[2025] KETAT 215 (KLR)

Hapag-Lloyd (Kenya) Limited v Commissioner of Domestic Taxes (Tax Appeal E1198 of 2024) [2025] KETAT 215 (KLR) (Commercial and Tax) (25 April 2025) (Judgment)

Neutral citation: [2025] KETAT 215 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E1198 of 2024

CA Muga, Chair, BK Terer, EN Njeru, E Ng'ang'a & SS Ololchike, Members

April 25, 2025

Between

Hapag-Lloyd (Kenya) Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant, a company incorporated in Kenya is the shipping agent of Hapag Lloyd AG (hereinafter “the Principal”), a non-resident shipping line registered in Germany pursuant to an Agency Agreement (hereinafter “the Agreement”) concluded between the Appellant and its shipping agent which became effective on 1st March 2021.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, CAP 469 of Kenya’s Laws (hereinafter “the Act”). 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 with respect to 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 Part 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 lodged an application refund VAT claim pursuant to Section 17(5) of VAT Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) on i-Tax for the periods August, 2023 to May, 2024 lodged on 10th June, 2024 amounting to Kshs. 4,154,544. 00. The Respondent reviewed the claim and rejected it on 6th September, 2024.

4. Being dissatisfied with the Respondent's refund decision, the Appellant lodged a notice of appeal dated 4th October 2024 on even date. Following an application for review of an earlier Judgement delivered on 4th April, 2025, the Tribunal established that the Notice of Appeal was filed on manually on time on 4th October, 2024 and not on 18th October, 2024 as earlier presumed by the said Judgement. The Judgment delivered on 4th April, 2025 has been set aside and the matter referred back for determination on its merits which determination the Tribunal will proceed to render herein.

The Appeal 5. The Appeal was predicated on the following grounds as outlined in the Memorandum of Appeal dated and filed on 18th October 2024:i.The Respondent erred in holding that the Appellant did not incur the input VAT costs despite having acknowledged that the Appellant purchases taxable supplies in its letter of 17th September 2024. ii.The Respondent erred in law and in fact in finding that the Appellant who had duly incurred and borne VAT costs, was not entitled to claim input tax or a refund contrary to Section 17 of the Value Added Tax Act, CAP 476 of the Laws of Kenya (hereinafter “VAT Act”) and regulation 8 of the VAT Regulations 2017 which entitles any person who meets the requirements to claim.iii.The Respondent erred in law in failing to treat the Appellant and its principal as distinct entities for the purposes of services supplied by the Appellant to its Principal under the Agreement contrary to the definition of a person under the provisions of the VAT Act.

Appellant’s Case 6. The Appellant’s statement of facts were dated and filed on 18th October, 2024 wherein the Appellant sated as follows:

7. The Appellant stated that as a shipping agent, it is responsible for supporting the Principal with respect to the services as set out at article 2 of the Agreement which outlines the duties customarily performed by a shipping agent representing a container carrier and by an inland transport operator. The Appellant provides these services in its capacity as an agent of the Principal. The Appellant further stated as follows:

8. That in the course of its business and to sustain its existence as a business entity and the nature of its business as a shipping agent notwithstanding, the Appellant incurs expenses unique to its business and other expenses similar to those that any typical entity would incur in its business operations. Such expenses traverse across overhead expenses, hiring suppliers and purchasing goods in order to sustain its business.

9. That the expenses incurred by it in the course of its business are taxable supplies which are subject to Value Added Tax (hereinafter “VAT”) and that it therefore incurs VAT as part of its costs in the performance of its services. It was not in dispute that the Appellant's services are taxable services pursuant to the provisions of the VAT Act.

10. That its services to the Principal are consumed by the Principal outside Kenya and qualify as exported services pursuant to the provisions of the VAT Act. Accordingly, such services qualify as zero-rated supplies under paragraph 23 of Part A of the Second Schedule to the VAT Act. The services are also zero-rated supplies under paragraph 6 of Part A of the Second Schedule to the VAT Act on account of them being taxable supplies rendered to an international sea carrier.

11. That having regard to the nature of its services and through an application dated 10th June 2024, the Appellant applied in the prescribed manner to the respondent for a refund of Kshs 4,154,544. 00 being excess input tax resulting from zero rated supplies for the period 1st August 2023 to 31st May 2024. The application was made pursuant to section 17(5)(a) of the VAT Act.

12. That by a VAT claim rejection order (the refund decision) made on 6th September 2024, the Respondent disallowed the Appellant's refund application on the ground that the VAT costs informing the application for refund ought to have been borne by the Principal since it was the person that incurred the cost of the services rendered or the goods purchased. The respondent further stated that since the Appellant was not the bearer of the cost, it could not claim a refund.

13. The Appellant further analysed the grounds raised in its Memorandum of Appeal as set out below:

The Respondent erred in holding that the Appellant did not incur the input VAT costs despite having acknowledged that the Appellant purchases taxable supplies in its letter of 17th September 2024. 14. In a letter dated 17th September 2024, the Respondent informed the Appellant that it was eligible to be appointed as a Withholding VAT Tax Agent pursuant to the provisions of Section 42A of the Tax Procedures Act, CAP 469B of the Laws of Kenya (hereinafter “TPA”). In that letter, the Respondent sought to designate the appellant as a Withholding VAT Tax Agent noting that the obligations of such an appointment would include the following:“Withholding two per cent (2%) of taxable value indicated on a tax invoice upon purchasing taxable supplies at the time of paying a registered supplier".

