[2023] KETAT 556 (KLR)

NCBA Bank Kenya Plc Limited (Successor in Title of NIC Bank PLC) v Commissioner of Legal Services & Board Coordination (Tax Appeal 666 of 2021) [2023] KETAT 556 (KLR) (29 June 2023) (Judgment)

Neutral citation: [2023] KETAT 556 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 666 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

June 29, 2023

Between

NCBA Bank Kenya Plc Limited (Successor in Title of NIC Bank PLC)

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a successor in title of NIC Bank PLC and carries on the business of banking and financial services

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Chapter 469 laws of Kenya and is charged with the mandate of assessment, collection and accounting of Government revenue.

3. The Responded carried out an audit on the Appellant and subsequently raised an assessment for VAT on interchange fees and Withholding tax on card business transactions on 17th December, 2020. The principal tax demanded was Kshs 25,691,073. 00 being WHT for the year 2017 & 2018 and Kshs 24,795,077. 00 being VAT for the year 2018. The amounts were inclusive of interest and penalties.

4. The Appellant objected to the assessment vide a letter dated 15th January, 2021. Thereafter the parties continued to engage including exchange of documents.

5. The Respondent vide a letter dated 7th September, 2021 issued its objection decision confirming total tax in the sum of Kshs 44, 336,076 being Kshs 27,108,218. 00 for WHT and Kshs 17,227,858. 00 for VAT.

6. The Appellant being dissatisfied with the Respondent’s objection decision lodged a Notice of Appeal at the Tribunal dated and filed on 7th October, 2021.

The Appeal 7. The Appellant has listed the following grounds of appeal in the Memorandum of Appeal dated and filed on 21st October, 2021. i.That the Respondent erred in fact and law in claiming payment of VAT on the basis that interchange fee received by the Appellant is payment for management or professional services.ii.That the Respondent erred in fact in failing to appreciate that interchange is received by the Appellant as an incentive to issue more cards and to compensate it for the administrative costs of issuing the cards.iii.That the Respondent erred in law and fact in failing to appreciate that as an issuing bank in a card transaction, the Appellant enables the transfer of money from its customer’s account and the supply of money is specifically excluded from the definition of services in the VAT Act 2013. iv.That the Respondent erred in fact in claiming that the Appellant provides management or professional services to the acquiring banks.v.That the Respondent erred in fact and law in failing to appreciate that the services provided by the Appellant are to its own customers and are in the nature of operation of the customer’s account, transfer of money, issuing of credit and debit cards and extending of credit which are specifically exempt services under Paragraph 1(a)(b)(c) and (h) respectively of Part II of the First Schedule to the VAT Act 2013. vi.That the Respondent erred in law and fact by subjecting interchange fees earned by the Appellant from international transactions to VAT despite the fact that such services are expressly zero-rated for VAT purposes in Kenya in accordance with Paragraph 1, Part A of the Second Schedule to the VAT Act.vii.That the Respondent erred in law and in fact by claiming withholding tax on the Acquirer fees paid by the Appellant to an international card companies known as Visa on the basis that the payment were royalties.viii.That the Respondent erred in law and fact by failing to appreciate that the acquirer fees paid by the Appellant to VISA was a contractual payment to enable the Appellant to acquire membership of the network operated by VISA and to have access to VISA’s network.ix.That the Respondent erred in law and fact in failing to appreciate that Acquirer Fees is not a royalty.x.That the Respondent erred in law and fact in failing to appreciate that the Appellant is not charged any royalty by VISA for use of its trademarks or logos.xi.That the Respondent erred in law and fact in attempting to rewrite the licence agreement between the Appellant and VISA by claiming a royalty payment when the licence agreement is quite clear that no royalties are payable.xii.That notwithstanding and without prejudice to the foregoing, the Respondent erred in law in failing to appreciate that the liability of the Appellant to account for withholding tax as the withholder had been removed from the Income Tax Act by virtue of an amendment effected by Finance Act 2016 and the said liability was only reintroduced in 2019 in the Tax Procedures Act. The Respondent failed to appreciate that during the period covering the audit there was no legal requirement for the Appellant, as the withholder, to account for withholding tax.xiii.That notwithstanding and without prejudice to the foregoing, the Respondent failed to appreciate that in not deducting withholding tax from the payment made to VISA during the audit period, the Appellant was guided by the Decision in R v Commissioner of Domestic Taxes ex Parte Barclays Bank of Kenya (2012) eKLR wherein the Honourable Court categorically held that the payments made to the card companies were not royalties and which decision has never been appealed by the Respondent.

The Appellant’s Case 8. Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:-i.The Appellant’s Statement of Facts dated 21st October, 2021 and filed on the same date together with the documents attached thereto.ii.The Appellant’s witness statement dated and filed on 16th June, 2022. iii.Appellant’s submissions together with its bundle of authorities dated 12th August 2022 and filed on the same date

9. According to the Appellant, the Respondent alleged vide the assessment that the Appellant failed to levy VAT on interchange fees earned in its role as an issuing bank. That the Commissioner claimed that the interchange fees earned by the Appellant amounts to consideration for management or professional services which are standard rated for VAT purposes in Kenya.

