[2024] KETAT 1311 (KLR)

Victoria Commercial Bank PLC v Commissioner of Domestic Taxes (Tax Appeal E260 of 2023) [2024] KETAT 1311 (KLR) (Civ) (30 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1311 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal E260 of 2023

CA Muga, Chair, BK Terer, D.K Ngala & SS Ololchike, Members

August 30, 2024

Between

Victoria Commercial Bank PLC

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

1. The Appellant is a company incorporated in Kenya and is regulated by the Central Bank of Kenya. Its principal activity is banking business and related services in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act with respect to the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Part 1 and 2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 2nd September 2021, the Appellant applied for a refund of overpaid corporate income tax (“CIT”) amounting to Kshs. 49,305,169. 00 in respect of the 2020 year of income. Following the application, the Respondent conducted a refund audit to verify the CIT refund. Subsequently, the Respondent issued its refund verification decision vide a letter dated 26th January,2023 through which the Respondent confirmed that the Appellant was duly entitled to the entire refund amount it claimed as it arose from overpayment of instalment taxes.

4. Through the same letter dated 26th January, 2023 the Respondent also demanded withholding tax amounting to Kshs. 15,095,219. 00 inclusive of penalties and interest on the basis that the Appellant did not charge withholding tax on Mastercard fees as required by Section 35 of the ITA.

5. Further, the Respondent also demanded Value Added Tax (“VAT”) amounting to Kshs. 505,126. 00 inclusive of penalties and interest on the basis that the Appellant did not charge VAT on imported services as required by Section 10 of the Value Added Tax Act, CAP 476 of Kenya’s Laws (hereinafter “VAT Act”).

6. The Appellant objected to the assessment by lodging its notice of objection vide a letter dated 22nd February 2023 and the Respondent rendered its objection decision vide a letter dated 12th April 2023 in which it reviewed the demand for withholding taxes and VAT to Kshs.15,198,633. 81.

7. Aggrieved by the Respondent’s objection decision lodged its notice of appeal dated 12th May, 2023 and filed on even date.

8. On 6th May, 2024 the parties signed a partial consent wherein the only matter that was referred back to the Tribunal for determination was with regard to withholding tax assessment amounting to Kshs. 11,389,057. 00.

9. The Appellant agreed to settle principal tax of Kshs. 695,879. 14 in respect to analysed as Kshs. 387,857. 44 in respect of withholding principal tax and reverse VAT amounting to Kshs.308,021. 70. The partial consent was filed on 15th May, 2024, a day before the hearing which was on 16th May, 2024.

The Appeal 10. The Appeal as contained in the Memorandum of Appeal dated 26th May, 2023 and filed on 29th May, 2023 was premised on the following grounds;i.That the Respondent’s purported objection decision on withholding tax was unprocedural, ultra vires and contrary to section 51(8) of the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”).ii.That the Respondent erred in law and in fact by assessing it for withholding tax on the mistaken basis that the payments made to a non-resident card company (hereinafter “Mastercard”) qualified as royalties as defined under the Income Tax Act, CAP 470 of Kenya’s Laws (hereinafter “ITA”).iii.That the Respondent erred in law and in fact in assessing withholding tax to other payments made by the Appellant.iv.That the Respondent acted in contravention of the law by imposing a tax shortfall penalty based on an incorrect withholding tax assessment contrary to the provisions of the TPA.v.That the Respondent erred in law and fact by charging late payment interest based on an incorrect withholding tax assessment contrary to the provisions of the TPA.vi.That the Respondent erred in law and in fact in assessing VAT to other payments made by the Appellant.vii.That the Respondent acted in contravention of the law by imposing a tax shortfall penalty based on an incorrect VAT tax assessment contrary to the provisions of the TPA.viii.That the Respondent erred in law and fact by charging late payment interest based on an incorrect withholding tax assessment contrary to the provisions of the TPA.

The Appellant’s Case 11. The Appellant has set out its case in its statement of facts dated 26th May, 2023 and filed on 29th May, 2023 together with the witness statement of Ms. Ruth Muasya dated 6th March, 2024 and filed on 7th March, 2024. The Appellant’s witness statement was admitted as evidence in chief by the Tribunal during the hearing of the matter on 16th May, 2024. The Appellant’s witness statement reiterated the following issues in the statement of facts and will not be rehashed by the Tribunal:I. The Respondent’s purported objection decision on withholding tax is unprocedural and contrary to Section 51(8) of the TPA.

12. On 26 January 2023, the Respondent demanded withholding tax of Kshs. 14,691,883. 72 inclusive of penalties and interest on the basis that the Appellant did not charge withholding tax on Mastercard fees as required by Section 35 of the ITA. According to the Respondent’s demand, the Mastercard fees were subjected to withholding tax as “management or professional fees”.

13. In its notice of objection dated 22nd February 2023, the Appellant objected to the Respondent’s assessment that the Mastercard fees did not qualify as management or professional fees and as such were not subject to withholding tax. It was the Appellant’s assertion that the Mastercard fees did not constitute management or professional fees within the definition set out in section 2 of the ITA.

14. At the core of the Respondent’s assessment and central to the notice of objection lodged by the Appellant was whether the Mastercard fees were management or professional fees defined under section 2 of the ITA and thus subject to withholding tax. Based on the objection raised by the Appellant on withholding tax on management or professional fees, the options available to the Respondent under section 51 (8) of the TPA, were to:a.Accept the objection by the Appellant that the Mastercard fees do not qualify as management or professional fees and are thus not subject to withholding tax;b.Reject the objection and explain why the Mastercard fees qualify as management or professional fees; andc.Partially allow the objection with regard to whether or not the Mastercard fees qualify as management or professional fees.

15. In its objection decision, the Respondent did not comment on the Appellant’s submissions that the Mastercard fees do not qualify as management or professional fees. Instead, the Respondent abandoned the claim that the Mastercard fees were subject to withholding tax as management or professional and claimed that the Mastercard fees were royalties stating:“That transaction fees paid by banks to non-resident card companies constitute royalty which is subject to withholding tax as per Section 35(1) of the ITA” [Emphasis added].

16. Under the ITA, “royalties” and Management or professional” fees are distinct and separate payments and have very different definitions. The same cannot be equated. Section 2 of the ITA defines a “royalty” as follows:“… a payment made as a consideration for the use of or the right to use –a)the copyright of a literary, artistic, or scientific work; orb)a cinematograph film, including film or tape for radio or television broadcasting; orc)a patent, trademark, design or model, plan, formula, or process; ord)any industrial, commercial, or scientific equipment”Section 2 of the ITA defines “professional or management fees” as:“a payment made to a person, other than a payment made to an employee by his employer, as consideration for managerial, technical, agency, contractual, professional, consultancy services however, calculated”

17. Pursuant to Section 51 (8) of the TPA, once the Respondent abandoned the claim for withholding tax on the Mastercard fees on the basis that they were management or professional fees as defined under section 2 of the ITA, the Appellant’s notice of objection on the withholding tax on Mastercard fees succeeded in full and no additional assessment remained.

18. The Appellant stated that an objection decision is restricted by law to the assessment raised and the objection tendered. It is not envisaged by law that an objection decision would be extended to cover issues or assessments other than those identified in the assessment objected to.

19. The entirety of the observations made by the Respondent at page 4 of the objection decision constituted an entirely new assessment that was unrelated to the issues raised and canvassed in the assessment of 26th January 2023 and the Appellant’s objection dated 22nd February 2023. In other words, the Respondent improperly and irregularly misused its objection decision to purport to raise a new additional assessment. This was not an option available to the Respondent and is ultra vires its powers.

20. The Appellant relied on the High Court’s decision in Commissioner of Domestic Taxes v Bank of Africa Limited (Civil Appeal E127 of 2020) [2023] KEHC 1036 (KLR) and the Tribunal’s decision in TAT No. 52 of 2017 Kamindi Selfridges Supermarket Limited v Commissioner of Investigations Enforcement which both noted the limited options available to the Respondent under section 51(8) of the TPA.

21. The options available to the Respondent when making its objection decision are specific and circumscribed pursuant to Section 51 (8) of the TPA. They do not include the power to raise a separate or additional assessment in the objection decision and more so, where the additional assessment is based on an entirely new ground. It follows therefore that the decision by the Respondent to purport to include or raise an assessment in the objection decision based on entirely new grounds rendered a purported assessment of Kshs. 14,652,927. 00 being an assessment for withholding tax on royalties allegedly paid as invalid, unlawful, and null and void for all purposes.II. The Respondent erred in law and in fact by assessing the Appellant for withholding tax on the mistaken basis that the payments made to Mastercard qualified as royalties as defined in the ITA.

22. The Respondent vide its objection decision letter has sought to levy withholding tax amounting to Kshs. 14,191,048. 68 inclusive of penalties and interest on the payments the Appellant made to Mastercard. The Respondent’s assertion was that the payments made by the Appellant constituted a payment for the right to use Mastercard’s intellectual property such as trademarks and logos hence the same amounted to payment for a royalty subject to withholding tax as per Section 35 (1) of the ITA.

23. The Appellant noted that in making the aforesaid assertion, the Respondent relied on the case of Commissioner of Domestic Taxes (Large Taxpayer Officer) vs Barclays Bank of Kenya Limited (Appeal No.195 of 2017) [hereinafter “the Barclays Case”] and implied the Appellant’s transaction fees were of the same nature as what was the subject matter in the stated case.

24. The Appellant refuted the above assertion in its entirety and submitted that contrary to the Respondent’s assertion the payments it made to Mastercard did not qualify as royalty and as such the Respondent is wrong in demanding withholding tax on it.

