Equity Bank (Kenya) Limited v Commissioner of Domestic Taxis (Appeal 161 of 2017) [2022] KETAT 1161 (KLR) (18 March 2022) (Ruling)
Neutral citation:
[2022] KETAT 1161 (KLR)
Republic of Kenya
Appeal 161 of 2017
J.K Maangi, Chair, G.G Karuu & T.M Ali, Members
March 18, 2022
Between
Equity Bank (Kenya) Limited
Appellant
and
Commissioner of Domestic Taxis
Respondent
Ruling
1.The Appellant is a limited liability company incorporated in Kenya under the Companies Act, Chapter 486 Laws of Kenya and is licensed and regulated by the Central Bank of Kenya. Its principal activity is the provision of financial services.
2.The Respondent is a principal Officer of the Kenya Revenue Authority, hereinafter referred to as KRA, appointed in accordance with Section 13 of the Kenya Revenue Authority Act Chapter 469 Laws of Kenya and is charged with the mandate of assessment, collection and receipt of revenue as an agent for the Government of Kenya.
3.The Respondent carried out a tax compliance audit of the Appellant's records with regard to Corporation tax for the 2015 year of income, Excise Duty for the period August 2013 to December 2015 and Pay As You Earn (PAY E) for the 2016 year of income.
4.On 21st June 2017 the Respondent, pursuant to the said audit issued a tax assessment in respect of the said three tax heads amounting to KshsI,738,969,276/= inclusive of penalties and interest. The Appellant objected to the entire assessment vide an Objection Notice dated 21 July 2017.
5.The Respondent issued an Objection Decision dated 19th September 2017 in which it confirmed the assessment as having been properly issued and proceeded to demand the taxes in the sum of Kshs. 1,738,969,276/=.
6.The Appellant being aggrieved by the Respondent's Objection Decision lodged this Appeal. It filed a Memorandum of Appeal and the Statement of Facts on 2nd November 2017.
7.Upon service, the Respondent filed its Response on 1st December, 2017 and served the same upon the Appellant.
8.The Tribunal, upon hearing the Appeal. including the submissions of the parties, extracted various issues that it deemed necessary for determination, namely;a)Whether bad and doubtful debts written off by the Appellant were tax deductible expenses pursuant to Sec. 15(2)(a) of the Income Tax Act as read with Legal Notice No.37 of 2011;b)Whether income earned in form of fees from loan and credit evaluation reviews are subject to Excise Duty;c)Whether income earned on temporary overdraft facilities offered to the Appellant's customers are subject to Excise Duty.d)Whether income earned on advance to the Appellant's customers relating to the uncleared cheques are subject to Excise Duty;e)Whether income earned from letters of credit, bank guarantees, invoice and bill discounting are subject to Excise Duty;f)Whether fees charged by the Appellant to programs run by donor organizations in conjunction with the Government of Kenya which programs are expressly exempt from taxes by virtue of a financing agreement between the Government of Kenya and the Government of the United Kingdom, are subject to Excise Duty; andg)Whether the Appellant is liable for PAYE on the ESOP benefit accruing to the company employees.
9.Consequently, the Tribunal made a determination on the two tax heads, namely corporation tax and PAY E. However, the Tribunal did not make a determination on the third tax head, namely, Excise Duty. The Tribunal was of the respectful view. that being cognizant of the fact that there was a similar case involving the parties on similar issues of Excise Duty pending determination in the High Court of Kenya at Nairobi, to wit, Commercial And Tax Division, Civil Suit No. E175 Of 2019, Kenya Bankers Association Vs. The Cabinet Secretary For National Treasury, The Attorney General And Kenya Revenue Authority and with concurrence of the parties herein, the Tribunal decided that in order to avoid duplicity of proceedings and determinations we would defer the analysis and ruling on the issue until the matter in the High Court was fully determined.
