Banki Kuu Pension Scheme 2012 Registered Trustees v Commissioner of Domestic Taxes (Tax Appeal E754 of 2023) [2024] KETAT 1294 (KLR) (Civ) (30 August 2024) (Judgment)
Neutral citation:
[2024] KETAT 1294 (KLR)
Republic of Kenya
Tax Appeal E754 of 2023
CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members
August 30, 2024
Between
Banki Kuu Pension Scheme 2012 Registered Trustees
Appellant
and
Commissioner of Domestic Taxes
Respondent
Judgment
1.The Appellant, is a defined contribution pension scheme that was established by the Central Bank of Kenya on 1st October 2012 pursuant to a circular by the Treasury No. 18/2010. It is governed by a Trust Deed and is registered with the Retirement Benefits Authority. Its principal activity is to provide pension and other periodical benefits to staff of the Central Bank of Kenya upon retirement and relief for the dependents of its deceased members.
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.The Respondent conducted investigations into the tax affairs of the Appellant with a view of establishing whether the Appellant was tax compliant for the tax period in respect of July 2018 – June 2020. The process was initiated by an electronic mail sometime in March, 2021.
4.Upon providing various documents requested by the Respondent, both parties had meetings and exchanged correspondence in a bid to resolve the audit issues. The Respondent then proceeded to issue an assessment letter on 27th June, 2023 through which a tax amount of Kshs. 240,865,260.00 was demanded.
5.On 25th July, 2023, the Appellant objected to the assessment and the Respondent rendered its objection decision dated 22nd September, 2022[sic]. The Respondent later clarified that there was a typographical error and that the date of its objection decision was 22nd September, 2023.
6.Aggrieved by the Respondent's objection decision, the Appellant lodged its its notice of appeal dated 19th October 2023 on even date.
The Appeal
7.The Appeal as contained in the Memorandum of Appeal dated 2nd November, 2023 and is premised on the following grounds:i.The Respondent erred in law and fact by demanding corporate taxes on exempt income from a pension scheme contrary to provisions of the Income Tax Act, CAP 470 of Kenya’s Laws (hereinafter “ITA”).ii.The Respondent erred in law in raising its assessment by diverging from strict interpretation of the tax statutes thus seeking to double tax the Appellant.iii.The Respondent erred in law by failing to adhere to the principle of legitimate expectation by raising an assessment on corporate taxes that was contrary to the position it had taken in its earlier refund decision for the income years of 2013 and 2014.iv.The Respondent erred in law and fact by failing to recognize that the tax law limiting the tax-exempt amount for a registered pension scheme has not been enacted.v.The Respondent’s tax assessment was excessive as it did not take into consideration taxes paid at the point of withdrawal of funds from the pension fund.vi.With regard to withholding taxes, the Respondent erred in law and fact by subjecting services to withholding taxes that do not qualify as professional and management services, thereby erroneously arriving at the wrong conclusion that the Appellant did not remit withholding tax.
The Appellant’s Case
8.The Appellant set out its case in the statement of facts dated 2nd November, 2023 together with the witness statement of Mr. Andrew Lentoijoni dated 7th February, 2024 and filed on 8th February 2024. The said witness statement was admitted as evidence in chief by the Tribunal on 27th March, 2024. The witness statement was a reiteration of the Appellant’s statement of facts and will not be re-hashed by the Tribunal. The Appellant stated as follows:
9.The Appellant is one scheme “a registered pension scheme” and during the investigation by the Respondent it was requested for the following documents to ascertain the its tax position:i.Trust Deedii.Actuarial reportsiii.Financial Statementsiv.List of Membersv.Employees Payrollvi.Rental Income Schedulesvii.Rental invoices/contracts/lease agreementsviii.Trial Balancesix.General Ledgersx.Schedules of contributors who have left in the periodxi.Schedules of contributions by members/ employerxii.Bank statements/ cheque counterfoils
10.Upon completion of the investigations an assessment was issued and on 18th October, 2023, after the objection decision was issued, the Appellant paid principal taxes amounting to Kshs. 198,396.00 which it had conceded to in respect of VAT on imported services, before lodging its Appeal at the Tribunal.
11.The Appellant outlined and analysed each of its grounds and more specifically with regard to corporate taxes it stated as follows:I. The Respondent erred in law and fact by demanding corporate taxes on exempt income from a pension scheme contrary to the provisions of the ITA.
12.The Respondent in its assessment claimed that upon perusal of the income tax returns filed and other availed information, in its determination on whether the correct declarations were made and taxes payable remitted as required under the ITA, the Appellant does not pay corporation tax since all the incomes have been declared as exempt.
13.The Respondent in its objection decision alleged that exempt income for pension schemes is the investment from the registered amount contributed not exceeding KShs. 240,000.00 for each employee in each year as guided by Section 22 and 22A (1) and (4) of the ITA. Thus, the investment income earned from the excess pension is taxable on the pension scheme in the year earned and not the individual employee upon leaving the scheme.
