[2024] KETAT 156 (KLR)

Morgan Air & Sea Freight Logistics Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E004 of 2023) [2024] KETAT 156 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 156 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E004 of 2023

Grace Mukuha, Chair, G Ogaga, E Komolo, Jephthah Njagi & T Vikiru, Members

February 9, 2024

Between

Morgan Air & Sea Freight Logistics Kenya Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company registered in Kenya whose main business is offering logistics solutions to a wide range of customers based in Europe, United Kingdom (UK) and other parts of Africa.

2. The Respondent is a principal officer appointed pursuant to Section 13 of the Kenya Revenue Authority Act, (Cap. 469 of the laws of Kenya) (“KRA Act”) and is empowered to enforce and administer provisions of written laws set out in Section 5 as read together with the First Schedule to the KRA Act, among Income Tax Act, Cap 470, Laws of Kenya) and the Value Added Tax Act.

3. The Appellant had accumulated excess input tax having made zero-rated supplies of logistics services to its customers who are based outside Kenya.

4. The Appellant proceeded to lodge a Value Added Tax (“VAT”) refund claims for the periods November 2017 and September 2020 amounting to Kshs 1,417,285. 00.

5. The Respondent rejected the Appellant’s VAT refund applications vide iTax notifications dated 6th and 8th September 2022.

6. In addition to issuing the refund rejection decisions, the Respondent issued the Appellant with credit adjustment vouchers (CAV’s) for the cumulative sum of Kshs. 1,417,285. 00 implying that the rejected VAT refund claims could be reinstated as excess input tax to be carried forward and utilized to offset against any future VAT liabilities arising therefrom as opposed to being paid out as cash refund claims.

7. The Appellant being dissatisfied with the rejected claims objected to the rejected claims totalling to Kshs. 1,417,285. 00 vide its notice of objection dated 27th September 2022.

8. The Respondent proceeded to issue its objection decision vide a letter dated 25th November 2022.

9. Aggrieved by the objection decision, the Appellant filed this Appeal vide a Notice of Appeal dated 23rd December 2022.

The Appeal 10. The Appeal is based on the grounds set out in the Appellant’s Memorandum of Appeal dated 6th January 2023 and filed on 9th January 2023. a.That it was not permissible in law for the Respondent to find that it was not satisfied with the Appellant’s explanations given in the notice of objection as well as in the subsequent meetings and email correspondences, on the issue of principal - agent relationship without the Respondent stating the reasons thereof or the specific shortcomings in the Appellant’s explanations on the subject.b.That the Respondent erred in fact in finding that the Appellant claimed input tax in reimbursable expenses contrary to the provisions of Section 13(5) of the VAT Act 2013 and by alluding that the Appellant had incurred the input VAT as an agent of its non­resident customers, when as a matter of fact there was no principal-agent relation in that respect.c.That the Respondent was misdirected both in fact and in law in rejecting the Appellant's VAT refund claims for the months of November 2017 and September 2020 which had arisen from excess input tax incurred from making zero-rated supplies.d.That the Respondent was misguided in law and in fact in alleging in its decision that it could not accept the Appellant's explanation that it was offering transportation services merely because the Appellant does not own any aircraft/vessel.e.That the Respondent was misdirected in law in holding in its objection decision that it had appealed cases with similar model as that of the Appellant when the Respondent ought to be aware that unless a stay order had been issued by a superior Court and the Judgement of the Tribunal or High Court vacated, the Respondent was bound by the said authorities.

The Appellant’s Case 11. The Appellant’s Case is also premised on the following documents:-a.The Appellant’s Statement of Facts dated 6th January 2023 and filed on 9th January 2023. b.The Appellant’s Written Submissions dated and filed on 12th May 2023.

12. The Appellant averred that in its objection decision, the Respondent stated thus:“1. Whereas you provided the requested documents through various email communications of 13. 10. 2022,17. 10. 2022, 16. 11. 2022,23. 11. 2022 & 24. 11. 2022 and the meetings held with you on 08. 11. 2022 and 17. 11. 2022, the Commissioner has not been persuaded to agree with you that you do not have a principal agency relationship with your business model.

2. The Commissioner has appealed to cases with a similar business model as yours."

13. That save for stating the Respondent was not persuaded by the Appellant's explanations in the notice of objections, the meetings as well as the numerous email correspondences, the Respondent did not state, why it was not satisfied with the explanations offered, what were the shortcomings in the information provided or in the explanation given. That the Respondent simply held that it was not persuaded.

14. That the right to a fair hearing under Article 50 as well as the right to fair administrative action under Article 47 of the Constitution not only envisages reasons being given but expects that the reasons given are substantive and adequate. That indeed, the High Court (GV Odunga, J (now JA)) in the case of Gideon Omare v Machakos University [20201 eKLR held thus:-“I associate myself with the position in South Bucks District Council & Another vs. Porter [2004] UKHL 33 to the effect that:"The reasons for a decision must be intelligible and they must be adequate. They must enable the reader to understand why the matter was decided as it was and what conclusions were reached on the "principal important controversial issues", disclosing how any issue of law or fact was resolved. Reasons can be briefly stated, the degree of particularity required depending entirely on the nature of the issues falling for decision. The reasoning must not give rise to a substantial doubt as to whether the decision-maker erred in law, for example by misunderstanding some relevant policy or some other important matter or by failing to reach a rational decision on relevant grounds."

