[2024] KETAT 34 (KLR)

Morgan Air & Sea Freight Logistics Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E003 of 2023) [2024] KETAT 34 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 34 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E003 of 2023

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

January 26, 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 principal 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 KRA 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, No. 35 of 2013 (“VAT Act”) and the Tax Procedures Act, No 29 of 2015 (“TPA”).

3. The Appellant having accumulated excess input tax for the periods of August 2017, September 2017, October 2017, December 2017, July 2020, January 2022, February 2022, April 2022 and May 2022, lodged Value Added Tax (“VAT”) refund claims on diverse dates amounting to Kshs. 11,390,241. 38 pursuant to the provisions of Section 17 (5) of the VAT Act, 2013.

4. The Respondent rejected the Appellant’s VAT refund applications vide several rejection notifications dated 3rd August 2022, 6th,7th, 8th and 17th September 2022

5. In addition to issuing the refund rejection decisions, the Respondent issued the Appellant with credit adjustment vouchers for the cumulative sum of Kshs. 11,390,241. 38 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 arising therefrom as opposed to being paid out as cash refunds.

6. The Appellant being dissatisfied, objected to the rejected claims totalling to Kshs. 11,390,241. 38 vide its notice of objection dated 30th September 2022.

7. The Respondent proceeded to issue its objection decision vide a letter dated 28th November 2022.

8. Dissatisfied with the Respondent’s objection decision dated 28th November 2022, the Appellant filed this Appeal vide a Notice of Appeal dated 23rd December 2022.

The Appeal 9. The Appeal is based on the following 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 meeting and email correspondences, on the issue of principal-agent relationship.b.That the Respondent erred in law and in fact claiming that the Appellant had incurred the input VAT, as an agent of its non-resident customers.c.That the Respondent was misdirected both in fact and in law in declining to process the Appellant’s VAT refunds claims which had risen 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 10. The Appellant’s Case is premised on the following documents:a.The Appellant’s Statement of Facts dated 6th January 2023 and filed on 9th January 2023b.The Appellant’s Written Submissions dated and filed on 12th May 2023

11. The Appellant contended that the Respondent in its objection decision simply held that“the Commissioner has not been persuaded to agree with you that you do not have a principal agency relationship with your business model.”without stating why it was not satisfied with the explanations offered and what the shortcomings in the information provided were.

12. The Appellant averred that the right to 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.

13. The Appellant relied on the case of Gideon Omare v Machakos University [2020] Eklr where High Court judge G Odunga cited the case of South Bucks District Council & Another vs. Porter [2004] UKHL 33 in emphasizing that the reasons for a decision must be intelligible and adequate for the reader to understand the rationale.

14. The Appellant stated that the Respondent had rejected its refund claim in its objection decision dated 30th August 2022 on the basis that the VAT in question had been incurred by the Appellant in its capacity as an agent as opposed to a principal and that as such, the Appellant did not qualify for the VAT refund.

15. The Appellant submitted that it did not act as an agent to any of its customers and there is no agency agreement at all between it and its customers.

16. The Appellant clarified that as part of the transportation services offered to its customers, it guarantees its suppliers of filling up space with contracted airlines. That in the event 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.

17. The Appellant explained that the contracts further stipulate that it would bear all the risks associated with operating the business, an attestation that these risks are borne by the Appellant. That the Appellant is therefore the sole “owner” of the airfreight capacity.

18. The Appellant averred that consideration received by the Appellant for the services rendered is at a market-related rate as agreed between the parties thereto and that the expenses incurred by the Appellant are part of its cost of sales.

19. The Appellant averred that it does not receive any reimbursement from its customers for any of the costs incurred but rather 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-the consideration for the supply; or if the supplier and recipient are related, the open market value of the supply.”

20. The Appellant cited Section 13 (5) of the VAT Act which provides that: -“in calculating the value of any services for the purpose 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…”

21. The Appellant submitted that all costs incurred in making a supply including incidental costs qualify to be included in the value of the supply for VAT purposes.

