Civil Reference No. 7 of 2004
Mantra (Tanzania) Limited, a company engaged in mineral exploration in Tanzania, procured services from non-resident service providers, mostly from South Africa. Between July 2009 and December 2012, the appellant paid withholding taxes amounting to USD 1,450,920.00 on fees for services that were physically performed outside Tanzania. On 31 July 2014, the appellant requested a refund, contending that the services were not rendered in Tanzania and that, as the service providers were South African residents, the payments were exempt under Article 7 of the Double Taxation Agreement (DTA) between Tanzania and South Africa, which taxes business profits only where the enterprise has a permanent establishment in the taxing state. The Commissioner General refused the refund, asserting the services were rendered in Tanzania and that Article 7 applied only to business profits, not business transactions such as service fees. The Tax Appeals Board and, on appeal, the Tax Revenue Appeals Tribunal both ruled against the appellant, relying on the Court of Appeal's decision in Tullow Tanzania BV v. Commissioner General (Civil Appeal No. 24 of 2018), holding that the payments had their source in Tanzania and that Article 7 of the DTA did not apply. The appellant then appealed to the Court of Appeal.
1. Whether payments for services rendered/performed abroad by non-resident suppliers to the appellant had their source in the United Republic of Tanzania for purposes of section 69(i)(i) read with section 83(1) of the Income Tax Act, thereby attracting withholding tax obligations. 2. Whether Article 7 of the DTA between Tanzania and South Africa (exempting business profits from taxation absent a permanent establishment) applied to exempt the payments from withholding tax. 3. Whether the appellant was entitled to a refund of the withholding tax it had paid.
The appellant, through Dr. Mwiburi, argued that under sections 6(1)(b), 69(i)(i) and 83(1)(b) of the Income Tax Act, the determinant of 'source' is the place of performance of the service, not its utilization; since the services were physically performed in South Africa, no Tanzanian source existed and no withholding tax was due. Counsel argued for a strict, literal construction of tax statutes (citing Cape Brandy Syndicate v IRC) and that 'rendered' should be equated with 'performed', relying on Black's Law Dictionary, the Interpretation of Laws Act, and the Indian Supreme Court decision in Ishikawajima-Harima Heavy Industries v Director of Income Tax, as well as the Tanzanian precedent in Pan African Energy Tanzania Ltd. The appellant contended that the Tullow Tanzania BV line of cases wrongly departed from the statutory text and did not overrule Pan African Energy. On Article 7, the appellant argued that since the service fees ultimately generate income/profit for the South African providers, who had no permanent establishment in Tanzania, they should be treated as business profits exempt from tax under Article 7, and that separating 'business profits' from 'business transactions' was artificial and also violated Article 138(1) of the Constitution. On refund, the appellant argued that since the tax was wrongly levied it must be refunded to the appellant (as withholding agent) rather than the foreign taxpayers, who lack Tanzanian TIN certificates. The respondent, through Mr. Chuwa, conceded the services were physically performed outside Tanzania but argued that 'rendered' under section 69(i)(i) does not require physical performance in Tanzania; it suffices that the service was delivered to, or utilized by, a Tanzanian resident. This interpretation was grounded in the Tullow Tanzania BV decision and its progeny (Shell Deep Water Tanzania BV, Aggreko International Projects), which applied a purposive approach appropriate to anti-tax-avoidance provisions, and distinguished Pan African Energy Tanzania Ltd as having erroneously relied on an Indian statute not in pari materia with Tanzanian law. On Article 7, the respondent argued that the DTA distinguishes business profits (Article 7) from other specified transactions, and since service fees are not listed as exempt, Article 20 of the DTA renders them taxable as business transactions, not business profits. On refund, the respondent argued no refund was due since the tax was correctly levied, and in any event any refund would belong to the foreign taxpayers, not the appellant.
The Court of Appeal dismissed the appeal in its entirety with costs. On the first ground, the Court held that it was bound to follow its more recent line of authority (Tullow Tanzania BV, followed in Shell Deep Water Tanzania BV and Aggreko International Projects Ltd) over the earlier Pan African Energy Tanzania Limited decision, because where two conflicting Court of Appeal decisions exist on the same point, the more recent decision is to be followed absent justification otherwise. The Court affirmed that the word 'rendered' in section 69(i)(i) of the Income Tax Act is synonymous with 'supplied' or 'delivered', so that the relevant test for 'source' is the place of utilization/consumption of the service (i.e., where the payer resides) rather than the place of physical performance. It held Pan African Energy distinguishable because it had relied on an Indian statute (section 9(1)(vii) of the Indian Income Tax Act) not in pari materia with the Tanzanian provision, since the Indian law speaks of 'source of income' while the Tanzanian law speaks of 'source of payment'. Consequently, since the appellant (the payer) resided in Tanzania, the payments had their source in Tanzania and were subject to withholding tax. On the second ground, relying on its own precedent in Kilombero Sugar Company v Commissioner General, the Court held that Article 7 of the DTA exempts only 'business profits' and does not cover service fees, which instead fall under Article 21 (and are governed by Article 20 as a residual category), and are thus taxable under section 83(1)(b) of the Income Tax Act. The Tribunal was therefore correct that Article 7 did not apply. On the third ground, since the withholding tax was correctly levied (grounds one and two having failed), there was no overpayment to refund, rendering the refund ground redundant.
The judgment reaffirms and consolidates the Court of Appeal's post-Tullow Tanzania BV approach to interpreting 'source' of payment for withholding tax purposes under section 69(i)(i) of the Income Tax Act, definitively favouring a purposive, anti-avoidance-oriented construction (place of utilization/consumption by the Tanzanian payer) over the literal 'place of performance' test earlier applied in Pan African Energy Tanzania Limited. It entrenches the principle that where the Court of Appeal has issued conflicting precedents, the more recent decision governs absent justification for departure, providing guidance to tax tribunals and boards facing similarly conflicting authorities. The decision also clarifies, consistent with Kilombero Sugar Company v Commissioner General, that under Double Taxation Agreements modeled on Article 7/Article 20/Article 21 structures, service fees paid to non-resident enterprises are treated as distinct from 'business profits' and are not exempted merely because the foreign provider lacks a permanent establishment in Tanzania, thereby remaining subject to Tanzanian withholding tax. The case is significant for taxpayers and tax administrators dealing with cross-border service payments and DTA interpretation in Tanzania.
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