1. The cause of action herein arises out of a contract that was entered into between Isolux Ingeniera S.A., a company incorporated in Spain, with Kenya Electricity Transmission Company (KETRACO) for the construction of high voltage electricity transmission lines from Lake Turkana to Suswa under Lake Turkana Wind Power project.
2. The Appellant herein is registered in Kenya as a branch of the Spanish company that successfully bid for the project in question. According to the Appellant, its role was to facilitate the warehousing and transportation of the material upon arriving at the port of Mombasa and to supervise the local subcontractors undertaking the foundation and erection works.
3. According to the Appellant, the contractor earn income from the supply of offshore services and manufacture of equipment outside Kenya whereas it earned income in its role in the local works.
4. When the Respondent verified the Appellant’s tax affairs, it observed that the contractor Isolux Spain had not declared its income in Kenya and that PAYE on motor vehicle benefit, telephone bills and emolument that had not been deducted.
5. The Respondents therefore issued a notice of additional assessment which led to the appeal at the Tribunal and subsequently to this court.
6. The decision of the Tribunal above culminated to the filing of the Appeal herein vide the Memorandum of Appeal dated 11.12.2020 on the following grounds: -
1. That the Tribunal contradicted itself and erred in law and fact in subjecting economic activities that took place in Spain to income tax in Kenya.
2. The Tribunal erred in law in failing to realise that Section 3 of the Income Tax Act is not a stand-alone provision. It is to be interpreted as subject to and in accordance with the Act.
3. The Tribunal erred in law and fact in failing to realise that only the income of a resident person from business carried on or exercised partly within and partly outside Kenya is taxable in Kenya and therefore such tax cannot apply to a branch which is not a resident person.
4. Having found that the dominant transaction relating to the supply of goods arose outside Kenya, the Tribunal contradicted itself and erred in law and fact in subsequently deeming he income to have accrued in or derived in Kenya.
5. The Tribunal erred in law and fact in failing to realise that taxation of non-resident income is provided for in specific section of the Income Tax and the income that was subject matter under the Engineering Procurement and Construction (EPC) contract did not fall within such sections.
6. Having recognized that there were three principal parties involved in the execution of the EPC contract, the Tribunal erred in law and fact in subjecting to tax the entire income from the EPC contract on one party.
7. Having recognized that the title and risk of the imported goods passed to KETRACO at the point of entry, the Tribunal contradicted itself and erred in law and fact in allocating the income arising from the sale of the goods to the branch.
8. The Tribunal erred in law and fact in failing to realise that the materials imported into Kenya were manufactured by non-resident 3rd party contractors sourced by the head office and the branch was not involved in the procurement, outsourcing, manufacturing or coordinating the shipping of the goods from the countries of origin.
9. The Tribunal erred in law and fact in failing that the branch was not involved in the engineering or design works which were the vital components of the EPC contact.
10. The Tribunal erred in law in finding that Section 18(3) of the Income Tax does not deal with business transactions between a head office and its branch.
11. The Tribunal erred in law in finding that there is a legitimacy question that has arisen in light of Section 18 (3) to a branch.
12. The Tribunal erred in law in finding that the distinct and separate principle is not supported by the Income Tax Act.
13. Notwithstanding and without prejudice to the foregoing, the Tribunal erred in law and fact in failing to realise that the cost of goods imported into Kenya was Kshs. 4,684,149,378/- as supported by import documentation and not Kshs. 1,035,075,057/- as indicated by the Respondent.
14. Notwithstanding and without prejudice to the foregoing, the Tribunal erred in law and fact in failing to recognize that the Respondent did not dispute the Appellant’s supplementary test which indicated that its income margin of 5.6% was at arm’s length as required by Transfer Pricing Rules.
15. Notwithstanding and without prejudice to the foregoing, the Tribunal erred in law and fact in failing to recognize that the Respondent did not dispute the Appellant’s analysis of the specific and distinct roles that the branch and head office performed.
16. Notwithstanding and without prejudice to the foregoing, the Tribunal erred in law and fact in failing to recognize that the Respondent selectively applied Section 18 by disallowing costs under Section 18(3) but not allowing costs under Section 18(4).