22. The Appellant relied on the case of Kennedy v De Trafford [1897] A.C 180 at 188 and an excerpt from Bowstead & Reynolds on Agency (twenty first edition) at pages 2 and 3 in defining the term agency.

23. The Appellant also relied on the Court of Appeal of England and Wales in Garnac Grain Co. Inc. v H.M.F. Faure & Fairclough Ltd.- {1967} 2 All E.R. 353 where it was held that for there to be a contract of agency between two parties:“there must be a previously existing agreement between A and B that A shall contract with C on B’s behalf so as to create privity of contract between B and C “

24. The Appellant stated that equally, the Black’s Law Dictionary, (sixth edition) at page 62 has defined agency as:“A relationship between two persons by agreement or otherwise where one (the agent) may act on behalf of other (the principal) and bind the principal by words or actions.”

25. The Appellant submitted that the Honourable 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.

26. The Appellant submitted further that this Tribunal in Tax Appeal No. 381 of 2018 Farab International Fez 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.

27. The Appellant expounded further that 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.

28. The Appellant submitted that from the foregoing, there is no agency relationship between the Appellant and its customers, hence the Coffee case referred to by the Respondent in its refund rejection decision is inapplicable and irrelevant to the facts of this case.

29. 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. 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 as per Section 2 of the VAT Act, 2013 which defines an exported service to mean:“Services provided for use or consumption outside Kenya.”

30. The Appellant relied on the High Court of Kenya holding when 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.”

31. The Appellant averred that the facts in the Total Touch case are similar to the facts in the instant case. That therefore, 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.

32. The Appellant averred further that the above position was reiterated by the High Court in the case of Panalpina Airflo Limited v Commissioner of Domestic Taxes [2019] Eklr where it was held that: -“…In having regard to the destination principle which provides that intentionally traded services should be taxed according to the rules of jurisdiction of consumption and having found the ultimate consumer of the impugned services is not in Kenya, I find that the instant appeal is merited…”

33. The Appellant stated 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.

34. The Appellant submitted that it is immaterial as to whether the Appellant owns a vessel/aircraft for it to qualify as provider of transportation and logistics services. That most of the companies who offer similar services do not own any vessel as was the case in both Panalpina Airflo Limited (supra) and Total Touch Cargo Holland (supra), which dealt with similar issue as in herein where none of these companies own an aircraft but provided services similar to those offered by the Appellant.

35. The Appellant averred 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. That the Respondent ought to be aware that unless a stay order had been issued by a superior court and the judgment of the Tribunal or High Court vacated, the Respondent was bound by the said authorities.

36. The Appellant averred that the Respondent was misguided in law in finding as it did that since it had appealed cases with similar business model as the Appellant’s, that it was not necessarily bound by such case laws and legal authorities.

The Appellant’s Prayers 37. The Appellant prayed this Honourable Tribunal to find that:a.This Appeal be allowed.b.The Respondent’s objection decision dated 28th November 2022 rejecting the Appellant VAT refund claims amounting to Kshs. 11,390,241. 38 is hereby set aside.c.That the VAT refund claims amounting to Kshs. 11,390,241. 38 are due, payment be made within thirty (30) days hereof or within such period as deemed fit by this Honourable Tribunal.d.This Honourable Tribunal be pleased to grant any other consequential order as deemed just and reasonable.e.The costs of and incidental to this Appeal be awarded to the Appellant.

The Respondent’s Case 38. The Respondent’s case is premised on the following documents: -a.The Respondent’s Statement of Facts dated 8th February 2023 and filed on 9th February 2023; andb.Its Written Submissions dated 28th May 2023 and filed on 11th June 2023.

39. The Respondent submitted that on 3rd August 2022, the Appellant lodged a VAT refund claim for excess input tax resulting from zero rated supplies for the period August 2017 to October, December 2017, July 2020, January to February 2022 for the sum of Kshs. 11,390,241. 38.

40. The Respondent submitted that on 6th September 2022, 7th September 2022, 08th September 2022 and 17th September 2022, it rejected the refund claims on the basis that the Appellant did not have zero-rated sales as per Section 17 (5) of the VAT Act 2013.

