[2024] KETAT 342 (KLR)

Morgan Air and Seafreight Logistics Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal 1023 of 2022) [2024] KETAT 342 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 342 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 1023 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

March 8, 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 registered in the Republic of Kenya. The principal business of the Appellant is offering logistics solutions to a wide range of customers based in Europe, United Kingdom and other parts of Africa. The logistics services comprise of transportation of goods from Kenya to destinations outside the country. Other services include inter alia documentation, handling and vacuum cooling which relate to both perishable and other non-perishable general goods.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant lodged a normal Value Added Tax (VAT) refund claim on 4th May 2022 for excess input tax resulting from zero rated supplies of logistics services to its customers outside Kenya for the period May 2020 worth Kshs. 776,358. 00.

4. The Respondent subjected the claim to an audit and on 4th July 2022 through an i-Tax notification, the Respondent rejected the refund claim.

5. The Respondent, on 4th July 2022 also notified the Appellant of a credit adjustment voucher (CAV) dated 30th June 2022 for the sum of Kshs. 776,358. 00.

6. Dissatisfied with the refund rejection decision and the attendant credit adjustment voucher, the Appellant lodged a notice of objection on 3rd August 2022.

7. Through a letter dated 17th August, 2022, the Respondent directed the Appellant to appeal to the Tribunal.

8. Aggrieved by the Respondent’s objection decision, the Appellant filed a Notice of Appeal dated 15th September 2022 on 16th September 2022.

The Appeal 9. The Appeal was premised on the following grounds as contained in the Appellant’s Memorandum of Appeal dated and filed on 16th September 2022:-a.That the Respondent erred in law by failing to consider the Appellant’s notice of objection dated 3rd August 2022 thereby declining to exercise jurisdiction on account of its erroneous interpretation and application of Section 47(13) of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’); and in the alternative and without prejudice to ground (a) above.b.That the Respondent erred in law and fact in claiming that the Appellant is an agent of its non-customers.c.That the Respondent erred in law and in fact by finding in its refund rejection decision dated 4th July 2022 that the Appellant had incurred the input VAT, subject of the refund claims, as an agent of its non-resident customers.d.That the Respondent was misdirected both in fact and in law in declining to process the Appellant’s VAT refund claims which had arisen from excess input tax incurred from making zero rated supplies as per Section 17(5) of the VAT Act, No. 35 of 2013 (hereinafter ‘VAT Act’).

Appellant’s Case 10. The Appellant’s case is set out in its Statement of Facts dated 16th September 2022 and filed on even date.

11. The Appellant stated that it had accumulated excess input tax having made zero rated supplies of logistic services to its customers based outside Kenya. Pursuant to the provisions of Section 17(5) of the VAT Act, on 4th May 2022, the Appellant proceeded to lodge a VAT refund claim for the month of May 2020 for the sum of Kshs. 776,358. 00.

12. That the Respondent through an iTax notification dated 4th July 2022 (refund rejection decision), rejected the refund claim lodged by the Appellant on the basis that:“Tax Service Office (TSO) audit report findings and Tribunal Ruling Judgment Appeal No. 74 of 2016 dated 7th December 2016 in Cofftea Agencies Ltd v Commissioner of Domestic Taxes, whereby the claimant is precluded from claiming input VAT from payments made on behalf of the principal as an agent.”

13. That todate, the Respondent has never availed the copy of the purported Tax Service Office audit report findings to the Appellant.

14. The Appellant argued that in addition to issuing the refund decision, on 4th July 2022, the Respondent notified the Appellant of a Credit Adjustment Voucher (CAV) dated 30th June 2022 for the sum of Kshs. 776,358. 00.

15. That the CAV implied that the rejected VAT refund claim 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.

16. The Appellant stated that it objected on 3rd August 2022 in accordance with Section 51 of the TPA and the Respondent responded on 17th August 2022 advising as follows:“We have reviewed your objection and we would like to guide as follows:Repeal and Replacement of section 47 of Tax Procedures Act.The above section of the Tax Procedures Act, 2015 governing refund of overpaid tax was repealed and replaced with a new Section 47 under the Finance Act, 2022 effective 1st July 2022. Specifically, the new Section 47(13) requires that “A person aggrieved bv a decision of the Commissioner under this section may appeal to the Tribunal within thirty days after being notified of the decision.”Kindly be guided accordingly and appeal to the Tax Appeals Tribunal.”

