[2024] KETAT 629 (KLR)

Temenos East Africa Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal E022 of 2023) [2024] KETAT 629 (KLR) (5 April 2024) (Judgment)

Neutral citation: [2024] KETAT 629 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E022 of 2023

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, AK Kiprotich & T Vikiru, Members

April 5, 2024

Between

Temenos East Africa Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a fully owned subsidiary of Temenos UK Limited which is based in the United Kingdom. The ultimate holding company, Temenos AG [TSHQ or IP owner], was founded in the year 1993 and is based in Switzerland. The principal activity of the group is the provision of banking software solutions to financial institutions that offer core banking, payments, fund management and wealth management software products i.e. retail, corporate, universal, private, Islamic, microfinance and community banks, serving over 3,000 financial institutions in more than 150 countries in the world.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act, and the Kenya Revenue Authority is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued a notice of assessment dated 22nd September, 2022.

4. The Appellant objected to the notice of assessment vide a letter dated 21st October, 2022.

5. The Respondent vide a letter dated 16th December, 2022, issued an objection decision confirming its initial assessment and subsequently amending the total tax liability of the Appellant to Kshs. 276,437,514. 00.

6. The Appellant being dissatisfied with the objection decision, lodged a Notice of Appeal dated 13th January, 2023 and filed on 16th January, 2023.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Memorandum of Appeal dated 27th January, 2023 and filed on the same date:a.The Respondent erred in law and in fact by basing its assessment on an erroneous interpretation of the terms of the Appellant's Intra-Group Sales and Marketing Services Agreement.b.The Respondent erred in law and in fact by requiring the Appellant to provide reconciliation of payments relating to transactions that the Appellant was not a party to.c.The Respondent erred in law and in fact by basing its assessment on third party information whose source and authenticity could not be verified by the Appellant.d.The Respondent erred in law and in fact by placing an unfair burden of proof on the Appellant contrary to the intention of Section 56 of the Tax Procedures Act.e.The Respondent erred in law and in fact by using unreliable and unverifiable information obtained from social media as a basis for its assessment.f.Notwithstanding and without prejudice to the foregoing, the Respondent's computation of the alleged income variance is mathematically erroneous and not in accordance with the provisions of the Intra­Group Sales and Marketing Services Agreement.

Appellant’s Case 8. The Appellant’s case is premised on its Statement of Facts dated and filed on 27th January, 2023 together with the documents attached thereto.

9. That during the period under review, the Appellant was involved in the provision of, implementation and maintenance support services and the marketing of software under an Intra-Group Sales and Marketing Services Agreement with Temenos HQ.

10. That the Respondent’s objection decision is based on a misinterpretation of the transactions between the various Temenos entities (including Appellant) and Kenyan customers with regard to sale of software licences and provision of other related services as contemplated under the Intra-Group Sales and Marketing Services Agreement (the Agreement).

11. That to achieve the group’s objectives, Temenos HQ signed a non-exclusive agreement with several parties including the Appellant to provide sales and marketing services to Temenos HQ. That Clause 1 of the Agreement identifies the nature of service to be provided by the Appellant to Temenos HQ as follows:“1. 1Services covered under this Agreement relate to the provision of sales and marketing support and may include: Identification of prospects in local markets

Gathering data for tenders and RFP processes

Following up on completed RFPs

Running client workshops

Identifying sales opportunities with existing clients1. 2In addition, the sales and marketing activities may include assisting TSHQ with the following: Completion of RFPs

Managing relationships with clients

Contract discussions

Dealing with client complaints

Attendance at Temenos marketing events

Organising local marketing events

Attendance at trade shows

Distributing marketing material to local clients and prospects

Aiding other group companies in their sales efforts.”

12. That the parties further agreed under Clause 2 of the Agreement on a 30% reward to TSEA for each license sale. That the payment became due when a software agreement is executed between Temenos HQ and the customer.

13. That the Agreement further provides under Clause 3. 3 that general sales and marketing costs incurred for the benefit of Temenos HQ could be recharged.

14. That from the Agreement, the sales and marketing services to be provided in Clause 1. 1 would entitle the Appellant to a 30% reward only to the extent that its efforts result in the sale of a license on behalf of Temenos HQ.

