[2024] KETAT 153 (KLR)

Jars Transporters Limited v Commissioner of Domestic Taxes (Tax Appeal 1432 of 2022) [2024] KETAT 153 (KLR) (Civ) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 153 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 1432 of 2022

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

February 9, 2024

Between

Jars Transporters Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose principal business activity is transportation of coffee and gurney bags.

2. The Respondent is a principal officer appointed under and in accordance with Section 13 of the Kenya Revenue Authority (KRA) Act, and KRA is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

3. The Respondent issued the Appellant with a credit verification notice on 2nd December, 2021 and subsequently with a VAT credit verification findings letter dated 27th April, 2022.

4. The Appellant objected on 24th August, 2022.

5. The Respondent issued its objection decision on 17th October, 2022.

6. Following its dissatisfaction with the Respondent’s decision, the Appellant appealed by filing a Notice of Appeal to the Tribunal on 15th November, 2022.

The Appeal 7. The Appeal is premised on the following grounds as stated in the Appellant’s Memorandum of Appeal dated 15th November, 2022 and filed on 25th November, 2022:-a.That the objection decision under Appeal is erroneous both on facts as well as law.b.That the Respondent erred in law and fact by failing to appreciate that the proprietary rights of the green coffee being transported remains with the grower during the course of transportation.c.That the Respondent erred in law and fact by failing to appreciate that the cost of transport is on the farmer as part of the auxiliary activities done by the farmer in the course of supplying the coffee to the auction centres, and this falls within the ambit of Paragraph 4 of part A in the Second Schedule of VAT Act Cap 35. d.That the Respondent erred in law and fact by failing to appreciate that the coffee supply to the auction in Kenya is by law not supplied by the farmer directly but has to appoint a Marketing agent duly registered to carry out the activity of coffee marketing and hence Paragraph 4 could not in any way be addressing the farmer in the absence of the Marketing agency activities that include transporting of coffee to the registered warehouses in readiness for the auction offers.e.That the Respondent erred in law and fact by considering that paragraph 4 of the Second Schedule of the VAT Act 2013 refers specifically to the coffee farmer and not any one acting as the agent of such a farmer, thus further defeating the principles of agency.f.That the Respondent erred in law and fact by failing to appreciate that coffee is not physically delivered to the auction centre and such supply being referred to by Paragraph 4 was addressing all that is related to the supply of coffee within the laid down trading framework including the physical location and the logistical activities that goes into the facilitation of the supply of the coffee to the auction, transport being part thereof.g.That the Respondent errored in law and fact by failing to appreciate the fact that coffee is a controlled and scheduled commodity under the Crops Act meant for export and whose costs pre-auction are all borne directly by the farmer and any post-harvest activity thereof is an auxiliary activity done by agents appointed by the farmer.h.That the Respondent errored in law and fact by considering the coffee supplier (here being the farmer) should have been charged VAT and that the farmer would have claimed input tax on the charged VAT only knowing too well (or ought to have known) that the ordinary coffee farmer is not a registered supplier and has no capacity to have a system of tax administration that would have enabled them to recover the VAT as the Respondent suggests.i.That the Respondent errored in law and fact by considering that the coffee supplier should have been charged VAT while is trite that coffee is an export commodity and all auxiliary services connected to this export are export services whose automate beneficiary is the foreign buyer and not the farmer.j.That the Respondent errored in law and fact by failing to appreciate that VAT is a consumption tax that is passed over and over to be consumed by the final buyer and when it is imposed on coffee, the farmer has no way of passing it to the coffee consumer who is outside Kenya.k.That the Respondent errored in law and fact by failing to consider the application of the destination principle under the Organization for Economic Co-operation and Development (OECD) Guidelines which provide that the jurisdiction where a customer (consumer) is located has the taxing rights over internationally traded services (coffee being an export supply) in order to achieve VAT neutrality.l.That the Respondent errored in law and fact by failing to consider that a transport service cannot be consumed in Kenya while the good being transported be consumed in a foreign country and that a consumer cannot benefit from goods and not services related to preparation and availing of such goods.m.That the Respondent errored in law and fact by deciding that a service is only consumed by a foreigner if it was acquired by the said foreigner, which was not the conclusion of the Court in the case of Total Touch Holland, a matter that had so clearly been settled by the Court in the case on Fontana Ltd.n.That the Respondent errored in law and fact by deciding that coffee transportation is Vatable at 16% and not at zero % even when the taxing principle is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him, in which case the VAT Act has not expressly stated that coffee transport does not form part of the zero-rated supply of coffee by the farmer to the auction centre.o.That this Appeal is being filed within the prescribed period of limitation, the objection decision being made on 17th October 2022. p.On 2nd December 2021, the Appellant was issued with Vat credit verification notice Section 59 of the tax procedure Act 2015 where we presented all the documents attached on our file that were required by your commissioner as attached in Appendix Aq.The Appellant received another email on March 11th 2022 requesting the Appellant to present itself Jars transporters, for an interview which all appeared at Sameer Business Park, 10:00 am March 2022 Block B1, 1st floor.r.On 4th April 2022, wrote a letter for the discussion that the Appellant had requested a letter to all its clients showing it needed to pay VAT which we got a reply saying our manager is away as attached in Appendix Bs.April 27th 2022, the Appellant got then the VAT verification findings as attached in Appendix C.t.The Appellant sent its objection on 1st September 2022 , attached Appendix Du.On 13th October 2022, we send a letter again for what our clients were sending us not to charge VAT but we never got any reply, attached Appendix Ev.On Tuesday 18th October 2022, we received a letter of objection decision by the KRA issuing us a tax liability of Kshs. 16,199,529. 00. Attached is Objection decision, AppendixGw.Attached are contracts agreement with different clients showing VAT was not agreed upon on transport of coffee.x.Attached are copies of invoices. Behind the invoice is the invoice ETR receipt, transport delivery notes, growers delivery notes from different farms, goods received note - an evidence we never charged our clients VAT.

