[2024] KETAT 24 (KLR)

Inchcape Shipping Services Kenya Limited v Commissioner of Legal Services & Board Coordination (Tax Appeal 741 of 2022) [2024] KETAT 24 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 24 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 741 of 2022

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

January 26, 2024

Between

Inchcape Shipping Services Kenya Limited

Appellant

and

Commissioner of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a is a limited liability company registered in Kenya under the Companies Act. Its principal business is shipping agency services to the maritime industry.

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 collecting and receiving all tax revenue.

3. The Appellant applied for refunds amounting to Kshs 172,152,008. 00 on various dates in the period 2015 to 2019 on the basis that its services were zero rated. The Respondent issued credit adjustment vouchers on various dates up to 4th March 2022.

4. The Appellant lodged its objection vide a letter dated 18th March 2022 and subsequently the Respondent issued its objection decision vide a letter dated 31st May 2022.

5. The Appellant dissatisfied with the objection decision, filed a Notice of Appeal on 30th June 2022.

The Appeal 6. The Appellant’s Memorandum of Appeal dated the 14th July 2022 and filed on the 19th July 2022 was premised on the following grounds:a.That the Respondent erred in law and in fact by claiming that the services offered by the Appellant do not qualify as zero rated.b.That the Respondent erred in law and fact by rejecting the refund claims lodged and issuing credit adjustment vouchers totaling to Kshs 172,152,008. c.That the Respondent erred in fact and law by relying on a decision by the Tribunal that had been overturned by the High Court.d.That the Respondent erred in fact and law in failing to issue refund decisions in accordance with the law. The credit adjustment vouchers do not meet the required legal threshold of a refund decision as set out in the Tax Procedures Act, 2015 and as envisaged by the Constitution of Kenya and the Fair Administrative Action Act, 2015.

Appellant’s Case 7. The Appellant’s case is premised on the following documents and proceedings before the Tribunal:-a.The Appellant’s Statement of Facts dated 14th July 2022 and filed on 19th July 2022 together with the attachments thereof.b.The Appellant’s written submissions dated 17th February 2023 and filed on 20th February 2023.

8. The Appellant submitted that in the years 2015 to 2019, it made applications to KRA for VAT refunds of excess input VAT amounting to Kshs 172,152,008. 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 VAT Act i.e the supply of taxable services to international sea or air carriers on international voyage or flight.

9. That the Respondent issued credit adjustment vouchers on different dates up to 4th March 2022. That the Appellant filed an objection on 18th March 2022 based on the below grounds that:a.the services offered by the company qualify as zero-rated supplies;b.the VAT refund claims were lodged correctly and in a timely manner as provided for in the VAT Act; andc.the basis for the rejection of the VAT refund claims is incorrect.

10. That the Respondent issued an objection decision vide a letter dated 31st May 2022 and reaffirmed its earlier decision that the Appellant's services were not zero rated and hence the Appellant is not entitled to a refund of the input VAT.

11. That being aggrieved by the Respondent’s decision it lodged this Appeal against the entire assessment on the following grounds:a.The services offered by the company qualify as zero-rated supplies.b.The VAT refund claims were lodged correctly and in a timely manner as provided for in the VAT Act.c.The basis for the rejection of the VAT refund claims is incorrect.

12. That the Appellant's 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.

13. That some of the services it offers to these international shipping lines include but are not limited to: 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 etc.

14. 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

15. The Appellant stated that in Commissioner of Domestic Taxes v Total Touch Cargo Holland HC MLITA No.17 of 2013 [2018] 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 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.

16. It averred that the place of the performance of the service was therefore immaterial and what is to be considered is where the use or consumption of the service takes place.

17. 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.

18. 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.

19. 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. That although the importers could have benefited from the activities of the Appellant, WEC Lines did not provide services to the importers. That the 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.

20. The Appellant submitted that it offers its services to international shippers while on the Kenyan waters. That 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.

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

22. That 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.

23. That the Respondent in its objection decision relied on the Tax Appeals Tribunal (decision in Tax Appeal Number 143 of 2015) where it was held that the Appellant's services were subject to VAT at 16%.