10. That the Commissioner claimed that the Appellant failed to account for WHT on fees paid to an international card company, VISA (hereinafter “acquirer fees”). Specifically, the Commissioner claimed that acquirer fees paid to VISA, amounts to royalty payments for the use of or the right to use VISA’s trademark and logos and therefore ought to be subjected to Withholding Tax (WHT)

11. The Appellant submitted in detail about the card transaction process. It stated that acquirer fees paid by it to VISA on a quarterly basis enables the Appellant to access the VISA network. The payment was not a royalty and that no withholding is deductible. That with regard to the Respondent’s assessment for VAT on interchange fee, the Appellant had provided as below the overview of the card transaction process that give rise to interchange fee. This involves establishing the parties involved in a typical credit/debit and transaction, the process involved, and the fees levied within the transaction.

12. That a typical credit/debit card transaction involves five primary parties as highlighted below together with their attendant tasks and duties;a.Cardholder- This refers to the person who holds a credit/debit card issued by a card issuing bank, and utilizes the same to make payment for goods and services procured;b.Marchant- This refers to any business that sells goods and services and accepts payment for the same through credit/debit cards. A merchant requires a merchant account in order to accept payment through a credit/debit card.c.Acquiring bank (Merchant’s bank)- An acquiring bank provides merchant with point of sale (POS) terminals and therefore enables the acceptance of payment for goods or services via credit or debit cards. In order to do this, the acquiring bank ought to be a member of an existing card association, for instance VISA, Mastercard and Amex (the card association), through which it may access an established card transaction network and facilitate acceptance of payment on behalf of a merchant. The acquiring bank enters contractual arrangements with merchants to create and maintain the merchant accounts that allow the business to accept payment via credit or debit cards. Where an acquiring bank has confirmed that a cardholder has sufficient funds or credit available to settle a transaction, the acquiring bank facilitates payment of the merchant on behalf of the cardholder.d.Issuing Bank (Cardholder’s bank)-Similar to an acquiring bank, an issuing bank is a member of the card associations. The issuing bank issues credit or debit cards to cardholders through which the cardholder may make payment for goods or services procured. The issuing bank is responsible for, inter alia, confirming to the network whether cardholders have sufficient funds or credit available to settle a transaction. Where sufficient funds or credit are available and the transaction proceeds successfully, the issuing bank subsequently transfers the money from its customer’s (the card holder) account to the network so that payment is effected for the goods or services purchased by the card holder using the credit or debit card.e.Card associations (VISA, MasterCard, Amex etc)- Card associations provide the overall network that enables payment through credit or debit cards. Through their respective networks, card associations enable member banks to provide secure card transaction services to their customers while maintaining the integrity of the card network. The Appellant pays VISA a fee called acquirer fees so as to gain membership to the VISA network. This fee is paid pursuant to an Agreement entered into between the Appellant and VISA. In addition, card associations function as the governing body of a community of financial institutions, Independent Sales Organizations (ISOs) and Membership Service Providers (MSPs) that work together in association to support card processing and electric payments. The primary roles of the card associations are to govern the members of their associations, including determining interchange fees and qualification guidelines, act as the arbiter between issuing and acquiring banks and maintain and improve the card network.

13. It stated that when payment is made using a debit or credit card, the Card Companies such as VISA play the role of a clearing and settlement house very much like the Central Bank of Kenya does in the process of clearing cheques. That the clearing and settlement process carried out by VISA is as explained below;a.Clearing: This is the process by which card companies transmit final transaction data from acquirers to issuers for settlement. It is during this stage that fees and charges that apply to the transaction are calculated by the network; andb.Settlement; This is the process by which the card companies’ network enables the exchange of funds between acquiring banks and issuing banks with respect to all cleared transactions.

14. Regarding its role as an issuing bank, the Appellant averred that within the card transaction process, it plays the role of an issuing bank. That as an issuing bank, the Appellant issues credit or debit cards to its customers through which payment can be effected by cardholders for goods and services. That where the Appellant has confirmed that the cardholder has sufficient funds or credit to settle the transaction, the Appellant then transfers funds from the cardholders account to the network so that payment can be effected.

15. The Appellant stated that it earns interchange fees which are calculated by the VISA network at the clearing stage. That the interchange fee serves to incentivise the Appellant to issue more cards and compensate it for the administrative costs incurred in issuing the cards.

PARA 16. The Appellant then submitted on the issues of VAT and Withholding Tax as follows;

Value Added Tax 17. It was the Appellant’s submission that interchange fees are payments received by the Appellant as the issuing bank to incentivise it to issue more cards and to compensate it for administrative costs associated with issuing cards. That it was not a payment for management or professional services as alleged by the Respondent.

18. The Appellant averred that the VAT Act does not make any reference to management or professional services. That it only refers to services, under Section 2, which specifically excludes the supply of money. That money is defined under Section 2 of the VAT Act, 2013 as;“(a)any coin or paper currency that is legal tender in Kenya;(b)a bill of exchange, promissory note, bank draft, or postal or money order;(c)any amount provided by way of payment using a debit or credit card or electronic payment system”

19. It averred that in its role as the issuing bank the Appellant checks its customers’ (cardholder) account to establish whether it has sufficient funds and thereafter transfers money from the account to the network so that payment can be effected for the goods or services purchased with the card. This amounts to a supply of money which specifically and expressly excluded from the definition of a supply of service under Section 2 of the VAT Act.

