[2024] KETAT 1623 (KLR)

Inchcape Shipping Services Kenya Limited v Commissioner of Domestic Taxes (Tribunal Appeal E440 of 2023) [2024] KETAT 1623 (KLR) (25 October 2024) (Judgment)

Neutral citation: [2024] KETAT 1623 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal E440 of 2023

E.N Wafula, Chair, G Ogaga, RO Oluoch, AK Kiprotich & Cynthia B. Mayaka, Members

October 25, 2024

Between

Inchcape Shipping Services Kenya Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

1. The Appellant is a limited liability company duly incorporated in Kenya and is a tax resident in Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 Laws of Kenya (KRA Act). Under Section 5 (1) of the Act, KRA is an agency of the Government for the collection and receipt of all revenue. For the performance of its function under Subsection (1), the Authority is mandated under Section 5(2) of the Act to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the KRA Act to assess, collect, and account for all revenues under those laws.

3. The Respondent conducted an audit covering the period January 2016 to December 2020, and on 23rd March 2023, issued the Appellant with a notice of audit findings disallowing input VAT amounting to Kshs. 208,536,905. 00 and assessing PAYE amounting to Kshs. 14,530,990. 00.

4. The Appellant objected to the assessment and the Respondent issued an objection decision on 22nd June 2023.

5. The Appellant, being dissatisfied with the Respondent’s objection decision, filed its Notice of Appeal dated 20th July 2023 on the 21st July, 2023.

The Appeal 6. The Appeal is premised on the Memorandum of Appeal dated and filed on 4th August 2023 which raised the following grounds: -a.That the Respondent erred in law and fact in failing to vacate the assessments made in respect of PAYE and VAT for time-barred periods of 2015, 2016 and 2017 contrary to Section 31(4)(b) of the Tax Procedures Act, 2015. b.That the Respondent erred in law and fact in confirming its assessment which disallowed input VAT claimed by the Appellant by incorrectly treating the expenses incurred by the Appellant as disbursements instead of incidental costs contrary to the provisions of Section 13(5) of the Value Added Tax (VAT) Act.c.That the Respondent erred in law and fact in disallowing input VAT contrary to Section 17(1) of the VAT Act on the basis of its interpretation of the business arrangement between the Appellant and its principal, Inchcape Shipping Services Dubai and therefore misdirected itself in concluding that the input VAT claimed by the Appellant was in relation to costs fully borne by the Principal and not incidental costs directly related to the production of agency income.d.That the Respondent erred in law and fact in disallowing input VAT claimed by the Appellant yet allowed the same expenses claimed by the Appellant as expenses wholly and exclusively incurred in the production of income under the Income Tax Act, CAP. 470, Laws of Kenya.e.That the Respondent erred in law and fact in disallowing input VAT claimed by the Appellant on the misconception that the same relates to costs fully borne by the Principal - Inchcape Shipping Services Dubai and were therefore disbursements.f.That in view of the foregoing, the Appellant is apprehensive that the actions of the Respondent lack in merit, are unlawful and manifestly unjust and that unless the orders sought are granted, the Appellant risks being unjustly compelled to pay for the alleged taxes to the prejudice of the Appellant.

Appellant’s Case 7. The Appellant’s case is premised on the Appellant’s Statement of Facts dated and filed on 4th August 2023 and the documents attached to it.

8. The Appellant stated that on 23rd March 2023, the Respondent issued it with a notice of audit findings for the period January 2016 - December 2020. That in the said notice, the Respondent stated that it found that Corporation tax was fully reconciled, input VAT for the period 2015 - 2019 in the amount of Kshs. 208,536,905. 00 was disallowed and PAYE was assessed in the amount of Kshs. 14,530,990. 00 for the period 2016 - 2018.

9. The Appellant further stated that it lodged its notice of objection dated 20th April 2023 under Section 51 of the Tax Procedures Act in respect of the entire assessment.

10. The Appellant stated that on 22nd June 2023, the Respondent issued its decision in respect of the Appellant’s objection, a decision which the Appellant appealed at the Tribunal.