24. That the Appellant appealed the said decision to the High Court, which overturned the Tax Appeals Tribunal decision and held that these services were zero rated.

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

26. The Appellant averred that it would be prejudicial to the Appellant to reject the VAT refund claim of Kshs 172,152,008. 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 27. The Appellant prayed that the Tribunal allows the Appeal and;a.Upholds that the Respondent should process the VAT refunds lodged.b.Sets aside and annuls the objection decision by the Respondent.c.Awards the costs of this Appeal to the Appellant andd.Any other remedies that the Tribunal deems just and reasonable.

Respondent’s Case 28. The Respondent supported its case with its Statement of Facts dated and filed on 19th August 2022, and its Written Submissions dated 8th March 2023.

29. The Respondent stated that in the years 2015 to 2019, the Appellant made applications for VAT refunds of excess input VAT amounting to KShs.172,152,008 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.

30. That this Appeal revolves around the issue whether the Respondent erred by rejecting VAT refund application on the basis that services made by the taxpayer are taxable at general rate.

31. The Respondent averred that it rejected the refund notices and the Appellant vide a notice of objection dated 18th March 2022 objected to the assessment on the following grounds;a.The services offered by the Company qualify as zero-rated suppliesb.The VAT refund claims were lodged correctly and in a timely manner as provided for in the VAT Act 2013. c.The basis for the rejection of the VAT refund claims is incorrect

32. That the Respondent on 31st May 2022 issued an objection decision and reaffirmed its earlier decision that the Appellant failed to object to refund decisions within a reasonable time and without giving reasons and that the refund decisions objected to on time emanated from services that are not zero rated.

33. The Respondent averred that the taxes totaling to KShs 106,327,150. 00 emanated from services that do not fall under Paragraph 1 "The exportation of goods or taxable services”and/or paragraph 6 "The supply of taxable services to international sea or air carriers on international voyage or flight” of the second Schedule to the VAT Act 2013.

34. That further, Paragraph 2 (1) of the VAT Act 2013 defines “service exported out of Kenya” to mean a service provided for use or consumption outside Kenya. As such the subject services are not zero rated and the Appellant is therefore not entitled to a refund of the input VAT.

35. The Respondent averred that as communicated via its objection decision dated 31st May 2022, refund claims totaling Kshs 65,824,858. 00 were rejected for being claimed out of time while refund claims totaling KShs 106,327,150. 00 were rejected since the subject services are not zero rated.

36. That the precedents cited by the Appellant do not apply to the instant Appeal and that at the opportune time, the Respondent would distinguish the same and prove that there are materially different facts between the cases and the instant Appeal.

37. The Respondent stated that the applicable law to the instant appeal as regards place of service was Section 8 of VAT Act.

38. That in the Case of Sturrock Shipping (K) Limited vs Commissioner DTD the Tribunal held that the charges levied by the Appellant were chargeable to VAT as they were rendered in Kenya post landing and that VAT is collectable from the Appellant and not the importers.

39. That further it had since appealed against the High court Judgment in W.E.C Lines Kenya vs Commissioner DTD, vide Court of Appeal Civil Appeal No.E176 of 2022 and the same was yet to be heard.

40. The Respondent averred that the impugned decisions were issued in accordance with the law and that in accordance with Section 56(1) of the TPA the onus of proof rests on the Appellant.

41. The Respondent reiterated that in relation to the objection application relating to refund decisions totaling Kshs 65,824858. 00 the Appellant filed a late objection and failed to provide reasons for the late objection contrary to Section 51 of the Tax Procedures Act.

Respondent’s Prayer 42. Based on the above grounds, the Respondent prayed that the Tribunal considers the Appeal and finds as follows;a.The objection decision dated 31st May 2022 be upheld.b.The Appeal be dismissed with cost to the Respondent

Issues For Determination 43. The Tribunal having carefully considered the pleadings filed and the evidence tendered is of the view that the Appeal herein crystallizes into the following issues for determination:-a.Whether the Appellant's Objection applications amounting to Kshs 65,824,858 were time barred.b.Whether the Respondent was justified in rejecting the Appellant’s refund claims amounting to Kshs 106,327,150.

