[2024] KETAT 14 (KLR)

Aviat Networks (Kenya) Limited v Commissioner of Domestic Taxes (Appeal 1104 of 2022) [2024] KETAT 14 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 14 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 1104 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

January 26, 2024

Between

Aviat Networks (Kenya) Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated under the Companies Act whose principal business is supply of microwave routers, switches and all equipment related to support of the internet for the mobile telecommunication companies in Kenya. The Appellant equally offers sales representative service including marketing and promotion of Aviat products on behalf of Aviat Network Singapore.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant was issued with a VAT credit verification notice on 13th September, 2021 and upon preparing a compliance check, the Respondent raised additional assessments on 27th May, 2022, in respect of both income tax and VAT amounting in the sum total to Kshs. 63,890,578. 41 in respect of the periods, 2018 to 2021.

4. On 26th June, 2022 the Appellant objected and outlined its reasons for doing so on the i-tax system. It also wrote a letter on the same day objecting to the online assessments. Thereafter, the Respondent wrote to it vide electronic mail on 29th June, 2022 requesting that it provides the following documents seven days from the date of the letter:a.Audited financial statements for the years 2018-2021;b.Bank statements for the year 2018 to 2021; andc.A brief summary of the nature of their business.

5. Upon receiving a letter and documents from the Appellant on 24th August, 2022, the Respondent issued its objection decision on 29th August, 2022 and reduced the assessment of principal tax to Kshs. 61,992. 746. 00. Kshs. 48,008,341. 00 was in relation to VAT and Kshs. 13,984,405. 00 was in relation to income tax. The total confirmed assessment inclusive of penalties and interest was Kshs. 82,240,790. 00.

6. The Appellant being dissatisfied with the Respondent’s decision lodged a Notice of Appeal on 21st September, 2022.

The Appeal 7. The Appellant’s Memorandum of Appeal dated 3rd October, 2022 and filed on 4th October, 2022 set out the following grounds of appeal:

8. Regarding Technical Fees:i.That the Respondent erred in law and fact by misinterpreting the agency between the Appellant and its principal, Aviat Network Singapore (hereinafter ‘Aviat Singapore’). The Appellant and Aviat Singapore entered into an Agreement dated 2nd July 2011 pursuant to which the Appellant either directly or through its affiliate agreed to perform certain management, technical, general and administrative functions. The Appellant, in its capacity as a sales representative and distributor for Aviat Singapore, would benefit from the support services provided by Aviat Singapore.ii.That the Respondent erred in assuming that the goods were held for resale by the Appellant. The Appellant could not have sold goods that it did not have a right to sell. The Respondent in arriving at the decision erred since it disregarded the agreement between the Appellant and its principal.iii.That the Respondent did not fault the fact that the Appellant had met the set criteria to qualify as an agent. However, the Respondent disregarded the intentions of the parties to the contract and went ahead to create "artificial assumptions”that the contract should have been between the Appellant and Safaricom which is a third party. The Respondent in determining whether the Appellant's services qualify to be an export of service, should be guided by the contract and the provisions of the VAT Act 2013. iv.That the Respondent also erred in making the assumptions that:a.The review of bank statements to indicate that the inflows from Safaricom meant that the whole transactions were vatable.b.The importation of equipment leads to a clear indication of the transfer of ownership to the Appellant.c.The operations and technical assistance are in respect of the equipment sold by the Appellant to Safaricom and payment made from Safaricom to the Appellant.The correct position on the matters above was that in (a) above, the only actual inflows from Safaricom were not treated as technical fees in the accounts. These were actually subjected to VAT in the monthly VAT returns. In (b) above, this was inaccurate as section 10. 1 of the agreement between the Appellant and its principal, the Appellant did not have ownership of the goods whatsoever. In (c) above, the correct position was that the Appellant did not sell the goods to Safaricom as it did not have the rights but rather Aviat Singapore does. The operations and technical assistance offered in installing the goods was what was termed as technical fees and charged to Aviat Singapore by the Appellant.

9. Regarding under-declared equipment Sales in 2021, the Respondent had used a mark-up computed using information from year 2020 to arrive at the under declared income. This was inaccurate as the income was cut off and as indicated in the accounts, was to be received in 2022. The final accounts indicated work in progress in the balance sheet which related to the income billed on the equipment. The cost of sale was captured in the year 2021 but the billing was cut off by a day and dated 1st July 2021 which falls in year 2022. There was no contract as Safaricom is their client but a copy of the breakdown had been attached.