15. The Appellant averred that the decision given was not intelligible. That it was not adequate. That the Appellant could not understand why the issue of principal­ agency relationship was decided and how it was decided.

16. That it is for these reasons that the Appellant prayed that the objection decision be set aside for want of adequate and substantive reasons.

17. The Appellant also averred that in its refund rejection decision, the Respondent rejected the Appellant's VAT refund claims on the basis that the input VAT in question was incurred by the Appellant in its capacity as an agent as opposed to a principal and as such, that the Appellant being an agent did not qualify for the VAT refund thereby declining to refund the sum of Kshs. 1,417,285. 00.

18. That the refund rejection decisions dated 6th September and 8th September 2022 also alluded to rejecting the refund claims on the basis of the provisions of Section 13(5) of the VAT Act, which provides as follows: -“In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client:Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value.”

19. The Appellant refuted the above assertion and averred that it did not act as an agent to any of its customers and that there was no agency relationship at all between it and its customers.

20. That the Appellant's business model clearly shows that the Appellant is not an agent of any of its customers. That the Appellant deals with the transportation of goods originating from Kenya. That this is evidenced by existing Block Space Agreements with the Airlines in which the Appellant is the owner of the capacity. That approximately 95% of the Appellant's sales consist of Airfreight transportation and the consumption of all the goods is in international destinations.

21. That the Appellant clarified that as part of the transportation services offered to its customers, Morgan Air guarantees its suppliers of filling up space with contracted airlines. That in the event that the Appellant is unable to fill up the guaranteed spaces, it has a contractual term that the Appellant will, nonetheless, pay up for the guaranteed space to its suppliers.

22. That the contracts further stipulate that the Appellant would bear all the risks associated with operating the business, an attestation that these risks are borne by the Appellant.

23. That the Appellant is therefore the sole "owner" of the airfreight capacity, and this is then subsequently sold to customers at market related rates.

24. That further, in the event, that the space is not taken up, then the Appellant has to pay up for the unused space.

25. That the Appellant's nature of the agreement with its customers is service orders/quotes for the services to be offered. That the Appellant then issues invoices to its customers depending on the terms and conditions of the service quote and based on the fee amount per the service order. That the consideration received by the Appellant for the services rendered is therefore at a market related rate as agreed between the parties.

26. That the expenses incurred by the Appellant are part of its cost of sales and the Appellant does not receive any reimbursement from its customers for any of the costs incurred but earns a consideration for services rendered. That this is in accordance with the provisions of Section 13 (1) of the VAT Act, 2013 that provides:“...the taxable value of a supply, including a supply of imported services, shall be-a.the consideration for the supply; orb.if the supplier and recipient are related, the open market value of the supply."

27. That for the avoidance of doubt, all costs and taxes incurred by the Appellant are its own costs and do not form disbursements paid on behalf of customers thereby negating the purported application of the provisions of Section 13(5) of the VAT Act.

28. That the Court in the case of Kennedy v De Trafford [1897] A.C. 180 at 188 observed as follows with respect to the use of the term "agent":“No word is more commonly and constantly abused than the word "agent". A person may be spoken of as an "agent", no doubt in the popular sense of the word may properly be said to be an "agent", although when it is attempted to suggest that he is an "agent" under such circumstances as create legal obligations attaching to agency that use of the word is only misleading. Therefore, whatever expressions Dodson may have used calling himself an agent, and however true or applicable they may be in the popular sense, in point of law and in their legal sense, they are meaningless."

29. The Appellant submitted that guided by legal authorities presented to the Tribunal, the relation between the Appellant and its customers did not qualify as a principal agent relationship. That a key characteristic of the agency relationship is that the agent has power to bind the principal should it enter contracts with third parties as an agent which is not the case herein. That the Appellant's service orders/quotes for the services offered grant it no such power to bind its customers should it enter third party obligations.

30. The Appellant submitted that the Tribunal rightfully reiterated its position as expressed in the case of Local Production Kenya Limited v Commissioner of Domestic Taxes where it held that in the absence of the ability of a party (acting as an agent) to bind the principal in relation to third party contracting, an agency relationship cannot be inferred.

31. That further, the Tribunal in Tax Appeal No. 381 of 2018 Farab International Fze vs Commissioner of Domestic Taxes also rejected implying an agency relationship between two parties as there was no imputation of the existence of a principal-agent relationship from the documents that governed the relationship between the parties.

32. That it is in fact not open in law for the Respondent to redraft the contracts between the Appellant and its customers to impose a non-existing agency relationship.

33. That additionally, in an agency relationship, the agent usually provides evidence of disbursements/costs incurred on behalf of the principal, and such costs are usually excluded from the value of own supplies. That under the present circumstances, the Appellant does not maintain a separate schedule of costs incurred on behalf of third parties, but rather all costs incurred belong to the Appellant.

34. That from the foregoing, the Appellant submitted that since there is no agency relationship between the Appellant and its customers, the Cofftea case referred to by the Respondent in its refund rejection decisions is inapplicable and irrelevant to the facts of this case.

35. That in that case, Cofftea Agencies Limited ("Cofftea") was engaged as a commission agent of a non-resident company to procure tea and coffee from the auctions on behalf of the principal. That this arrangement was on the basis of a letter of engagement signed between the two parties. That according to the letter of engagement, the principal would bear all costs incurred by Cofftea including collection, blending, transportation, shipping and port charges and such costs would be reimbursed so long as they were supported by third party invoices.