14.Section 3 of the ITA brings to charge the income of a person, whether resident or non-resident, which is accrued in or derived from Kenya. A person, for purposes of this section, refers to both natural and incorporated persons.
15.The forms of income subject to tax under Section 3 of the ITA are listed and include business income as well as dividends or interest. The Appellant asserted that assuming a no-exemption status, the income generated by the Appellant, would be liable to income tax as it meets the criterion of income accrued in or derived from Kenya, and falls within the purview of the income categories listed under section 3 (2) of the ITA:ii.any withdrawals from, or payments out of, a registered pension fund or a registered provident fund or a registered individual retirement fund; and
16.The above not-withstanding, Section 13 of the ITA provides for certain incomes that are exempt from tax. Section 13 (1) of the ITA states as follows:
17.Further, Part I of the First Schedule to the ITA outlines the income accrued in, derived from or received in Kenya which is exempt from tax. Paragraphs 12, 13, 14 and 15 of Part I of the First Schedule to the ITA exempts from income tax the incomes of a registered pension scheme, registered trust scheme, registered pension fund, and registered provident fund respectively.
18.The Appellant stated that more specifically, the paragraphs provide as follows:
19.The Appellant stated that it was registered with the Respondent with effect from 1st October 2012 and that it had been issued with an Income Tax Exemption Certificate indicating that the investment income of the Appellant is exempt from income tax with effect from 1st October 2012.
20.The Appellant is therefore exempted from income tax pursuant to paragraph 12 of the ITA. The exemption provision does not make a distinction between the income attributable to the allowable pension contributions nor the income attributable to excess pension contributions contrary to the Respondent’s aversions.
21.The Appellant averred that there was no requirement for tax purposes to segregate the income of a registered pension scheme into what is attributable to the allowable pension contributions or what is attributable to the excess pension contributions. The Appellant operates “a registered pension scheme” whose income is exempt from tax.
22.The exemption in the First Schedule to the ITA covers the total income of the pension scheme. The determination of whether the contributions used in the generation of the income were taxed would thus not be expected to alter the exemption status of the income of a registered pension scheme. The Respondent’s interpretation of Section 22A(2) of the ITA on defined contribution schemes was erroneous. Sections 22A (1) and (2) provide as follows;
23.The Appellant averred that it was because, the provisions of Section 22A (1) and (2) deal purely with the taxation of the pension contributions in excess of Kshs. 240,000.00 on the contributors which is the amount that is tax deductible on the employer and the employee and limits this amount to Kshs. 240,000.00 per annum as opposed to the taxation of the pension schemes into which the contributions are made.
24.In this regard, Section 22A (1) and (2) of the ITA does not envisage the taxation of the pension scheme itself but rather the taxation of the pension contributors.
25.In the case of withdrawals of pension from a registered pension scheme, the tax-free limit is specifically provided and the amounts over and above this tax-free limit are taxed as per the provisions of Section 35(3)(e) on deduction of tax from certain income of the ITA and at rates provided by paragraph 5(d) of the Third Schedule to the ITA. Specifically, the Section 35 (3) (e) states as follows:
26.Additionally, the Appellant stated that paragraph 5 (d) of the Third Schedule to the ITA outlines the following rates:
27.The Appellant stated that it had at all times paid taxes at the point of withdrawal including taxes arising from investment income from excess pension. It further stated that to subject the same income to corporation tax would not only be against the provisions of the ITA but would amount to double taxation.
II. The Respondent has erred in law in raising its assessment by diverging from strict interpretation of tax statutes and thus seeking to double tax the Appellant.
28.The Respondent demanded corporation taxes on the basis that the investment income earned by the Appellant from excess pension is taxable on the pension scheme in the year earned and not the individual employee upon withdrawing pension from the scheme. The Respondent erred in its interpretation as Section 3 (2) (c) of the ITA states as follows:
29.Section 3 (2) (ii) of the ITA provides strictly that tax is chargeable upon withdrawals or payments out of the registered scheme, not the investment income earned by the scheme. Article 210 (1) of the Constitution of Kenya, 2010 (hereinafter “the Constitution”) is categorical that any charge or demand for tax has to be made on the basis of express statutory provisions. There is also a settled legal principle that tax statutes must be interpreted restrictively as alluded to by the Court in the case of Keroche Industries Limited v Kenya Revenue Authority & 5 Others [2007] 2 KLR 240 as follows:
30.The Appellant’s view was that the court is emphatic that unless expressly provided for in tax legislation, no taxes can be charged or demanded by the revenue authority, and further, in any event, where the words of the legislature may be unclear, the interpretation ought not to be the one that imposes a burden on the taxpayer. The interpretation ought to be the one that favours the taxpayer in such a case. In the circumstances, it was not open in law for the Respondent to purport to demand corporation tax from the investment income which is explicitly exempt from tax under Paragraph 12 of Part I of the First Schedule to the ITA.
