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Court of AppealPartially AllowedCivil Appeal No. 195 of 2017· [2020] KECA 214 (KLR)

Commissioner of Domestic Taxes (Large Tax Payer Office) v Barclays Bank of Kenya Ltd [2020] KECA 214 (KLR)

Court of Appeal
6 November 2020
WKW. KaranjaKMK. M'inotiFSF. Sichale
5,426 words in judgment
View original judgmentRead on Kenya Law Watch case
AI-assisted case brief
·~22 min to read original · ~4 min brief

The bottom line

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Kenya's Court of Appeal allowed KRA to tax card transaction and interchange fees as royalties and management fees, reversing a win for Barclays Bank.

What this practically means

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Executive summary

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This Court of Appeal judgment (Karanja, M'inoti and Sichale, JJ.A.) allows the appeal by the Commissioner of Domestic Taxes against a High Court decision (Odunga J, 20 May 2015) that had quashed, by certiorari, and prohibited, the Commissioner's demand for withholding tax on payments made by Barclays Bank of Kenya to credit card companies (Visa, MasterCard and American Express) and to other issuing banks (interchange fees). The High Court had found the demand lacked the clarity required in tax matters, following an earlier High Court decision involving the same parties. The Court of Appeal reversed. It reaffirmed the strict-construction principle for tax legislation - a tax demand must fall within the terms of the statute without ambiguity, and ambiguity is remedied by legislative amendment, not intendment - but held that construction must be reasonable and grounded in the evidence and circumstances of each case. On the facts, the court found that the bank could not access the card networks without using cards bearing the card companies' trademarks and logos, so the transaction fees constituted royalty under section 2(c) of the Income Tax Act, regardless of the agreements' statements that no royalties were payable, since characterisation depends on the statute, the agreements and the totality of the dealings. The interchange fees paid by the bank as acquirer to issuers satisfied the definition of management or professional fees, which need not fall within only one statutory category. The court distinguished the earlier Barclays and SDV Transami decisions on the basis that the confusion evident in those demands was absent here. The appeal was allowed with costs to the appellant.

Key legal issues

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01

Whether transaction fees paid to card companies constitute royalty for use of trademarks and logos

Holding

Yes. The respondent could not access or use the card networks without using cards bearing the card companies' trademarks and logos, so the transaction fees constituted royalty under section 2(c) of the Act, however disguised.

Reasoning

The court examined the trademark licence agreements with Visa, MasterCard and AMEX and found that use of the trademarks was a precondition for accessing the card networks. Although the MasterCard and AMEX agreements stated no royalties were payable, the court held that characterisation of the payment is not determined solely by the parties' descriptions of it but by the statute, the agreements and the totality of the dealings. The payments were consideration for the right to use trademarks, falling squarely within section 2(c) of the Income Tax Act.

p. 5
02

Whether interchange fees paid by the acquirer to issuers constitute management or professional fees

Holding

Yes. The services rendered by the issuer to the acquirer satisfy the definition of management or professional fees in section 2 of the Act.

Reasoning

The court clarified that the respondent, while paying interchange fees, was acting in its capacity as acquirer. On the totality of the evidence, there were clear co-ordination, managerial, professional and contractual services rendered by the issuer to the acquirer for which the acquirer pays. The fee need not fall within a single category of service in section 2; it is enough that the payment reasonably falls within the statutory definition on the evidence.

p. 6
03

Whether the tax demand lacked the clarity required to sustain judicial review remedies

Holding

No. Unlike the earlier case before Majanja J, the appellant here identified with clarity the basis of its demand, so certiorari and prohibition ought not to have issued.

Reasoning

The court distinguished the first case between the parties and the SDV Transami decision, where the tax authority's lack of clarity was evident. Here, the evidence established the basis of the royalty and management/professional fees demands, and the respondent did not misunderstand the basis of the demand. There being no ambiguity in the statute, the High Court erred in granting judicial review remedies.

p. 6

Legal principles established

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  • Tax legislation must be strictly construed so that a tax demand must fall within the terms of the statute without ambiguity, but construction must be reasonable and based on the wording of the statute and the circumstances of each case
  • Whether a payment constitutes royalty is determined by considering the terms of the statute, the written agreements, and the totality of the relationship and actual dealings between the parties, not the written agreements alone
  • A management or professional fee need not fall within only one of the categories of services defined in section 2 of the Income Tax Act; it can cover one or more, and what is critical is whether the payment reasonably falls within the terms of the statute on the totality of the evidence
  • Where the meaning of tax legislation is clear, courts will give effect to the law; ambiguity is construed in favour of the taxpayer only where it exists

Court orders

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  1. 1.Appeal allowed with costs to the appellant
  2. 2.Implicit setting aside of the High Court's orders of certiorari and prohibition quashing and prohibiting the withholding tax demand

Authorities

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Legislation

  • Income Tax Actsection 35
  • Income Tax Actsection 35(1)
  • Income Tax Actsection 35(1)(a)
  • Income Tax Actsection 35(1)(b)
  • Income Tax Actsection 35(3)(f)
  • Income Tax Actsection 35(3)(g)
  • Income Tax Actsection 2
  • Income Tax Actsection 3(1)
  • Income Tax Actsection 4(a)
  • Income Tax Actsection 10(a) and (b)

Cases cited (7)

  • Adamson v. Attorney General
    [1933] AC 257
  • Cape Brandy Syndicate v. Inland Revenue Commissioners
    [1920] 1 KB 64
  • T. M. Bell v. Commissioner of Income Tax
    [1960] EA 224
  • Republic v. Commissioner of Income Tax ex parte SDV Transami
    CA No 212 of 2004
  • Republic v. The Commissioner of Domestic Taxes ex parte Barclays Bank of Kenya Ltd
    HC Misc App No. 1223 of 2007
  • Stanbic Bank Ltd v. Kenya Revenue Authority
    [2009] eKLR
  • Kenya Commercial Bank v Kenya Revenue Authority
    HC Income Tax Appeal No. 14 of 2007
On appeal from
High Court of Kenya at Nairobi
JR Misc. CA No. 46 of 2013
Jurisdiction invoked
First appellate jurisdiction over the High Court's judicial review decision under the Court of Appeal Act (appeal as of right on facts and law); not a Supreme Court Article 163(4) appeal

Key timeline

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Practical implications

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Frequently asked questions

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Cite this brief

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Cite this brief

Caselaw, "Commissioner of Domestic Taxes (Large Tax Payer Office) v Barclays Bank of Kenya Ltd [2020] KECA 214 (KLR)", Case Analysis (2020). Civil Appeal No. 195 of 2017. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2020/214/eng@2020-11-06

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