17. That he Respondent declined to exercise jurisdiction on the basis that Section 47 of the TPA usurped its jurisdiction to consider notices of objection on all refund claims. That the Section indicated that a party dissatisfied with a refund rejection decision ought to appeal to this Tribunal.

18. The Appellant set out the amendment referred to by the Respondent introduced by the Finance Act, 2022 which repealed Section 47(1) of the TPA which provides as follows:“(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form—(a)to offset the overpaid tax against the taxpayer's outstanding tax debts and future tax liabilities; or(b)for a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.”

19. It was the Appellant’s view that the Respondent erroneously interpreted the provisions of Section 47, which is in any event, inapplicable to the facts of this case. It is not denied that the Appellant lodged refund claims, but the said refund claims related to excess input VAT arising from making zero rated supplies. The refund did not relate to overpaid taxes as envisaged under Section 47 of the TPA.

20. Section 17(5) of the VAT Act provides as follows:“Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period:Provided that any such excess shall be paid to the registered person by the Commissioner where –a.such excess arises from making zero rated supplies;”

21. That the said Section is concerned with excess input taxes and particularly the refund of excess tax arising from zero rated supplies. Section 17(5)(d) provided that a registered person may lodge a claim for refund of excess tax within twenty-four months from the date the tax becomes due and payable, this departs from the prescribed timelines under Section 47 of the TPA.

22. The Appellant’s view is that the refund application under Section 17(5) of the VAT Act is different from that under Section 47 of the TPA as well as the provisions of Section 47 including Section 47(13) of the TPA.

23. The Appellant submitted that the resultant excess input tax arising from making zero rated supplies is not an overpayment of tax but rather a VAT mechanism that ensures VAT is borne by the final consumer of the goods supplied.

24. That since the goods supplied are zero rated, it follows that the VAT incurred in making the supplies should be refunded to the supplier of the said goods.

25. The Appellant averred that the timelines for the application of the refunds under the VAT Act and the Tax Procedures Act are different as seen above.

26. That the applicability of the Tax Procedures Act is limited under Section 2(2) of the Act where a tax law does not specify a procedure that is unique to the administration of a tax.

27. That in this case, Section 17 of the VAT Act specifies a unique procedure to refund claims arising out of excess input VAT occasioned from making zero rated supplies. The Respondent was thus misguided in applying Section 47 of the Tax Procedures Act.

28. The Appellant stated that Section 2 of the Tax Procedures Act defines a tax decision to include a refund decision, while Section 51(1) of the same Act mandates any taxpayer disputing a tax decision to first lodge an objection decision against the same.

29. That the Respondent thus rendered a refund rejection decision on 4th July 2022 which is a tax decision and the Appellant was properly guided by law to issue a notice of objection on 3rd August 2022.

30. The Appellant contended that is apparent that the Respondent misapprehended the law by declining to exercise its jurisdiction under Section 51 of the Tax Procedures Act to consider this a valid and proper notice of objection, but rather advised the Appellant to appeal before the Tribunal by referring to Section 47 of the same Act.

31. That in any event, unless otherwise provided by any tax law, the Tribunal’s jurisdiction is limited to Section 52 of the Tax Procedures Act to consider only an appealable decision.

32. That an appealable decision is defined under Section 2 of the Tax Procedure Act as either an objection decision or any other decision made under a tax law other than a tax decision.

33. That the Appellant argued that was before the Respondent was a tax decision which ought to have been considered and a proper objection decision rendered, rather than being dismissed on misconception of the law.

34. That the Respondent also rejected the Appellant’s refund claim on the basis that VAT was incurred by the Appellant as an agent as opposed to a principal, hence the Appellant did not qualify for VAT refund.

35. The Appellant stated that at all material times based on contracts entered with its customers, it does not act as an agent of any of its customers.

36. That as part of its transportation services, the Appellant guarantees its suppliers of filling up space with contracted airlines.

37. The Appellant averred that the contracts further stipulate that the Appellant would bear all the risks associated with operating the business.

38. That the Appellant’s nature of the agreement with its customers is service orders/quotes for the services to be offered. The Appellant then issues invoices to its customers depending on the terms and conditions of the service quote and agreed fees.

39. The Appellant stated that it is not an agent, and there is no term in the agreement expressly or by implication appointing the Appellant as an agent of another entity.

40. 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 costs incurred but earns a consideration for services rendered.

41. That this is in line with Section 13(5) of the VAT Act that reads:“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 cause of making the supply to the client…”

42. All costs and taxes incurred by the Appellant are its own costs and do not form disbursements paid on behalf of customers.