17. Having found that motor vehicle benefit does not accrue to staff in respect to vehicle used in project sites and office errands on the basis that they were exclusively used for business purposes, the Tribunal erred in law and fact in proceeding to uphold the PAYE assessment.
18. Having found that some motor vehicle had restricted use by employees, the Tribunal erred in law and fact in proceeding to uphold the PAYE assessment.
7. The Appellant prayed that the appeal be allowed and the Respondent ordered to pay costs of the appeal.
8. The appeal was canvassed by way of written submissions dated 29th March 2023 and 10th May 2023 for the Appellant and Respondent respectively. The Appellant’s reply to the Respondent’s submissions is dated 7th June 2023. The said submissions were highlighted by advocates for the respective parties on 20th March 2024 as follows: -
9. Ms. Malik Advocate for the Appellant submitted that the Appellant is a Kenyan branch company of a Spanish company which was merely registered as a branch and not incorporated in Kenya. She argued that the contract between the Spanish company and KETRACO had 2 components being offshore work done in Spain and work done in Kenya. She clarified that the contract was for installation of power lines which were to take place from Loyangalani to Suswa.
10. It was further claimed that the Tax Appeals Tribunal admitted that there was a foreign contract by the Respondent and that income earned for economic activities carried out in Spain cannot be subjected to tax in Kenya as the income was not derived in Kenya. That at paragraph 10 of the Respondent’s statement of facts dated 5th February 2021 it was admitted that there was a local portion of the contract and there was a foreign portion of the contract.
11. The Appellant’s counsel submitted that what happened in Kenya is the warehousing of import which installation was supervised by the Branch. It was argued that the Appellant branch properly accounted for the income derived in Kenya.
12. It was argued that the company in Spain carried out the testing, actual manufacture in Spain and actual construction of the towers and cables before the said towers and cables were shipped in Kenya and the importer on record was KETRACO which made payments to Spain.
13. It is argued that when the towers and cables arrived in Kenya, Isolux Spain had registered a branch in Kenya being the Appellant herein and all it did was to warehouse the towers and transmission cables and oversee transportation to the actual site as well as installation. That for the activities done in Kenya, the Appellant properly accounted for the income it earned and paid for the tax it earned on the income.
14. It is therefore contended by the Appellant that the Respondent wrongfully assessed the branch for the work that was carried out in Spain and income derived by the company in Spain and not Kenya and that the Tribunal upheld the wrongful assessment. The Appellant’s position is that income that is not derived in Kenya cannot be taxed.
15. The Appellant relied on Esso Standard v Income Tax (1971) EALR as well as Commissioner of Domestic Taxes v Mabati Rolling Mills (2012) eKLR to support their position that the Appellant’s mother company did not derive its income from Kenya. It was further argued that even if payment was made in Kenya, that was not a factor in determining where income was derived from.
16. In applying the principle of apportionment, the Appellant relied on the principle of Ishikawajima Harima Heavy Industries Ltd v Director of Income Tax Mumbai, Supreme Court of India where the court held that services of goods supplied outside India have nothing to do with the permanent establishment in India. The Appellant faulted the finding of the Tribunal for finding that income was derived in Kenya when the consignee of the imported towers and cables was KETRACO.
17. It is also argued that the Appellant is merely a branch of the Spanish company and is not incorporated in Kenya and therefore cannot be said to be a resident company in Kenya.
18. Ms. Chelangat Advocate for the Respondent submitted that the Respondent had not admitted that there was an offshore and onshore activity. On whether the income was derived in Kenya, she said that the invoices were based on performance certificate and payment schedule attached to the contract. She said that the contract did not specify that 33% would be local and 67% foreign. That if it was an intention of the parties, nothing would have stopped them from apportioning the contract onshore and offshore. She said there was no documentary support why the offshore was a greater portion than the onshore.
19. It was further said that the contract was signed in Kenya for a plant in Kenya and commissioned in Kenya, the payments are done in Kenya, the Consignee, KETRACO, was Kenyan, and the Appellant is now resident in Kenya for tax purposes. That there was therefore no basis for apportionment.