Appellant’s Case 8. The Appellant’s case is premised on the following documents:i.The Appellant’s Statement of Facts dated 15th November, 2022 and filed on 25th November, 2022 together with the documents attached thereto and proceedings before the Tribunal.ii.The Appellant’s witness statement of Ann Bahati dated and filed on 12th May, 2023 and which was admitted in evidence under oath on 5th September, 2023. iii.The Appellant’s written submissions filed on 12th May, 2023 together with the legal authorities filed therewith.

9. That Value Added Tax (VAT) is a consumer tax charged on the supply and importation of taxable goods or services made in Kenya.

10. That supply of coffee to the auction centers is zero rated as per Para 4 of Part A of the 2nd Schedule under the VAT Act Cap 35 laws of Kenya.

11. In the Appellant’s considered view, supply of coffee-to-coffee auction centers includes the transportation of coffee to the coffee warehouse. That the warehouse is the physical location of the auction’s coffee commodities and the Coffee Act 2009 creates a condition that coffee is not auctioned if it is not in a registered warehouse within Nairobi Area.

12. That 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 vs Total Touch Cargo Holland HC ML ITA No. 17 of 2013 [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. That the determining factor is the location where that service is to be finally used or consumed.

13. The Appellant submitted that for a service to be deemed an exported service, the determining factor is the location where that service is to be finally used or consumed. The Appellant posed the following questions:i.Whether a transport service be consumed in Kenya while the good being transported be consumed in a foreign country.ii.Whether, a consumer benefit from goods and not services related to preparation and availing of such goods.iii.Why would it not be construed that the coffee transport services fall under Regulation 13 of the VAT Regulations 2017, being an export service that is zero rated for VAT in accordance with paragraph (1) of the Second Schedule to the VAT Act, 2013, being in respect of exportation of taxable services?iv.Whether transport of coffee to the auction centers NOT form part of the supply of such coffee being transported?

