[2024] KETAT 1057 (KLR)

Hapag Lloyd Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E444 of 2023) [2024] KETAT 1057 (KLR) (12 July 2024) (Judgment)

Neutral citation: [2024] KETAT 1057 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E444 of 2023

CA Muga, Chair, BK Terer, D.K Ngala, GA Kashindi & SS Ololchike, Members

July 12, 2024

Between

Hapag Lloyd Kenya Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a private limited company incorporated in Kenya and a registered taxpayer engaged as the shipping agent of Hapag-Lloyd AG, an international sea carrier and shipping company registered in Germany pursuant to an agency agreement dated 1st March 2021.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all tax revenue. Further, under Section 5(2) of the Act concerning the performance of its functions under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts 1 and 2 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 applied for a refund claim on excess input tax amounting to Kshs. 1,634,610. 00 for the periods November 2022 to February 2023 on the basis that it was offering zero-rated supplies to Hapag Lloyd AG being exported services.

4. The Respondent after considering the application dated 20th March 2023, rejected the Appellant's VAT refund claim via i-tax VAT claim rejection order dated 4th May 2023. Additionally, the Respondent sent an electronic mail to the Appellant on 15th May 2023 outlining reasons for the VAT refund rejection.

5. Subsequently, the Appellant filed an objection dated 2nd June 2023 stating that the services it offered were Business Process Outsourcing (BPO) services which were zero-rated under Second Schedule to the Value Added Tax Act, CAP 476 of Kenya’s Laws (hereinafter “VAT Act”).

6. The Respondent rendered its objection decision on 27th June 2023 affirming its decision rejecting the Appellant’s refund claims on grounds that the services provided by the Appellant did not fall under paragraph 6 of the Second schedule to the VAT Act.

7. The Appellant being dissatisfied with the Respondent's objection decision lodged an appeal at the Tribunal vide a Notice of Appeal on 25th July 2023.

The Appeal 8. The Appellant filed its undated Memorandum of Appeal and set out the following grounds of appeal:(i)The Respondent erred in law in rejecting the input VAT refund claim properly claimed by the Appellant.(ii)The Respondent erred in law and fact by misconstruing and misapprehending the shipping Agency Agreement between the Appellant and its principal, Hapag Lloyd AG, a company registered in Germany.(iii)The Respondent erred in law and fact in disregarding the clear fact that Hapag Lloyd AG (the Principal or Liner) does not reimburse Hapag Lloyd Kenya the input VAT incurred by the Appellant herein, Hapag Lloyd Kenya.(iv)The Respondent erred in law and fact in finding that Section 13(5) of the VAT Act applies to the Appellant whereas in fact the Appellant was not reimbursed by its principal (the Liner) for the shipping agency services rendered.(v)The Respondent erred in law and fact in relying on an inapplicable and unbinding precedent in arriving at the impugned decision not to refund the Appellant's input VAT refund claim.(vi)The Respondent erred in law and fact in failing to address itself to and respond to the Appellant's ground of objection that the Appellant's transaction which was in the nature of taxable services provided to the Principal, an international sea carrier, and which services were VAT zero rated under the Second Schedule to the VAT Act.(vii)Without prejudice to the foregoing, the Respondent erred in law and fact in failing to address itself to and properly characterizing the services offered by the Appellant which services were clearly exported taxable services in respect of Business Process Outsourcing.(viii)The Respondent erred in law and fact in failing to observe and be guided by the clear definition of a service exported out of Kenya as provided for in the VAT Act.

The Appellant’s Case 9. The Appellant’s case was supported by a Statement of Facts dated 7th August 2023 in which the Appellant reiterated the grounds of appeal contained in the Memorandum of Appeal and explained and argued them in detail in its submissions which it subsequently filed. In addition, the Appellant relied on the undated witness statement of Mr. Anthony Mukobe who is the Appellant’s Senior Coordinator, Business Administration which was adopted as evidence in chief by the Tribunal on 27th March 2024.

10. The Appellant’s witness stated that for the period from March 2021 to the present, the Appellant entered into an agency agreement with Hapag-Lloyd AG to provide shipping agency services. That under the terms of the agency agreement, the Appellant was mandated to carry out services on behalf of Hapag-Lloyd AG and on its own behalf, as an entrepreneur, was to be compensated for the agency services rendered to Hapag-Lloyd AG.