20. She argued that Section 3(1) of the Income Tax uses the word ‘or’ and as long as income was derived in Kenya whether by resident or non-resident, the income was subject to tax. Counsel for the Respondent distinguished the holding in Esso Standard case saying it was an income from interest and not income from a contract of service as is the case herein and cannot be treated the same way.
21. The Respondent further argued that invoices ought to have been raised before the materials left the port in Spain but that was not done. That inspection component of the Contract constitutes cost of the materials, the invoice value included installation stringing which is an onshore activity. That they were not separated as two different activities. That the Appellant did not explain how the activities included in the invoice became an offshore transaction.
22. The Respondent’s counsel also contended that the Tribunal in its judgment did not admit that there was apportionment of income but said that the Appellant’s distinction of itself and its mother company was not supported by Income Tax Act and that economic activities that happened in Spain derived its income from Kenya.
23. On the 2nd issue on taxation of motor vehicle benefit, the Respondent said that the Appellant admitted that some of its staff was using motor vehicles for official and personal use and apportioned personal use at 30% without documentary proof that personal use was 30% and not more. That therefore without control put in place to support categorization, the assessment of the Respondent on PAYE for use of motor vehicle should stand.
24. Ms. Chelangat urged the court to dismiss the appeal for lack of merit and uphold the judgment of the tribunal that the Appellant should pay taxes amounting to Kshs. 749,000/-.
Analysis and Determination
25. This court has considered the grounds of appeal, the opposition by the Respondent by their Statement of Facts as well as submissions and authorities by respective parties and the mandate of this court in such an appeal is to consider questions of law pursuant to Section 56 of the Tax Procedure Act which provides: -
(1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.
(2) An appeal to the High Court or to the Court of Appeal shall be on a question of law only.
(3) In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.
26. Although the Tribunal identified two issues for determination being: -
(1) Whether additional corporate income tax assessment for the years 2015-2016 were in respect of income derived in Kenya or income derived offshore.
(2) Whether the Respondent’s assessment of PAYE for the years 2015-2016 was proper.
27. This court however finds the following as the issues for determination:
(1) Whether the contract between the Appellant and KETRACO spelt out the terms and conditions as to payment of income tax
(2) Whether the Respondent’s assessment of PAYE for the years 2015-2016 was proper
Whether the contract between the Appellant and KETRACO spelt out the terms and conditions as to payment of income tax
28. The Appellant, Isolux Ingeniera S.A., herein known as the contractor entered into a contract with KETRACO for engineering, procurement and construction of high voltage transmission line from Loyangalani to Suswa. The said contract has explicitly expressed terms and conditions governing the relationship between the employer and contractor as well as terms as to whether the contractor was liable to pay taxes. The relevant clauses of the contract are in Clauses 1.4, 1.13, 5.4, 8.1, and 14.1(b) which are produced below as follows: -
29. Clause 1.4 provides for Law and Language as follows: -
The contract shall be governed by and construed in accordance with the laws of Kenya.
The language of the contract and all correspondences, communication and submitted documents shall except to the extent otherwise required under this contract be English. If this contract or any other related documents are translated into another language, the English version shall prevail.
30. Clause 1.13 provides for compliance with laws, taxes and customs clearance as follows: -
(a) The parties acknowledge that the project shall be exempted from VAT and all customs, import duties and taxes including IDF fees payable in Kenya as a consequence of locally purchased goods and services or the importation of plant for the project. This exemption shall constitute a condition precedent to issue of the full notice to proceed in accordance with Sub-Clause 8.1.
(b) The parties undertake to provide to the relevant government authorities all documentation and evidence required in order for the exemption referred to in Sub-Clause 1.13(a) to be obtained and maintained during the contract execution.
(c) Obtaining tax exemptions: -
(i) Promptly and in any event within 1 month following the contract date, contractor will furnish to employer a comprehensive and detailed master list of both local and imported goods and services for the project including all documentation and evidence required by the relevant government authorities in order for the exemptions referred to in Sub-Clause 1.13(a) to be obtained and maintained during the contract execution.
(ii) Provided that Contractor has complied with its obligation under Sub-Clause 1.13(c)(i), Employer shall obtain from the relevant Governmental Authorities the letter(s) of exemption with respect to exempted taxes.
