[2024] KETAT 146 (KLR)

Morgan Air and Seafreight Logistics Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E002 of 2022) [2024] KETAT 146 (KLR) (9 February 2024) (Judgment)

Neutral citation: [2024] KETAT 146 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E002 of 2022

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

February 9, 2024

Between

Morgan Air And Seafreight Logistics Kenya Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act. Its principal business activity is offering logistics solutions to a wide range of customers based in the UK, Europe and other parts of Africa. This mainly comprises transportation of goods from Kenya to destinations outside the Country, documentation, handling, and vacuum cooling which relates to both perishable and non-perishable goods.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, 1995. Under Section 5 (1) of the said Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue.

3. The Appellant lodged VAT refund claim for excess input tax resulting from zero-rated supplies for the months of March to June 2022 for the same of Kshs. 2,424, 665. 00 on 3rd August 2022.

4. The Respondent rejected the refund claim on 8th September 20222, on the basis that the Appellant did not have zero-rated sales as per Section 17(5) of the VAT Act 2013.

5. The Respondent additionally notified the Appellant of a Credit Adjustment Voucher 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.

6. Aggrieved by the Respondent’s refund rejection decision, the Appellant lodged a notice of objection on 30th September 2022.

7. The Respondent fully rejected the Appellant’s objection on 25th November 2022 on the basis that the Respondent was not convinced by the explanations give by the Appellant and confirmed its refund notice.

8. Aggrieved by the Respondent’s decision, the Appellant lodged the instant Appeal vide a Notice of Appeal dated 23rd December 2022, and filed on 9th January 2023.

The Appeal 9. The Appeal is premised on the Appellant’s Memorandum of Appeal dated 6th January 2023 and filed on 9th January 2023 stating the following grounds: -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 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 non-resident 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 refunds claims for the months of March 2022 and June 2022, 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 the superior court and 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 filed before the Tribunal: -a.The Appellant’s Statement of Facts dated 6th January 2023 and filed on 9th January 2023, together with annexures thereto.b.Appellant’s Written Submissions dated and filed on 12th May 2023.

11. The Appellant averred that it had accumulated excess input tax having made zero-rated supplies of logistics services to its customers who are based outside Kenya, and accordingly pursuant to the provisions of Section 17(5) of the VAT Act 2013, the Appellant proceeded to lodge VAT refund claim for the months of March and June 2022 for Kshs. 2,424,665.

12. That the Respondent stated in its Objection decision as follows:-“…whereas you provided the requested documents through various email communications of 13. 10. 2022. 17. 10. 2022, 16. 11. 2022, 23. 11. 2022 and 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…”

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

14. 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.

15. That the reason given by the Respondent is not intelligible and adequate, and the Appellant could not understand the basis for the Respondent’s claim that there was a principal-agent relationship.

16. That in its refund notifications, the Respondent rejected the Appellant’s refund claims on the basis that the VAT in question resulted from declaring export of services which is exempt and not zero-rated as declared by the Appellant and that as such, the Appellant did not qualify for VAT refund.

17. That the Appellant is a freight forwarding company in the business of transporting perishable goods to the United Kingdom and Europe from Kenya and undertaking other services including documentation, handling, and vacuum cooling.

18. That there were amendments to the Finance Act 2021 as well as VAT Act where exportation of goods and exportation of taxable services were segregated into two separate items in the VAT Act. Transportation of goods originating from Kenya to a place outside Kenya are provided for under the zero-rated schedule at paragraph 20 thereof.

19. That in light of the foregoing, the Appellant proceeded to classify its output as zero rated in accordance with the provisions of Paragraph 20 of the Second Schedule of the VAT Act 2013, which stipulates that the transportation of good originating from Kenya to a place outside Kenya are zero-rated.

20. That as part of the transportation services offered by the Appellant to its customers, the Appellant guarantees its suppliers of filling up space with contracted airlines. In the event the Appellant is unable to fill up the guaranteed spaces, it has a contractual term that the Appellant nonetheless pay up the guaranteed space to its suppliers.

21. That the contract further stipulates that the Appellant would bear all the risks associated with operating the business, an attestation that these risks are borne by the Appellant.

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

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

24. That it is on the basis of the above, which involves transportation of goods to a place outside Kenya that the Appellant went ahead and classified its supply as zero-rated and went ahead to lodge a VAT refund claim as provided under section 17(5) of the VAT 2013.

25. That from the foregoing, the Appellant stated that it does not only deal with exempt supplies but also that the transportation of goods from Kenya to places outside Kenya accounts for more than 90% of sales.

26. That the Appellant’s services by dint of being provided for ‘use’ and ‘consumption’ outside Kenya to various non-resident customers based outside Kenya qualify as exported services as per section 2 of VAT Act 2013.