36. That the Tribunal in its ruling held that the business arrangement and the agency agreement between the principal and Cofftea clearly indicated that packaging and shipping costs paid should be reimbursed by the Principal.

37. That the Cofftea arrangement completely differs with Morgan Air's business model as Morgan Air has agreements for supply of services and there are no agency agreements between Morgan Air and its clients. That all costs incurred by Morgan Air are in its own capacity as a principal and there is no reimbursement arrangement with its clients or any other 'principal' party.

38. That in this regard, the Appellant does not act as an agent of any principal in its business and therefore is not reimbursed any costs incurred. That the Appellant objected to the Respondent's assertion that an agency relationship exists between Morgan Air and its customers and submitted that there is no agency agreement between the Appellant and its customers.

39. The Appellant averred that in considering the Appellant's refund application for the months of November 2017 and September 2020, the Respondent in issuing its refund rejection decisions rejected the refund application on the basis that the Appellant had no zero-rated sales.

40. The Appellant submitted that the VAT refund claims lodged by it were valid both in law and supported in fact for the following reasons:-a.That the Appellant supplies various logistics and handling services relating to the exportation of perishable cargo to its non-resident customers located outside Kenya. That in particular, the Appellant supplies logistic services relating to perishable items and other general goods to be consumed outside Kenya.b.That the Appellant's services by dint of being provided for 'use' and 'consumption' outside Kenya to the various non-resident customers based outside Kenya qualify as exported services. That Section 2 of the VAT Act, 2013 defines an exported service to mean: "Services provided for use or consumption outside Kenya."c.That further, the Appellant averred that by dint of the services it offers its customers, it made zero rated supplies for November 2017 and September 2020. That this is further buttressed by the declaration of zero-rated supplies made in the Appellant's VAT return for November 2017 and September 2020, resulting in the Appellant claiming input VAT in the sum of Kshs. 987,210. 00 and Kshs. 430,075. 00 respectively.

41. That the High Court of Kenya faced with similar facts in the case of Commissioner of Domestic Taxes v Total Touch Cargo Holland [2018] eKLR wherein a Kenyan company was providing logistic services for goods consumed outside Kenya, stated as follows:-“The location where the service is provided does not determine the question of whether the service is exported or not. The test is the location (or place) of use or consumption of that service. Therefore, the relevant factor is the location of the consumer of the service and not the place where the service is performed. In this case the service provided by KAHL was for use and consumption in Europe."

42. That in the case of Commissioner of Domestic Taxes v Total Touch Cargo Holland(supra) was an appeal occasioned by an adverse tax decision by the Commissioner that reversed an earlier private ruling issued in 2011 indicating that scanning, cooling, and palletizing services provided to a non-resident company by a local airfreight handling company was taxable at 16%.

43. That aggrieved by this adverse tax decision, the Respondent, Total Touch Cargo Holland, a limited liability company incorporated and resident in the Netherlands filed an appeal before the Tribunal challenging this position. That the Tribunal delivered its Judgement on 17th September 2013 in favour of the Appellant holding that no VAT was chargeable to the Respondent on account of cooling, scanning and palletizing services rendered by the airfreight handling company as these services were exported out of Kenya leading to the current case. That the High Court then upheld the holding of the Tribunal that the said services were exported services.

44. That the upshot of this is that the facts in the Total Touch case are similar to the facts in the present case. That the conclusion by the High Court that the handling, palletizing, and exportation services are taxable at zero percent ought to hold as a binding precedent in the present appeal.

45. That above position was further reiterated by the High Court in the case of Panalpina Airflo Limited v Commissioner of Domestic Taxes [2019] eKLR where the Respondent, Panalpina Airflo had been providing similar services to those rendered by the Appellant in the present Appeal. That the High Court in that case held that in establishing whether services have been exported out of Kenya, the guiding factor should be the location of the consumer of the services and not the place where the services are performed.

46. That the High Court also went further to determine that the taxing rights in relation to VAT on cross border supply of services are vested in the jurisdiction of the final consumer. The Court held that:“...in having regard to the destination principle which provides that internationally traded services should be taxed according to the rules of jurisdiction of consumption and having found that the ultimate consumer of the impugned services is not in Kenya, I find that the instant appeal is merited ..."

47. The Appellant prayed that the Tribunal be pleased to find that the services provided by the Appellant to its non-resident customers amount to an export of services and thus subject to VAT at zero rate.

48. The Appellant averred that in its objection decision, the Respondent held that:-“Your explanation that you are a transporter has not been accepted by the Commissioner owing to the fact that you do not own the aircraft/vessel.",

49. The Appellant submitted that it is immaterial as to whether the Appellant owns a vessel/aircraft for it to qualify as a provider of transportation and logistics services. That in fact, most of the companies who offer similar services do not own any vessel.

50. That in the two cases of Panalpina Airflo Limited (supra) and that of Total Touch Cargo Holland (supra), which dealt with similar issue as is herein, none of these companies owned an aircraft but provided services similar to those offered by the Appellant.

51. The Appellant also averred that in is objection decision, the Respondent stated thus:-“the Commissioner has appealed to cases with a similar business model as yours."