25. On the issue of the payments by the Appellant to Mastercard, it asserted that the same did not qualify as royalty as defined in the ITA. The Appellant maintained that the Respondent misapprehended the nature of the Mastercard transaction fees booked in the Appellant’s ledger which the Respondent allegedly claimed should be subjected to withholding tax as a royalty. Consequently, the Appellant outlined in tabular form the nature of its transactions as follows:No. Concept Description

1. Card issuing The issuance of debit/credit cards to existing and new customers (whether with bank accounts or without bank accounts).

2. Issuing Bank A bank that issues a payment card.

3. Card holder Customer of the Issuing Bank who has been issued with a payment card under terms and conditions agreed to with the Issuing Bank. Credit cards are issued with an approved credit limit amount and cardholders can make purchases using the credit cards.

Debit cardholders can make purchases using their debit cards and this will result in the Issuing Bank immediately debiting the cardholder’s checking account with the value transacted.

4. Acquiring Bank This is the Merchants’ bank. An Acquiring bank enables Merchants to accept cashless payments by acting as a link between the Cardholder, Issuing Banks, and payment networks.This is made possible by the Acquiring Bank providing point of sale (“PoS”) Terminals or card check-out online payment gateways to Merchants.

5. Merchant Establishment or entity that accepts payment for its goods or services by way of a payment card. It is the customer of the Acquiring Bank.

6. Card Company A global payments technology company (association) which owns and operates the card payment network that enables card transactions to take place, and which licenses the Acquiring and/or Issuing Bank e.g., Mastercard Inc. and VISA.

7. Interchange This is the transfer of value or money between financial institutions but through a medium created, owned and operated by a Card company.

8. Interchange fees This is the fee retained by the Issuing Bank for all transactions done using cards at points of sale and Automated Tellers Machines (ATMs) respectively under the Card Company platform.

9. Merchant charge (MC) This is the fee earned with respect to money transfer services and operating the Merchants’ account which is shared between the Acquiring Bank and the Issuing Bank.

26. The Appellant asserted that it had entered into an agreement with Mastercard. through its sponsoring bank Mauritius Commercial Bank Limited (hereinafter “MCB”) for the provision of card network payment services, through which its customers/clients conduct credit card transactions.

27. The Appellant explained that in order to expand use of its card payment network, Mastercard enrolls customer banks into their respective card payment networks. Depending on the customer’s preference, the customer bank can either be a principal customer or an Affiliate customer. The principal customer has direct access to the network platform provided by Mastercard and has the primary obligation to settle with Mastercard. As a principal customer, they may sponsor an “Affiliate” who leverages on the relationship and settlement account of the principal.

28. The Affiliate has indirect access of the card payment network through the principal. The Affiliate does not have a direct relationship with the card payment network and as such relies on the principal customer to settle transactions.

29. The Appellant entered into an agreement with MCB under which MCB agreed to sponsor the Appellant for the acquisition of an “Affiliate Mastercard Licence” with Mastercard for the services of card issuing only. The Appellant proceeded to outline how a transaction involving a credit/debit card issued by the Appellant to one of its customers allowed the credit/debit card holder to pay for goods and services as follows:a.The credit/ debit card issued by the Appellant (issuing bank) is inserted into a merchant’s card reader machine (that is provided by the Acquiring bank), and the merchant enters the amount of the transaction, say for example Kshs.100,000. 00;b.The cardholder will then insert their Personal Identification Number (‘PIN’) into the card reader machine;c.The PIN acts as the credit/ debit cardholder’s mandate to the Appellant for the Kshs.100,000. 00 to be withdrawn from their bank account with the Appellant and the Kshs.100,000. 00 be paid to the merchant;d.A message of the credit/ debit cardholder’s mandate to the Appellant is transmitted through a network operated by the card association, Mastercard, to MCB (MCB has direct access to the Mastercard network) and the merchant’s bank (Acquiring bank).e.Once the message is received by MCB as the principal, through its settlement account transfers the equivalent of Kshs.100,000. 00 to the merchant's bank (Acquiring bank) on behalf of the Appellant.f.The above verification process by the Issuing bank is akin to that of a cardholder who walks into a banking hall to undertake an over the counter (OTC) transaction. In an OTC transaction, the bank will verify the customer’s identity by examining their identification documents, verify that the account details are correct and verify that the bank customer has sufficient funds to complete the requested transaction whether it may be a transfer of funds or a cash/cheque withdrawal;g.This verification process in the OTC transaction described above is essentially the same verification process undertaken in a card transaction where the customer seeks to pay for goods or services purchased via a Point of Sale (hereinafter “PoS”) at a merchant’s premises;h.Once MCB verifies that the cardholder details are accurate in the card transaction process, the third- party processor (on behalf of the Issuing bank) sends this confirmation to the Mastercard. network;i.the Card Payment Network relays this message to the Acquiring bank;j.the Acquiring bank forwards the response to the merchant;k.the merchant receives the response and completes the transaction by generating two transaction slips - a merchant’s copy and customer’s copy. The customer thereafter takes possession of the goods/services and leaves with the customer’s copy of the slip.l.Under the Sponsorship agreement, MCB will then recover the amount settled with Mastercard from a settlement account held by the Appellant (see clause 3. 6 of the sponsorship agreement). The Appellant then recovers the amount settled with MCB of Kshs.100,000. 00 from their cardholder.m.The settlement and clearing between the cardholder, the Appellant, MCB and the merchant completed within 48 hours and is carried out by the Card Payment Networks.

30. Under the Sponsorship Agreement, the Appellant is required to pay MCB, Mastercard fees and charges (transactional fees) received from Mastercard for the settlement of transactions on behalf of the Appellant. The Appellant asserted that it was billed weekly by Mastercard through its sponsorship bank MCB for these Mastercard fees and charges for settlement of its cardholders’ transactions, and they are charged based on the number of transactions that MCB ran through Mastercard technology infrastructure.

31. The Appellant stated that card companies own elaborate distinct Card Payment Networks which link Merchants, Acquiring Banks, Issuing Banks, and Cardholders. These Card Payment Networks allow the customers to make payments electronically for the purchases they make from Merchants. To emphasize, the Mastercard fees and charges paid by the Appellant are for the authorization, clearing and location facilitated by Mastercard in settling the card payment transactions undertaken by the Appellant’s customers.

32. The Appellant demonstrated that the Respondent was misguided in attempting to levy withholding tax on the Mastercard fees and charges as “royalties”.

33. Section 10(1) (c) of the ITA provides as follows:“Where a resident person or a person having a permanent establishment in Kenya makes payment to any other person in respect of a royalty or natural resource income, the income thereof shall be deemed to be income which accrued in or was derived from Kenya…”

34. Section 35(1) of the ITA provides as follows:“(1)A person shall, upon payment of an amount to a non-resident person not having a permanent establishment in Kenya in respect of –…..(b) a royalty or natural resource income;”which is chargeable to tax, deduct therefrom tax at the appropriate non-resident rate.”

35. Section 2 of the ITA further defines a royalty to mean:“… a payment made as a consideration for the use of or the right to use –the copyright of a literary, artistic, or scientific work; orb)a cinematograph film, including film or tape for radio or television broadcasting; orc)a patent, trademark, design or model, plan, formula, or process; ord)any industrial, commercial, or scientific equipment”

36. The Appellant was of the view that in accordance with the foregoing definition, the payment must be made “as a consideration for the right to use…” certain intellectual rights listed under section 2 of the ITA for it to qualify as a royalty. The Appellant asserted that withholding tax is only applicable under Section 10 and 35 of the ITA should the said consideration qualify as a royalty.

37. The Appellant noted that the Respondent did not identify the particular intellectual property right out of those listed under section 2 of the ITA, that the Appellant was allegedly paying for the right to use. Without identifying the alleged intellectual property rights, the Respondent cannot fit the Appellant’s payments within the definition of a royalty under section 2.

38. Moreover, of the various Appellant payments to Card Companies that the Respondent sought to impose withholding tax on, the said payments include various components such as transaction processing, connectivity, back office which have nothing to do with royalties as alleged by the Respondent. The said payments to Card Companies are not for any intellectual property rights rather for relaying the settlement and authorization of transactions.

39. In accordance with decision of the High Court in Republic vs Commissioner of Income Tax, Ex-parte SDV Transami (Kenya) Limited [2005] eKLR for a payment to qualify as a royalty;“(i)it should have been made as a consideration;(ii)it should relate to the use of or the right to use a property; and(iii)the property should be within those identified under Section 2 (a) to (d) in the definition provided in the ITA.”

40. The Appellant asserted that the payment was made as a consideration and did not relate to the use or the right to use a property i.e.; trademarks or patents belonging to the Card Companies. The consideration has been made for “clearing and settlement functions” performed by the Card Companies. This was clear from clause 3. 2 of the Sponsorship Agreement which states “VCB agrees to pay all Mastercard fees and charges received by MCB from Mastercard for the settlement of transactions on behalf of VCB” [Emphasis added]. That in fact, under the Sponsorship Agreement which was the basis of the payment of Mastercard fees and charges, there is no intellectual property right being licensed or transferred. Clause 6 of the Sponsorship Agreement provides as follows:“Nothing in this Agreement shall transfer the ownership of, grant any other interest in, any Intellectual Property Rights of a party to the other party.”

41. The Appellant stated that clearing and settlement functions do not fall under the property identified under Section 2(a) to (d) in the definition provided under the ITA. Further, the Appellant stated that the definition of “royalties” under the OECD Model Tax Convention was similar to that under Section 2 of the ITA. The High Court in Seven Seas Technologies Limited v Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021] KEHC 358 (KLR) relied on the OECD Model Tax Convention in determining a matter involving the taxation of software payments and endorsed the reliance, stating:“The International guidelines are not part of the law in respective countries but are international best practices that guide in interpretation of laws and regulate the international business transactions.”