Analysis And Determination 44. Having identified the issues falling for its determination, the Tribunal wishes to analyze the same as hereunder.

a. Whether the Appellant's Objection Applications amounting to Kshs 65,824,858 were time barred. 45. The Appellant submitted that in the years 2015 to 2019, it made applications to KRA for VAT refunds of excess input VAT amounting to Kshs 172,152,008. 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 VAT Act i.e the supply of taxable services to international sea or air carriers on international voyage or flight.

46. It was the Respondent’s contention that as communicated via its objection decision dated 31st May 2022, refund claims totaling Kshs 65,824,858 were rejected for being claimed out of time.

47. Section 51(2) of the TPA provides as follows regarding objections;“A taxpayer who disputes a tax decision may lodge a notice of objection to the decision, in writing, with the Commissioner within thirty days of being notified of the decision.”

48. The Respondent’s in its objection decision provided a list indicating that the Appellant’s objections were dated 18th March 2022 and received by the Respondent on 28th April 2022 in relations to refund decisions of the Respondent issued on various dates in March 2017, July 2017, February 2018, October 2019 and November 2019.

49. The Tribunal noted that although the Appellant did not address the issue of any objections being late, the Respondent’s tabulation in the objection decision clearly shows that the objections amounting to Ksh 65,824,858. 00 as having been lodged late. The Respondent’s statement as presented in the objection decision was therefore not controverted in any way.

50. Further, there was no evidence presented to the Tribunal to demonstrate that the Appellant made any application to the Commissioner to lodge a late objection as provided for under Section 51(6) & (7) of the TPA.

51. Under the circumstances, the Tribunal finds that the Appellant’s objections to the Respondent’s refund decisions in relations to the refund applications amounting to Kshs 65,824,858. 00 were time barred.

b. Whether the Respondent was justified in rejecting the Appellant’s refund claims amounting to Kshs 106,327,150. 52. It was the Respondent’s contention that the taxes totaling to Kshs 106,327,150. 00 emanated from services that do not fall under Paragraph 1 "The exportation of goods or taxable services”and/or paragraph 6 "The supply of taxable services to international sea or air carriers on international voyage or flight” of the Second Schedule to the VAT Act 2013.

53. That further, Paragraph 2 (1) of the VAT Act 2013 defines “service exported out of Kenya” to mean a service provided for use or consumption outside Kenya. That as such the subject services are not zero rated and the Appellant is therefore not entitled to a refund of the Input VAT.

54. The Appellant on the other hand submitted that some of the services it offers to the international shipping lines include but are not limited to: 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.

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

56. 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

57. The Appellant added that the Respondent in its objection decision relied on the Tax Appeals Tribunal (decision in Tax Appeal Number 143 of 2015) where it was held that the Appellant's services were subject to VAT at 16%.

58. That the Appellant appealed the said decision to the High Court, which overturned the Tax Appeals Tribunal’s decision and held that these services were zero rated.

59. 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.

60. 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’s decision was 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.”

61. There was no evidence provided to the Tribunal to demonstrate that any stay orders had been issued regarding this decision of the High Court. The subsisting decision therefore is the finding of the High Court.

62. The Tribunal is bound by this decision of the High Court and therefore the Appellant cannot be deprived of its right of getting its refund claim. Accordingly, the Tribunal finds that the Respondent was not justified in rejecting the Appellant’s refund claim.

Final Decision 63. For the reasons set out above, the Tribunal finds that this Appeal is partially merited and proceeds to issue the following Orders:-a.The Appeal is partially allowedb.The Respondent‘s objection decision dated 31st May 2022 be and is hereby varied in the following terms;i.The Respondent’s decision relating to refund applications amounting to Kshs 65,824,858. 00 is hereby upheld.ii.The Respondent’s decision relating to refund applications amounting to Kshs 106,327,150. 00 is hereby set aside and the corresponding credit adjustment vouchers revoked.c.The Respondent to process the Appellant’s refund applications for the sum of Kshs.106,327,150. 00 within Ninety (90) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

38. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBER.ABRAHAM K. KIPROTICH -MEMBERCYNTHIA B. MAYAKA - MEMBER.EUNICE NG’ANG’A - MEMBERBERNADETTE GITARI - MEMBER