52. This was in relation to instances where case law that were cited by the Appellant in its objection to demonstrate that indeed in cases of model's similar to the Appellant's model, the Court had found that services such as the subject herein were exempt from taxes thereon.

53. The Appellant submitted that unless the Judgements of the High Court and the Tribunal on this subject are appealed against and overturned or a stay order granted in connection thereto, the same is valid law and the Respondent is bound by the said case law and authorities from the Tribunal and the High Court.

54. That the Respondent was misguided in law in finding as it did by insinuating that since it had appealed cases with similar business model as the Appellant's that the Respondent was not necessarily bound by such case laws and legal authorities.

Appellant’s Prayers 55. The Appellant prayed that the Tribunal finds the following:-a.That this Appeal be allowed.b.That the Respondent breached the Appellant's rights to fair administrative action under Article 47 and fair hearing under Article 50 of the Constitution by failing to give substantive and adequate reasons as to why the Respondent was not satisfied with the explanations given on the issue of principal­ agent relationship.c.That the Respondent's objection decision dated 25th November 2022 rejecting the Appellant VAT refund claims amounting to Kshs. 1,417,285. 00 be and is hereby set aside.d.That the Respondent was misdirected both in fact and in law in rejecting the Appellant's VAT refunds claims for the months of November 2017 and September 2020 which had arisen from excess input tax incurred from making zero-rated supplies.e.That the VAT refund claims amounting to Kshs. 1,417,285. 00 relating to the periods November 2017 and September 2020 are due and payable.f.That the Tribunal be pleased to order for the Respondent to refund the Appellant the excess input VAT in the sum of Kshs. 1,417,285. 00 in cash, within thirty (30) days hereof or within such a period of time as deemed fit by this Tribunal.g.That this Tribunal be pleased to grant any other consequential order as deemed just and reasonable.h.The costs and interest at court's rate.

The Respondent’s Case 56. The Respondent’s case is premised on the following documents filed before the Tribunal:-a.The Respondent’s Statement of Facts dated 8th February 2023 and filed on 9th February 2023 together with the documents attached thereto.b.The Respondent’s submissions dated 28th May 2023 and filed on 14th June 2023.

57. The Respondent refuted each and every allegation by the Appellant in the Memorandum of Appeal and Statement of Facts.

58. In response to the first and second grounds of Appeal, the Respondent stated that it conducted an audit with the main objective of confirming the authenticity and correctness of the amount claimed by the Appellant.

59. That the audit revealed that the Appellant failed to provide an analysis of the input incurred related to services offered to mainly non-resident companies where output VAT was not charged.

60. That further, the audit revealed that the Appellant had been claiming input tax in reimbursable expenses contrary to Section 13(5) of the VAT Act 2013 which provides that;“In calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of 1naldng the supply to the client: Provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of his client, then such disbursement shall be excluded from the taxable value"

61. The Respondent averred that the Appellant was claiming input Value Added Tax (VAT) on supplies made to the principal and subsequently proceeded to disallow the same on the account that the Appellant in the furtherance of its business thereon, did not incur the expenses and input VAT.

62. That despite several requests, the Appellant never provided documents to prove the expenses. That Section 23 of the Tax Procedure Act makes it a requirement for taxpayers to keep documentation for a period of at least 5 years to enable the Respondent ascertain their taxes due. The Section states as follows;“A person shall- maintain any document required under a tax law, in either of the official languages; maintain any documents required under a lax law so as to enable the person’s tax liability lo be readily ascertained; and retain the document-for a period of five years from the end of the reporting period to which it relates or such shorter period as may be specified in a tax law."

63. The Respondent averred that the Appellant failed to provide documentation in support of the same contrary to the provisions of Section 59 of the Tax Procedure Act which provides that:“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, or for any other purposes relating to a tax law, the Commissioner or an authorised officer may require any person, by notice in writing, to produce for examination, at such time and place as may be spec ed in the notice, any documents (including in electronic format) that are in the person's custody or under the person's control relating to the tax liability of any person."

64. In response to the third ground of Appeal, the Respondent reiterated that the Appellant was claiming input Value Added Tax (VAT) on supplies made to the principal and subsequently proceeded to disallow the same on the account that the expenses and input VAT thereon was not incurred by the Appellant in the furtherance of its business.

65. The Respondent relied on the case of Cofftea Agencies Limited Vs Commissioner of Domestic taxes (2016) where the Honorable Tribunal held that input VAT is only deducible where the supply is made to the taxable person and it is made for the purposes of that person's taxable activities.

66. The Respondent averred that the Appellant also failed to provide documentation in support of the same contrary to the provisions of Section 59 of the Tax Procedure Act.

67. In response to ground 4 of the Appeal, the Respondent averred that since it was the Appellant's claim that it was offering transportation services yet it does not own any aircraft or vessel, it is purely upon the Appellant to prove the same virtue of Section 56 of the Tax Procedures Act 2015 which states that;“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect."

68. The Respondent averred that the Appellant failed to discharge this burden to the Respondent's satisfaction. That as such, the Respondent rightfully issued the decision on the basis that the Appellant does not own any aircraft or vessel therefore does not offer transportation services.

69. In response to ground 5 of the Appeal, the Respondent averred that indeed the Respondent is bound by the judgements of the Tribunal. Consequently, the Respondent is bound by the decision highlighted above in Cofftea Agencies Limited v Commissioner of Domestic Taxes (2016).

