Wakilii

Pac Spa Limited v Uganda Revenue Authority (Application 27 of 2022)

Tribunal · [2023] UGTAT 50 · 2023 Application Granted AI-generated summary ↓ Download Pin to watchlist Add to matter
Jurisdiction
Uganda
Case Type
Application challenging corporate tax and withholding tax assessments before the Tax Appeals Tribunal
Decision
Tax assessments set aside; applicant not liable to pay the assessed amounts

Observed later treatment

No later-treatment classification is recorded for this judgment.

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Holding

The Tribunal held that the respondent was justified in applying Section 45 of the Income Tax Act to the applicant's long-term construction contracts, requiring income recognition on an accrual basis using percentage of completion. However, the corporate tax assessment of Shs. 7,287,370,395 was set aside because the respondent failed to provide a factual basis for the 4% profit margin it applied, with contradictory evidence from its witnesses on whether the margin was 3%, 4%, or 5%. The withholding tax assessment of Shs. 308,096,773 was also set aside because Section 119 applies only to payments made to persons in Uganda, and the applicant's payments were made to a supplier in Italy. Application allowed with costs.

Outcome

Tax assessments set aside; applicant not liable to pay the assessed amounts

Facts

Pac Spa Limited, a Ugandan branch of an Italian company providing construction engineering services to hydropower projects, was subjected to a comprehensive tax audit by Uganda Revenue Authority for the period July 2015 to June 2019. The audit resulted in corporate tax assessments of Shs. 7,287,370,395 and withholding tax assessments of Shs. 308,096,773. The applicant had used a profit margin of 1.1% for its group and 0.54% for the Achwa 1 and 2 projects in its financial statements. The respondent rejected this margin and applied an industry average of 4%, contending that similar projects in Africa had margins of 3% to 5%. The respondent also assessed withholding tax, alleging the applicant failed to withhold on local supplies despite being a designated withholding tax agent from July 2018. The applicant objected, arguing its audited financial statements should be relied upon and that payments to its Italian supplier Meta Camuna were not subject to withholding tax under Section 119.

Issues

  1. Whether the applicant is liable to pay the corporate tax assessment of Shs. 7,287,370,395 and withholding tax assessment of Shs. 308,096,773?
  2. Whether the respondent was justified in disregarding the applicant's profit margin of 1.1% and applying a profit margin of 4% under Section 56A of the Income Tax Act?
  3. Whether the applicant correctly recognized revenue and expenses under Section 45 of the Income Tax Act for long-term contracts?
  4. Whether the applicant was obliged to withhold tax on payments to suppliers under Section 119 of the Income Tax Act?
  5. What remedies are available to the parties?

Orders

  • Application allowed with costs.
  • Corporate tax assessment of Shs. 7,287,370,395 set aside.
  • Withholding tax assessment of Shs. 308,096,773 set aside.

Rules and key headnotes

Income Tax — Long-Term Contracts — Revenue Recognition — Accrual Basis
For long-term construction contracts not completed within the year of income, Section 45 of the Income Tax Act requires that income and deductions be recognized on an accrual basis using the percentage of completion method, determined by comparing total costs allocated to the contract and incurred before year-end with estimated total contract costs at commencement.
Income Tax — Assessment — Best Judgment — Factual Basis Required
Where a revenue authority exercises its power under Section 56A of the Income Tax Act to use alternative methods of allocating costs and revenue, including applying an estimated profit margin, such exercise of best judgment must have a factual basis, be reasonable, and be supported by evidence of comparable projects; contradictory evidence on the profit margin percentage renders the assessment unjustified.
Withholding Tax — Territorial Scope — Payments to Non-Residents
Section 119(1) of the Income Tax Act, which requires designated payers to withhold tax on payments exceeding one million shillings for supply of goods or services, applies only to payments made to 'any person in Uganda'; payments made to suppliers outside Uganda are not subject to withholding tax under this provision.
Expert Evidence — Qualification and Basis — Profit Margin Assessment
An expert witness, even if duly qualified and registered, must demonstrate that their opinion is based on examination of relevant materials; a quantity surveyor cannot determine profit margins for tax assessment purposes without examining the financial statements and revenue data of the taxpayer and comparable projects.

Legislation cited (17)

Cases cited (13)

  • Anupama Chandrakandath v ACIT (ITAT Cochin)
  • Nitta Jatiya (Acias & Nitajatia) v. Deit, Central Charge Range
  • R v Silverlock [1894] 2 QB 766
  • Bamwenyana v Byanguye (Court of Appeal No. 24 of 2017)
  • Kimani v Republic (2000) EA 417
  • Red Concepts Limited v Uganda Revenue Authority (Application No. 36 of 2018)
  • Primarosa Flowers Limited v The Commissioner of Income Tax Income Tax Appeal 18 of 2013
  • Karl Evans Brown v Commissioner of Income Tax
  • Dennis Murray v Commissioner of Tax Payer Appeals Civil Appeal 70 of 2007
  • Uganda Revenue Authority v Tembo Steels Ltd (Civil Appeal No. 9 of 2006)
  • Van Boeckel v Customs and Excise Commissioners [1981] 2 All ER 505
  • Goal Relief Development v Uganda Revenue Authority (Application No. 77 of 2021)
  • Uniworks Transporters and Logistics Ltd v Uganda Revenue Authority (Application No. 62 of 2018)

Full judgment

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The original judgment as reported. Read the original PDF before relying on any passage.

Pac Spa Limited v Uganda Revenue Authority (Application 27 of 2022) 2023 UGTAT 50 (31 October 2023)
Source: this page presents Wakilii’s issue analysis and metadata for a publicly reported Ugandan judgment. Any AI-generated summary is marked as such. Judgment text is sourced from the Uganda Legal Information Institute (ulii.org). Wakilii is not affiliated with ULII.