20. According to the Appellant, even if it was a service, then it can only be a financial service entailing the transfer of money which service is expressly exempt from VAT pursuant to Paragraph 1, Part (b) of the First Schedule to the VAT Act 2013 which provides as thus; “the issue, transfer, receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills,”

That these are expressly exempt from VAT. 21. That interchange fees earned may also be characterized as incidental to financial services captured under Paragraph 1(a)(c) and (h), Part II of the First Schedule to the VAT Act, being “issuing of credit and debit cards” and “the making of any advances or granting of any credit” respectively. That this is to the extent that the Appellant, in its role as an issuer, earns interchange fees as a result of issuing credit/debit cards to its customers. That in addition, where a customer utilizes a credit card to make a purchase, the same amounts to granting of credit by the Appellant when a purchase is made using a credit or debit card. That the Appellant also operates its customer’s (the cardholder) account by checking whether the account has sufficient funds and also provides statements to its customer.

22. The Appellant averred that interchange fees are therefore exempt from VAT pursuant to Paragraph 1(a), (b), (c) and (h) of Part II of the First Schedule to the VAT Act 2013. That the Appellant requests the Tribunal to vacate the VAT assessment on interchange fees in this regard.

23. That in addition, the Appellant noted that the Respondent levied VAT on interchange fees earned by the Appellant from international transactions amounting to Kshs 17,905,520. 00 despite the same being expressly zero-rated for VAT purposes in Kenya.

Withholding Tax 24. The Appellant reiterated that the purpose of the payment made by the Appellant to VISA (which is referred to as acquirer fees) was to enable the Appellant to gain membership to VISA’s networks and to access the network. That the payment is made pursuant to a contract entered into between the Appellant and VISA and is made on quarterly basis. That the Respondent had erroneously claimed that the payments were royalties for the use of the card company’s trademarks and logos.

25. The Appellant stated that VISA had expressly allowed it to use its trademark through Trademark Licence Agreement (“the Agreement”) entered into between the Appellant and VISA. That the Appellant was not required to pay any royalties to VISA and the Membership and Trademark Licence Agreement expressly states at Page 2 that the Agreement grants the Appellant a “non-exclusive, non-transferable, royalty-free licence to use the Licenced Marks in connection with the Approved Program(s) in the Approved Country”.

26. It averred that the Respondent was therefore attempting to rewrite the Agreement between the Appellant and VISA by imposing a royalty payment when it was clear that no royalty was payable under the Agreement. That the Respondent had neither the power nor the mandate to interfere with the Appellant’s freedom to contract with VISA and impose royalty payments when it was clearly not the intention of VISA to charge any royalty.

27. That the acquirer fees paid by the Appellant to VISA was contractual, transaction-based fees for access and use of the card companies’ network to facilitate its customers’ transactions and not a royalty. The Respondent’s assessment for withholding tax was therefore unlawful and completely without merit.

28. That notwithstanding and without prejudice to the foregoing, the Appellant averred that between the period 9th June, 2016, following the amendment of the Income Tax Act (ITA) vide the Finance Act, 2016 and prior to the amendment of the TPA, 2015 via the Finance Act 2019, the prevailing tax legislation did not deem WHT as a tax liability of the withholder.

29. That specifically, prior to the enactment of the Finance Act 2016 and on 9th June, 2016, Section 35 (6) (a) of the ITA provided as follows;“Where a person who is required under this section and in accordance with the rules made under section 130, to deduct tax—(a)fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted; or(b)…………….the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of tax and the payment of interest thereon, shall apply to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by that person and the due date for the payment of which was the date on which the amount of tax should have been remitted to the Commissioner.”

30. It averred that this provision however was deleted via the Finance Act, 2016 and was only subsequently reinstated in the Tax Procedures Act (TPA), via the Finance Act 2019, which came into force on 7th November, 2019 through the inclusion of Section 39(A) which reads as follows;“where a person who is required under this section, and in accordance with the rules made under section 130, to deduct tax fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted, the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and te provisions of this Act relating to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by the person and the due date for the payment of which has the date on which the amount should have been remitted to the Commissioner”

31. The Appellant submitted that the import of Section 35(6)(a) of the ITA, and subsequently Section 39(a) of the TPA, 2015 is that the provisions serve to deem tax not deducted or withheld in line with Section 10, as read together with Section 35 of the ITA, as tax due and payable by the person with a requirement to deduct or apply WHT upon payment for qualifying services. That further, the provisions deem any attendant penalties and interest as due and payable by the person with a requirement to withhold.

32. That therefore it stands to reason that between the periods 9th June, 2016 and 7th November, 2019, where the above deeming provisions were not captured in law, there was no legislative requirement that tax not appropriately withheld be deemed due and payable by the person required to deduct and account for WHT. Consequently, the Appellant averred that the Respondent’s imposition of principal tax, penalty and interest with respect to payment made between 9th June, 2016 and 7th November, 2019 was not supported by the applicable legislation and should ultimately be considered ultra vires.