10. Regarding income tax liability:(a)Variances between Sales as per the VAT returns and Total Income Tax Turnover:That the Respondent focused on the year ending June 2021. The actual variances of Kshs. 33,501,477. 00 were due to the unearned income (work in progress) which was not added as part of the income for the year as it was yet to be earned. Only three bills of Kshs. 17,388,361. 00, Kshs. 13,608,125. 00 and Kshs. 2,999,845. 00 were utilized in reconciling the difference since these are the only transactions that had already been invoiced though. not yet earned.(b)Under-declared equipment Sales in 2021That the Appellant's position was that there should be no tax liability arising since it declared all equipment sales in respect of 2021.

The Appellant’s Case 11. The Appellant has set out its case in the Statement of Facts dated 3rd October, 2022 and filed on 4th October, 2022.

12. The Appellant stated that it was issued with a VAT credit verification notice through a letter dated 13th September, 2021 in which it was required to provide documentation as outlined below on or before 20th September, 2021:a.Purchases and sales ledgers;b.Purchases and sales invoices, payment vouchers;c.Bank statements for the period under review; andd.Financial statements for the period under review.

13. That the Respondent prepared and issued a compliance check report on 25th May, 2022. On 27th May, 2022, the Respondent then raised additional assessments on both income tax and VAT, the total of which was Kshs. 63,890,578. 41. In this regard, Kshs. 15,039,410. 73 of the additional assessment was in relation to income tax and Kshs. 48,851,167. 68 was in relation to VAT.

14. It objected to the assessments on the i-tax platform on 26th June, 2022 and on the same date, received acknowledgement of its objection as follows:Period Receipt/Acknowledgement Number Amount in Kshs.

2021 KRA202211522006 13,984,405. 35

2020 KRA202211521664 1,055,005. 38

2021 KRA202211522166 17,876,050. 72

2020 KRA202211521895 11,390,591. 52

2019 KRA202211521791 9,042,904. 32

2018 KRA202211521452 10,541,621. 12

15. That despite several meetings and the fact that it shared detailed submissions and reconciliations to support its objections on 24th August, 2022, the Respondent went ahead to issue a notice of objection invalidation decision on 29th August, 2022 thereby confirming the whole assessment with minimal adjustments.

Appellants Prayers 16. The Appellant prayed for the following orders from the Tribunal:a.To allow the VAT and income tax objection for the full objected and supported amount for the period under review.b.To amend both the VAT and income tax additional assessments in the iTax system from Kshs. 82,240,790. 00 being the total principal tax, penalties and interests to nil as all the required clarifications had been shared.

The Respondent’s Case 17. The Respondent’s case was as set out in its Statement of Facts dated 3rd October, 2022 and filed on 3rd November, 2022 in which it stated as follows:

18. The Respondent stated that it identified the Appellant for tax review due to its perpetual status of being in a credit position in respect to VAT return and then, it issued a review notice to conduct a credit verification audit for purposes of finding out whether the input claimed by the Appellant was accurate and whether the sales were properly declared.

19. That during the audit, the Respondent noted instances of under declaration of both VAT and income tax as well as variances between the income tax returns and VAT returns and subsequently issued additional assessments on 25th May, 2022 based on the following:a.Charging VAT on the technical and operation services provided by the Appellant to Safaricom.b.Charging VAT on the variances between sales declared in VAT3 returns and Income Tax Returns.c.Charging Corporation tax on the variance between sales declared in VAT3 returns and Income tax returns.d.Charging VAT and Corporation tax on the variance between purchase claimed from the Appellant’s PIN and sales declared in VAT and Income Tax Returns.

20. The total additional assessments in respect VAT and income tax for the years 2018 to 2021 amounted to Kshs. 63,890,579. 00 [Kshs. 48,851,168. 00 in respect of additional VAT tax assessment and Kshs. 15,039,411. 00 additional assessment in respect of income tax].

21. That the Appellant’s objection was lodged on 26th June, 2022 and it partially allowed the objection that was fully supported and confirmed the unsupported part of the assessment vide its letter dated 29th August, 2022.

22. The Respondent responded to the Appellant’s grounds of Appeal by outlining, with regard to technical fees, the following:a.That it erred in law and fact by misinterpreting and disregarding the agency relationship between the Appellant and its principal, Aviat Singapore.b.That it erred in law and fact by assuming that the goods held by the Appellant were for resale by the Appellant whereas the Appellant could not sell goods which it did not have rights to.c.That it erred in law and fact by failing to consider precedent cases where the Tribunal made rulings in support of the Appellant's arguments such as the W.E.C Lines Kenya Limited case.

23. That contrary to the Appellant's allegations that it had misinterpreted the relationship between the Appellant and Aviat Singapore, it averred that it correctly interpreted the relationship between the Appellant and Aviat Singapore which was that pursuant to the contract, the Appellant and Aviat Singapore were related parties engaging in intercompany transactions involving:-i.Sales representative services, including marketing and promotion of Aviat products, as well as operational and technical assistance related to Aviat products by the Appellant to Aviat Singapore;ii.Purchase of Aviat products by the Appellant from Aviat Singapore for resale to local customers; andiii.Provision of support services, including management, technical and general and administrative ("G&A") services by Aviat Singapore to the Appellant.