11. The Appellant submitted that in line with Section 31(4) of the Tax Procedures Act, it noted that the assessments confirmed by the Respondent in respect of the periods 2015, 2016 and 2017 were time-barred. That the five-year limit for the amendment of the said self-assessments by the Respondent lapsed in 2020, 2021 and 2022 respectively.

12. The Appellant further submitted that Section 23 of the Tax Procedures Act provides for the requirement that taxpayers shall maintain documents required under any tax law for a period of five years after the end of the reporting period.

13. The Appellant argued that the Respondent’s decision confirming the assessment in respect of PAYE and disallowed input VAT for the time-barred periods is unlawful. That the Respondent misdirected itself in its statement of findings at page 5 of the decision by stating that the assessment was within the five-year period.

14. The Appellant buttressed its contention against the Respondent’s assessments by referring to the case of Paragon Electronics Limited -vs- Commissioner of Domestic Taxes (TAT 709 of 2015) where the Tribunal held as follows: -“If it was Parliament's intention that if the five-year period was only for the filing of the documents but not the limitation of the Respondent's powers to interrogate and carry out an in-depth audit then nothing would have been easier than for Parliament to provide for such an explanation. The Tribunal can only conclude that Parliament or the drafter did not intend to extend the powers and duties of the Respondent to carry out an in-depth audit after the lapse of the five years provide for. It is important to note that Parliament did not provide the timelines in vain, there was a reason that informed the Legislature to cap the time limits that the Respondent is excepted to execute its mandate. The efforts of the Respondent were statutorily time-barred if one looks at the quoted relevant section of the law.”

15. The Appellant contended that, notwithstanding its payment to the Respondent in respect of the assessment of PAYE in the amount of Kshs. 14,530,989. 00, the assessment was time-barred under Section 31(4) of the Tax Procedures Act, 2015 and was wholly objected to in its notice of objection.

16. The Appellant submitted that assessments for the periods 2015, 2016 and 2017 in respect of VAT and PAYE are time-barred and should be set aside.

17. The Appellant outlined the background of the transaction in dispute as follows:i.That the principal of the Appellant - Inchcape Shipping Services Dubai (ISSD) entered into a contract on 1st September 2012 for the supply of foodstuff to the United Nations Support Office for AMISOM (UNSOA) in Somalia.ii.That the Appellant then entered into a contract with International Shipping Services Dubai, its principal, to provide it with assistance in the form of logistical and administrative services.iii.That the supply of foodstuffs to Kenya was then handled by the Appellant until the same was delivered to various locations of the AMISOM forces in Somalia.iv.That the Appellant contracted other entities in undertaking its engagement under its contract with ISSD specifically engaging the following entities:a.Southern Shipping Services Limited (SSSL) was contracted to assist in handling services such as port handling; customs clearance; transfer of cargo from port to the transit warehouse; undertaking storage of cargo in accordance with instructions and processing requisitions for rations; ex-warehouse clearance and arrangement of transportation of cargo to the destinations;b.Buri Transporters was engaged by the Appellant to provide transportation services under the UNSOA contract;c.Dodwell was engaged by the Appellant to provide customs clearance and transportation services;d.Gateway Marine Limited was contracted to provide equipment to be utilized in the UNSOA contract; ande.Almar Containers East Africa was engaged by the Appellant to provide containers for utilization in the UNSOA contract; andf.Having been contracted by the Appellant, the abovementioned entities billed the Appellant directly for the supplies made and not ISSD as implied by the Respondent, further, the costs were borne by the Appellant to ensure delivery of goods to the AMISOM locations as evidenced by the contracts, invoices and payment confirmations.

18. The Appellant averred that based on Section 13(5) of the VAT Act, the Respondent failed to consider that the input VAT claims were in respect of incidental costs directly incurred by the Appellant in respect of the supply of services made by the suppliers under separate contracts entered into by the Appellant and various service providers, hence such costs form part of the taxable value of supply. That, as such, the Appellant correctly claimed input VAT on the said supplies having been the recipient of the supplies as evidenced by the billing done by the said suppliers to the Appellant and not Inchcape Shipping Services Dubai (ISSD).