43. On the issue of zero percent VAT on exported services, the Appellant stated that it supplies various logistics and handling services relating to the exportation of perishable cargo to its non-resident customers outside Kenya.

44. That the Appellant’s services by dint of being provided for ‘use and consumption’ outside Kenya qualify as exported services under Section 2 of the VAT Act.

45. That exported services are taxable at zero percent.

Appellant’s Prayers 46. In line with the above grounds, the Appellant makes the following prayers:a.The Appeal be allowed.b.This Honourable Tribunal be pleased to declare the Respondent’s decision vide letter dated 17th August 2022 as erroneous and unlawful and be set aside, as a consequence thereof, the Tribunal be pleased to find that the Appellant is entitled to refund of Kshs. 776,358. 00c.This Honourable Tribunal be pleased to order for the payment of the refundable excess input VAT in the sum of Kshs. 776,358. 00 within thirty (30) days hereof or such a period of time as the Tribunal deems fit.d.This Honorable 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.

Respondent’s Case 47. In response to the Appeal, the Respondent filed its Statement of Facts dated 14th October and filed on even date and averred as hereunder.

48. In response to the first ground of appeal, the Respondent stated that prior to the amendment of the law concerning refund of overpaid tax, Section 47(3) of the Tax Procedures Act imposed on the Respondent the duty to consider the application, audit the claim if necessary, and thereafter decide on it within 90 days of the application.

49. That Section 47(3) reads as follows:“The Commissioner shall notify in writing an applicant under subsection (1) of the decision in relation to the application within ninety days of receiving the application for a refund.”

50. The Respondent further averred that vide Section 42 of the Finance Act 2022, the above Section, Section 47(3), was repealed and thus inapplicable in the instant Appeal. The relevant Section provides as follows:“The Tax Procedures Act, 2015 is amended by repealing section 47 and replacing it with the following new section –47(13) A person aggrieved by a decision of the Commissioner under this section may appeal to the Tribunal within thirty days after being notified of the decision.”

51. The Respondent based on the above law averred that it rightly interpreted the above provisions and referred the Appellant to lodge an appeal in the right forum.

52. In response to the second and third grounds of appeal, the Respondent stated that an audit was conducted with the main objective of confirming the authenticity and correctness of the amount claimed.

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

54. The audit also revealed that the Appellant had been claiming input tax in reimbursable expenses contrary to Section 13(5) of the VAT Act, 2013 which states:-“(5)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.”

55. The Respondent further observed that the Appellant was claiming input VAT on supplies made to the principal and subsequently proceeded to disallow the same as the expenses and input VAT were not incurred in furtherance of the Appellant’s business.

56. That despite several requests, the Appellant never provided documents to prove the expenses. Section 23 of the Tax Procedures 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 Appellant thus failed to provide documentation in support of the same contrary to the provisions of Section 59 of the Tax Procedures Act, which gives the Respondent power to request the Appellant to produce documents for ascertaining its tax liability.

57. The Respondent prayed that the second and third grounds of appeal be disallowed as they had no basis.

58. On the fourth ground of appeal, the Respondent reiterated that the Appellant was claiming input VAT on supplies made to the principal. The Respondent proceeded to disallow the same on account that the input VAT was not incurred by the Appellant to further its business. The Respondent also relied on the case of Cofftea Agencies Limited v Commissioner of Domestic Taxes [2016] where the Tribunal stated that input VAT was only deductible where the supply was made to the taxable person for the purpose of that person’s taxable activities.

59. The Appellant did not provide documents in support of its claim. The Appeal should thus be dismissed with costs.

Partie’s Submissions 60. The Appellant’s written submissions dated 21st February 2023 were filed on 22nd February 2023. The Appellant submitted on the following issues;a.On whether the Respondent erred in law in declining to consider the Appellant’s objection ostensibly on an erroneous interpretation of section 47(13) of the Tax Procedures Act, 2015.

61. The Appellant submitted that the Respondent in its appealable decision declined to consider the Appellant’s notice of objection on the basis that the Finance Act, 2022 repealed and replaced the provisions of Section 47 of the Tax Procedures Act, 2015, on refunds.

62. The Appellant submitted that the Finance Act repealed the said Section and provided new provisions including Section 47(1) which reads:“(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form—(a)to offset the overpaid tax against the taxpayer's outstanding tax debts and future tax liabilities; or(b)for a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.”

