IN THE COURT OF APPEAL OF TANZANIA

AT PAR ES SALAAM
(CORAM: MUGASHA. J.A.. GALEBA. J.A.. And RUMANYIKA. J J U

CIVIL APPEAL NO. 146 OF 2021

TANGA CEMENT PUBLIC LIMITED COMPANY............................ APPELLANT

VERSUS
THE COMMISSIONER GENERAL,
TANZANIA REVENUE AUTHORITY........................................ RESPONDENT
[Appeal from the Judgment and Decree of the Tax Revenue
Appeals Tribunals at Dar es Salaam]

(Haji, Vice Chairperson)

dated the 15th day of December, 2020

in
Tax Appeal No. 14 of 2020

JUDGMENT OF THE COURT

7th & l ? hJune, 2022

GALEBA. J.A.:

Prior to 1st July 2014, Tanga Cement Public Limited Company, a

Tanzanian cement manufacturer, the appellant, had hired her wholly

owned subsidiary called Cement Distributors East Africa Limited (CDEAL)

to provide services of marketing and distribution of her products,

namely cement. CDEAL was the major distributor of the appellant's

products during the time of their agreement. However, responding to

market challenges and dynamics of the appellant's product in the same

year 2014, the appellant made a business decision to terminate CDEAL's

marketing and distributorship services, such that cement marketing and

distribution, would from then, be carried out by the appellant herself

without CDEAL's involvement. Following cessation of the dealership, the

appellant paid TZS. 1,270,298,73.00 (the disputed amount) to CDEAL.

In April and May 2016, Tanzania Revenue Authority, whose

principal officer is the respondent, under the tax revenue laws, carried

out a tax audit in respect of the appellant's business and investment

affairs. Following that exercise and after numerous communications and

consultations between the appellant's tax consultants and the

respondent's representatives, on 31st May 2017 the respondent issued a

notice of adjusted assessment, under the law, disallowing the disputed

amount because, according to her, the money was not wholly and

exclusively expended in the production of the appellant's income.

According to the appellant in its notice of objection to the

respondent and its statement of facts and grounds to support her

appeal in the Tax Revenue Appeals Board (the Board), at pages 15 and

253 of the record of appeal respectively, this payment was

compensation for CDEAL's loss of customers and business opportunity

following the appellant's operational decision to terminate CDEAL from

its marketing and distributorship role.

The respondent's clear position was that compensation to a third

party for the latter's loss of customers or opportunity, cannot, in any

way, as alleged by the appellant, be deemed to be payment for

advertisement or marketing for the appellant's products, which would be

otherwise an allowable expenditure.

The treatment of the said disputed amount by the respondent as

an expense not spent wholly and exclusively on the production of the

appellant's income, led the appellant to file Income Tax Appeal No. 226

of 2018 in the Board, and the first issue for resolution in that tax dispute

was whether the respondent's decision to disallow the disputed amount

was legally correct.

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 In addition to the above dispute between the parties, there was

yet another tax issue in the same year of income 2014, which was

whether the respondent's decision to imposed underestimated interest

of TZS. 730,534,130.30 was, in law, a correct action to take. This issue

arose because there was in the year of income 2014 an underestimated

taxable amount. The appellant's argument was that imposing the tax

was arbitrary because upon discovery of the error, in early January

2015, she wrote a letter contained at page 378 of the record of appeal,

dated 7th January 2015 informing the respondent of the anomaly but the

latter did not respond to that letter.

The Board heard parties on the two issues and finally resolved

both in favour of the respondent. Being deeply aggrieved with the

decision of the Board, under section 16 (4) of the Tax Revenue Appeals

Act [Cap 408 R.E. 2002] (the TRAA), the appellant filed Tax Appeal No.