19. The Appellant stated that upon entry and clearance of consignments, it assumes responsibility for the goods which the Appellant deals with as required. That in the course of dealing with the consignments, the Appellant engages service providers who provide services such as transportation and warehousing which contracts are between the Appellant and the service providers such as Southern Shipping Services Limited and not ISSD.

20. It was the Appellant’s position that while disbursements are paid on behalf of the importer, for instance, statutory levies paid upon entry and clearance of the consignment, the expenses incurred by the Appellant were not disbursements but incidental costs incurred in the course of making the supply in the meaning of Section 13(5) of the VAT Act.

21. The Appellant additionally stated that the transaction between it and ISSD, being a related party transaction, is subject to transfer pricing rules. That in accordance with the Appellant’s transfer pricing policy, the Appellant in billing other related parties for provision of services, including ISSD, charges ISSD as shown below:“Aggregate costs + Net Cost-Plus Mark-up”

22. The Appellant stated that at Paragraph 1. 4.3 of its Transfer Pricing Policy, the price charged by the Appellant for the provision of agency services to ISSD for the UNSOA project is provided for and the transfer price determined as Net Cost-Plus Mark-up of 5% on the basis of a benchmark analysis.

23. The Appellant highlighted that it acts as the agent to various unrelated shipping lines in Kenya similarly to ISSD wherein the Appellant incurs costs in respect of contracts entered into with other relevant service providers in the course of its agency business in Kenya. That the Appellant claims input VAT on the basis that the said claims were in respect of incidental costs incurred in the provision of services by the suppliers.

24. The Appellant contended that the Respondent erred in its treatment of the Appellant’s transactions in respect of third-party service providers in the provision of agency services to ISSD which is inconsistent with input VAT claims allowed in respect of similar transactions between the Appellant and unrelated entities as principals.

25. It was the Appellant’s position that the Respondent misdirected itself in determining that the input VAT claims by the Appellant were disallowable inspite of input VAT claimed by the Appellant in respect of similar transactions being allowed where the Appellant acts as the agent of unrelated parties as the principals which is inconsistent with the principle of legitimate expectation which arose from the said tax treatment accorded by the Respondent.

26. In support of its argument, the Appellant referred to the case of Republic -vs- Attorney General & another ex-parte Waswa & 2 others (2005) KLR 280 where the Court pronounced itself on the principle of legitimate expectation.

27. The Appellant maintained that the Respondent misdirected itself in its notice of audit findings that the input VAT claimed by the Appellant was contrary to Section 17(1) of the VAT Act 2013 and that the affected supplies related to costs fully borne by the principal, hence they were not directly related to the production of agency income as they were disbursements.

28. The Appellant referred to Section 2 of the Value Added Tax Act, 2013 which provides for the interpretation of "input tax". That in line with this legal provision, the Appellant stated that the Respondent erred in failing to consider that the input VAT claims made by the Appellant were in respect of supplies used by the Appellant for the purpose of its business, being logistical coordination for the main supply to UNSOA.

29. The Appellant stated that it claimed input VAT on purchases it made which were directly related to its agency business and in the coordination of logistical works for ISSD in its supply of foodstuff to UNSOA for which the Appellant earned agency income, hence the Appellant qualified to claim input VAT.

30. The Appellant further stated that the input VAT it claimed for the period of assessment 2015 to 2020 was used by the Appellant in making taxable supplies which is provided for in the VAT Act as referring to zero-rated and standard rated supplies. That the expenses incurred by the Appellant were directly related to the Appellant’s provision of services in respect of the goods in transit being a taxable supply.

31. The Appellant averred that in light of the foregoing statements, the input VAT it claimed was properly claimed in respect of the said services and in accordance with Section 17(1) of the VAT Act, 2013 and should therefore be allowed by the Respondent.

32. The Appellant stated that the Respondent misdirected itself in concluding that the input VAT was disallowable yet the expenses claimed in respect of the production of income was allowed as it was wholly and exclusively incurred in the production of income.