15. That due to the non-exclusive nature of the agreement as provided under Clause 3. 1 of the Agreement, Temenos HQ or its other affiliate entities were not restricted from transacting with Kenyan customers either directly or through other third parties without input from the Appellant.

16. That even though the Respondent did not question the legal validity of the Agreement and did not have an issue with the compensation terms between the Appellant and Temenos HQ, the Respondent in its assessment made an erroneous assumption that the Appellant was solely responsible for the sales that Temenos HQ and its affiliates made in Kenya.

17. That consequently, the Respondent has proceeded to deem 30% of all payments made by local banks to the TSEA’s related parties as the Appellant’s taxable income without any regard to the provided source documents or the audited financial statements provided by the Appellant.

18. That in various correspondences, the Appellant explained to the Respondent that it did not act as the sole agent for the Temenos HQ and went on to explain the role of each entity under the Group during the period under review.

19. That the sales and marketing services outlined in Clause 1. 2 of the Agreement contemplate scenarios where Temenos HQ could engage a customer independently and only require the Appellant’s support on specific aspects of delivery such as maintenance services.

20. That further, Page 17 of the local Transfer Pricing (TP) documentation provides among other things that TSEA may not always be involved in the provision of all support services since Temenos HQ has its own help desk to provide standard support services to the client during and post implementation. That the Appellant attached the local TP documentation to its pleadings.

21. That the assessment by the Respondent is based on assumption that the Appellant is entitled to 30% of all payments that have been made from Kenya to Temenos HQ regardless of whether they were engaged by Temenos HQ for the provision of sales and marketing support or the nature of service in consideration.

22. That this assumption is not only flawed but is tantamount to the Respondent re-writing the contract between the Appellant and Temenos HQ for purposes of raising assessment of tax that is not lawfully due.

23. That the Respondent in reaching its objection decision relied on data alleged to have been generated from iTax declarations made by Kenyan customers who purchased the Temenos Software License from “Temenos Group”.

24. That as part of its supporting documentation for the impugned assessment, the Respondent further provided the Appellant with an excel spread sheet containing entries of license fees paid by local banks to Temenos HQ on an annual basis and an itemised comparison of the expected reward income listed against reward income reported by the Appellant.

25. That the Respondent has not at any point in its assessment or objection decision disputed the fact that the Appellant was not a party to the alleged transactions, nor has it produced any documentary evidence of the Appellant having provided undeclared services to the listed banks or having received the payment thereon.

26. That the Appellant wishes to reiterate that it was not party to the transactions listed on the Respondent’s excel sheet and is therefore not in a position to reconcile the itemised numbers against its own legitimate transactions which have been captured in its ledgers, trial balances and financial statements.

27. That whereas Section 23 of the Tax Procedures Act (TPA) obligates a taxpayer to maintain records required under any tax law, the taxpayer is only obliged to produce documents that relate to its own transactions and resultantly relate to the computation of its own tax liability.

28. That as a law-abiding taxpayer and in support of its position, the Appellant availed to the Respondent copies of its financial statements, ledgers, and trial balances, which all tied to the self-assessment returns filed by the Appellant for the years under review.

29. That the Respondent erred in law and in fact by basing its assessment on third party information whose source and or authenticity could not be verified by the Appellant.

30. That the Respondent in confirming its assessment did not disclose the details of the payments made by the banks nor provide contracts, contract dates or invoice details to aid in identifying the Temenos entity receiving the payment which would in turn enable the Appellant to confirm if it had been engaged to support the transaction.

31. That the excel spreadsheet shared by the Respondent to support its assessment and subsequently the objection decision, only listed Kenyan banks who allegedly made payments to Temenos Group.

32. That however, for reasons known to the Respondent but not disclosed to the Appellant, the Respondent did not engage the said banks or the Appellant to confirm if it were involved in the delivery of the services on behalf of Temenos HQ.

33. That given that the listed banks on the Respondent’s spread sheet were at all material times within the Respondent’s jurisdiction, it is within the Respondent’s powers to request for information relating to the alleged transactions from the third parties to verify which entity was receiving payments from the sale of licenses to the local customers. That instead, the Respondent raised an assessment based on an assumption that there was a correlation between the declarations made by the third-party banks and the Appellant’s taxable income.