14 of 2020 in the Tax Revenue Appeals Tribunal (the Tribunal). The

grounds upon which the appeal was based were a replica of its

complaints that had been lodged in the Board and dismissed. The
Tribunal heard the parties on the appeal and at the end, like the Board,

it dismissed it in its entirety for want of merit. This appeal is against that

decision. The appeal is based on two grounds of appeal. The first

ground was amended with leave of the Court such that the two grounds

of appeal, that we will deal with in this matter are as follows:

"1. The Tax Revenue Appeals Tribunal erred in

law for failing to hold that under section
11(2) o f the Income Tax Act, the
advertising and marketing costs paid to
Cement Distributors East Africa Limited for
loss o f customers is an allowable expense
for tax purposes.
2. The Tax Revenue Appeals Tribunal erred in
law for failing to hold that the Board was
wrong to analyze the evidence before it
and upholding that the respondent was
justified to impose underestimated
interest"

At the hearing of this appeal on 7th June, 2022, the appellant

was represented by Mr. Wilson Kamugisha Mukebezi learned advocate,

whereas the respondent had the services of Messrs. Harold Gugami and

Cherubin Chuwa both learned Senior State Attorneys.

As written submissions for the appellant and the respondent had

been filed under rule 106 (1) and (6) respectively, they were adopted at

the hearing by the respective counsel.

In orally elaborating on what is contained in the appellant's written

submissions, in respect of the first ground of appeal, Mr. Mukebezi

argued that the disputed amount which was paid to CDEAL, was wholly

and exclusively spent on the production of the appellant's income

because, with that payment, CDEAL was able to hand over customers to

the appellant, meaning that securing those customers was a marketing

activity done by CDEAL.

In reply, Mr. Gugami submitted that before 2014 the appellant had

an agreement with CDEAL for advertisement and marketing in which

case he was being paid a service fee recognized under section 83 of the

Income Tax Act [Cap 332 R.E. 2019] (the ITA) and the amount would

be deemed to have been wholly and exclusively expended in the

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production of income of the appellant. However, after termination of the

agreement, the appellant cannot be paid any money in respect of

advertisement and marketing. In any event, he added, the appellant's

own witness at page 181 of the record of appeal, testified that the

amount was a compensation to CDEAL following termination of the

service agreement with the appellant.

With the advantage of the record of appeal and the submissions

of parties, we trust we are in a position to determine the first ground of

appeal. To do so, we will start with section 11(2) of the ITA on which

kind of expenditure is allowable in business for income tax purposes.

That section provides as follows:

"(2) Subject to this Act, for purposes o f

calculating a person's income for a year of
income from any business or investment, there
shall be deducted all expenditure incurred during
the year o f income, by the person wholly and
exclusively in the production o f income from the
business or investment"
 Our determination point is whether the disputed payment to

CDEAL was expended wholly and exclusively by the appellant in the

production of income from its business or investment. In the case of

Bulyanhulu Gold Mine Limited v. Commissioner General TRA,

Consolidated Civil Appeals No. 89 and 90 of 2015 (unreported), this

Court highlighted on what should be taken as a criteria in deciding

whether an expenditure is wholly and exclusively spent for production of

income:

"What is to be decided in each case is the nexus

between the alleged claim for deduction and the
particular head under which it is claimed. I f the
claim made is under section 16(1) and (2) o f the
TTA 1973 the Appellant must establish sufficient
nexus between the expenditure and its
wholesomeness and exclusivity in the production
o f income as well as its necessity and
reasonableness."

In respect of Mr. Mukebezi's argument that CDEAL handed over

customers to the appellant, we inquired from him whether CDEAL had

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identifiable customers that he had control over, such that, she (CDEAL)

could hand them over to a third party like the appellant. Although his

response was prolonged and mouthful, it was incomprehensible and

non-directional. What we remotely gathered from his submission was

that the nature of the cement industry demands arrangement where an

outgoing distributor like CDEAL needed to be compensated for loss of

customers to whom he was supplying the cement during the time he

was serving them. Nonetheless, we did not get it right from the

appellant's side, as to why and how would one company (CDEAL in this

case), give customers to another company (the appellant in this case) at

a price, while the giver had no verifiable pool of customers, upon whom

she had clear mandate to command as from which cement company

should those customers purchase the product. In this case, there was

no proof that CDEAL had in possession of a specified market segment or

a cluster of customers who she would hand over to the appellant, upon

cessation of their marketing contract.