14. The Appellant prayed that This Honorable Tribunal take judicial notice that the coffee while being transported to the Commercial Warehouse remains the property of the farmer up until when a buyer pays after the sale is made. That before the coffee is sold in an auction or through a direct sale, such coffee belongs to the farmer and all its related costs are wholly borne by the farmer. That coffee is sellable only when warehoused within Nairobi and hence the farmer has to cause the coffee to be brought to Nairobi for it to become sellable.

15. That the Appellant has therefore signed transport contracts with the Marketing Agents who are duly appointed and act on behalf of the farmers, pay for the coffee transport cost on behalf of the coffee farmers and recover the paid sums from the coffee sale proceeds before remitting to the farmers the net of sales. That it is the Marketing agents who thus extend their agency to the transporter and by this the transporter remains an agent of the coffee farmer. That in respect of this, all the costs related to the production and preparation of that coffee to reach the market, including transport thereof are costs directly borne by the farmer in preparing and availing his coffee to the export market. That transport cost is the farmer’s cost and without it, the coffee is not available for export.

16. That in the Appellant’s view, a key question is who the ultimate consumer is. That the consumer of the coffee plus its incidental preparation costs are the foreign buyers’. That these foreign buyers buy coffee directly from the farmers and from the auction center through their appointed agents who form part of the Kenya coffee dealership registered by the Agricultural Food Authority. That for direct sales, the farmer signs a direct sale contract with the foreign buyer directly through the linkage of the Marketing Agents. That this makes the transport element within the coffee commodity form part of the export.

17. That in the case of Total Touch Holland (supra), the taxman argued that it was the horticultural produce that was exported not the service provided by KAHL before said produce left Kenya. That the taxman further argued that it was the flower farmer in Kenya (similar to the Kenyan coffee farmer) that benefited from the services in contention. That similarly, in this instant case, the taxman is arguing that it is the coffee that is zero rated and not the transport service in relation to this zero-rated coffee. That however, the court had this to say in regard to the ultimate consumer of the services;“Said services were ultimately enjoyed or used by the buyers (consumers) of the horticultural produce and flowers who were also outside of Kenya.”

18. That this was in line with the TAT definition of consumption as quoted in the same case as follows:“To our mind then, it is immaterial where the place of the performance of the service takes place, it can be in China, in Latin America, in Ireland, in Mesopotamia, in Asia or Europe or even here in Kenya; what is material is where the use or consumption of the service takes place, not the place of services.”

19. That again, this was in line with the destination principle under the Organization for Economic Co-Operation and Development (OECD) Guidelines which provide that the jurisdiction where a customer is located has the taxing rights over internationally traded services (coffee being an export supply). That this principle was reinforced in the 3M Kenya Limited (Appellant) vs. Kenya Revenue Authority. TAT No. 30 of 2016.

20. That coffee supply to the auction center is a zero-rated supply under the 2nd Schedule of the VAT Act, 2013. That it would be grossly erroneous to assume that transportation does not form part of that supply. That to charge VAT on the coffee transport before the coffee leaves the Country would be to apply the origin principle which has been faulted by the court in the case of Unilever Kenya Limited –vs- The Commissioner Of Income Tax – Income Tax Appeal No. 753 of 2003 as failing to achieve VAT neutrality.

21. That in the case of Card Protection Plan Ltd vs Commissioners Customs and Excise [2001] UKHL 4 Lord Slynn of Hadley held that (which was unanimously agreed by a 5-judge bench):“2 9. I would therefore hold in response to paragraph 32 of the European Court of Justice's judgment [1999] 2 A.C. 621, 627 that the transaction performed by CPP for Dr. Howell is to be regarded for VAT purposes as comprising a principal exempt insurance supply and the other supplies in the transaction are ancillary so that they are to be treated as exempt for VAT purposes”

22. That the Court further went ahead to define what constitutes a service:“…. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied: Customs and Excise Commissioners v. Madgett and Baldwin (trading as Howden Court Hotel) (Joined Cases C-308/96 and 94/97) [1998] STC 1189, 1206, para 24. " (p 627. )”

23. That it is to be noted and held that coffee transport is an auxiliary or preparatory activity carried by the farmer in moving the coffee to the market since the Kenyan coffee farmer is not allowed by law to sell his coffee at farm gate. That in this breadth, there would not be a sale of coffee minus the transportation since all coffee in Kenya are sold while in licensed warehouses located within Nairobi. That coffee not in a licensed warehouse within Nairobi is not sellable coffee.