70. That the judgement was express on the fact that input VAT is only deducible where the supply is made to the taxable person and it is made the purposes of that person's taxable activities.

71. The Respondent averred that by virtue of the above decision, the decision to disallow the Appellant's input VAT as claimed was rightfully issued.

72. The Respondent was of the considered view that to unpack the dispute, the Tribunal ought to make a determination on the following issues:-a.Whether the logistic services offered by the Appellant are zero-rated?b.Whether the principle of stare decisis applies? andc.Whether the decision issued failed to provide for shortcomings in the Appellant’s explanations.

a. On whether the logistic services offered by the Appellant are zero-rated? 73. The Respondent submitted that the Appellant sought to place its output under the provisions of Paragraph 20 of the Second Schedule of the VAT where transportation of goods originating from Kenya to a place outside Kenya are classified as zero-rated.

74. The Respondent submitted that the Tribunal needs to make a determination as to the nature of services offered by the Appellant given that it has failed to provide evidence and only relies on averments to prove the services it offers. That this is a factual issue which can only be established from the evidence based on the evidence provided.

75. The Respondent submitted that averments in pleadings are not evidence was appreciated in Francis Otile vs. Uganda Motors Kampala HCCS No.210 of 1989 where it was held that the court cannot be guided by pleading since pleadings are not evidence and neither can they be a substitute thereof.

76. To buttress its point that averments are not evidence, the Respondent relied on the following cases:-i.Mohammed & Another vs Haidara [1972] E.A 166ii.Edward Muringa through Stanley Muringa vs. Nathaniel D. Schulter Civil Appeal No.23 of 1997iii.CMC Aviation Ltd. vs. Cruisair Ltd. (No.1) [1978] KLR 103;[1976-80] 1 KLR, Madan, J

77. The Respondent stated that it follows that the Tribunal has to consider the evidence provided to ascertain the true nature of the services offered by the Appellant. That the Tribunal cannot make determination by basing on the explanation advanced.

78. The Respondent submitted that from the Magma Contract, the Appellant is simply subcontracted by Magma to perform some functions and that Magma itself is also not an operator but the person who actually hires the aircraft and books the space in the Aircraft.

79. The Respondent averred that the same can be depicted as per the sample agreement between the Appellant and Magma Cargo Charter at page 45 of the Appellant’s record. That the Appellant in the Agreement is referred to as the Client. The Agreement states that:“the Client is acting as a freight forward agent. The client may allocate, transfer or sell of any of its Base cargo payload on any flight to any other Customer…”

80. That the Magma Cargo Charter Agreement, at Article 13 states that: -“The client warrants that: 13. 1 In accepting the terms of this agreement it is, or is the agent of, has the authority of, the person owning or entitled to the possession of the cargo or the person who is or may become interested in the cargo”

81. The Respondent submitted that from the agreement, the responsibilities of the Appellant are exactly the same as what is offered by the travel agent who help client to book seats. That in this case, the Appellant helps the customer to secure block space for the customer’s goods and it cannot therefore plead that it is not the agent of the customer while the contract expressly provides for the same.

82. The Respondent submitted that to understand the role played by the Appellant, Article 16 of the Agreement provides the role of the Appellant to include: -“16. 1. ensuring the cargo is available at the departure airport at the specified place for the relevant flight;

16. 2. obtaining all the necessary import or export licences and other documentation relating to the cargo and complying with all the necessary customs and import/export requirements at the place of departure and the place ….

16. 3ensuring cargo which has been delivered by the operator is promptly collected.”

83. That from the foregoing, it is evident that the true nature of the services simply is that of being the freight forward agent of the person who is seeking to have the goods transported.

84. The Respondent submitted that the agreement expressly states that that the Appellant is freight forwarding agent. That the Appellant itself is clearly not a transporter, who in the agreement is called the operator.

85. The Respondent asserted that the Appellant as per the business model is therefore a middle man between the customer and the airline which offers the transportation services. That it was worth noting that the Contract that the Appellant has is not with the Airline but with the Magma, who is also an intermediary.

86. The Respondent relied on the Black Laws dictionary which defines “transportation “as:“The movement of goods or persons to another by carrier”

87. The Respondent relied on Human v Finanzamt Hamburg-Eimsbuttel which discusses what is meant by transport in the context of the sixth Council Directive 77/388/EEC of 17th May 1977 on the harmonization of the laws of the member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (the Sixth Directive). That the Court of Justice adopts a broad interpretation of the term ‘form of transport’ finding that ocean-going sailing yachts that are used by their hirers for the practice of the sport of sailing are ‘forms of transport’ within the meaning of Art 9(2)(d) of the Sixth Counsel Directive 77/388/EEC (at paragraphs 16 to 22 of the judgement). That the Court agreed with the Commission that: -“the term ‘forms of transport’ must be interpreted widely and that it covers anything which may be used to go from one place to another. According to the Commission, any sailing boat suitable for sailing is therefore a form of transport within the meaning of the sixth Directive”

88. The Respondent submitted that it follows that transportation is the act of moving goods from one place to another, to buttress its position, the Respondent cited Paragraphs 4, 8, 15 and 17 of the Agreement.