41. Additionally, the Respondent stated that it notified the Appellant of a Credit Adjustment Voucher (“CAV”) for an equal amount that meant that the rejected VAT refund claims could be reinstated as excess input tax to be carried forward and utilized to offset against any future liabilities as opposed to being paid out as cash refund claims.

42. The Respondent submitted that the Appellant, dissatisfied with the refund rejection decision and the CAV lodged notice of objection on 30th September 2022.

43. The Respondent stated that vide a letter dated 28th November 2022, it had fully rejected the Appellant’s objection on the basis that the Respondent was not convinced by the explanations given by the Appellant therefore confirming the contents of its refund rejection notices.

44. In response to the first and second ground of Appeal as per the Memorandum 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.

45. 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.

46. The Respondent submitted further that 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 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”

47. The Respondent submitted that despite several requests, the Appellant never provided documents to prove the expenses.

48. The Respondent cited Section 23 of the TPA which requires taxpayers to keep documentation for a period of atleast 5 years to enable the Respondent ascertain their taxes obligations. The Section states as follows: -“A person shall - maintain any document required under a tax law, in either of the official languages; maintain any document required under a tax law so as to enable the person’s tax liability to be readily ascertained; and retain the document for a period to which it relates or such shorter period as may be specified in a tax of law.”

49. The Respondent averred that the Appellant failed to provide documentation in support of the same contrary to the provisions of Section 59 of the TPA which provides that;“For the purposes of obtaining full information in respect of the tax liability of any person or class of persons, 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 specified 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.”

50. In response to the third ground of appeal, the Respondent reiterated that the Appellant was claiming input VAT on supplies made to the principle 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.

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

52. In response to the fourth ground of 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 was purely upon the Appellant to prove the same in accordance with Section 56 (1) of the TPA which states that: -“In any proceedings under this Part, the burden shall be on the taxpayer to prove that a tax decision is incorrect.”

53. The Respondent averred that the Appellant failed to discharge this burden to the Respondent’s satisfaction and 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.

54. In response to ground 5 of the appeal, the Respondent averred that it is bound by the judgements of the Tribunal. That consequently it is bound by the decision highlighted above in Cofftea Agencies Limited v Commissioner of Domestic Taxes (2016).

55. The Respondent noted that the above mentioned judgement is express on the fact that input VAT is only deductible where the supply is made to a taxable person and it is made for the purposes of that person’s taxable activities therefore by virtue of the above decision, the decision to disallow the Appellant’s input VAT as claimed was rightfully issued.

56. The Respondent averred that the Appellant is involved in logistic services in the nature of selling block spaces in aircrafts for customers. That the Appellant does not own the aircraft nor the vessel which it facilitate the customer to get spaces for their goods they intend to transport as per the agreement entered with MAGMA.

57. The Respondent was of the considered view that to unpack the dispute before this Honourable Tribunal it 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?c.Whether the decision issued failed to provide for shortcomings in the Appellant’s explanations.

58. The Respondent averred that the Appellant seeks to place its output under the provisions of Paragraph 20 of the Second Schedule to the VAT where transportation of goods originating from Kenya to a place outside Kenya are classified as zero-rated.

59. The Respondent posited that the Tribunal needs to make a determination as to the nature of services being 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 provided.

60. The Respondent emphasised that averments in pleadings not being 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.

61. To buttress its point that averments are not evidence, the Respondent further relied on the cases of: -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

62. 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, the Tribunal cannot make determination by basing on the explanation advanced.

63. The Respondent averred 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.

64. 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…”

65. That further, the Magma Cargo Charter Agreement, at Article 13 states that: -“The client warrants that:13. 1In 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”

66. The Respondent posits 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.

67. The Respondent averred that to understand the role played by the Appellant, Article 16 of the Agreement provides the role of the Appellant (who is the client) 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.”

68. 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.

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

70. To define transportation, the Respondent relied on the Black’s Law Dictionary which defines “transportation “as:“The movement of goods or persons to another by carrier”

71. 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”

72. The Respondent propounded 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.

73. 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.