42. The Appellant stated that article 12(2) of the OECD Model Tax Convention defines royalties as follows:“The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula, or process, or for information concerning industrial, commercial, or scientific experience.” (Emphasis added)

43. Paragraph 10. 1 of the Commentary on Article 12(2) of the OECD MTC states as follows:“Paragraph 2 contains a definition of the term “royalties”. These relate, in general, to rights or property constituting the different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience.”

44. The Appellant stated that similar to the definition under Section 2 of the ITA, for a payment to qualify as a “royalty” under Article 12(2) of the OECD MTC, the payment ought to be consideration for the use of, or the right to use, intellectual property for example, a trademark.

45. The Appellant stated that the Respondent had asserted that the payments made by the Appellant constituted a payment for the right to use Mastercard intellectual property such as trademarks and logos hence the same amounted to payment for a royalty subject to withholding tax pursuant to Section 35 (1) of the ITA. In making the said assertion, the Respondent further relied on the Barclays case and implied the Appellant’s transaction fees are of the same nature as what was the subject matter in the stated case.

46. The Appellant averred that the Respondent’s assertions were baseless, and the Barclays case did not apply in this present case. The Appellant further maintained that the facts and arrangement in its transaction were distinct and different to those in the Barclays case. In the Appellant’s case, there was no license of a trademark or otherwise. Further, it was evident to the Appellant that the fees being paid out by the Appellant were paid for settlement of transactions and not as consideration for the use of or the right to use a trademark.

47. Therefore, taking the foregoing into consideration, the Appellant asserted that its payments to Mastercard did not qualify as royalty under Section 2 of the ITA.III. The Respondent erred in law and fact in seeking to assesses withholding tax on other payments made by the Appellant.

48. In its objection decision, the Respondent proceeded to impose withholding tax on other payments made by the Appellant amounting in the sum total to Kshs. 308,021. 70. The Appellant averred that the Respondent’s additional withholding tax assessment as regards the other payments listed above violated the principles of section 31 (1) of the TPA in failing to give the foundation, basis and reason or information relied upon to raise the assessment.

49. The Appellant maintained that the Respondent simply listed some transaction fees payments made by the Appellant and did not indicate the specific category of the service as provided for in the ITA upon which it was demanding the withholding tax. It was noteworthy to the Appellant that failure to provide reasons on which the assessment was based violated the Appellant’s constitutional right to fair administrative action that is lawful, reasonable, and procedurally fair contrary to article 47(1) of the constitution of Kenya, 2010 (hereinafter “the Constitution”). Article 47 (1) of the Constitution provides as follows;“Every person has the right to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair."

50. Additionally, the court in the Republic versus commissioner of Domestic Taxes Large Taxpayers’ Office ex-parte Barclays Bank of Kenya Ltd (2012) eKLR stated as follows:“... Section 35(1) (a) of the Income Tax Act identifies specific types of payments that attract tax, 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 ... "

51. The Appellant averred that failure to give reasons on which the tax demand is based is an incurable defect given that the Appellant can only presume the reasons for such an assessment. Notwithstanding and without prejudice to the foregoing, it was the Appellant’s view that the Respondent had sought to demand withholding tax on transaction fees payments made for receipt of basic services that were not within the scope of withholding tax.

IV. The Respondent acted in contravention of the law by imposing a tax shortfall penalty based on an incorrect withholding tax assessment contrary to the provisions of the TPA. 52. The Respondent sought to levy tax shortfall penalty on principal withholding tax alleged to be due and payable at the rate of 5% according to computations tabulated in earlier sections of its letter. The Appellant averred that no principal withholding tax was due and payable, and the assessment raised was thereby erroneous and lacked any legal merit.

V. The Respondent erred in law and fact by charging late payment interest based on incorrect withholding tax assessment contrary to the provisions of the TPA. 53. The Appellant noted that the Respondent vide its assessment letter sought to levy late payment interest at the rate of 1% on the principal withholding tax alleged to be due. Section 38 (1) of the TPA provides as follows:“… a person who fails to pay a tax on or before the due date for the payment of the tax shall be liable for late payment interest at the rate equal to one percent per month or part of a month on the amount unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid.”

54. The Appellant asserted that Section 38 (1) of the TPA envisioned payment of interest where one failed to pay a tax by the due date. A tax is only due if one has an obligation to pay the tax. The Appellant averred that no withholding tax was due and payable, and the Respondent has thus erred in law and fact by imposing late payment interest on a tax obligation that did not exist in the first place.

55. The Appellant outlined the pertinent legislative provisions of the VAT Act by stating that VAT in Kenya is inter alia governed by the VAT Act, the Value Added Tax Regulations 2017 (“the VAT Regulations, 2017”) and relevant case law precedents.

56. VAT is due and payable on a taxable supply made by a registered person in Kenya, the importation of taxable goods and the supply of imported taxable services. There are 3 separate VAT rates applicable in Kenya – zero (0%) for goods and services listed in the Second Schedule to the VAT Act, a standard rate (16%) and a reduced rate of 8% for petroleum products. Separately, a supply is treated as VAT exempt if it is listed in the First Schedule to the VAT Act.

57. Further, Section 2 of the VAT Act provides that for VAT to apply on imported services, the following conditions need to be met:a.the supply is made by a person who is not a registered person to any person;b.the supply would have been a taxable supply if it had been made in Kenya (emphasis added); andc.in the case of a registered person, the person would not have been entitled to a full amount of input tax payable if the services had been acquired by that person in a taxable supply.

58. In light of the above, it was clear to the Appellant that VAT on imported services was only applicable where the supply acquired would have been taxable had it been made in Kenya. Having provided the above foundation on applicability of VAT, the Appellant proceeded to outline in detail its grounds of appeal to the Respondent’s VAT assessment.

VI. The Respondent erred in law and in fact in assessing VAT to other payments made by the Appellant. 59. In its objection decision, the Respondent claimed that the Appellant ought to have accounted for VAT on imported services (reverse VAT) on its other payments. The Respondent therefore assessed VAT amounting to Kshs.387,857. 44 inclusive of penalties and interest, on these payments. The Appellant averred that VAT is a tax on a supply. Therefore, it followed that for VAT to be chargeable, there ought to be a demonstration that a supply has taken place.

60. It was the Appellant’s assertion that the Respondent failed to demonstrate that a supply had been made by the recipient of the said payments to justify its conclusion that all the payments the Appellant had outlined in its statement of facts were liable to reverse VAT. The Appellant asserted that the Respondent acted beyond its powers by applying a blanket treatment of all other payments made by the Appellant and charging reverse VAT on them with no specific explanation on the grounds upon which they relied on in charging the additional VAT.

VII. The Respondent acted in contravention of the law by imposing a tax shortfall penalty based on an incorrect VAT assessment contrary to the provisions of the TPA. 61. The Respondent sought to levy tax shortfall penalty on principal VAT alleged to be due and payable at the rate of 5% according to the computations tabulated in its letter. The Appellant stated that no principal VAT was due and payable, and the assessment raised was thereby erroneous and lacked any legal merit.

VIII. The Respondent erred in law and fact by charging late payment interest based on an incorrect VAT assessment contrary to the provisions of the TPA. 62. The Appellant noted that the Respondent vide its assessment letter sought to levy late payment interest at the rate of 1% on the principal VAT alleged to be due. Section 38 (1) of the TPA provides as follows:“… a person who fails to pay a tax on or before the due date for the payment of the tax shall be liable for late payment interest at the rate equal to one percent per month or part of a month on the amount unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid.”

63. The Appellant stated that Section 38 (1) of the TPA envisions payment of interest where one fails to pay a tax by the due date. A tax is only due if one has an obligation to pay the tax. The Appellant hence submitted that no VAT was due and payable, and the Respondent has thus erred in law and fact by imposing late payment interest on a tax obligation that did not exist in the first place. In this regard, the Appellant submitted that the Respondent’s imposition of interest of Kshs. 138,456. 02 was based on an incorrect VAT assessment and on that basis the same should be vacated in its entirety.

64. The Appellant made the following prayers to the Tribunal:a.That this Appeal be allowed;b.That the Respondent’s decision dated 12th April, 2023 be set aside in its entirety;c.That the principal tax and attendant penalties and interest demanded by the Respondent relating to withholding tax amounting to KShs. 14,652,927. 48 vide its decision dated 12th April 2023 was erroneous and be vacated forthwith in its entirety;d.The principal tax and attendant penalties and interest demanded by the Respondent relating to VAT assessment amounting to Kshs. 545,706. 33 vide its decision dated 12th April 2023 is erroneous and be vacated forthwith in its entirety;e.That the costs of and incidental to this Appeal be awarded to the Appellant; andf.Any other orders that the Tribunal may deem fit.

Respondent’s Case 65. The Respondent’s case was as set out in its statement of facts dated and filed on 27th June, 2023 in which it stated as follows:

66. In a rejoinder to grounds numbers (ii); (iv); and (v) that it had erred in charging Master card fees, it reiterated that it had placed full reliance on its objection decision issued on 12th April, 2023 and further averred that the audit established that the Appellant made payment to Mastercard for which the withholding tax had been charged. This case was only limited to payment made to a card company in a card transaction. The Respondent indicated that it was necessary for the Tribunal to be made aware of various card players in a card transaction so that it could appreciate the true nature of a transaction and the role of each party.

67. The Respondent outlined the parties in card transaction business and stated that the four (4) parties to any card transaction were the issuing bank, the cardholder, the merchant and the financial institution or bank. The Respondent elaborated that the Merchants who wished to accept payment cards under the scheme contract with an acquirer which agrees to provide services to the merchant and enable the acceptance of the cards in consideration of the merchant service charge (hereinafter “MSC”). The acquirer receives payment from the issuer to settle a transaction entered into between cardholder and passes the payment on to the merchant, less MSC.