89. The Respondent submitted that the person offering the transport service is the carrier/operator who is causing the movement of the goods and not the Appellant or Magma who facilitate in procuring the clients.

90. The Respondent relied on the case of Troy v. The Eastern Company of Warehouses, and Midland Rubber Company v Robert Park Co. where the court held: -“based on the issued transport document confirm that the freight forwarder should compensated for the damage. This happened even from the whole communication, the court did not see the intention of the freight forwarder to act as carrier or to take carrier’s liability.

91. The Respondent submitted that the Appellant seeks to be considered as a carrier/transporter while the evidence it has provided states otherwise. That no evidence before the Tribunal supports the Appellant’s averments. The Respondent relied on the following cases: -a.Motex Knitwear Limited vs. Gopitex Knitwear Mills Limited Nairobi (Milimani) HCCC No. 834 of 2002,b.Trust Bank Limited vs. Paramount Universal Bank Limited & 2 Others Nairobi (Milimani) HCCC No. 1243 of 2001

92. The Respondent submitted that the Appellant had failed to discharge the burden of proof in accordance with Section 56 (1) of the TPA to show that it is a provider of transportation services so as to disprove the objection decision. That the Appeal must fail on this ground.

93. The Respondent submitted that from the sample agreement and Appellant’s pleadings, the Appellant’s principal business is offering logistics solutions to its customers that enable them to get block spaces for their goods. That the consumers of its services are individuals seeking to transport goods. That it acts as an intermediary between the customer and the carrier, the liabilities it has are very distinct in law.

94. The Respondent submitted that Euro sender provides the following as regard the difference in the roles between the carrier and the freight forwarder: -“Although both have the same logistical scope of transporting goods, it is important to understand the differences between carriers and freight forwarders. Carriers are responsible for transporting goods while freight forwarders are responsible for organising transport.”

95. That Euro sender goes further to define the two as follows:-“Carriers are transport companies that move goods from one point to another using their own vehicles or chartered vessels. They focus exclusively on transport and unlike freight forwarders, carriers do not handle any bureaucracy regarding shipping documentation, taxes or customs clearance.A freight forwarder is the company or individual that organises the transport service by connecting shipping with the right carries(s) to ensure cargo is moved in the best way. In other words, freight forwarders can act as intermediaries between shippers and carriers.”

96. The Respondent submitted that from the above, it follows that while the carrier transports the cargo from one place to another, the freight forwarders organise the entire shipping process, including transport, documentation, warehouse and consolidation of goods from various customers. That freight forwarders normally do not own vehicles themselves, they are simply the transport managers but not the transporter.

97. The Respondent submitted that from the Magma agreement, the Appellant procures the customers from the block space and further ensures that the goods are packaged ready for the transportation and facilitate the documentation necessary for the transportation. That its mandate ends at that point, it does not take part in the actual moving of the goods.

98. The Respondent submitted that having appreciated the role of each party in the transaction. That while the operator, which is the airline is tasked with the transportation of the goods and MAGMA secure space in the different aircrafts.

99. That the Appellant who has a contract with the Magma procures clients for Magma and further assists the customers to place the goods in a transportable manner including help in secure the documentation.

100. The Respondent submitted that as per the Agreement, the Appellant is evidently a freight forward agent. That the services undertaken by the Appellant under the contract are listed at Paragraphs 15 and 16 of the Agreement as:a.Ensuring the cargo is available at the departure airport at the specified time;b.Obtaining necessary documents and licensing relating to transportation;c.Ensuring cargo is duly and promptly collected from the destination airportd.Complying with any reasonable requirements of the operator

101. The Respondent submitted that the above are the services which the Tribunal is invited to find if the same are zero rated.

102. The Respondent stated that the second schedule to the Value Added Tax Act provides the list of the zero-rated supplies, for which none of the services rendered by the Appellant is listed. That the list of zero-rated supplies include at Paragraph 20:“The transportation of goods originating from Kenya to a place outside Kenya.”

b. Whether the principle of stare decisis applies. 103. The Respondent submitted that facts of the instant Appeal are different from those in Commissioner of Domestic Taxes vs Total Touch Cargo Holland Income Tax Appeal No. 17 of 2013, where the court held that: the Netherlands citizens were the final consumers of the ‘preparation for export services’ such as cooling even though the agreement was between Kenya Airfreight Handling Limited (KAHL) and Total Touch Cargo Limited, and Total Touch paid for services. That therefore, the High Court held the services were exportable services to be taxed in the location of the final consumer - Netherlands. That this is not the dispute herein.

104. The Respondent also submitted that the facts in TAT Appeal No. 115 of 2016 consolidated with TAT Appeal No. 149 of 2016 Panalpina Airflo Limited vs Commissioner of Domestic Taxes differ from those in the instant Appeal. That the Tribunal at paragraph 45 of its decision held:“What is important is the place of consumption of service. The mere fact that an overseas company requisitioned for the services from the Appellant does not necessarily mean that it was a consumer of the services rendered by the Appellant.”

105. That equally, the issue therein was on exported services which is not the case herein. In the current case, the court is invited to make a finding that the services offered by Freight Forward Agent are transportation services.