24. The Appellant emphasized that it is a global practice that if the product or service being sold is not taxable, any charge for shipping or delivery is also not taxable. Example: A customer purchases smoked meats, assorted cheeses, and jellies from a mail-order food merchant. The food merchant adds a shipping and handling charge to the customer’s bill. Since all of the products the customer purchased are non-taxable food products, the entire charge, including the shipping and handling charge, is exempt from tax.

25. That transport of coffee has not been expressly said to be VATable. That the reason why the law makers remained silent on this issue is because they expected that the Status Quo should remain. That in the case of Ibrahim Manyara vs Registered Trustees of Agricultural Society of Kenya (Ask) [2014] eKLR it was stated that “The offshoot of my finding on this subject is that there is no known law that subjects decrees of court to taxation. The Income Tax Act aforecited is silent on this and we should so far trend that path.” That it is on this spirit that this Tribunal should hold that when the law is silent on this issue, it should remain silent.

26. That in the case of Republic vs Kenya Revenue Authority & another Ex-parte Fontana Limited [2014] eKLR, JR Misc. Civil Application No. 442 OF 2013, the Court laid bare on para 60, what should be considered when determining a taxable supply as quoted below:“…in a taxing Act, one has to look at what is clearly said. There is no room for intendment as to a tax. Nothing is to be read in, nothing it to be implied. One can only look fairly at the language used… If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”“…… It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose the tax upon him”“…… Any tax imposed on a subject is dictated by the terms of legislation and taxing authority must satisfy itself that the transaction fits within the definition of the statute. In Adamson v Attorney General (1933) AC 257 at p 275 it was held that, “The section is one that imposes a tax upon the subject, and it is well settled that in such cases it is incumbent on the Crown to establish that its claim comes within the very words used, and if there is any doubt or ambiguity this defect-if it be in view of the Crown a defect can only be remedied by legislation.”

27. That further, the Court in the Fontana case at Paragraphs 62 to 64 has quoted the following words:“62. “Taxes are imposed on subjects by parliament. A citizen cannot be taxed unless he is designated in clear terms by a taxing Act as a taxpayer and the amount of his liability is clearly defined.”

63 “...my Lords, there is a maxim of income tax law, which though it may sometimes be overstressed yet ought not to be forgotten. It is that the subject is not to be taxed unless the words of the taxing statute unambiguously impose tax upon him. It is necessary that this maxim should on occasion be reasserted and this is such an occasion.”64 “Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for ambiguity…any ambiguity in such a law must be resolved in favour of the taxpayer and not the Public Revenue Authorities which are responsible for their implementation.”

28. That as was held in the Fontana case, it is the Appellant’s case that the taxman acted by imposing a VAT claim in the absence of express provisions of the law and by assumption that transportation of clean coffee to the market, which forms part of the agricultural services as under Third Schedule of the VAT Act Cap 35 of 2013 is a taxable service yet the law does not expressly state as such and there has been no case law that has ever supported such taxation. That by so doing, the taxman acted in discrimination with no other coffee related cost that is VATable, making this case a form of re-writing the statute through the back door.

29. That it was the taxman’s argument that the farmer upon receiving a tax invoice is in a position of recovering the same through input tax deduction. That the VAT Act Cap. 35 of 2013, Section 5(4) states as follows:“(4)The amount of tax payable on a taxable supply, if any, shall be recoverable by the registered person from the receiver of the supply, in addition to the consideration.”