63. The Appellant submitted that Section 47 of the Tax Procedures Act concerns itself with “offset and refund of overpaid taxes” and in the instant case, the Appellant applied for refund of excess input tax under Section 17(5) of the VAT Act, and excess input tax is not synonymous with overpaid tax.

64. The Appellant submitted that it was well settled that the provisions of the Tax Procedures Act are only applicable where there was a lacuna in the substantive tax law by dint of Section 2 of the Tax Procedures Act which states:“2. Object and purpose of the Act

(1)The object and purpose of this Act is to provide uniform procedures for—(a)consistency and efficiency in the administration of tax laws;(b)facilitation of tax compliance by taxpayers; and(c)effective and efficient collection of tax.(2)Unless a tax law specifies a procedure that is unique to the administration of a tax thereunder, the procedures provided for under this Act shall apply. “

65. That the Respondent ought not to have invoked Section 47 of the Tax Procedures Act in light of section 2(2) of the same Act. The Appellant submitted that Section 17 of the VAT Act elaborately provides for refund of excess input VAT.

66. The Tax Procedures Act allows a taxpayer aggrieved by the Respondent’s tax decision to lodge an objection to the said decision.

67. A refund decision is a tax decision as defined under Section 3 of the Tax Procedures Act which provides that:“tax decision” means—(a)an assessment;(b)a determination under section 17(2) of the amount of tax payable or that will become payable by a taxpayer;(c)a determination of the amount that a tax representative, appointed person, director or controlling member is liable for under section 15, section 17 and section 18;(d)a decision on an application by a self-assessment taxpayer under Section 31(2);(e)a refund decision (this was however deleted by Act No. 4 of 2023, s. 49 (a))…(f)a decision under section 48 requiring repayment of a refund; or(g)a demand for a penalty”

68. The Appellant submitted that the refund decision, being a tax decision, the Respondent had an obligation under Section 51 of the Tax Procedures Act to consider the Appellant’s notice of objection and to render an objection decision under Section 51(8) of the Tax Procedures Act.

69. The Respondent did not question the validity of the Appellant’s notice of objection and as such, the Respondent was duty bound to make an objection decision instead of declining to exercise jurisdiction. It was submitted that this was a jurisdictional error on the Respondent’s part. The Appellant relied on the case of Republic v Public Procurement Administrative Review Board & 2 others exParte Pelt Security Services Limited [2018] eKLR where the court held that:“3. Jurisdictional error will occurs where the decision-making body fails to exercise the jurisdiction conferred on it. This may be because a body actually declined to make the decision; alternatively and more often, it is a ‘constructive failure’ to exercise jurisdiction”

70. The Appellant therefore sought that this Tribunal finds that the Respondent made a jurisdictional error in failing and declining to make an objection decision when it has such powers.b.On whether the Respondent breached the provisions of Article 47 of the Constitution by failing to furnish the Appellant with a copy of the purported tax service office audit finding report referred to in the refund decision dated 4th July 2022.

71. The Appellant submitted that in its appealable decision, the Respondent while declining to exercise jurisdiction in essence upheld its position stated in the refund decision. The Respondent referred to the tax service audit report findings, in declining the Appellant’s objection.

72. The Appellant submitted that despite referring to a purported ‘audit findings report’, the Appellant had not been furnished with a copy of the said report contrary to the dictates of Article 47 of the Constitution and Section 4(3)(g) of the Fair Administrative Action Act, 2015. c.On whether the excess input tax incurred by the Appellant arising from making zero rated taxable supplies is payable as a cash refund in accordance with the provisions of Section 17(5) of the VAT Act, 2013

73. The Appellant submitted that it supplies various logistics and handling services relating to the exportation of perishable cargo to its non-resident customers outside Kenya. The Appellant therefore, in essence supplies logistics services relating to perishable items and other general goods.

74. The Appellant submitted that its services by dint of being offered for ‘use’ and ‘consumption’ to its non-resident customers, qualify as exported services. The VAT Act in Section 2 defines exported services as services provided for use or consumption outside Kenya.

75. The Appellant referred to the case of Commissioner Of Domestic Taxes v Total Touch Cargo Holland [2018] eKLR where the High Court faced similar facts and stated:“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.”

76. The Appellant submitted that this position was also reiterated in the case of Panalpina Airflo Limited v Commissioner of Domestic Taxes [2019] eKLR in which the Appellant provided similar services to those rendered by the Appellant herein. The court stated:“…in having regard to the destination principle which provides that internationally traded services should be taxed according to the rule 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.”