68. The Respondent also proceed to outline what it referred to as the salient business terminologies including the meaning of the terms Card holder; issuer; acquirer; the Merchant, a merchant agreement and the Association or card companies which have not been reproduced herein.

69. The Respondent described a typical transaction flow where a cardholder makes a purchase at a merchant’s outlet and upon swiping their card, a network platform facilitates authentication of the card employed at the merchant and clears the use of the card for concluding the transaction. The card association network or card company network generates reports for merchant settlement and forwards the same to the acquirer who settles the account of the merchant upon deducting a percentage towards discount or commission. The MSC charge is made to a merchant by an acquirer for processing transactions originated by the card purchases. The MSC retained by the acquirer is shared with an issuer as “interchange” fee and after payment of the issuer and card company, the acquirer retains fees. The Respondent also represented the transaction in a diagrammatic form and the same has not been reproduced.

70. There are relationships in card schemes, which the Respondent outlined as being contractual relationships, that between the acquirer and the card association embodied in a membership and trademark licence agreement. The same grants an acquirer a license, the relationship between the issuer and its cardholders; the relationship between the cardholder and the merchant and the final relationship between the issuer and acquirer concerning payment for purchasers and government by the rules of the card company.

71. The Respondent proceeded to outline the process of authorisation clearing and settlement and indicated that the authorizing transactions through which the transaction is approved, the process of clearing where the final transaction data is delivered to acquirers and issuers, posting to the cardholder’s account and settlement which is the process of transmitting sales information to the issuer for collection and reimbursement of funds to the merchant.

72. The Respondent explained the meaning of MSC which would be negotiated under the Merchant Service Agreement. The fees charged are the interchange fees, dues and assessment fees and the acquirer’s fees. The Respondent was of the view that the dues and assessment fees attract royalty which are subject to withholding tax pursuant to section 35(1) of the ITA.

73. The Respondent relied on the provisions of Section 31 of the TPA; section 2 and 35(1) of the ITA and the provisions of Article 12(2) of the OECD Model Tax Convention (hereinafter “OMTC”). All of which are as outlined below:“Section 31 of the TPAAmendment of assessmentsSubject to this section, the Commissioner may amend an assessment (referred to in this section as the “original assessment") by making alterations or additions, from the available information and to the best of the Commissioner's judgement,Section 2 on the definition of “royalty”:"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,”35. Deduction of tax from certain income(1)Every person shall, upon payment of any amount to any non-resident person not having a permanent establishment in Kenya in respect of—(a)a management or professional fee or training fee except—(i)a commission paid to a non-resident agent in respect of flowers, fruits or vegetables exported from Kenya and auctioned in any market outside Kenya and audit fees for analysis of maximum residue limits paid to a non-resident laboratory or auditor; or(ii)a commission paid by a resident air transport operator to a non-resident agent in order to secure tickets for international travel;(b)a royalty or natural resource income;(c)a rent, premium or similar consideration for the use or occupation of property, except aircraft or aircraft engines, locomotives or rolling stock:Article 12 (2) of the OECD Model Tax Convention“2. The term “royalties” as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for any information concerning industrial, commercial or scientific experience.” 74. The Respondent cited the Barclays Case wherein the court held that transaction fees constituted the right to use the card companies’ trademarks and logos, a payment which constituted royalty for trademark, however disguised.

75. Though the Appellant averred that the fees and charges it paid were for authorisation, clearing and location facilitated by MasterCard, in settling the card payments undertaken by the Appellant, the Respondent took a different opinion which was that the Appellant was paying for the right to use the Mastercard intellectual property such as trademarks, logos and processes and that the Appellant had admitted this in its pleadings. The Respondent relied on section 35(1) of the ITA [supra]. The Respondent further averred that the Appellant had an agreement with Mastercard.

76. The Respondent stated that the Appellant failed to demonstrate that Mastercard fees were reimbursements not subject to withholding tax and it raised appropriately, the assessments for withholding tax against payments for royalties, made by the Appellant to Mastercard as a non-resident person.

77. The Respondent also identified an issue for determination which is whether withholding tax is chargeable on management and professional services offered by the Appellant and this was in response to grounds (iii); (iv) and (v) with regard to assessment of withholding tax on other payments made to non-resident persons. The Respondent reiterated the finding in its objection decision and averred that the Appellant made other payments in its books which were captured as subscriptions such as payments to WBC US counsel, NSI services, Consultancy fees and Claris real time. The Appellant objected to the Respondent’s additional assessments. However, it failed to provide all the necessary invoices in support of its objection to defray the taxes and failed to discharge its burden of proof pursuant to section 56(1) of the TPA which provides as follows:“(1)In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

78. Section 24 of the TPA states as follows:“A person required to submit a tax return under a tax law shall submit the return in the approved form and in the manner prescribed by the Commissioner.”

79. The Appellant claimed that the Respondent violated the principles of section 31 (1) of the TPA for failing to give a foundation basis and reason for claiming withholding tax on transactions made for receipt of basic services that were not within the scope of withholding tax. The Respondent stated that Section 31 of the TPA allows the Respondent to raise assessments and upon it raising an assessment for withholding taxes upon management and professional fees offered by the Appellant, it was upon the Appellant to provide evidence or supporting documentation to prove that the services were not management services that the Appellant paid for.

80. The Appellant had the burden of proving that the Respondent’s withholding tax assessment was erroneous and by failing to do so it failed to discharge it burden of proof. The Respondent then analysed whether reverse VAT was chargeable upon the Appellant as it was faulted by the Appellant in grounds (vi) (vii) and (viii) of the grounds of Appeal. The Respondent’s view was that the Appellant did not dispute the fact that it received the services.

81. The Respondent therefore issued an assessment for reverse VAT pursuant to section 2 of the VAT Act pursuant to which a taxable supply is defined to mean the following:“a supply other than an exempt supply made in Kenya by a person I the course or furtherance of a business carried on by the person including a supply made in connection with the commencement or termination of a business”

82. The Respondent averred that the obligation was on the Appellant to show that the services rendered to it by the foreign entities was an exempt supply. According to the Respondent the Appellant was a recipient of imported services for which it is deemed to be the supplier of vatable services under section 5(6) of the VAT Act. Section 5(6) of the VAT Act provides as follows:“5. Charge to tax(6)Tax on the supply of imported taxable services shall be a liability of any person receiving the supply and, subject to the provisions of this Act relating to accounting and payment, shall become due at the time of the supply.”

83. The Respondent also relied on the provisions of section 10 of the VAT Act which deals with the treatment of imported services and provides as follows:“10. Treatment of imported services(1)If a supply of imported taxable services is made to any person, the person shall be deemed to have made a taxable supply to himself.”

84. The Respondent stated that the Appellant relied on the definition of supply of imported services pursuant to Section 2 of the VAT Act which provides as follows:“supply of imported services" means a supply of services that satisfies the following conditions—(a)the supply is made by a person who is not a registered person to any person;(b)the supply would have been a taxable supply if it had been made in Kenya; and(c)in the case of a registered person, the person would not have been entitled to a full amount of input tax payable if the services had been acquired by that person in a taxable supply;”

85. The Respondent averred that the Appellant did not provide information to support the services it received and was unable to discharge its burden of proof pursuant to section 56(1) of the TPA. The Appellant, according to the Respondent received imported services which were vatable and made payments for the same. Accordingly, the Appellant was deemed to have made a taxable supply pursuant to section 10 (1) of the VAT Act.

86. The Respondent was of the view that it was proper in law for it to issue an assessment for reverse VAT tax upon the Appellant for supply of imported services. The Respondent also analysed whether its objection decision was proper and in accordance with section 51(8) of the TPA and stated that the Appellant’s claim that its objection decision was improper was a frivolous claim. According to the Respondent, sections 51 (8); 51 (9) and 51 (10) relates to the objection decision and not the assessment and the same could not be used to contest the assessment for which a valid decision is made. The said provisions provide as follows:“(8)Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an "objection decision".(9)The Commissioner shall notify in writing the taxpayer of the objection decision and shall take all necessary steps to give effect to the decision, including, in the case of an objection to an assessment, making an amended assessment.(10)An objection decision shall include a statement of findings on the material facts and the reasons for the decision.

87. The Respondent was of the view that the Appellant having considered the objection is allowed to review the objection in line with the provisions of the applicable law, the issues raised and make a finding. The Appellant claimed that the Respondent claimed withholding tax on master card fees as management services, a claim it abandoned and did not address. The Respondent also noted that the Appellant claimed that its decision constituted a new assessment which was in violation of section 51(8) of the TPA.

88. The Respondent averred that the claim was untrue as the Respondent in its income tax verification claimed withholding tax on master card fees and withholding tax on other services. The position of the Respondent was that the initial assessments raised were the same ones addressed in its objection decision. The Respondent was of the view that its objection decision was proper.

89. The Respondent relied on the following provisions of section 38 of the TPA to claim late payment interest:“38. Late payment interest(1)Subject to subsection (2), a person who fails to pay a tax on or before the due date for the payment of the tax shall be liable for late payment interest at a rate equal to one per cent per month or part of a month on the amount unpaid for the period commencing on the date the tax was due and ending on the date the tax is paid.”

90. The Respondent in issuing its decision considered the following documents submitted to it by the Appellant:i.Copies of undeclared invoices.ii.Bank statements for 2018 and 2019iii.GlaxoSmithKline contract-2019iv.Audited accounts for 2018 and 2019v.Sales ledgers for 2018 and 2019vi.Directors accounts for 2018 and 2019.

91. The Respondent contended that its objection decision dated 12th April, 2023 met the requirements of section 29 (1) of the TPA which requires the Respondent to give the foundation, basis and reason or information relied upon.