30. That it is now well demonstrated that coffee is a taxable supply at zero rate. That the receiver of the supply is outside Kenya, just like the flower consumer. That it therefore means that Section 5(4) of the VAT Act is not addressed to the coffee farmer. That as such, the Appellant questioned whether the case cited by KRA in its objection notice related to the issue of clean coffee transport. The Appellant was of the view that it was not. That the referenced case dealt with goods in transit while this instant case is about charging VAT to the farmer whose coffee is being transported to the market, and as a legal condition for availing coffee to the market. The Appellant wondered whether the Parliament in its wisdom could have created this legal condition for sale of coffee with a view to having the coffee farmer subjected to VAT on transport.

31. That the Tribunal in the case of Mars Logistics Ltd gave reasons why VAT would be levied in Para 42 where the recipient would recover through input tax. That in this case, the coffee farmers (safe for the large coffee plantations in Kiambu County) are not registered VAT taxpayers and as such have no way of recovery through input tax and hence would be the ultimate VAT consumers. The Appellant questioned whether the Parliament could have zero rated the supply of the coffee to the export market with intention that incidental and auxiliary costs of such supply by the farmer would be VATable at standard rate and failed to express themselves as such.

32. That again, at para 42 of the of Mars Logistics Ltd case, the Tribunal considered that VAT is an allowable expense. That to the coffee farmer, there is no benefit of allowable expenses since this is only available while computing Corporate income tax. That coffee farmers are not incorporated persons and such benefits as allowable expenses are not available in their coffee production activities. That again, VAT being a consumption tax and the farmer not being the consumer of the coffee, it is not fair and just to have the farmer bear VAT cost on transport. The Appellant queried whether it was the intention of the law that coffee farmers pay VAT on auxiliary costs of coffee export while other farmers like in flower farming are not, and yet not expressly stated in the Act.

33. That on the issue of input tax recovery, it is the farmer whom the taxman is referring to while knowing only too well that the coffee farmer has no capacity to file such returns and to make such recoveries as coffee farming is pooled through Coffee Cooperatives only after post-harvest leaving all the pre-harvest costs to the hundreds of thousands of farmers to handle them individually. That such farmers cannot logically be VAT registered so as to benefit from input tax as the taxman tends to argue; since to be registered for VAT, one requires to make sales of above Kshs. 5 Million, obviously beyond the imagination of a majority of coffee farmers.

34. That it is also for judicial notice that coffee must be transported to a registered warehouse within Nairobi so as to be catalogued for sale in the Nairobi Coffee Exchange and hence coffee stored outside Nairobi is not available for sale. That the farmers do not have the option of holding the coffee and selling it from their local warehouses and stores and hence transport forms part of the sales preparation by the farmer. It was the Appellant’s view that coffee transport forms part of what the VAT Act Cap. 35 refers to as supply of coffee and tea to the coffee and tea auction centers and clearly referred as zero rated.

Appellant’s Prayers 35. The Appellant made the following prayers:i.That this Appeal be allowed and the objection decision of the Commissioner for Domestic Taxes be set aside with costs.ii.The costs of this Appeal be borne by the Respondent.iii.Such further or other orders as this Tribunal may deem just and expedient.

Respondent’s Case 36. The Respondent’s case is premised on the Respondent’s Statement of Facts dated and filed on 22nd December, 2022 together with the documents attached thereto.

37. That the Respondent carried out a credit validation on the Appellant and observed that the Appellant's business is supply of services through transportation of coffee and supply of goods, that is, gunny bags.

38. That the Respondent therefore determined that the services rendered by the Appellant were neither zero rated nor exempt but taxable at applicable standard rates of either 14% or 16% depending on the period.

39. That the Respondent served the Appellant with a VAT credit verification notice dated 2nd December 2021 because the Appellant had been a perpetual VAT credit filer who declared sales for the transportation of coffee as exempt and zero-rated sales instead of general rated sales.