34. That the Respondent has proceeded to place an unfair burden of proof on the Appellant to reconcile its income and respond to the tax assessment based on entries made on an excel spreadsheet; details of which are absolutely unknown to the Appellant.

35. That the Respondent justified the reason for confirmation of its assessment in its objection decision by stating that the Appellant had failed to provide reconciliations identifying the income that was attributable to it from the list of bank payments contained in the excel spreadsheet shared by the Respondent.

36. That the Respondent also clarified within its objection decision that the list of payments contained in the said spreadsheet had been generated from the iTax declarations made by the third parties relating to payments made to Temenos Group and not the Appellant.

37. That the Appellant throughout the correspondence with the Respondent has reiterated that it was impossible to substantiate the figures contained in the excel sheet owing to the fact that it was not a party to the transactions and effectively did not have visibility of transactions particulars despite the fact that Temenos HQ and possibly another related entity within the Temenos Group or an unrelated third party could have been involved.

38. That basic principles of taxation require the Respondent to apply its best judgment when deciding to raise an assessment. That indeed, the provisions of Section 56 of the TPA does not impose a burden of proof on the taxpayer to prove that a tax decision is incorrect where such a decision is based on information to which a taxpayer is not party to.

39. That in this case, the Respondent has failed to apply its best judgment by relying on third party iTax returns which were in no way related to the Appellant while ignoring the financial statements, intercompany agreements and the transfer pricing policy that the Appellant provided as a basis for the income it declared in its self-assessment returns.

40. That it is trite law that a taxing authority must exercise fairness in the exercise of its powers under the law.

41. That the High Court has on numerous occasions, had the opportunity to address this issue of legal specificity. For example, in the case of R vs Commissioner of Domestic Taxes Ex Parte Barclays Bank of Kenya Limited [2012] eKLR the High Court stated as follows:“… the respondent is obligated by law to state with clarity its claim and state how the transaction falls within the terms of the statute. The respondent cannot exercise its duty like a trawler in the deep seas expecting all the fish by casting its net wide. The respondent’s decision in this respect falls below this standard and the transaction caught by the decision cannot be said to fall within the statutory definition of the tax”.

42. Further, the High Court in PZ Cussons East Africa Limited vs Kenya Revenue Authority Petition 309 of 2012 held that it was necessary and taking into regard reasonable administrative action, for the KRA to detail how it came to its decision so as to enable the Petitioner, if it so wished, to mount a challenge. In this case, the Court held as follows:“It is incumbent upon an organ such as the Respondent, which has a monopoly over the discharge of administrative action that affects the rights of others that it carries out its duties in a fair and procedural manner...”

43. That indeed, the Respondent’s decision is without any form and the Appellant stands to suffer harm if the Respondent’s attempt to re-invent the law or develop its own facts in demanding for additional CIT over non-existent transactions.

44. That in this case, the Respondent picked figures which it alleged were declarations made on transactions between the various banks and Temenos Group and imposed tax on the Appellant.

45. That the requirement by the Respondent to reconcile third party information does not have any basis in law and the Appellant should not be punished for failing to produce that which it does not have.

46. That in any case, the Respondent can if it deems necessary, exercise its extensive powers under statute law, multilateral and bilateral agreements to obtain the information it requires from the correct parties as identified from its records.

47. That in its objection decision, the Respondent relied on various social media posts derived from the LinkedIn profiles of past and present employees of the Appellant to conclude that the Appellant under declared its income.

48. That the Respondent is duty bound to properly consider the documentation provided by the taxpayer in reaching its decision. That in this case, the Respondent based its assessment on unverified information obtained from personal LinkedIn accounts which the Appellant had no control or oversight.

49. That the Appellant just like most employers globally has no legal duty or the means to authenticate or verify the information posted by its employees on their personal LinkedIn profiles. That it can be expected from employees (past or present) to have a tendency to exaggerate their actual roles and responsibilities on social network such as LinkedIn for career management and personal branding reasons. That for such reasons, LinkedIn profiles should not be considered a pertinent source of information.