92. The ground by the Appellant that the objection decision was not proper was frivolous as the objection decision was based on all evidence and information provided by the Appellant and to the best of its judgement. The Respondent properly assessed the Appellant for taxes due, and partially allowed the Appellant’s objection and confirmed its assessments for the unsupported grounds.

93. The Respondent prayed that the Tribunal would uphold its decision dated 12th April, 2023 as the same was proper in law and that it would determine that the amount of Kshs. 15,198,633. 81 is due and payable to it and also that the Appeal be dismissed with costs to it as the same was without merit.

Parties’ Submissions 94. On 16th May, 2024 the Tribunal directed parties to file written submissions on or before 30th May, 2024. Both parties complied with the directions. However, without leave having been granted by the Tribunal, both parties proceeded to file supplementary submissions on 19th and 25th June, 2024. The further submissions have been expunged from the record. The Tribunal further notes that it will not rehash the submissions of both parties where these were repeated from the statement of facts.

95. The Appellant submitted as follows regarding the two issues it had identified for determination:

a. Whether the Respondent’s purported objection decision on withholding tax is procedural and in line with Section 51 (8) of the TPA. 96. Through its letter dated 26th January, 2023, the Respondent assessed and demanded withholding tax from the Appellant on the basis that the Appellant did not charge withholding tax as required by section 35 of the ITA. The Respondent stated as follows in its letter:“We confirmed that you did not charge withholding tax on MasterCard fees as required by the provisions of section 35 of the Income Tax Act. Consequently, withholding tax has been charged on the management and professional fees as detailed below [Emphasis added]”

97. The Respondent in Paragraph 96 and 97 of its statement of facts claimed that the basis of its initial assessment reproduced above at Paragraph 17 was not changed in its objection decision stating that:“96. Respondent avers that this claim is not true as the Respondent in its income tax refund verification decision dated 26 January 2023 which has been annexed herein as KRA-1 clearly claimed for withholding tax on MasterCard fees and withholding tax on other services considered as management services as two separate items which the Appellant also acknowledged and objected to as two separate grounds of assessment in its objection dated 22 February 2023. 97. The respondent’s claim is that the initial assessments raised are the same ones addressed in its objection decision this regard the respondent’s objection decision was proper as it did not address any new issues as claimed by the Appellant” [Emphasis added]

98. In response to that assertion by the Respondent the Appellant submitted that under ITA “royalties” and “Management or professional” fees are distinct and separate payments that are defined differently under Section 2 of the ITA. Therefore, by changing the basis of its assessment, the Respondent effectively used its objection decision to raise an entirely new assessment contrary to the provisions of Section 51(8) of the TPA.

99. The Appellant submitted that by changing the basis of the assessment, the Respondent improperly and irregularly misused the objection decision to purport to raise a new assessment that the Appellant has had no opportunity to object to. The Appellant relied on the High Courts’ decision in Commissioner of Domestic Taxes v Bank of Africa Limited (Civil Appeal E127 of 2020) [2023] KEHC 1036 (KLR) upholding the Tax Appeals Tribunal finding in TAT 319 of 2018 Bank of Africa Ltd v Commissioner Domestic Taxes wherein the Tribunal stated as follows:“It is clear to us that the provision of section 51 (8) of the Tax Procedures Act provides that in giving its objection decision the Respondents may allow the objection in whole or in part or disallow it. Considering the same we note that the Appellant is justified in claiming that it did not have ample time to consider their assessment holistically as by providing this assessment workings on 25 September 2018, three weeks after the objection decision dated 5 September 2018, the Respondent did in fact deny the Appellant adequate time. In view of the foregoing, the Tribunal finds that the amendment of the assessment to reflect interchange fees brought in a new matter in the appeal. [Emphasis added]

100. The above interpretation of Section 51(8) of the TPA was also reiterated by the Tribunal’s decision in TAT No. 52 of 2017 Kamindi Selfridges Supermarket Limited v C Investigations Enforcement wherein it was held as follows:“We note that in its demand dated 11 November 2016 the respondent’s demand was of Kshs. 72,607,955 to which the Appellant objected via its letter dated 9 September 2016. The Respondent in its Objection Decision dated 13 February 2017 confirmed taxes amounting to 153,463,437. This higher demand therefore renders the Respondents Objection Decision illegal as its mandate is restricted to either allow the objection in whole or in part or disallow it. The Respondents actions are therefore contrary to the laid down legislation[Emphasis added]

101. The Appellant submitted that in view of the foregoing, the options available to the Respondent when making the objection decision are specific and circumscribed pursuant to Section 51 (8) of the TPA. They do not include the power to raise a separate or additional decision in the objection decision. The Appellant submitted that in doing this, the Respondent disregarded the principles of natural justice by fundamentally changing the legal basis of the assessment.

102. The Appellant submitted that by fundamentally changing the legal basis of the assessment in the objection decision, the Respondent denied the Appellant the right to submit a notice of objection as is a right assured by Section 51 of the TPA and the right to fair administrative action provided for in Article 47 of the Constitution and Section 4 (a) and (b) of the Fair Administrative Action Act, CAP 7L of the Laws of Kenya (hereinafter “FAAA”).

103. The Appellant submitted that the Respondent unfairly prejudiced it by denying it the opportunity to submit on this new legal basis of the assessment through the submission of a notice of objection contrary to the principles of natural justice and fair administrative action now codified in the Constitution of Kenya, 2010 and the FAAA. Article 47(1) of the Constitution requires that administrative actions be expeditious, efficient, lawful, reasonable, and procedurally fair.

104. Section 4 of the FAAA provides further context on Article 47 of the Constitution providing that:“4. Administrative action to be taken expeditiously, efficiently, lawfully etc.1. Every person has the right to administrative action, which is expeditious, efficient, lawful, reasonable and procedurally fair.2. Every person has the right to be given written reasons for any administrative action that is taken against him.3. Where an administrative action is likely to adversely affect the rights or fundamental freedoms of any person, the administrator shall give the person affected by the decision-a.prior and adequate notice of the nature and reasons for the proposed administrative action;b.an opportunity to be heard and to make representations in that regard;c.notice of a right to a review or internal appeal against an administrative decision, where applicable……..…….(g) information, materials and evidence to be relied upon in making the decision or taking the administrative action [Emphasis added]”

105. The upshot of Section 4 of the FAAA reproduced above is that the Respondent has a duty to not only provide adequate notice of the nature and reasons for the assessment but also to provide the affected party in this case the Appellant, an opportunity to lodge a review or internal appeal through the submission of a notice of objection as is its right in accordance with Section 51 (1) of the TPA.

106. The Appellant herein submitted that the Respondent failed in discharging its duty under Article 47 of the Constitution as read together with Section 4 of the FAAA and Section 51 (1) of the TPA reproduced above by denying the Appellant the opportunity to lodge a notice of objection to this new legal basis of the assessment.

107. The importance of the right to fair administrative action as a constitutional right in Article 47 cannot be over emphasized. The Court of Appeal stated in the case of Judicial Service Commission v Mbalu Mutava & another [2014] eKLR that:“Article 47 (1) marks an important and transformative development of administrative justice for, it not only lays a constitutional foundation for control of the powers of state organs and other administrative bodies, but also entrenches the right to fair administrative action in the Bill of Rights. The right to fair administrative action is a reflection of some of the national values in article 10 such as the rule of law, human dignity, social justice, good governance, transparency and accountability. The administrative actions of public officers, state organs and other administrative bodies are now subjected by Article 47(1) to the principle of constitutionality rather than to the doctrine of ultra vires from which administrative law under the common law was developed.”

b. Whether the payments made by the Appellant to its sponsor bank, MCB qualified as royalties as defined in the ITA. 108. The Appellant submitted that the Respondent failed to fully understand the purpose of the payments made to MCB by the Appellant and has expressed the same in its statement of facts as detailed below:i.At Paragraph 47 the Respondent erred by stating that the payments made by the Appellant are for the right to use Mastercard Intellectual Property;ii.At Paragraph 50, the Respondent erred by stating that the Appellant had an agreement with Mastercard;iii.At Paragraph 51, the Respondent incorrectly stated that the Appellant is both an Issuer and an Acquirer; andiv.At Paragraph 53, the Respondent erred by stating that the Appellant normally makes payments to Mastercard for software license fees, trademark licensing and service fees.

109. The Appellant further submitted that in Paragraphs 51 and 53 of its statement of facts, the Respondent used generalizing terms such as “typically” and “normally and did not produce before the Tribunal the evidentiary basis of its suppositions in stating that the payments made by the Appellant to Mastercard normally includes software license fees, trademark licensing and service fees. As aforementioned, Mastercard owns an elaborate card payment network which link Merchants, Acquiring Banks, Issuing Banks, and cardholders.

110. The Appellant submitted that this card payment network allows the cardholders to make payments electronically for the purchases they make from Merchants. In order to access this network, a cardholder requires a card linked to the Mastercard payment network.

111. The Appellant submitted that to access Mastercard’s connectivity and settlement network, customer banks must be a licensed member of the card payment network either as a principal customer or through a sponsor as an affiliate customer. In this case, the Appellant is an affiliate customer that leverages on MCB’S relationship and settlement account with Mastercard by virtue of its Sponsorship Agreement.

112. The Appellant submitted that the Respondent erred in law and fact by rewriting contractual agreements between parties in its quest for additional taxes. The Appellant reiterated that it leverages on the relationship between MCB and Mastercard to enable its customers who are cardholders to be able to make use of this payment network.

113. Pursuant to the preamble of the Sponsorship Agreement, the Appellant solely issues Mastercard branded credit cards to its customers for use. Additionally, Clause 3 of the Agreement expressly states that the Appellant pays MCB a monthly management fee and pays all Mastercard fees and charges received by MCB from Mastercard for the settlement of transactions on behalf of the Appellant. The Appellant further submitted that the Respondent had attempted to rewrite its Sponsorship Agreement in its quest to charge additional taxes.