77. Accordingly, the Appellant submitted that this Honourable Tribunal makes a finding that the refund claim of Kshs.776,358. 00 is due and refundable to the Appellant.d.On whether the Respondent erred in law and in fact in inferring the existence of an agency-principal relationship between the Respondent and its customers as a basis of declining to process the refund claim.

78. The Appellant submitted that the Respondent rejected its refund claim on basis that the input VAT was incurred by the Appellant as an agent as opposed to a principal. The Appellant submitted that its business model is one of an independent contractor and not an agent as alleged by the Respondent.

79. The Appellant submitted that as part of its logistics services, the Appellant offers transportation services and guarantees its suppliers of filling up space with contracted airlines. In the event it is not able to fill up the guaranteed spaces, it has a contractual term to nonetheless pay up for the guaranteed space to its suppliers.

80. The Appellant referred the Tribunal to a sample block space agreement between the Appellant and one of the airlines annexed to its statement of facts to prove its averments. The block space agreements stipulated that the Appellant would bear all the risks associated with operating the business and was thus the sole owner of the airfreight capacity which it sells to its customers. The Appellant submitted that it then issues its customers with the service quotes for the services to be offered, and the issues invoices based on the quotes. The consideration it later receives is at a market-related rate.

81. The Appellant submitted that the above demonstrates that there is no principal-agent relationship between the Appellant and its customers. The Appellant submitted that it incurs expenses for furtherance of its business as part of its cost of sales in accordance with Section 13(1) of the VAT Act that defines the taxable value of a supply as the consideration for the supply.

82. Section 13(5) of the VAT Act further states:“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.”

83. All costs and taxes incurred by the Appellant are its own costs and do not form disbursements paid on behalf of customers. All costs incurred in making a supply including incidental costs qualify to be included in the value of the supply for VAT purposes.

84. The Appellant relied on the case of Kennedy v De Trafford [1897] A.C.180 where the word agent was defined:“No word is 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…”

85. That in Brownstead & Reynolds on Agency (21st ed) at page 2 and 3, the term agency is defined to connote an authority or capacity to create legal relations between a person occupying the position of principal and third parties. The Appellant also relied on the case of Garnac Grain Co. Inc. v H.M Faure & Fair Dough Ltd and Bunge Corporation [1967] 2 ALL ER where an agency was defined as a relationship between two persons by agreement or otherwise where one may act on behalf of the other and bind the principal by words or action. The relationship between the Appellant and its customers did not fall within the definitions above.

86. The Appellant relied on the case of Local Production Kenya Limited v Commissioner of Domestic Taxes TAT Appeal No.50 of 2017 where it was held that in the absence of the ability of a party (agent) to bind the principal in relation to third party contracting, an agency relationship cannot be inferred and the same position was held in Tax Appeal No.381 of 2018 Farab International FZE v Commissioner of Domestic Taxes.

87. The Appellant thus submitted that the case of Cofftea Agencies (supra) referred to by the Respondent was inapplicable and irrelevant to the facts of this case. The Respondent did not demonstrate that the Appellant contravened Section 13(5) of the VAT Act. Without prejudice to the submissions, the Appellant submitted that reimbursements are not the same as disbursements as the Respondent asserts. The Appellant relied on the cases of Rowe & Maw (a firm) v Customs and Excise Commissioners [1975]1 WLR 1291 and Brabners LLP v HMRC [2017] UKFTT 666 (TC) to distinguish the two.

88. Reimbursements of expenses or recharges for costs incurred do not automatically constitute disbursements. Such payments can represent compensation for supply of services irrespective of whether they were itemized separately or form part of an inclusive overall fee.

89. In addition, for VAT purposes, disbursements occur where specific services have been supplied by C to B and not to A, and A has merely acted as B’s known and authorized representative in paying C.

90. Therefore, disbursements only apply when one is acting as an agent of another. The facts in Coffea (supra) are different from those in the present appeal as Cofftea Agencies was a commission-agent of a non-resident company, its principal, by the name Ballahane International. The Respondent thus erred in law in inferring the existence of an agency-principal relationship.

91. The Respondent filed its written submissions dated 12th April and filed on even date where it submitted on the following issues;a.On whether the Respondent erred in law and fact by failing to consider the Appellant’s notice of objection thereby declining to exercise jurisdiction on account of its erroneous interpretation and application of the provisions of section 47(13) of the Tax Procedures Act.