50. That in an effort to clarify the apparent misapprehension of facts on the role of its employees, the Appellant provided the official job descriptions of the employees explaining the role of each employee as was agreed upon between TSEA and the said employees. That the Appellant attached the official job descriptions and attendant performance appraisals.

51. That the job descriptions provided by the Appellant clearly describe the role of the project director, business development manager and the account manager of TSEA during the period under review.

52. That the Respondent ignored the information and the explanation put forth by the Appellant and in the absence of justifiable basis held that the employees’ personal social media profiles took precedence over the official job description as agreed upon between the company and its employees.

53. That the decision by the Respondent is highly prejudicial to the Appellant’s right to fair administrative action as espoused in Article 47 of the Constitution of Kenya, 2010 by placing an unfair burden on the Appellant to refute information obtained from third parties’ social media platforms, often prone to manipulation and exaggeration.

54. That from its review of the Respondent’s workings, the Appellant noted that in computing the alleged variance between the Appellant’s reported reward income and the expected reward income from bank payments, the Respondent added the two figures instead of subtracting the reported income from the expected income.

55. That by way of example, the expected reward income from the bank reports for the year 2017 is Kshs. 274,033,223. 00 and the reported reward income by the Appellant is Kshs. 84,873,794. 00, That by simple subtraction, the variance should be Kshs. 189,159,429. 00 as opposed to the Kshs. 358,907,017. 00 reported by the Respondent.

56. That this apparent miscalculation by the Respondent has effectively resulted in an overstated demand by a total of Kshs. 49,403,631. 00 for the period 2017 to 2020 in both the initial assessment and the objection decision.

Appellant’s Prayers 57. The Appellant prayed that:-a.The Objection decision setting out the assessment of Kshs. 276,437,514. 00 be set aside in its entirety;b.The Appeal be allowed with costs to the Appellant; andc.Any other remedies that the Honourable Tribunal deems just and reasonable.

Respondent’s Case 58. The Respondent’s case is premised on its Statement of Facts dated 9th December, 2022 and filed on 28th February, 2023 together with the documents attached thereto.

59. That based on the structure of the Group, the Appellant entered into an agreement with TSHQ dated January 2017 for sales and marketing of Temenos products. That under this sales and marketing agreement, the Appellant identifies potential customers and opportunities and concludes the subsequent license contracts on behalf of TSHQ among other sales functions.

60. That in addition, the Appellant also entered into an intra-group agreement with other Temenos affiliates for services in the line of implementation, maintenance and support services. That this Agreement also dated January 2017 was entered into by all Temenos participating entities whereby they offer support services to each other on a need basis.

61. That it is noteworthy that the Appellant: -a.Was registered in Kenya in February 2007 to undertake the sale of software and offer implementation services to local customers.b.The marketing agreement does not reference the regional coverage for TSKE, the Appellant, however, the Transfer Pricing (TP) Policy notes that TSKE performs sales and marketing activities for the local market in this case, Kenya.

62. That the software sold by the Group can be categorized into 5 broad categories namely:-a.Infinity - A digital from office platform that incorporates all software that bank staff needs to run the front office focusing on customer engagement across all channels (e.g. apps, branches, call center, website).b.Transact - This is the market lending core, back office banking solution.c.Payements - An end-to-end payment platform that processes all payment orders that a bank receives in one solution in any region.d.Multifolds - A single, global platform for fund administrators, asset managers, insurance companies and pension funds to achieve increased operational efficiency, whilst reducing risk.e.SaaS - Enables offering of Software on a cloud-hosted basis.

63. That further, the Respondent observed that the Temenos Group exploits the software in various forms which includes: -a.Software licensing as an initial license or through the purchase of additional modules or user rights which excludes any amounts that are related to maintenance. The license agreement is entered into often between the customers and the Temenos Headquarters. Other times the local Temenos enters into the license agreements with customers if the customers wish to do so.b.Software as a service (SaaS) is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.c.Software maintenance is often included in software license agreements and is generally priced as a percentage of the initial license fees. Customers have rights to unspecified software product upgrades, maintenance enhancements and access to the help desk during the term of the support period.d.Implementation services. This is a result of specialization of individual banking systems. Implementation services, modifications and changes to the software required by clients are offered by Temenos through providing technical support services. This is usually provided by the local Temenos entities or third group IT consultant firms hired by the group.

