The taxman sought to get Ksh64 million tax on allowances paid to police officers by the China Road and Bridge Corporation (CRBC) during the construction of the Standard Gauge Railway (SGR) line.
In a ruling, High Court Judge David Majanja overturned an earlier ruling by the Tax Appeals Tribunal which had ruled in favour of the tax collection agency.
Making an appeal, CRBC through its lawyer argued that the Ksh64 million demand by KRA was illegal as the agreement between the firm and Kenya was that it would build the railway while the Government offers security.
“The appellant contends that there are no contractual services between itself and the police officers by the virtue of the fact that the appellant did not determine the work by the police officers and they were not answerable to the appellant,” the company’s lawyer stated.
The Chinese company further stated that it did not employ police officers who had been assigned to guard rail items during the construction adding that the money paid to the officers as allowances ought to be deducted from National Police Service Commission (NPC).
“The police officers are not employees of the appellant (CRBC) as such, the National Police Service should bear the responsibility of the Pay As You Earn (PAYE),” the Chinese firm argued.
Agreeing with the company, Justice Majanja noted that CRBC was not an employer of the police officers and was therefore not under statutory obligation to deduct and remit any tax to KRA.
The court found that the tax tribunal had erred in the classification of the allowances as income for services rendered under the agreement.
“The clear language of section 37 (1) of the Income Tax Act refers to: ‘An employer paying emoluments to an employee’. It would therefore be improper to imply or read into this provision any other relationship other than an employer or employee. To do so violates the clear words of the statute. It also violates the principles of interpretation of tax statutes,” Justice Majanja explained.
In court filings, KRA had stated that it was the responsibility of CRBC to deduct the taxes and remit the same to the taxman.
The tax agency further claimed that the contractor was an employer on account of the services rendered by the police.