(iii) …
(iv) …
…
(e) General obligation
(i) Contractor shall give all notices, pay all taxes, duties and fees (other than exempted taxes) and obtain all approvals referred in Sub-Clause 4.26 in each case as required by law in relation to the design, execution and completion of the works and the remedying of any defects; and contractor shall indemnify and hold employer harmless against and from the consequences of any failure to do so.
(ii) Without limiting the foregoing except as otherwise specifically provided in the contract, contractor shall bear and pay all taxes, duties, levies and charges assessed on the contractor, its Sub-Contractor or their employees by all municipal state or national government authorities that receive no exemption from the relevant Governmental Authorities.
31. At Clause 5.4 it is provided that the Contractor undertakes that the design, contractor’s documents, the execution and the completed works will be in accordance with the laws in the country.
32. At Clause 14.1(b) it is provided that unless otherwise stated in this contract, the Contractor shall pay all taxes, duties and fees required to be paid by him under the contract and the contract price shall not be adjusted for any of these costs except as stated in Sub-Clause 1.13 or 13.4.
33. The Appellant had the right under Clause 1.13 to apply for exemption for the importation of plant for the project upon providing all documentation and evidence within 1 month following the contract date but there is no evidence that the Appellant complied with the exemption clause in Clause 1.13(b) and (c) so as to claim that they are not liable to pay income tax on alleged offshore economic activities. It has not come out in the records of the Tribunal that there was any offshore economic activity that would be exempted from income tax and therefore the Appellant’s claim which is not specifically provided for in the contract cannot be imported therein and cannot stand.
34. It therefore follows that the Appellant under Section 3(1) of the Income Tax Act is liable to be charged income tax out of the income derived from the contract in question which was executed in Kenya, invoices raised in Kenya, and payments made in Kenya by the government of Kenya.
35. Section 3(1) of the Income Tax Act provides as follows: -
Subject to, and in accordance with, this Act, a tax to 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.
Whether the Respondent’s assessment of PAYE for the years 2015-2016 was proper
36. In regard to the issue as to whether the Respondent’s assessment of PAYE for the years 2015-2016 was erroneous, Clause 1.13(e)(ii) provides: -
Without limiting the foregoing except as otherwise specifically provided in the contract, contractor shall bear and pay all taxes, duties, levies and charges assessed on the contractor, its Sub-Contractor or their employees by all municipal state or national government authorities that receive no exemption from the relevant Governmental Authorities.
37. Section 3 (2)(a)(ii) of the Income Tax Act provides: -
(2) Subject to this Act, income upon which tax is chargeable under this Act is income in respect of: -
(a) gains or profits from: -
(ii) any employment or services rendered;
38. Section 5 (1) of the Income Tax Act provide: -
(1) For the purposes of section 3(2)(a)(ii) of this Act, an amount paid to -
(a) a person who is, or was at the time of the employment or when the services were rendered, a resident person in respect of any employment or services rendered by him in Kenya or outside Kenya; or
(b) a non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident,
shall be deemed to have accrued in or to have been derived from Kenya.
39. The Appellant in their submissions said a detailed analysis was given to the Respondents and they proved how they arrived at 30% to be a taxable benefit for personal use of the motor vehicles. The Tribunal had an opportunity to consider the documents presented and applied their discretion to make a finding that the Appellants unilaterally applied the usage of 30% without demonstrating how they arrived at 30% rule for motor vehicles categorized as for mixed use. This court cannot therefore interfere with the exercise of the Tribunal’s discretion in arriving at the decision in relation to the second issue.
40. In conclusion and in consideration of the terms of the contract as well as Section 3(2)(a)(ii) and Section 5 of the Income Tax Act, this court upholds the finding of the Tribunal dated 16th October 2020 save that an adjustment to the assessment of PAYE should be made by applying the graduated rates instead of the top rate of 30%.
41. Each party to bear its own cost.
Dated, signed and delivered in Open Court/online through MS TEAMS,
This 13th day of June 2024
In the presence of: -
Esther - Court Assistant
No appearance for Ms. Malik Advocate for the Appellant
No appearance for Ms. Chelangat Advocate for the Respondent
Court: Registry at Nairobi to mail judgment to the parties
2. The Appellant herein is registered in Kenya as a branch of the Spanish company that successfully bid for the project in question. According to the Appellant, its role was to facilitate the warehousing and transportation of the material upon arriving at the port of Mombasa and to supervise the local subcontractors undertaking the foundation and erection works.