74. 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.

75. 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

76. 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.

77. 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.

78. 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.”

79. 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.”

80. 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.

81. 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.

82. The Respondent submitted that having appreciated the role of each party in the transaction. While the operator, which is the airline is tasked with the transportation of the goods and Magma secure space in the different aircrafts. The Appellant who has a contract with the Magma procure clients for Magma and further assist the customers to place the goods in a transportable manner including help to secure the documentation.

83. 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 are:-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

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

85. 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 included at Paragraph 20:“The transportation of goods originating from Kenya to a place outside Kenya.”

86. 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.

87. 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.”

88. That equally, the issue therein is on exported services which is not the case herein. That in the current case, the Tribunal is invited to make a finding that the services offered by freight forward agent are transportation services.

89. 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’…”

90. 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.

91. The Respondent countered the Appellant’s submission that the objection decision issued by the Commissioner 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: -“(10) An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

92. The Respondent referred the Tribunal to the impugned decision of 25th November 2022 stating that each Section provided a detailed explanation, the grounds raised by the Objection were also fully addressed.

93. The Respondent asserted that the objection decision was evidently made in line with the applicable law and that this was 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.”

Respondent’s prayers 94. The Respondent prayed that this Honourable Tribunal finds:a.The Respondent’s refund rejection decision dated 28th November 2022 was properly issued as under law.b.This Appeal be dismissed with the costs to the Respondent as the same is without merit.

Issues for Determination 95. After perusing the pleadings and documentation produced before it, the Tribunal is of the view that the following are the main issues for determination:-a.Whether the Respondent erred in finding that the services offered by the Appellant were not exported servicesb.Whether the Appellant is entitled to an input tax refund

Analysis and Findings 96. Having identified the issues that calls 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. 97. The dispute at hand stems from the Appellant’s claim for refund of accumulated VAT input tax arising from supplies made to its customers who are based out of Kenya pursuant to Section 17 (5) of the VAT Act, 2013, a claim which the Respondent rejected on the basis that the Appellant had incurred the input VAT as an agent of its non-resident customers and not as a transporter providing export services.

98. Basing on the Respondent’s objection decision, the Appellant raised several grounds of appeal including inter alia ;-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

99. 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: -i.Documentationii.Airfreight / transportiii.Handlingiv.Vacuum cooling

100. 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. 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.”

101. 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.

102. 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 that of an agent.

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

104. 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 offered by the Appellant are exported services.

105. The Tribunal is guided by its previous holdings as well as those of the High Court when faced with similar matters. In Commissioner Of Domestic Taxes v Total Touch Cargo Holland [2018] eKLR 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.”

106. The Tribunal was further guided by the case of Commissioner of Domestic Taxes v Coca Cola Central East and West Africa Ltd (ITA E038 of 2020) eKLR, where 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.”

107. The services provided by the Appellant including logistics, documentation, handling, vacuum cooling 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.

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

109. In 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.”

110. Based on the analysis above, the Tribunal finds that the services offered by the Appellant were indeed export services within the definition of Section 2 of the VAT Act.

b) Whether the Appellant is entitled to an input tax refund 111. 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.

112. Section 17(5) of the VAT Act states: -(5)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 —(a)such excess arises from making zero rated supplies;

113. 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.

114. 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 this 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.

115. 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.

116. 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.

117. 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 Respondent and the Tribunal.

118. The Appellant stated that in addition to issuing the refund rejection decisions, the Respondent issued the Appellant with credit adjustment vouchers 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.

119. Section 17 (5)(a) of the VAT Act 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.

120. 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 121. The upshot of the foregoing is that the Appeal is meritorious and 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 a refund of the excess input VAT within Sixty (60)days of the date of delivery of this Judgment.d.Each party to bear its own costs.

122. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024GRACE MUKUHA - CHAIRPERSONGLORIA OGAGA - MEMBERDR. ERICK KOMOLO - MEMBERJEPHTHAH NJAGI - MEMBERTIMOTHY VIKIRU - MEMBER