15. It was clearly evident that in its letter of 17th September 2024 the Respondent unequivocally admitted that the Appellant purchases taxable supplies and consequently incurs input tax this was why the Respondent intended to appoint the Appellant as a WH VAT agent. It is now inconceivable for the respondent to ironically assert that the Appellant was not the bearer of the VAT costs.

16. The Appellant noted that the Respondent's refund decision rejecting the Appellant's VAT refund application and the Respondent's letter of 17th September 2024 were issued 10 days apart.

17. At the very least, the Appellant stated, the Respondent, as a public body vested with the mandate to administer and collect taxes has a duty to promote certainty in the administration of tax laws and guarantee certainty of outcomes in the discharge of its mandate. The Respondent's refund decision dated 6th September 2024 read together with its letter of 17th September 2024 defies this significant tax principle.

II. The Respondent erred in law and in fact in finding that the Appellant who had duly incurred and borne VAT costs is, not entitled to claim input tax or a refund contrary to section 17 of the VAT Act and regulation 8 of the Value Added Tax Regulations 2017. 18. The Appellant stated that in the course of its business it incurs expenses and other expenses similar to those that any typical entity would incur in its business operations and that such expenses traverse across overhead expenses, hiring suppliers and purchasing goods in order to sustain the Appellant's business. The expenses incurred by the Appellant in the course of its business are taxable supplies which are subject to VAT. The Appellant therefore incurs VAT as part of its costs in the performance of its services.

19. It was undisputed that the Appellant provides taxable services to its Principal, an international sea carrier resident in Germany. It was also not in dispute that these services are VAT zero rated as provided for in paragraphs 6 and 23 of Part A of the Second Schedule to the VAT Act which provides as follows:“Where the following supplies, excluding hotel accommodation, restaurant or entertainment services where applicable, take place in the course of a registered person's business, they shall be zero rated in accordance with the provisions of section 7- 1. The supply of taxable services to international sea or air carriers on international voyage or flight...

23. The exportation of taxable services.”

20. Having supplied VAT zero rated services to its Principal, the Appellant was entitled to a VAT refund having met the requirements set out under section 17(5)(a) of the VAT Act as read with regulation 8 of the Value Added Tax (VAT) Regulations, 2017.

21. Section 17(1) and 17(5)(a) of the VAT Act provide as follows:“Credit for input tax against output tax 17. (1)Subject to the provisions of this Act 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 in a return for the period, 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'(5)Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period: Provided that any such excess shall be paid to the registered person by the Commissioner where -(a)such excess arises from making zero rated supplies; or….”

22. Regulation 8(1) of the VAT Regulations, 2017 provides as follows:“A registered person who makes taxable supplies at both the general rate and zero rate, shall only be entitled to a refund arising from making zero rated supplies.”

23. The Appellant meets the requirements set out both in Section 17 of the VAT Act and regulation 8 of the Value Added Tax Regulations 2017 and is entitled to a refund. That this was because of the following reasons:a.The Appellant is the registered person making the taxable supply to the Principal.b.The Appellant is the registered person incurring input tax on the taxable supply. The Appellant is charged input tax when it incurs business expenses, hires suppliers and purchases goods in order to render the services to the Principal.c.These supplies in (b) above are only incurred to make the taxable supply of rendering services to the Principal.

24. The Respondent's singular contention is that the Appellant did not incur the VAT costs of the goods. The Respondent has not provided any reasons for this contention. In fact, as demonstrated in Ground 1 above, the Respondent has acknowledged that the bearer of the VAT costs of services is the Appellant.

Ill. The Respondent erred in law in failing to treat the Appellant and its principal as distinct entities for the purposes of services supplied by the appellant to its principal under the Agreement, contrary to the definition of a person under the provisions of the VAT Act. 25. In its refund decision, the Respondent stated as follows:“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 Lloyd AG.”

26. In making this determination, the Respondent erred in law in failing to treat the Appellant and its principal as distinct entities for the purposes of services supplied by the Appellant to its principal under the Agreement, contrary to the definition of a person under the provisions of the VAT Act and established practice. Section 2 provides as follows:“person" means an individual, company, partnership, association of persons, trust, estate, the Government, a foreign government, or a political subdivision of the Government or foreign government;"registered person" means any person registered under section 34, but does not include an export processing zone enterprise or a special economic zone"

27. The Appellant is a registered person pursuant to the provisions Section 34 of the VAT Act, its Principal is not. Further, under the Agreement , the Appellant is compensated by way of a mark-up on all net expenses incurred. These expenses include salaries and wages, rent, security and other business expenses.

28. The remuneration is provided for under exhibit A of the Agency Agreement which provides as follows:“Agency remuneration shall be calculated and payable by the Line to the Agent for the services rendered under the agency agreement as follows:The agency remuneration shall recover the net expenses of the agent arising in connection with services provided to the Line under this agreement plus a mark-up of 2. 0 percent (the mark-up) minus third party revenue net of taxes.”

29. The Appellant stated its compensation was net of taxes and therefore excluded the VAT costs. The commercial and legal rationale for excluding input VAT incurred by the Appellant from the remuneration base is that the Appellant would otherwise be entitled to a VAT refund claim from the Respondent.

30. For these reasons, it was clear to the Appellant that it bears the VAT costs in question, as far as the Agreement between the Appellant and its Principal is concerned.

