In the absence of an employer-employee relationship, the person paying for services rendered is not subject to pay as you earn tax

China Road & Bridge Corporation v Commissioner of Domestic Taxes [2021] eKLR

Tax Appeal No. E003 of 2020

High Court at Nairobi

DS Majanja, J

February 5, 2021

Reported Kakai Toili

Tax Law – income tax - pay as you earn tax (PAYE) – where payment for services rendered were made in the absence of an employer-employee relationship - whether PAYE was payable by a person paying for services rendered absent an employer-employee relationship – Income Tax Act, Cap 470, sections 3(1) and (2), 5(2) and 37.

Civil Practice and Procedure – appeals – appeals from the Tax Appeals Tribunal to the High Court – grounds of appeal – matters of law - what amounted to matters of law.

Statutes – interpretation of statutes – interpretation of tax statutes - what was the proper way of interpreting a tax statute.

Brief facts

The appellant entered into a construction contract with Kenya Railways Corporation (Kenya Railways) for the construction of the standard gauge railways (SGR) from Mombasa to Nairobi. The appellant asserted that one of the conditions of the contract was that Kenya Railways was required upon request and at a cost to it, to provide reasonable additional assistance in matters of security. It contended that its sole responsibility was to construct the SGR and that security services were not part of its contractual obligation.

The management and administration of the police officers providing security services to the SGR was fully carried out by the National Police Service (NPS) through the Kenya Railways Police Unit. The appellant’ s role was limited to the payment of the allowances of assigned officers as determined by the NPS while their salaries were paid by and received from the NPS.

 The respondent (Commissioner) issued the appellant with an investigation finding for the years 2014 to 2016 wherein it claimed that the allowances paid to the police officers amounted to salaries and that the appellant ought to have remitted pay as you earn tax (PAYE) on the same. The appellant objected to the Commissioner’s decision. The Commissioner rejected the objection and aggrieved by that decision, the appellant appealed to the Tax Appeals Tribunal (Tribunal) which upheld the Commissioner’s decision and found the demand for taxes proper. Aggrieved, the appellant filed the instant appeal.

Issues

1. Whether PAYE was payable by a person paying for services rendered in the absence of an employer-employee relationship.
2. What amounted to matters of law capable of being appealed against from the Tax Appeal Tribunal to the High Court?
3. What was the proper way of interpreting a tax statute?

Relevant provisions of the law

Income Tax Act

Section 37

1. An employer paying emoluments to an employee shall deduct therefrom, and account for tax thereon, to such extent and in such manner as may be prescribed.

Held

1. The interpretation or construction of the Constitution, statute or regulations made thereunder or their application to the sets of facts established by the trial court amounted to matters of law. As far as facts were concerned, the instant court’s engagement with them was limited to background and context and to satisfy itself, when the issue was raised, whether the conclusions of the trial court were based on the evidence on record or whether they were so perverse that no reasonable tribunal would have arrived at them. The court could not be drawn into considerations of the credibility of witnesses or which witnesses were more believable than others; by law that was the province of the trial court.
2. The allowances paid to the police officers amounted to income under section 3(1) and (2) and section 5(2) of the Income Tax Act upon which income tax was chargeable. Under section 3(2)(a)(ii), the allowances amounted to a gain from, an employment or services rendered and under section 5(2)(a) it was an amount, received in respect of employment or services rendered.
3. In a taxing Act, one had to look at what was clearly said. There was no room for intendment as to a tax. Nothing was to be read in, nothing was to be implied. One could only look fairly at the language used. If a person sought to be taxed came within the letter of the law he had to be taxed, however great the hardship could appear to the judicial mind to be. On the other hand, if the State, seeking to recover the tax, could not bring the subject within the letter of the law, the subject was free, however apparently within the spirit of the law the case could otherwise appear to be.
4. The basis of PAYE was section 37(1) of the Income Tax Act. The clear language of that provision referred to, an employer paying emoluments to an employee. It would therefore be improper to imply or read into section 37(1) any other relationship other than an employer or employee. To do so violated the clear words of the statute. It also violated the principles of interpretation of tax statutes.
5. The Tribunal fell into error by holding that section 37 of the Income Tax Act applied to a situation where, absent an employer-employee relationship, the person paying for services rendered was subject to PAYE. Further, it also erred by holding that, it would be prejudicial to the taxing authority to limit the ambit of section 37(1) to scenarios where only an employer-employee relationship existed. In so doing, the Tribunal expanded the scope of statutory provisions beyond the words of the statute.
6. Section 37 of the Income Tax Act bespoke an employer-employee relationship. Since the appellant was not an employer, it was not under a statutory obligation to deduct and remit any tax in accordance with section 37(1).

Appeal allowed; the decision of the Tribunal was set aside together with the respondent’s objection decisions dated September 19, 2017; the respondent to bear the costs of the appeal.