33. The Appellant averred that the demand for principal tax, penalty and interest placed upon it in respect of payment of acquirer fees to VISA between the period 9th June, 2016 and 7th November, 2019, without the necessary legislative provision imposing the said principal tax, penalty and interest would be in gross violation of the Appellant’s Constitutional rights and protections. Specifically, the Appellant noted that that this would be in violation of Article 210 of the Constitution of Kenya 2010 under Sub-Article 1.

34. The Appellant therefore urged the Tribunal to vacate the Respondent’s principal WHT assessment, together with attendant penalties and interest to the extent that WHT in question arose between the periods 9th June, 2016 and 7th November, 2019 wherein there was no legislative provision deeming tax not withheld as liability of the person required to withhold tax.

Appellant’s Prayer 35. The Appellant prays that the Appeal be allowed and the objection decision dated 7th September, 2021 be vacated and set aside in its entirety with costs to the Appellant.

The Respondent’s Case 36. The Respondent’s case is premised on its Statement of Facts dated 19th November, 2021 and filed on the same date together with the documents attached thereto and proceedings before the Tribunal: -

37. In response to the Appellant’s Appeal, the Respondent stated that it confirmed the assessments on the grounds that;i.Card companies provide infrastructure which enables credit and debit card transactions to take place. That a review of the Appellant’s trial balance indicated that it made payments of interchange fees to card companies.ii.For the Appellant to access and participate in any of the networks set up by card companies, it must use the particular company’s cards bearing that company’s trademarks and logos which are distinct and distinguish one card company from the other. The trademarks are intended for use in the identification of services and goods.iii.Without the use of debit and credit cards bearing those specific trademarks and logos from the authorizing card company, the Appellant cannot access or use the networks.iv.The Respondent relied on the Court of Appeal ruling in Commissioner of Domestic Taxes (Large Tax payer Office) Vs Barclays Bank of Kenya Ltd (Appeal No. 195 of 2017) where it was held that; “without the use of credit and debit cards bearing those specific trademarks and logos from the authorizing card company, the respondent cannot access or use the networks. In these circumstances we cannot see how the respondent can contend that the transaction payments, whatever else they cover, exclude payment of royalty to the credit card companies for use of their trade mark and logos”.v.Acquirer fees paid to card companies is part of revenue arising from the use by the Appellant of the card companies’ networks. The fees can be traced to revenue arising from the right to use the card companies networks, hence payment to VISA (non-resident card company) by the Appellant constitute royalty and therefore subject to WHT.vi.Interchange fees earned from international transaction constitutes a taxable service and should be accorded treatment of items in the Second Schedule of the VAT Act where taxable supplies become zero-rated upon export.vii.Based on information submitted by the Appellant, Kshs 37,939,546. 00 were foreign transactions which were charged VAT at 0%, Kshs 54,847,244. 00 were local transactions which were charged VAT at 16% while Kshs 17, 905,520. 00 which was unsupported was charged VAT at 16%.viii.Commissions fall under the scope of other fees charged by financial institutions under Part II of the First Schedule of the Excise Duty Act. Consequently, the Respondent was justified to charge tax at a rate of 10%.

38. The Respondent submitted that the Appellant was selected for single issue audit for the periods January 2017 to December 2018 following the Court of Appeal judgement delivered on 6th November, 2020 in favour of the Respondent in the case of Commissioner of Domestic Taxes Versus Barclays Bank of Kenya Ltd (Civil Appeal No. 195 of 2017)

39. That it conducted the audit and raised an assessment on Value Added Tax and Withholding tax on card business transactions on 17th December, 2020. The principal tax demanded was WHT kshs 25,691,073. 00 for the year 2017 and 2018 and VAT of Kshs 24,795,077. 00 for the year 2018. The amounts were inclusive of interest and penalties.

40. Regarding interchange fees, the Respondent submitted that the Appellant being an issuer provided management or professional services to the acquiring bank.

41. The Respondent added that Section 2 of the Act also defines ‘management and professional fee’, for which tax is payable as follows;““management or professional fee” means any payment made to any person, other than a payment made to an employee by his employer, as consideration for any managerial, technical, agency, contractual, professional or consultancy services however calculated;”

42. The Respondent further cited the case in Commissioner of Domestic Taxes Versus Barclays Bank of Kenya (Civil Appeal No. 195 of 2017) where it averred that the Court considered whether interchange fees were management or professional fees and held as follows;“There is no doubt in our minds that the decisions in Adamson v. Attorney General (supra), Cape Brandy Syndicate v. Inland Revenue Commissioners [1920] 1 KB 64, T. M. Bell v. Commissioner of Income Tax [1960] EA 224, Republic v. Commissioner of Income Tax ex parte SDV Transami (supra) and the first judgment represent a correct statement of the law, namely strict construction of tax legislation, so that the tax demand must fall within the terms of the statute without ambiguity. If there’s any ambiguity in the legislation, it is not to be rectified by considerations of intendment, but by amending the legislation. However, determination of whether there is clarity or ambiguity in the legislation or whether a tax demand is precise and within the terms of the legislation, is not an abstract or pedantic exercise. It must be based on the evidence and the circumstances of each case. We agree with the majority of this Court in Stanbic Bank Ltd v. Kenya Revenue Authority [2009] eKLR that meaning of words should not be stained so as to find ambiguity.”

