Civil Reference No. 7 of 2004
Kilombero Sugar Company Limited (appellant), a Tanzanian resident company, paid TZS 188,000,000.00 to Zambia Sugar Company Limited (ZSCL), a Zambian resident company with no permanent establishment in Tanzania, as management/service fees for directorate services for the Central Region based in Zambia. Following an audit of the appellant's 2011 and 2012 tax returns, the Commissioner General, Tanzania Revenue Authority (respondent) found that the appellant had not withheld tax on this payment and issued a Withholding Tax Certificate assessing liability of TZS 32,006,125.00 under section 84 of the Income Tax Act, 2004 (ITA). The appellant's objection was rejected, and a notice of confirmation of assessment was issued. The appellant unsuccessfully appealed to the Tax Revenue Appeals Board (TRAB) and then to the Tax Revenue Appeals Tribunal (TRAT), both of which held that management fees were not covered by the term 'industrial and commercial profits' in Article IV(1) of the Double Taxation Agreement (DTA) between Tanzania and Zambia because the Article did not mention 'service', and therefore the appellant remained liable to withhold tax. The appellant appealed to the Court of Appeal.
(1) Whether Article IV(1) of the DTA between Tanzania and Zambia, which refers to 'industrial and commercial profits,' includes or embraces management/service fees, given that the word 'service' does not appear in the provision. (2) If service fees are embraced within Article IV(1), whether, on the facts, the appellant's payment to ZSCL was nonetheless subject to withholding tax in Tanzania.
The appellant, through Mr. Ayoub Mtafya, argued that both TRAB and TRAT took an unduly narrow view of the word 'profit', contrary to its meaning under the OECD Commentary 2014 (Articles 1, 72, 73 and 74) which should guide interpretation of the DTA. He contended that Article IV of the DTA covers all types of income, distinguishing Article IV(1) (general coverage) from Article IV(7) (restricting application where other articles address specific income), and that the tribunals failed to consider the latter. He further relied on section 8(2) of the ITA, which defines business income to include service fees, and section 128(4) of the ITA, which obliges Tanzania to honour DTA provisions exempting or reducing tax. He maintained the management fee was a business profit of ZSCL, a Zambian enterprise with a permanent establishment in Zambia, and thus not subject to Tanzanian withholding tax under Article IV(1).
The respondent, through Mr. Juma Kisongo and Ms. Consolata Andrew, argued that Article IV(1) does not use the word 'service' and therefore management/service fees do not fall within 'industrial and commercial profits.' They relied on the Court's earlier decision in Kilombero Sugar Company Limited v Commissioner General, TRA, Civil Appeal No. 218 of 2019, interpreting the similarly worded Article 7 of the DTA between Tanzania and South Africa as excluding service fees from 'business profits,' and on the TRAB's decision in Tullow Tanzania BV v Commissioner General, TRA, which the TRAT had followed. They urged the Court to dismiss the appeal and uphold the withholding tax liability.
The Court held, on ground one, that Article IV(1) of the DTA does embrace service (management) fees within the concept of 'industrial and commercial profits,' because 'business' — properly understood, including reliance on established tax law commentary — extends beyond the sale of goods to the provision of services for gain, and since 'commercial' profit necessarily includes profit derived from services rendered for gain, the absence of the express word 'service' in the Article did not exclude service fees from its scope. The Court declined to read into or restrict the provision beyond its plain wording, applying established principles of strict construction of tax statutes and rejecting intendment, while finding that a purposive reading of 'commercial profit' naturally subsumes service-based commercial transactions. Ground one of appeal therefore succeeded.
However, on ground two, applying Article IV(1) to the facts, the Court held that because the appellant is resident in Tanzania, carries on business in Tanzania, and has no permanent establishment in Zambia, the appellant remained obliged under sections 6(1)(b), 69(i)(i) and 83(1)(b) of the ITA to withhold tax on the payment to ZSCL, as the source and residence tests were satisfied (the services were rendered/consumed in Tanzania and the payer was Tanzania-resident). The DTA would only relieve the appellant of the withholding obligation if it carried on business in Zambia through a permanent establishment there, which was not the case. Consequently, ground two failed. The appeal was thus allowed only in part (as to the correct interpretation of Article IV(1)), but the substantive finding that the appellant was liable to withhold and remit the tax was sustained, and the Commissioner General's assessment notice was upheld. Given the mixed outcome, each party was ordered to bear its own costs.
The judgment clarifies the interpretation of 'industrial and commercial profits' under Article IV(1) of the Tanzania-Zambia DTA, holding that such profits encompass income derived from the provision of services for gain, even though the Article does not expressly use the word 'service.' This refines the Court's earlier reasoning in Kilombero Sugar Company Limited v Commissioner General, TRA (Civil Appeal No. 218 of 2019) concerning the similarly worded Article 7 of the Tanzania-South Africa DTA, by distinguishing that case on the basis that the presence/absence of the word 'service' was not there in issue. The decision reinforces the application of the source and residence tests under sections 6(1)(b), 69(i)(i) and 83(1)(b) of the Income Tax Act, 2004, in determining withholding tax obligations on payments to non-residents, following the Court's earlier ruling in Tullow Tanzania BV v Commissioner General, TRA (Civil Appeal No. 24 of 2018). It further affirms principles of strict, literal construction of tax statutes and DTAs, cautioning against reliance on OECD Commentary except where treaty language is genuinely ambiguous, and demonstrates that even where a taxpayer succeeds on statutory interpretation, the ultimate tax liability may still be sustained based on independent statutory withholding obligations.
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