11. The witness further stated that the Appellant's remuneration, payable by Hapag-Lloyd AG, was arrived at by calculating the net expenses incurred by the Appellant less third-party revenue, net of taxes, and that the Appellant's business model was not unique. This business model was used by almost all shipping agents who rendered services to companies providing international sea transportation to different ports worldwide.

12. The witness averred that following the Appellant's remuneration and business model, the Appellant incurred additional expenses in furtherance of its business, including legal fees, rent, stationery purchases, security, printing, electricity, among others. He noted that these additional expenses were subject to VAT in accordance with the VAT Act.

13. It was the witness testimony that the nature of the Appellant's business and the additional expenditure that the Appellant incurred in the furtherance of its business qualified for input VAT claims and refunds under the VAT Act. The Appellant accordingly applied for VAT refunds under Section 17 of the Act. That was why the Appellant's services for the periods November 2022-February 2023 were under zero rated services by virtue of the fact that they were exported taxable services consumed in Germany by Hapag-Lloyd A.G.

14. It was the witness assertion that for the period November 2022 - February 2023, the Appellant's services fell under Paragraph 23 of the Second Schedule to the VAT Act which provided for exported taxable services in respect of Business Processing Operations which were zero rated services.

15. The Appellant’s witness averred that during the claim periods, the Appellant's services not only qualified as exportation of taxable services but also supplies of taxable services to an international sea carrier on international voyage i.e. Hapag-Lloyd AG, and that these services were VAT zero rated under paragraph 6 of the Second Schedule to the VAT Act.

16. The witness asserted that it was on the basis of the Appellant's business model, the agency agreement and the prevailing VAT Act provisions that the Appellant, having incurred input VAT in relation to the expenses it incurs in furtherance of its business, applied for input VAT refunds under Section 17(5) of the VAT Act.

17. The witness averred that the Appellant declared the income earned under this business model from its agency services to Hapag-Lloyd AG and settled the resultant income tax liability with the Respondent. Moreover, that since the Respondent did not dispute this very same business model for income tax purposes, it therefore had no cogent basis to deny the same business model for VAT purposes.

18. The witness further stated that the rejection of the Appellant's input VAT refund claims gave rise to this dispute. He further stated that the rejection of the VAT input refund claims was unfounded, as the Appellant clearly and properly incurred input VAT in its supply of zero-rated services to Hapag-Lloyd AG, and its input VAT refund credit claims were legitimate and should be refunded by the Respondent.

19. The Appellant made the following prayers to the Tribunal:a.That the Respondent’s objection decision dated 27th June 2023 be declared null and void and be set aside in its entirety;b.That the Respondent do forthwith process and pay the Appellant's VAT refund claims of KES 1,634,610. 00 for the period November 2022 to February 2023;c.That the Appeal be allowed with costs to the Appellant; andd.Any other remedies that the Tribunal deems just and reasonable.

The Respondent’s Case 20. The Respondent has set out its case in the Statement of Facts dated 4th September 2023 and filed on 7th September 2023.

21. The Respondent averred that the Appellant's contract with Hapag Lloyd AG outlined an agency principal relationship and therefore the input was not claimable as per section 13(5) of the VAT Act as expenses incurred were reimbursed by the principal.

22. The Respondent stated that it was only the principal who may deduct input VAT made to an agent on behalf of the principal. The Respondent drew a comparison between the instant appeal and a dispute previously heard and determined by the High Court in Nairobi High Court Income Tax Appeal No. E101 of 2020, Commissioner of Domestic Taxes Versus Dutch Flowers Group Kenya Limited which was similarly upheld by the Tribunal in Nairobi TAT Appeal No. 838 of 202, Dutch Flowers Kenya Limited Vs Commissioner of Domestic Taxes. In that case, it was held that the Taxpayer, being an agent of the contracting principals, cannot claim costs (input VAT) belonging to the principals.

23. In response to ground no. (iii)of the Memorandum of Appeal, the Respondent stated that upon review of the Agency Agreement signed on 15th September 2021 between the Appellant and Hapag-Lloyd AG, Hamburg for provision of Agency services, it was found that the Appellant incurred expenses on behalf and in the name of Hapag-Lloyd AG and therefore the Appellant was reimbursed all costs incurred plus a 3% mark up.