43. It stated that the Court of Appeal further went on to determine whether interchange fee paid by the bank as an acquirer to an issuer constituted management and professional services or whether it was merely a subsidy to create incentives. That the court held as follows;“We are persuaded that the management and professional fee does not have to fall within only one of the services defined in section 2; it can cover one or more. 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 rationalised the payment. The appellant contends that the services for which the respondent as acquirer pays the issuer include facilitation fee for facilitating a medium of communication between the issuers, acquirers and merchants, and for confirmation of the creditworthiness of the cardholders. The respondent however argues that these are its own duties which it does not have to pay for. In our view part of the confusion arises from failure to clarify that while paying the interchange fee, the respondent, who is both an issuer and an acquirer, is actually acting in his latter capacity. In the transactions we have described above, there are clear coordination, managerial, professional, and contractual services rendered by the issuer to the acquirer, for which the latter pays. In our view, the appellant proved that those payments by the respondent in its capacity as acquirer to the issuer banks, satisfy the definition of management and professional fees as defined in section 2 of the Act.”

44. It stated that in Stanbic Ltd v. Kenya Revenue Authority, the Court reiterated that:-“where there is ambiguity in the legislation, the same must be construed in favour of the taxpayer. Conversely, where the meaning of legislation is clear, courts will give effect to the law. In this appeal, we have come to the conclusion that there is no ambiguity in the law and that the appellant has sufficiently demonstrated that the payments made by the appellant to the card companies are “royalty” under the act and further that the interchange fees made by the respondent in its capacity as acquirer to the issuer banks were for management and professional services within the meaning of the Act. The confusion or lack of clarity that was obvious on the part of the tax authority regarding what it claimed constituted royalty and management of professional fees in Republic v. Commissioner of Income Tax ex-parte SDV Transami (K) Ltd. (supra) and in the first case between the parties in this appeal (before Majanja J), is not evident in the present appeal. We are persuaded that the evidence on record properly established that the payments paid by the Respondent to the card companies were royalty as defined in the Act and further that the interchange fees it paid to the issuer banks were for management and professional services as defined in the Act, and therefore both payments were subject to withholding tax under the Act.

45. The Respondent averred that the issue as to whether the payment of interchange fee by the acquirer to the issuer was a fee for professional or management fees had been settled by the Court of Appeal.

46. The Respondent stated that the services provided by the issuer to the acquirer are not provided on behalf of the other but the issuer is providing distinct services to the acquirer to be able to meet the contractual obligation to the merchant under the merchant agreement. That it was noteworthy that the issuer does not have a contract with the acquirer or the merchant and the contract was between the acquirer and the merchant. That it was therefore not absurd to argue that the issuer was providing the services on behalf of the acquirer without a contractual arrangement. That the reason why the acquirer shares part of the MSC with the issuer (Interchange fee) was because it could not deliver its contractual obligation to the merchant without the issuer. That this was because the cardholder’s account/funds are with the issuer and the acquirer had given a contractual undertaking that once the merchant accepts the card, the acquirer will pay for the transaction. That the acquirer therefore pays the interchange fee to the issuer for the services of authorization, clearing and settlement.

47. Regarding whether the interchange fees received by the Appellant were subject to VAT, the Respondent submitted that the fact that the issuer offers management or professional fees, the next step was to establish whether the same was subject to VAT.

48. It asserted that VAT was payable for goods and services that are not zero-rated and not exempt. That it did not matter what name those goods and services are given. That all the Respondent was required to demonstrate was that those goods or services were not zero-rated and not exempt. That the case before the Tribunal was in respect to services and not goods.

49. To support its case, the Respondent relied on Paragraph 1(b) of Part II of the First Schedule to the VAT Act, 2013. The Respondent further cited Section 2 of the VAT Act in relation to the definition of money and definition of supply of services.

50. It averred that the Appellant by being an issuer, provided the supply of a service as defined under Section 2 of the VAT Act.

51. To further buttress its case, the Respondent cited the First Schedule to the VAT Act at Part II Paragraph 1 which provides for the exempt financial services. The Respondent submitted that these services which are distinct and clearly defined are not exempt and are therefore subject to VAT at 16%.

52. The Respondent further submitted on the issue of whether there was any legal requirement for the Appellant to account for withholding tax as the withholder or if the said requirement had been removed by an amendment to the Income Tax Act effected in 2016 and the question of whether the reintroduction in 2019 of the requirement to account for Withholding Tax by the withholder be applied retrospectively.

53. The Respondent relied on Rule 10 of the Income Tax (Withholding tax) Rules which provides as follows;“For the purposes of the recovery of tax which a person would have been liable to pay under rule 8 had he complied with the provisions of these rules, that person shall be deemed to have been appointed an agent of his payee under Section 96 of the Act”

54. That Rule 8(1) provides that;“On or before the twentieth day of the month following the month in which the deduction is made or before such other day as may be notified to him by the Commissioner, a person shall, subject to subparagraph (3), pay to the Commissioner or to such other person as the Commissioner may direct, all amounts of tax deducted in accordance with the Act and these rules.”