24. The Respondent averred that in Tax Appeals Tribunal No. 5. of 2018, Coca-Cola Central East and West Africa Limited Vs the Commissioner of Domestic Taxes, the Tribunal noted that:-“it is seemingly evident that there is rich jurisprudence globally as Courts have been approached on different circumstances in regards to the applicability of the export service ... "

25. It averred that before delving into the services the Appellant provided during the period under review, it examined the VAT law applicable to export of services and that therefore the period under review was 2018-2021 and the VAT Act, 2013 was considered relevant.

26. It further averred that Section 2 of the VAT Act, 2013 defines 'service exported out Kenya" as Service provided for use or consumption outside Kenya'…. The Respondent however, noted that VAT Act, 2013 does not define the terms "use" or "Consumption" in relation to export service'

27. The Respondent stated that under the OECD Guidelines, with respect to business service, the general rule is that the jurisdiction where the customer is located has the taxing rights over a service. The Appellant imported telecommunication equipment from Aviat Singapore for resale in the local market. Safaricom was the main customer and Airtel to a small extent as confirmed from the clause on ‘shipment’ found on page 5 of the Contract between the Appellant and Aviat Networks Singapore which stated as follows:-“The parties acknowledge and agree that, except as otherwise specified in a delivery order or purchase order risk or loss and title to the products and title to the tangible components of the products shall be transferred from the Company (Aviat Network Singapore) to the Contractor (the Appellant) at the port of entry in designated country within the Territory.”

28. That in the clause on ‘cancellation and rescheduling’, of the contract between the Appellant and Aviat Singapore, the parties referred to the orders as if they belonged to the Appellant and stated as follows:“Contractor (the Appellant) may cancel or reschedule any of its purchase orders for products submitted.”

29. That the clause on ‘Return of Products’ at page 5 of the contract between the Appellant and Aviat Singapore stated as follows:“At the Request of the Contactor (the Appellant) Aviat Networks Singapore shall repurchase from the Appellant any products supplied by the Company to the Contractor that have not been resold by the Contractor within ninety (90) days.”

30. That from the above excerpts from the Contract between the Appellant and Aviat Singapore, it was clear that the goods belonged to the Appellant since upon receipt at the Port, the risk and ownership was transferred to the Appellant. Further, that the contract provided that the Appellant could request Aviat Singapore to repurchase goods which had not been resold. This meant, according to it, that the Appellant purchased the goods for selling and that was why the contract stated that if they had not sold within 90 days, the same were re-purchased not returned.

31. That the Respondent stated that the operation and technical assistance referred to were in respect of the equipment sold by Appellant to Safaricom as evidenced by the invoice from the Appellant to Safaricom. Upon review of the Appellant's bank statement it found that there was a significant inflow of cash from Safaricom to the Appellant.

32. That by the Appellant's own admission at page two of its Memorandum of Appeal, it confirmed that in flows from Safaricom were not treated as technical fees and were subjected to VAT at the standard rate in the monthly returns. This admission confirmed that the Appellant acknowledged and agreed that Safaricom was its main client to whom it offered technical services and as such the same were not exported services since the consumer of the services was Safaricom and not Aviat Singapore.

33. The Respondent averred that during a meeting held with the Appellant on 22nd August 2022, the Appellant was unable to explain how the supply of equipment was separated from the provision of the support services. Hence there was no doubt that the services provided by the Appellant to Safaricom were local services i.e. operational and technical assistance. These services were therefore performed and consumed in Kenya and were subject to VAT at the standard rate of 16%.

34. That having established that the goods belonged to the Appellant and the sales were made in Kenya and particularly to Safaricom, the sales were under-declared for VAT purposes in the years 2018 and 2019. The Appellant earned technical fees from the services provided to customers in Kenya. However, this income was misclassified in the VAT returns for the periods 2020 and 2021 as either partly zero-rated supplies or exempt supplies. In regard to other periods the income was completely omitted in the VAT returns but then declared in income tax-self-assessment returns as ‘other income’.

35. In response to the grounds that:a.The Respondent erred in law and fact by using a mark-up computed using information from the 2020 year of income to arrive at the under declared income as the same was inaccurate since the income was cut off and was to be received in 2022; andb.That the Respondent erred in law and fact by using the cost of sales computed using information from 2021 year of income. to arrive at the under declared income as the same was inaccurate since the income was cut off and to be received in 2022.

