Civil Reference No. 7 of 2004
Kilombero Sugar Company Limited (the appellant), a Tanzanian company engaged in sugar cane farming and production, entered into an Operational and Technical Services Agreement in 1998 with Illovo Project Services Limited (Illovo), a South African company, for management and technical services, under which the appellant paid Illovo a fixed monthly fee of USD 30,000 plus separately itemised reimbursements for costs such as air tickets, air charter, and hotel accommodation incurred by Illovo in rendering services. Following a tax audit for the years 2004/05–2007/08 and 2009/10, the Commissioner General of the Tanzania Revenue Authority (the respondent) found that the appellant had failed to withhold tax on the reimbursed costs paid to Illovo, treating them as part of the taxable 'service fee', and issued two Withholding Tax Certificates totalling Tshs. 469,739,933/= (tax plus interest). The appellant objected, then unsuccessfully appealed to the Tax Appeals Board and the Tax Revenue Appeals Tribunal, both of which held that the reimbursed costs formed part of the 'service fee' subject to withholding tax and that the Tanzania–South Africa Double Taxation Agreement did not exempt such payments. The appellant brought a second appeal to the Court of Appeal.
(1) Whether costs incurred by Illovo (e.g., air tickets, air charter, accommodation) and reimbursed by the appellant form part of the 'service fee' under section 3 of the Income Tax Act, 2004, and are therefore subject to withholding tax under section 83(1)(b) of the Act. (2) In the alternative, if such reimbursed costs are part of the service fee, whether they are nonetheless exempt from withholding tax by virtue of the Tanzania–South Africa Double Taxation Agreement, particularly under Article 7(1) (Business Profits).
The appellant, through Mr. Mtafya, argued that 'service fee' under section 3 of the ITA, 2004 is limited to payments for professional or labour services and excludes reimbursed costs such as travel and accommodation expenses, which were separately itemised in the agreement and not charged as part of Illovo's fee. He contended that treating costs as part of service fee contravened section 83(1) of the ITA, 2004, which lists specific types of payments subject to withholding tax without including 'costs', and that under Article 138(1) of the Constitution, any ambiguity in tax statutes should be resolved in favour of the taxpayer, citing Professor Luoga's work. In the alternative, he argued that even if reimbursed costs were part of service fee, such fee constituted 'business profits' of Illovo under Article 7(1) of the Double Taxation Agreement, taxable only in South Africa since Illovo had no permanent establishment in Tanzania, relying on OECD Commentary and academic texts on double taxation. The respondent, through Mr. Maswanyia, countered that 'reimbursement' and 'costs incurred' are conceptually distinct, and that the definition of 'service fee' in section 3 turns on whether a payment is 'reasonably attributable to services rendered', which the travel and accommodation costs were, since Illovo could not have rendered its services without incurring them. The respondent argued Article 7 was inapplicable because it deals with 'business profits', which are cost-exclusive, whereas 'service fee' is cost-inclusive, and that the correct provision was Article 21 dealing with 'other income' not otherwise addressed in the Agreement.
The Court of Appeal dismissed the appeal with costs, upholding the Tribunal's decision on both issues. On the first issue, the Court agreed with the Tribunal that 'service fee' under section 3 of the ITA, 2004 is not confined to labour or professional charges alone but includes all payments 'reasonably attributable to services rendered', and that costs such as air tickets, air charter, and accommodation incurred by Illovo in rendering services and reimbursed by the appellant fall within this definition, since no service can be rendered without accompanying costs. The Court held that contractual separation of the service fee and reimbursable costs was merely for the parties' administrative convenience and did not remove such costs from the withholding tax base under section 83(1)(b). The Court found support in TRA Practice Note No. 01/2019, treating it as a permissible (though non-binding) external aid to construction confirming that withholding tax should be calculated on the gross amount including reimbursements. On the second issue, the Court held that Article 7(1) of the Double Taxation Agreement, dealing with 'business profits', was inapplicable because it concerns cost-exclusive profits, whereas the service fee (inclusive of reimbursed costs) is a cost-inclusive item not otherwise dealt with in the Agreement's specific articles. The Court held the applicable provision was Article 20 ('Other Income'), read with Article 21 on elimination of double taxation, meaning such service fee income remained taxable in Tanzania and subject to withholding tax under section 83(1)(b) of the ITA, 2004.
The judgment clarifies that under Tanzanian tax law, the statutory term 'service fee' in section 3 of the Income Tax Act, 2004 is to be interpreted broadly to include ancillary costs (such as travel and accommodation) reasonably attributable to the rendering of services, even where such costs are contractually itemised separately from the core professional fee; parties cannot avoid withholding tax obligations merely by structuring payments as separate reimbursements. It also establishes that, in the context of double taxation agreements modelled on the OECD/UN templates, payments characterised as 'service fees' (cost-inclusive) are distinct from 'business profits' (cost-exclusive) under Article 7, and instead fall to be taxed under the residual 'Other Income' provisions (Articles 20–21), thereby remaining subject to domestic withholding tax. The decision further affirms that administrative Practice Notes issued by revenue authorities, while not binding on courts, may serve as legitimate contemporanea expositio aids to statutory construction, particularly where they reflect established administrative practice consistent with the statutory scheme.
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