[2023] KETAT 555 (KLR)

Inchape Shipping Services Kenya Limited v Commissioner Legal Services and Board Coordination (Tax Appeal 1004 of 2022) [2023] KETAT 555 (KLR) (13 October 2023) (Judgment)

Neutral citation: [2023] KETAT 555 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1004 of 2022

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka, E Ng'ang'a & B Gitari, Members

October 13, 2023

Between

Inchape Shipping Services Kenya Limited

Appellant

and

Commissioner Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a company incorporated and licensed in Kenya. Its principal business activity is shipping agency services

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 revenue.

3. The Appellant made application for refund of excess input VAT amounting to Kshs 35,846,663. 00 on various dates in January 2016, February 2016 and March 2016 on the basis that its services were zero rated.

4. The Respondent issued credit adjustment vouchers dated 20th April 2022 and forwarded to the Appellant via email on 26th May 2022.

5. The Appellant lodged an objection on 21st June 2022 and subsequently the Respondent issued its objection decision vide a letter dated 1st August 2022.

6. Dissatisfied with the Respondent’s objection decision the Appellant filed a Notice of Appeal on 30th August 2022 and this Appeal on 14th August 2022.

The Appeal 7. The Appeal herein is premised on the following grounds;a.That the Respondent erred in law and fact by claiming that the services offered by the Appellant do not qualify as zero rated.b.That the Respondent failed to take into consideration all the information provided by the Appellant while arriving at the objection decision.c.That the Respondent erred in law and fact by rejecting the refund claims lodged and issuing credit adjustment vouchers totalling to Kshs 35,845,663. 00

Appellant’s Case 8. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal;a.The Appellant’s Statement of Facts dated 13th September, 2022 and filed on 14th September 2022 together with the documents attached thereto.b.The Appellant’s written submissions dated 19th April 2023 and filed on 24th April 2023.

9. The Appellant stated that in the period January 2016, February 2016 and March 2016, it made applications to the Kenya Revenue Authority for Value Added Tax (VAT) refunds of excess input VAT amounting to Kshs. 35,846,663. 00 on the basis that its services were zero rated since they fall under Paragraph 6 of Part A of the Second Schedule to the Value Added Tax Act i.e. the supply of taxable services to international sea or air carriers on international voyage or flight.

10. That the Respondent issued credit adjustment vouchers on 26 May 2022 of Kshs 35,846,663. 00 rejecting the entire refund claim lodged by the Appellant. The credit adjustment vouchers reinstated the Appellant to its initial VAT credit position before the refund.

11. The Appellant stated that it filed an objection on 21st June 2022 based on the following grounds:a.That the services offered by the company qualify as zero-rated supplies;b.That the VAT refund claims were lodged correctly and in a timely manner as provided for in the VAT Act; andc.That the basis for the rejection of the VAT refund claims is incorrect.

12. That the Respondent issued an objection decision vide a letter dated 1st August 2022 and reaffirmed its earlier decision that the Appellant's services were not zero rated and hence the Appellant was not entitled to a refund of the excess input VAT.

13. It averred that the Respondent stated that the reasons for the objection decision were that the services provided by the Appellant do not qualify as zero-rated supplies under the VAT Act, 2013.

14. That the Appellant is a limited liability company with its registered place of business at Mombasa and its principal business activity is that of a shipping agent to international shipping lines such as Shipner Shipping and Agencies PVT Ltd, M&J shipping Line etc.

15. That some of the services it offers to these international shipping lines include; issuance and signing of bill of lading .and other similar documents to shippers for and on behalf of the principal, arranging for the delivery of cargo to consignees, soliciting and securing of cargo in accordance with the principal standing, surveying (load and joint),CFS handing fees , providing medical including doctor fees, embalming of and repatriation of deceased cabin crews and food supplies to the cabin crew while on Kenyan waters.

16. That Section 2 of the VAT Act, 2013, defines 'services exported out of Kenya' as 'a service provided for use or consumption outside Kenya.' That this definition has been subject to interpretation in various court cases

17. That in Commissioner of Domestic Taxes v Total Touch Cargo Holland HC ML ITA No. 17 of 2013 [20181 eKLR it was held that for a service to be deemed an exported service, it matters not whether that service was performed in Kenya or outside Kenya. That further in Commissioner of Domestic Taxes v Panalpina Airflo Limited ITA No. 5 of 2018 (20191 eKLR, it was held that logistical services provided to specifically facilitate exports whose consumption and final beneficiary is outside Kenya qualify as exported services, That the determining factor is the location where that service is to be finally used or consumed. Therefore, an exported service will be one which is provided for use or consumption outside Kenya.

18. The Appellant stated that the place of the performance of the service is therefore immaterial and what is to be considered is when the use or consumption of the service takes place.

19. That the services provided by the Appellant (services to the ship crew such as medical, documentation and survey) are enjoyed by the international voyagers (the 'principals') who are not in Kenya.

20. That Paragraph 6 of the Second Schedule to the VAT Act, provides that the supply of taxable services to international sea or air carriers on international voyage or flight is zero rated.