31. The Appellant sought the following reliefs from the Tribunal:a.That the Appeal be hereby allowed.b.The VAT Claim rejection order dated 6th September 2024 be set aside.c.Costs of this Appeal be awarded to the Appellant.

Respondent’s Case 32. The Respondent replied to the Appeal through its statement of facts dated 21st November, 2024 and filed on 22nd November, 2024.

33. The Respondent stated that upon a review of the Appellant’s claim it noted that there was an Agreement signed on 15th September, 2021 between the Appellant and its Principal.

34. It was a term of the aforementioned contract that the Appellant incurs expenses on behalf and in the name of the Principal and is reimbursed all costs incurred plus a markup of 3. 0 per cent (the mark-up) minus third party revenue net of taxes.

35. The Respondent pleaded that pursuant to the terms of the Agreement it concluded that the Appellant is an agent of the Principal and thus all sales and inputs belong to the Principal and not which the parent company caters for pursuant to the definition of expenses in the Agreement.

36. The Respondent rejected the Appellant’s claim on 6th September, 2024 on the basis 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 the Appellant.

37. It was the Respondent’s case that the Appellant's contract with the Principal outlined an agency principal relationship and therefore the input was not claimable as provided for under Section 13(5) of the VAT Act since expenses incurred were reimbursed by the Principal.

38. The Respondent pleaded that it is only the principal who may deduct input VAT made to an agent on behalf of the Principal.

39. The Respondent pleaded that the services offered by the Appellant were purely shipping management services to the Principal where the former was reimbursed all costs plus a markup of 3. 0 per cent (the mark- up) minus third party revenue net of taxes.

40. The Respondent pleaded that its decision was based on Section 13(5) of the VAT Act and the decision to reject the Appellant’s claim was sound. The decision to reject the Claim was justified and premised on sound legal basis as provided for under Section 17 on the VAT Act.

41. The Respondent pleaded 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."

42. The Respondent stated that since the Appellant is an agent of the Principal then all sales and inputs belong to the Principal and not to the Appellant. It is only the Principal who could deduct Input VAT made to an agent on behalf of the Principal. The Appellant only supplied a service which was remunerated vide a commission from the Principal who controls all aspects of operation.

43. The Respondent stated that since the services offered by the Appellant were purely shipping management services to its parent holding company, the Principal, where the Appellant was reimbursed all costs incurred plus a markup of 3. 0 per cent minus third party revenue net of taxes, the Appellant was not entitled to deduct Input VAT on expenses incurred.

44. The Respondent stated that pursuant to the the agency-principal relationship between the Principal and the Appellant, the principal reimburses the Appellant on all net expenses incurred during the refund periods including VAT excluding income tax only.

45. Paragraph 1 of the Agreement provides as follows:“Net expenses” are defined as all expenses necessary to provide the agency services to the Line, comprising(non-exhaustive list) wages and salaries including social security, pensions and other related expenses, depreciation, amortisation, office and administration expenses, other non-income taxes, less recoveries of those expenses or other income, according to local GAAP(Generally Accepted Accounting Principles)…”

46. The Respondent stated that the Black’s Law Dictionary, 10th Edition defines an agency as follows:“A relationship that arises when one person (principal) manifests assent to another (an agent) that the agent will act on the principal’s behalf subject to the principal’s control, and the agent manifests assent or otherwise consents to do so...”

47. Section 13 (5) of the VAT Act 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.”

48. The Respondent stated that the finding of the Tribunal in the case of Cofftea Agencies vs The Commissioner of Domestic Taxes (Tax Appeals Tribunal, Tax Appeal No. 74 of 2016). The Tribunal held that payments made by an agent on behalf of the principal should be precluded from deducting input VAT from the subject payments.

49. The definition of agency was further set out in the case of Lucy Nungari Ngigi & 132 Others V National Bank of Kenya & 150 Others [2016] EKLR which cited the book of Bowstead and Reynolds on Agency, Seventeenth Edition, Sweet & Maxwell which set out as follows:“…a relationship which exists between two persons, one whom expressly or impliedly consents that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly consents so to act or so acts.”

50. In the case Commissioner of Domestic Services V Dutch Flower Group Kenya (Income Tax Appeal E101 of 2020) [2021] KLR The High Court had the following to say on what exactly was the nature of the relationship between the Appellant and the Principal:“9. It is clear that what creates an agency relationship is the degree of control that the principal retains in what the agent does on its behalf. In this regard, where parties in a relationship envisage and agree that one will retain some control over another in the latter’s conduct or execution of some duty, an agency relationship is created. It matters not what the parties call that relationship. It is the legal effect that arise from their relationship that will count.

51. It was thus clear from the aforesaid clause, that the Appellant exercises a considerable degree of control over the Appellant pursuant to the Agency Agreement. The Principal “the line” retains control over the Appellant in the nature of business the two are engaged on and that is why the Principal “the line” has the right under the agreement ‘to issue instructions for the effecting of accounting and settlement”, also,” the “Agent’ will follow all applicable national and international laws and guidelines and instructions of the Line, whether written or electronically transmitted and not limited to the Line’s code of ethics….” It is unheard of where an independent entity will have to issue instructions to another entity so as to give effect and guidance on how services are offered.

52. The Appellant faulted the Respondent for holding that it did not incur VAT costs despite having acknowledged that the Appellant purchases taxable supplies in its letter of 17th September, 2024. The Respondent in response pleaded that an appointment as a Withholding Agent means that the appointee has the ability to withhold and remit taxes. It does not demonstrate that there is purchase of taxable supplies; which need to be demonstrated by way of evidence of any purchases.