10.The Tribunal therefore, though having extracted the issues for determination, on Excise Duty did not delve further into the issues.
ll.In view of the foregoing and for avoidance of doubt, the Tribunal, having made a determination on the other two tax heads aforesaid, issued the following order on the Excise Duty, namely:" iii.The Respondent's Tax Assessment vide its Objection Decision dated 19th September 2017 in respect of Excise Duty in the sum of Kshs. 1, is hereby deferred, in abeyance to await the outcome of the decision of the High Court in respect of the pending suit relating to similar issues and parties, being Commercial and Tax Division Civil Case No. E175 OF 2019".
12.However, subsequently, vide a letter dated 1st November 2021, the parties advised the Tribunal that they had by consent withdrawn the suit in the High Court. Having perused the Decree from the High Court in Civil Suit Number E175 of 2019, issued on 1st July 2021, the High Court did not make a determination on the issues on the Excise Duty tax-head. As a result, the Tribunal is of the respectful view that so as to bring finality of the appeal and in the interest of justice to both parties, it is pertinent to make a final determination on the remaining issues in the appeal.
13.Consequently, the following are the remaining issues that were pending determination in the Appeal, namely:a)Whether income earned in form of fees from loan and credit evaluation reviews are subject to Excise Duty;b)Whether income earned on temporary overdraft facilities offered to the Appellant's customers are subject to Excise Duty.c)Whether income earned on advance to the Appellant's customers relating to the uncleared cheques are subject to Excise Duty;d)Whether income earned from letters of credit, bank guarantees, invoice and bill discounting are subject to Excise Duty;e)Whether fees charged by the Appellant to programs run by donor organizations in conjunction with the Government of Kenya which programs are expressly exempt from taxes by virtue of a financing agreement between the Government of Kenya and the Government of the United Kingdom, are subject to Excise Duty.
Analysis And Findings
14.It is to these issues on Excise Duty that the Tribunal will now turn to for determination as hereunder;-
a) Whether income earned in form of fees from loan and credit evaluation reviews are subject to Excise Duty;
15.The Respondent is of the opinion that the Finance Act, 2013 is explicit on the definition of the term 'other fees' which includes fees, charges, and commissions charged by financial institutions and that the only incomes explicitly exempted from Excise Duty, by the Finance Act, 2013 and Excise Duty Act 2015 are interest and insurance premium or premium based on related commissions and other services under part B of the latter Act.
16.The Appellant avers that the Respondent was erroneous in charging Excise Duty on interest earned and may not have considered the underlying facts of the nature of the fees deemed to have been subject to Excise Duty.
17.We have thoroughly looked into both parties' submissions and we deem it appropriate to replicate the provisions of Paragraph 8 of Part Ill of the Fifth Schedule to the now repealed Customs and Excise Act as relied on by the parties herein. Paragraph 8 of the Fifth Schedule stipulates as follows;
18.The Tribunal's understanding on this issue is that the contention herein is the term "interest" and whether it includes credit evaluation (and other lending) fees or not. As the repealed Customs and Excise Act did not provide a definition of what interest entails the Tribunal will be guided by the definition of "interest" in Section 2 of the ITA. The Tribunal considers the definition adopted by the ITA to consider the fact that the term interest encompasses all other lending fees.
19.To be specific, Section 2 of the ITA provides " "Interest" (other than interest charged on tax) means interest payable in any manner in respect of a loan, deposit, debt, claim or other right or obligation and includes a premium or discount by way of interest and a commitment or service fee in respect of any loan or credit."
20.Further, the Tribunal is also guided by the case of Greenwood Trust Co. vs Common Wealth of Massachusetts 971 F2d 818 (1992) as relied on by the Appellant wherein it was held;
21.Similarly, in the case of CIR vs Genn Co. (Pty) Ltd 20 SA TC 113, the court held that "it could not justify a difference in treatment between the interest on the loans and the raising fees, since the raising fees together with the interest formed in effect one consideration that the taxpayer had to pay for the use of the money for the period of the loan. This, we find and hold to be reasonable logic, one especially applicable to the current set of facts in this appeal given that the repealed Act did not exactly classify what "other fees" include."