3. According to the Appellant, the contractor earn income from the supply of offshore services and manufacture of equipment outside Kenya whereas it earned income in its role in the local works.
4. When the Respondent verified the Appellant’s tax affairs, it observed that the contractor Isolux Spain had not declared its income in Kenya and that PAYE on motor vehicle benefit, telephone bills and emolument that had not been deducted.
5. The Respondents therefore issued a notice of additional assessment which led to the appeal at the Tribunal and subsequently to this court.
6. The decision of the Tribunal above culminated to the filing of the Appeal herein vide the Memorandum of Appeal dated 11.12.2020 on the following grounds: -
1. That the Tribunal contradicted itself and erred in law and fact in subjecting economic activities that took place in Spain to income tax in Kenya.
2. The Tribunal erred in law in failing to realise that Section 3 of the Income Tax Act is not a stand-alone provision. It is to be interpreted as subject to and in accordance with the Act.
3. The Tribunal erred in law and fact in failing to realise that only the income of a resident person from business carried on or exercised partly within and partly outside Kenya is taxable in Kenya and therefore such tax cannot apply to a branch which is not a resident person.
4. Having found that the dominant transaction relating to the supply of goods arose outside Kenya, the Tribunal contradicted itself and erred in law and fact in subsequently deeming he income to have accrued in or derived in Kenya.
5. The Tribunal erred in law and fact in failing to realise that taxation of non-resident income is provided for in specific section of the Income Tax and the income that was subject matter under the Engineering Procurement and Construction (EPC) contract did not fall within such sections.
6. Having recognized that there were three principal parties involved in the execution of the EPC contract, the Tribunal erred in law and fact in subjecting to tax the entire income from the EPC contract on one party.
7. Having recognized that the title and risk of the imported goods passed to KETRACO at the point of entry, the Tribunal contradicted itself and erred in law and fact in allocating the income arising from the sale of the goods to the branch.
8. The Tribunal erred in law and fact in failing to realise that the materials imported into Kenya were manufactured by non-resident 3rd party contractors sourced by the head office and the branch was not involved in the procurement, outsourcing, manufacturing or coordinating the shipping of the goods from the countries of origin.
9. The Tribunal erred in law and fact in failing that the branch was not involved in the engineering or design works which were the vital components of the EPC contact.
10. The Tribunal erred in law in finding that Section 18(3) of the Income Tax does not deal with business transactions between a head office and its branch.
11. The Tribunal erred in law in finding that there is a legitimacy question that has arisen in light of Section 18 (3) to a branch.
12. The Tribunal erred in law in finding that the distinct and separate principle is not supported by the Income Tax Act.
13. Notwithstanding and without prejudice to the foregoing, the Tribunal erred in law and fact in failing to realise that the cost of goods imported into Kenya was Kshs. 4,684,149,378/- as supported by import documentation and not Kshs. 1,035,075,057/- as indicated by the Respondent.
14. Notwithstanding and without prejudice to the foregoing, the Tribunal erred in law and fact in failing to recognize that the Respondent did not dispute the Appellant’s supplementary test which indicated that its income margin of 5.6% was at arm’s length as required by Transfer Pricing Rules.
15. Notwithstanding and without prejudice to the foregoing, the Tribunal erred in law and fact in failing to recognize that the Respondent did not dispute the Appellant’s analysis of the specific and distinct roles that the branch and head office performed.
16. Notwithstanding and without prejudice to the foregoing, the Tribunal erred in law and fact in failing to recognize that the Respondent selectively applied Section 18 by disallowing costs under Section 18(3) but not allowing costs under Section 18(4).
17. Having found that motor vehicle benefit does not accrue to staff in respect to vehicle used in project sites and office errands on the basis that they were exclusively used for business purposes, the Tribunal erred in law and fact in proceeding to uphold the PAYE assessment.
18. Having found that some motor vehicle had restricted use by employees, the Tribunal erred in law and fact in proceeding to uphold the PAYE assessment.