36. It responded that having established that the Appellant imported telecommunication equipment from Aviat Singapore for resale in the local market and that Safaricom was the main customer and Airtel to a small extent, during the review process, it requested the Appellant to provide the following documents for review:a.Sales support agreement.b.The transfer pricing document.c.Audited financial account for the periods 2018-2020. d.Schedules on reconciliation of variances between sales as per purchases claimed and income tax declarations for the periods under review.e.Schedules on reconciliation of variances between sales as per VAT returns and Income Tax declarations for the periods under review.f.Sales ledgers and invoices that relates to the technical fees.g.Valuation reports for work done and interim fee notes in regards to work in progress.

37. The Respondent reviewed the documents provided and found that during the period under review, there were variances between sales of equipment as per the audited accounts and sales of equipment as declared in VAT3 returns. The Appellant provided reconciliation and relevant supporting documents i.e. Invoice in question and sales ledgers for both periods 2020 and 2021. However, its review of the VAT return for June 2020 indicated that indeed the invoice in question was declared in the said month.

38. The review of the Appellant’s sales ledger for the period 2021 indicated that the said invoice was declared in the financial period 2021 for income tax purposes. It therefore established that the reconciliation, explanation and documents provided in support of the variances for the periods 2020 and 2021 were proper, adequate and were accepted. However, the explanation provided by the Appellant in regards to the variance noted in the period 2018 and 2019 was inadequate because the Appellant neither provided reconciliation nor documentation in support of the said variances. Subsequently, the Respondent rejected the Appellant's claim with respect to the 2018 year of income.

39. With regard to the ground on under declaration of equipment sales in 2021 it averred that the financial statements provided by the Appellant for the period 2021 were unsigned and their reliability could not be ascertained. In addition, the the Appellant did not indicate work in progress in the balance sheet and instead indicated a block-figure named "unearned revenue" without analysis.

40. The Appellant did not provide the contract for the work in progress, valuation reports for work done, and interim fee notes. Due to lack of the relevant supporting documentation mentioned above in regard to the work in progress, the Respondent could not review the same. The said documents were not provided during the review and were not been presented before the Tribunal.

41. With regard to the ground on the issue of income tax Liability and variances between sales as per the VAT returns and total income tax turnover, it found that the VAT returns for the periods ending June 2018,June 2019 and June 2020 did not have a corresponding corporation tax leading to the variance it had noted.

42. In the period ending June 2021, the Appellant erred by adjusting the variance using the technical fees since the same had been taken care of in both VAT and income tax returns. In addition, the Appe11ant did not provide any document in support of the variance.

43. It also responded to the ground raised on under declared equipment sales in 2021 by stating that the financial statements provided by the Appellant during the review process for the period 2021 were unsigned and their reliability could not be ascertained. In addition, the Appellant did not have a closing stock in the balance sheet meaning that all equipment purchased during the year were sold. Further, the balance sheet did not have a note on work in progress.

44. Its position that all equipment purchased during the year were sold was stated in the objection decision and the Appellant has not contended the same in its Memorandum of Appeal meaning it is agreeable to that position. The Appellant never provided the contract for the work in progress, valuation reports for work done, and interim fee notes. Documents were not available during the review process and the same have not been presented before this Tribunal meaning they are unavailable. Due to lack of relevant supporting documentation mentioned above in regard to the work in progress it was not able to arrive at a different decision.

45. With regard to the Appellant’s ground on under declared equipment sales in 2020 the variance between the equipment sales declared in income tax return and VAT returns for the period 2020, the reconciliation, explanation, and documents provided in support of the variances for the period 2020 were proper, adequate and acceptable leading to a review of the principal tax liability from Kshs 63,890,578. 41 to 61,992,746. 00 and a total tax liability amounting to Kshs 82,240,790. 00 inclusive of applicable penalties and interest.

46. Pursuant to Section 56(1) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’) and Section 30(a) of the Tax Appeals Tribunal Act No. 40 of 2013 (hereinafter ‘TAT’), it is the onus of the Appellant to prove that indeed the assessment is inaccurate or excessive. The allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where agreed upon were unfounded in law and not supported by evidence.

Respondents Prayers 47. Reasons wherefore the Respondent prayed for the following orders:a.That the Appeal be dismissed with costs; andb.That the additional income tax and VAT assessments raised by the Respondent be confirmed and the principal taxes, interests and penalties be found due and payable in accordance with the objection decision rendered by the Respondent.

Submissions by the Parties 48. In its Written Submissions dated and filed on 28th March, 2023 the Appellant submitted on three issues that it had identified for determination whilst in its Written Submissions dated 6th April, 2023 and filed on 11th April, 2023 the Respondent submitted on and analyzed two issues that it had identified for determination.

49. The Appellant submitted as follows regarding the three issues it had identified for determination:-

i. Whether the services offered by the Respondent in terms of technical fees are indeed exported services. 50. The Appellant submitted that the services offered by Aviat Kenya to Aviat Singapore were ideally exported service and for this reason, the agreement between it and its principal clearly stated that it did not have authority to take ownership of the goods. The technical fee charged were due on the support services provided by it to Aviat Singapore which included services like management, technical and general administrative activities, which were charged to Aviat Singapore as technical fees.

51. That the Appellant did not have authority over the goods and could not have sold goods which they did not have rights to sell as it may merely agents of Aviat Singapore. Accordingly, the services offered to Aviat Singapore were not vatable. The recipients of the services were actually Aviat Singapore as it was it that had an engagement with it. Even if the recipient could have been in Kenya, the requirement that the recipient be out of Kenya for it to be termed as an export were laid out by the VAT Regulations 2017. The Regulations are null and void as they were not tabled before the National Assembly within the required timelines. This has been well laid out by the judgement on Tax Appeal Tribunal case number E084 of 2020.

ii. Whether there was any under declaration of equipment sales in year 2021. 52. The Appellant in its answer to this question was in the negative. The reason was that the final accounts shared with the Respondent indicated work in progress in the balance sheet. This related to the income billed on the equipment. The cost of sales was captured in the 2021 year of income but the billing was cut off by a day and dated 1st July 2021 which fell in the 2022 year of income. This meant that the variance which the Respondent claimed as under declaration was declared in 2022 even if the cost element was claimed in year 2021.

iii. Whether there were variances of Kshs. 33,501,477. 00 between the sales as per VAT and that of the income tax for the year ended June 2021. 53. The Appellant in its answer to this question was in the negative. The Respondent focused on the year ending June 2021. The actual variances of Kshs. 33,501,477. 00 were due to the unearned income (work in progress) which were not added as part of the income for the year as it was yet to be earned.

54. That due to VAT tax point, this had to be declared. However, when it came to Income tax the income had not been earned. This income would have been earned in the subsequent year where it would have been declared as part of income and removed from the balance sheet as work in progress.

55. That it availed the support documentation with regards the variances but the Respondent did not disagree with the Appellant’s position but remained silent on the matter. The Respondent also experienced some delays in executing the assignment and had been updating the Appellant on the progress thereby delaying the completion of the whole ADR process resulting in the hearing of the case.

56. That the Respondent meant to mislead the Tribunal by failure to close this matter and allowing it to go through the cumbersome full hearing and it therefore urged the Tribunal to interpret the statute and allow the Appeal in full as it was purely a reconciliation matter.

57. The Respondent identified two issues for determination as follows:a.Whether the Appellant's sales and services to Safaricom were exported services eligible for zero rating under the VAT Act?b.Whether the Respondent erred in raising additional assessment based on the variances noted in the Appellant's Income and VAT returns vis-a-vis the sales declared in the audited books?

58. The Respondent submitted as follows regarding both of the issues it had identified for determination.

59. That the Appellant indicated in both its objection and Statement of Facts, that it acted as a limited risk distributor and provider of sales representative and support services without taking titles to the goods. It had further, stated that Aviat Singapore provided support services to the Appellant and that the transactions were highly interrelated and involved the same products and services. The Appellant also alleged in its pleadings that the Technical, sales and distributorship services were rendered on behalf of its related entity Aviat Singapore.

60. That the Respondent It found that the Agreement between the Appellant and Aviat Singapore, contradicted the Appellant’s allegations since excerpts of clauses on page 5 of the Agreement under the headings ‘shipment’, ‘cancellations and rescheduling’ and ‘return of products’ showed that the goods that were sold belonged to the Appellant since upon receipt of the goods at the Port, the risk and ownership of the good were transferred to the Appellant. More particularly, the contract between the parties stated that Aviat Singapore would re-purchase the goods that had not been sold in 90 days.

61. That having established that the goods belonged to the Appellant, the Appellant could not purport that in selling the products to Safaricom in Kenya, it was offering sales representative and distributor services on behalf of Aviat Singapore yet it was selling its own imported products to consumers in Kenya. The technical services offered to Safaricom were in respect to the products imported by the Appellant and sold to Safaricom.

62. That the Appellant could not therefore allege that the services were being offered by Aviat Singapore through the Appellant yet the technical services were in respect to the equipment it imported from Aviat Singapore.

63. The Respondent submitted that having demonstrated that the products being distributed by the Appellant belonged to the Appellant since the risk and title passed upon entry at the Port of entry of the Country where the Appellant is domiciled, it proceeded to answer the question on whether the sales and distribution services rendered by the Appellant to Safaricom were exported services in support of the Appellant's related entity.

64. That in order to determine the question on whether the services rendered by the Appellant were exported services it analysed 3 questions namely:a.Who is a consumer for purposes of exported services and how is the consumer to be ascertained?b.What is the test in establishing whether services are exported or not: is it the place of performance of the services, the location of the payer or the location of the consumer?c.Which jurisdiction reserves the taxing rights in relation to exported services?

65. That in order to determine the place of use or consumption of the Appellant's sales and distribution services and hence the jurisdiction with the taxing rights, there was a need to determine who is the consumer of sales and distribution services offered by the Appellant.

66. The Respondent stated that the Kenyan VAT legislation does not provide guidance on how to determine the place of 'use' or 'consumption' of exported services or the consumer of the exported services. In the absence of such guidance it was guided by international best practice as set out by the OECD Guideline 3. 3 on VAT/GST pursuant to which the identity of the customer with regard to supply of services is to be determined by reference to its business agreement and other general correspondence, invoices, payment instruments and receipts exchanged between the parties.

67. That the Guideline also provides that the jurisdiction of the consumer of the services has the taxing rights over the said services. From its reading of the Agreement between the Appellant and its related entity, Aviat Singapore, it was clear that the products which were sold and distributed belonged to the Appellant and the consumers of the said products were Safaricom and Airtel who are both based in Kenya.

68. That it relied on the High Court of Kenya ("the Court") decision, in the case of Commissioner of Domestic Taxes vs. Total Touch Cargo Holland (Income Tax Appeal no. 17 of 2013) where the Court held that;-“contractual relations are to be ascertained by having due regard to existing service contracts.”

69. According to the Respondent Paragraph 1 of Part A of the Second Schedule of the VAT Act 2013 provides that 'the exportation of goods or taxable services shall be zero rated.' Whilst Section 2 of the VAT Act 2013 defines 'service exported out of Kenya' as 'a service provided for use or consumption outside Kenya'. The aforementioned OECD Guidelines laid down the general rule that the jurisdiction where the consumer is located has the taxing rights over a service.

70. The Respondent delved into two main issues which were; who was the user or consumer of the Appellant's services; and, whether the Appellant's services were offered to local customers. In determining who the end user of goods or services consumed is either locally or abroad, Justice Mabeya in Commissioner of Domestic Services v Dutch Flower Group Kenya (Income Tax Appeal E101 of 2020) [2021] KEHC 23 (KLR) (Commercial and Tax), merited the Respondent’s appeal by finding that:-“The services are consumed locally by the supplier of the subject flowers. So that the end product is to the specification of the consumer. The value is not consumed by the person in Netherlands but the supplier locally.”

71. In respect to the first issue the Respondent noted that Safaricom and Airtel were the consumers of both the equipment and the technical services, being purchasers of the telecommunication equipment imported by the Appellant from Aviat Singapore. It maintained that the consumer of the sales services was Safaricom since the Appellant was selling its own products which it had imported from its related entity.

72. That the Appellant would invoice Safaricom who in turn would transfer the payments to the Appellant's account contrary to Regulation 13 (2) of the VAT Regulations, 2017 which lays out the documents required to demonstrate exportation of goods and services. Regulation 13 (2) of the VAT Regulations, 2017 provides that the documentation proof for an exportation shall be:“(a)a copy of the invoice showing the recipient of the supply to be a person outside Kenya;(b)proof payment for the supply;(c)for services, such other documents as the Commissioner may require as proof that that the services had been used or consumed outside Kenya."

73. The Respondent stated that the copies of invoices as well as the proof of payment for the services rendered by the Appellant clearly demonstrated that the services were supplied to Safaricom and Airtel whose location is within Kenya. Having established the consumer and the test for ascertaining whether the services were exported or not, it proceeded to analyse the issue on who reserved the taxing rights in relation to exported services.

74. To buttress its position, the Respondent it relied on the High Court case of Panalpina Airflo Limited vs. Comn1issioner of Domestic Taxes [2019] eKLR when the Court, inter alia held that:-'the taxing rights in relation to VAT on cross border supply of services are vested in the jurisdiction of the final consumer.'

75. That the jurisdictions with the taxing rights in relation to the sales services is Kenya since the services provided were used and consumed within Kenya and did not amount to supply of exported services subject to VAT at the rate of zero percent. That the Appellant by its own admission in its pleadings confirmed that the sales services in respect to sale and distribution of equipment rendered to Safaricom and Airtel were vatable and it therefore wondered how the products being sold and distributed belonged to the Appellant yet the technical support in respect to the very product belonging to the Appellant are exported services on behalf of Aviat Singapore.

76. That having established that indeed the sale of equipment and distribution services were consumed by Safaricom and Airtel and were not exported services, it proceeded to analyse the second issue for determination which was whether it erred in raising additional assessment based on the variance.

77. The Respondent averred that the Appellant did not dispute the fact that there were variances on VAT arising from failure by the Appellant to charge VAT on technical fees; variances arising from the sales as per income tax vis-a-vis sales as per the VAT returns; and variances arising between purchases claimed from the Appellant’s Personal Identification Number (hereinafter ‘PIN’) and sales declared in the Income and VAT returns.