33. The Appellant argued that following the principle that there must be certainty as to tax, the Respondent disallowing the Appellant’s input VAT claims is inconsistent with the Respondent’s position that the Corporation tax was fully reconciled wherein the same expenses were allowed as being wholly and exclusively incurred in the production of agency income.

34. That, therefore, the position taken by the Respondent that the expenses claimed by the Appellant were allowable for income tax purposes yet disallowing input VAT on the purchases made by the Appellant as not being directly related to agency income is contradictory and the same should be allowed for VAT purposes.

35. The Appellant stated that it and not ISSD was billed directly by the suppliers hence proceeded to claim input VAT on the services provided by various suppliers and incurred for the purpose of provision of services in relation to goods in transit. That in billing ISSD, the Appellant charged for VAT together with disbursements incurred in the supply in accordance with Section 13(5) of the VAT Act, 2013.

36. The Appellant submitted that in light of the nature of its business being that of an agent, Public Notice No. 13 of 1999 on VAT in respect of clearing and forwarding services provides clarity on the tax treatment of payments received by clearing and forwarding agents in the course of supplying clearing and forwarding services.

37. The Appellant averred that the said notice provides clarity on the taxation of costs recharged to the principal in the provision of clearing and forwarding services. That specifically, the notice provides that costs purely incurred by the Appellant being the agent in servicing the principal, ISSD, form part of the costs incurred by the agent in offering the services and thus are a taxable supply for VAT purposes.

Appellant’s prayers 38. The Appellant prayed for the following:a.That this Appeal be allowed.b.That the Respondent’s objection decision dated 22nd June 2023 be set aside in its entirety.c.That the Respondent do allow the disallowed input VAT claimed by the Appellant in the amount of Kshs. 208,536,905. 00. d.That the Respondent do refund the tax paid by the Appellant in respect of the demand for PAYE in the amount of Kshs. 14,530,990. 00 as the same is without legal basis.e.That the costs of this Appeal be awarded to the Appellant.f.Any other orders that this Honourable Tribunal may deem fit.

Respondent’s Case 39. The Respondent’s case is premised on its Statement of Facts dated 8th September, 2023 and filed on the 11th September, 2023.

40. The Respondent stated that it conducted an audit for the period January 2016 to December 2020. That on 23rd March 2023, the Respondent issued the Appellant with a notice of findings disallowing input VAT amounting to Kshs. 208,536,905. 00 and assessing PAYE amounting to Kshs. 14,530,990. 00.

41. The Respondent averred that on 20th April 2023, the Appellant filed a late notice of objection which was received and acknowledged by the Respondent on 5th May 2023.

42. The Respondent stated that it requested for supporting documentation to validate the objection and that on 17th May 2023, the Appellant validated the objection by providing the requested documents.

43. The Respondent asserted that after considering the documents provided by the Appellant, it issued its objection decision on 22nd June 2023 confirming the entire assessments. That the being dissatisfied by the objection decision, the Appellant filed a Notice of Appeal dated 20th July 2023 at the Tax Appeal Tribunal.

44. In response to the Appellant’s grounds in the Memorandum of Appeal and the Statement of Facts, the Respondent asserted that the Appellant’s claim is inaccurate. That the Appellant stated that assessments for the periods 2015, 2016 and 2017 were raised beyond the 5 years’ time period contrary to provisions of Section 31(4)(b) of the Tax Procedures Act, 2015.

45. The Respondent stated that the notice of assessment clearly stated that the adjustments resulted in a VAT credit adjustment from Kshs. 274,970,507. 00 to Kshs. 91,559,057. 00 as at February 2023. That therefore, the assessment would be raised in the period February 2023 and not in 2015, 2016 and 2017 to adjust the VAT credit running balance as at February 2023 as communicated in the notice of assessment. That, therefore, the assessment is within the 5 years’ time period.

46. The Respondent further stated that as per the contract agreement, it noted that Appellant would be reimbursed by the principal all costs incurred in performance of the contract. That the Appellant was just offering facilitative and logistical services to the main supply contract, hence the Appellant only earned agency income.

