Judgment summary
The Appellant, Kutuma Kenya Limited, a food delivery business, subscribed to various off-the-shelf digital products and solutions and recorded the transactions as software licences. The Respondent assessed Withholding tax (WHT) on these payments on the basis that they constituted royalties under Section 35 of the Income Tax Act read with the definition of royalty in Section 2 [81].
The Tribunal framed the issue for determination as whether WHT was applicable to the Appellant's payments for software licences for the periods 2020, 2021 and 2022 [79].
The Tribunal examined the terms of the licences of the digital products from all 15 vendors and found that in every case intellectual property rights were retained by the vendor, access to source code was denied, and the licence granted was narrow, personal, non-exclusive, non-transferable and revocable with no exploitation rights conferred [105].
The Tribunal found that none of the 15 subscription payments satisfied the definition of a royalty under Section 2 of the Income Tax Act, and this was corroborated by the Commentary on Article 12 of the OECD Model Tax Convention [105, 114].
The Tribunal held that WHT was not applicable to the Appellant's payments for software licences for the periods 2020, 2021 and 2022, and allowed the appeal [119, 120].
Background
The Appellant is a limited liability company incorporated in the Republic of Kenya carrying on the business of food delivery service in Kenya [1]. The Respondent is the Commissioner of Domestic Taxes [2].
The Respondent issued to the Appellant Withholding tax (WHT) assessments in a notice of assessment dated 18th February 2025 covering the periods of 2020, 2021 and 2022 [3]. The Appellant objected to the entire WHT assessments on 14th March 2025 [4].
The Respondent rendered its Objection decision in a letter dated 12th May 2025, received by the Appellant on the same date, confirming the WHT assessments in their entirety [5]. The Appellant filed its Notice of Appeal dated 12th June 2025 [6].
The Appellant subscribes to various off-the-shelf digital products and solutions including data storage and web hosting, emails and workspace solutions, antivirus/security solutions, analytics/messaging/OTP and system notifications, geo-location solutions, and analytics and integration solutions among other cloud computing products, being the subject of the disputed WHT assessment of Kshs. 5,097,193 comprising principal tax, penalty and interest [9].
The Respondent stated that the audit for the period 2020 to 2022 concerned Withholding Income Tax and VAT and led to an assessment dated 18th February 2025 in the sum of Kshs. 5,580,788 comprising principal tax, penalties and interest [47].
Core dispute
The central dispute was whether the subscription payments made by the Appellant to the listed digital service providers constituted royalties within the meaning of Section 2 of the Income Tax Act and were accordingly subject to withholding tax under Section 35 [17, 79].
The Appellant contended that the digital products were commoditized off-the-shelf software purchased for internal use and consumed via limited end-user licences that were royalty free, non-exclusive, non-transferable, non-sublicensable, revocable, non-distributive and non-modifiable, with no rights to the source codes and intellectual property [7c, 7d, 20]. The Appellant argued that the payments were for use of a copyrighted article rather than for the use of copyright [23].
The Appellant also raised computational issues: that the 2021 software licence base of Kshs. 12,457,981 double-counted the sum of Kshs. 4,010,370 previously assessed in 2020 [36, 37]; that the non-resident rate of 20% was incorrectly applied to Kenyan-resident vendors HostAfrica EAC, Wingubox and Africa's Talking [39, 40]; and that the Objection decision failed to give reasons contrary to Section 51(8) of the Tax Procedures Act, 2015 [41, 42].
The Respondent maintained that the payment for software was a payment of royalty as it was consideration for the use and right to use the copyright of the literary work of another person under Section 2 of the Income Tax Act, and that whether software was purchased for resale or for own use, WHT would be collected [54, 62, 63].
Court findings
The Tribunal reviewed the Appellant's concerns and documents and found merit in the assertions of computational errors which the Respondent failed to rebut in its Objection decision and pleadings. The Appellant demonstrated with its ledgers that the Respondent applied an excess cost base in 2021, and that the Respondent applied a WHT rate of 20% on the software licence costs despite the Appellant showing that some suppliers were residents and others were non-residents from jurisdictions with double-taxation avoidance agreements with Kenya [83].
The Tribunal proceeded to analyse the applicability of WHT on the cost bases of Kshs. 4,010,370 in 2020, Kshs. 8,447,611 in 2021 and Kshs. 7,722,795 in 2022 [84].
The Tribunal set out the definition of royalty under Section 2 of the Income Tax Act and was guided by the holding in Seven Seas Technologies Limited v Commissioner of Domestic Taxes (Income Tax Appeal 8 of 2017) [2021] KEHC 358 (KLR) [85, 87].
The Tribunal perused the terms of the licences for all 15 vendors, including Google Inc, HostAfrica EAC, Intuit-QB, 3 Degrees, GoDaddy/WebFaction, DigitalOcean, Tookan (JungleWorks), Wingubox, Africa's Talking, Appfigures, Approval Donkey, Twilio (SendGrid & Segment), Intuit-Mailchimp, Hawkstone-Instabug and WAMA Cloud, and found that in each case the subscription payments were consideration for access to a hosted service, not for the use of or right to use any copyright, with all intellectual property retained by the vendor, source code access denied, and no exploitation rights conferred [90 to 105].
The Tribunal found that none of the 15 subscription payments satisfied the definition of a royalty under Section 2 of the Income Tax Act, and this was corroborated by the Commentary on Article 12 of the OECD Model Tax Convention, particularly paragraphs 14, 14.2, 14.4 and 17 [105, 114].
The Tribunal applied the principle of strict construction of fiscal statutes from Equity Group Holdings Limited v Commissioner of Domestic Taxes [2021] KEHC 25 (KLR) [115].
The Tribunal noted that the Finance Act, 2026, assented to on 23rd June 2026, amended Section 2(1) of the Income Tax Act by substituting a new definition of royalty that expressly included software, and found that this legislative addition sustained its finding that the framework existing prior to the amendment rendered the Appellant's transactions outside the ambit of royalty during the periods assessed [116, 117].
The Tribunal held that the burden of proof shifted to the Respondent when the Appellant presented evidence, and the Respondent failed to show that the transactions were subject to WHT, while the Appellant discharged its burden and demonstrated that WHT did not apply [118].
Outcome
The Tribunal found the Appeal to be meritorious [120]. The Tribunal allowed the Appeal, set aside the Objection decision dated 12th May 2025, and ordered each party to bear its own costs [120].
The Tribunal found and held that WHT was not applicable to the Appellant's payments for software licences for the periods 2020, 2021 and 2022 [119].
Major issues / areas of contention
- Whether the subscription payments made by the Appellant to the listed digital service providers constituted royalties within the meaning of Section 2 of the Income Tax Act and were subject to withholding tax under Section 35.
- Whether the 2021 software licence base of Kshs. 12,457,981 adopted by the Respondent double-counted the sum of Kshs. 4,010,370 previously assessed in 2020.
- Whether the non-resident rate of 20% was correctly applied to payments made to Kenyan-resident vendors HostAfrica EAC, Wingubox and Africa's Talking.
- Whether the Objection decision was vitiated for failure to give reasons on the computational grounds, contrary to Section 51(8) of the Tax Procedures Act, 2015 and the Fair Administrative Action Act, 2015.
- Whether the burden of proof had shifted to the Respondent and whether it had been discharged.