31.In addition, tax on income arising from the investments of the scheme is charged or paid at the point of withdrawal of funds from the pension scheme by the pensioners pursuant to section 35(3)(e) of the ITA at rates provided in paragraph 5(d) of the third schedule to the ITA. This fact, according to the Appellant, was not disputed by the Respondent and it was the fact that when members of the Appellant withdraw their pension from the fund, they are taxed according to the provisions of the ITA. To subject the same income to corporation tax would not only be against the provisions of the ITA but would amount to double taxation. This is because, the income that the Respondent is assessing for corporate tax is the same income that is subjected to tax at the point of withdrawal.
III. The Respondent erred in law by failing to adhere to the principle of legitimate expectation by raising an assessment on corporation taxes that was contrary to the position it had taken in its earlier refund decision for the income years of 2013 and 2014.
32.In a letter dated 28th May 2018 which was a follow up to a letter dated 2nd August 2016, the Appellant applied for a refund of corporate taxes that were paid in error for the years of income for 2013 and 2014 amounting to KShs. 360,317.00 and KShs. 5,094,440.00 respectively. The Appellant in its application informed the Respondent that it paid corporate tax in error given its income is exempt from income tax in accordance with Paragraph 12 of Part I of the First Schedule to the ITA. The Respondent responded on 27th February 2017 and requested the Appellant to claim the refund of corporate tax paid in error by filing income tax returns for the affected period online.
33.Following various meetings and explanations provided to the Respondent, the Respondent refunded the Tax Approval Orders and Disbursement Orders for the income years of 2013 and 2014 respectively. By granting the refund of corporate tax, this raised a legitimate expectation that the income earned by the Appellant is tax exempt. By raising an assessment and demanding taxes from the Appellant, the Respondent violated the its legitimate expectation.
34.The Respondent’s decision to depart from the position that it intimated to the Appellant was therefore contrary to the Appellant’s legitimate expectation. According to De Smith, Woolf & Amp; Jowell “Judicial Review of Administrative Action” 6th Edn, Sweet & amp; Maxwell page 609 quoted in Republic v Kenya Authority Ex-Parte; Cosmos Limited [2016] Eklr:
35.In determining the existence of legitimate expectation, the court in Republic v Principal Secretary, Ministry of Mining Ex-parte Airbus Helicopters Southern Africa (PTY) Ltd [2017] eKLR cited R (Bibi) v Newham London Borough Council [2001] EWCA Civ 607 [2002] 1 WLR 237 at [19] to hold that existence of legitimate expectation involves the following questions:
36.The Appellant asserted that by previously refunding the corporate tax paid in error and thereby confirming that the Appellant’s income is indeed exempt, the Respondent made a representation that it is now bound to keep. The Appellant further averred that the representations made by the Respondent were actually the correct and lawful position, and the Respondent could not reinvent its position to suit its intention to collect tax that was not due.
37.The Appellant stated that the Respondent had by its utterances in writing given the Appellant an enforceable legitimate expectation that all its income is exempt from corporate tax. The Appellant prayed that the objection decisionn would be set aside as the Respondent had diverged from the correct position where there was no change of law or circumstances to warrant the tax demand.
IV. The Respondent erred in law and fact by failing to recognise the tax law limited the tax- exempt amount for a registered pension scheme has not been enacted.
38.The Appellant submitted that the provisions of Paragraph 12 of the First Schedule to the ITA do not contain the provision limiting the amount of exempt income for a registered pension scheme. This provision is only included in the draft Income Tax Bill, 2018 which is yet to be enacted. Particularly, Paragraph 7 of the First Schedule to the draft Income Tax Bill, 2018 provides as follows:
39.Section 32 (1) of the Income Tax Bill, draft Act 2018 which is yet to be enacted provides as follows:
40.The Appellant stated that the Respondent had no basis for assessing corporate tax on its income as there is no existing law providing for this taxation.
V. The Respondent’s corporate tax assessment is excessive as it did not take into consideration taxes paid at the point of withdrawal of funds from the pension fund.
41.The Appellant stated that if at all the corporate taxes demanded by the Respondent are due and payable, the Respondent’s tax assessment and confirmation in its objection decision was excessive as it did not consider the taxes paid on withdrawals from the pension scheme.
42.The Respondent did not dispute that tax has been paid by the Appellant. The issue in contention according to the Respondent is the point of payment of this tax. The Appellant accounts for tax at the point of withdrawal from the it in accordance with the provisions of Section 3 (2) (c), Section 8 and Paragraph 5 (d) of the Third Schedule to the ITA.
43.The Appellant already paid to the Respondent a total of taxes amounting to Kshs. 11,803,567.00 for the years 2017 to 2021. These taxes were paid to the Respondent at the point when the members of the scheme withdrew their contributions from the scheme. Additionally, the Respondent did not dispute that these taxes were paid and received at the time that members of the scheme were making withdrawals and not contributions.