92. The Respondent submitted that the law on overpaid taxes was found under Section 47(3) of the Tax Procedures Act prior to the amendments introduced by Section 24 of the Finance Act 2022. Section 47(3) imposed on the Commissioner the duty to consider a refund application, audit the claim if necessary and thereafter make a decision on it within 90 days of the application.

93. Section 42 of the Finance Act, 2022 repealed the entire Section 47 of the Tax Procedures Act, 2015 and replaced it with among other Section 47(13) which states that:“A person aggrieved by a decision of the Commissioner under this section may appeal to the Tribunal within thirty days after being notified of the decision.”

94. The Respondent therefore submitted that the above provisions were rightly interpreted and referred the Appellant to lodge an Appeal in the right forum, hence this ground of appeal had no merit.b.On whether the Respondent erred in claiming that the Appellant is an agent of its non-customers.

95. The Respondent submitted that it conducted an audit with the main objective of confirming the authenticity and correctness of the amount claimed. The audit revealed that the Appellant failed to provide an analysis of the input tax incurred related to services offered to mainly non-resident companies where output VAT was not charged. 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 reads:“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.”

96. The Respondent submitted that the Appellant was claiming input 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.

97. The Respondent submitted that despite several requests, the Appellant never provided documents to prove the expenses. Section 23 of the Tax Procedures Act makes it a requirement for taxpayers to keep documents for a period of five (5) years for the Respondent to ascertain the tax due.

98. The Appellant failed to provide documentation in support of the same contrary to section 59 of the Tax Procedures Act, that mandates the Commissioner, through a written notice, to request the Appellant to produce documents for examination to ascertain their tax liability.

99. The Respondent averred that the Appellant was claiming input VAT on supplies made to the principal. The Respondent proceeded to disallow the same on account that the expenses and input VAT was not incurred by the Appellant in furtherance of its business. The Respondent relied on the case of Cofftea Agencies Limited v Commissioner of Domestic Taxes [2016] eKLR where the Tribunal held that input VAT was only deducible where the supply was made to the taxable person and it was made for purposes of that person’s taxable activities. The Tribunal stated:“Regarding the contention as to whether the Appellant is entitled to deduct input VAT on expenses incurred and yet the supplier invoices is in the name of the Appellant, the Tribunal agrees with the Respondent's submission 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. The fact that the Appellant made the subject payments on behalf of its Principal was clearly documented and cannot gainfully be disputed…The Appellant having made payments only as an agent, the Tribunal is of the respectful view that it is the principal who made the payments and thus the Appellant should be precluded from deducting input VAT from the subject payments for the reason that the Appellant made such payments strictly as an agent of the principal.”

100. The Respondent contended that the onus lies with the Appellant to support the expenses, but the Appellant failed to provide documents in support of their expenses.c.On whether the Respondent erred in law and fact in declining to process the Appellant’s VAT refunds claims which had arisen from excess input tax incurred from making zero-rated supplies as per the provisions of section 17(5) of the VAT Act.

101. The Respondent argued that the case of Cofftea Agencies Limited (supra) supports the ground that input tax claimed by the Appellant was not for expenses incurred in furtherance of the Appellant’s business.

102. The Respondent thus prayed that the Appeal be dismissed in its entirety as it lacked merit, the Commissioner’s decision and demanded tax be upheld in its entirety and the Respondent be awarded costs.

Issues For Determination 103. The Tribunal having carefully considered the parties’ pleadings, documentation and submissions notes that 4 issues call for its determination as follows;i.Whether the Respondent erred in law and fact in declining the Appellant’s notice of objection.ii.Whether the Respondent breached the provisions of Article 47 of the Constitution by failing to furnish the Appellant with the purported Tax Service Audit findings report.iii.Whether the Respondent erred in law and in fact in declining the Appellant’s VAT refund claim arising from excess input tax incurred from making zero-rated supplies.iv.Whether the Respondent erred in claiming that the Appellant is an agent of its non-customers.

Analysis And Findingsi.Whether the Respondent erred in law and fact in declining the Appellant’s notice of objection.

104. The Respondent declined the Appellant’s notice of objection on the basis that Section 42 of the Finance Act, 2022 repealed Section 47 of the Tax Procedures Act replacing it with a new section.

105. The Appellant lodged its notice of objection on 3rd August 2022 while the amendments to Section 47 of the TPA came into effect on 1st July 2022. The amendments introduced were in relation to ‘offset or refund of overpaid tax’. It is the Appellant’s contention that Section 47 does not apply to refund of excess input VAT. Section 47(1) provides as follows:“47. Offset or refund of overpaid tax

(1)Where a taxpayer has overpaid a tax under any tax law, the taxpayer may apply to the Commissioner, in the prescribed form—(a)to offset the overpaid tax against the taxpayer's outstanding tax debts and future tax liabilities; or(b)for a refund of the overpaid tax within five years, or six months in the case of value added tax, after the date on which the tax was overpaid.”