7. The Appellant prayed that the appeal be allowed and the Respondent ordered to pay costs of the appeal.
8. The appeal was canvassed by way of written submissions dated 29th March 2023 and 10th May 2023 for the Appellant and Respondent respectively. The Appellant’s reply to the Respondent’s submissions is dated 7th June 2023. The said submissions were highlighted by advocates for the respective parties on 20th March 2024 as follows: -
9. Ms. Malik Advocate for the Appellant submitted that the Appellant is a Kenyan branch company of a Spanish company which was merely registered as a branch and not incorporated in Kenya. She argued that the contract between the Spanish company and KETRACO had 2 components being offshore work done in Spain and work done in Kenya. She clarified that the contract was for installation of power lines which were to take place from Loyangalani to Suswa.
10. It was further claimed that the Tax Appeals Tribunal admitted that there was a foreign contract by the Respondent and that income earned for economic activities carried out in Spain cannot be subjected to tax in Kenya as the income was not derived in Kenya. That at paragraph 10 of the Respondent’s statement of facts dated 5th February 2021 it was admitted that there was a local portion of the contract and there was a foreign portion of the contract.
11. The Appellant’s counsel submitted that what happened in Kenya is the warehousing of import which installation was supervised by the Branch. It was argued that the Appellant branch properly accounted for the income derived in Kenya.
12. It was argued that the company in Spain carried out the testing, actual manufacture in Spain and actual construction of the towers and cables before the said towers and cables were shipped in Kenya and the importer on record was KETRACO which made payments to Spain.
13. It is argued that when the towers and cables arrived in Kenya, Isolux Spain had registered a branch in Kenya being the Appellant herein and all it did was to warehouse the towers and transmission cables and oversee transportation to the actual site as well as installation. That for the activities done in Kenya, the Appellant properly accounted for the income it earned and paid for the tax it earned on the income.
14. It is therefore contended by the Appellant that the Respondent wrongfully assessed the branch for the work that was carried out in Spain and income derived by the company in Spain and not Kenya and that the Tribunal upheld the wrongful assessment. The Appellant’s position is that income that is not derived in Kenya cannot be taxed.
15. The Appellant relied on Esso Standard v Income Tax (1971) EALR as well as Commissioner of Domestic Taxes v Mabati Rolling Mills (2012) eKLR to support their position that the Appellant’s mother company did not derive its income from Kenya. It was further argued that even if payment was made in Kenya, that was not a factor in determining where income was derived from.
16. In applying the principle of apportionment, the Appellant relied on the principle of Ishikawajima Harima Heavy Industries Ltd v Director of Income Tax Mumbai, Supreme Court of India where the court held that services of goods supplied outside India have nothing to do with the permanent establishment in India. The Appellant faulted the finding of the Tribunal for finding that income was derived in Kenya when the consignee of the imported towers and cables was KETRACO.
17. It is also argued that the Appellant is merely a branch of the Spanish company and is not incorporated in Kenya and therefore cannot be said to be a resident company in Kenya.
18. Ms. Chelangat Advocate for the Respondent submitted that the Respondent had not admitted that there was an offshore and onshore activity. On whether the income was derived in Kenya, she said that the invoices were based on performance certificate and payment schedule attached to the contract. She said that the contract did not specify that 33% would be local and 67% foreign. That if it was an intention of the parties, nothing would have stopped them from apportioning the contract onshore and offshore. She said there was no documentary support why the offshore was a greater portion than the onshore.
19. It was further said that the contract was signed in Kenya for a plant in Kenya and commissioned in Kenya, the payments are done in Kenya, the Consignee, KETRACO, was Kenyan, and the Appellant is now resident in Kenya for tax purposes. That there was therefore no basis for apportionment.
20. She argued that Section 3(1) of the Income Tax uses the word ‘or’ and as long as income was derived in Kenya whether by resident or non-resident, the income was subject to tax. Counsel for the Respondent distinguished the holding in Esso Standard case saying it was an income from interest and not income from a contract of service as is the case herein and cannot be treated the same way.