47. The Respondent averred that the purchases were disbursements and the Appellant ought not to have claimed them in its VAT returns. The Respondent further averred that the Appellant’s purchases did not meet the requirements of Section 17(1) of the VAT Act, 2013.

48. The Respondent submitted that in accordance with Section 59 of the Tax Procedures Act, the Appellant was requested to provide sales invoices issued to its principal, ISSD. That the Appellant only provided sales invoices for management fee and did not provide the sales invoices showing a breakdown of costs recharged to ISSD. That as a result, the assessment was made based on the only available information and the best judgement by the Respondent.

49. The Respondent further averred that it reviewed the disallowed purchases invoices and noted that the suppliers would bill the Appellant directly and not the principal for the services offered. That the Appellant would then proceed to claim input VAT in the VAT returns.

50. The Respondent asserted that the assessments were correctly issued and conform to the law. That the Appellant did not provide any evidence that would have altered the tax assessment.

51. The Respondent referred to Section 56(1) of the Tax Procedures Act and submitted that the provision places the onus of proof in tax objections on the taxpayer who in this case failed to avail evidence that would support a contrary assessment or that would have guided the Respondent at arriving at a different objection decision.

Respondent’s prayers 52. The Respondent prayed that Tribunal finds: -a.That the Respondent’s decision dated 22nd June 2023 be upheld.b.That the confirmed assessments disallowing input VAT were proper in law.c.That the Appeal herein be dismissed with costs to the Respondent.

Issues For Determination 53. The Tribunal has considered the facts of the matter and the submissions made by the parties and is of the considered view that the issues falling for its determination are as follows:a.Whether the Respondent’s assessments were time-barred.b.Whether the Respondent was justified in issuing its objection decision dated 22nd June 2023.

Analysis And Findings 54. The Tribunal has analysed the issues that call for its determination as hereunder, having reviewed all the pleadings, information and documents adduced by the Appellant and the Respondent concerning the impugned objection decision.

55. The Respondent conducted an audit covering the period January 2016 to December 2020 and on 23rd March 2023, issued the Appellant with a notice of audit findings disallowing input VAT amounting to Kshs. 208,536,905. 00 and assessing PAYE amounting to Kshs. 14,530,990. 00.

56. The Appellant objected to the assessment and the Respondent issued an objection decision on 22nd June 2023.

57. The Appellant, being dissatisfied with the Respondent’s objection decision, filed its Notice of Appeal dated 20th July 2023. a.Whether the Respondent’s assessments were time-barred.

58. The Respondent stated in its notice of audit findings that the findings which raised the disputed assessments were as per Section 31 of the Tax Procedures Act, and that the assessment is within the 5 years’ time period.

59. The Appellant submitted that in line with Section 31(4) of the Tax Procedures Act, it noted that the assessments confirmed by the Respondent in respect of the periods 2015, 2016 and 2017 were time-barred.

60. Before delving into the merits of the Respondent’s PAYE and VAT assessments and the Appellant’s arguments against them, the Tribunal has sought to establish whether the Respondent issued assessments within the time allowed under Section 31 of the Tax Procedures Act.

61. On 23rd March 2023, the Respondent issued the Appellant with VAT assessments for the periods of 2015, 2016, 2017, 2018 and 2019 and PAYE assessments for the periods of 2016, 2017 and 2018 in a notice of audit findings. The Appellant argued that the assessments for the periods 2015, 2016 and 2017 in respect of VAT and PAYE are time-barred and should be set aside.

62. Section 31(4) of the Tax Procedures Act is clear that the Respondent can only issue assessments before the expiry of five years from the date of submitting of a self-assessment by a taxpayer. It provides as follows: -“The Commissioner may amend an assessment –a.in the case of gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer, at any time; orb.in any other case, within five years of –i.for a self-assessment, the date that the self-assessment taxpayer submitted the self-assessment return to which the self-assessment relates; orii.for any other assessment, the date the Commissioner notified the taxpayer of the assessment.” Emphasis added

63. According to Section 31(4)(a) of the Tax Procedures Act, the Respondent may only issue an assessment beyond the five years where the Respondent can prove gross or wilful neglect, evasion, or fraud by, or on behalf of, the taxpayer. It is thus clear that an assessment issued under Section 31 of the Tax Procedures Act beyond the five-year limit is unlawful unless the Respondent can prove gross or wilful neglect, evasion, or fraud by or on behalf of a taxpayer.