24. The Respondent in response to ground 4 sought to rely on Section 13 (5) of the VAT Act which provides as follows:“In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client: Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value."

25. The Respondent therefore averred that the services offered by the Appellant were purely shipping management services to its parent holding company Hapag-Lloyd AG where the former was reimbursed a cost-plus markup.

26. The Respondent further stated that its decision was based on Section 13(5) of the VAT Act and that the precedence relied upon from the Tribunal was reiterating the said section. It therefore reiterated that their objection decision was legally and procedurally sound.

27. It was the Respondent's position that they arrived at the decision with careful adherence to the pertinent statutes, demonstrating that the decision was well-informed by the relevant legal provisions.

28. The Respondent stated that the decision to arrive at the confirmed assessments was justified and premised on sound legal basis as provided for under Section 17 on the VAT Act.

29. The Respondent further stated that in order to claim input VAT, the Appellant and any other taxpayer was bound by and required to comply with Section 17 of the VAT Act which provides as follows:“17(1) Subject to the provisions of this section and the regulations, input tax on a taxable supply to, or importation made by, a registered person may, at the end of the tax period in which the supply or importation occurred, be deducted by the registered person, subject to the exceptions provided under this section, from the tax payable by the person on supplies by him in that tax period, but only to the extent that the supply or importation was acquired to make taxable supplies."

30. The Respondent averred that since the Appellant is an agent of Hapag Lloyd AG , Hamburg, then all sales and inputs belong to Hapag Lloyd Hapag Lloyd AG, Hamburg (principal) and not to the Appellant. Therefore, it was only the principal who could deduct Input VAT made to an agent on behalf of the principal. That the Appellant supplied a service which was remunerated vide a commission from the principal who controls all aspects of operation.

31. The Respondent stated that since the services offered by the Appellant were purely shipping management services to its parent holding company, Hapag Lloyd AG, Hamburg where the Appellant was reimbursed a cost-plus markup, the Appellant was not entitled to deduct Input VAT on expenses incurred.

32. The Respondent reiterated that as per the agency-principal relationship between Lloyd AG and the Appellant, the principal reimburses the Appellant on all net expenses incurred during the refund periods including VAT excluding Income tax only.

33. It was the Respondent's position that the input VAT claim was legally and procedurally rejected, and the assessment legally and procedurally issued and that the Appellant's objection was accordingly measured and objection decision made as per the law.

34. The Respondent made the following prayers to the Tribunal:a.That it upholds the Respondent’s objection decision dated 27th June 2023 as proper in law and in conformity with the provisions of the VAT Act and the Tax Procedures Act, CAP 469B of Kenya’s Laws (hereinafter “TPA”).b.That it dismisses this Appeal with costs to the Respondent as the same is devoid any merit.

Parties’ Submissions 35. The Respondent’s written submissions were filed on 11th April 2024 contrary to the directions of the Tribunal issued on 27th March 2024. The Tribunal with therefore proceed to consider the Appellant’s submission dated 10th April 2024 and filed on even date wherein it identified four issues for determination;

(i) Whether the Appellant’s services to Hapag Lloyd AG qualified as zero-rated services by dint of being exportation of taxable services in respect of BPO. 36. On this issue, the Appellant submitted that it acted as a shipping agent of Hapag-Lloyd AG and ensured the continuous and efficient operation of Hapag-Lloyd AG's services to Hapag-Lloyd AG's clients in Kenya and the wider East Africa.

37. Some of the services performed by the Appellant include supervising all activities of the line within the territory, marketing and sales services, organizing and loading/discharging activities for vessels of the line and attending to ship husbandry services to ensure berthing of the vessels on arrival at Mombasa port.

38. The Appellant averred that its services were used and consumed by the principal in Germany, and therefore qualified as exported services pursuant to Section 2 of the VAT Act.

39. The Appellant submitted that the Respondent was fully aware of the functions performed and the nature of the exported services provided by the Appellant, yet it still rejected the Appellant's input VAT claims on the grounds that the services provided were not considered as Business Process Outsourcing services (hereinafter “BPO”).

