Seven Seas Technologies Limited v KRA

-SSTL was registered for an In-depth audit as per the?Income Tax Act?and the Value Added Tax Act in November 2013. Following a request by SSTL commencement date was postponed to February 2014.

-Several meetings were held in 2014 where findings presented, explanations given, documents availed and subsequently a demand issued on 30th?October, 2014.

-Among the findings arising from the audit is that the Company was not deducting Withholding tax on payment to non-resident persons in respect of software licenses. Total withholding tax demanded thereon was Ksh 21,525,013/- which comprised of software SSTL alleged was for resale Ksh 15,320,673 while software purchased by SSTL for its own use was charged at Ksh 6,204,340.67/- thus the total of Ksh 21,525,013/-

-Upon unsuccessful objection. SSTL appealed to TAT.

-TAT ruled in favour of KRA

-SSTL appealed to the High Court.

-SSTL argued that:

• ?????In order for a payment to be considered a royalty it must be made in consideration for the use of or the right to use a copyright. The ITA does not provide a definition of a 'copyright' nor does it define a 'literary work'. SSTL therefore relies on the provisions of the Copyright Act, 2001 for the definition of these terms. Section 22(1)(a) of the Copyright Act, 2001 determines works eligible for copyright as follows:

?????????????Section 22. Works eligible for copyright

?????????????(1)Subject to this section, the following works shall be eligible for copyright- (a) literary works;

???????????????Section 2(1) of the Copyright Act, 2001 defines a ‘literary work' as follows:

???????????????"Literary work" means, irrespective of literary quality, any of the following, or works similar thereto,????????????????????????????

????????????????(h) computer programs;"

From these provisions, there is an unequivocal statutory basis that provides that computer programs may be literary works which are eligible for copyright.

Section 2(1) of the Copyright Act, 2001 defines a

“computer program" as a set of instructions expressed in words, codes, schemes or in any other form, which is capable, when incorporated in a medium that the computer can read, of causing a computer to perform or achieve a particular task or result;"

From this definition, what is copyrightable is the set of instructions rather than particular medium (copyrightable material) on which the software is incorporated.

• by purchasing software, it acquired copyrighted material and it did not in any way acquire the rights to the Intellectual Property, that is, the Copyright in the software.

KRA argued that:

• ???Callidus Inc. U.S.A is a non-resident person who received consideration for software procured by SSTL, hence the monies received were deemed to be royalties as provided under Section 35(1)(b) of the?Income Tax Act?(ITA) as read with Section 2 of the ITA. The consideration paid was for the use of or right to use the copy right of a literary work, in this case the software.
• ?????The consideration paid by SSTL to use the software for personal use within its business amounts to royalty. This is because by using the software is enjoying a right in respect of copyright in the software.
• ???????it would be absurd to separate the copyright from the copyrighted material because the software in this case is an intangible and the right being enjoyed is the right in respect of the copyright that is embedded in the software
• ·??during audit, several documents were availed by SSTL;Callidus Software Purchase Schedule and Purchase Invoices of Licenses?but SSTL failed to produce the Software Sales agreement signed between Callidus Software Inc dated 30th September 2009.

In its ruling on 10/12/2021, the High court observed that:

• ?????The parties ought to have established from the Agreements documents , relationship of the parties’ and totality of the circumstances of the matter, whether the software purchased by SSTL was a copy right or copy righted article in a sale of goods or license.
• ???In the absence of the Software Sales agreement signed between Callidus Software Inc and SSTL, Software Supply Contract has no restrictions. The terms of the license are not stipulated so as to confirm whether rights were transferred or it was only for the purposes of accessing software or not. Secondly, if the license was restricted for software to be used internally only or for resale without transfer. For these reasons, it has not been proved that funds paid to Callidus Software Inc were royalty so as to attract Withholding Tax.
• ???The Tribunal erred in concluding that by buying and selling computer software, which is a copyrighted item, SSTL was commercially exploiting the copyright in that copyrighted item. Contrary to the above definition of a license, and in the absence of the Agreement(s) that set out the terms of the license, SSTL was a vendor of a copyrighted item and was therefore copyright was not transmissible.

As such SSTL was not subject to pay royalties and in turn not liable to pay Withholding tax to KRA with regard to the distribution of the computer software

The TAT decision was therefore set aside. A victory for SSTL