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 In any event, consistently, in the notice of objection, in exhibit A5

and the evidence of Emmanuel James, AW1 at pages 253, 261 and 181

of the record of appeal, respectively all from the appellant's side, it is

clear that the money which was paid to CDEAL was to compensate that

company for loss of customers and business opportunity. For instance,

AW1 in his evidence at the above page stated thus:

"... Tanga Cement took over the duties which

were being made (sic) by CDEAL and dealt itself
to the customers. Therefore, it was found that it
could not leave it without compensation and also
to maintain their status..."

The question we asked ourselves is how payment to a third party

in order to maintain its status could be taken to have been expended

wholly and exclusively on the production of income of the appellant. As

held in Bulyanhulu Gold Mine case (supra), we did not see any nexus

clearly established between the expenditure and its wholesomeness and

exclusivity in the production of income as well as its necessity and

reasonableness to the production of the appellant's income. Actually,

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the nexus, that is the contract for marketing and advertising between

CDEAL and the appellant, according to available records, had been

terminated around the same time.

That is why we do not agree with Mr. Mukebezi when pressing on

us to equate the concept of payment to CDEAL in compensating for her

loss of customers and business opportunity with advertising and

marketing in favour of the appellant. Further, we do not agree that the

disputed amount which was paid to CDEAL was a service fee within the

meaning of section 83 of the ITA, particularly because the appellant and

CDEAL had just terminated the agreement for advertising and

marketing, where the section would have been applicable and therefore

the amount, an allowable expense. In our view, the respondent was

right to disallow the expenditure, for it did not fall within the purview of

section 11(2) of the ITA. We accordingly uphold the decision of the

Tribunal on that aspect, in which we find no merit in the first ground of

appeal which we are constrained to dismiss.

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 In respect of ground two, the appellant had two paragraphs of

submissions. First, the appellant's side was in agreement that indeed,

the appellant underestimated the income tax payable in the year of

income 2014. That was the first premise. The reason why the appellant

was not supposed to be charged the underestimated interest, according

to the appellant's counsel, is because when she discovered the anomaly

in early January 2015, she voluntarily rectified it vide a letter to the

respondent dated 7th January 2015. Mr. Mukebezi added that the

respondent was supposed to respond to that letter, otherwise, charging

the underestimated interest of TZS. 730,534,130.30 was arbitrary,

hence unlawful. If we understood Mr. Mukebezi well, he treated the

appellant's above letter as an application under section 79(2) of the ITA

for extension of time to pay tax which was otherwise not paid within the

time provided by statute. With those few contentions, he moved the

Court to fault both the Board and the Tribunal on that point.

In reply, Mr. Gugami submitted that the alleged tax was paid in

January 2015 after expiry of the relevant year of income on 31st

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December 2014, because the appellant's year of income 2014 started on

1st January of that year. He contended further that the revision was

sought outside the relevant year of income, so imposing the

underestimated interest by the respondent was a lawful action. He

argued that the said letter dated 7th January 2015 was analyzed by both

the Board and the Tribunal and in both instances, findings were made,

refusing to give any effect to the letter.

We have considered the arguments of both learned counsel and

have also reviewed the necessary exhibits in question and the issue for

our consideration, we think, is whether the respondent was wrong to

impose tax in respect of interest for understated installment income tax

in the year of income 2014. The relevant law is section 99 (1) of the ITA

with the side notes "Interest for Understating Tax Payable by

Installments." That section provides as follows:

"99 (1) This section applies where:

(a) An installment payer's estimate or

revised estimate o f income tax
payable for a year o f income under

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 section 89 which shall be used to
calculate an installment o f income tax
for the year of income payable under
section 88; shall be less than;
(b) 80 percent o f the income tax payable
by the payer for the year o f income
under section 4(1) (a) and (b) ("the
correct amount)."

