Following a tax audit, the Tanzania Revenue Authority disallowed IT expenses on the grounds that Nyota Tanzania Limited had failed to demonstrate that the services had been provided or that the charges had been incurred solely for the purpose of generating income, as required under section 11(2) of the Income Tax Act.
Both the Tax Revenue Appeals Board and the Tax Revenue Appeals Tribunal upheld the disallowance, finding that Nyota Tanzania Limited had failed to provide sufficient documentary evidence to substantiate the nature, extent and benefit of the IT services received or demonstrate that the charges reflected arm’s length pricing in a related-party context.
An appeal was then filed with the Court of Appeal.
Judgment
On further appeal, the Court of Appeal of Tanzania confirmed these findings. The court held that it is the taxpayer’s responsibility to demonstrate the reality and deductibility of related-party service expenses. In the absence of detailed contracts, service descriptions and contemporaneous evidence showing that the IT services were provided and contributed to the taxpayer’s income-generating activities, the deductions were properly denied.