64. The Tribunal has examined the Appellant’s pleadings and notes that the issues under Section 31(4)(a) of the Tax Procedures Act regarding gross or wilful neglect, evasion or fraud on the part of the Appellant were neither pleaded, transacted and/or proved by the Respondent.

65. The Tribunal reiterates its holding in a similar matter TAT Appeal No. 411 of 2021, City Gas East Africa v Commissioner of Investigations and Enforcement where Tribunal held that the Respondent erred in assessing the Appellant for a period beyond five years when there was no evidence of wilful neglect or fraud.

66. The Respondent’s assessment was dated 23rd March 2023, meaning that the earliest periods that the Respondent could assess additional PAYE and VAT were only the tax periods starting from March 2018.

67. Consequently, the Tribunal finds that the Respondent’s assessment of PAYE and VAT for the tax periods before March 2018 was unlawful and the same was not justified.b.Whether the Respondent was justified in issuing its objection decision dated 22nd June 2023.

68. The Tribunal observes that the Appellant did not address the issue of the additional PAYE assessment besides its contention that the assessment was time-barred. Additionally, the Appellant did not provide any evidence in support of its dispute against the assessments.

69. Having determined that the PAYE assessments for periods before March 2018 were time-barred, and that the Appellant failed to defend its case for the PAYE assessments issued within the legal timelines, the Tribunal finds that the Respondent was justified in assessing PAYE for the periods starting from March 2018.

70. The Respondent averred that the purchases for which the Appellant claimed input VAT were disbursements, and the Appellant ought not to have claimed the input VAT in its VAT returns. The Respondent further averred that the Appellant’s purchases did not meet the requirements of Section 17(1) of the VAT Act.

71. On the other hand, the Appellant asserted that the Respondent erred in disallowing the input VAT claimed by the Appellant on the incorrect basis that the claims were in respect of disbursements yet the same constituted incidental costs which form part of the taxable value of supply under Section 13(5) of the VAT Act.

72. The Tribunal has analysed the Appellant’s assertion that it was allowed to claim the input VAT which the Respondent disallowed. Based on the arguments presented by the parties, the Tribunal considers the key issues in the present case to be the applicable law and the documentation required to substantiate the Appellant’s claims.

73. A person carrying on a business must keep certain records and documents and avail the same to the Commissioner for inspection as per Section 43 of the VAT Act which provides as follows: -1. A person shall, for the purposes of this Act, keep in the course of his business, a full and true written record, whether in electronic form or otherwise, in English or Kiswahili of every transaction he makes and the record shall be kept in Kenya for a period of five years from the date of the last entry made therein.2. The records to be kept under subsection (1) shall include—a.copies of all tax invoices and simplified tax invoices issued in serial copies number order;b.of all credit and debit notes issued, in chronological order;c.purchase invoices, copies of customs entries, receipts for the payment of customs duty or tax, and credit and debit notes received, to be filed chronologically either by date of receipt or under each supplier’s name;d.details of the amounts of tax charged on each supply made or received and in relation to all services to which section 10 applies, sufficient written evidence to identify the supplier and the recipient, and to show the nature and quantity of services supplied, the time of supply, the place of supply, the consideration for the supply, and the extent to which the supply has been used by the recipient for a particular purpose;e.tax account showing the totals of the output tax and the input tax in each period and a net total of the tax payable or the excess tax carried forward, as the case may be, at the end of each period;f.copies of stock records kept periodically as the Commissioner may determine;g.details of each supply of goods and services from the business premises, unless such details are available at the time of supply on invoices issued at, or before, that time; andh.such other accounts or records as may be specified, in writing, by the Commissioner.”

74. A person is also obligated to maintain and retain any document required under a tax law for a period of five years from the end of the reporting period to which it relates, as per Section 23(1) of the Tax Procedures Act so as to enable the person’s tax liability to be readily ascertained.