53. The Respondent further stated that being appointed a Withholding VAT agent does not mean inputs are allowable. The Appellant is not the bearer of VAT input, only the bearer of the VAT input can claim a deduction of input. The right party should claim VAT input.

54. The Respondent stated that the Appellant is an agent of the Principal and thus all sales and inputs belong to the Principal and not the Appellant and therefore, it was only the Principal who may deduct Input VAT made to an agent on behalf of the Principal.

55. The Respondent stated that the Appellant supplies a service which is remunerated vide a commission from the principal and the principal controls all aspects of operation.

56. The Respondent pleads that the services offered by the Appellant are purely shipping management services to its parent holding company, the Principal where the Appellant is reimbursed a cost-plus markup and therefore is not entitled to deduct Input VAT on expenses incurred.

57. The Respondent pleads in conclusion that input is borne by the person who has incurred the cost. In this case, the Appellant cannot claim to have incurred the cost; the cost has been incurred by the Principal who reimburses the Appellant, and even adds a mark-up on the cost when reimbursing.

58. The Respondent in conclusion stated that the averments of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by it were unfounded.

59. The Respondent stated that its conduct was in adherence to the law and the resulted rejection of input VAT refund claim could not be faulted.

60. The Respondent prayed that the Appeal be dismissed with costs as it was devoid of merit and further that its rejection of refund claim be upheld.

Parties’ Written Submissions 61. The Appellant’s written submissions dated 6th March, 2025 and flied on even date were adopted by the Tribunal during its hearing on 20th March, 2025 as were the Respondent’s submissions dated and filed on 6th March, 2025.

62. The Appellant submitted that the Respondent flouted the rules of procedure in the filing and service of its statement of facts contrary to the following provisions of Section 15 (1) and 15 (3) of the Tax Appeals Tribunal Act, CAP 469A of the Laws of Kenya (hereinafter “TATA”):“(1)The Commissioner shall, within thirty days after being served with a copy of an appeal to the Tribunal, submit to the Tribunal enough copies as may be advised by the Tribunal, of-(a)a statement of facts including the reasons for the tax decision; and(b)any other document which may be necessary for review of the decision by the Tribunal.(3)The Commissioner shall serve the appellant with a copy of the statement of facts and other documents required under this section within two working days from the date of submission to the Tribunal. "The Commissioner shall serve the appellant with a copy of the statement of facts and other documents required under this section within two working days from the date of submission to the Tribunal. "

63. The Respondent having been served with the Appeal on 18th October 2024 was required to file its statement of facts in response to the Appeal on or before 18th November 2024. Given the date of its statement of facts, it is evident that the earliest the Respondent could have filed its statement of facts is 21st November 2024 which is after the statutory timeline for filing its statement of facts had lapsed.

64. The Respondent having filed its Statement of Facts was then required to serve its Statement of Facts upon the Appellant within two working days pursuant to the provisions of Section 15 (3) of the TATA. The Respondent was directed by the Tribunal on 12th February 2025 to serve its Statement of Facts by close of business on 12th February 2025. The Respondent has to date not served its Statement of Facts on the Appellant despite the statutory timeline contemplated by Section 15 (3) of the TATA and the Tribunal's directions.

65. The Appellant submitted that it was worth noting that while Section 15 (4) of the TATA provides an avenue for the Respondent to remedy the defects in the filing and service of its Statement of Facts, the Respondent did not take any steps to remedy the defects, and continued to be in breach of the mandatory rules of procedures. In Kissi Petroleum Products Limited v Kobil Petroleum Ltd & 2 other {2006[ KECA 291 (KLR), the Court of Appeal stated as follows with regard to rules of procedure:“Rules of procedure are meant to be obeyed as without them. there would be no route to reach justice. In any case, for a court of law to ignore glaring aspects of what would very well amount to attempts to mislead the court by an officer of the court, would mean encouraging a state of lawlessness where the more non candid a party is the more successful in the court he becomes. "

66. The Appellant submitted further that in the case Nicholas Kiptoo Arap Korir Salat v Independent Electoral a11d Boundaries Commission & 7 others [2013/KECA 113 (KLR) it was held as follows:“This Court, indeed all courts, must never provide succour and cover to parties who exhibit scant respect for rules and timelines. Those rules and timelines serve to make the process of judicial adjudication and determination fair, just, certain and even-handed. Courts cannot aid in the bending or circumventing of rules and a shifting of goal posts for, while it may seem to aid one side, it unfairly harms the innocent party who strives to abide by the rules. I apprehend that it is in the even-handed and dispassionate application of rules that courts give assurance that there is clear method in the manner in which things are done so that outcomes can be anticipated with a measure of confidence, certainty and clarity where issues of rules and their application are concerned. "

67. The Appellant submitted that in the circumstances, the Tribunal ought to disregard the Respondent's Statement of Facts given that it was not properly before the Tribunal and no effort had been made to rectify the defects in the filing and service of the Statement of Facts.