106. The Respondent relied on the case of Ernst & Young LLP v capital Markets Authority & another [2017] eKLR where Mativo J referred to the foreign case of R v NorElec.co to explain the doctrine of stare decisis.“The doctrine of stare decisis is long recognised as a principle of our law. Sir Fredric Pollock, in his first book of jurisprudence,6th ed. Page 321: ‘The decisions of an ordinary superior court are binding on all courts of inferior rank within the same jurisdiction, and though not absolutely binding on courts of co-ordinate authority nor the court itself, will be followed in the absence of strong reason to the contrary’…”

107. The Respondent submitted that the issues under consideration in the above cases are very distinct from the matter herein and therefore the Tribunal is not bound by those decisions.

c. Whether the decision issued failed to provide for shortcomings in the Appellant’s explanations. 108. The Respondent countered the Appellant’s submission that the objection decision issued by the Respondent did not address the shortcomings in the Appellant’s objection. The Respondent cited Section 51 (10) of the TPA which provides that the objection decision should contain the statement of finding and the reason for the decision. That the said provision states as follows: -“An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

109. The Respondent referred the Tribunal to the impugned decision of 25th November, 2022 stating that each Section provides a detailed explanation, the grounds raised by the Objection are also fully addressed. That the decision is divided into the following sections: -a.The basis of the refund decisionb.Grounds of Objectionc.Statement of Findingsd.Our decision

110. The Respondent asserted that the objection decision was evidently made in line with the applicable law and that this is one of those preliminary objections that Sir Charles Newbold was speaking about when he said;“The improper raising of points by way of Preliminary Objection does nothing but unnecessarily increase the costs and, on occasion, confuse the issues. This improper practice must stop.”

The Respondent’s Prayers 111. The Respondent prayed that this Honourable Tribunal finds:a.The Respondent’s refund rejection decision dated 25th November 2022 was properly issued as under law.b.This Appeal be dismissed with the costs to the Appellant.

Issues For Determination 112. After perusing the pleadings and documentation produced before it, the Tribunal is of the view that the following are the main issues for determination in this matter:-a.Whether the Respondent erred in finding that the services offered by the Appellant were not exported services.b.Whether the Appellant is entitled to an input tax refund.

Analysis And Findings 113. Having identified the issues that call for its determination, Tribunal proceeded to analyse them as hereunder.

a. Whether the Respondent erred in finding that the services offered by the Appellant were not exported services. 114. The genesis of this dispute is the objection decision made by the Respondent on 25th November 2022 rejecting the Appellant’s VAT refund claims for the period November 2017 and September 2020.

115. The Respondent rejected the refund claims lodged by the Appellant on the following basis:-a.For November 2017- “The refund has been rejected because it violates Section 13 Subsection 5 of the VAT Act 2013. ”b.For September 2020- “The TSO found out that the taxpayer has been claiming input tax in reimbursable expenses contrary to Section 13(5) of the VAT Act 2013. Recommended disallowing of the claim guided by the Tribunal ruling in Coffetea Agency Ltd Vs Commissioner of Domestic Taxes. In this case the Tribunal ruled that the Appellant has made the payments……”

116. Aggrieved by the Respondent’s objection decision, the Appellant filed the instant Appeal and raised several grounds of including: -a.That the Respondent erred in finding that the Appellant had incurred the input tax while acting as an agent of its non-resident customers and not as the provider of the exported services.b.That the Respondent misdirected itself in finding that the Appellant was not offering transportation services merely because it did not own aircraft/vessel

117. The Appellant submitted explanations, definitions and cited authorities to disprove the Respondent’s assertion that it was an agent and that it did not offer transportation services. The Appellant listed its principal activities as: -a.Documentationb.Airfreight / transportc.Handling

118. The Appellant averred that it supplies various logistics and handling services relating to the exportation of perishable cargo to its non-resident customers located outside Kenya.

119. That by dint of being provided for ‘use’ and ‘consumption’ outside Kenya to the various non-resident customers based outside Kenya qualify as exported services under Section 2 of the VAT Act, 2013 which defines an exported service to mean:“Services provided for use or consumption outside Kenya.”

120. The Appellant relied on the High Court of Kenya holding in the cases of Commissioner of Domestic Taxes v Total Touch Cargo Holland [2018] eKLR and Panalpina Airflo Limited v Commissioner of Domestic Taxes [2019] Eklr

121. The Respondent on the other hand asserted that the Appellant was an agent of its customers, the Respondent relied heavily on the sample agreement between the Appellant and Magma Cargo Charter citing sections of the agreement to show that the services provided by the Appellant were those of an agent.

122. The Respondent in advancing the position that the Appellant was not providing transportation services submitted that the Appellant hand not presented any evidence to show that it offered transportation services and that it was relying merely on averments to persuade the Tribunal that it was offering transportation services to its customers abroad.

123. Upon evaluating the arguments and counter arguments propounded by the parties on the various grounds of Appeal, the Tribunal is persuaded that the crux of the matter in this dispute is whether the services provided by the Appellant qualified as exported services.

124. The Tribunal is guided by its previous holdings as well as those of the High Court when faced with similar matters.

125. In the case of Commissioner of Domestic Taxes v Total Touch Cargo Holland [2018] eKLR the High Court Judge Maureen Odero held that: -“I am in full agreement with the above finding by the tribunal. The location where the service is provided does not determine the question of whether the service is exported or not. The test is the location (or place) of use or consumption of that service. Therefore the relevant factor is the location of the consumer of the service and not the place where the service is performed. In this case the service provided by KAHL was for use and consumption in Europe.Accordingly based on the foregoing, my finding is that the proper tax jurisdiction for the services provided by KAHL to the Appellant is the Netherlands and not Kenya.”

