By 
The Court of Appeal said Vodacom Tanzania must pay the Tanzania Revenue Authority (TRA) Sh3 billion withholding tax on purchase of a computer software from Siemens Telecommunications (Pty) Limited.
The highest court in the land has upheld decisions of the Tax Revenue Appeals Board (Trab) and the Tax Revenue Appeals Tribunal (Trat) that had turned down Vodacom’s attempts to escape the tax liability.
The two tax appeal bodies had held that payment that Vodacom made to Siemens for the purchase of the software was taxable under the Income Tax Act.
“We find and hold that the payment made by the appellant (Vodacom) to M/s Siemens Telecommunications (Pty) Limited for the purchase of computer software was in the nature of, and is taxable as, royalty in terms of section 34 (1) (c) of the Income Tax Act,” the court held.
The decision is the third consecutive blow for the giant telecom after it has lost the legal battle in the quasi-judicial bodies.
Vodacom went to the Court of Appeal last year to challenge the decision of Trat to uphold decision of Trab that confirmed the tax liability imposed on it in 2007.
It all started in 2006 when the taxman conducted a tax audit on the telecom’s operation and splashed the firm with Sh1 billion and Sh1.9 billion respectively as withholding tax and penalties on the services and royalty for the years of income 2001 to 2004.
Vodacom strongly disputed the tax burden. Their initial protest culminated into a revision of the preliminary audit findings in April 2007.
The company’s main complaint at Trab was that TRA ought not to have demanded withholding tax on payments it made for acquisition of software licence exclusively granted to her for data transmission purposes.
After hearing the company, Trab rejected their arguments and maintained that the telecom giant was entitled to withholding tax for payments she made to the supplier for the software licence.
Vodacom’s second attempt to escape the tax liability failed at Trat that upheld the decision of Trab.
At the Court of Appeal, Vodacom argued among other things, that Trat grossly misdirected itself and erred in law when it held that payments for the right to use software should attract royalty.
It further argued that Trat erred in holding that payments for the right to use the software were chargeable in the form of withholding tax under section 34 (1) (c) of the Income Tax Act, 1973.
Vodacom was represented by Mr Yohanes Konda and Dr Erasmo Nyika while TRA enjoyed the service of Principal State Attorney, Juma Kisongo who was assisted by Senior State Attorneys Harold Gugami and Marcel Busegano.
Mr Nyika submitted before the court of appeal that it was wrong for the tribunal to hold that payments for the right to use software constituted royalty and thus subject to withholding tax.
It was Mr Nyika’s contention that TRA wrongly interpreted the term “royalty” under section 2 of the Income Tax Act, 1973.
According to Dr Nyika, acquisition of software was different from acquisition of a copyright in the software. He further argued that the right to use software does not attract tax as distinct from the right to use a copyright of the software which does.
TRA’s response through Mr Kisongo was that payment on purchase of the software constituted a royalty which attracted payment of withholding tax on it as per section 34 (1) (c) of the Income Tax Act, 1973.
The main issue that the Court of Appeal was called upon to decide was whether the payment made by Vodacom to Siemens Telecommunication (Pty) Limited for purchase of computer software constituted royalty.
After considering the arguments, the justices of appeal Jacobs Mwambegele, Rehema Kerefu and Issa Maige sided with TRA in holding that the payment for the right to use computer software constituted royalty.
“For the reasons we have endeavored to assign above in which we have found all grounds of appeal, except the second, as lacking substance, this appeal is, ultimately, wanting in merit,” said the judges.
Comments