75. The Tribunal refers to the case of Commissioner of Domestic Taxes v Trical and Hard Limited (Tax Appeal E146 of 2020) [2022] KEHC 9927 (KLR) where the Court held as follows at paragraph 26 with regard to the evidential burden of a taxpayer: -“From the above, it is clear that the evidential burden of proof rests with the taxpayer to disprove the Commissioner and that once competent and relevant evidence is produced, then this burden now shifts to the Commissioner. I have emphasized and underlined ‘competence’ and ‘relevance’ because it is only evidence that meets these two tests that demolishes presumption of correctness and swings the burden to the Commissioner. This means that even if one avails evidence but then it is found that the same is incompetent or irrelevant, then the burden continues to remain with the tax payer.”

76. In the absence of relevant documentation to facilitate the assessment of a tax liability, the Respondent is empowered under Section 31(1) of the Tax Procedures Act to use its best judgment in making its tax assessment.

77. The Tribunal has reviewed the record of Appeal and notes that the Appellant attached the following documents as evidence:a.The agreement between the Appellant and ISS Dubai dated 1st Sepetmber 2012. b.Copies of contracts and invoices between the Appellant and its suppliers.c.The Appellant’s Transfer Pricing Policy for the financial period 2014 to 2017. d.The Appellant’s Excel sheet workings.e.The Respondent’s Public Notice No. 13 dated 23rd February 1999 on VAT on clearing and forwarding services.

78. The Tribunal notes that the agreement between the Appellant and ISSD (the Agreement) enclosed as Appendix ISSK - 6 in the Appellant’s bundle of documents, provides that ISSD is the principal contracted to provide services. That ISSD has appointed the Appellant as its agent to provide all the services in Kenya as instructed by the principal either directly or through a vendor.

79. Clause 4 of the Agreement states as follows: -“…The Principal agrees to reimburse the Agent for the direct and indirect cost relating to the execution of the directions of the principal relating to execution of the direction of the Principal relating to this contract and as defined in Annexure “A” attached to this agreement.”

80. That Annexure A attached to the Agreement provides a list of services to be performed by the agent as follows: -1. Payment of salaries for persons employed for this contract.2. Payment of any rent for warehouses hired for this contract.3. Arranging services as requested by ISS Dubai through vendors.4. Any indirect services relating to the performance of instructions of the Principal.5. Any services as from time to time be requested by the Principal either to perform directly or through other vendors.”

81. The agent’s consideration for performance of the contract is found in Clause 6 of the Agreement as follows: -“In consideration of the performance of this contract, the Principal agrees to pay the Agent as compensation for his services an Agency fee as follows:All costs incurred by the Agent over the total project duration plus a fee of 5% on the costs so incurred by the Agent, which is based on a Monthly General Statement of accounts sent by the Agent by 5th of the next month”

82. The Appellant averred that based on Section 13(5) of the VAT Act, the Respondent failed to consider that the input VAT claims were in respect of incidental costs directly incurred by the Appellant in respect of the supply of services made by the suppliers under separate contracts entered into by the Appellant and various service providers, hence such costs form part of the taxable value of supply. That, as such, the Appellant correctly claimed input VAT on the said supplies having been the recipient of the supply as evidenced by the billing done by the said suppliers to the Appellant and not Inchcape Shipping Services Dubai (ISSD).

83. The Appellant argued that upon entry and clearance of consignments, it assumes responsibility of the goods which the Appellant deals with as required. That in the course of dealing with the consignments, the Appellant engages service providers who provide services such as transportation and warehousing which contracts are between the Appellant and the service providers such as Southern Shipping Services Limited and not ISSD.

84. It was the Appellant’s position that while disbursements are paid on behalf of the importer, for instance, statutory levies paid upon entry and clearance of the consignment, the expenses incurred by the Appellant were not disbursements but incidental costs incurred in the course of making the supply in the meaning of Section 13(5) of the VAT Act.