64. That from the audit, the Respondent made the following findings: -i.On Intercompany Income Sales and Marketing

65. That TSKE, the Appellant, provides support services as part of the software sales activities performed in the local market. TSHQ owns the software (Temenos T24, Temenos Core Banking, Temenos TFR, jBase, related software and all )

66. That the Group licenses the software to third party customers and under this agreement, TSKE, the Appellant, performs the following duties among others: -a.Sourcing for potential customers and new opportunities from already existing customers.b.Workshops.c.Sourcing for potential tenders, following up on RFPsd.Conducting subsequent license contracts on behalf of TSHQ ande.Managing client relationshipsf.Aiding other Group companies in their sales efforts among others

ii. On TSKE Remuneration Model 67. That according to Clause 2. 1 of the Sales and Marketing Agreement, TSKE is remunerated a reward income equivalent to a fee of 30% of the license fees agreed between TSHQ and the third party customers net of other commissions; 3rd Party license fees payable Withholding Income Tax (WHIT).

68. That in the event that more than one of the Group entities is involved in the sale of a license, the reward income is split among the parties based on proportionate efforts and cost incurred.

69. That TSKE invoices quarterly while payments are made based on sales achieved in the previous quarter. That where TSKE incurs general sales and marketing costs incurred for the benefit of TSHQ, such is charged separately.

70. That for the period 2017 to 2020, TSKE reported reward income amounting to Kshs. 495,641,333. 00 which translates to Kshs. 1,652,137,777. 00 gross license fee.

71. That to enable the Respondent verify the income declared by TSKE, vide an email dated 16th February, 2022, the assessing team requested for a reconciliation between license fees made by local banks to Temenos Group as iTax and the declared reward income.

72. That however, vide the email dated 10th March, 2022, TSKE declined to provide this information citing the following reasons that: -a.The transactions are between various Temenos entities (other than TSKE) and Kenyan customers with regard to sale of licences and provision of other related services.b.TSKE is not in a position to provide the information requested since it has no visibility of such transactions between the IP owners and the local customers.

73. That the Audit team also examined the employee structure of TSKE to fully understand the substance and actual contribution of TSKE to the overall company had engaged a team of experts both in sales and technology some of whom had been employed by TSKE since 2009. That some of the key employees in the structure and their roles is as summarized below: -a)Mr. Ashish Ranjan - He joined TSKE in September 2009 and currently holds the position of project director from April 2007 and his achievements through the period included : -i.Delivered projects worth over US$ 20M, conducted business performance analytics and mapping market conditions for further trends forecasting and cost reduction.ii.Deployed Business Mapping for 20+ critical applications and optimized the service availability by mapping issues.iii.Built strong relationships with prospective global accounts by creating response to 15+ RFIs and generated business from the existing accounts, achieved profitability and increased sales growth through resolutions, business cases and solution demos.iv.Transformed 10 out of 15 opportunities to real accounts worthv.$10m by maintaining healthy relations with solution partners and resellers to secure the deal.vi.Mentored a team of 50+ associates, built POCs and advocated the implementation of standard practice for clients.vii.Commenced roll-out of M-shwari project at Commercial Bank of Africa currently NCBA, which was a grand success for Temenos. Temenos boasts of this achievement noting on its website that the most successful banks use its platforma)Mr. Kennedy Kamau - He had been hired in 2017 as a Senior Account Manager however, he is no longer an employee of TSKE, his roles include: -i.Lead point of contact for any and all matters specific to existing accounts in E.A.ii.Generating and managing revenue pipeline by identifying and winning profitable license, training, consulting and support of business.iii.Upgrading existing contracts such as higher levels of maintenance and up-selling and identifying new opportunities with existing clients but outside of the existing implementation.c)Mr. Jason Maingi - He was employed by TSKE from October 2010 to May 2013 as the Business Development Manager, South African Development Community and from July 2014 to July 2020 he was employed as a senior account director. His key rolls included: -i.New business generation within the SADC region. Identification and satisfaction of sell up opportunities.ii.Lead generation and pipeline managementiii.Strategic and business planning including Go to Market GTM. Develop new software sales opportunitiesiv.Relationship building and management throughout the life of a dealv.Sales process which ensures effective leads generation and deal progression through the closure and contracting. Actively responsible for contract drafting, negotiation and sign-offs.d)Niall Meany - He joined TSKE as an account manager in East Africa in September 2020 providing clients the software to thrive in the digital banking age.