40. The Appellant averred that at all the material times, though the VAT Act, referred to zero rating on exportation of taxable services in respect of BPO the VAT Act does not define what a BPO is and in the absence of a definition, the Appellant submitted that the common understanding and trade usage of a BPO ought to apply. In this regard, the Appellant referred to the Black's Law Dictionary, 21st Edition which defines "an outsourcing agreement" as an agreement "in which the service provider promises to provide necessary services esp. data processing and Information management, using its own staff and equipment, usually at its own facilities".

41. The Appellant asserted that the reasonable tests that ought to apply in determining whether a service was a BPO and therefore zero-rated for purposes of paragraph 23 of the Second Schedule to the VAT Act were as follows:

a.Is the service one that the recipient would have performed for themselves internally? 42. The Appellant submitted that the Principal, Hapag-Lloyd AG in Germany would, in the absence of the Appellant in Kenya, have had to perform these services itself, or at the very least, engage an independent third party to provide these shipping agency services. Performing these services itself is commercially impractical, especially given that the principal's vessels call in more than 100 countries and ports around the world.

(b)Is the outsourced service critical to the functioning of the business or delivery of the services? 43. The Appellant again submitted that without the support services provided by the Appellant or an independent third-party shipping agent, the principal would not deliver on its contractual obligations of shipping and delivering containerized goods to its global clients. Thus, for example, without the coordination of arrival of ships, unloading and loading of cargo and marshalling of containers Hapag-Lloyd AG would not deliver its international sea freight service to its clients; and

(c)Is the BPO service used and consumed outside Kenya? 44. It was the Appellant’s submission that the shipping agency service was used, consumed and for the economic benefit of the Principal, Hapag-Lloyd AG in Germany and thus accordingly, this shipping agency service was a service exported out of Kenya as provided for under Section 2(1) of the VAT Act.

45. The Appellant further urged the Tribunal to take judicial notice and be guided by the definition of a BPO under the Special Economic Zones Act, CAP 517A of Kenya’s Laws (hereinafter “SEZA”), which defines BPO as follows:“the provision of outsourcing services to business for specific business functions or processes such as back-office support services in human resource, finance, accounting, procurement amongst other services."

46. The Appellant averred that it provides such back-office support services including finance, reconciliation of client receivables for freight and shipping costs as well as managing the arrival, discharge and loading of the principal's vessels, among others.

47. The Appellant also drew the attention of the Tribunal to the Sector Plan for Business Process Outsourcing and IT-Enabled Services (Bpo/ltes) 2018-2022 which provides that BPO refer to “the contracting of non-primary activities to a third-party provider and is part of a cost saving measure for any organization.”

48. The Appellant asserted that the services it provided in Kenya, were services which the principal would have either performed itself or, by virtue of the Principal not being present in Kenya, would have contracted independent third parties to provide these services. The Appellant cited the provisions of Paragraph 23 of the Second Schedule to the VAT Act, as it was then, which provided for exportation of taxable services in respect of BPO as being zero rated services.

49. The Appellant averred that it was entitled to the full VAT refund claim as it clearly provided zero-rated services which were the exportation of taxable services in respect of Business Process Outsourcing services.

50. It was the Appellant’s submission that the decision by the Respondent to reject the Appellant's VAT refund claim even though the Appellant's services were exported services in respect of BPO was illegitimate, arbitrary and a clear abuse of power. To support this aversion the Appellant relied on the High Court's interpretation outlined in Commissioner of Domestic Taxes v Total Touch Cargo Holland HC ML ITA No. 17 of 2013 [2018] eKLR in which the court stated as follows:“for a service to be deemed an "exported service", it matters not whether that service was performed in Kenya or outside Kenya. The determining factor is the location where that service is to be finally used or consumed.”

51. Additionally, the Appellant also relied on the decision of the Court in Panalpina Airflo Limited v Commissioner of Domestic Taxes (2019) eKLR whereby the Court relied on the destination principle provided under the OECD guidelines to find that an exported service under Section 2 of the VAT Act, was determined by where the service is finally consumed and/or used.