40. That the Appellant was notified of the requirement to provide the following supporting documents on or before 13th December 2021: -a)Audited accounts for the years 2017 - 2020;b)Bank statements for the period 2017 to datec)Sales and purchases ledgers for the period 2017 to date

41. That the Respondent verified the Appellant's returns and ascertained that the Appellant had declared its sales as zero rated and exempt sales.

42. That Paragraph 4 of Part A of the Second Schedule of the Value Added Tax Act, 2013 that states... “The supply of coffee and tea for export to coffee or tea auction centre” specifically refers to supply of goods i.e. coffee and tea by the suppliers of these goods to coffee and tea auction centres and not the contracted transporter.

43. That Section 2 of the VAT Act defines the following words:-“goods” means tangible movable and immovable property and includes electrical or thermal energy, gas and water, but does not include money.

44. In this case, coffee is a tangible and movable property.“supply of goods” means-(a)a sale, exchange, or other transfer of the right to dispose of the goods as owner; or(b)the provision of electrical or thermal energy, gas or water;”“supply of services" means anything done that is not a supply of goods or money, including-(a)the performance of services for another person;(b)the grant, assignment, or surrender of any right;(c)the making available of any facility or advantage; or(d)the toleration of any situation or the refraining from the doing of any act;”

45. That in this matter, the Appellant is engaged in the supply of services through transportation of coffee and supply of goods, that is, gunny bags, which are general rated supplies.

46. That therefore, when Paragraph 4 of the Second Schedule of VAT Act,2013 refers to “supply of coffee and tea for export to coffee or tea auction centres” being zero rated supplies. That it is only zero-rated supplies where it involves the owner of the coffee supplying the coffee or tea to the auction centres and not the contracted transporter.

47. That the Appellant is involved in supply of transportation services which form part of the value chain and does not directly export coffee.

48. That supply of coffee as a good as defined by Section 2 of the VAT Act, 2013 is not in contention and the assessment was based on the transportation services rendered by the Appellant.

49. That regarding the Appellant's failure to charge VAT on transportation of the unprocessed (green) coffee, the Respondent was of the considered view that the Appellant erred by not charging its clients.

50. That the Appellant should have charged the coffee supplier VAT, and if the Appellant would have done so, it would not increase the cost of coffee in the market since the supplier has the right to claim input and apply for a refund pursuant to Section 17 (5) of the Value Added Tax Act 2013 which states as follows: -“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-(b)such excess arises from tax withheld by appointed tax withholding agents; and withholding agents may be applied against any tax payable under this Act or any other written law, or is due for refund pursuant to section 47(4) of the Tax Procedures Act,2015;(d)the registered person lodges the claim for the refund of the excess tax within twenty-four months from the date the tax becomes due and payable; and(e)such excess arises from input tax under subsection (8):Provided further that a registered person who, since the commencement of subsection (8) but before the commencement of this provision, has a credit arising from input tax under subsection (8) may apply for the refund of excess tax within twelve months from the commencement of this provision.Provided further that, notwithstanding section 17(5)(d), a registered person who, within a period of thirty-six months prior to the commencement of section 17(5)(b) and (c), has a credit arising from withholding tax, may make an application for a refund of the excess tax within twelve months from the commencement date”

51. That this particular provision allows payment of excess input tax to a registered person where refund arises from making zero rated supplies listed under the Second Schedule of the Value Added Tax Act. That however, the claim should be on inputs that are solely used in the making of the zero-rated supplies.

52. The Respondent agreed that, as stated by the Appellant, VAT is a consumption tax. That however, it is charged at all stages of production and value chain, where VAT registered taxpayers are entitled to deduct input tax on purchases and account for output tax on sales. That each business in the supply chain takes part in the process of controlling and collecting the tax, remitting the proportion of tax corresponding to the difference between the VAT paid out to suppliers and the VAT charged to customers.