68. In its submissions, the Appellant identified three issues for determination which it proceeded to analyse as follows:

I. Whether the Respondent erred in holding that the Appellant did not incur the input VAT costs despite having acknowledged that the Appellant purchases taxable supplies in its letter of 17th September 2024. 69. The Respondent, through its letter dated 17th September 2024, informed the Appellant that it was eligible to be appointed as a Withholding Value Added Tax Agent pursuant to the provisions of section 42A of the TPA and subject to the Respondent's guidelines for appointed VAT Withholding Agents. The Appellant stated that a cursory look at the Respondent's VAT WH Agents guidelines indicates that the Respondent may appoint a person who purchases taxable supplies as WH VAT Agent. More particularly, the guidelines stated as follows:“··section 2A of the Tax Procedures Act, 2015 gives powers to the Commissioner to appoint a person to withhold two per cent of the taxable value on purchasing taxable supplies at the time of paying for the supplies and remit the same directly to the Commissioner. "

70. The Appellant stated that by dint of the Respondent's letter of 17th September 2024 and its VAT WH Agents guidelines, the Respondent unequivocally admitted that the Appellant purchases taxable supplies and consequently incurs input tax. It is on this basis that Respondent intended to appoint the Appellant as a WH VAT Agent.

71. The Appellant submitted that the Respondent's refund decision of 6th September 2024, issued just ten (10) days earlier, was contradictory as it implied that the Appellant who has already been identified as a purchaser of taxable supplies is not the bearer of VAT costs.

72. This conflict between the Respondent's refund decision of 6th September 2024 and its letter dated 17th September 2024, fundamentally undermines the respondent's duty to promote certainty in the administration of tax laws and its responsibility to guarantee certainty of outcomes in the discharge of its mandate.

73. This duty arose directly from Sessional Paper No.02 of 2023 (National Tax Policy) which states the following at clause 4. 3(1):“In order to progressively increase tax compliance levels and reduce tax disputes between the revenue administrator and the taxpayers, the Government will:(a).....(l)Enhance framework for a tax audit process, in consultation with stakeholders, to ensure transparency, certainty and predictability of the audit process ….”

74. This therefore obligated the Respondent to implement its decisions in a manner that promotes certainty and predictability.

75. The Tribunal in Mount Kenya Breweries Limited v Commissioner of lnvestigation & Enforcement (Tax Appeal Elll of 2023) (20241 KETAT 746 (KLR) (24 May 2024) (Judgment) emphasized the principle of certainty in tax administration, holding the following at paragraph 81:“The Tribunal notes that the canon of certainty is the hall mark of a good tax administration or policy and a long-held practice and principle.”

76. The Respondent's duty to exercise clarity and certainty was further emphasized in Republic v Commissioner of Domestic Taxes Large Tax Payer's Office Ex-parte Barclays Bank of Kenya Ltd /2022/ KEHC 1988 (KLR) where the High Court held as follows at paragraph 39:'”he respondent is obligated by law to state with clarity its claim and state how the transaction falls within the terms of the statute. The respondent cannot exercise its duty like a trailer in the deep seas expecting all the fish by casting its net wide. The respondent’s decision in this respect falls below this standard and the transaction caught by the decision cannot be said to fall within the statutory definition of the tax”

77. It was therefore evident to the Appellant that the Respondent, as the authority responsible for tax administration, was duty-bound to uphold the principle of certainty in the execution of its mandate. Consequently, the inconsistencies arising from the refund decision dated 6th September 2024 and the Respondent's letter dated 17th September 2024 as well as the VAT WH Agents guidelines could not be sustained in light of this fundamental principle. On this basis alone, the appeal ought to be allowed and the respondent's decision of 6th September 2024 ought to be set aside in its entirety

II. Whether the Respondent erred in law and in fact in finding that the Appellant, who had duly incurred and borne VAT costs, is not entitled to claim input tax or a refund contrary to section 17 of the VAT Act and regulation 8 of the Value Added Tax Regulations 2017 78. The Appellant submitted that in the course of its business it incurs expenses unique to its business which traverse across overhead expenses, hiring suppliers and purchasing goods in order to sustain its business. These expenses are taxable supplies which are subject to VAT. The Appellant submitted that the Respondent had admitted that it incurs VAT costs in the course of its business.

79. The Appellant further submitted that it provides taxable supplies to its Principal, an international sea carrier as evidenced by Article 2 of the Agency Agreement. The services rendered by the Appellant to its Principal are zero-rated for VAT purposes under paragraphs 6 and 23 of Part A of the Second Schedule of the VAT Act which provide as follows:“Where the .following supplies, excluding hotel accommodation, restaurant or entertainment services where applicable, take place in the course of a registered person’s business, they shall be zero rated in accordance with the provisions of section 7- 6. The supply of taxable services to international sea or air carriers on international voyage or flight.”

23. The exportation of taxable services.”

80. In light of the foregoing, the Appellant was entitled to make an application for refund which it did through its application dated 10th June 2024. The application was based on section 17(1) and 17(5) of the VAT Act which provides as follows:“7(1) Subject to the provisions of this Act 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 in a return for the period, 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.17(5) Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period: Provided that any such excess shall be paid to the registered person by the Commissioner where-(a)such excess arises from making zero rated supplies; or….”

81. These provisions are to be read in conjunction with regulation 8(1) of the VAT Regulations, 2017 which provides as follows:“A registered person who makes taxable supplies both the general rate and zero rate, shall only be entitled to a refund arising from making zero rated supplies.”

82. The Appellant submitted that its operations are contemplated by the provisions of the law cited above. As such, it properly made its application dated 10th June 2024, seeking a refund of Kshs. 4,154,544. 00 being excess input tax resulting from zero rated supplies made to the Principal for the period of 1st August 2023 to 31st May 2024. The Respondent's refund decision in the circumstances failed to consider the clear and irrefutable fact that the Appellant's services to the Principal are zero-rated supplies to which a refund claim can be founded.