52. The Appellant highlighted that the Respondent's Objection Decision and Statement of Facts did not address this ground raised in the Appellant's objection. Drawing on the maxim of 'qui tacet consentire videtur' - 'He who is silent, when he ought to have spoken and was able to, is taken to agree,' the Appellant interpreted this silence as consent and agreement from the Respondent that the Appellant's exported services, concerning BPO, are zero-rated.

(ii)Whether the Appellant provided zero rated services to Hapag Lloyd AG in the form of supply of taxable services to international sea or air carriers on international voyage or flight. 53. On this issue, the Appellant asserted that it provided and still provides taxable services to an international sea carrier, that is Hapag-Lloyd AG, whose services are zero rated services as provided by Paragraph 6 of the Second Schedule of the VAT Act which zero rates "the supply of taxable services to international sea or air carriers on international voyage or flight."

54. The Appellant submitted that the nature of business of Hapag-Lloyd AG, the principal, was an international sea carrier providing international shipping and container transportation to clients in various countries around the world.

55. The Appellant, therefore acting in its capacity as an agent provides various services to Hapag-Lloyd AG as required by the Agency Agreement. Some of these functions included booking cargo and issuing bills of lading, discharging vessels, dispatching ships, managing equipment and container depots for sea transportation, all for the benefit of Hapag Lloyd AG.

56. The Appellant relied on the High Court's interpretation of services provided to international carriers in Commissioner of Domestic Taxes v Fortune Container Depot (2020) and Commissioner of Domestic Taxes v Dodwell EA Limited (2020).

57. The Appellant thus submitted that by virtue of providing services to the principal, it was entitled to claim its Input VAT, as its services were zero-rated according to Paragraph 6 of the Second Schedule to the VAT Act.

58. The Appellant therefore averred that on this basis it was improper and illegal for the Respondent to reject the Appellant's input VAT claim as the claim was backed by proper legal basis in law and originated from zero-rated supplies.

(iii)Whether the Appellant VAT claim was restricted by Section 13 (5) of the VAT Act. 59. On this issue, the Appellant contended that it was inappropriate for the Respondent to rely on Section 13(5) of the VAT Act in its Objection Decision as a basis for rejecting the Appellant’s input VAT claims, as Section 13(5) does not apply to the Appellant. The wording in Section 13(5) provides "where the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value."

60. The Appellant averred that the existence of the Agency relationship between the Appellant and its Principal was not challenged by the Respondent. That however, the Respondent misconstrued the nature of the Agency relationship by relating the agency transactions to that envisioned in Section 13(5) of VAT Act.

61. The Appellant further averred that Section 13(5) of the VAT Act outlined the exclusion from a taxable supply, the disbursements made to a third party acting as an agent of a client. In the material case, the disbursement referred to would be any amounts paid to agents of clients who use Hapag-Lloyd AG's services.

62. The Appellant provided an example of a disbursement under Section 13(5) of the VAT Act, wherein an advocate acts for a person purchasing land, and the advocate settles the stamp duty on behalf of the client. When the advocate recovers the amount of stamp duty paid, it would be classified as a disbursement, or an amount expended on behalf of the client and now being recovered.

63. It was the Appellant’s averment that this position was different from the instant case where the issue at hand relates to taxable supplies made by Hapag-Lloyd Kenya, which was acting as an agent of the Supplier i.e. Hapag-Lloyd AG, and not acting as an agent of the clients/customers. The Appellant further explained that it did not make any payments on behalf of the principal to be recovered from the principal. Thus, for example, the Appellant incurred rental and operational expenses for it to render services to the principal and since this expense was incurred in furtherance of its business, the Appellant having incurred VAT was entitled to claim input VAT on such expenses.

64. The Appellant averred that it was therefore improper, irregular, and misconceived for the Respondent to rely on Section 13(5) in rejecting the Appellant's Input VAT refund claims.

65. It was the Appellant’s submission that the Respondent did not point to any legal authority to displace the ordinary principal-agent relationship of the Appellant and Hapag Lloyd AG, the principal and the Respondent did not also give any supporting evidence to support the assertion that the Appellant's transaction fell within the ambit of Section 13(5) of the VAT Act, in which case the Appellant would have been an agent of the customers/clients.

(iv) Whether the Appellant was entitled to its VAT refunds under the VAT Act. 66. On this issue, the Appellant submitted that the Respondent's decision to reject Input VAT refund claims was illegal as it was based on a wrong foundation of law.