53. That the High Court ruling in Commissioner Of Domestic Taxes vs Total Touch Cargo Holland [2018] eKLR on determination of zero rating of export services in a case pitting the Respondent against Total Touch Cargo Holland, where the High Court ruled in favour of the Appellant, the Respondent stated the following: In the case relied on by the Appellant, the Kenyan service provider had been contracted by Total Touch Cargo Holland based in Netherlands through its Kenyan subsidiary Total Touch Cargo Kenya hence the High Court ruled in favour of Total Touch Cargo Holland on the basis that even though the service in question was rendered in Kenya, the benefit of the service provided accrued outside Kenya since it was acquired and utilised by a foreign company hence an exported service.

54. That on the contrary, the Appellant in this matter is a local company contracted by local farmers therefore the transport service is supplied locally and subject to VAT.

55. The Respondent further relied on the High Court ruling in Mars Logistics Limited vs The Commissioner of Domestic Taxes (2021) eKLR where the High Court held that it found no basis to fault the Tax Appeals Tribunal's findings and dismissed the Appeal. That the Tribunal had ruled in favour of the Respondent on the basis that under the VAT Act 2013, transportation of goods in transit is neither zero rated nor exempt from VAT. That as the Tribunal correctly held, “to qualify for zero-rated status, the service should be specifically provided in the 2nd Schedule to the Act.”

56. That the Respondent reviewed the earlier assessment and confirmed that the assessment of Kshs. 2,352,962. 00 for the period January 2017 to April 2017 was raised out of the 5 years stipulated time as prescribed by Section 31(4) to 31(6) of the Tax Procedures Act. That specifically, the review of the Appellant's VAT returns indicated that transport services of Kshs. 702,000. 00 to C Dormans SEZ Ltd. was charged VAT contrary to the provisions of the Paragraph 12 of Part A of the 2nd Schedule to the VAT Act 2013 which zero rates this particular service. That the Appellant's objection application was partially accepted and the outstanding tax liability of Kshs. 16,199,529. 00 remained due and payable.

57. That the following issues were not in contention:i.The proprietary rights of green coffee being transported by the Appellant;ii.Whether or not coffee is physically delivered to the auction centre; andiii.Determination of whether or not coffee is a controlled commodity under the Crops Act.

58. That Section 5 (1) of the Value Added Tax Act which is an Act of Parliament states as follows: -“(1)A tax, to be known as value added tax, shall be charged in accordance with the provisions of this Act on-(a)a taxable supply made by a registered person in Kenya;(b)the importation of taxable goods; and(c)a supply of imported taxable services.”

59. That in addition, as per OECD guidelines, destination principle applies to VAT on exports where exports are free from VAT and imports are taxed on the same basis and at the same rate as local production. That however, the principle does not apply in this matter as the Appellant does not engage in international trade and does not export any service.

Respondent’s Prayers 60. The Respondent prayed that the Tribunal:i.Finds that this appeal lacks merit;ii.Upholds the Respondent's review decision; andiii.Dismiss the appeal with costs to the Respondent

Issue for Determination 61. The Tribunal has carefully studied the pleadings and documentation filed by both parties and is of the respectful view that the singular issue for its determination is:- Whether the Value Added Tax assessments was justified.

Analysis and Determination 62. The Tribunal having ascertained the issue for determination as set out above proceeds to deal with the same as hereunder.

63. This dispute arose from the Respondent’s action of charging VAT on the Appellant’s service of transportation of coffee to coffee auctions for export. The Appellant argued that the service is zero-rated while the Respondent averred that it is taxable.

64. The Tribunal having reviewed the parties’ pleadings is of the considered view that the bone of contention in this matter is whether transportation of coffee to auction houses for export is zero rated as per Paragraph 4 of the 2nd Schedule to the VAT Act, 2013. Further, the dispute requires a determination as to whether the transport services by the Appellant qualify to be services exported out of Kenya.

65. Paragraph 4 of the 2nd Schedule to the VAT Act states 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—4. The supply of coffee and tea for export to coffee or tea auction centers.”

