Civil Reference No. 7 of 2004
Celtel Tanzania Limited (later Airtel Tanzania Limited), a Tanzanian telecommunications company, made two payments totaling TZS 830,115,584 in 2004 to foreign companies Alcatel France and Ericsson AB for software and software licences used in its telecommunications business. The use of the software was governed by a Service Levy Agreement and Country Frame Contracts. In 2008, following a tax audit of the appellant's 2004 accounts, the Commissioner General of the Tanzania Revenue Authority demanded TZS 217,905,341 as withholding tax, characterising the payments as royalty under the Income Tax Act 1973 (ITA 1973) and Income Tax Act 2004 (ITA 2004). The appellant objected, contending the payments were not royalty. The Tax Revenue Appeals Board initially ruled in the appellant's favour, but on appeal the Tax Revenue Appeals Tribunal reversed, holding that the payments constituted royalty because the two foreign companies owned protected software which the appellant was licensed to use, and the payments for that access were royalty income taxable in the appellant's hands as withholding agent. The appellant then appealed to the Court of Appeal.
(1) Whether the Tribunal erred by ignoring the relevance of authorities (including the OECD Commentary and foreign case law) placed before it. (2) Whether the Tribunal erred in finding that the software was intangible intellectual property protected through patent arrangements without evidentiary support. (3) Whether the Tribunal erred in holding that the mere right to use a software program constituted use of copyright giving rise to royalty. (4) Whether the Tribunal erred in holding that the payments for computer software licences were subject to withholding tax on royalty under section 2(1)(a) and (d) of the ITA 1973 and corresponding provisions of the ITA 2004.
The appellant, through Dr. Nguluma, argued that the Tribunal wrongly found the software was patented intellectual property without evidence of any patent grant, and that the payments were merely for the right to use a copyrighted article (not the copyright itself), relying on the OECD Commentary (paragraphs 12.2 and 14.2) and the Indian Income Tax Appellate Tribunal decision in Infra Soft Ltd v. Assistant Director of Tax, which distinguished acquisition of a copyright from acquisition of a copyrighted article and treated such payments as business profits rather than royalty. The appellant contended that since the ITA 1973/2004 definitions of royalty were ambiguous or had gaps, recourse should have been made to international guidance, and that section 2(1)(d) (industrial/commercial/scientific equipment) could not apply to software, an intangible item, since 'equipment' denotes tangible things. The respondent, through Mr. Tito, argued that the payments were consideration for the right to use an intellectual property (the software) whose ownership remained with the foreign companies, thus constituting royalty within section 2(1)(a) and (d) of the ITA 1973 and section 3(a) and (d) of the ITA 2004. He contended the statutory definitions were clear and unambiguous, making resort to the OECD Commentary unnecessary, especially since Tanzania had no tax treaty with the relevant countries providing for its application. He relied on prior Tanzanian decisions (Bulyanhulu Gold Mine, Tullow Tanzania BV, BP Tanzania) supporting a broad interpretation of royalty covering payments for intangible rights, including consultancy and software use.
The Court of Appeal dismissed the appeal with costs. On the first issue, it held that the Tribunal had not ignored the relevance of the OECD Commentary or foreign case law; rather, it considered and rejected their application because it found no ambiguity or gap in the domestic statutory definition of royalty, consistent with the principle (cited from the Kenyan case of Bank of Kenya Limited v. Kenya Revenue Authority) that undomesticated international instruments are applied only where domestic law is ambiguous or has a gap. On the second issue, the Court agreed with the appellant that the Tribunal erred in finding the software was protected by patent arrangements without any evidentiary basis, since existence of a patent grant must be proved and was not established. However, this error was not fatal because the Tribunal's decision was not solely grounded on patent protection but also, and independently, on the finding that the payments constituted royalty for use of copyright under section 2(1)(a) of the ITA 1973 and section 3(a) of the ITA 2004. On the third and fourth issues, after reviewing conflicting Indian authorities (the Delhi Tribunal/High Court's Infra Soft Ltd decision, which distinguished a 'copyrighted article' from a 'copyright' and treated such payments as business profits, versus the Karnataka High Court's Samsung Electronics decision, which held that a licence to use software involves partial transfer of copyright amounting to royalty) and the persuasive East African authority of Kenya Commercial Bank Limited v. Kenya Revenue Authority (where the Kenyan Court of Appeal, interpreting a materially similar statutory definition, held that licence fees for software use constituted royalty), the Court found the Kenyan Court of Appeal's reasoning highly persuasive and adopted it. Applying it to the facts, the Court held that the payments to Ericsson AB and Alcatel France were consideration for the appellant's use of the software under the Agreement, and by granting such use the foreign companies made a limited or partial transfer of their copyright to the appellant. Accordingly, the Tribunal did not err in concluding that the payments constituted royalty under section 2(1)(a) of the ITA 1973 and section 3(a) of the ITA 2004, notwithstanding its erroneous reliance on the inapplicable patent-based reasoning. The third and fourth issues were answered in the negative, and the appeal was dismissed as devoid of merit.
The judgment clarifies the application of the domestic statutory definition of 'royalty' under the Tanzanian Income Tax Act 1973 and Income Tax Act 2004 to payments for licences to use computer software, holding that such payments can constitute royalty where they represent consideration for a limited or partial transfer of copyright, even absent a full transfer of ownership. It affirms the principle that undomesticated international instruments, such as the OECD Commentary on the Model Tax Convention, are only resorted to as interpretive aids where there is ambiguity or a gap in domestic law, and are inapplicable where the domestic definition is clear. The decision also demonstrates the Tanzanian Court of Appeal's approach to comparative and persuasive authority, favouring the reasoning of the Kenyan Court of Appeal (interpreting a materially similar statutory provision) over conflicting Indian tax tribunal/court decisions, thereby contributing to a regionally consistent East African approach to characterising software licensing payments as royalty for withholding tax purposes. It further underscores that a finding of patent protection requires evidentiary proof of an actual government grant, and that an erroneous finding on one statutory basis (patent) does not vitiate a tribunal's decision where an alternative, correctly reasoned basis (copyright) independently supports the same conclusion.
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