67. The Appellant contended that the Respondent rejected the Appellant's input VAT refund claim on the basis that the Appellant was reimbursed on its expenses and therefore it was not entitled to the input VAT refunds.

68. The Appellant averred that the Respondent misdirected itself from the agency agreement availed to it. Accordingly, the Appellant asserted that it was remunerated by the principal for the services it provided to Hapag Lloyd AG on a cost-plus mark-up model, and it was based on this remuneration that the Appellant paid its Corporate Income tax.

69. The Appellant drew the attention of the Tribunal to the fact that the Respondent neither contested the income declared by the Appellant nor the corporation tax paid on this income. Therefore, the Appellant found it mischievous and callous for the Respondent to collect and retain the income tax paid on the Appellant's income from its support services, while simultaneously arguing that the Appellant only receives a reimbursement from the principal. A mere reimbursement of costs would not generate taxable income, and hence, no corporation tax liability would arise.

70. The Appellant submitted that the Respondent's assertions were incorrect and erroneous as it only invoiced the Principal, Hapag-Lloyd AG for the costs and not the recoverable input VAT as evidenced by the sample invoices annexed to its Statement of Facts.

71. The Appellant averred that the expenses it incurred were in the course of it furthering its own business and that being a commercial undertaking assumed risks in the course of its business. It was on this basis that the Appellant therefore charged the principal and was paid through a remuneration for the services it offered much like any other independent shipping agent would charge an international sea carrier for shipping agency services rendered.

72. The Appellant highlighted that the Respondent in its Statement of Facts, paragraph 13 cites Commissioner of Domestic Services v Dutch Flower Group Kenya (2021) as a basis for rejecting the VAT refund claim, to which the Appellant avers that the facts of the case presented a different scenario from the facts of the case at hand as it relates to a transaction where the Dutch Flower Group Kenya's costs were those of the Principal and no costs are incurred by the Respondent therein for its own business benefit.

73. In conclusion the Appellant averred that the facts of this case are pari materia to the case of Commissioner of Domestic Taxes v W. E. C. Lines (K) Limited (2022) in which the Court, in recognizing the role played by the shipping agent, ruled that the respondent therein was entitled to VAT refunds.

74. The Appellant therefore urged this Tribunal to set aside the entire Respondent's Objection decision as it was unfounded in law and in fact and not backed by any legal or factual findings.

75. The Respondent filed its submissions outside the timelines directed by the Tribunal and the same were expunged from the record.

Issues For Determination 76. The Tribunal having carefully considered the parties’ pleadings, documentation and the Respondent’s submissions notes that a single issue calls for its determination as follows:

SUBDIVISION - Whether the Respondent was justified in rejecting the Appellant’s input VAT refund application.

ANalysis And Findings 77. Having identified the issue for determination, the Tribunal will proceed to analyze it as hereinunder;

Whether the Respondent was justified in rejecting the Appellant’s input VAT refund application 78. The Tribunal notes that it is not in dispute that the Appellant is the agent of Hapag Llyod AG. The same is conceded by the Appellant in paragraph 18 of its Statement of Facts. The Tribunal has perused the Agency Agreement adduced by the Appellant and which was the basis for the Respondent’s rejection decision. The Agreement stipulates that Hapag Lloyd AG appointed the Appellant as its shipping agent and inland transport operator in the territory. In the said Agreement the Appellant signified its willingness to serve as the Hapag Llyod AG’s agent and to act in the name and for the account of Hapag Llyod AG.

79. The reasons for the rejection of the refund application and which are contained in the Respondent’s email dated 15th May 2023 are that the “the contract outlines an agency principal relationship and the input is not claimable as per section 13 (5) of the VAT Act and expenses incurred are reimbursed by the principal.”

80. The Tribunal notes that Hapag Llyod AG controlled the actions of the Appellant since the Agreement at Clause 1. 4 prohibited the Appellant from rendering services equal or comparable to the services rendered to Hapag Llyod AG without prior approval in writing. The main bone of contention in this case arises from the fact that under the Agreement, the Line reimburses the Appellant net costs incurred by it, meaning that the Appellant is not reimbursed the VAT costs incurred.

