax statutes are to be construed strictly. There is completely no room for intendment or presumption.

115. In the case of Republic -vs-Kenya Revenue Authority Ex parte Bata Shoe Co. (K) Ltd [2014] it was stated that, the construction should use plain and literal meaning of the words used in the statute to discern the intention of parliament.

116. In the Black’s law Dictionary, 10th Ed (2014), interest is defined as;“The compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use; esp., the amount owed to a lender in return for the use of borrowed money.”

117. In the Oxford Dictionary 8th Ed. Interest is defined as;“the extra money that you pay back when you borrow money or that you receive when you invest money; to pay interest on a loan.”

118. In the Halsbury’s Laws of England, interest is defined as;“the return or compensation for the use or retention of by one person of a sum of money belonging to or owed to another.”

119. In the case of Commissioner of Domestic Taxes vs. National Bank of Kenya [2022] eKLR, the court held;“From the foregoing, it is crystal clear that interest is the compensation paid in consideration of using someone else’s money. Or put differently, it is the consideration that is paid foe keeping someone out of the use of his money. It is payable both when a lender lends money to a borrower or a lender takes a deposit from a depositor.”

120. From the foregoing it can be surmised that interest is the compensation paid for using someone else ‘s money for keeping them away from their money. This interest is levied at a particular rate for the period of the loan repayment. The owner of the money is kept away from that money for a certain duration, and it is that duration that the compensation applies to, and for which interest is charged.

121. The issue that follows is where a party has returned the money advanced to them before time, why would they be subjected to interest for the remainder of the period yet the money is with the owner and is available for onward lending to other borrowers and interest charged?

122. Flowing from the foregoing, the obvious option for the Appellant is to charge a fee or penalty for the money returned earlier than the anticipated or agreed period and for foregoing the projected revenue.

123. The Tribunal takes note that “Other Fees” has been defined in Part III of the First Schedule to the Excise Duty Act as;“Other fees include any fees, charges or commissions charged by financial institutions relating to their licensed activities, but does not include interest on a loan or return on a loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder.”

124. From the above provision it is clear that the Legislature recognized that apart from the compensation that is paid for the borrowed money, there were other expenses or charges that are to be incurred.

125. Going by the foregoing definition of interest, critical is the aspect of the owner of the money being kept away from that money for a duration, and it is that duration that the compensation applies to, and for which the interest is charged.

126. It is noteworthy that though the Appellant applied the term “loan” to its facility, the same were basically charges, and there is no money that passed on to the member. These were mere book entries that are made to enable the Appellant’s members either borrow more from the Appellant, or are mere administrative expenses. The charges or expenses exerted by the Appellant on its members are not interest in the strict sense of the word, as the Appellant is not kept away from its money for a duration to justify those charges qualifying as interest.

127. While dealing with a similar issue in the case of Commissioner of Domestic Taxes vs. Stima Sacco Ltd [2021] eKLR, the High Court held;“Accordingly, the Tribunal erred when it held that the charges for bridging loans, appraisal, boosting deposits and deferred on appraisal are interest and exempt from excise duty. Obviously, these charges are just but fees that is christened “interest” and that are not interest strictu sensu. They are not exempt from excise duty.”

128. The Tribunal guided by the aforecited holding from the High Court, is satisfied that though the Appellant applied the term “loan” to its bridging facility, the Appellant was not kept away from its money for a duration to justify those charges thereon qualifying as interest. The same were basically charges and not interest in the strict sense of the word, and more appropriately ought to have been categorized as “other fees” and not interest.

129. In light of the foregoing the Tribunal finds and holds that the charges the Appellant levied on its bridging facility to its members qualified as “other fees “and not as interest, and therefore ought to be subject to excise duty as the provisions of the Excise Duty Act.

130. Having made the finding in the foregoing issue of interest on bridging facilities, the Tribunal delves into the second substratum, that is the issue of interest on Dividends Advance facility.

131. In this issue, it has been submitted that the Appellant has structured a facility under which members are advanced part of the dividend payable in a particular year in advance pending approval by the members at the AGM. To access their annual dividend in advance, the members are charged a one-off fee or commission, which the Appellant has categorized as interest.

132. The Appellant submitted that the dividend in advance is a loan advanced to members in anticipation that it would be recovered after the AGM approves dividend or interest rebate payable to members, disbursed to allow a member get value of the receivable earlier than the due date. The loan granted is estimated based on a member’s prior year’s dividend or interest rebate entitlement allowing for variation in case the AGM approves less dividend.

133. The Respondent has contended that the money being given to the members of the Appellant in dividends, is money already declared, set aside or provision made and is due to them, just awaiting formal resolution by the AGM. It is therefore the member’s money and not the Appellant’s money.