114. The Appellant relied on the judgment of the Court of Appeal in Fidelity Commercial Bank Limited v Kenya Grange Vehicle Industries Limited [2017] Eklr where it was held as follows in so far as freedom to contract is concerned:“The principle undergirding this rule flows form the notion of freedom of contract that is central to the law of contract that it would be perverse and directly inconsistent with the intention of the parties after reaching a bargain and choosing to record that bargain in writing, for any court to resort to the prior history of exchanges and negotiations in order to resolve a dispute arising from the interpretation of the terms of the written bargain; and that the parties by consensus have themselves chosen not to give their prior negotiations contractual force and instead they have reached an agreement, and documented it" [Emphasis added]

116. In Kenya Bureau of Standardsv Commissioner of Investigations & Enforcement, Tax Appeals Tribunal, Tax Appeal No. 136 of 2019 the Tribunal in allowing the appeal by the Kenya Bureau of Standards held as follows:“Consequently, asking this Tribunal to construe an agency relationship between the Appellant and the PVOC contractors is tantamount to asking it to rewrite the terms of the contracts contrary to the spirit of interpretation expressed by Lord Hoffman in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 where the court stated that:-…. “The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute, or articles of association. It cannot introduce terms to introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means ….it is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would be reasonably available to the audience to whom the instrument is addressed [Emphasis added].”

116. The Appellant submitted that payments by it to its sponsor bank, MCB did not qualify as royalties as defined in the ITA since withholding tax is only applicable under Section 10 and 35 of the ITA where the consideration in question qualifies as a royalty as defined under Section 2 of the ITA which states as follows:“a payment made as consideration for the use or the right to use-(a)the copyright of a literary, artistic, or scientific work; or(b)a cinematograph film, including film or tape for radio or television broadcasting; or(c )a patent, trademark, design or model, plan, formula, or process; or(d)any industrial, commercial, or scientific equipment. “

117. The Appellant submitted that contrary to the Respondent’s assertions at paragraph 47 of its statement of facts, payments to MCB, are not consideration for use of trademark or marks belonging to Mastercard rather payments for a monthly sponsorship fee and reimbursement of all Mastercard fees and charges received by MCB from Mastercard for the clearing and settlement functions it offers to the card holders as clearly stated in Clause 3 of the Sponsorship Agreement.

118. The Appellant submitted that in Republic vs Commissioner of Income Tax, Ex-parte SDV Transami (Kenya) Limited [2005] eKLR where the Court held that payment for access to a website for information should not have been characterized as royalty payments given that for a payment to be categorized as a royalty, it should have been made as a consideration relating to the use of the right to use property defined under section 2 of the ITA.

119. The Appellant submitted that as an issuing bank, it issues its customers with credit cards branded with the Mastercard logo to enable them to easily identify the specific automated teller machines (hereinafter “ATM’) or PoS which can be used by the cardholder and not the Appellant. Without the said marks, the cardholder will chance upon every ATM or PoS until they find one for which the card issued to them will work.

120. This Appellant submitted that it was evident that the payments made and in relation to clearing and settlement functions which are not listed as property under the definition of royalty in the ITA and therefore the payments made should not be characterized as royalties chargeable to withholding tax pursuant to section 10 and 35 of the ITA.

121. The Appellant submitted that the Respondent misinterpreted case law in order to make a tax claim by relying on the Court of Appeal determination in Commissioner of Domestic Taxes (Large Taxpayer Office) versus Barclays Bank of Africa Kenya Limited (Appeal No.195 of 2017) despite the fact that the facts of this case are in no way aligned to the Appellant’s matter.

122. The Appellant submitted that in the Barclays case, the Court of Appeal relied on the express wordings of the contract which stated that the agreements were in relation to a trademark license and furthermore in that case, Barclays bank was dealing directly with the card companies as the Principal customer bank. However, in this instant case, there is no license of a trademark and furthermore, the express provisions of the contract state that the monies paid out by the Appellant are in relation to the settlement of transactions and not for the use or right to use a trademark.

123. The Appellant submitted that the Respondent erred in fact by stating that the Appellant has an agreement with Mastercard. The Respondent in its statement of facts stated that the Appellant makes payment to Mastercard in relation to the use of trademarks, logos and processes referring to an agreement with Mastercard at paragraphs 47 and 50.

124. The Appellant submitted that contrary to the Respondent’s assertions, as an affiliate, it has no agreement with Mastercard and is operating in accordance with the Sponsorship Agreement with MCB. This fact is further buttressed by the sample invoices issued by Mastercard to MCB which the Appellant had adduced as evidence. The Appellant further reiterated that the payments made to MCB were in effect reimbursements of monies paid out by MCB to Mastercard to settle and clear the card. There was no direct relationship between the Appellant and Mastercard and the fact that all payments made to MCB are expressly with regards to clearing and settlement is that there can be no inference as to the payments being made as consideration for the use or right to use Mastercard’s intellectual property.

125. The Respondent submitted as follows:

126. That the sole issue for determination was whether the payments made by the Appellant to credit card companies (MasterCard) were royalties and subject to withholding tax under section 35 of the ITA. The Respondent then identified some questions which had to, in its view be answered so as to decide on whether payments made by the Appellant to credit companies were subject to withholding tax. The questions were set out as shown below:(a)For what was the payment made?

127. The Respondent considered in its submissions totality of facts leading to the payment. The Court of Appeal in Civil Appeal No. 195 of 2017: Commissioner of Income Tax v Barclays Bank Limited it was stated that:“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. "

128. In the Appellant's objection at page 25-26 of the Respondent's statement of facts the Appellant indicated as follows:“15. In the conduct of its business, VCB has agreed with MasterCard International Incorporated (Mastercard Inc.) through sponsoring bank Mauritius Commercial Bank Limited for the provision of card network payment services, through which customer credit card transactions.20. VCB is an issuing bank. The company utilises the card payment network technology solutions in helping fulfil the various transaction as per the customer needs.23. The bank is billed weekly by Mastercard through the sponsorship bank Mauritius Commercial Bank for these transactional fees, and they are charged based on the number of the transactions that the run through the Mastercard technology infrastructure. The fees charged are a reimbursement of the costs incurred by Mastercard in the facilitation of the transaction.”

129. The Respondent submitted that the MasterCard License Sponsorship Agreement allows the Appellant to issue MasterCard Branded Cards to enable access to the Card Platform. The Respondent submitted that from the foregoing, and with the admission by the Appellant that the payment is made to enable utilization of the card payment's technology infrastructure as the issuing bank. The Respondent noted the importance of understanding the terminology in the typical transaction and reiterated its statement of facts by outlining the meaning of card business terminologies, typical transactions for which payments are made that would attract income tax and contractual relationships in card schemes that attract tax.

130. The Respondent also delved into the issue of the “nature of payment” by citing Civil Appeal No. 195 of 2017: Commissioner of lncome Tax v Barclays Bank Limited at page 16 where it was held as follow:“How are we to determine whether the payments made by the respondent to the card companies constitute royalty? Is it, as the respondent suggests, by reference only to the terms of the written agreements between the respondent or the card companies? In our view, it is by considering the terms of the statute, the written agreements, and the totality of the relationship between the respondent and the card companies, including the actual dealings between the parties. "

131. Having already established the Mastercard fees is what enabled the Appellant's clients access the card transaction technological infrastructure, the Respondent proceeded to submit that it would try and find from the pleadings what else had been stated with regard to the fees.“i.The Appellant in the Objection decision [sic] at par. 15 stated that: In the conduct of its business, VCB has entered into an agreement with Mastercard International Incorporated (Mastercard Inc.) through sponsoring bank Mauritius Commercial Bank Limited for the provision of card network payment services, through which customer credit card transactions.ii.The Appellant's objection at Par. 23 states that:

132. The bank is billed weekly by Mastercard through the sponsorship bank Mauritius Commercial Bank for these transactional fees, and they are charged based on the number of the transactions that the run through the Mastercard technology infrastructure. The fees charged are a reimbursement of the costs incurred by Mastercard in the facilitation of the transaction.”iii.The Sponsorship License Agreement allows the Appellant to issue MasterCard Branded Cards which are used to access the MasterCard Platform.“At par. (b): VCB wishes to have an affiliate MasterCard License "the License" which will enable VCB as follows:Affiliate MasterCard License Issue Master Cards Only”iv.The Appellant's witness statement at par. 18, she states that it is through the license sponsorship agreement that its customers can conduct card transactions in the MasterCard's Platform.v.During the hearing, the Appellant Witness admitted that they can only access and use the card platforms having paid the MasterCard fees.vi.The Appellant witness statement at par. 20, states that the Mauritius Commercial Bank is billed for MasterCard Inc. Technology Infrastructure transactions. It follows, therefore that the MasterCard fees and charges is paid to enable the access to the platform and use of the MasterCard branded cards.vii.The License Sponsorship Agreement allows the Appellant to utilize the License issued by Mastercard as "an affiliate member"

133. The Respondent, in its submissions considered whether the nature of payment made were a royalty income as the case of Civil Appeal No. 195 of 2017: Commissioner of Income Tax v Barclays Bank Limited [supra], had already settled the issue as to the nature of the MasterCard fees and charges. Section 2 of the ITA states that, a royalty means:“royalty means a payment made as a consideration for the use of or the right to use-c.any patent, trademark, design or model, plan, formula or process; ord.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;”

134. The payments made by the Appellant to Mastercard have been established and evidenced to include payments for the use of MasterCard branded Cards and software license fees, and the technical infrastructure, which it submitted are payments for the right to use the global network services to link the services to users and the Appellant's agreement with MCB itself is called "MasterCard License Sponsorship Agreement" meaning that the Agreement enabled the use of the licenses granted to the MCB by MasterCard:“At par. 3. 9 it provides that: VCB shall pay for the One-time licenses fees, project management fees and other fees associated with license enrolment process for MasterCard.”

135. The Court of Appeal in Barclays Case at page 17 of the judgment having considered the same transaction stated as follows:“The agreement further provides that the respondent "is desirous to obtain a license to use the marks in various aspects of the charge card and debit services business conducted or to be conducted by the licensee. " By the agreement MasterCard grants the respondent a license to use its marks in connection with such aspects of the charge card and debit service business as may be performed or conducted by the licensee. Subject to the provisions of the agreement on termination, the terms of the agreement are perpetual.. .. . . . Without the use of credit and debit cards bearing those specific trademarks and logos from the authorising 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 trademarks and logos. 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.”

136. In the present scenario, building upon the Mastercard standard License Agreement outlined in the Court of Appeal case above, the Appellant has entered into a License Sponsorship Agreement. The Agreement grants the Appellant the authority to issue MasterCard branded cards, enabling access to the Mastercard Card transaction Platform. The transaction fees paid within this arrangement still qualify as royalties. Therefore, irrespective of any attempts at disguising them, these transaction fees maintain their essential character as royalties.

137. E.P. Ellinger in his treatise. Ellinger's On Modern Banking Law" at p.584 states:“As noted above, many credit cards currently in use bear a logo or insignia such as "Visa" or "MasterCard". Such a logo is usually held by a corporation which sponsors and controls the card in question. The corporation itself is not a card­ issuer. That role is undertaken by the participating banks and financial institutions. The corporation's role is, basically, to hold the trademark respecting the card in question (including the logo)..."

138. The Respondent submitted that the payments would fall within the above meaning of the term royalty, as defined in Section 2 of the ITA and as already established in the binding decision of the Court of Appeal. The Respondent in its submissions proceeded to outline the legal basis for the taxation in issue being Section 3 (1) of the ITA as read with Section 4(a) of the ITA, both, provide as follows:“Subject to, and in accordance with, this Act, a tax be known as income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya".

74. This means, all income, so long as it is income made in Kenya is taxable. Even if payments are made to companies abroad, such as MCB and Mastercard, the income taxes due from the income must be withheld by the withholding agent, (such as the Appellant), who makes the payment. Key words are "payments paid".

(b) Who made the payments? 139. Sec 10 (a) and (b) of the ITA provide as follows:“For the purposes of this Act, where a resident person or a person having permanent establishment in Kenya makes a payment to any other person in respect of-a.A management or professional fee.....b.A royaltythe amount thereof shall be deemed to be income which accrued or was derived from Kenya.”Sec 35 (1) of the ITA on withholding tax (Deduction of tax) provides that:“A person shall. upon payment of an amount to a non-resident person not having a permanent establishment in Kenya in respect of -a.a management or professional fee....b.a royalty;Which is chargeable to tax deduct therefrom tax at the appropriate non-resident rate. "

140. The Respondent submitted that it established that the Appellant made a payment for the Mastercard fee to a non-resident person and even claimed the same from their Income Tax Ledger as an expense. This was not disputed by the Appellant, they only alleged that the payments were channeled through Mauritius Commercial Bank as a reimbursement for making payment to the owner of the platform and the branded cards: Mastercard. Key word "upon payment".

141. It follows, therefore that the payments made to MasterCard being royalty are subject to withholding tax under section 10 as read with section 35.

(c) Whether the allegation of reimbursement changes the character of the payment? 142. The Respondent submitted that the Appellant made two conflicting submissions concerning the issue of reimbursement. Firstly, at the objection stage, paragraph 24 of the Appellant's objection stated as follows:“23. The bank is billed weekly by Mastercard through the sponsorship bank, Mauritius Commercial Bank for these transactional fees, and they are charged based on the number of the transactions that the run through the Mastercard technology infrastructure. The fees charged are a reimbursement of the costs incurred by Mastercard in the facilitation of the transaction.”

143. At the Appeal, the Appellant's witness during the hearing and at Paragraph 19 and 20 alleged that the amounts paid were a reimbursement to MCB and not to MasterCard. They indicated that MCB paid MasterCard and they were simply reimbursing MCB, based on the invoice. The Respondent submitted that the Court does not allow a party to approbate and reprobate. In R V KRA ex parte Aberdare Freight Services Ltd Hdwc App. 9410/04, the court found the Applicant to be guilty of both legal and factual misrepresentations and the court held that the Applicant's conduct disentitled it to the orders of Judicial Review which are discretionary in nature in stating that “It is obvious that Mundia is approbating and reprobating which is an unacceptable conduct”. Such conduct was considered in Evans V Bartlam (1937) 2 ALL ER 649 at page 652 where Lord Russel of Killowen held as follows:“The doctrine of approbation and reprobation requires for its foundation inconsistency of conduct, as where a man, having accepted a benefit given him by a judgment cannot allege the invalidity of the judgment which conferred the benefit. "

144. The Respondent submitted that the Appellant’s position could not be accepted as there was no clarity as to which reimbursement was even true noting that the Appellant never availed evidence, for example, a receipt or proof of payment that the amounts were paid to MCB and not MasterCard. Invoices are not proof of payment. On the first allegation that the same were the cost to reimburse MasterCard, the Court of Appeal in the Barclay’s case considered the same argument which was advanced by the Barclays Bank of Kenya and dismissed it. It indicates that the Tribunal must consider the totality of events leading to the accrual of the fees to determine the true character of a payment.

145. The Respondent also considered in its submissions whether the the use of MCB place the payment outside the term "paid" under the ITA. The Respondent illustrated its point using the analogy of rent payment, submitting that in a situation where someone “pays rent and you pay them the amount, does the amount stop being rent? If you sublet a house which is leased to you, does the payment made stop being rent?”

146. The Respondent submitted that the Appellant's case pivoted on the argument that MCB made the payment to Mastercard on its behalf, portraying its payment as a mere reimbursement. The Cambridge Dictionary defines the term "a reimbursement" as:“the act of paying back money to someone who has spent it for you or lost it because of you, or the amount that is paid back. "The Collins Dictionary: "Reimbursement is the act of paying back money to someone if they have spent it or lost it because of you.”The Black's Law Dictionary 8th Edition defines reimbursement as 1. repayment 2. Indemnification

147. The Respondent submitted that the Court has extensively discussed the meaning of the phrase "upon payment” and found that it has the same meaning as “paid” in the Income Tax Act. In Cimbria (EA) Limited v Kenya Revenue Authority [2017] eKLR and observed as follows:“These words may appear simple and straightforward, but not so in tax law. Indeed they have been subject of interpretation in many decisions both within and outside our jurisdiction. We start the interpretation with the simple English dictionary meaning attached to these words. In normal English parlance, the word "on" and "upon" are used interchangeably and are taken to have similar meaning..... It follows that "upon payment" would similarly refer to 'upon payment, when payment was made, at the time of payment. '......it is clear that the words "upon payment" would mean 'on payment', and in this case, it would also mean "paid". We agree with the learned Judge's interpretation of the said phrase in the case of Republic v Kenya Revenue Authority & Another Ex parte Kenya Nut Company Limited [2014] e.KLR, where the court held that the word 'upon payment' literally means 'paid'....we come to the following conclusions,· That the words "upon payment" mean "paid" and not ''payable".According to the definition of "paid" under Section 2 of the Income Tax Act. ''paid" includes distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person,”

148. The position that the term "upon payment" used in section 35 means the same as paid as used in section 35 was further adopted by Court of Appeal in Kenya Revenue Authority vs Republic (Exparte Fintel Limited) [2019] eKLR wherein the Court made the following determination of the term "upon payment" as used in section 35:If "upon payment" means ''paid" then what does ''paid" under the Income Tax Act mean. Under section 2 the word ''paid",·“....includes distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person and ''pay", ''payment" and ''payable" have corresponding meanings". (Our emphasis).Withholding tax is to be deducted from taxable management or professional fee for building, civil or engineering works "upon payment" of the amount due. While it was common factor that the respondent never paid the outstanding contractual fee as well as interest charged on the outstanding fee, it was the view of the appellant that, applying the meaning of the words "upon payment" and ''paid", as defined above, the respondent was bound to withhold the tax on account of the contractor even if it had not paid out the interest to the latter because an obligation to make payment had arisen,· and that the interest payment was accordingly included in its books of account as a credit to the contractor.”“This placed the Appellant's obligation squarely under the provision of Section 35 as read with the definition of the term paid under the Income Tax Act. It was therefore of Appellant to arrange its affairs to comply with the provisions of the ITA.”

149. The Respondent submitted that, it followed, that whether the Appellant made the payment directly to MasterCard or the payment was made by MCB on behalf of the Appellant and the Appellant reimbursed MCB, the amount so reimbursed fits within the definition of “upon payment”. It was therefore the Appellant's responsibility to arrange its affairs to comply with the withholding tax requirement.

150. The Respondent also submitted that the nature of an amount remains unchanged despite being paid for by another party for services utilized by the Appellant. Even if a third party facilitated payment for services on behalf of the Appellant, the essence of the financial obligation remains unaltered. The Appellant still benefited from the service and is ultimately responsible for the associated costs. The Respondent concluded that the nature of payment made by the Appellant in relation to the services received was not altered because it has been channelled through another person. The Respondent considered how the term paid under section 2 of the ITA fully addressed the issue of reimbursement.

