Seven Seas Technologies under a software license agreement purchased software from a US company – Callidus software – for internal use and for distribution to local customers. Following an audit, the tax authorities found that Seven Seas Technologies had not been paying withholding taxes on payments in respect of the software license agreement with Callidas. An assessment was issued according to which these payments were found to by a “consideration for the use and right to use copyright in the literary work of another person” as per section 2 of the Income Tax Act, thus subject to withholding tax under Section 35 (1)(b) of the Kenyan Income Tax Act. Seven Seas Technologies contested the assessment before the Tax Appeals Tribunal where, in a judgement issued 8 December 2016, the tribunal held that Seven Seas Technologies had acquired rights to copyright in software that is commercially exploited and that the company on that basis should have paid withholding tax. A decision was issued in favor of the tax authorities. Unsatisfied with the decision of the tribunal Seven Seas Technologies Ltd moved the case to the High Court. In the appeal filed in 2017 Seven Seas Technologies Ltd argues that a payment may only be deemed a royalty where it results in the transfer of copyrights which grants rights as set out in Section 26 (1) of Copyright Act 2001. In the case at hand, a transfer of such rights had not taken place under the software license agreement and the payments are therefore not subject to withholding tax. Judgement of the High Court The High Court granted the appeal and decided in favor of Seven Seas Technologies Ltd. The additional tax assessment and the decision of the tribunal – was set aside. During the proceedings the High Court sought additional evidence, including evidence of experts. The expert witness for the Appellant pointed to the decision in the case of Tata Consultancy Services vs State of Andhra Pradesh (277ITR 401) 2004 Pg 99-122 wherein the Indian Supreme Court held that software, when put in a medium, is goods for sale, not copyright. The High Court relied on the Indian Supreme Court decision of 2 March 2021 in the case of Engineering Analysis Centre of Excellence Private Limited v. Commissioner of Income Tax. The Court extracted the finding that “What is licensed by the foreign, non-resident supplier to the distributor and resold to the end-user or directly supplied to the resident end-user is, in fact, the sale of a physical object which contains an embedded computer program and is, therefore, the sale of goods.” Excerpt “The upshot of the above excerpts and the case is that the Appellant in this case paid the license fee did not acquire any partial rights in copyright and thus not subject to royalty as argued by the Respondent. In addition to the above, the OECD Model Tax Convention on Income and on Capital provides that in such transactions, distributors are paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Therefore, payments in these types of transactions should be dealt with as business profits and not as royalties. The Tribunal erred in failing to consider that the Appellant is a vendor of copyrighted material and not the user of a copyright and in this regard does not receive any right to exploit the copyright. Disposition It is therefore right to conclude that the Appellant was not subject to pay royalties and in turn not liable to pay Withholding tax to the Respondent with regard to the distribution of the computer software. For these reasons the Appeal is allowed and the decision of the Tribunal set aside.” ...

Following an audit of Oracle Technology Systems (Kenya) Limited, a distributor of Oracle products in Kenya, the tax authority issued an assessment for FY2015-2017 relating to controlled transactions. In assessing the income, the tax authority had used a CUP method instead of the TNMM. Dissatisfied with the assessment, Oracle Technology Systems (Kenya) Limited appealed to the Tax Appeals Tribunal on the basis that the return on its related party transactions was at arm’s length and did not require adjustment. Judgement of Tax Appeals Tribunal The Tribunal referred the case back to the tax authority for an appropriate reassessment. Excerpts “The question that arises is which method was the most suitable one. The OECD TP Guidelines state that the preferred method is CUP. But this only applies where there are appropriate comparables. Internal comparables are of course always preferred where they are reliable or can be reliably adjusted. From our understanding, the TP Policy implied that the reason internal comparables could not be used was due to differences in the functions of the independent distributors as compared with those of the Appellant. 127. We however note that during the hearing and in its submissions, the Appellant went out of its way to show that its functions are routine and not much different from those carried out by other distributors. The Appellant for example states in Paragraph 76 of its Statement of Facts as follows:- ‘The Appellant would like to note that the IT industry itself is a very competitive market and that the Appellant’s functional profile is not different from other value-added distributors in the same competitive market … ”  128. Similarly, the expert witness Dr Neighbour stated in his review of the Appellant’s role as a distributor as thus:- “In my experience, these are standard functions that would be expected of a typical distributor, i.e one that provides some local sales and marketing activity to support the sales as well as provision of customer support and services in respect of the distributed products … “ 129. The arguments offered by the Appellant seem to imply its functions are no different from any other distributor. This seems to contradict what its TP Policy suggests that the reasons it could not use the internal comparables was because the functions carried out by the Appellant and the  independent distributors were different and could not be reliably adjusted. 130. If indeed as the Appellant and its expert witness suggests its functions are routine and much in line with those of other distributors in the industry, we are at a loss as to why the internal comparables could not be used, and where such internal comparables were available why the CUP method which as both parties have admitted is the preferred method could not be used. (…) 132. It is unclear to the Tribunal both from the Appellant’s and the Respondent’s arguments and the documentation made available whether the Appellant is indeed a routine distributor as it averred during the hearing or if the services it offers are distinct as stated in the TP Policy. 133. Accordingly, we are of the view that the matter ought to be referred back to the Respondent to carry out a proper audit and in particular a functional analysis to determine what the exact functions of the Appellant are and if these are fundamentally different from those of independent distributors. Only then is it possible to determine the proper method to be applied.” ”] ...