134. The Tribunal having determined the definition of interest and what constitutes other fees in the first issue above, does not intend to rehash the same under this issue. Suffice to say that for interest to be applicable, the owner of the money ought to be separated from the money for a duration, and it’s this separation for a duration for which compensation is payable in form of interest.

135. In the instance issue, the dividends had not been declared and provided for, therefore the money at this point did not belong to the members of the Appellant in the strict sense as the receivables had not crystalized. In that regard, advancing the said monies to the members before the declaration of the dividends and announcement by the AGM, amounted to separating or keeping away the Appellant from its money for a duration, this entitled the Appellant to a compensation in form of interest.

136. The Tribunal takes the view that the charge the Appellant ought to be entitled to ought to be entitled to interest income for advancing a dividend before the due time for disbursement, which amounts for the advance to be a loan entitling the Appellant to interest therefrom.

137. In view of the foregoing, the Tribunal finds and holds that the charges the Appellant levied on its members for paying their dividends in advance would be appropriately categorized as interest and not a fee, and therefore not subject to a charge of excise duty as per the provisions of the Excise Duty Act.

138. On the third stratum, the issue is whether interest is chargeable on clearance of FOSA Advance. The Appellant has characterized the charges on the clearance of Fosa Advance as interest, which has been contested by the Respondent.

139. Again, going back to the definitions of “interest” set out hereinabove, it is settled that the cardinal principle is that, the owner of the money is kept away from that money for a certain duration, and it is that duration the compensation in form of interest applies and interest is charged.

140. The question posited then is, where a party has returned the money advanced to them before the due date, why would they be subjected to interest yet they have returned the money to the owner? Or why would one benefit on interest when they already have their money back, where is the risk? Interest is only chargeable where one is separated from their money.

141. In Commissioner of Domestic Taxes -vs- Stima Sacco (supra), it was stated that;“that the literal meaning of the term interest is the consideration payable for keeping one away from his money or for using someone else’s money.”

142. The Appellant gave an account of how this FOSA Advance facility is structured and averred that the Appellant through FOSA advances the members loans equivalent to their net salary that goes to their FOSA salary account. The members may be required to clear the outstanding FOSA advance loan before the due date to enable them access much higher loan amount, and in most cases the member may not have the required cash to clear the outstanding FOSA advance amount. In which case the member may request the SACCO to clear the amount, borrow from third party sources and remit the amount to the Sacco, or deposit cash to clear the loan balance.

143. The Appellant therefore charges interest on the amount advanced to clear outstanding FOSA facility, as compensation for the foregone investment income, on account of the member clearing the loan earlier than the projected duration.

144. Having taken note of the Appellant’s structure of the subject facility, the Tribunal takes the view that, the moment the money is returned, it is available for lending to other borrowers, thus it is not being kept away from the owner (Appellant) for duration, so as to entitle the owner (Appellant) to a compensation by way of interest for that duration. The charges levied would therefore amount more to a penalty for paying the loan earlier before the agreed duration. Hence more appropriately categorized as “other fees” rather than interest.

145. Therefore, flowing from the foregoing, the Tribunal finds and holds that the charges the Appellant levied on its members on clearance of FOSA advance loans in advance would be more appropriately categorized as “other fees” rather than interest, and therefore subject to a charge of excise duty in accordance with the provisions of the Excise Duty Act.

146. The Tribunal therefore finds and holds that the Respondent was justified in re-categorizing the Appellant’s interest on bridging loans, Dividends in advance and clearance of FOSA advance to fees, and subjecting the said items to excise duty.

147. The upshot of the foregoing is that the Tribunal finds that the Appellant’s Appeal is partially merited on the three issues as determined herein.

Final Determination 148. The Appellant’s Appeal having partially succeeded the Tribunal makes the following orders;a.The Appellant’s Appeal be and is hereby partially allowed;b.The Respondent’s Objection Decision issued on 20th March 2023 be and is hereby varied in the following terms;i.The assessment on understated Excisable Income (Reconciliation) and Income on which Excise Duty was not charged as agreed by consent of the parties at ADR be and is hereby confirmed;ii.The assessment on interest on bridging loans be and is hereby upheld;iii.The assessment on interest on Clearance (FOSA Advances) be and is hereby upheld;iv.The assessment on interest on dividends in advance be and is hereby vacated;c.The parties to bear their own costs.

149. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 12TH DAY OF JULY 2024ROBERT M. MUTUMACHAIRPERSONELISHAH N. NJERU MUTISO MAKAUMEMBER MEMBERBERNADETTE M. GITARI ABDULLAHI DIRIYEMEMBER MEMBER