27. That the High Court in Commissioner of Taxes vs Total Cargo Holland (2018) eKLR held that ‘…the test is location (or place) of use or consumption of that service’. The facts in the case are like the instant case.

28. That the same position was also reiterated by the High Court in Panalpina Airflo Limited vs Commissioner of Domestic Taxes (2019) eKLR.

29. 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”

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

31. That in its objection decision, the Respondent stated that:-“…the Commissioner has appealed the cases with a similar business model as yours”

32. That unless the judgments of the High Court and the Tribunal on this subject appealed against are 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.

Appellant’s prayers 33. The Appellant prayed to the Tribunal for the following Orders:-a.That the Appeal be allowed.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 VAT Act 2013 and by alluding that the Appellant had incurred input VAT as an agent of its non-resident 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 March 2022 and June 2022, which had arisen from excess input tax incurred from making zero-rated supplies.d.That the Respondent’s objection decision dated 25th November 2022 rejecting the Appellant’s VAT refund claims amounting to Kshs. 2,424, 665. 00 is hereby set aside.e.That the VAT refund claims amounting to Kshs. 2,424,665. 00 relating to the period November 2017 and September 2020 are due and payable.f.That the Honorable Tribunal be pleased to order for payment of the refundable excess input VAT in the sum of Kshs. 2,424,665. 00 within thirty (30) days hereof or within such a period as the Honorable Tribunal deems fit.g.That the Honorable Tribunal be pleased to grant any other consequential orders as deemed fit and reasonable.

The Respondent’s Case 34. 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. b.The Respondent’s written submissions dated 28th May 2023 and filed 11th June 2023.

35. The Respondent averred that it refutes every allegation by the Appellant in the Memorandum of Appeal and Statement of Facts.

36. That the Respondent conducted an audit with the main objective of confirming authenticity and correctness of the amount claimed by the Appellant.

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

38. That the audit further revealed that the Appellant had been claiming input tax in reimbursable expenses contrary to Section 13(5) of VAT Act 2013.

39. That the Respondent further observed that the Appellant was claiming input VAT on supplies made to the principal and subsequently proceeded to disallow the same on account that the Appellant in furtherance of it business did not incur the expenses and input VAT.

40. That despite several requests, the Appellant never provided documents to prove the expenses as per Sections 23 and 59 of the Tax Procedures Act.

41. That the Respondent reiterated that the Appellant was claiming input VAT on supplies made to the principal and subsequently proceeded to disallow the same on account that the expenses and input VAT thereon was not incurred by the Appellant in furtherance of its business.

42. That 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 supply is made to the taxable person and it is made for purposes of that person’s taxable activities.

43. That on 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 by virtue of Section 56 of the TPA 2015.

44. That the Appellant failed to discharge its burden of proof to the satisfaction of the Respondent and the Respondent rightfully issued the decision on the basis that the Appellant does not own any aircraft or vessel, and therefore it does not offer transportation services.

45. That the Respondent is bound by judgments of the Tribunal including the authority in Cofftea Agencies Limited vs Commissioner of Domestic Taxes (2016), which is express on the fact 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.

Respondent’s prayers 46. The Respondent prayed to the Tribunal for the following orders: -a.That the Respondent’s refund rejection decision dated 25the November 2022 was properly issued under the law.b.That the Appeal be dismissed with costs to the Appellant as the same is without merit.

Issues For Determination 47. 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 48. Having identified the issues that calls for its determination, Tribunal proceeds to analyse them as hereunder.

a) Whether the Respondent erred in finding that the services offered by the Appellant were not exported services 49. 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.

50. 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

51. 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.Handlingd.Vacuum cooling

52. 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.”

53. 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.

54. 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.

55. 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 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.

56. Upon evaluating the arguments and counter arguments advanced by the parties on the various grounds of Appeal, the Tribunal is persuaded that the gist of the matter in this dispute is whether the services offered by the Appellant are exported services.

57. 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.”

58. 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.”

59. 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.

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

61. 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.”

62. 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 63. 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.

64. Section 17(5) of the VAT Act states: -“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;

65. 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.

66. The Appellant countered by relying on the Black’s Law dictionary’s definition of the term agency and citing 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.

67. Having perused the 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.

68. 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.

69. 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.

70. The Appellant stated that in addition to issuing the refund rejection decisions, the Respondent issued the Appellant with 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.

71. 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.

72. 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 73. The upshot of the foregoing analysis 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 refund rejection decision dated 25th November 2022 be and is hereby set aside.c.The Respondent to process the refund of excess input VAT within Sixty (60) days of the date of delivery of this Judgment.d.Each party to bear its own costs.

74. It is so ordered.

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