151. The Respondent submitted that the definition of "paid" under section 2 of the ITA provides that payments made on behalf of another person are covered within the provision. From the definition of reimbursement pursuant to the Cambridge Dictionary, the term "a reimbursement" is defined as; "the act of paying back money to someone who has spent it for you or lost it because of you, or the amount that is paid back. According to the definition of "paid" under section 2 of the ITA the same include reimbursement. Its states as follows "paid" includes distributed, credited, dealt with or deemed to have been paid in the interest or on behalf of a person,”

152. The Respondent considered, in its submissions the Appellant's explanation wherein it alleged that it made repayment/ reimbursement to MCB as a result of MCB paying Mastercard on behalf of the Appellant as consideration for MasterCard issuing the platform, the said amounts fall within the term payment under section 2 and 10 of ITA and it was therefore the Appellant who was the payer and the amount still attracted withholding tax.

153. The Respondent averred that the definition of "paid" ensures that regardless of who pays for a service used by the Appellant, the essence of the financial obligation remains unaltered. The Appellant still benefits and thus remains accountable for the associated costs. Evidently, the direction of the payment did not diminish the Appellant's responsibility for their financial obligations to Mastercard and subsequently the relevant withholding tax.

(d) Whether the allegation of reimbursement is supported? 154. The Respondent submitted that although the issue of reimbursement had been given a centre stage in the case, no proof of payment like a receipt was ever availed to support there being any payments made to MCB. The Respondent picked the entries booked as payments to MasterCard from the Appellant's Ledger, while the Respondent introduced the argument of reimbursement at the current Appeal.

155. The Respondent submitted that averments in pleadings are not evidence was appreciated in Francis Otile v Uganda Motors Kampala HCCS No. 210 of 1989 where it was held that the court cannot be guided by pleadings since pleadings are not evidence and nor can they be a substitute therefore. Before that the then East African Court of Appeal held in Mohammed & Another v Haidara [19721 E.A 166 that the contents of a plaint are only allegations, not evidence. According to the holding in the case Edward Muriga Through Stanley Muriga vs. Nathaniel D. Schulter Civil Appeal No. 23 of 1997, where a defendant does not adduce evidence the plaintiff’s evidence is to be believed as allegations by the defence is not evidence. In CMC Aviation Ltd. v Cruisair Ltd. (No. 1) [1978] KLR 103; [1976 - 80] 1 KLR 835, Madan, J (as he then was) expressed himself as hereunder:“Pleadings contain the averments of the parties concerned. Until they are proved or disproved, or there is an admission of them or any of them, by the parties, they are not evidence and no decision could be founded upon them. Proof is the foundation of evidence. Evidence denotes the means by which an alleged matter of fact, the truth of which is submitted for investigation. Until their truth has been established or otherwise, they remain un-proven. Averments in no way satisfy, for example, the definition of "evidence" as anything that makes clear or obvious; ground for knowledge, indication or testimony; that which makes truth evident, or renders evident to the mind that it is truth. "

156. The Respondent submitted that the Tribunal could not make a determination based on unsupported averments as such the case should stick as was framed at the objection stage and presented herein by the Respondent.

(e) Effect of the Tribunal adopting the Appellant's position. 157. The Respondent submitted that if the Tribunal accepted the Appellant’s position, it would pose a significant threat to tax regimes globally. It would essentially imply that a local company receiving services from foreign or any entities by simply channeling funds through third parties, effectively removing the transaction from the tax jurisdiction as though it is the one that has received the payment and subsequently made the payments. Such a practice directly contradicted the fundamental principle that income tax should be levied where the income was accrued. This misinterpretation as to the nature of the payment undermines the fairness and efficacy of tax systems.

158. The Respondent finally submitted that the Tribunal must reject this stance to uphold the integrity of tax regimes and ensure that income is taxed appropriately based on where it is accrued.

Issues For Determination 159. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions finds that two issues call for its determination as follows:(a)Whether the Respondent complied with the provisions of section 51 (8) in issuing its objection decision dated 12th April, 2023. (b)Whether the payment made by the Appellant to Mastercard through MCB was a royalty payment subject to withholding income tax.

Analysis And Findings 160. Having identified the two issues for determination the Tribunal will proceed to analyse them as follows:

(a) Whether the Respondent complied with the provisions of section 51 (8) of the TPA in issuing its objection decision dated 12th April, 2023. 161. The Appellant disputed whether the objection decision was proper since according to it the Respondent had amended the assessment by amending its basis and failing to give the Appellant an opportunity to make an objection on the assessment.

162. Section 51 (8 of the TPA) provides as follows:“(8)Where a notice of objection has been validly lodged within time, the Commissioner shall consider the objection and decide either to allow the objection in whole or in part, or disallow it, and Commissioner's decision shall be referred to as an “objection decision”

163. The Tribunal has reviewed the income tax refund decision that was issued on 26th January, 2023 and notes that the Respondent referred to “Master card fees” and stated that withholding tax was charged on management and professional fees. When the Appellant objected on 22nd February, 2023, it indicated at par 14 that the Respondent did not give reasons for the tax demand and that therefore the Appellant could only presume the reasons for such an assessment.

164. The Tribunal has perused the objection decision dated 12th April, 2023 and notes that the basis of the assessments was still “Mastercard fees” but that upon receiving the notice of objection of the Appellant, the Respondent was of the view that the “Mastercard fees” were royalty payments and were subject to withholding tax. It was when the Appellant received the objection decision that it proceeded to raise as a ground of the Appeal the fact that the Respondent’s objection decision was unprocedural and ultra vires.

165. The view of the Tribunal is that the reference to Mastercard fees as royalties and not “management and professional fees” in the objection decision of the Respondent did not amount to an amendment of the assessment nor an amendment to the basis of the assessment. The description of the basis of the payment made changed from “management and professional fees” to “royalties”. The Tribunal is of the view that this change was not contrary to the provisions of section 51 (8) of the TPA since the Respondent disallowed the objection of the Appellant as a whole when it issued its objection decision on 12th April, 2023. The further view of the Tribunal is that the Respondent did not issue a separate additional decision in the objection decision as averred by the Appellant.

166. The Tribunal is of the further view that the Appellant was not prejudiced as it had asserted, by the change in the description of the Mastercard fees since it had the opportunity to lodge this Appeal against the decision of the Respondent. The finding of the Tribunal is that the assessment was not amended and the Respondent did not issue a new decision.

167. In view of the foregoing, the Tribunal notes the claim by the Appellant that the objection decision was improper is unsupported accordingly the Tribunal finds that the Respondent complied with the provisions of section 51(8) of the TPA in making its objection decision dated 12th April, 2023.

(b) Whether the payment made by the Appellant to Mastercard through MCB was a royalty payment subject to withholding income tax. 168. The Tribunal notes that in order to support its payments to Mastercard through MCB, the Appellant signed a Sponsorship Agreement titled “Mastercard License Sponsorship Agreement”. The parties to the Agreement were MCB which had signed a license Agreement directly with Mastercard and the Appellant which by signing the Sponsorship Agreement became an affiliate of Mastercard. Pursuant to Clause 3. 9 of the “Mastercard License Sponsorship Agreement”, the Appellant paid a one-time license fee, project management fee and other fees associated with license enrolment process for Mastercard. By signing the Agreement, the Appellant became an affiliate and was allowed to issue MasterCard cards to its customers.

169. The Tribunal also notes that the Appellant, in its pleadings indicated that under Clause 6 of the Sponsorship Agreement, there was no transfer or license of intellectual property. The said clause 6 of the “Mastercard License Sponsorship Agreement” provided as follows:“Nothing in this Agreement shall transfer the ownership of , grant any other interest in, any intellectual property rights of a party to the other Party..”

170. On the issue of the said Clause 6 the Tribunal is of the view that it meant that there were intellectual property rights that could have been transferred and that the Clause was making it clear that it was not the intention of the MCB, the Sponsor, to transfer its intellectual property or that of Mastercard. Section 2 of the ITA provides for the following meaning of “royalty”:“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; orb.any cinematograph film, including film or tape for radio or television broadcasting; orc.any patent, trade mark, design or model, plan, formula or process; ord.any industrial, commercial or scientific equipment,”

171. The Appellant stated that it took advantage of its relationship with MCB to make use of the Mastercard payment system, give its clients access and ability to use the Mastercard card at the ATM and at the PoS. This meant that Mastercard had a property and in Republic v Commissioner of Income Tax Ex-parte SDV Transami (Kenya) Limited [2005] eKLR for a payment to qualify as royalty, it would meet the following criteria:“(i)It would have made as a consideration;(ii)It should relate to the use of or the right to use a property; and(iii)The property should be within those identified under section 2 (a) to (d) in the definition provided in the ITA. “

172. The Tribunal notes that the Appellant paid a consideration to use the Mastercard system through MCB. MCB as its Sponsor, made provision for the Appellant to use the services of Mastercard, its business strategy and technologies such as its payment systems. The Appellant was also able to use its logo upon payment of the license fee to MCB. Therefore, the payment made was a consideration for the right to use a property and the same were identified under section 2 of the ITA.

173. In Civil Appeal No. 195 of 2017 Commissioner of Domestic Taxes (Large Tax Payer Office vs Barclays Bank Of Kenya Ltd the Court of Appeal held that the payment made to Visa Card company under the license Agreement was payment for a royalty. It was payment for the right to use the intellectual property of Visa card and withholding tax was due and payable.

174. In view of the foregoing, the Tribunal will not depart from the holding n the Court of Appeal its finding in the instant Appeal is that the payment made by the Appellant to Mastercard through MCB was a royalty payment subject to withholding income tax.

Final Decision 74. The upshot of the foregoing is that the Appeal fails and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is dismissed.b.The Respondent’s objection decision dated 12th April, 2023 be and is hereby upheld.c.Each party to bear its own costs.

74. It is so Ordered.

DATED AND DELIVERED AT NAIROBI THIS 30TH DAY OF AUGUST, 2024. .............................................CHRISTINE A. MUGACHAIRPERSON.............................................BONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBER.............................................OLOLCHIKE S. SPENCERMEMBER