66. Part A of the Second Schedule to the VAT Act provides for “zero rated supplies”. Specifically, it lists all the supplies that are considered VATable at zero rate under this Act.

67. The Tribunal notes that the Appellant’s argument is that the transport services are ancillary or essential to ensuring that the coffee for export is in situ at the auction centers in readiness for export. The Tribunal however notes that these transportation services are not specifically listed in the Second Schedule as zero-rated supplies.

68. The Tribunal was guided by the principle in Cape Brandy Syndicate v Inland Revenue Commissioner [1921} 1 KB 64, where the court held:“In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing Is to be read in, nothing is to be implied. One can only look fairly at the language used...”

69. It is apparent to the Tribunal that the Second Schedule to the VAT Act does not list “transport of coffee to auction centres” as a zero-rated supply. If the purpose of the legislature was to zero rate transportation services to coffee auction centres, then this would have been expressly listed under the Second Schedule as zero rated. A reading of the listing of zero-rated supplies under this Schedule confirms that these transportation services are not listed and are therefore are not zero rated.

70. On the issue of use or consumption, the Appellant in its pleadings stated that it has signed transport contracts with Marketing agents who are duly appointed and act on behalf of the coffee farmers, pay for the transport cost on behalf of the farmers and recover the sums from the coffee sales proceeds before remitting to the farmers the net of sales. That in relation to this, all the costs related to the production and preparation of that coffee to reach the market, including transport thereof are costs directly borne by the farmer in preparing and availing coffee to the export market.

71. Further, the Tribunal reviewed contracts between the Appellant and its clients as well as goods dispatch notes and delivery notes provided by the Appellant. The Tribunal confirmed that these contracts were all with local entities and none was with a non-resident/ foreign client. Further, transport rate cards provided in the contracts showed that deliveries were made from local origins to local destinations.

72. Section 2 of the VAT Act defines a “service exported out of Kenya” to mean a service provided for use or consumption outside Kenya.

73. To determine use or consumption in relation to the definition of service exported out of Kenya, the Tribunal must determine the place of consumption of the said services and the location of the business/ persons receiving the services.

74. In relation to the services in question, and as per the Appellant’s averment, the Tribunal is clear that the end consumer of the transport services and the person that bears the ultimate cost of the service, is the farmer. It is therefore apparent to the Tribunal that the benefit that arose from the transportation services carried on by the Appellant was the availing of coffee at coffee auction centres on behalf of coffee farmers. Ultimately, it was the coffee farmers within Kenya that were the final consumers of the transportation services and not the foreign buyers of the coffee.

75. Further, based on the contracts, it is apparent to the Tribunal that the transport services were from local origins to local destinations and that the person that contracted with the Appellant were local entities and not foreign entities.

76. Consequently, the place of consumption of the said services was in Kenya and the location of the business/ persons receiving the services was in Kenya which are all key in determining whether a service is exported or not. The Tribunal, in the instant case, concludes that the services were not exported.

77. In view of the foregoing, the Tribunal found that transportation of coffee to coffee auction centres was not zero rated for the period under review.

78. The Tribunal having confirmed that transport of coffee to coffee auction centres was not zero rated under the Second Schedule to the VAT Act found that the Respondent was justified in issuing the VAT assessment to the Appellant.

Final Decision 79. In view of the foregoing, the Tribunal finds that the Appeal lacks merit and accordingly makes the following Orders: -a.The Appeal be and is hereby dismissed.b.The Respondent’s Objection decision dated 17th October, 2022 be and is hereby upheld.c.Each Party to bear its own costs.

80. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY,2024ERIC NYONGESA WAFULA - CHAIRMANCYNTHIA B. MAYAKA - MEMBERDR. RODNEY O. OLUOCH - MEMBEREUNICE NG’ANG’A - MEMBERABRAHAM K. KIPROTICH - MEMBERBERNADETTE GITARI - MEMBER