126. In the case of Commissioner of Domestic Taxes v Coca Cola Central East and West Africa Ltd (ITA E038 of 2020) eKLR, Mwita J while referring to the case of Google Kenya Limited v Commissioner of Domestic Taxes (ITA No E 004 of 2021) eKLR among other cases stated the following which the Tribunal finds to be instructive: -“See also Commissioner of Domestic Taxes v 3M Kenya limited, ITA E096 of 2021 [2022] eKLR, Commissioner of Domestic Services v Total Touch Cargo Holland [2018] eKLR and Panalpina Air Flow Limited v Commissioner of Domestic Taxes [2019] eKLR). 36. All the decisions referred to above are consistent in one theme, that the consumer of the service is not necessarily where the marketing is done but the party who benefits from the marketing and promotion services. That is, the consumer or user of the service is the party who commissioned the contract and who directly benefited from the service provided.”

127. The services provided by the Appellant including logistics, documentation, handling, and airfreight were consumed by its customers in Europe, United Kingdom and other parts of Africa as evidenced by the attached sample contract and invoices.

128. Section 2 of the VAT Act states: -“service exported out of Kenya" means a service provided for use or consumption outside Kenya;”

129. In the case of Commissioner of Domestic Taxes v Coca Cola Central East and West Africa Ltd (ITA E038 of 2020) eKLR the High court pronounced itself clearly as to the interpretation of the above Section. It stated:-“Section 2 of the repealed VAT Act 2013 defined “export” to mean “take or cause to be taken from Kenya to a foreign country.” “service exported out of Kenya” was defined to mean “a service provided for use or consumption outside Kenya.” The operative words in that section were “use” or “consumption.” To amount to exported service, the service was to have been provided for use or consumption outside Kenya.”

130. Informed by the analysis above, the Tribunal finds that the services provided by the Appellant were exported services within the definition of Section 2 of the VAT Act.

b) Whether the Appellant is entitled to an input tax refund 131. Having determined that the services provided by the Appellant fall within the VAT Act’s definition of exported services, the Tribunal shifted its focus to the refund application.

132. Section 17(5) of the VAT Act states: -(5)Where the amount of input tax that may be deducted by aregistered 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 carried forward as input tax deductible in the next tax period:Provided that any such excess shall be paid to the registered person by the Commissioner where —(a)such excess arises from making zero rated supplies;

133. To determine whether the Appellant was entitled to a refund, the Tribunal interrogated the reasons for rejection as given by the Respondent in its objection decision. The Respondent gave three reasons which could be summarized as follows:a.That it was not persuaded that the Appellant did not have a principal agency relationship with its customers despite the documents and explanations provided by the Appellant.b.That the Appellant was not a transporter since it did not own a vesselc.That the Commissioner had appealed to cases with similar business models as the Appellant’s.

134. The Appellant countered by relying on the Black’s law dictionary’s definition of the term agency and stating various authorities on the matter including the case of Local Production Kenya Limited v Commissioner of Domestic Taxes where the Tribunal held that in the absence of the ability of a party (acting as an agent) to bind the principal in relation to third party contracting, an agency relationship cannot be inferred.

135. Having perused material presented before it, the Tribunal established that the Appellant did not have the power to bind its customers and that it neither incurred costs on behalf of its customers nor maintained a separate schedule of costs incurred on behalf of third parties. The Tribunal is therefore persuaded that there is no principal agent relationship between the Appellant and its customers.

136. The Tribunal considers that the issue of whether the Appellant is a transporter or not is of no consequence as the test of importance in this instance is whether the services provided by the Appellant are exported services. The same has already been determined above.

137. Whereas the Respondent stated that it had appealed cases with similar business models as those cited by the Appellant, Tribunal maintains the position that unless a superior court sets aside or stays the judgment, the authorities are instructive and remain binding to the Tribunal.

138. The Appellant stated that in addition to issuing the refund rejection decisions, the Respondent issued the Appellant credit adjustment vouchers (CAV’s) for each of the rejected refund claims implying that the rejected VAT refund claims could be reinstated as excess input tax to be carried forward and utilized to offset against any future VAT liabilities. The Respondent’s actions in this regard indicate its admission that the Appellant indeed qualified for a refund as applied for.

139. Section 17 (5)(a) cited above, clearly indicates that one of the instances where excess input tax is to be refunded by the Respondent is where the excess tax arises from zero rated supplies.

140. Based on the analysis above, the Tribunal holds that the Appellant is entitled to an input tax refund in accordance with Section 17(5)(a) of the VAT Act.

Final Decision 141. The upshot of the foregoing is that the Appeal is meritorious and therefore succeeds. The Tribunal consequently makes the following Orders;-a.The Appeal be and is hereby allowed;b.The Respondent’s objection decision dated 25th November 2022 be and is hereby set aside.c.The Respondent to process the VAT refund claims for the periods November 2017 and September 2020 within Sixty (60) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

142. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 9TH DAY OF FEBRUARY, 2024GRACE MUKUHA - CHAIRPERSONGLORIA OGAGA - MEMBERDR. ERICK KOMOLO- MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBER