[2023] KETAT 102 (KLR)

Dutch Flower Group Kenya Limited v Commissioner of Domestic Taxes (Tribunal Appeal 690 of 2022) [2023] KETAT 102 (KLR) (10 February 2023) (Judgment)

Neutral citation: [2023] KETAT 102 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 690 of 2022

RM Mutuma, Chair, RO Oluoch, E.N Njeru, D.K Ngala & EK Cheluget, Members

February 10, 2023

Between

Dutch Flower Group Kenya Limited

Appellant

and

The Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya, and is in the business of providing logistical services including, assisting in sourcing flowers, checking the quality of sourced flowers before they are shipped, checking and maintaining procedures and provisions important for the contracting party and the Kenyan growers, as well as maintaining relations on behalf of the contracting party in Kenya.

2. The Appellant had entered into an agreement with importers of flowers, Flower Retail Europe BV [FRE], and Flower Connect Holdings BV [FCH], both domiciled in Netherlands, and import flowers from Kenya to Netherlands.

3. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act and is the Kenya Revenue Authority charged with the responsibility of among others, assessment, collection, accounting, and the general administration of tax revenue on behalf of the Government of Kenya.

4. The Appellant lodged input four VAT refund claims in the sum of Kshs 427,006 for the period October 2019, Kshs 285,924. 00 for the period November 2019, Kshs 87,279. 00 for the period December 2019 and Kshs 142,883. 00 for the period January 2020, all totaling to a sum of Kshs 943,092. 00

5. The Respondent rejected the Appellant’s VAT refund application by issuing credit adjustment vouchers.

6. The Appellant lodged an objection application on 31st March 2022, on the grounds that the services offered by the Appellant were consumed outside Kenya thus are exported services therefore zero rated according to Paragraph 1 of Part A of the Second Schedule to the VAT Act, and the Appellant was therefore entitled to the refunds.

7. The Appellant’s objection was duly reviewed and considered by the Respondent, and an objection decision issued on 17th May 2022 confirming the Respondent’s earlier decision of rejecting the refund claim for Kshs 943,042. 00.

8. The Appellant being aggrieved and dissatisfied by the Respondent decision dated 17th May 2022 rejecting the VAT refund claim application for the sum of Kshs 943,042. 00 brought this Appeal against the whole of that decision. It lodged its Notice of Appeal dated 16th June, 2022.

The Appeal 9. The Appellant filed its Memorandum of Appeal on 30th June 2022 and the the Appeal is premised on the following grounds :-i.That the Respondent erred in law and in fact in finding that an agency relationship exists between the Appellant and Flower Retail Europe (FRE) and Flower Connect Holding (FCH) as against the clear provisions of the service agreements and the conduct of the parties.ii.That the Respondent erred in fact and in law in finding that the costs of the Appellant in providing the services under the service agreements are the costs of FRE and FCH therefore disallowing the Appellant ‘s claim for input VAT alleging that it would be allowing the Appellant to claim costs belonging to FRE and FCH.iii.That the Respondent fell in error in basing its objection decision on a Ruling of the High Court delivered on 10th September 2021, where the court found that the Appellant is not allowed to claim input tax incurred on behalf of its Principal, Flower Retail Europe B.V. (FRE) which the Appellant has appealed against.iv.That the Respondent erred in fact and in law in failing to find that the Appellant ‘s services are used or consumed outside Kenya, therefore exported services that are zero rated supplies in accordance with section 2 and paragraph 1, part A of the second schedule to the VAT Act.v.That the Respondent erred in fact and in law in failing to refund the Appellant VAT in put claimed amounting to Kshs 943,042 , arising from excess input tax resulting from zero rated supplies fr the months October 2019 to January 2020 , contrary to Section 7 and Section 17(5) of the VAT Act.

10. The Appellant for the reason of the grounds stated above has therefore sought the following reliefs :-i.A declaration that the services offered by the Appellant to the Flower Retail Europe B.V. and Flower Connect Holdings B.V. are exported supplies which are zero rated under the VAT Act [2013].ii.A declaration that the Appellant is entitled to VAT refunds arising from excess input tax resulting from the zero-rated supplies made to Flower Retail Europe B.V and Flower Connect Holdings B.V. in the periods between October 2019 to January 2020 as claimed.iii.An order compelling the Respondent to allow and or approve the Appellant’s VAT refund claims as made for the period October 2019 to January 2020. iv.The costs of the Appeal; andv.Any other remedies that the Honourable Tribunal may deem just and reasonable to grant.

The Appellant’s Case 11. The Appellant has relied in support of its Appeal on its Statement of Facts dated 30th June 2022 and filed on even date, and its written submissions dated and filed on 6th October 2022.

12. The Appellant stated that its two clients, FRE BV and FCH BV, who are importing flowers to Netherlands, have entered into separate contracts with the farmers for the delivery of flowers, and have direct and immediate control and communication with the farmers/growers. The Appellant stating that it only provide logistical support to the two companies.

13. That specifically, the Appellant was to contractually provide the two companies with the following services:-a.Maintaining relations on behalf of the principal with breeders in Africa.b.Assist the principal in sourcing flowers from Africa and to create a team within progress specifically for the of supply chain.c.Check the quality of sourced flowers for the principal before they are shipped to ensure the suppliers are certified according to the requirements of the principal ‘s customers, and ensure that all specifications required are adhered to. The service provider to create a team within progress to address these tasks called technical.d.To provide all suppliers with correct packaging requirements especially sleeves, flower, food, labels etc. These consumables must be to the exact specifications required by the principal ‘s customers. The service provider will create a team within progress to address these tasks called consumables.e.To check and maintain procedures and provisions important for the principal and principal ‘s clients.

14. In providing the said logistical services, the Appellant stated that it charges VAT at zero per cent [zero rated], as these services are exported services within Section 2 of the VAT Act 2013 ie. consumption outside Kenya.

15. The Appellant stated that in providing the said services, under the agreement with FRE and FCH, a service fee is paid which is attributed to all costs incurred in providing the said services plus a markup of 5% . That all the costs incurred by the Appellant are for the purposes of deriving its income and are not on a reimbursable basis as is in an agency – principal relationship.

16. The Appellant stated that by Credit Adjustment Vouchers dated 3rd March 2022, the Respondent rejected its VAT refund claims totaling Kshs 943,042. 00 on the basis that the services offered are not exported services and were therefore not zero rated.

17. Further, it was stated by the Appellant that the Respondent upheld the decision to reject the Appellant’s VAT refund claim applications on the basis that by a Ruling delivered on 10th September 2021, the High Court found that the Appellant was not allowed to claim input tax incurred on behalf of its principal, Flower Retail Europe B.V.

18. The Appellant asserted that that the Respondent failed to consider, or totally ignored the representations made by the Appellant in its Notice of Objection, and solely relied on the aforesaid decision of the High Court in arriving its decision.

19. It is the Appellant’s submission that Section 2 of the VAT Act defines an export to mean, “ to take or cause to be taken from Kenya to a foreign country , a special economic zone enterprise or to an export processing zone” . That the Section further defines a service exported out of Kenya to be, “a service provided for use or consumption outside Kenya.”

20. The Appellant further submitted that, Paragraph 1-Part A of the Second Schedule of the VAT Act provides that, “the exportation of goods or taxable services shall be treated as zero rated.”

21. The Appellant submitted further that Section 7 of the VAT Act provides that “where a registered person supplies goods and services and the supply is zero rated, no tax shall be charged for the supply, but it shall in all respects be treated as a taxable supply.”

22. The Appellant contended that services are said to be used or consumed in the jurisdiction of the final consumer, or where supply to the final consumer occurs, and that’s the jurisdiction where consumption occurs, and that’s what determines whether the service is to be deemed an exported service.

23. The Appellant therefore submitted that there is no doubt that the place of supply of services- provided by the Appellant to FRE and FCH is Kenya, since it is the place of business of the Appellant, which is the supplier of the services in Kenya.

24. It was also the submission of the Appellant that it offers its services for use or consumption by FRE and FCH in the Netherlands, in other words, outside Kenya. The services offered by the Appellant to FRE and FCH are effectively consumed or used outside Kenya since it is FRE and FCH who are the users or consumers, or benefit or profit from the service provided by the Appellant, thereby making Section 7 of the VAT Act [2013] applicable to the services provided to FRE and FCH by then Appellant.

25. The Appellant submitted that the services it provide its customers in Netherlands fall under Paragraph 1-Part A of the Second Schedule to the VAT Act and ought to be zero rated as they are exported services. The said services being, logistical services, which include ; sourcing of flowers ,checking the quality of sourced flowers before they are shipped, checking and maintaining procedures, and provisions important for the contracting party and the Kenyan growers , as well as maintaining relations on behalf of the contracting party in Kenya.

26. The Appellant strongly asserted that its relationship with FRE and FCH was purely a contract for provision of services and not an agent- principal relationship. It relied on the case of National Bank of Kenya – vs- Pipe Plastic Samkolit (K) ltd & Anor CA 95 of 1999 (2001) KLR .

27. The Appellant contended that its claim for refund of excess input tax was therefore justified having been made pursuant to the provisions of Section 7, as read together with Section 17[5] of the VAT Act which permits a taxpayer to seek refund of excess input tax where the excess arises from making zero rated supplies.

28. It was averred by the Appellant that the issue of whether the services provided by the Appellant to FRE and FCH are zero rated thus entitling the Appellant to claim VAT refunds, is subject of ongoing court proceedings in the Court of Appeal in CA 673 OF 2021 Dutch Flowers Group [ K ] Ltd -vs- The Commissioner of Domestic Taxes.

29. The Appellant also submitted that its service contracts with FRE and FCH fall within the category of business -to- business agreement prescribed under the OECD Guidelines. In following the destination principle and OECD VAT Guidelines, the Appellant submits that VAT is therefore chargeable in the Netherlands where FRE and FCH are domiciled, and not in Kenya.

30. The cases of Coca-Cola Central East and West Africa ltd -vs- Commissioner of Domestic Taxes [2020] eKLR , Commissioner of Domestic Taxes -vs- Total Touch Cargo Holland (2018) eKLR , and , FH Services Kenya ltd -vs- Commissioner of Domestic Taxes ( Appeal No. 6 of 2012) were relied on by the Appellant.

31. The Appellant therefore submitted that it correctly claimed for refund of excess VAT input tax pursuant to the provisions of Section 7 read together with section 17[5] of the VAT Act, which permits a taxpayer to seek refund of excess input tax, where the excess arises out of zero-rated supplies. It asserted that the claims for refund were made within the allowed period.

32. In conclusion, the Appellant averred that the crucial question of whether the services provided by the Appellant to FRE and FCH are zero rated thus entitling the Appellant to claim VAT refunds is a matter subject of active Court Proceedings in Civil Appeal case no. 673 of 2021 – Dutch Flowers Group [K] Limited -vs- Commissioner of Domestic Taxes . It therefore contended that it is imperative that the Respondent ought not to have relied on the decision rendered in the High Court Income Tax Appeal No. E101 of 2020 as the same was per incuriam.

33. The Appellant therefore prayed that the Honourable Tribunal do issue a declaration that the services offered by the Appellant to FRE and FCH are export supplies which are zero rated under VAT Act 2013, and that the Appellant is entitled to VAT refunds arising out of excess input tax thereon in the period claimed. The Appellant further urged the Tribunal to either allow and or approve the Appellant’s VAT refund claims as claimed, or compel the Respondent to allow or approve the said refund claims.

The Respondent’s Case. 34. In opposing the Appeal the Respondent relied on its Statement of Facts dated 29th July 2022 and filed on even date, and written submissions filed on 20th September 2022.

35. The Respondent stated that it reaffirms its position that there existed an agency relationship between the Appellant, and FRE and FCH, and as such claiming a refund would be claiming tax belonging to the principal. That a reading of the agreements demonstrated how the parties have been described, where FRE and FCH have been described as principal, while the Appellant has been described as service provider.

36. It was also stated that the clause on “prices and payment “ is apparent that FRE and FCH exercise a lot of control on the Appellant over the issue of costs. Most importantly, the principal and the Appellant agree at the beginning of the year on a budget on the cost for which the principal pays the same to the Appellant plus a 5 % markup thereon as an income to the Appellant, and secondly, the Appellant raises invoices on a provisional basis based on the pre -determined budget and expenses. This implies that the Appellant cannot freely incur any cost that is neither set out in the said agreement nor not approved by the principal.

37. The Respondent submitted that despite the respective service agreement not expressly identifying the Appellant as a commission agent of FRE or FCH, the net effect of the clauses under “price and payment “connotes in essence the existence of a principal – agent relationship.

38. That in their submissions, the Appellant and the Respondent have brought to the attention of this Tribunal of ongoing proceedings in the Court of Appeal being CA 673 of 2021 Dutch Flowers Group [K] ltd -vs- Commissioner for Domestic Taxes , which is an appeal against the judgement of the High Court in High Court Income Tax Appeal No.- E101 of 2020 , and in which the main issue in dispute for determination is whether the services provided by the Appellant to FRE BV and FCH BV are exported services , thus zero rated- , enabling the Appellant to claim VAT refunds. The Honourable Court of Appeal is yet to hear and render its judgement in the matter.

39. However , the Respondent submitted that the issue in the instant Appeal before the Tribunal is similar to the dispute heard and determined by the High Court in Nairobi High Court Income Tax Appeal No. E101 0f 2020 The Commissioner of Domestic Taxes [Appellant] -vs-Dutch Flowers Group Kenya Ltd[ Respondent] The Respondent submitted that the objective scenario bears the lesson that there is need for fidelity to the principle of stare decisis , a bearing that ensures that judicial officers reach substantially the same legal conclusions that were reached in previous cases , when considering similar issues, thus creating certainty, clarity , predictability and legitimacy within the law.

40. The Respondent cited the Supreme Court case of Jasbir Singh Rai &3 others - vs – Tarlochan Singh & 4 others SC Petition No. 4 of 2012 [2013] eKLR, where the court observed that:-“Adherence to precedent should be the rule and not the exception …, the labour of judges would be increased almost to breaking point if every past decision could be opened in every case , and one could not lay one’s own course of bricks on the secure foundation of the courses laid by others who had gone before him.”

41. The Respondent further submitted that in arriving at the decision, the learned Judge reviewed the service agreements between the Appellant and the other party, and stated as follows:-“… I firmly hold that notwithstanding that the agreement does not expressly state that the Respondent is a commission agent of FRE BV , the net effect of the clauses set out above spells the relationship between the two , the two are in an agency relationship. The income of the Respondent is controlled by FRE BV in that the two agree at the beginning of the year on a budget on the costs for which FRE BV pays the same to the Respondent plus 5% thereon as the income for the latter.”

42. The Court then went on to hold that, “ …allowing the Respondent to claim VAT input tax would be to allow it to claim a cost belonging to FRE BV and not itself. The Appellant was right in declining the claim.”The reasoning hereon was arrived as a result of how the said contracts are performed in that, the Appellant engages the local suppliers who sell flowers to the principal companies, by among others, providing the suppliers with the correct packaging requirements, and to check the quality of the flowers before they are shipped to Netherlands.

43. The Respondent therefore submitted that the learned Judge in the Dutch Flowers High Court Appeal held that , “ the services in question although meant to shape the final product to the specifications of the consumer in the Netherlands , the services are directed at and consumed by the local suppliers. 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.”

44. The Respondent submitted to this Tribunal that there is no contrary ruling from the Court of Appeal on the issue in dispute. The Respondent is therefore legally bound to adhere to the decision of the High Court once it pronounces itself on a matter, and in this case the Court held that an agent could not claim a cost belonging to the principal, and thus was bound to take the position of the court in disallowing the input VAT claimed by the Appellant.

45. The Respondent therefore urged the Tribunal to dismiss the Appellant’s Appeal.

46. The Respondent has argued that the services offered by the Appellant did not fall within the definition of exported services in accordance with Section 2 of the VAT Act [2013], which defines services exported out of Kenya as,“Service exported out of Kenya means a service provided for use or consumption outside Kenya.”

47. That according to the Respondent the services provided by the Appellant are physically performed in Kenya by persons in Kenya at the time of supply, and are provided for consumption and use in Kenya and therefore did not fit the description of exported services.

48. The Respondent submitted that the services provided by the Appellant not fitting the description of exported services, and being provided and consumed in Kenya, do not qualify for VAT input refund, and ought to be subjected to VAT at the rate of 16%.

Issues For Determination 49. The Tribunal having carefully reviewed the pleadings filed by the parties, the documents produced and the submissions made by the parties’ , frames two issues for determination as follows :-i.Whether the services provided by the Appellant are exported services.ii.Whether the Appellant is entitled to claim VAT input tax refund.

i. Whether the services provided by the Appellant are exported Services. 50. The issue in dispute before the Tribunal for determination hinges on the treatment or classification of the services rendered by the Appellant to its contracting parties. Whereas the Appellant argues that its services were exported and should therefore be zero rated thereby entitling it to a VAT refund, the Respondent on the other hand has argued that the services were not exported and were offered and consumed locally in Kenya , thereby disqualifying the Appellant from eligibility for VAT input refunds as provided under Section 17 [5] of the VAT Act. Secondly, the Respondent has argued that costs incurred by the Appellant belong to its clients as principals, whom it acts for as an agent in providing the subject services, and therefore cannot validly claim the principal ‘s costs.

51. Both parties have submitted extensively on the qualifications for services to be deemed exported services and the Tribunal has taken note of the extensive submissions as outlined hereinabove.

52. The Tribunal has also taken note that the same issues were adjudicated on between the same parties in the High Court Income Tax Appeal No. E101 of 2020 Commissioner of Domestic Taxes -vs- Dutch Flowers Group Kenya Ltd, arising out of an appeal from TAT No. 9 and 18 of 2018 – Dutch Flowers Group Kenya ltd -vs- Commissioner of Domestic Taxes.In this Appeal, Justice Alfred Mabeya found that, based on the service agreements between the Appellant and FRE BV, “ ...the net effect of the clauses , spell the relationship between the two are in an agency relationship . The income of the Respondent is controlled by FRE BV, in that the two agree at the beginning of the year on a budget , on the cost for which FRE pays the same to the Respondent plus a 5% thereon as the income for the latter…….The costs of the Respondent in providing the services to FRE are those of the latter . They are paid in advance by FRE through settlement of or are reimbursed in full plus 5% as per agreement.That being the case, allowing the Respondent to claim input VAT would be to allow it to claim a cost belonging to FRE and not itself. The Appellant was right in rejecting the claim. That ground succeeds.”

53. The Judge’s finding effectively determined that the services provided by the Appellant are not exported services by the very nature of the contracts entered into by the Appellant.

54. The Tribunal has had the benefit of perusing the two contracts annexed to Appellant’s Statement of Facts, entered into between the Appellant and FRE BV, and FCH BV, and find the clauses referred to in the High Court judgement above, bear the same terms and conditions as replicated.

55. It has also been brought to the attention of this Tribunal that the Appellant has preferred an Appeal in the Court of Appeal to wit CA No. 673- of 2021 Dutch Flowers Group Kenya ltd -vs- Commissioner of Domestic Taxes. The Appellant has invited the Tribunal not to place any reliance on the High Court decision, as the Respondent did, on account of its pending appeal.

56. However, the Respondent has rightly pointed out that there is no contrary ruling from the Court of Appeal on the issue in question, neither has any order of stay forcefully issued produced before this Tribunal.

57. In this regard the Tribunal is of the view that the Respondent is legally bound to adhere to the decision of the High Court, in this case, the court has pronounced that the Appellant is an agent of a principal, and an agent could not claim costs belonging to a principal, and is therefore bound to take the position of the court in disallowing the VAT input claim made by the Appellant.

58. This Tribunal upholds the principle of stare decisis, which ensures judicial officers reach substantially the same legal conclusions that were reached in previous cases when considering similar legal issues, thus the principle ensures certainty, clarity, predictability, and legitimacy within the law. In this regard the Tribunal has also taken note of the Supreme court case cited before us, ie. Jasbir Singh Rai & 3 others -vs- Tarlochan Singh Rai & 4 others SC PET. NO. 4 of 2012 [2013] eKLR, where the court observed that;“Adherence to precedent should be the rule rather than the exception….,the labour of judges would be stretched almost to a breaking point if every past decision could be reopened in in every case , and one could not lay one’s own course of bricks on the secure foundation of the courses laid by others who had gone before him.”

59. In view of the foregoing and this Tribunal laying its own course of bricks on the decision of Justice Alfred Mabeya in HC IA E101 of 2020 between the same parties, on same facts find that the services provided by the Appellant are not exported services as they are consumed in Kenya, and that the Appellant being an agent of the contracting principals cannot claim costs belonging to the principal.

ii. Whether the Appellant is entitled to claim VAT input tax refund 60. This Tribunal having determined that the services provided by the Appellant are not exported services as they are consumed in Kenya and that the Appellant is an agent of the principals who have contracted it to wit FRE BV and FCH BV, and thereby cannot claim their costs, it then follows that the Appellant is not entitled to claim VAT input tax refund, and the Respondent validly disallowed the VAT input refund claimed by the Appellant.

Final Determination 61. The upshot of the foregoing analysis is that the Appeal is not merited, and the Tribunal accordingly proceeds to make the following Orders;a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 17th May 2022 rejecting VAT refund claim of Kshs 943,042. 00 be and is hereby upheld.c.Each party to bear its own costs.

62. It is so ordered.

DATED AND DELIVERED IN NAIROBI THIS 10TH DAY OF FEBRUARY, 2023. ROBERT M. MUTUMACHAIRPERSON.........................RODNEY O. OLUOCHMEMBER...............ELISHAH NJERUMEMBER...............DELILAH K. NGARAMEMBER...............EDWIN CHELUGETMEMBER.