Civil Reference No. 7 of 2004
The appellant, National Microfinance Bank Limited (NMB), a licensed bank operating 133 branches, undertook major restructuring including automation of its banking systems. On 30 April 2003 it entered a 'Software Licence Agreement' (SLA) with Neptune Software PLC (UK) for supply and use of banking software, with payment terms fixed in a 2006 extension agreement requiring payment of USD 165,117 investment costs and an annual licence fee of USD 29,716.20. In 2009 the Commissioner General's large taxpayer department audited NMB for 2004–2007 and found that payments to Neptune for software licence fees and related IT services should have been subjected to non-resident withholding tax under section 83(1)(b) of the Income Tax Act, 2004. NMB disputed this, but the Commissioner General issued a withholding tax certificate assessing liability of Tshs. 680,042,401 (principal tax plus interest). NMB appealed to the Tax Revenue Appeals Board, which found in its favour, holding that the payments did not constitute a royalty and that IT services were not rendered in Tanzania, hence not subject to withholding tax. The Commissioner General appealed to the Tax Revenue Appeals Tribunal, which reversed the Board, holding that the SLA was a lease agreement, the payments were royalties, and that the IT services—regardless of where performed—were rendered on an asset located in Tanzania and thus had a source in Tanzania. NMB then appealed to the Court of Appeal.
(1) Whether the Tribunal correctly held that the Software Licence Agreement between NMB and Neptune Software PLC constituted a 'lease' as defined under section 3 of the Income Tax Act, 2004. (2) Whether the payments made under that agreement constituted a 'royalty' subject to withholding tax under section 83(1)(b) of the Act. (3) Whether the service fees paid by NMB to Neptune for IT support and maintenance services, some or all of which were performed outside Tanzania, were nonetheless payments with a 'source in the United Republic' under section 69(i)(i) and thus subject to withholding tax.
The appellant argued that the SLA was, in substance, a purchase agreement rather than a lease: the recitals showed an intention to purchase/acquire the software, and clause 29 provided for continuity/permanence of the agreement until terminated, inconsistent with a temporary right characteristic of a lease. Accordingly, the payments represented purchase price for a copyrighted article, not a royalty. The appellant relied on several unreported Indian decisions (Tata Consultancy Services; Motorola Inc.; Velankani Mauritius; Infrasoft) to support this characterisation. On the service fee issue, the appellant contended that under section 69(i)(i) withholding tax applies only where services are 'rendered' i.e. 'performed' in Tanzania; since the IT services were performed outside Tanzania, the payments had no Tanzanian source and were not taxable. It relied on the Court's earlier decision in Commissioner General (TRA) v Pan African Energy (T) Ltd, and urged the Court to depart from its later contrary decision in Tullow Tanzania BV v Commissioner General as wrongly decided. The respondent countered that the SLA's own language—describing the licensee as 'desirous of acquiring and being licensed to use' the software and agreeing 'to buy... the right to use the software'—together with the agreement's title ('Software Licence Agreement') showed it was merely a licence to use, i.e., a lease, and the fees paid were royalties for the right to use the software. On the service fee issue, the respondent argued that the statutory test under section 69(i)(i) turns on whether services were 'rendered' (i.e., delivered/transmitted/supplied) in Tanzania, not whether they were 'performed' there; since the services were delivered to and utilised by NMB in Tanzania, the payments had a Tanzanian source and were subject to withholding tax regardless of the physical location of performance.
The Court of Appeal dismissed the appeal with costs, upholding the Tribunal's decision on both issues. On the first two issues, the Court held that Article 2.0 of the SLA—granting the licensee a 'non-exclusive and non-transferrable right to use' the software 'for its internal use only'—showed that only a licence to use, not ownership, was transferred to NMB. This matched the statutory definition of 'lease' under section 3 of the ITA 2004, which expressly includes a licence granting a temporary right in respect of an asset. Consequently, the licence fees paid were 'royalty' under paragraph (a) of the section 3 definition (payment for the use of, or right to use, a copyright/patent etc.), and the Court upheld the Tribunal's characterisation of the SLA as a lease and the payments as royalty. On the third issue, the Court adopted and applied its earlier reasoning in the unreported Tullow Tanzania BV v Commissioner General (TRA) decision, holding that reading sections 6(1), 69(i)(i) and 83(1)(b) together, two conditions must be met for withholding tax to apply: (1) the services must be 'rendered' in Tanzania, and (2) the payment must have a source in Tanzania. The Court held that 'rendered' is synonymous with 'supplied' or 'delivered', and since the services were consumed/utilised by NMB in Tanzania for earning income there, the payments had a Tanzanian source irrespective of where the services were physically performed. The Court distinguished and declined to follow the Pan African Energy case, agreeing with the reasoning in Tullow that Pan African Energy had wrongly relied on an Indian statutory provision addressing 'source of income' rather than 'source of payment', which is the relevant test under section 69(i)(i) of the Tanzanian Act. The Court also noted its consistent approach in the subsequent Shell Deep Water Tanzania BV v Commissioner General (TRA) decision.
The judgment reaffirms and applies the Court of Appeal's earlier ruling in Tullow Tanzania BV v Commissioner General (TRA), settling that under Tanzania's Income Tax Act, 2004, the relevant test for withholding tax on service fees paid to non-residents is whether the payment has a 'source' in Tanzania—determined by where the services are rendered/delivered/consumed—not merely where they are physically performed. It explicitly declines to follow the earlier, differently reasoned Pan African Energy case, distinguishing it on the basis that it relied on an Indian statutory provision concerned with 'source of income' rather than 'source of payment'. The decision also clarifies the statutory definitions of 'lease' and 'royalty' under section 3 of the ITA 2004, confirming that software licensing arrangements granting a non-exclusive, non-transferrable right to use software (without transfer of ownership) constitute a lease, and payments thereunder constitute royalty subject to withholding tax. The case thus provides guidance for characterising software licensing transactions and cross-border service fee payments for withholding tax purposes, consolidating the line of authority represented by Tullow and the subsequent Shell Deep Water Tanzania BV case.
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