106. A refund of overpaid VAT ought to be made within six months from the date the tax was overpaid. The Appellant’s contention is that Section 17(5) of the VAT Act is the right law to be applied in the Appellant's case since the refund claimed was for excess input VAT. Section 17(5) provides as follows:“Where the amount of input tax that may be deducted by a registered person under subsection (1) in respect of a tax period exceeds the amount of output tax due for the period, the amount of the excess shall be carried forward as input tax deductible in the next tax period:Provided that any such excess shall be paid to the registered person by the Commissioner where —(a)such excess arises from making zero rated supplies; or…”

107. Both Section 47 of the TPA and Section 17(5) of the VAT Act provide for refund of overpaid taxes, however it is clear that Section 17(5) of the VAT Act is specific to refund and offset of excess input VAT. Even though Section 47(1)(b) of the TPA allows for a refund claim for excess VAT within six months from the date of overpayment, the provision does not apply to excess input VAT whose refund process is clearly provided under Section 17(5) of the VAT Act.

108. Under Section 17(5)(d) of the VAT Act, a claim for refund of excess input tax should be lodged within twenty-four months from the date the tax becomes due and payable. Section 47 of the Tax Procedures Act does not therefore, apply to the Appellant’s case since Section 17(5) of the VAT Act is the specific law on the issue of refund of excess input VAT.

109. The tax amount claimed by the Respondent of Kshs. 776,358. 00 was for the period May 2020 while the refund claim by the Appellant was lodged on 4th May 2022. The period, therefore, falls within the twenty-four-month limitation period. The Respondent issued a refund rejection decision on 4th July 2022. A notice of objection was lodged by the Appellant on 3rd August 2022. A refund decision fell within the meaning of a tax decision under Section 3 of the TPA before the provision was deleted by Section 49(a) of the Finance Act No. 4 of 2023.

110. Being a tax decision, the Appellant had the right to object to the Respondent’s refund decision within 30 days of being notified of the decision, in line with Section 51(2) of the TPA. The Tribunal finds that the objection by the Appellant was issued on time and the Respondent ought to have issued an objection decision rightly with reasons for disallowing the Appellant’s notice of objection rather than just directing the Appellant to appeal to the Tribunal based on amendments of Section 47 of the TPA.

111. The objection decision dated 17th August 2022 should have been issued in line with the provisions of Section 51(10) of the Tax Procedures Act which states:“(10) An objection decision shall include a statement of findings on the material facts and the reasons for the decision.”

112. There was however, no statement of findings provided to the Appellant. By dint of the above analysis, the Tribunal finds that the notice of objection of the Appellant is deemed allowed and the Respondent erred in law and in fact in declining the objection by the Appellant without issuing a statement of findings and sufficient reasons.ii.Whether the Respondent erred in law and in fact in declining the Appellant’s VAT refund claim arising from excess input tax incurred from making zero-rated supplies.

113. The Appellant submitted that its services fall within the meaning of exported services under Section 2 of the VAT Act, 2013. It should be noted that the mere fact that an overseas company requisitioned for the services from the Appellant does not necessarily mean that it was the consumer of the services rendered by the Appellant.

114. The Appellant has the burden of proof to show that its services were indeed consumed outside Kenya. An export is defined under Section 2 of the VAT Act as to take or to cause to be taken from Kenya to a foreign country, a special economic zone enterprise or to an export processing zone. While a service exported out of Kenya is defined as a service provided for use or consumption out of Kenya. Section 7 of the VAT Act, 2013 provides that no tax shall be charged for zero-rated supplies of goods or services. It states that:“7. Zero rating

(1)Where a registered person supplies goods or services and the supply is zero rated, no tax shall be charged on the supply, but it shall, in all other respects, be treated as a taxable supply.(2)A supply or importation of goods or services shall be zero-rated under this section if the goods or services are of the description for the time being specified in the Second Schedule.”

115. The Appellant stated that it makes zero-rated supplies since it offers exported services which are consumed outside Kenya as the area of destination. Exported services are subject to zero-rated VAT in line with the destination principle.