21. It averred that in WEC Lines Kenya Limited Vs Commissioner of Domestic Taxes Appeal Number 137 of 2018, it was held that the services offered by WEC Lines Kenya to its principal were zero rated. Although the importers could have benefited from the activities of the Appellant, WEC Lines did not provide services to the importers. T h a t t he same position was upheld by the High Court, in Tax Appeal E084 of 2020 between the Commissioner of Domestic taxes vs W.E.C Lines (K) Limited.

22. That the Appellant offers its services to international shippers while on the Kenyan waters. The services such as boat hires, surveys, medical assistance are consumed by the crew while on the voyages. That these services without a shadow of doubt are zero rated under the VAT Act, 2013.

23. That the Appellant having made zero rated supplies in the period between 2015 to 2019 applied for a refund as guided by Section 17(5) of the VAT Act, 2013.

24. The refunds were lodged as required under the VAT Act, and the requisite documents (auditors' certificates, VAT4 returns) submitted and subsequently acknowledged as received by the Respondent.

25. That the Respondent in its objection decision relied on the Inchape Shipping Services (k) Limited v Commissioner of Domestic Taxes Tax Appeals Tribunal No 143 of 2015 where it was held that the Appellant’s services were subject to VAT at 16%.

26. The Appellant submitted that it appealed the said decision to the High Court which overturned the Tax Appeals Tribunal decision and held that these services were zero rated.

27. That this position has been reiterated in several other cases including, Dodwell and Company (EA) Limited Vs Commissioner of Domestic Taxes Appeal Number 63 of 2017 where it was held that these services offered were zero rated.

28. It averred that it would be prejudicial to the Appellant to reject the VAT refund claim of Kshs 35,846,663. 00 based on an overturned decision and disregarding the numerous precedence set by the various courts which have determined that the services offered by the Appellant qualify as zero rated supplies.

Appellant’s Prayers 29. The Appellant prayed that the Tribunal allows the Appeal and;i.Upholds that the Respondent should process the VAT refunds lodged.ii.Sets aside and annuls the Objection Decision by the Respondent.iii.Awards the costs to this Appeal to the Appellant.iv.Any other remedies that the Tribunal deems just and reasonable.

Respondents Case 30. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal;a.The Respondent’s Statement of Facts filed on 11th October 2022 together with the documents attached thereto.b.The Respondent’s written submissions dated 7th March 2023 and filed on 8th March, 2023.

31. The Respondent stated that for the periods January 2016 to March 2016, the Appellant made applications for VAT refunds of excess input VAT amounting to Kshs. 35,846,663. 00 via iTax on the basis that its services were zero rated as they fall under Paragraph 6 of Part A of the Second Schedule to the VAT Act.

32. That the Respondent considered the application for VAT refund claims and rejected the taxpayer’s application and issued Credit Adjustment Vouchers dated 20th April 2022.

33. That the Appellant filed a late manual notice of objection dated 21st June 2022 and received on 22nd June 2022. That it issued an Objection Decision dated 1st August 2022.

34. That Section 5(2) of the Kenya Revenue Authority Act obligates the Respondent to enforce the written provisions of the Law. To support its argument, the Respondent relied on Section 5(2) of the KRA Act, Section 5(1) (b) and 5(2) of the VAT Act and Section 2 of the VAT Act.

35. The Respondent reiterated that all taxable supplies under the Act are Vatable at the general rate of 16% except where expressly provided. That the services are supplied by the Appellant who is located in Kenya to Kenyan Consumers hence the services are not export supplies.

36. That services rendered by the Appellant are subject to VAT at the general rate of 16% as was provided by Regulation 20 (1) (a) of the VAT Act Cap 476.

37. That from the above regulation, the Appellants delivery order fees and bill of lading fees are subject to VAT at the general rate of 16%. The Appellant is located in Kenya and the importers who consume the services are located in Kenya. Therefore, there is no exported services as both the supplier and consumer of those services are located in Kenya.

38. That the Appellant does not meet the requirement for a VAT refund as provided under Section 11(2) of the repealed VAT Act Cap 476 because these charges are subject to VAT at the standard rate of 16%.

39. The Respondent stated that on 7th December 2016, in the case of Inchcape Shipping Services Kenya Limited vs Commissioner, DTD, the TAT upheld that VAT on the Bill of Lading and Delivery Order is collectable from the Appellant ISSK and not from the importers.

40. The Respondent submitted that on 27th March 2018, in the case of W.E.C lines (Kenya) Limited vs Commissioner Domestic Taxes Department, the TAT upheld that delivery order fees are subject to VAT as they do not constitute freight costs.

41. That the High Court issued a judgement in favor of the taxpayer in the case of Commissioner of Domestic Taxes vs. WEC Lines (k) Limited delivered on 31st January 2022 where the Judge held that WEC Lines (K) Limited made zero rated supplies.

