[2025] KETAT 137 (KLR)

SBM Bank Kenya Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E419 of 2024) [2025] KETAT 137 (KLR) (21 February 2025) (Judgment)

Neutral citation: [2025] KETAT 137 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E419 of 2024

RM Mutuma, Chair, Jephthah Njagi, D.K Ngala, T Vikiru & M Makau, Members

February 21, 2025

Between

Sbm Bank Kenya Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant, SBM Bank (Kenya) Limited is a company incorporated in Kenya under the Companies Act, 2015.

2. The Appellant is a commercial licensed by the Central Bank of Kenya whose principal business activity involves the provision of financial services such as debt facilities, checking and savings options and investment banking among others.

3. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act 1995. Under Section 5 (1), the Respondent is an agency of the Government for the collection and receipt of all tax revenue. Further under Section 5 (2) with respect to performance of its functions under subsection (1), the Respondent is mandated to administer and enforce provisions of the written laws as set out in Part 1 & 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenue in accordance with those laws.

4. The Commissioner of Domestic Taxes conducted an audit of the books, records and accounts of the Appellant for the period September 2018 to September 2023. The audit involved a review of the Appellant’s tax affairs, and the examination covered the Appellant's Excise Duty obligation for the audit period.

5. Following the tax audit, the Commissioner raised tax assessments vide a letter dated 13th December 2023 for the years of income 2018 to 2023.

6. The Respondent demanded additional tax of Kshs. 176,442,491. 00 being principal tax, penalties, and interest.

7. Being dissatisfied with the Commissioner’s assessment, the Appellant lodged an objection on the 11th January 2024 in line with the provisions of Section 51 of the Tax Procedures Act, 2015.

8. The Respondent reviewed the Objection and subsequently engaged in discussions with the Appellant. It requested for additional information which the Appellant provided on various dates.

9. On 4th March 2024, the Respondent issued the Appellant with its Objection Decision in response to the objection on the assessment.

10. The Appellant, being dissatisfied with the Objection Decision lodged this Appeal, vide a Notice of Appeal dated and filed on 3rd April 2024.

The Appeal 11. The Appeal is premised on the following grounds of Appeal as stated in the Appellant’s Memorandum of Appeal dated and filed on 17th April 2024;a.That the Respondent erred in law and fact by demanding Excise Duty on interest on loans, contrary to the provisions of the Excise Duty Act, 2015; and,b.That the Respondent erred in law by demanding Excise Duty for periods that are time barred.

The Appellant’s Case 12. The Appellant’s case is premised on the following;a.Statement of Facts dated and filed on 17th April 2024 together with the documents attached thereto; and,b.Written submissions dated 27th August 2024 and filed on 28th August 2024.

13. The Appellant averred that it is a commercial bank. That it is in the business of provision of financial services including loan facilities.

14. That in the course of providing loan facilities, the terms and conditions of the loan facilities include an agreed repayment period, the interest rate, a default interest rate and other fees associated with the loan, including other special conditions that may apply.

15. The Appellant averred that penal interest relates to additional interest that the Appellant charges its customers for loan repayments which remain outstanding beyond the stipulated due dates.

16. That within the letter of offer, there is a specific clause referred to as the ‘Default Interest’ which provides that in the event that the borrower does not repay the amounts within the agreed due dates, the borrower is required to pay to the bank an additional interest at a rate of 1. 25% of the outstanding loan value per month over and above the subsisting rate of interest payable by the borrower on all monies due with effect from the date of the same becoming due, until actual payment of such monies in full. The bank then recognizes the interest in its books as per the applicable accounting standards.

17. The Appellant averred that the penal interest earned is therefore additional interest income received on outstanding loans or a return on a loan and not a ‘fee’. That it is therefore not subject to Excise Duty under Paragraph 4 of Part 11 of the First Schedule of the Excise Duty Act, 2015 which levies Excise Duty on other fees charged by financial institutions.

18. The Appellant averred that Part Ill of the Excise Duty Act defines the term “other fees” to 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 any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder ...”

19. The Appellant averred that from the above legal provisions, there is an express exclusion of interest and return on loans from the definition of ‘other fees’. That it is apparent that the intent of the tax law, from the onset, was to exclude interest income earned by financial institutions from Excise Duty.

20. The Appellant Averred that while the Excise Duty Act, 2015 excludes interest and return on loans from the definition of other fees, it does not specifically provide an operative definition of ‘interest’ and ‘return on loan’.

21. That the ordinary interpretation of words in statutes has also been adopted by Kenyan Courts in the interpretation of tax statutes.

22. The Appellant averred that in Primarosa Flowers Limited vs. The Commissioner of Income Tax, High Court, Income Tax Appeal No 18 of 2013. the High Court of Kenya quoted Lord Donovan in Mangin v Inland Revenue Commissioner [1971] AC 739 where he held that;“First, the words are to be given their ordinary meaning. They are not to be given some other meaning simply because their object is to frustrate legitimate tax avoidance devices...moral precepts are not applicable to the interpretation of revenue statutes. Secondly, ... one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption so to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used...Thirdly, the object of the construction of a statute being to ascertain the will of the legislature, it may be presumed that neither injustice nor absurdity was intended. If therefore a literal interpretation would produce such a result, and the language admits of an interpretation which would avoid it, then such an interpretation may be adopted. Fourthly, the history of an enactment and the reasons which fed to its being passed may be used as an aid in its construction...Hence, the governing principle is this when construing a taxing or other statute, the sole function of the court is to discover the true intention of Parliament. In that process, the court is under a duty to adopt an approach that produces neither injustice nor absurdity; In other words, an approach that promotes the purpose or object underlying the particular statute albeit that such purpose or object is not expressly set out therein.”

23. The Appellant averred that it relied on the literal meaning of interest as per the Black’s Law Dictionary (10th Ed.) which defines 'interest' to mean “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: especially the amount owed to a fender in return for the use of borrowed money”.

24. That the Oxford Dictionary defines ‘interest’ as “the money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt and the charge made for borrowing a sum of money”. That the 8th Edition defines ‘interest’ 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.”

25. The Appellant averred that Halsbury's Laws of England state that ‘interest’ is,“the return or compensation for the use or retention by one person of a sum of money belonging to or owed to another.”

26. The Appellant submitted that the Court of Appeal in Stanbic Bank Kenya Limited vs. Kenya Revenue Authority CA Civil Appeal No. 77 of 2008 [2009] eKLR while interpreting a tax statute, it stated that;“..the court did not seek any assistance from outside a dictionary in ordinary use. Moreover, the court did not strain the meaning of the words in order to achieve any particular result. The court simply adopted the ordinary meaning of the words used in the relevant tax statute. This is because as regards tax law the issue of intention or intendment does not arise. If there is any ambiguity, and I did not detect any in my analysis, the same must be construed in favour of the taxpayer. In tax law, the converse is also true that if the meaning is clear, that tax is chargeable, the issue of what was intended is not the function of the court and where tax liability is expressed and located by law the courts must uphold the taxman's position.”

27. The Appellant submitted that the High Court, in National Bank of Kenya Ltd vs. Commissioner of Domestic Taxes Income Tax Appeal E155 & 533 of 2020 (Consolidated) [2022] KEHC 10549 (KLR) (Commercial and Tax) (26th May 2022) opined that;“The starting point is that tax statutes are to be construed strictly. There is no room for intendment or presumption. In construing tax statutes, the court has to ascertain the clear intention of Parliament. The Court should avoid a construction that will lead to an injustice or absurdity...Further, the construction should use the plain and literal meaning of the words used in the statute to discern the intention of Parliament...lt is trite law that a person is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him... I have already found 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...There are various fees associated with acquiring a loan and they include commitment fees, appraisal fees, front-end fees, arrangement fees, loan administration fees and many other fees and charges that lenders charge when lending. These are distinguishable from interest as they are only costs incidental to the loan while interest is the main consideration that is charged for the loan. The rest are only expenses incurred in obtaining the loan.”

28. The Appellant submitted that from the above citations, it is evident that all compensation earned from a loan is considered to be interest, while all charges imposed when lending the loan are what is considered fees. That therefore, the default interest, otherwise referred to by the taxpayer as penal interest, comprises of additional interest or a return on loan earned from the loan issued to the customers which is levied for denying the Appellant the use of their money, as and when they fell due.

29. The Appellant submitted that it was erroneous and an abuse of power for the Respondent to attempt to reclassify these payments with an aim of collecting tax, contrary to the provisions of the Excise Duty Act. The Appellant submitted that the penal income is a default interest rate, as specifically stated in the letters of offer, for late payment of loans and consequently does not attract Excise Duty. That Allowing the Respondent to charge tax on interest would be a contradiction to the rules of interpretation of Statutes in Kenya.

30. The Appellant submitted that Justice Visram, in the case of Unilever Kenya Ltd vs. The Commissioner of Income Tax No. 753 of 2003, recognized that where legislation and the KRA could not provide guidance on tax issues, recourse should be made to international best practice.

31. That International Accounting Standard (IAS) 18, which is the recognized accounting standards in Kenya provides that;“where an entity allows another person the use of its assets, the charges by the entity for the right to use its cash or cash equivalents (loan) results in interest income for the entity in question.”

32. The Appellant further submitted that the OECD Guidelines define interest as inter alia;“income from debt claims of every kind, whether or not secured by mortgage whether or not carrying a right to participate in the debtor's profits...”

33. The Appellant submitted that the above provisions of the International Accounting Standards and the OECD Guidelines further support the fact that any charges in relation to loans or financial obligations result in interest.

34. That in light of the above facts, the Respondent’s claim that the default interest charges on loans provided by the Appellant to its customers is not interest in nature is incorrect and unfair and goes against the generally accepted rules of interpretation. That the assertion by the Respondent that the Appellant did not charge Excise Duty on interest is erroneous and therefore, ought not to be allowed.

35. The Appellant submitted that all fees and commissions earned in respect of a loan were excluded from the definition of 'other fees' during the period 7th November 2019 to 1st July 2021. That during that period, all fees and commissions earned in respect of a loan were not subject to Excise Duty as these were excluded from the definition of ‘other fees.’

36. The Appellant submitted that Section 26 (c) of the Finance Act, 2019 amended the definition of ‘other fees’ in the Excise Duty Act, 2015 as follows;“The First Schedule to the Excise Duty Act, 2015 is amended- in Part Ill- by deleting the expression ‘or an insurance premium or premium based or related commissions’ in the definition of the term ‘other fees’ and substituting therefor the expression "or fees or commissions earned in respect of 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.”

37. The Appellant submitted that the provision was effective from the date of assent, being 7th November 2021 and was only deleted in the Finance Act, 2021, which came into force on 1st July 2021.

38. The Appellant further submitted that the Commissioner had no legal basis to demand for Excise Duty on the alleged fees and commissions earned in respect of loans during the period when the provision was in place.

39. The Appellant submitted that the entire principal assessment relating to the aforementioned period of Kshs. 36. 430,862. 00 ought to be vacated.

40. The Appellant also submitted that the tax assessments in relation to September 2018 to February 2019 were time barred. That this was based on the provisions of Section 31 (4) of the Tax Procedures Act (TPA) which provides that;“The Commissioner may amend an assessment -(a)In the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; or(b)In any other case, within five years of­(i)for a self-assessment, the date that the self-assessment taxpayer submitted the self ­ assessment return to which the self -assessment relates; or(ii)for any other assessment, the date the Commissioner notified the taxpayer of the assessment.”

41. The Appellant submitted that following the review of the Appellant’s records, the Respondent issued its assessment on 4th March 2024, for the 2018 to 2023 years of income. That based on the tax legislation highlighted above, the period of 5 years of assessment as stipulated in law would be five years back from the date the assessment was issued on 4th March 2024.

42. That the amended excise duty assessment issued by the Respondent for the period September 2018 to February 2019 on 4th March 2024 amounting to Kshs. 9,452,376,00 including all penalties and interest thereof, was time barred and should be vacated in its entirety as it was issued after the time limitation of 5 years.

43. The Appellant submitted that the subject matter of this Appeal was specifically determined in the case of Commissioner of Domestic Taxes vs. Key Microfinance Bank Limited (Tax Appeal E031 of 2022) [2023] KEHC 19067 [KLR] in which both the High Court and the Tax Appeals Tribunal reaffirmed the definition of term interest and stated that excise duty was not chargeable on the interest charge for late repayment by borrowers. That in determining this, the Tribunal stated as follows;“The Tribunal is of the view that additional interest for late payment falls within the ambit of interest and are therefore not subject to excise duty...the Tribunal is further guided by Section 9 (6) of the Excise Duty Act which provides that the excisable value of excisable services specified in item 4 of Part II of the First Schedule shall not include interest or an insurance premium.”

44. The Appellant submitted that the High Court, in the subsequent appeal stated as follows;“in the circumstances, this Court is not persuaded that the Appellant has established that the Respondent ought to pay excise duty on the interest charge for late repayment of loans by borrowers.”

45. The Appellant submitted that in matters subsequent to the above-mentioned case laws, the Courts have determined that the definition of interest under the Excise Duly Act should not be borrowed from the Income Tax Act, an application of the literal interpretation of the term 'interest' would have resulted in the same determination.

The Appellant’s Prayers 46. The Appellant prayed for judgement/order against the Respondent that;a.The Respondent’s Objection Decision made on 4th March 2024 that confirms a tax assessment of Kshs. 174,744,928. 00 be and is hereby vacated;b.This Appeal be allowed; andc.The costs of and incidental to this appeal be awarded to the Appellant.

The Respondent’s Case 47. The Respondent’s case is premised on its written submissions dated and filed on 19th September 2024.

48. The Respondent submitted that the only issue for determination in this matter is whether the Appellant’s penal income is chargeable to Excise duty.

49. The Respondent submitted that one of the clauses in the letters of offer provided by the Appellant for period 2018 to 2023, indicated that penal income is charged if the borrower fails to pay the sum payable on its due date for payment.

50. That Clause 9 in the Letters of Offer reads;“If the borrower fails to pay the sum payable under this letter on its due date for payment, the borrower will (without prejudice to the exercise by the bank of any other rights or remedies in its favour), pay to the bank interest at the rate of 1. 25% per month over and above the then subsisting rate of interest payable by the borrower.”

51. The Respondent submitted that it deduced that when a borrower fails to pay monthly instalments as prescribed in their loan contract, a fine is charged on the monthly repayments due over and above normal interest rates on the principal amounts due. The Respondent submitted that the extra charge is what is classified as penal income. That this income is considered as a fee that should be charged excise duty.

52. The Respondent submitted that Part II, Paragraph 4 of the First Schedule to the Excise Duty Act (EDA) provides that excise duty on other fees charged by financial institutions shall be 20% of the excisable value.

53. That in addition, Part III of the First schedule to the EDA defines “other fees” to include any fees, charges or commissions charged by financial institutions relating to their licensed financial institutions, but does not include interest on loan or return on loan or an insurance premium or premium based or related commissions.

54. The Respondent submitted that the penalty charged by the bank to the borrower is therefore classified as penal income which falls under other fees.

55. The Respondent submitted that it noted that the Appellant in the contracts provided to it referred the penal income as additional interest. That this position was simply meant to mislead the Tribunal. That the charge of penalty is not a charge of additional interest.

56. The Respondent submitted that the definition in the Black’s Law Dictionary is clear that at no point can a penalty become interest payment as the two are completely different and independent of each other.

57. The Respondent further submitted that it is manifestly clear from the foregoing description of the statutory purview for the services chargeable to Excise Duty that financial institutions ought to charge and collect Excise Duty on the levies termed as other fees on services rendered by the institutions.

58. The Respondent submitted that the monies as demanded are due and relied on the holding in the case of the Republic vs. Kenya Revenue Authority Ex-Parte Bata Shoe Company (Kenya) Limited [2014] eKLR where the court expressed itself as hereunder:“This brings me to the role and interpretation of tax laws. Payment of tax is an obligation imposed by law. It is not a voluntary activity.That being the case a taxpayer is not obliged to pay a single coin more than is due to the tax man. The taxman on the other hand is entitled to collect up to the last coin that is due from a taxpayer.”

59. The Respondent submitted that in Primarosa Flowers Ltd vs. Respondent of Domestic taxes [2019] eKLR, the Court stated as follows:“21. Section 107 of the evidence provides;(1)whoever desires any court to give judgement as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist.(2)When a person is bound to prove the existence of any fact it is said that the burden of proof lies on that person.”In the instant Appeal, I find the burden of proof that TAT Tribunal relied on extraneous factors and that the Appellant carried out multiple conversions lies with the Appellant. In the instant case, the Appellant has not produced any documentary evidence, that the currency of the transaction or export documents were in Dollars or payments were received in Dollars. I find the Appellant has not discharged the burden of proof to the required standard of proof. In Mulherin vs Respondent of Taxation [2013] FCAFC 115 the Federal Court of Australia held that in tax disputes, the taxpayer must satisfy the burden of proof to successfully challenge income tax assessments. The onus is on the taxpayer in proving that assessment was excessive by adducing positive evidence which demonstrates the taxable income on which tax ought to have been levied.”

60. The Respondent submitted that it has demonstrated before the Tribunal what was considered in arriving at the assessment and the objection decision.

The Respondent’s Prayers 61. The Respondent therefore urges this Tribunal to affirm and uphold the Objection decision issued by the Respondent on the 4th March 2024, to be legal. The taxes demanded by the Respondent from the Appellant were properly assessed in confirm with the law and the same are due and payable.

Issues For Determination 62. The Tribunal has considered the pleadings by the Appellant, documentation and submissions by the parties and is of the view that this Appeal raises one issue for determination;Whether the Respondent erred in law and fact by assessing excise duty on amounts that are not subject to excise duty under the Excise Duty Act.

Analysis And Findings 63. Having established the issue for determination, the Tribunal will proceed to analyse it as herein under:

64. As the Appellant did not file its Statement of Facts and the Tribunal dismissed its Application to file the same out of time on the 7th February 2025, its case will be considered on basis of its submissions.

65. The genesis of this Appeal was the audit conducted by the Commissioner of Domestic Taxes on the Appellant for the period September 2018 to September 2023.

66. Following the tax audit, the Commissioner raised tax assessments vide a letter dated 13th December 2023. The Respondent demanded additional tax of Kshs. 176,442,491. 00 being principal tax, penalties, and interest.

67. Being dissatisfied with the Commissioner’s assessment, the Appellant lodged an objection on the 11th January 2024. On 4th March 2024, the Respondent issued the Appellant with its Objection Decision.

68. The Appellant, being dissatisfied with the Objection Decision lodged this Appeal, vide a Notice of Appeal dated 3rd April 2024.

69. The main issue in dispute in this Appeal is whether the additional amount that the Appellant charges its borrowers when the fail to repay their loans is interest or a fee. The amount charged is specifically spelt out in clause 9 of the letters of offer which states:“If the borrower fails to pay the sum payable under this letter on its due date for payment, the borrower will (without prejudice to the exercise by the bank of any other rights or remedies in its favour), pay to the bank interest at the rate of 1. 25% per month over and above the then subsisting rate of interest payable by the borrower”.

70. The Appellant submitted that its letters of offer are clear as they state that the borrower will “pay the bank interest at the rate of 1. 25% per month over and above the then subsisting rate of interest payable by the borrower.” The Appellant submitted that what is paid is additional interest as stipulated in the letters of offer and not a fee, penalty or fine.

71. The Appellant submitted that the penal interest earned is additional interest income received on outstanding loans or a return on a loan and not a ‘fee’. That it is therefore not subject to Excise Duty under Paragraph 4 of Part 11 of the First Schedule of the Excise Duty Act, 2015 which levies Excise Duty on other fees charged by financial institutions.

72. On the other hand, the Respondent submitted that when a borrower fails to pay monthly instalments as prescribed in their loan contract, a fine is charged on the monthly repayments due over and above normal interest rates on the principal amounts due. The Respondent submitted that the extra charge is what is classified as penal income. That this income is considered as a fee that should be charged excise duty.

73. The Tribunal notes that Part Ill of the Excise Duty Act defines the term “other fees” to 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 any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder ...”

74. The Tribunal notes that there is an express exclusion of interest and return on loans from the definition of ‘other fees’. The above provisions make it clear that interest income earned by financial institutions is excluded from being charged Excise Duty.

75. The Tribunal has dealt with a similar dispute in TAT 251 of 2020 Key Microfinance Bank Limited vs. Commissioner of Domestic Taxes where from paragraphs 65 to 68 the Tribunal found and held;“65. The Tribunal is of the view that additional interest for late payment falls within the ambit of interest and are therefore not subject to excise duty.

66. The Tribunal is guided by its decision in Co-operative Bank Of Kenya Ltd-vs-commissioner Of Domestic Taxes. Appeal No. 45 OF 2017, where the Tribunal adopted the definition of interest as contained in the ITA and proceeded to hold as follows:"in the absence of a definition of "interest" in the Excise Duty Act, the Tribunal finds that the operational definition is found in the Income Tax Act."

67. The term 'interest' is defined under Section 2 of the Income Tax Act (Cap 470) as follows:“interest' (other than interest charged on tax) means interest payable in any manner in respect of a loan, deposit, debt, claim or other right or obligation, and includes premium or discount by way of interest and a commitment or service fee paid in respect of any loan or credit an Islamic finance return."

68. The Tribunal is further guided by Section 9(6) of EDA which provides that the excisable value of excisable services specified in item 4 of Part 11 of the First Schedule shall not include interest or an insurance premium.”

76. Aggrieved by the Judgement of the Tribunal, the Respondent appealed to the High Court in Tax Appeal E031 of 2022 Commissioner of Domestic Taxes and Key Microfinance Bank. The Court agreed with the Tribunal and held as follows at paragraphs 41 and 42. “41. It is clear that under Section 5(1)(2) and Part III of the Excise Duty Act, 2015, goods and services subject to excise duty are elaborated. The definition of other fees as per the Excise Duty Act excludes interest or any returns made on loan and is not subject to excise duty. In the absence of the definition of interest in the Excise Duty Act, the tribunal was correct in inferring to the definition as per the Income Tax Act.

42. In the circumstances, this Court is not persuaded that the Appellant has established that the Respondent ought to pay excise duty on the interest charge for late repayment of loans by borrowers.”

77. Based on the law and the case laws cited above, the Tribunal holds and finds that the Respondent erred in law and fact by assessing excise duty on amounts that are not subject to excise duty under the Excise Duty Act.

Final Decision 78. The upshot of the foregoing is that the Tribunal finds that the Appeal is merited and therefore succeeds. The Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby allowed;b.The Respondent’s Objection Decision contained in the letter dated 4th March 2024 is hereby set aside; and,c.Each party to bear its own costs.

79. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 21ST DAY OF FEBRUARY 2025ROBERT M. MUTUMA - CHAIRPERSONJEPHTHAH NJAGI - MEMBERDELILAH K. NGALA - MEMBERDR, TIMOTHY B. VIKIRU - MEMBERMUTISO MAKAU - MEMBER