85. The Tribunal analysed the abovementioned clauses of the Agreement against the Appellant’s averments and finds that the meaning and tenor of the Agreement contradict the Appellant’s assertions regarding the manner in which it invoices for the services it provides as an agent of its principal, ISSD.

86. The Agreement illustrates a situation in which the Appellant enters into vendor agreements on behalf of the principal in order to perform the services outlined in the Agreement. Under the Agreement, the principal is obligated to reimburse the Appellant for these costs. Conversely, the Appellant averred that these vendor costs were its incidental costs that it included in its taxable value on its invoices to the principal.

87. The Tribunal notes that the Appellant described in its pleadings a situation that differed from the one envisioned in the Agreement, but failed to provide any evidence of the alternative approach to invoicing ISSD. The Appellant’s invoices to ISSD could have served as evidence of its invoicing structure.

88. In the absence of the Appellant providing proof of its assertion of how it actually invoices ISSD, the Tribunal is not persuaded that the vendor costs incurred in the performance of the services under the Agreement are the Appellant’s incidental costs and not the costs of its principal, ISSD, reimbursed to the Appellant as outlined in the Agreement.

89. The Tribunal is guided by Section 17 of the VAT Act on what is deductible input tax. Section 17(1) of the VAT Act 2013 provides that: -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, 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.”

90. It is the Tribunal’s considered view that the Appellant was required to prove that it satisfied the parameters outlined in Section 17 of the VAT Act to deduct input VAT in the periods assessed. The Tribunal’s examination of the evidence presented revealed that the Appellant failed to demonstrate that it incurred the input VAT to supply its taxable services. The evidence of the Appellant instead demonstrated that the Appellant claimed input VAT on costs that pertain to its principal, ISSD.

91. Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act place the burden of disproving the Commissioner upon the taxpayer. To satisfy this burden, a taxpayer ought to submit all the relevant evidentiary material in its possession.

92. Contrary to the Appellant’s requirement under Section 56(1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act to prove that the Commissioner’s assessments are incorrect or excessive, the Appellant neglected to present to the Tribunal the relevant source documents that it is required to keep under Section 43 of the Value Added Tax Act and Section 23(1) of the Tax Procedures Act to substantiate its assertions of its tax position, specifically copies of its invoices to its principal.

93. The Tribunal further relied on the case of Commissioner of Domestic Services v Dutch Flower Group Kenya (Income Tax Appeal E101 of 2020) [2021] KEHC 23 (KLR) where the Court addressed the issue of an agent claiming input VAT at paragraphs 16 - 18 as follows: -16. In view of the foregoing, 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, which spells the relationship between the two, the two are in an agency relationship. The income of the respondent is controlled by FRE 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 5% thereon as the income for the latter.17. 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.”

94. Based on the foregoing, the Tribunal finds that the Respondent was justified in disallowing the input VAT claimed by the Appellant for the tax periods starting from March 2018.

Final Decision 95. The upshot of the foregoing analysis is that the Tribunal finds that the Appeal is partially merited and accordingly proceeds to make the following Orders:a.The Appeal be and is hereby partially allowed.b.The Respondent’s objection decision dated 22nd June 2023 be and is hereby varied in the following terms:i.The Value Added Tax (VAT) assessments for the periods before March 2018 be and are hereby set aside.ii.The Value Added Tax (VAT) assessments for the periods starting from March 2018 be and are hereby upheld.iii.The Pay as You Earn (PAYE) assessments for the periods before March 2018 be and are hereby set aside.iv.The Pay as You Earn (PAYE) assessments for the periods starting from March 2018 be and are hereby upheld.v.The Respondent is hereby directed to recompute the tax assessments based on the Tribunal’s findings under Orders b) (i), (ii), (iii) and (iv) above within Thirty (30) days from the date of delivery of this Judgment.c.Each party to bear its own costs.

96. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 25TH DAY OF OCTOBER, 2024. ERIC NYONGESA WAFULACHAIRMANGLORIA A. OGAGA DR. RODNEY O. OLUOCH MEMBER MEMBERABRAHAM K. KIPROTICH CYNTHIA B. MAYAKA MEMBER MEMBER