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A distributor of Microsoft products has won a legal fight, stopping Kenya Revenue Authority (KRA) from demanding Sh56.8 million, after a judge ruled that the resale of software to users in Kenya did not amount to earning royalty.
High Court Judge Josephine Mong’are upheld a decision of the tax appeals tribunal, stating that Microsoft did not transfer its intellectual property in the software to Dynasoft Business Solutions and the firm did not pay any royalties towards it.
“The Respondent (Dynasoft Business Solutions) was granted rights limited to those of a commercial intermediary without the right to exploit or alter the software or further reproduce it,” said the judge.
KRA had claimed that the firm had failed to withhold and remit tax in respect to payments made for royalties to Microsoft (a non-resident entity) as per Section 35(1) of the Income Tax Act.
The taxman said it also discovered that some supplies were not declared for Value Added Tax (VAT) despite withholding VAT being deducted.
The court heard that the Kenyan firm entered into three agreements with Microsoft, which granted it the authority to resell and distribute Microsoft’s licensed software.
In one of the agreements, Microsoft granted the firm the right to conduct localization or translation on the software products supplied to third party customers of Microsoft.
The firm said the rights granted to it were non-exclusive, royalty-free, non-transferable, non-assignable and terminable.
KRA and the IT solutions firm disagreed on the amount of VAT to be paid and the payment of Withholding Tax on the software purchase from Microsoft Ireland.
Ultimately, the taxman issued an objection decision in October 2021 for VAT assessment of Sh6.9 million and withholding tax of Sh49.8 million, inclusive of penalties and interest.
The firm maintained that the payment made to Microsoft did not qualify as a royalty under the Income Tax Act since the agreements governing the relationship do not grant it the right to use the software.
The firm said it was a mere distributor of Microsoft’s software and only facilitates the business between Microsoft and its customers.
The judge agreed with the company saying the firm was granted rights limited to those of a commercial intermediary without the right to exploit or alter the software or further reproduce it.
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