55. The Respondent stated that Section 96 of the Income Tax Act which was on recovery from an agent was replaced with the Section 42 of the Tax Procedures Act which obligations of the agent remained the same.

56. The Respondent cited Section 42(13) of the Tax Procedures Act which provides as follows;“A taxpayer who without reasonable cause fails to comply with a notice or a requirement by the Commissioner under this section shall be personally liable for the amount specified in the notice or requirement.”

57. That Rule 10 had already placed the obligation for the recovery of the tax from the payer and therefore it was erroneous for the Appellant to claim that the provision was being applied retrospectively and thus rendering the objection decision an illegality.

58. Regarding whether the payments by the Appellant to VISA were a royalty, the Respondent cited the provisions of Section 2 of the Income Tax Act which defines royalty as follows;““royalty” means a payment made as a consideration for the use of or the right to use—(a)any copyright of a literary, artistic or scientific work; or(b)any cinematograph film, including film or tape for radio or television broadcasting; or(c)any patent, trade mark, design or model, plan, formula or process; or(d)any industrial, commercial or scientific equipment,”

59. It asserted that Section 3(1) as read with Section 4(a) of the Income Tax Act provides that all income made in Kenya, whether by a resident or a non-resident was taxable.

60. It averred that the payments made by the Appellant to the card companies comprised payments for use of logo, software licence fees, trademark licencing and service fees which were payments for the right to use the global network services for the purpose of linking the services to the users. That the payments were therefore for the right to use trademarks, patents and licences, which are intellectual property rights and therefore fell within the definition of royalty in Paragraph 33.

Respondent’s Prayers 60. The Respondent prayed that the Tribunal considers the case and finds that;a.The Appellant should pay the outstanding VAT and Withholding taxes.b.The Respondent is entitled to costs of the Appeal.

Issues for Determination 61. The parties agreed on the following as the Key issues;a.Did the Appellant, as the issuing bank, provide services to the acquiring banks?b.Is the interchange fees received by the Appellant subject to VAT?c.During the audit period, was there any legal requirement for the Appellant to account for withholding tax as the withholder or had the said requirement been removed by an amendment to the Income Tax Act effected in 2016?d.Can the reintroduction in 2019 of the requirement to account for withholding tax by the withholder be applied retrospectively?e.Notwithstanding and without prejudice to the foregoing, are the payments made by the Appellant to VISA a royalty for use of its trademark or logos and was withholding tax deductible?

62. Having reviewed the pleadings and the agreed issues as well as the evidence tabled before the Tribunal, the Tribunal was of the respectful view that two issues stand for its determination namely;a.Whether interchange fees earned by the Appellant were subject to VAT.b.Whether the WHT assessed on the Appellant for 2018 was backed by law.

Analysis andFindings a. Whether interchange fees earned by the Appellant were subject to VAT. 63. It was the Respondent’s assertion that interchange fees earned from international transaction constitutes a taxable service and should be accorded treatment of items in the Second Schedule of the VAT Act where taxable supplies become zero-rated upon export.

64. The Appellant on its part submitted that interchange fees are payments received by the Appellant as the issuing bank to incentivise it to issue more cards and to compensate it for administrative costs associated with issuing cards. That it was not a payment for management or professional services as alleged by the Respondent. It added that the VAT Act does not make any reference to management or professional services. That it only refers to services under Section 2 which specifically excludes the supply of money.

65. Paragraph 1(b) of the First Schedule to the VAT Act, 2013 provides as follows regarding exempt services:“The supply of the following services shall be exempt supplies-1(b) the issue, transfer, receipt or any other dealing with money, including money transfer services, and accepting over the counter payments of household bills, but excluding the services of carriage of cash, restocking of cash machines, sorting or counting of money.”

66. The Tribunal noted that the Respondent in its objection decision had stated in part as follows regarding charging VAT on interchange fees;“…The Bank as an issuing bank supplies a composite service (authorization, capture and settlement) to the acquiring Bank who does not hold an account with NIC Bank and is not the Bank’s client and for that service it is paid the interchange fee which is not a payment for operation of an account.That VAT Act 2013 defines the supply of services to include the performance of services for another person. As an issuer NIC Bank therefore earns interchange fees because of providing services to acquirers and this does not fall under paragraph 1 of Part II of the First Schedule to the VAT Act, 2013 and is therefore not an expressly exempt service under the VAT Act 2013……”

67. The key question was therefore whether the Appellant as the issuing bank was providing services to the acquiring banks.

68. The Appellant argued that even if it was a service, then it can only be a financial service entailing the transfer of money which service is expressly exempt from VAT pursuant to Paragraph 1, Part (b) of the First Schedule to the VAT Act 2013 which expressly exempt these services from VAT.

69. It averred that interchange fees earned may also be characterized as incidental to financial services captured under Paragraph 1(a),(c) and (h), Part II of the First Schedule to the VAT Act which was exempted from VAT. That this is to the extent that the Appellant, in its role as an issuer, earns interchange fees as a result of issuing credit/debit cards to its customers. In addition, where a customer utilizes a credit card to make a purchase, the same amounts to granting of credit by the Appellant when a purchase is made using a credit or debit card.