116. The destination principle stipulates that, the price of an imported input does not bear VAT, the effective VAT rate that the imported input is subjected to is that of the importing Country. For input VAT to be claimed, the services ought to be exported and consumed outside Kenya. This position was clarified by the court in F.H. Services Ltd vs Commissioner of Domestic Taxes Appeal No.6 of 2012, where it was held that:“The benefit of the services offered by the Appellant accrues outside Kenya for the simple reason that the beneficiary of this service is the final consumer of the flowers who is located far away from Kenya, in Holland, the destination jurisdiction ….It is for this reason that it is very clear in our minds that these services and all services that accompany and occasion exportation are provided of the sole purpose of benefitting the final consumer who is not in Kenya, the origin jurisdiction, but the final consumer who is located in the destination jurisdiction and therefore provided for the use or consumption outside Kenya….”

117. This was also clarified by the court in Republic v Kenya Revenue Authority & Another Ex-Parte Fontana Limited 2014 eKLR wherein the court stated that for a service to be deemed as exported, the determining factor is the location where the service is to be finally consumed or used, which should be outside Kenya. Where the services are exported services, then Section 7 of the VAT Act would apply. In the foregoing case, the Appellant supplies logistics services for exportation of perishable goods outside Kenya. The contract provided to the Tribunal, between the Appellant and Kenya Airways shows an agreement for purchase of space by the Appellant for the carriage of cargo.

118. The Appellant also provided a Cargo Block Space Agreement between itself and Etihad Airways in which Etihad offered to provide flight services and cargo space to the Appellant, as its customer.

119. The perishable items the Appellant stores for its customers are exported and consumed in countries outside Kenya. This aligns with the definition of exported services since the final consumer of the services is not in Kenya. The Tribunal therefore finds that the VAT refund claimed by the Appellant arose from export of zero-rated supplies.iii.Whether the Respondent erred in claiming that the Appellant is an agent of its non-customers.

120. The Respondent relied on the case of Cofftea Agencies (supra) in determining that the Appellant is an agent of its non-customers and thus, cannot claim input VAT as it makes payments on behalf of its principals.

121. The Tribunal, however, notes that the same issue between the same parties herein was handled and determined by the Tax Appeals Tribunal in TAT No.286 of 2020 Morgan Air Sea Freight and Logistics Kenya Limited v the Commissioner of Domestic Taxes.

122. In TAT No. 286 of 2020 above, the Tribunal held that the Respondent did not provide reasons for rejecting the refund claims of input VAT by the Appellant. The Respondent did not provide proof as to how it arrived to the conclusion that the Appellant is an agent of its non-customers.

123. The Tribunal in the above case also stated that, in the absence of these reasons, the Appellant was not able to substantially respond to the claims that it acted as an agent and failing to give reasons violates Section 51(10) of the TPA.

124. In the instant case, the Respondent also did not issue the Appellant with a Statement of findings to show how it concluded that the agency principle applied in the Cofftea case above applies to the Appellant’s situation.

125. The Respondent also stated that the Appellant failed to provide the requested documentation to prove that they were not acting as agents of their non-customers. The burden of proof indeed lies with the Appellant, and it is the duty of the Appellant under section 23 of the TPA to keep and provide the necessary documents to ascertain their tax claims.

126. The Respondent stated that it issued several requests for documents to the Appellant for the Appellant to prove their claim that they are not agents. However, the Respondent does not provide any proof that the requests were issued and the burden of proof shifts to the Respondent to prove this assertion.

127. The Appellant’s contract with Kenya Airways shows under Clause 8 that each party undertook to take insurance in respect of their liability under clause 6 of the contract. The contractual terms also do not imply or express an existing agency relationship.

128. Therefore, in the absence of proof that an agency relationship exists between the Appellant and its non-customers as alleged by the Respondent, and without any evidence of requests for documentation, the Tribunal finds that the Respondent misconstrued the existence of an agency relationship between the Appellant and its non-customers.

Final Decision 129. In light of the foregoing analysis, the Tribunal finds the Appeal herein is merited and proceeds to make the following orders:a.The Appeal be and is hereby allowed.b.The Respondent to process the Appellant’s VAT refund claim within Ninety (90) days of the date of delivery of this Judgment.c.Each party to bear its own costs

130. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH, 2024. ERIC NYONGESA WAFULA - CHAIRMANDELILAH K. NGALA - MEMBERCHRISTINE A. MUGA - MEMBERGEORGE KASHINDI - MEMBERMOHAMED A. DIRIYE - MEMBERSPENCER S. OLOLCHIKE - MEMBER