74. That from the foregoing, the Respondent observed that TSKE was in fact responsible for the growth of the license sales on behalf of TSHQ. That as such, it was evident that the license sales in Kenya had a huge input from the Appellant, TSKE.

iii. On compliance with the Agreement 75. That the Respondent through an email sent on 18th October, 2021 requested the Appellant to provide the gross income earned by the Group in the Kenyan market which the Appellant willingly declined and refused to do.

76. That this would have enabled the Respondent’s assessing team to review the gross license fee earned by Temenos group from the region with a view of working the 30% reward income and comparing the same with what had been reported.

77. That the assessing team nonetheless proceeded and conducted a test on some of banks operating in Kenya.

78. That a comparison between what the banks had paid as license fees as captured in iTax system was then compared to what was expected as the reward income that had been reported by the Appellant, TSKE which resulted to a variance of Kshs. 777,590,533. 00 for the period 2017-2019.

79. That the Respondent then made a detailed analysis of the sampled banks with regards to the corresponding license fees paid as extracted from iTax and recomputed the reward income compared to the reported reward income for the period 2017 2019.

80. That from the analysis, it was evident that TSKE was not in compliance with the contractual terms of the sales and marketing agreement with TSHQ. That further, no verifiable explanations were ever provided to reconcile the variances noted despite numerous requests by the Respondent.

81. That for the year 2020, the Respondent noted that the Appellant did not provide the sales and marketing reward income computation breakdown prompting the Respondent to charge tax on the variance for the total reward income reported by TSKE vis-a-vis the license fees income.

82. That from the foregoing audit findings, the Respondent brought to charge the variance in reward income with regard to license sales to the listed banks on the basis that it was income earned in Kenya by TSKE but the same was not declared. That the assessment excluded the sales done in the region and was only limited to work done by the Appellant in Kenya.

83. That the burden of proving erroneous tax decisions rests on the taxpayer. That further, the marketing and sales agreement states that the Appellant was to receive 30% of the licensing fees for the services provided to the local customers. That the Respondent only demanded Corporation tax on reward income earned from 100% of all payments by local banks to the Appellants foreign related parties.

84. The Respondent stated that the authenticity of the data clientele, to the Temenos Group the requested documentary evidence, therefore the Respondent, pursuant to Section 29 of the Tax Procedures Act, made the tax decision to the best of its judgement and available evidence.

85. That the Respondent quoted the provisions of Section 29 of the Tax Procedures Act and stated that despite numerous reminders made to the Appellant to submit supporting evidence, it failed to do so.

86. That the data used in arriving at its assessments, was extracted from iTax platform, specifically from the Withholding tax deducted by banks that use Temenos software. That the data referred to by the Appellant from social media, is simply LinkedIn profiles of, and roles played by its past and present employees, which does not affect the actual assessment figures.

87. The Respondent stated that the Appellant never demonstrated the alleged mathematical error, neither did it provide any documents to prove its assertions contrary to the mandatory provisions of Section 30 of the Tax Appeals Tribunal Act and Section 56(1) of the Tax Procedures Act.

88. That the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent are unfounded in law and not supported by evidence.

89. The Respondent maintained that the Appellant has not provided any additional documents therefore the Appeal herein is devoid of any merits.

90. The Respondent reiterated that the Appellant has failed to discharge its burden of proof in proving the provisions of Section 56(1) of the Tax Procedures Act.

Respondent’s Prayers 91. The Respondent prayed that:-a.The objection decision be found to be proper in law and be upheld.b.That this Appeal be dismissed with costs to the Respondent as the same lack merit.

Issues for Determination 92. The Tribunal has carefully considered the pleadings and documentation filed by both parties and is of the view that the issue for its determination is:-Whether the assessment by the Respondent was justified

Analysis and Findings 93. The Tribunal having established the issue for its determination, proceeds to analyse it as hereunder.

94. The genesis of this dispute was the imposition of Corporation tax on transactions that the Respondent alleged were attributable to income it deemed as earned by the Appellant.

95. The Appellant on its part stated that the assessment by the Respondent was erroneous as it had not earned the income on which the Respondent based its assessment.

96. The Respondent stated that, from its iTax system, it made a detailed analysis of the sampled banks with regards to the corresponding license fees paid as extracted from iTax and recomputed the reward income compared to the reported reward income for the period 2017 to 2019.

97. That from this analysis, it was evident that TSKE was not in compliance with the contractual terms of the sales and marketing agreement with TSHQ. That further, no verifiable explanations were ever provided to reconcile the variances noted despite numerous requests by the Respondent.

98. The Respondent averred that from the Appellant’s employee job descriptions, the Respondent observed that TSKE was in fact responsible for the growth of the license sales on behalf of TSHQ. That as such, it was evident that the license sales in Kenya had a huge input from the Appellant, TSKE.

99. On the issue of employee job descriptions, the Tribunal reviewed the parties’ pleadings and noted that although the Respondent in the objection decision findings raised the issue of work done by employees vis a vis job descriptions, the Tribunal noted that in its Statement of Facts, the Respondent categorically stated that the data used in arriving at its assessments was extracted from the iTax platform, specifically from the withholding tax deducted by banks that use Temenos software. That the data referred to by the Appellant from social media, is simply LinkedIn profiles of, and roles played by its past and present employees, which does not affect the actual assessment figures. This issue as raised in the objection decision did not therefore to much.

100. Further, the Tribunal has reviewed the sales and marketing agreement between the Appellant and TSHQ and notes the following provisions of various clauses;a.Clause 2. 1 - In consideration for sales and marketing activities carried out by TSKE, TSHQ agrees to pay TSKE a reward for each sale, equivalent to 30% of the licence fees agreed, net of other commissions and third party licence fees payable and withholding tax.b.Clause 2. 2 - The 30% reward is the total amount that will be paid for each licence sale. To the extent that TSKE is involved in managing a licence sale jointly with another affiliated entity the reward will be split between the entities based on their relative efforts and costs. The split of the reward is to be agreed between the entities and communicated to TSHQ.c.Clause 2. 3 - Rewards will only become due to TSKE when the software agreement is executed between TSHQ and the customer.d.Clause 3. 1 - This Agreement is non-exclusive. Nothing in this Agreement will restrict TSHQ from making agreements with other parties.

101. From the terms of the agreement, the Tribunal confirms that under Clause 2 of the Agreement on a 30% reward to TSEA for each license sale, the payment became due when a software agreement is executed between Temenos HQ and the customer.

102. Additionally, the sales and marketing services to be provided as per Clause 1. 1 would entitle the Appellant to a 30% reward only to the extent that its efforts result in the sale of a license on behalf of Temenos HQ.

103. The Tribunal also notes that the agreement was non-exclusive and as provided under Clause 3. 1 of the Agreement, Temenos HQ or its other affiliate entities were not restricted from transacting with Kenyan customers either directly or through other third parties without input from the Appellant.

104. The Tribunal observes that the Transfer Pricing Policy submitted by the Appellant, under heading “Standard Support and Maintenance services” provides as follows:“Temenos provides standard maintenance of the core banking software system subject to the client paying a Recurring License fee (RLF)/maintenance fee every year.Provided the client has paid all recurring license fees, Temenos undertakes to provide the client with the following:‒ Annual Maintenance Release (an annual major tested and qualified release of the software) to enable clients to upgrade;‒ Core banking software updates (the latest version of a Core Banking software component that includes bug fixes on the component since the last main release);‒ Corrections (any corrections to software to fix reported lapses in functionality);‒ Enhancements (improvements in software functionality);‒ Help Desk services through Product Analysis and Customer Support (PACS) to enable the client to register, analyse and resolve reported non-conformities related to the operation of Temenos software.While all the above services may be agreed with the customer, TSKE may not be involved in the provision of all of them and receives the support of other entities of the Group, as shown below.Temenos has its own helpdesk (referred as Product Analysis and Customer Support or PACS) to provide standard support services to the client during and post implementation. The PACS team offers support for the Annual main releases and monthly releases of the Temenos software as well as for any local development/customization done specifically for the client by Temenos.Whenever a client faces any issue with regard to the software system – either functional or technical, a support request can be raised by the client on the Temenos Customer Support Portal for tracking and ultimate resolution. The support strategy of PACS revolves around the following groups:‒ Back Office operations in Chennai and Bengaluru (India). This team is responsible for analysing the problems reported by our global client base and support implementing and upgrading projects.‒ Critical call centre (24/7/365) based in Chennai and Bengaluru (India), the team is responsible to provide emergency assistance to the client during system down situations.‒ Onsite Support Services to provide support services onsite to clients during implementation and upgrade projects.‒ Non-core support (for customer specific customizations).‒ Support relationship management – Single point of contact within PACS dedicated to each client for prompt service/prioritizing/tracking and resolution of issues.” (Emphasis ours)

105. The Tribunal notes that the Appellant provided its financial statements in support of its pleadings. These financial statements highlighted related party transactions including:a.Monies due from related partiesb.Monies due to related partiesc.Purchase of services from related partiesd.Sale of services to related partiese.Management fees

106. Additionally, the Appellant provided a ledger breakdown of the related party transactions to confirm the amounts that were due to it for the period under review.

107. The Tribunal has further established, based on the sales and marketing agreement with TSHQ, that the Appellant’s agreement with its related party provides that the Appellant shall only be remunerated for sales and marketing activities carried out by TSKE directly and that the agreement is non-exclusive.

108. The Tribunal posits that the Appellant can only then, reasonably, be privy to and have visibility of the contracts it has been involved in with local customers. Additionally, nothing stopped the parent company from directly engaging with local customers.

109. The Tribunal notes that the Appellant provided the information within its purview to support its income chargeable to tax for the period under dispute. Further, at no point in its pleadings does the Respondent rebut the averment that the Appellant was not a party to the transactions that the Respondent claims were paid by local banks to Temenos Headquarters or question the validity of the contract between the Appellant and Temenos Headquarters.

110. Additionally, the Respondent did not rebut the financial statements and supporting ledger transactions supplied by the Appellant to support its income. Notably, in its Statement of Facts, the Respondent categorically stated that there were declarations by Kenyan banks of direct purchases from Temenos HQ and AG.

111. The Tribunal holds that the Appellant having provided the documents relating to its income for the period under dispute discharged its burden of proof and the Respondent did not discharge its onus in rebutting the prima facie case that has been made out by the Appellant.

112. The Tribunal is guided in this position with the High Court case of Commissioner of Domestic Taxes vs Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) (Commercial and Tax) (8 July 2022) (Judgment) where it was stated as thus:-“―A presumption of correctness arises from the Commissioner‘s determination/assessment. The presumption remains until the taxpayer produces competent and relevant evidence to support his/her position. When the taxpayer comes forward with such evidence, the presumption vanishes and the case must be decided upon the evidence presented.”

113. The conclusion that dictates itself from the above analysis is that the pendulum of the onus of proof swung back to the Respondent who failed to swing it back to the Appellant. In which case the presumption of correctness of the Respondent’s objection decision has vanished.

Final Decision 114. The upshot of the foregoing is that the Appeal is merited and consequently the Tribunal makes the following Orders: -a.The Appeal be and is hereby allowed.b.The Respondent’s Objection decision dated 5th July, 2022 be and is hereby set aside.c.Each Party to bear its own costs.

115. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 5TH DAY OF APRIL, 2024ERIC NYONGESA WAFULACHAIRMANCYNTHIA B. MAYAKA DR. RODNEY O. OLUOCHMEMBER MEMBERABRAHAM K. KIPROTICH TIMOTHY B. VIKIRU MEMBER MEMBER