21. The Respondent further argued that invoices ought to have been raised before the materials left the port in Spain but that was not done. That inspection component of the Contract constitutes cost of the materials, the invoice value included installation stringing which is an onshore activity. That they were not separated as two different activities. That the Appellant did not explain how the activities included in the invoice became an offshore transaction.
22. The Respondent’s counsel also contended that the Tribunal in its judgment did not admit that there was apportionment of income but said that the Appellant’s distinction of itself and its mother company was not supported by Income Tax Act and that economic activities that happened in Spain derived its income from Kenya.
23. On the 2nd issue on taxation of motor vehicle benefit, the Respondent said that the Appellant admitted that some of its staff was using motor vehicles for official and personal use and apportioned personal use at 30% without documentary proof that personal use was 30% and not more. That therefore without control put in place to support categorization, the assessment of the Respondent on PAYE for use of motor vehicle should stand.
24. Ms. Chelangat urged the court to dismiss the appeal for lack of merit and uphold the judgment of the tribunal that the Appellant should pay taxes amounting to Kshs. 749,000/-.
Analysis and Determination
25. This court has considered the grounds of appeal, the opposition by the Respondent by their Statement of Facts as well as submissions and authorities by respective parties and the mandate of this court in such an appeal is to consider questions of law pursuant to Section 56 of the Tax Procedure Act which provides: -
(1) In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.
(2) An appeal to the High Court or to the Court of Appeal shall be on a question of law only.
(3) In an appeal by a taxpayer to the Tribunal, High Court or Court of Appeal in relation to an appealable decision, the taxpayer shall rely only on the grounds stated in the objection to which the decision relates unless the Tribunal or Court allows the person to add new grounds.
26. Although the Tribunal identified two issues for determination being: -
(1) Whether additional corporate income tax assessment for the years 2015-2016 were in respect of income derived in Kenya or income derived offshore.
(2) Whether the Respondent’s assessment of PAYE for the years 2015-2016 was proper.
27. This court however finds the following as the issues for determination:
(1) Whether the contract between the Appellant and KETRACO spelt out the terms and conditions as to payment of income tax
(2) Whether the Respondent’s assessment of PAYE for the years 2015-2016 was proper
Whether the contract between the Appellant and KETRACO spelt out the terms and conditions as to payment of income tax
28. The Appellant, Isolux Ingeniera S.A., herein known as the contractor entered into a contract with KETRACO for engineering, procurement and construction of high voltage transmission line from Loyangalani to Suswa. The said contract has explicitly expressed terms and conditions governing the relationship between the employer and contractor as well as terms as to whether the contractor was liable to pay taxes. The relevant clauses of the contract are in Clauses 1.4, 1.13, 5.4, 8.1, and 14.1(b) which are produced below as follows: -
29. Clause 1.4 provides for Law and Language as follows: -
The contract shall be governed by and construed in accordance with the laws of Kenya.
The language of the contract and all correspondences, communication and submitted documents shall except to the extent otherwise required under this contract be English. If this contract or any other related documents are translated into another language, the English version shall prevail.
30. Clause 1.13 provides for compliance with laws, taxes and customs clearance as follows: -
(a) The parties acknowledge that the project shall be exempted from VAT and all customs, import duties and taxes including IDF fees payable in Kenya as a consequence of locally purchased goods and services or the importation of plant for the project. This exemption shall constitute a condition precedent to issue of the full notice to proceed in accordance with Sub-Clause 8.1.
(b) The parties undertake to provide to the relevant government authorities all documentation and evidence required in order for the exemption referred to in Sub-Clause 1.13(a) to be obtained and maintained during the contract execution.
(c) Obtaining tax exemptions: -
(i) Promptly and in any event within 1 month following the contract date, contractor will furnish to employer a comprehensive and detailed master list of both local and imported goods and services for the project including all documentation and evidence required by the relevant government authorities in order for the exemptions referred to in Sub-Clause 1.13(a) to be obtained and maintained during the contract execution.
(ii) Provided that Contractor has complied with its obligation under Sub-Clause 1.13(c)(i), Employer shall obtain from the relevant Governmental Authorities the letter(s) of exemption with respect to exempted taxes.