44.The Respondent’s objection decision and assessment indicated that tax should be accounted for in the year earned and not when the individual employee leaves or withdraws from the scheme which was erroneous. However, the Respondent in its calculation of the tax liability did not consider the taxes already paid by the Appellant to the Respondent on the members withdrawal from it. To subject the same income to corporation tax would not only be against the provisions of the ITA but would amount to double taxation of members’ income.
VI. The Respondent erred in law and fact by subjecting services to withholding taxes that do not qualify as management or professional services, thereby erroneously finding that the Appellant did not remit withholding tax
45.The Respondent sought to demand withholding taxes on various maintenance services provided to the Appellant amounting to Kshs. 149,674.00. The Appellant submitted that the services offered by the service providers highlighted by the Respondent did not fall under the ambit of Section 10 of the ITA which provides as follows:
46.Section 2 of the ITA defines “management or professional fees” as follows:
47.The Appellant stated that from the description of the services which are standard maintenance procedures on lifts and cleaning services offered to the Appellant as evidenced by the sample invoices that it adduced as evidence, the services were maintenance supply services on various equipment that are provided to the Appellant, and not professional or management services. This was on the basis that:
- the services are not managerial in nature as they don't relate to management;
- the services are not professional in nature as maintenance services are not included in the list of professions in the Fifth Schedule to the ITA;
- the services are not consultancy as they do not relate to payment for acting in an advisory capacity or providing services on a consultancy basis;
- the services are not agency as the provider was not acting on behalf of the Appellant;
- the services are not contractual fees as they relate to generator maintenance services, lift services and cleaning and gardening service; and
- such services would not be deemed as technical as special skills are not required.
48.The Appellant was of the view that the Respondent had misinterpreted section 2 of the ITA as the description provided for in section 2 of the ITA did not constitute the services. The basis of the Appellant’s assertion was that the services were standard maintenance services, gardening and cleaning services.
49.The Appellant further stated, in addition that “professional services” were not defined in the ITA but that the Fifth Schedule to the ITA provided a schedule of professions and qualifications and the activities of standard maintenance services, gardening and cleaning services were not amongst those listed in the Fifth Schedule to the ITA and could not therefore qualify as a professional service. The Appellant adduced as evidence copies of the invoices illustrating the professional services.
50.The Appellant referred to Article 12A of the UN Model Tax Convention on the definition of “Fees for Technical services” which was similar to the definition of “management or professional fees” under section 2 of the ITA as it encompassed, managerial, technical and consultancy services. The Appellant stated that Article 12A of the UN Model Tax Convention provides as follows:
51.Fees for technical services, according to the Appellant are defined to mean payments for services “of a managerial, technical or consultancy nature”. The Commentary to Article 12A of the UN Model Tax Treaty provides as follows on the fundamental concept of fees for technical services:‘Given the ordinary meanings of the terms “managerial,” “technical” and “consultancy”, the fundamental concept underlying the definition of fees for technical services is that the services must involve the application by the service provider of specialized knowledge, skill, or expertise on behalf of a client or the transfer of knowledge, skill, or expertise to the client .. (Emphasis added)”.
52.Paragraphs 63-66 of the Commentaries further define “management”, “technical” and “consultancy” as follows:
53.The Appellant stated that in summary, the Commentaries suggest as follows:a.Managerial services involve services relating to how a business is to be run;b.Technical services require technical skills or knowledge in relation to a particular technical field i.e.; art, science, or profession; andc.Consultancy services require the provision of advice, which arguably involves human interaction.
54.The Appellant stated that the services that it had outlined including cleaning, gardening and lift maintenance do not constitute any managerial, technical or consultancy services and thus the Appellant had no obligation to withhold any amounts.
55.The Appellant asserted that without prejudice to its preceding statements, the Respondent ought not to charge withholding tax on the gross amount as the gross amount included an amount that did not constitute “management or professional fee” but was goods and spare parts necessary for the maintenance works as demonstrated by the invoices it had adduced as evidence.
56.The invoices showed that the Appellant had received basic services for maintenance work, cleaning and gardening. The Appellant’s position was guided by the provisions of section 2 of the ITA which defines “management or professional fees” to only consist of fees for services. Costs for the use of goods and spare parts did not constitute management or professional fees but are costs of goods. The Respondent ought to have distinguished between costs for the maintenance services and the cost of individual items as clearly indicated in the invoices and agreements between the Appellant and the service providers. To illustrate the above, the Appellant adduced as evidence a sample Agreement for the provision of Maintenance and Service to lifts between Starlink Diesel Sales and Services - Banki Kuu Pension Scheme 2012.
57.The decision by the Respondent to assess withholding taxes on cost of goods was contrary to the decision in Two Lakes Packing v Commissioner of Domestic Taxes TAT Appeal No. 420 of 2021, where the Tribunal when interpreting the provisions of section 35(3)(f) of the ITA held as follows:
58.The Appellant asserted that taxation must be based on clear provisions of the law. It relied on the case of Republic v Commissioner of Domestic Taxes large Taxpayers office Ex parte Barclays Bank of Kenya Limited (2012) eKLR where the court held as follows:
59.The Appellant finalized its statement of facts by stating that since the invoices were for maintenance services and not professional fees the payments could not be subjected to withholding tax.
