Kenya Commercial Bank Limited v Kenya Revenue Authority [2016] KECA 220 (KLR)

Court of Appeal

5 August 2016

EGE. M. Githinji HOH. M. Okwengu GKG. B. M. Kariuki

3,294 words in judgment

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The bottom line

Kenya's Court of Appeal confirmed that software licence fees and Nostro account charges attract withholding tax the moment payment is made.

What this practically means

Executive summary

The Court of Appeal (Githinji, Okwengu and G.B.M. Kariuki, JJ.A) dismissed the bank's appeal against the High Court (Lesiit, J.) which had upheld the Income Tax Local Committee's decision that the bank was liable for withholding tax on payments to Infosys Technologies Limited and on interest and charges on its Nostro accounts. On payments to Infosys, the Court held that whether the payments were licence fees and related services or deposits was a question of fact determined from the agreement and transactions; three fact-finders had found they were licence fees, supported by the payment schedule, invoices paid, and the post-termination addendum under which the bank agreed to pay US$353,565 outstanding. Licence fees for the right to use Infosys software constituted a royalty under section 2(c) of the Income Tax Act, and liability to withholding tax arose upon payment, independent of delivery, full performance or benefit to the payer. On Nostro accounts, despite evidential gaps (no identified account or amounts, no documentary or expert evidence, no agreed facts), the Court applied the statutory definitions of 'interest' and 'paid' and concluded that interest and incidental charges on Nostro accounts are taxable income to the correspondent bank, with withholding tax payable once the expense is debited. Crucially, the Court corrected the Local Committee's basis, holding the liability rests on the income tax law and not on 'current practice'. The Court also noted its doubt about its own appellate jurisdiction but followed Commissioner of Income Tax v. Memon. The appeal was dismissed with costs to the respondent.

Key legal issues

Nature of payments to Infosys

Holding

The payments to Infosys were licence fees and related services, not deposits; they constituted royalties subject to withholding tax, and tax liability arose on payment irrespective of delivery or termination

Reasoning

Whether payment was for licence and related services or deposits is a question of fact determined from the agreement and transactions. Three fact-finders (Commissioner, Local Committee, High Court) found payments were licence fees, amply supported by evidence: the agreement provided for payment of licence, ATS and professional services fees per an agreed schedule, invoices were paid, and after termination the bank agreed to pay the outstanding US$353,565. The licence granted a right to use Infosys intellectual property, a royalty under section 2(c).

p. 4

Withholding tax on Nostro accounts

Holding

Interest and incidental charges on Nostro accounts are taxable income to the correspondent bank and attract withholding tax under sections 2, 34(2) and 35(1) of the Act; the deeming definition of 'paid' captures charges debited to the account

Reasoning

Despite evidential difficulties, the Court applied statutory definitions: interest includes commitment or service fees in respect of a loan or credit, and 'paid' includes credited or dealt with. Charges levied by foreign banks on Nostro accounts fall within the statutory definition of interest since they are levied in connection with credit advanced, and debiting the account deems payment effected, making withholding tax immediately payable.

p. 6

Competence of appeal to Court of Appeal

Holding

The Court entertained doubts about its jurisdiction since the Income Tax Act does not specifically provide for appeal to it, but followed the majority decision in Commissioner of Income Tax v. Memon that jurisdiction exists

Reasoning

The issue of competence was not raised by the parties. The Court's research revealed the jurisdictional issue was directly raised and decided by majority in Memon, holding the Court has jurisdiction to entertain such an appeal. The Court declined to depart from that precedent, letting the matter rest there.

p. 2

Legal principles established

Liability to withholding tax arises upon making payment and is not dependent on full performance of the contract or on whether the contract was ultimately beneficial to the payer
Payment of licence fees for the right to use computer software is a royalty within the definition in section 2 of the Income Tax Act and attracts withholding tax
Interest and incidental expenses on Nostro accounts paid to correspondent banks are taxable income and attract withholding tax under the Income Tax Act, based on the statute and not merely on administrative practice

Court orders

1.The appeal is dismissed
2.Costs of the appeal to the respondent

Authorities

Legislation

Income Tax Actsection 3(1)
Income Tax Actsection 4(9)
Income Tax Actsection 2 (definition of royalty, interest and paid)
Income Tax Actsection 10(a), (b) and (c)
Income Tax Actsection 34(2)
Income Tax Actsection 35(1)

Cases cited (1)

Commissioner of Income Tax v. Memon
[1985] eKLR

On appeal from: High Court of Kenya at Nairobi – Commercial Division; H.C. Income Tax Appeal No. 14 of 2007
Jurisdiction invoked: Appeal from the High Court on a question of law under the Income Tax Act; the Court noted the Act does not specifically provide for appeal to this Court and followed Commissioner of Income Tax v. Memon on competence

Key timeline

Practical implications

Frequently asked questions

Later judgments citing this (2)

Judgments in the corpus that rely on this one. Where the Court said how it treated the authority, that is shown.

JNG v Republic (Criminal Appeal 189 of 2017) [2025] KECA 1006 (KLR)
[2025] KECA 1006 (KLR)2 May 2025applied
Kiti v Republic (Criminal Appeal 14 of 2019) [2023] KECA 1403 (KLR)
[2023] KECA 1403 (KLR)24 Nov 2023

Cite this brief

Caselaw, "Kenya Commercial Bank Limited v Kenya Revenue Authority [2016] KECA 220 (KLR)", Case Analysis (2016). Civil Appeal No. 184 of 2009. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2016/220/eng@2016-08-05

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.