83. The High Court has had a chance to pronounce itself on the validity of refund claims following a zero-rated supply in Commissioner o(Domestic Taxes v WEC Lines (K) Limited (Tax Appeal E084 0(2020) {2022] KEHC 57 (KLR) (Commercial and Tax) (31 January 2022) (Judgment) at paragraph 19:“Section 2 of the VAT Act, 2013 defines "services exported out of Kenya" as 'a service provided for use or consumption outside Kenya' and as the court in Commissioner of Domestic Taxes v Total Touch Cargo Holland HCML ITA No. 17 of2013 [2018} eKLR held, 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. WEC BV a company incorporated in the Netherlands stands to benefit from the services offered by the respondent as stated above and it follows that the services offered by the respondent to them were exported services that were not consumed in Kenya and thus were zero-rated for purposes of VAT'”

84. It then followed, according to the Appellant, that the Respondent was obligated to process the refund claim in its favour as it had properly lodged its refund application on I0th June 2024 for exported services offered to the Principal, which is a company registered in Germany and benefits from services provided by the Appellant.

III. Whether the Respondent erred in law in failing to treat the Appellant and its Principal as distinct entities for the purposes of services supplied by the Appellant to it under the Agreement, contrary to the definition of a person under the provisions of the VAT Act. 85. The Appellant is a company incorporated in Kenya and carries on business as a shipping agent. The Appellant is registered for VAT pursuant to Section 34 of the VAT Act. The Principal on the other hand is a non-resident shipping line registered in Germany and operates worldwide liner services and provides worldwide door to door multi­ modal transportation.

86. The Respondent's refund decision indicated that the VAT incurred by the Appellant ought to have been borne by the Principal. The Respondent, through its refund rejection further alleges that the Principal is in fact the person who incurred the cost of the services rendered or the goods purchased instead of the Appellant consequently rejecting the Appellant's refund claim.

87. Evidently, the Appellant submitted, that proposition sidestepped the clear provisions of sections 17(1) and 17(5) of the VAT Act which provide that only a registered person can seek a VAT refund as the registered person is the entity that incurs the VAT. Further, section 2 of the VAT Act provides as follows:''person" means an individual, company, partnership, association of persons, trust, estate, the Government, a foreign government, or a political subdivision of the Government or foreign government."registered person" means any person registered under section 34, but does not include an export processing zone enterprise or a special economic zone.”'

88. The Appellant being the registered person under section 34 of the VAT Act is entitled to claim input pursuant to Section 17 of the VAT Act and in the circumstance seek a refund of input VAT incurred for exported services rendered to the non-resident Principal.

89. The Respondent's refund decision also fails to consider that the Appellant and its Principal are distinct entities that operate distinctly. This distinctiveness is reflected from the fact that the entities incur expenses individually and therefore the treatment of VAT should reflect this separate and distinct operation.

90. The Tribunal is invited to consider the position espoused in Tolley’s Value Added Tax 1989-90, Robert Wareham and Nicholas Bowen. It is proposed from a reading at page 13 that:“An agents services to his principal are taxable in the normal way and, if registered, he must account for the tax in the same way as any other taxable person. The charge for these services must always be treated separately for VAT purposes, from charges to the principal for other supplies. The principal, if he is a taxable person, may treat the tax on commission etc. as input tax.”

91. The implication of the above is that the Appellant and the Principal must be treated as separate entities each accountable for its own VAT. The Respondent's refund decision did not take into account this distinction. The Respondent in its statement of facts dated 21st November 2024 averred that the Appellant's refund claim should be disallowed on the basis of the provisions of section 13(5) of the VAT Act. However, Section 13(5 of the VAT Act provides as follows:“In calculating the value of any services for the purposes of subsection(]), 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.”

92. The Tribunal has made it clear that the intention of section 13(5) of the VAT Act is to determine the value of a taxable supply. This was held in Stratostaff E.A. Limited Commissioner of Domestic Taxes (Tribunal Appeal £267 of 2024) (20251 KETAT 58 (KLR) (24 January 2025) (Judgment) :“The Tribunals view is that the Appellants billing of the salaries, wages and other employment costs of the outsourced temporary staff as disbursements, thus presenting the amounts without charging VAT, is in line with Section 13(5) of the VAT Act as the provision expressly excludes disbursements from the taxable value of the supply of services.”

93. The Appellant submitted that the Tribunal proceeded to state the following under paragraph 110 of the said case:“When faced with a similar situation regarding contracts which set out the terms of payment which separated the employee emoluments (and related taxes) from the fee earned by the Appellant for the various categories of services the Tribunal stated as follows in Preferred Personnel vs Commissioner of Domestic Taxes IJ49 of 2022: ''As a result of the foregoing, the Tribunal. Finds that the payments made to the Appellant for reimbursement of employee-related costs are not vatable as they constitute reimbursements of employee salaries and emoluments and therefore not chargeable to VAT Consequently, the Tribunal finds that the Respondent was not justified in raising the VAT assessment on the total pay received by the Appellant from its clients as only VAT on the service element was taxable and this was accounted for by the Appellant. '

94. It was therefore evident that the purpose of section 13(5) of the VAT Act is to determine the value of a taxable supply while the questions before the Tribunal are not meant to determine the value of a taxable supply but about whether the Appellant incurred expenses which amount to taxable supplies. Consequently, Section 13(5) of the VAT Act has no bearing on the determination of the present appeal.