42. That the Respondent appealed the decision in a case of Commissioner of Domestic Taxes vs. WEC Lines (k) Limited delivered on 31st January 2022 to the Court of Appeal on the basis that the Respondent considers that post landing services offered by WEC (K) Limited do not constitute an export service under the VAT Act, 2013.

43. That in view of the pending case at Court of Appeal, the Respondent's position is that the services offered by the Appellant do not qualify as exported services and are subject to VAT at the general rate of 16%.

44. That further, the Appellant has a remedy of a tax refund from the Respondent if the Court of Appeal rules in its favor while the State will lose revenue in form of taxes if it rules in favor of the Respondent.

45. The Respondent averred that it considered all information provided before making its decision. That the Appellant has not pointed out which documents it believes was not considered.

46. That the burden lies with the Appellant to proof that the decision of the Respondent is wrong pursuant to section 56(1) of the Tax Procedures Act.

Respondent’s Prayers 47. The Respondent prayed that the Tribunal;a.Dismiss the Appeal with costs for lack of meritb.Uphold the Respondent’s decision dated 1st August 2022.

Issue For Determination 48. After considering the submissions of both parties, the Tribunal is of the view that the Appeal herein raises only one issue for determination namely; Whether the Respondent was justified in rejecting the Appellant’s refund claim.

Analysis And Determination Whether the Respondent was justified in rejecting the Appellant’s refund claim. 49. The genesis of the dispute is the Respondent’s decision to reject the Appellant’s VAT refund claim amounting to Kshs 35,845,663. 00 on the basis that the Appellant’s services were subject to VAT.

50. It was the Appellant’s contention that the services it offers to international shipping lines include; issuance and signing of bill of lading .and other similar documents to shippers for and on behalf of the principal, arranging for the delivery of cargo to consignees, soliciting and securing of cargo in accordance with the principal standing, surveying (load and joint),CFS handing fees , providing medical including doctor fees, embalming of and repatriation of deceased cabin crews and food supplies to the cabin crew while on Kenyan waters.

51. That Section 2 of the VAT Act, 2013, defines 'services exported out of Kenya' as 'a service provided for use or consumption outside Kenya.' That this definition has been subject to interpretation in various court cases.

52. It was the Respondent’s contention that on 7th December 2016, in the case of Inchcape Shipping Services Kenya Limited vs Commissioner, DTD, the TAT upheld that VAT on the Bill of Lading and Delivery Order is collectable from the Appellant ISSK and not from the importers.

53. The Appellant however submitted that it appealed the said decision to the High Court which overturned the Tax Appeals Tribunal decision and held that these services were zero rated.

54. The Tribunal noted that this issue had been prosecuted at the Tribunal in TAT No 143 of 2015 Inchcape Shipping Services (k) Limited Vs The Commissioner of Domestic Taxes and a judgement delivered on 7th December 2016 where it was held that the services rendered by the Appellant were vatable.

55. The Tribunal’s decision was appealed in the High Court which summarized the services offered by the Appellant as VAT on post landing charges (including Bill of Lading (BL) fees and Delivery Order Fees). The Tribunal decision was however overturned by the High Court in the case of Income Tax Appeal No 13 of 2017 Oceanfreight (EA) Limited Vs The Commissioner of Domestic Taxes (in respect to seven (7) Appeals including High Court Income Tax Appeal No. 9 of 2017 Inchcape Shipping Services (k) Ltd Vs Commissioner Domestic Taxes). The Court in its Judgement held as follows regarding the services as invoiced by the Appellant;“As regards Appeals No. 29 of 2017, 31 of 2018, 33 of 2017 and 9 of 2017, the Court sets aside the decision of the Tribunal that delivery order fees is not part of freight and allows the Appeals in this respect.”

56. The Respondent acknowledged this decision but stated that it had appealed the same in the Court of Appeal. However, the Respondent did not provide any evidence to demonstrate that any stay orders had been issued regarding the decision of the High Court. The subsisting decision therefore is the finding of the High Court.

57. The Tribunal is bound by this decision and therefore the Appellant cannot be deprived of its right of getting its refund claim merely because there is a pending Appeal.

58. Accordingly, the Tribunal finds that the Respondent was not justified in rejecting the Appellant’s refund claim.

Final Decision 59. On the basis of the foregoing analysis the Tribunal finds that the Appeal is merited and therefore succeeds. The Orders that commend themselves are as follows: -a.The Appeal be and is hereby allowed.b.The Respondent’s Credit Adjustment Vouchers dated 20th April 2022 are hereby revoked.c.The Respondent’s the Objection decision dated 1st August, 2022 be and is hereby set aside.d.The matter is referred to the Respondent to consider the Applicant’s refund claim and timeously process the same within a period of Ninety (90) days from the date of delivery of this Judgment.e.Each party to bear its own costs

DATED AND DELIVERED AT NAIROBI THIS 13TH DAY OF OCTOBER, 2023ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBERABRAHAM K. KIPROTICH - MEMBERCYNTHIA MAYAKA - MEMBEREUNICE NG’ANG’A - MEMBER