60.The Appellant made the following prayers to the Tribunal:a.That the Respondent’s objection decision dated 22nd September, 2023 relating to corporate income tax be set aside in its entirety;b.That the Respondent’s objection decision dated 22nd September 2023 relating to withholding taxes as demanded by the Respondent be set aside in its entirety;c.That the costs of and incidental to this Appeal be awarded to the Appellant; andd.Any other orders that the Tribunal may deem fit.
Respondent’s Case
61.The Respondent’s case was as set out in its statement of facts dated 29th November, 2023 and filed on 30th November, 2023 and the witness statement of Ms. Linet Ojiambo dated 1st March, 2024 and filed on 6th March, 2024 which was admitted as evidence in chief by the Tribunal on 27th March, 2024.The witness statement of Ms. Ojiambo was a reiteration of the Respondent’s statement of facts in which it stated as follows:
62.The Respondent averred that the Appellant was registered by it on 18th March 2013 and was granted an Income Tax Exemption Certificate on 19th August 2013. The Respondent stated that it conducted tax investigations into the tax affairs of the Appellant with a view of establishing whether the Appellant was tax compliant for the tax period years 2018 to 2022.
63.The Respondent averred that it took notice of the fact that the Appellant did not pay corporation tax since all the incomes were declared as exempt and the Appellant claimed that exempt income for the registered amount contributed not exceeding Kshs. 240,000.00 for each employee in each year as guided by section 22 of the ITA.
64.The Respondent averred that the investment income earned from the excess pension is taxable on the pension scheme in the year earned and not on the individual employee upon leaving the scheme. The Respondent averred that the Appellant is registered with the Retirement Benefits Authority and has an exemption certificate issued by the Respondent. The exemption certificate exempts it from Income Tax. Dividend and interest payable to the Appellant should be paid gross without deduction of income tax.
65.The Respondent averred that the contributions exceeding the tax limits provided by Section 22A are not exempt thus their investments are not tax exempt. The contributions above tax limit ought to be accounted for separately and the taxes thereon be paid promptly pursuant to the law.
66.The Respondent averred that it reviewed the Appellant's withholding income tax returns for the tax period July 2018 to June 2022 to determine whether the Appellant had declared and paid the correct taxes. The Respondent noted that the Appellant consumed the services of professionals during the years under review and payments were not subjected to withholding income tax.
67.The Respondent averred that the Appellant is an appointed Withholding VAT agent under Section 42A of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”) and a review of the filed returns revealed unpaid principal taxes of Kshs 47,594.00.The Respondent reviewed the Appellant's documents and noted that reverse VAT on imported services was not remitted, assessments for corporation tax, withholding income tax, withholding VAT and VAT on imported services amounting to principal of Kshs 183,687,956.00. The Appellant objected to the additional tax assessments.
68.The Respondent averred that the Appellant contended that the services subjected by the Respondent to withholding income tax did not qualify as management or professional services pursuant to the definition in section 2 of the ITA.The Respondent requested invoices relating to the services and the Appellant’s contractual agreements with the service providers. The Respondent reviewed the invoices provided and noted that the services related to repair, maintenance and overhaul of generator, maintenance of lifts and cleaning services. The Respondent averred that the services fall under technical, contractual and professional services and are therefore subject to withholding income tax.
69.The Respondent averred that following deletion of Section 35(6) of the ITA through changes introduced by Section 9 of the Finance Act 2016 and reintroduced the same under Section 39A of the TPA, in November 2019 the assessment relating to the period 1st July 2016 to November 2019 was excluded in the assessments.
70.The Respondent averred that the Appellant contended that the Respondent had issued the assessment on VAT on imported services outside the statutory 5 years and upon review the Respondent vacated the assessments for January 2017 to April 2018.
71.The Respondent averred that with regards to the three invoices for Crown Agents Ltd in respect of the dates 20th September, 2018 and 20th October, 2018 the Appellant contended that the same had not been correctly accounted for VAT purposes. The Appellant contended that it was ready to pay VAT under the accurate VAT percentage, The VAT applicable rate was 16%.
72.The Respondent stated that the Appeal evoked the following issues for determination:(i)Whether the objection decision dated 22nd September, 2022 were[sic] proper in law?(ii)Whether the Appeal herein should be allowed?
73.The Respondent stated that section 24 of the TPA allows a taxpayer to file returns but further provides that the Commissioner is not bound by the information provided therein and can assess the tax liability based on any other available information. Section 77 of the ITA and Section 31 of the TPA allow the Respondent to issue additional assessments where a taxpayer has been assessed for a lesser amount based on any additional available information and to the best of its judgement.