95. In its submissions, the Respondent identified two issues for determination which it proceeded to analyse as outlined hereinunder:

Who is entitled to deduct Input VAT 96. The Respondent reviewed the refund claim and noted that there was an Agency Agreement signed on 15th September, 2021 between the Appellant and the Principal where in a term of the Agreement provided as follows:“Remuneration paragraph 1 of Contract Agreement, Hapag-lloyd Kenya Limited incurs expenses on behalf and in the name of Hapag-Lloyd Aktiengesellschaft, Hamburg and is reimbursed all costs incurred plus a markup of 3. 0 per cent (the mark-up) minus third party revenue net of taxes.”

97. Pursuant to the terms of the Agreement, the Respondent submitted that it concluded that the Appellant is an agent of the Principal and thus all its sales and inputs belong to the Principal and not the Appellant which the parent company caters for defined in the Agreement. The Principal exercises a considerable degree of control over the Appellant as outlined in the Agreement.

98. The Respondent submitted that the Agreement outlines an agency principal relationship and therefore the input is not claimable as per section 13(5) of the VAT Act and expenses incurred are reimbursed by the principal. It was the Respondent’s submission that, it is only the principal who may deduct input VAT made to an agent on behalf of the principal.

99. The issue in the instant appeal before the Tribunal was similar to the dispute 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, the learned judge in arriving at his decision reviewed the service agreements between the Appellant and stated the following at paragraph 16 of the judgment:“… I firmly hold that notwithstanding that the agreement does not expressly state that the Respondent is a commission agent of FRE, 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 the FRE in that the two agree at the beginning of the year on a budget on the costs for which FRE pays the same to the Respondent plus 5% thereon as the income for the latter.”

100. The Respondent submitted that the Court went on to conclude as follows:“…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 declining the claim…”

101. The Respondent further submitted that this Tribunal in a judgment delivered on 18th November 2022 in Nairobi TAT Appeal No 838 of 202 Dutch Flowers Kenya Limited Vs Commissioner of Domestic Taxes adopted the Superior Court’s determination and held that the Taxpayer being an agent of the contracting principals cannot claim costs (input VAT) belonging to the principals and this position was also applied in the case of Tax Appeals Tribunal No. E217 of 2023 Hapag-Lloyd Kenya Limited versus Commissioner of Domestic Taxes.

102. The Respondent submitted that it had noted that the Appellant and its principal are distinct entities taking into account the roles each party undertakes. The Respondent indicated in its decision that “the claim was rejected as 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 the Principal. “Kindly note that since you are not the beared[sic] of the cost, you cannot claim a refund for the VAT cost.”

103. The Respondent submitted that the Appellant’s averment that it failed to treat the parties as distinct were misleading and concluded its analysis of this issue for determination that the Appellant is not the right party to claim for input tax or a refund.

Whether the Appellant is entitled to a refund and /or to claim input VAT 104. The Respondent submitted that in order to claim input VAT, the Appellant and any other taxpayer is bound by and is 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.”

105. The Principal “the line” retains control over the Appellant in the nature of business the two are engaged on and that is why the Principal “the line” has the right under the agreement ‘to issue instructions for the effecting of accounting and settlement”, also,” the “Agent’ will follow all applicable national and international laws and guidelines and instructions of the Line, whether written or electronically transmitted and not limited to the Line’s code of ethics….” It is unheard of where an independent entity will have to issue instructions to another entity so as to give effect and guidance on how services are offered.

106. The Appellant is an agent of the Principal and thus all sales and inputs belong to the Principal and not the Appellant and therefore, it is only the Principal who may deduct Input VAT made to an agent on behalf of the Principal.

107. The Respondent submitted that the Appellant supplies a service which is remunerated vide a commission from the Principal and the Principal controls all aspects of operation. The services offered by the Appellant are purely shipping management services to its parent holding company, the Principal where the Appellant is reimbursed a cost-plus markup and therefore is not entitled to deduct Input VAT on expenses incurred.

108. In conclusion, input is borne by the person who has incurred the cost. In this case, the Appellant cannot claim to have incurred the cost; the Principal who reimburses the Appellant, and even adds a mark-up on the cost when reimbursing has incurred the cost.

109. The Appellant averred, faulting the Respondent for holding that it did not incur VAT costs despite having acknowledged that the Appellant purchases taxable supplies in its letter of 17th September, 2024. The Respondent submitted that an appointment as a Withholding Agent pursuant to Section 42A of the TPA means that the appointee has the ability to withhold and remit taxes. It does not demonstrate that there is purchase of taxable supplies; which need to be demonstrated by way of evidence of any purchases.

110. The Respondent further submitted that being appointed a Withholding VAT agent does not mean inputs are allowable. The Appellant is not the bearer of VAT input, only the bearer of the VAT input can claim a deduction of input. The right party should claim VAT input.

111. It was the Respondent’s submission and 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 in accordance with the law.

Issues For Determination 112. The Tribunal noted the Appellant’s submissions that the Respondent filed its Statement of Facts 3 days late without the leave of the Tribunal first having been obtained. The Tribunal further notes that the Respondent failed to comply with its directions on 12th February,2025 by failing to serve on the Appellant its statement of facts. The Tribunal has not therefore considered the Respondent’s statement of facts nor its submissions.