70. The Tribunal noted that the parties explained in detail the activities which ought to be undertaken by the Appellant to ensure a card transaction is completed prior to the Appellant earning the interchange fees. The Tribunal observed that these checks and activities must also be done on any other transaction involving the Appellant’s bank account and therefore they were in the Tribunal’s view incidental to the completion of any movement of cash from the card holder’s bank account.

71. The Tribunal was further of the view that the checks and activities from which the Appellant earns interchange fees must be undertaken to ensure a card transaction is completed. That these are the usual checks that must be undertaken on any transaction and are incidental to the completion of any movement of cash from a card holder’s account.

72. The Tribunal reiterates its findings in Barclays Bank of Kenya Limited vs. Commissioner of Domestic Taxes, TAT Appeal No. 114 of 2014 that interchange fee is a fee paid by a merchant’s bank (acquirer) to a card holder’s bank (issuer) to compensate the issuer for value and benefit that merchants receive when they accept electronic payments. Further, the interchange service provided by the bank is a service to its customers and not the acquiring bank.

73. The Tribunal reiterates its decision in TAT No. 361 of 2018, NIC Group PLC and NIC Bank PLC vs. Commissioner of Domestic Taxes where it held that interchange fees received by issuing banks are not subject to VAT. The Tribunal does not find any reason whatsoever to depart from this finding.

74. The Tribunal further makes reference to High Court Case No. 8 of 2018, Barclays Bank of Kenya Ltd. Vs. Commissioner of Domestic Taxes where the Court concluded that interchange fees is exempt from VAT.

75. It was the Tribunal’s considered view that the checks and activities undertaken by the issuer are incidental to the provision of money transfer services and are, therefore, not distinct from the supply of money by the Appellant. Consequently, the Tribunal finds that interchange fees earned by the Appellant are not subject to VAT.

b. Whether the WHT assessed on the Appellant for 2018 was backed by law. 76. The dispute here arose from the Respondent’s assessment of Withholding tax on the Appellant’s payments to VISA for the year 2018. The Tribunal looked at two aspects of the assessment, first the issue of whether the payments to VISA were royalties subject to withholding tax and whether the requirement to withhold the tax by the Appellant was removed by the Finance Act 2016

77. It was the Appellant’s contention that the purpose of the payment made by the Appellant to VISA was to enable the Appellant to gain membership to VISA’s network and to access the network and not royalties for the use of the card company’s trademarks and logos. That the payment is made pursuant to a contract entered into between the Appellant and VISA. and is as claimed by the Respondent made on quarterly basis.

78. The Respondent on the other hand stated that acquirer fees paid to card companies is part of revenue arising from the use by the Appellant of the card companies’ networks. That the fees could be traced to revenue arising from the right to use the card companies’ networks, hence payments to VISA (non-resident card company) by the Appellant constitute royalty and therefore subject to WHT.

79. The Income Tax Act defines royalties as:-““royalty” means a payment made as a consideration for the use of or the right to use—(a)any copyright of a literary, artistic or scientific work; or(b)any cinematograph film, including film or tape for radio or television broadcasting; or(c)any patent, trade mark, design or model, plan, formula or process; or(d)any industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific equipment or experience, and any gains derived from the sale or exchange of any right or property giving rise to that royalty;”

80. It was however the Appellant’s contention that VISA had expressly allowed it to use its trademark through Trademark Licence Agreement (“the Agreement”) entered into between the Appellant and VISA. That the Appellant was not required to pay any royalties to VISA and the Membership and Trademark Licence Agreement expressly states at Page 2 that the Agreement grants the Appellant a “non-exclusive, non-transferable, royalty-free licence to use the Licensed Marks in connection with the Approved Program(s) in the Approved Country”.

81. The Tribunal noted that although the Appellant averred that the Agreement between it and VISA was non-exclusive, the Agreement attached by the Appellant stated at clause 2 in part as follows: -“Licence grant…In the event User desires to use the Licensed Marks in connection with the Approved Program(s) in a country other than the Approved Country, User shall give Owner prior written notice thereof and shall not commence use in such other country until it has received Owner’s prior written consent, …..”

82. It was clear to the Tribunal that for the Appellant to access and participate in the VISA network in any Country, it must seek prior permission from the owner (VISA) in order to use the trade mark and logo which is distinct and distinguishable from any other company. The debit and credit card issued by the Appellant to its customers bear this distinct logos and trademark which in our view remains a precondition for the Appellant to access and use the VISA network.

83. The Tribunal is guided by the finding in the case of Commissioner of Domestic Taxes (Large Taxpayers Office) v Barclays Bank Kenya Limited PLC Civil Appeal No 195 of 2017 where the Court of Appeal held that:“We are satisfied that, in the circumstances of the case giving rise to this appeal, the appellant was able to identify with clarity the basis upon which it was claiming withholding tax from the respondent based on payment of royalty, however disguised. The appellant was able to demonstrate that the transaction fee constituted, in the circumstances we have explained above, payment for the right to use the card companies’ trademarks and logos. The payment constituted royalty for trademark under section 2(c) of the Act.”