78. The Appellant however made an attempt in both the objection and pleadings and stated that the variance was from technical fees from Aviat Singapore and were not declared for VAT which included sales representation of Aviat Singapore equipment. The Appellant offered explanation and supporting documentation in respect to periods 2020 and 2021 which the Respondent reviewed and allowed. However, in respect of the period 2018 and 2019, the Appellant failed to avail reconciliations as well as adequate supporting documentation leading to the rejection of the objection for the period in question.

79. For the period 2021, the Appellant provided unsigned financial statements in which neither the alleged work in progress nor closing stock were indicated in the balance sheet. This meant that all the equipment was sold. In addition, the Appellant failed to provide relevant supporting documentation such as the contract for the work in progress, valuation reports for the work done and interim fee notes.

80. Accordingly, it concluded that the equipment sold to Safaricom belonged to the Appellant and by the Appellant's own admission in both the objection correspondence and pleadings the transactions were highly interrelated and involved the same products and services and further that the consumers were largely Safaricom and to a small extent Airtel. It was right in raising the additional VAT and Corporation tax based on the variances explained in its objection decision.

81. That Section 56(1) of TPA and Section 30 of TAT places the burden on the Appellant to demonstrate that the assessment was excessive, a burden the Appellant failed to discharge.

82. That Section 30 of TAT states as follows:“In a proceeding before the Tribunal, the appellant has the burden of proving –a.where an appeal relates to an assessment, that the assessment is excessive; orb.in any other case, that the tax decision should not have been made or should have been made differently”

83. The Respondent averred that Appellant's burden to prove that the assessment was wrong was also raised elaborately in the case of KRA vs. Man Diesel & Turbo SE, Kenya [2021] eKLR at Paragraph 31 and 32 where it was stated that:“The import of the above provisions is that the Party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof the flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the taxpayer has the burden of proof in any tax controversy. The taxpayer must demonstrate that the commissioner's assessment is incorrect. The taxpayer has a significantly higher burden. The taxpayer must prove the assessment is incorrect ............ "

Issues for Determination 84. The Tribunal having carefully considered the pleadings and submissions made by the parties is of the considered view this Appeal distils into two issues for determination which are that:a.Whether the Appellant’s technical fees are exported services.b.Whether the additional VAT and Income Tax Assessments were justified.

Analysis and Findings 85. The Tribunal having identified the issues falling for determination proceeds to analyze the same separately as hereinafter.

i. Whether the Appellant’s technical fees are exported services 86. The Tribunal finds that this dispute arose when the Respondent carried out a VAT credit verification notice and then raised additional tax assessments on the Appellant. Part of the VAT credit verification process required that the Respondent review the ‘Sales Support Agreement’ (hereinafter ‘the Agreement’) between the Appellant and Aviat Singapore to determine whether the treatment of technical fees by the Appellant in its books and the taxes applied on the same were in accordance with the relevant tax laws.

87. The Tribunal notes that according to the Appellant the Agreement amounted to an agency between it and Aviat Singapore and that therefore it ‘did not have authority to take ownership of the goods’ that Pursuant to the Agreement it was to perform certain support services which included management, technical and general and administrative activities and services.

88. Having reviewed the Agreement, the Tribunal finds that the Appellant was appointed on a non-exclusive basis to market and promote products within the territory. The territory meant and included Kenya or any other Country that the Appellant and Aviat Singapore would agree on from time to time. Its appointment was limited under Clause 2. 2 of the said Agreement, in such a way, that the Appellant was not authorised to market products outside the agreed territory.

89. The Tribunal notes that Clause 2. 2 of the Agreement further stated that the Appellant had no power or authority to sell any of the products, enter into contracts or binding agreements with respect to the products or accept or fill any orders for the products, which were not in the agreed territory.

90. The Appellant further referred to Clauses 9. 2 and 10. 1 of the Agreement in its pleadings but the Tribunal finds that whereas clause 9. 2 was in relation to ownership of materials and documents and not products or equipment, clause 10. 1 was in relation to the fact that the Appellant did not own or have rights to the intellectual property of Aviat Singapore. It is also notable that the costs incurred by the Appellant in the Agreement in relation to services performed on behalf of Aviat Singapore were reimbursable.

91. The Tribunal finds that the Appellant outlined the above Clauses in the Agreement to support its argument that it did not own the goods received from Aviat Singapore and that therefore, it had an agency relationship with Aviat Singapore. In its pleadings, the Appellant also had the view that the Respondent agreed to the fact that the Appellant and Aviat Singapore had an agency relationship.

92. The Tribunal has however observed that according to the Respondent, the Appellant and Aviat Singapore did not have an agency relationship but were related parties and engaged in inter-company transactions including the purchase of Aviat products by the Appellant from Aviat Singapore for re-sale to local customers. The Respondent outlined in its pleadings, the provisions of Clauses 3. 2 (d);(f) and (g) of the Agreement which were clauses on shipping, cancellation and rescheduling and return of products.

93. The Tribunal having reviewed the Agreement finds that pursuant to the clause on shipping, the risk of loss and title of the products and title to the tangible components of the products were transferred to the Appellant at the port of entry in the designated country within the territory. Aviat Singapore could also, pursuant to the agreement, re-purchase any of the products that the Appellant had imported from it.

94. The Tribunal has also found, from the documentation provided by the Respondent, that there were in-flows from Safaricom. More particularly, the Respondent provided as evidence one of the invoices issued by the Appellant to Safaricom. The Tribunal having reviewed the bank statements of the Appellant, which were attached by the Respondent to its pleadings, finds that there were significant in-flows from Safaricom and also to a smaller extent, Airtel. The invoice adduced as evidence by the Respondent indicated that Safaricom was to pay for ‘support services extended warranty ….in country support’.

95. The Tribunal notes that for traded services, jurisdiction is at the core in conferring the right to tax; locally, this right is defined under Section 8(1) of the VAT Act 2013 as;“(1). A supply of services is made in Kenya if the place of business of the supplier from which the services are supplied is in Kenya.”

96. The Tribunal also finds that exported services are defined by Section 2 of the VAT Act as;“…a service is said to be exported if it is provided for use or consumption outside Kenya.”

97. At both levels, local and international, the Tribunal notes that jurisdiction is at the core of defining where taxing rights lie. The Tribunal is also guided by guideline 3. 2 of the OECD Guidelines which reads as follows;“…for business-to-business supplies, the jurisdiction in which the consumer is located has the taxing rights over internationally traded services and intangibles.”

98. Regarding the jurisdiction right to tax, the Tribunal relies on the holding of the court in the case of Total Touch Cargo Holland vs Commissioner of Domestic Taxes [2013] eKLR that;“To our mind, it is immaterial where the place of performance of the service takes place, it can be China, in Latin America, in Ireland, in Mesopotamia, in Asia, in Europe or even here in Kenya; what is material is where the use and consumption of the service takes place, not the place of services.”

99. The Tribunal has taken the view that the Appellant’s Agreement with Aviat Singapore was a sales support agreement that allowed the Appellant to be a sales representative for Aviat Singapore but also distribute goods within the agreed territory. Accordingly, the Appellant did not, in its pleadings prove that it was an agent for Aviat Singapore. Equally, the Tribunal did not sight any documents that proved that services were being offered to Aviat Singapore, in Singapore.

100. The Tribunal finds that the technical support services were provided to Safaricom and to Airtel by the Appellant and not Aviat Singapore or on behalf of Aviat Singapore. These services could not therefore be categorized as exported services since they were performed and consumed in Kenya. Accordingly, the Tribunal is of the view that the Appellant’s technical fees are not exported services and agrees with the Respondent that these are subject to V.A.T at 16%.

ii. Whether the additional VAT and Income Tax Assessments were justified. 101. The Tribunal notes that according to the Agreement the Appellant had title to the goods that it had imported. The Tribunal further notes that the Appellant did not provide evidence to support the variances in sales in the accounts and in the VAT returns in respect to the 2018-2019 years of income. The Respondent stated that the Appellant’s financial statement in respect of the 2021 year of income were unreliable as they were not signed.

102. The Tribunal notes that the Appellant was able to present its partially signed financial statements at the Appeal stage though page 9 of the financial statements remained unsigned. The Tribunal also agrees with the assertion of the Respondent that under Note 17 in the Financial statements of the 2021 year of income the unearned income from Safaricom was not analysed and the Appellant did not provide the project documents/agreements as outlined in the said Note 17 of the Financial Statements in order to enable the Tribunal to review the same.

103. The Tribunal has also observed that the Appellant neither provided contracts nor notes on the work-in progress in its financial statements and furthermore, since there was no closing stock item as a net asset in its balance sheet, it is evident that the Respondent was correct in its conclusion that all the equipment in respect of the 2021 year of income were sold.

104. The Appellant has the burden of proving the incorrectness of a tax decision. More particularly, Section 56 (1) of TPA provides as follows:‘In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

105. The Appellant did not provide evidence that would have enabled the Respondent arrive at a different conclusion and therefore the additional VAT and income tax assessments were justified.

Final Decision 106. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following final Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 29th August, 2022 be and is hereby upheld.c.Each party to bear its own costs.

107. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI MOHAMED A. DIRIYEMEMBER MEMBERSPENCER S. OLOLCHIKEMEMBER