(iii) …
(iv) …
…
(e) General obligation
(i) Contractor shall give all notices, pay all taxes, duties and fees (other than exempted taxes) and obtain all approvals referred in Sub-Clause 4.26 in each case as required by law in relation to the design, execution and completion of the works and the remedying of any defects; and contractor shall indemnify and hold employer harmless against and from the consequences of any failure to do so.
(ii) Without limiting the foregoing except as otherwise specifically provided in the contract, contractor shall bear and pay all taxes, duties, levies and charges assessed on the contractor, its Sub-Contractor or their employees by all municipal state or national government authorities that receive no exemption from the relevant Governmental Authorities.
31. At Clause 5.4 it is provided that the Contractor undertakes that the design, contractor’s documents, the execution and the completed works will be in accordance with the laws in the country.
32. At Clause 14.1(b) it is provided that unless otherwise stated in this contract, the Contractor shall pay all taxes, duties and fees required to be paid by him under the contract and the contract price shall not be adjusted for any of these costs except as stated in Sub-Clause 1.13 or 13.4.
33. The Appellant had the right under Clause 1.13 to apply for exemption for the importation of plant for the project upon providing all documentation and evidence within 1 month following the contract date but there is no evidence that the Appellant complied with the exemption clause in Clause 1.13(b) and (c) so as to claim that they are not liable to pay income tax on alleged offshore economic activities. It has not come out in the records of the Tribunal that there was any offshore economic activity that would be exempted from income tax and therefore the Appellant’s claim which is not specifically provided for in the contract cannot be imported therein and cannot stand.
34. It therefore follows that the Appellant under Section 3(1) of the Income Tax Act is liable to be charged income tax out of the income derived from the contract in question which was executed in Kenya, invoices raised in Kenya, and payments made in Kenya by the government of Kenya.
35. Section 3(1) of the Income Tax Act provides as follows: -
Subject to, and in accordance with, this Act, a tax to 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.
Whether the Respondent’s assessment of PAYE for the years 2015-2016 was proper
36. In regard to the issue as to whether the Respondent’s assessment of PAYE for the years 2015-2016 was erroneous, Clause 1.13(e)(ii) provides: -
Without limiting the foregoing except as otherwise specifically provided in the contract, contractor shall bear and pay all taxes, duties, levies and charges assessed on the contractor, its Sub-Contractor or their employees by all municipal state or national government authorities that receive no exemption from the relevant Governmental Authorities.
37. Section 3 (2)(a)(ii) of the Income Tax Act provides: -
(2) Subject to this Act, income upon which tax is chargeable under this Act is income in respect of: -
(a) gains or profits from: -
(ii) any employment or services rendered;
38. Section 5 (1) of the Income Tax Act provide: -
(1) For the purposes of section 3(2)(a)(ii) of this Act, an amount paid to -
(a) a person who is, or was at the time of the employment or when the services were rendered, a resident person in respect of any employment or services rendered by him in Kenya or outside Kenya; or
(b) a non-resident person in respect of any employment with or services rendered to an employer who is resident in Kenya or the permanent establishment in Kenya of an employer who is not so resident,
shall be deemed to have accrued in or to have been derived from Kenya.
39. The Appellant in their submissions said a detailed analysis was given to the Respondents and they proved how they arrived at 30% to be a taxable benefit for personal use of the motor vehicles. The Tribunal had an opportunity to consider the documents presented and applied their discretion to make a finding that the Appellants unilaterally applied the usage of 30% without demonstrating how they arrived at 30% rule for motor vehicles categorized as for mixed use. This court cannot therefore interfere with the exercise of the Tribunal’s discretion in arriving at the decision in relation to the second issue.
40. In conclusion and in consideration of the terms of the contract as well as Section 3(2)(a)(ii) and Section 5 of the Income Tax Act, this court upholds the finding of the Tribunal dated 16th October 2020 save that an adjustment to the assessment of PAYE should be made by applying the graduated rates instead of the top rate of 30%.
41. Each party to bear its own cost.
Dated, signed and delivered in Open Court/online through MS TEAMS,
This 13th day of June 2024
In the presence of: -
Esther - Court Assistant
No appearance for Ms. Malik Advocate for the Appellant
No appearance for Ms. Chelangat Advocate for the Respondent
Court: Registry at Nairobi to mail judgment to the parties