KCB Bank Kenya Limited v Commissioner Legal Services & Board Co-ordination (Tax Appeal E023 of 2024) [2025] KETAT 2 (KLR) (17 January 2025) (Judgment)

Key Facts

Tax Type

Transaction Type

Issues

• The Tribunal assessed whether the Respondent erred in imposing withholding tax on interchange fees for card transactions. The Appellant claimed these fees relate to automated network access, not royalties or professional services. The Respondent relied on the Court of Appeal's decision in Barclays Bank of Kenya Ltd, asserting the fees fall under management/professional fees or royalties. The Tribunal upheld the Respondent's assessment, citing the binding precedent until the Supreme Court rules otherwise.
• The Tribunal determined whether the Respondent erred in assessing VAT on the sale of seized motor vehicles by the Appellant bank. The Appellant argued that the auction of vehicles is incidental to the VAT-exempt service of granting credit, while the Respondent contended it is a separate taxable supply. The Tribunal found the Appellant failed to prove the VAT assessment was incorrect, upholding the Respondent's position that the sale of vehicles is a taxable supply under the VAT Act.

Tax Years

• 2019
• 2020
• 2018
• 2021

Holdings

• The Tribunal found that the Respondent did not err in VAT assessments for the periods 2018 to 2021, as the recovery of seized motor vehicles through auction is not exempt from VAT under the VAT Act. The Appellant failed to discharge its burden of proof to demonstrate the assessment was incorrect.
• The Tribunal held that the Respondent was justified in assessing withholding tax on Card Business Interchange fees for 2019 to 2021, citing the binding Court of Appeal decision in Commissioner of Domestic Taxes vs. Barclays Bank of Kenya Ltd [2009] eKLR until the Supreme Court provides a contrary ruling.

Remedies

• The Appeal on the outstanding issues for determination is hereby dismissed.
• Each party to bear its own cost as per the Tribunal's order.
• The partial consent signed and dated 9th May 2024, filed and adopted as an order of the Tribunal on 6th June 2024 is hereby confirmed.

Tax Issue Category

• Withholding-Tax Characterisation
• Deductibility / Allowances

Legal Principles

• Under Section 30 of the Tax Appeals Tribunal Act and Section 56(1) of the Tax Procedures Act, the Tribunal held that the burden of proving the Respondent's VAT assessments for 2018-2021 were excessive or incorrect fell on the Appellant. The Appellant failed to discharge this burden due to lack of documentary evidence, leading to the dismissal of the VAT-related appeal.
• The Tribunal applied the Literal Rule in interpreting the VAT Act, emphasizing that tax laws must be strictly construed based on their plain wording without implied meanings. It cited the oft-cited case of Cape Brandy Syndicate v Inland Revenue Commissioners [1920] 1 KB, reiterating that where a taxpayer falls within the letter of the law, they must be taxed, and where the law is not explicitly met, the taxpayer is free from tax despite potential alignment with the spirit of the law.
• The Tribunal relied on the doctrine of stare decisis, applying the Court of Appeal's binding judgment in Commissioner of Domestic Taxes vs. Barclays Bank of Kenya Ltd [2009] eKLR to uphold the Respondent's withholding tax assessment on interchange fees. The decision was deemed valid until the Supreme Court might overturn it, demonstrating the principle of judicial review and precedent in tax law.

Disputed Tax Amount

Precedent Name

• Federal Bank Limited vs. State of Kerala
• Singapore Motors Limited vs. Commissioner of Domestic Taxes
• Commissioner of Domestic Taxes vs. Barclays Bank of Kenya Limited
• Stanbic Bank Kenya vs. Kenya Revenue Authority
• Ali Abdi Dere vs. Hash Hauliers Limited and Another
• Seven Seas Technologies Limited vs. Commissioner of Domestic Taxes
• Lord Krishna Bank Limited vs. Assistance Commissioner (Assessment) Sales Tax Office
• Director of Income Tax vs. TUV Bayren (India) Ltd
• Card Protection Plan Limited vs. Customs and Excise Commissioners

Key Disputed Contract Clauses

• The Appellant contested the Respondent's classification of interchange fees to local banks as management or professional fees subject to WHT. The Respondent relied on the Barclays Bank of Kenya Ltd [2009] eKLR precedent, asserting the fees fall within statutory definitions of such services. The Tribunal upheld the Respondent's position under binding court decisions.
• The Appellant disputed the disallowance of penalties incurred under private contractual agreements with MasterCard and Visa, arguing they are allowable expenses wholly and exclusively incurred in income production. The Respondent countered that these penalties arise from conscious non-compliance with contractual terms and are not justifiable for tax deductions.
• The Appellant argued payments to Visa for network access do not qualify as royalties for intellectual property use. The Respondent maintained these payments fall under ITA's royalty definition, citing the Barclays case. The Tribunal affirmed the Respondent's stance until the Supreme Court revisits the precedent.

Cited Statute

• Income Tax Act (ITA)
• Kenya Revenue Authority Act
• Auctioneers Act (Cap. 526)
• Tax Appeals Tribunal (Procedure) Rules, 2015
• Industrial Property Act, No. 3 of 2001
• Tax Procedures Act (TPA)
• Value Added Tax Act (VAT Act)

Judge Name

• Mutiso M. Makau
• Jephtah Njagi
• Timothy B. Vikiru
• Robert M. Mutuma
• Delilah K. Ngala

Passage Text

• Consequently, the Tribunal finds and holds that the Respondent was justified in assessing withholding tax on Card Business Interchange fees for the period 2019 to 2021 amounting to Kshs. 369,023,956.00, the Appeal thus fails.
• The Tribunal finds and holds that the Appellant failed to discharge its burden of proof and failed to demonstrate that the Respondent erred in its VAT assessments for the periods 2018 to 2021 amounting to Kshs. 67,539,788.03.

Damages / Relief Type