74.The Respondent averred that the contributions exceeding the tax limits provided for under Section 22A of the ITA are not tax exempt and therefore their investment income is taxable. The Respondent first that the contribution above the tax limit ought to be accounted for separately and the taxes thereon paid promptly in accordance with the law. The Respondent also averred that the withholding income tax charged on services related to repair, maintenance and overhaul of generator, maintenance of lifts and cleaning services which are technical, contractual and professional services and therefore are management or professional fee subject to withholding income tax.
75.The Respondent averred that in line with the deletion of Section 35 (6) of the ITA through changes introduced by Section 9 of the Finance Act 2016 and reintroduced under Section 39A in the TPA the withholding income tax assessments for the tax period 1st July, 2016 to November 2019 were dropped.
76.The Respondent averred that the VAT on imported services charged for the tax period months January 20l7 to April 2018 which were outside the 5-year statutory timelines were dropped. The Respondent stated that for the 3 invoices for Crown Agent’s Limited dated 20th September 2018 and 20th October 2018 respectively, where VAT had not been correctly accounted for the Appellant was ready to pay the correct VAT which was calculated at 16%.
77.The Respondent averred that it is empowered under section 31 of the TPA to issue additional tax assessments based on available information and its best judgement. The Respondent finally averred that the objection decision dated 22nd September, 2022 [sic] was proper in law based on the information available to it.
78.The Respondent prayed that the Tribunal would find that the objection decision dated 22nd September, 2022[sic] would be upheld and that the Appeal would be dismissed with costs to it.
Parties’ Submissions
79.On 27th March, 2024 the Tribunal directed both parties to file and serve on each other their respective written submissions on or before 10th April, 2024. The Appellant’s written submissions dated 18th April, 2024 were filed on 19th April, 2024 and the same have been expunged from the record. The Respondent’s written submissions dated 9th April, 2024 and filed on the same date will be analysed by the Tribunal though it will not rehash the submissions of the Respondent where there was a reiteration of its statement of facts.
80.The Respondent submitted as follows regarding the two issues it had identified for determination:
(a) Whether the objection decision dated 22nd September, 2022 [sic] is proper in law?
81.The Respondent submitted that the contributions exceeding the tax limits provided for under Section 22A of the ITA are not tax exempt thus their investment income is taxable. Section 22A (1) of the ITA provides as follows:
82.The Respondent averred that the contributions above the tax limit should be accounted for separately and the taxes thereon paid promptly as provided by the law. Section 2 of the ITA defines pension fund as follows:
83.Section 3 of the ITA provides as follows regarding chargeable income:
84.The Respondent averred that the contributions made above the tax limit provided under Section 22A of the ITA should be accounted for separately and taxes on investments thereon paid. The Respondent further averred that the investment income earned from the excess pension is taxable on the pension scheme in the year earned and not on the individual employee upon leaving the scheme.
85.The Respondent submitted that the withholding income tax from the tax period November 2019 was charged on services related to repair, maintenance and overhaul of generator, maintenance of lifts and cleaning services which are technical, contractual and professional services thus are management or professional fee subject to withholding income tax.
86.The Respondent submitted that the Appellant availed invoices and agreements for services on repair, maintenance and overhaul of generator and maintenance of lifts and cleaning services. The Respondent submitted that the services fall under management or professional services under section 2 of the ITA; and for which the Appellant ought to have charged a withholding tax as provided for under Section 10 and 35 of the ITA.
87.Section 2 of the ITA defines management or professional fees as follows;
88.Section 10 of the ITA provides as follows:
89.The Court of Appeal in Kenya Revenue Authority & another v Republic (Ex parte) Kenya Nut Company Limited [2020] eKLR explained withholding income tax as follows:
(ii) Whether the Appeal herein is merited?
90.The Respondent submitted that Section 56 of the TPA places the burden of proof upon the Appellant as follows:
91.In Kenya Revenue Authority v Man Diesel & Turbo Se, Kenya [2021] eKLR.
92.Section 107 (1) of the Evidence Act Cap, 80 of Kenya’s Laws (hereinafter “Evidence Act”) further provides that: "Whoever desires any court to give judgment as to any legal right or liability dependent on the existence of facts which he asserts must prove that those facts exist."
93.The Respondent humbly submitted that it applied its best judgement based on the information before it and it is now upon the Appellant to prove that the assessments were excessive or wrong.
94.The Respondent further submitted that what constituted the Commissioner's best judgment was been dealt with extensively in the Commissioner for Her Majesty's Revenue and Customs TC/2017/02292 Saima Khalid Appellant Vs the Commissioners for Her Majesty's Respondents Revenue & Customs at paragraph 29 therein where the Tribunal set out the following requirements for a decision to be to the best of HMRC's judgment as follows:
Issues For Determination
95.The Tribunal having carefully considered the parties’ pleadings, documentation and submissions identified the following two issues for determination:(a)Whether the income of the Appellant that was attributable to excess pension contribution was subject to corporate tax.b.Whether withholding tax was deductible on payments made to the providers of gardening, cleaning and maintenance services.