81. The Tribunal notes the submissions of the Appellant that the commercial and legal rationale for excluding input VAT incurred by the Appellant from the remuneration base is that the Appellant would and is entitled to a VAT refund claim from the Respondent having supplied exported services to the principal.

82. The Tribunal notes that the Appellant sought to distinguish the Tribunal case of Cofftea Agencies Limited Vs The Commissioner Of Domestic Taxes, where the Tribunal faced with a similar agent-principal relationship dispute, and submitted that the decision on Cofftea was based on the clearly distinguishable fact that Cofftea was not entitled to VAT refunds as the payments for the tea purchased at the auction were made by the principal through the Appellant in that case as an agent and not made by the agent in their own capacity.

83. The Tribunal further notes that the Appellant’s submissions that Cofftea position is entirely different and distinguished from the basis of the Appellant’s input VAT refund claim as the Appellant pays its various suppliers for its expenses that the Appellant incurs in the course of providing agency services to the Liner and that these costs are incurred by the Appellant in its own business and in furtherance of its business.

84. The Tribunal also notes the reasons the Respondent gave for why it rejected the refund application and which are contained in the Respondent’s electronic mail dated 15th May 2023 and this was as follows:“the contract outlines an agency principal relationship and the input is not claimable as per section 13 (5) of the VAT Act and expenses incurred are reimbursed by the principal.”

85. The Tribunal has reviewed Exhibit 1A which is annexed to the Agreement and which outlines the agreement regarding the remuneration of the Appellant. The same provides that the agency remuneration would recover the "Net Expenses" of the Appellant arising in connection with services provided to Hapag Llyod AG under the Agreement plus a mark-up of 3%, minus third-party revenue net of taxes.

86. The Tribunal also notes that under the remuneration clause, the Appellant is reimbursed all expenses necessary to provide the agency services to the Line. The list is non-exhaustive and includes wages and salaries, social security, pensions and other related expenses, depreciation, amortization, office and administration expenses and other non-income taxes, less recoveries of those expenses or other income, according to local GAAP.

87. The Tribunal is guided by the decision of the High Court in the case of Commissioner of Domestic Services vs Dutch Flower Group Kenya (Income Tax Appeal E101 of 2020[2021] KEHC 23(KLR)(Commercial and Tax)(10 September 2021)(Judgment)-Income Tax Appeal E101 of 2020 where Justice Mabeya held as follows:“…the net effect of the clauses spells the relationship between the two in an agency relationship. The income of the Respondent is controlled by FRE B.V 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 income for the latter. 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.”

88. The Tribunal is of the view that the Agreement provided that the Appellant would be remunerated for all costs incurred in acting for Hapag Llyod AG within Kenya and other jurisdictions covered under the Agreement. This was due to the fact that the Appellant was undertaking work to protect Hapag Llyod AG interests and functions performed and as mentioned under the Clauses 2,3,4 and 5 of the Agreement.

89. In the circumstances of this case, it is the finding of the Tribunal that the VAT cost ought to have been borne by the person who incurred the cost of the service rendered or the goods purchased in this case Hapag Llyod AG. The Appellant could not claim to have incurred the cost, as it was the principal who bore or ought to have shouldered the VAT cost.

90. The Tribunal has perused and reviewed Exhibit A, annexed to the Agreement and finds that the definition of net expenses includes “other non-income taxes”. This supports the basis for the Tribunal finding that it was Hapag Llyod AG that ought to have borne the VAT cost since the Appellant was at liberty to load VAT on the costs incurred by it in rendering the services under the Agreement. Having established that the Appellant acted as agent of its Hapag Llyod AG, the claim for input VAT would therefore belong to the Line, Hapag Llyod AG.

91. Consequently, the Tribunal finds that the Respondent was justified in rejecting the Appellant’s input VAT refund application.

Final Decision 91. The upshot of the foregoing is that the Appeal herein lacks merit 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 27th June 2023 be and is hereby upheld.c.Each party to bear its own cost.

92. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 12TH DAY OF JULY, 2024CHRISTINE A. MUGACHAIRMANBONIFACE K. TERER DELILAH K. NGALAMEMBER MEMBERGEORGE KASHINDI OLOLCHIKE S. SPENCERMEMBER MEMBER