84. The Tribunal, in the circumstances, found that payments to VISA were royalties subject to Withholding tax.

85. The Tribunal then turned to the question of whether the requirement to withhold the tax by the Appellant was removed by the Finance Act 2016.

86. The Appellant had stated that, notwithstanding and without prejudice to the foregoing, the period 9th June, 2016, following the amendment of the Income Tax Act (ITA) vide the Finance Act, 2016 and prior to the amendment of the TPA, 2015 via the Finance Act 2019, the prevailing tax legislation did not deem WHT as a tax liability of the withholder.

87. That specifically, prior to the enactment of the Finance Act 2016 on 9th June, 2016, Section 35 (6) (a) of the ITA provided as follows;“(6)Where a person who is required under this section and in accordance with the rules made under section 130, to deduct tax—(a)fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted; or(b)fails to remit the amount of a deduction to the Commissioner on or before the twentieth day following the month in which the deduction was made or ought to have been made, the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of tax and the payment of interest thereon, shall apply to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by that person and the due date for the payment of which was the date on which the amount of tax should have been remitted to the Commissioner.”This Section was deleted by the enactment of the Finance Act 2016 on 9th June, 2016.

88. The Tribunal noted that the TPA re-introduced the provision through the Finance Act 2019 where it stated as follows at Section 39(A):“where a person who is required under this section, and in accordance with the rules made under section 130, to deduct tax fails to make the deduction or fails to deduct the whole amount of the tax which he should have deducted, the Commissioner may impose such penalty as may, from time to time, be prescribed under the rules, and the provisions of this Act relating to the collection and recovery of that amount of tax and penalty as if they were tax due and payable by the person and the due date for the payment of which has the date on which the amount should have been remitted to the Commissioner”

89. However, the Respondent insisted that Rule 10 of the Withholding Tax Rules had already placed the obligation for the recovery of the tax from the payer and therefore it was erroneous for the Appellant to claim that the provision was being applied retrospectively and thus rendering the objection decision an illegality.

90. The Tribunal noted that the WHT assessment was for the year 2018 which was prior to the enactment of the Finance Act 2019 and subsequent to the Finance Act 2016. The Tribunal was of the view that the key provision of the law that would hold the Appellant liable to withhold the tax was removed by the Finance Act 2016 and re-introduced under the TPA by the Finance Act 2019. The question was therefore whether the Appellant could be held responsible to account for the withholding tax on royalties in 2018.

91. There exists a maxim on retrospectivity of laws which states that Nova Constitutio Futuris Formam Imponere Debet, Non Praeterit (A new law ought to be prospective and not retrospective, in operation). Courts have on a number of times expressed themselves on retrospectivity of new laws. In James v I.R.C [1977] STC 240 The plaintiff challenged the validity of Section 8 of the Finance Act of 1974 which increased the rate of surcharge retrospectively for the year of assessment 1972-73, in dismissing the case Slade J stated thus;-“…It is in my judgment that as the constitutional law of England stands today parliamentarians have the power to enact by-statute any fiscal law whether of a prospective or a retrospective nature and whether or not it may be thought by some persons to cause injustice to individual citizens and note. If the wording of the legislation is clear the court must give effect to it even though it may have or will have a retrospective effect.”

92. In Samuel Kamau Macharia and Another v Kenya Commercial Bank Ltd and 2 Others, SCK Application No. 2 of 2011 [2012] eKLR, the Supreme Court while considering the question whether the retrospective application of a statutory provision is unconstitutional stated that:“As for non-criminal legislation, the general rule is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or evidence are prima facie prospective, and retrospective is not to be given to them unless, by express words or necessary implication, it appears that this was the intention of the legislature. (Halsbury’s Laws of England, 4th Edition Vol. 44 at p.570). A retroactive law is not unconstitutional unless it:(i) is in the nature of a bill of attainder;(ii) impairs the obligation under contracts;(iii) divests vested rights; or (iv) is constitutionally forbidden”

93. Casting the foregoing on the instant case, the Tribunal noted that since the Finance Act 2019 was enacted on 7th November, 2019, the only period during which the Respondent could legally enforce collection under the new law was subsequent to the 7th November 2019.

94. It was the view of the Tribunal that the period subsequent to the enactment of the Finance Act 2016 and prior to the enactment of the Finance Act 2019, the law did not deem the WHT to be a liability of the Appellant. Consequently, the Tribunal finds that the WHT assessment for the year 2018 on the Appellant was not backed by law.

Final Decision 95. On the basis of the foregoing analysis, the Appeal partially succeeds and the Tribunal accordingly proceeds to make the following Orders: -i)The objection decision dated 7th September, 2021 be and is hereby varied as follows:-a.The assessment in relation to VAT on interchange fees is hereby set aside.b.The assessment in relation to Withholding tax on royalties in 2018 is hereby set aside.ii.Each party to bear its own costs.

96. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 29TH DAY OF JUNE, 2023ERIC N. WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERGRACE MUKUHA - MEMBERABRAHAM K. KIPROTICH - MEMBERJEPHTHAH NJAGI - MEMBER