Analysis And Findings
96.The Tribunal will proceed to analyse the issues that it has identified for determination as outlined hereinunder:
(a) Whether the income of the Appellant that was attributable to excess pension fund contribution was subject to corporate tax.PARA 97.The Tribunal notes that the Appellant conceded to the Respondent’s assessment on withholding vat and VAT on imported services. This Appeal is therefore properly before it as the undisputed taxes were paid. Accordingly, the disputed tax was that in relation to the corporate tax applied on the income of the Appellant.
98.The Tribunal also notes the Appellant’s argument in its pleadings and during the hearing that its income was exempt from corporate tax. The Respondent on the other hand contended that corporate tax was due and payable on the income of the Appellant. During the hearing, the Appellant’s witness confirmed that there were those who had made excess contributions to the scheme.
99.The Tribunal is of the view the ITA provides for the taxation or lack thereof of the Appellant’s income and its members contributions. Most importantly, the Tribunal notes that pursuant to the income tax exemption certificate issued by the Respondent to the Appellant on 19th August, 2013, its income is exempt and the dividend and interest income earned by the Appellant is paid to it without deduction of withholding tax.
100.The Tribunal notes that the ITA does not define the meaning of the term ‘pension’ and therefore it relied on the definition outlined in the 10th Edition of the 10th Edition of the Oxford Advanced Learners Dictionary which defines a pension as follows:
101.The Tribunal notes the following provisions of section 3 of the ITA which charges tax on pensions:
102.The Tribunal’s view is that in view of the foregoing provisions of the ITA, pensions and withdrawals from registered pensions are chargeable to income tax. Pursuant to the following provisions of section 15 of the ITA, the following deductions are allowed against the income of a person:
103.The Tribunal notes the provisions of section 22A of the ITA which provides as follows at sections 1 and 2:
104.The Tribunal further notes that the foregoing provisions of the ITA outline how pension contributions are taxed. The minimum allowable deduction is Kshs. 240,000.00 per annum or Kshs. 20,000.00 for each month in respect to each employee as anchored in the provisions of section 22A of the ITA.
105.The Tribunal notes the assertions of the Respondent that upon review of the Appellant’s records, it noted that a number of its members had made excess contributions to it. Accordingly, contributions by its members in some instances were in excess of Kshs. 240,000.00 allowable deduction per annum as required by law. The Appellant did not provide the list of its members and their respective contributions in this regard and therefore the assertion of the Respondent that there were contributions by its members, in excess of the minimum deductible amount allowed by the ITA of Kshs. 240,000.00 per annum was unchallenged. The Tribunal therefore infers that some of the members of the Appellant made “excess contributions”, or in other words, some of the members contributed amounts that were more than the allowable deductible limit of Kshs. 240,000.00 per annum.
106.The issue at hand is whether the income earned by the Appellant from dividends, interest or other investments that was attributable or as a result of the excess pension contribution of its respective members, was subject to corporate tax on the Appellant. The Tribunal having established that exemption certificate exempted both the Appellant’s income from tax and also that the dividends and interest it earned were exempt from withholding tax deduction at source, will now delve into establishing whether the Appellant’s income that was attributable to excess pension contributions was subject to corporate tax.
107.In order to establish this fact, the Tribunal relies on the provisions of section 13 and Paragraph I of the First Schedule to the ITA which provide as follows:
108.The Tribunal cites the case Cape Brandy Syndicate v I.R Commissioner (CA 1921 12 TC 358 [1921] 2KB 403) where the Judge expressed the common law position on interpretation of a taxing statute by holding as follows:
109.The Tribunal places reliance on the rules set in the cited case and is of the view that the provisions of paragraph 16 of part I of the First Schedule to the ITA and the preceding section 13 of the ITA exempt income earned from a registered pension scheme. The Tribunal has sighted a letter to the Appellant by the Respondent dated 19th August, 2013 wherein it was notified of its registration as a pension scheme.
110.The Tribunal notes that the letter dated 19th August, 2013 from the Respondent, addressed to the Appellant referred to “Ernst and Young Provident Fund” as having been registered. This error was not raised by either party and as such it is the view of the Tribunal that it was a typographical error because the Respondent admitted, in its statement of facts, that the Appellant was registered. There is therefore no dispute about the fact that the Appellant’s was duly registered by the Respondent. The Tribunal can therefore conclude from the Appellant’s pleadings and documents and the pleadings of the Respondent, that the Appellant was a registered pension scheme.
111.Pursuant to the rules established regarding interpretation of tax statutes in the cited case of Cape Brandy Syndicate v I.R Commissioner (CA 1921 12 TC 358 [1921] 2KB 403), the view of the Tribunal is that the Appellant was duly registered and that therefore its income, was exempt from tax pursuant to section 13 of the ITA read in tandem with paragraph 16, Part 1 of the First Schedule to the ITA. The ITA does not have a proviso or any other section requiring the income of the Appellant to be pro-rated so as to determine the income attributable to the excess contributions by its members and that attributable to members’ contributions that meet the threshold set out in section 22A (1) and (2) of the ITA.
112.The Tribunal is of the further view that the Respondent issued and refunded taxes that were paid in error on 11th and 14th September, 2018 and when the Appellant received the refund, it had a legitimate expectation that the Respondent was in agreement hat its income was exempt. In this regard, the Tribunal cites Communications Commission of Kenya & Others v Royal Media Services and Others [2014] eKLR in which the Supreme Court of Kenya set out the tests for successful invocation of ‘legitimate expectation’ as follows:
113.The finding of the Tribunal is that the ITA provides that the Appellant’s income is exempt from tax and therefore its expectation that it’s income would be treated by the Respondent as tax exempt were legitimate. Furthermore, the Respondent registered the Appellant and then issued it with an income tax exemption certificate in accordance with the provisions of ITA, the existing tax statute on income tax. The Appellant therefore had a legitimate expectation that its income would be treated as exempt by the Respondent.
114.In view of the foregoing, the Tribunal finds that the income of the Appellant that was attributable to excess pension contribution was not subject to corporate tax.
(b) Whether withholding tax was deductible on payments made to the providers of gardening, cleaning and maintenance services.
115.The Tribunal notes that the Appellant hired various entities, one to maintain the lifts in its building, another to maintain the generator and some to carry out cleaning services and another, gardening services. The Appellant argued that the services carried out by the entities were not subject to withholding tax. In a bid to buttress its position, the Appellant outlined the provisions of the ITA as well as the UN Model Tax Convention Commentaries in a bid to elucidate the meaning of the term “management and professional fees” and why the services referred to it were not, in its view “management and professional fees”.
116.The Tribunal notes the argument of the Appellant that the services were not of a management or professional nature within the meaning provided pursuant to section 2 of the ITA which provides as follows:
117.The view of the Tribunal is that the payments for the services were covered by the definition of “management and professional fees” pursuant to section 2 of the ITA since the services offered were of a technical nature. Paragraphs 63 to 66 of the UN Model Tax Convention Commentary to article 12A as outlined by the Appellant provides as follows regarding the ordinary meaning of the term “technical”:
118.According to the 10th Edition of the Oxford Advanced Learners Dictionary, the term “occupation” means: “a job or profession”.
119.The Tribunal views the services provided to the Appellant as having been of a technical nature and those who provided those services had the special skills of gardening, cleaning, maintaining lifts or maintaining the generator. These were all occupations or jobs each of which required the person performing the tasks of having the specific skills in that area of service provision. The Tribunal is of the firm view that the services, which the Appellant averred, were not of a technical nature, were technical services. The Appellant paid the respective service providers a labour charge as well as for certain items (hereinafter “consumables”) which the service provider would use in performing its services.
120.The Tribunal sighted and reviewed the invoices which were adduced as evidenced and noted that whereas some were itemized, others were not. The Tribunal notes that in calculating the amount from which tax was to be withheld, the Respondent ought to have excluded the consumables. The Tribunal notes that in order to maintain the generator, the service provider, Messrs. Starlink Diesel Sales listed in the Agreement between it and the Appellant, which the Appellant adduced as evidence, the consumables such as oil filters and fuel filters among other consumables and that its monthly labour charge was Kshs. 8,500.00.
121.The Tribunal cites the case of Two Lakes Packaging Services Limited v Commissioner of domestic Services [TAT Appeal No. 402 of 2021] [supra] where it was held a follows:
122.The Tribunal is of the view that the Respondent ought to have itemised the invoices so to analyse the payments into the labour charge (hereinafter “technical fees”) and consumables. The Tribunal is of the view that withholding tax would be deductible against the technical fee as long as the conditions set out in the following provisions of section 35 (3) (f) of the ITA are met:
123.The Tribunal’s finding is that the Respondent could only have considered the deduction of withholding tax on the amount attributable to the technical fee. The Tribunal is of the further view that technical fees less than Kshs 24,000.00 in a month, are not subject to withholding tax pursuant to section 35 (3) (f) of the ITA.
124.In view of the foregoing, the Tribunal finds that withholding tax was deductible on the technical fee of the payments made to the providers of gardening, cleaning and maintenance services in so far as the technical fee did not exceed Kshs. 24,000.00 per month,
Final Decision
125.The upshot of the foregoing is that the Appeal partially succeeds and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 22nd September, 2022 [sic] be and is hereby varied as follows:i.The assessment in relation to corporation tax be and is hereby expunged.ii.The Respondent to review the assessment in the next 60 days in respect of withholding tax on payments made to the providers of gardening cleaning and maintenance services to determine the correct taxes, if any, due and payable.c.Each party to bear its own costs.
126.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..............................................GEORGE KASHINDI OLOLCHIKE S. SPENCERMEMBER MEMBER