113. The Tribunal having carefully considered the Appellant’s pleadings, documentation dduced as evidence and its written submissions has identified a single issue for determination.Whether the Respondent’s refund rejection decision dated 6th September, 2024 was justified.

Analysis And Findings 114. The Tribunal having established the issue for determination will proceed to analyze it as follows:

Whether the Respondent’s refund rejection decision dated 6th September, 2024 was justified. 115. This dispute arose when the Respondent rejected the Appellant’s refund tax claim through a rejection notice issued on 6th September, 2024. The basis of the Appeal was first that the Respondent held that the Appellant did not incur input VAT costs whilst it did, second that the Respondent erred in its decision that the Appellant was not entitled to claim input tax or a refund and it further erred in failing to treat the Appellant and its Principal as distinct entities.

116. The Tribunal has decided on the very issue before it in the following cases: Cofftea Agencies vs The Commissioner of Domestic Taxes (Tax Appeals Tribunal, Tax Appeal No. 74 of 2016)

Hapag LloydKenya Limited vs Commissioner of Domestic Taxes [TAT Appeal No. E444 of 2023] ;

Hapag Lloyd Kenya Limitedvs Commissioner of Domestic Taxes [Tax Appeal No. E952 of 2023];

Pollen Limited vs. Commissioner of Domestic Taxes [TAT Appeal No. 311 of 2022]

Pollen Limited vs. Commissioner of Domestic Taxes [TAT Appeal No. 693 of 2022]

117. The Tribunal further notes the following High Court holding by Justice Mabeya in the case of Commissioner of Domestic Taxes -vs- Dutch Flowers Group Kenya Ltd, Income Tax Appeal No. E101 of 2020 arising from an appeal from Dutch Flowers Group Kenya ltd -vs- Commissioner of Domestic Taxes [TAT No. 9 and 18 of 2018] :“Accordingly, the Tribunal erred in holding that there was no agency relationship between the two. The costs of the respondent in providing the services to FRE are those of the latter. They are either paid in advance by FRE through settlement of the provisional invoices or they are reimbursed in full plus 5% as per the agreement. 18. That being the case, allowing the respondent to claim in put VAT would be to allow it to claim a cost belonging FRE and not itself. The appellant was right in declining the claim. That ground succeeds.”

118. The Tribunal notes that the Appellant adduced in evidence an Agency Agreement which proves that it is an agent acting on behalf of a Principal. Upon a review of the Agreement, the Tribunal notes that pursuant to Clause 1. 4 of the Agency Agreement, the Appellant agreed not to render services equal or comparable to the services it renders to its Principal without first having obtained the approval of its Principal. This is proof of the level of control that the Principal has over it.

119. The Tribunal further notes that the provisions of Article 4 of the Agreement require the Agent[the Appellant] to use its best efforts to collect money due to the Principal including starting legal proceedings against any customer or third parties owing money to the Principal. The Tribunal notes that this action can only be taken with prior approval of the Principal. Article 8 of the Agreement provides for the remuneration of the Appellant [the Agent]. Further, Exhibit A provides for details on the remuneration of the Agent, wherein the term “Net expenses” includes ‘other non-income taxes’.

120. The fact that the Appellant was appointed as a Value Added Tax Withholding Agent on 17th September, 2024 means that it is required to withhold 2% of the tax value indicated on a tax invoice and to remit VAT withheld to the Commisisoner. The appointment of the Appellant as a Value Added Tax Withholding Agent did not create a right for it to claim input taxes on behalf of the Principal.

121. The Tribunal notes that in the case Cofftea Agencies vs The Commissioner of Domestic Taxes (Tax Appeals Tribunal, Tax Appeal No. 74 of 2016) it held as follows:“Based on the foregoing, the Tribunal is of the .view that the taxable supply is deemed to be made to the Principal [emphasis ours]and 'not the agent and that though a supplier may issue a tax invoice to the agent as if such supply was made to the agent in those circumstances, it is only the Principal who may deduct input VAT on the supply made to an agent on behalf of the Principal. The Tribunal's considered view is that there must be the existence of a. direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to an entitlement to deduct input VAT and further that the right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring such goods or services was a componentt of the cost of the output transactions that gave rise to the right to deduct the related input VAT.”“The Appellant having made the payments only as an agent, the Tribunal is of the respectful view that it is the Principal who made the payments and thus the Appellant should be precluded from deducting input VAT from the subject payments for the reason that the Appellant made such payments strictly as an agent of the Principal.”

122. The Tribunal sees no reason to depart from its findings in Cofftea Agencies vs The Commissioner of Domestic Taxes (Tax Appeals Tribunal, Tax Appeal No. 74 of 2016) or the decision of the High Court that it is the Principal who can make an input VAT claim in such an arrangement. It is by upholding the principles outlined in the cases listed at paragraph 118, that the principle of certainty of tax is upheld.

123. The consequence of these findings is a holding by the Tribunal that the Respondent’s refund rejection decision dated 6th September, 2024 was justified.

Final Decision 124. The upshot of the foregoing is that the Appeal herein fails and accordingly the Tribunal proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The refund rejection decision dated 6th September, 2024 be and is hereby upheld.c.Each party to bear its own costs.

125. It is so Ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 25TH DAY OF APRIL, 2025. CHRISTINE A. MUGA - CHAIRPERSONBONIFACE K. TERER - MEMBERELISHAH N. NJERU - MEMBEREUNICE N. NG’ANG’A - MEMBEROLOLCHIKE S. SPENCER - MEMBER