22.The Tribunal is further guided by the case of Barclays Bank of Kenya vs The Commissioner of Domestic Taxes Tax Appeal number 137 of2016 wherein the Tribunal stated as follows:
23.From a recapitulation of the foregoing, income earned in form of fees from loan and credit evaluation reviews constitutes interest. Thus, it is not subject to Excise Duty as provided under Part Ill of the first schedule of the Excise Duty Act, 2015.
24.The upshot of the above is that the Tribunal finds that income earned in form of fees from loan and credit evaluation reviews are not subject to Excise Duty.
b) Whether income earned on temporary overdraft facilities offered to the Appellant's customers are subject to Excise Duty.
25.The Tribunal, having held hereinabove, that the definition adopted by the ITA wherein interest encompasses all other lending fees, is applicable and relevant. This Tribunal now has to opine on whether income earned on temporary overdraft facilities fall within the concept of "lending fees".
26.An overdraft is the amount by which withdrawals exceed deposits. It is by definition, a loan facility required to be repaid or reduced to zero. According to Investopedia, "An overdraft occurs when there isn't enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction anyway. Essentially, it's an extension of credit from the financial institution that is granted when an account reaches zero. The w. overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal".
27.In applying the definition of the word 'interest' as contained in the ITA, this Tribunal is of the opinion that fees, including those relating to overdraft facilities form "commitment or service fee in respect of any loan or credit".
28.Accordingly, we find that income earned on temporary overdraft facilities offered to the Appellant's customers are not subject to Excise Duty.
c) Whether income earned on advance to the Appellant's customers relating to the uncleared cheques are subject to Excise Duty;
29.Advances to customers are a term for advance payments. According to Investopedia, "an advance is a type of loan or payment in which money or goods are given before consideration is received in return".
30.The determination on the immediately preceding two issues is sufficient to extinguish this issue as well. Having determined the operative definition of the word 'interest' in the ITA, we are of the respectful opinion that that income earned from advances to customers relating to uncleared cheques constitutes interest.
31.Consequently, the Tribunal finds that income earned on advance to the Appellant's customers relating to the un cleared cheque are not subject to Excise Duty.
d) Whether income earned from letters of credit, bank guarantees, invoice and bill discounting are subject to Excise Duty;
32.Having determined hereinabove that the term "interest" includes income and fees from commitment or service fees in respect of any loans or credits, what is now left to determine is whether letters of credit, bank guarantees, invoice and bill discounting fall within the ambit of loans or credits. The same are defined by Investopedia as per the below:i)"A letter of credit, or "credit letter," is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility"ii)"A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan."iii)I nvoice / bill discounting also known as "Invoice financing is a way for businesses to borrow money against the amounts due from customers. Invoice financing helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid their balances in full. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money. Invoice financing can solve problems associated with customers taking a long time to pay as well as difficulties obtaining other types of business credit."
33.Having thoroughly studied the trade finance instruments stated above, the Tribunal is comfortable to declare that the said products indeed form part of loans or credits.
34.Consequently, we find that income earned from letters of credit, bank guarantees, invoice and bill discounting are not subject to Excise Duty.
e) Whether fees charged by the Appellant to programs run by donor organizations in conjunction with the Government of Kenya which programs are expressly exempt from taxes by virtue of a financing agreement between the Government of Kenya and the Government of the United Kingdom, are subject to Excise Duty;
35.The Respondent states that it established that the Appellant handles donor funds on behalf of Northern Irelands Department for International Development (DFID) for projects done with the Government of Kenya and earns fees on services offered. In this regard the Respondent contends that the Appellant did not demonstrate that the fees earned are tax exempt.
36.The Appellant has stated that Excise Duty on fees charged to the Hunger and Safety Network Program is also in error as notwithstanding the findings on Excise Duty, the Program is exempt from taxes pursuant to an agreement signed by the Government of Kenya.
37.The Appellant avers that The Government of Kenya (60K) signed a financing agreement with the Government of the United Kingdom of Great Britain and DFID with regard to the Financial Sector Deepening Trust (FSD) Program.
38.The Appellant submits that DFID has initiated a number of projects in Kenya, including the Hunger and Safety Network Program (HSNP) to carry out the objectives of DFID as agreed with GoK. FSD subsequently entered an agreement with the Appellant to facilitate the carrying out of the HSNP program to execute its mandate of providing financial support to the lower income groups in Kenya and charged FSD various fees in connection with the provision of these services.
39.The Tribunal has thoroughly studied the Financing Agreement attached in the Appellant's Memorandum of Appeal on Page 259 and can confirm that at Paragraph 30 on Page 8, it states that GoK shall "recognise FSD's primary income is by way of grants in accordance with the terms of FSD's Trust Deed; all of which are transfer income funds that have already been subject to taxation framework in the country of origin. As laid out in the 1995 development agreement between the UK and the Government, such FSD income applied in delivery of programme so agreed with the Government shall not be used to meet the cost of taxes or fiscal charges normally im posed by the Govemment whether directly or indirectly". The document has been signed by the then Cabinet Secretary of the National Treasury.
40.The Tribunal's interpretation of the above provision is that any income associated to the delivery of the program shall be exempt from taxes or fiscal charges whether directly or indirectly.
41.On the basis of this agreement, the Appellant states that it did not charge any Excise Duty on fees charged to FSD. The Appellant therefore avers that the Respondent is similarly precluded from demanding any taxes on such fees on account of the agreement signed by GoK and DFID as the Respondent is an agency within GoK and must abide by agreements entered into by 00K. This is as any taxes charged on the fees would be taxes paid by FSD in contravention of the provisions of the Agreement.
42.The Appellant has relied on the case of Savings And Loan Kenya Limited vs Mayfair Holdings Limited, [2012] EK/r which stated "...the object of construdion of terms of a written agreement is to establish there from the intention of the parties to the Agreement which must be approached objectively. The question in this appeal is not what the appellant or the respondent m eant or understood by the words used but the meaning which the particular clause would convey to a reasonable person having all the to. OF13 background information that was available to the parties at the time of the contract."
43.The Tribunal is of the respectful opinion that the Respondent, by collecting Excise Duty, would be retracting from the intention of the parties to the agreement.
44.Consequently, fees charged by the Appellant to programs run by donor organizations in conjunction with the Government of Kenya which programs are expressly exempt from taxes by virtue of a financing agreement between the Government of Kenya and the Government of the United Kingdom, are not subject to Excise Duty.
45.Having made the analysis to the above issues for determination, the Tribunal finds as follows:a.Excise Duty charged on loan and credit evaluation reviews is hereby set aside;b.Excise Duty charged on income earned on temporary overdraft facilities is hereby set aside;c.Excise Duty charged on advances to the Appellant's customers relating to the uncleared cheques is hereby set aside;d.Excise Duty charged on income earned from letters of credit, bank guarantees, invoice and bill discounting is hereby set aside;e.Excise Duty charged on the Appellant to programs run by donor organizations in conjunction with the Government of Kenya which programs are expressly exempt from taxes by virtue of a financing agreement between the Government of Kenya and the Government of the United Kingdom is hereby set aside.
Final Decision
46.The upshot of the foregoing is that the Appeal in relation to the Respondent's tax assessment vide its Objection Decision dated 19 th September 2017, in respect of Excise Duty is hereby set aside with no orders as to costs.
47.Orders accordingly.
DATED AND DELIVERED AT NAIROBI ON THIS 18 TH DAY OF MARCH, 2022.JOSEPHINE K. MAANGI - CHAIRPERSONGEOFFRPT' KARUU - MEMBER TANVIRAU - MEMBER