According to the records, in this case the amount of tax paid by

way of installments was a total of TZS 10,700,000,000.00 and the

correct amount of the income tax was TZS 15,016,157,980.70. The

undisputed calculations that were made by the Board, the instalment tax

was 71.3% of the actual tax. The amount self-assessed being less than

80% of the actual amount, the respondent was right to invoke his

statutory powers to charge the tax as she did.

Secondly, Mr. Mukebezi challenged the respondent for not having

considered and replied to the letter dated 7th January, 2015. His point

was that, by failure to reply to the appellant's application contained in

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that letter, and instead imposing the tax was an arbitrary act, hence

illegal.

Mr. Gugami's reaction was that the letter, if it was aiming at

seeking extension of time to pay the tax due, it ought to have been

written in the relevant year of income, in this case the year 2014.

Having been written in 2015, the letter was irrelevant and would not be

treated as an application under section 79 (2) of the ITA, he insisted.

His point was that the respondent could only be held responsible for

having failed to attend to the letter had it been an application under the

law, written and received in the year 2014.

We will start with section 79 (2) of the ITA which provides that: -

"(2) On written application by a person, the

Commissioner,
(a) may, where good cause is shown
extend the date on which tax or
part of tax is payable including
by permitting payment of the tax

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 by instalments of equal or varying
amounts; and
(b) shall serve the person with written
notice of
the Commissioner's decision on the
application."
[Emphasis supplied].

Under the above section upon a written application by the tax

payer, the Commissioner may extend the day for payment of tax upon

application showing good cause supporting the prayer for extension of

time. With that understanding we will proceed to the letter that the

respondent is challenged for not having attended to presumably under

section 79 (2) (b) of the ITA. The relevant substance of the letter dated

7th January, 2015 reads as follows:

"Dear Sir/Madame,

RE: REVISION OF AMENDED PROVISIONAL

TAX

Reference is made on the caption above.

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 In the course o f finalizing year end accounts for
2014 it was noted that there was omission of
TZS. 6,872,398,077.56/= related to impairment
o f financial investment which was done after
filing provisional tax leading to reduction of
taxable income.

We are now amending provisional tax for quarter

four from TZS. 2,000,000,000/= which is already
paid to TZS. 2,900,000,000/= after taking into
account the amount impaired and the same will
be paid accordingly.

Your faithfully,

TANGA CEMENT COMPANY LIMITED. "

With respect to Mr. Mukebezi, we read nothing in the above letter

which would have compelled the respondent to respond to it. A careful

reading of the letter reveals that it was informing the respondent of the

omission the appellant had noticed while finalizing year end accounts

which had led to the reduction in her taxable income. The letter further

informs the respondent that the appellant would amend provisional tax

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for quarter four. That letter has no request to the respondent for any

extension of time to effect any payment of any tax. It is only an

informative letter rather than a statutory application under section 79

(2) (a) of the ITA which would have necessitated action of the

respondent under section 79 (2) (b) of the ITA. In a nutshell, the

appellant usurped the respondent's power under the latter provision of

the law.

In the circumstances, we find no offence with the silence of the

respondent after receiving the above letter. In any event, Mr. Mukebezi

did not refer us to any provision of law that the respondent breached by

not replying to the letter, other than contending that she acted in an

arbitrary manner which is, in our view, an unwarranted accusation. It is

our considered opinion therefore, that the respondent was right for

acting, presumably under section 99 of ITA, to impose the tax as

appropriate. In the circumstances, the second ground of appeal fails;

and we dismiss it.

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 In the event, this appeal has no merit, we hereby dismiss it with

costs.

DATED at DAR ES SALAAM this 16th day of June, 2022

S. E. MUGASHA
JUSTICE OF APPEAL

Z. N. GALEBA
JUSTICE OF APPEAL

S. M. RUMANYIKA
JUSTICE OF APPEAL

This Judgment delivered this 17th day of June, 2022 in the

presence of Mr. Method Nestroy, learned counsel for the Appellant, Mr.

Achileus Karumuna, Andrew Kombo and Trofmo Tarimo, learned State

Attorneys for the Respondent, is hereby certified as a true copy of the

oriqinal.

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