[2023] KETAT 310 (KLR)

PVH Kenya Limited v Commissioner of Legal Services & Board Coordination (Appeal 712 of 2021) [2023] KETAT 310 (KLR) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 310 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 712 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

May 26, 2023

Between

PVHKenya Limited

Appellant

and

Commissioner Of Legal Services & Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya under the Companies Act, Cap 486, of the laws of Kenya and whose principal business is providing sourcing support services to PVH Far East Limited (“PVHFEL”), situated in Hong Kong.

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. Further, 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 Part 1&2 of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. On 21st August, 2019 the Appellant lodged a VAT refund claim amounting to Kshs. 3,232,755. 00 for the periods between August 2018 and July 2019 with the Respondent.

4. The Appellant received a system generated email from the Respondent on 28th April 2021. The Respondent’s email indicated that the refund application was rejected because there were no zero-rated sales to support the VAT refund claim. Attached to the email was a Credit Adjustment Voucher (“CAV”) dated 20th April 2021 relating to the period between 1st August 2018 to 31st August 2018 for the amount of Kshs. 353,109. 00

5. Subsequently, additional CAVs were separately issued for the tax periods September 2018 to July 2019 to effect a reversal of the refund claim and reinstate the credits for each month in the Appellant’s iTax ledger.

6. The Appellant sought clarification from the Respondent on the reason for rejection and received an email response dated 4th May, 2021 indicating that the claim was rejected because the services provided by the Appellant were not zero-rated as provided under Paragraph 1(b) of Regulation 13 of the VAT Regulations, 2017.

7. The Appellant lodged its notice of objection against the Respondent’s refund decision vide a letter dated 20th May, 2021.

8. The Respondent rendered its objection decision vide a letter dated 24th September, 2021 confirming its decision to reject the Appellant’s VAT refund claims.

9. Being aggrieved by the Respondent’s objection decision, the Appellant filed a Notice of Appeal on 22nd October, 2021.

The Appeal 10. The Appeal is based on the Memorandum of Appeal dated and filed on 5th November 2021 citing the following grounds for Appeal:a.That the Respondent erred in fact and law in claiming the services offered by the Appellant were consumed in Kenya, yet the services were exported out of Kenya.b.The Respondent erred in law in relying on Regulation 13(1)(b) of the Value Added Tax Regulations, 2017 which contradicts the provisions of the Value Added Tax Act, 2013. c.The Respondent erred in law in relying on Regulation 13(1)(b) of the Value Added Tax Regulation, 2017 which created an absurdity that was later remedied by amendment through the Value Added Tax (Amendment) Regulations, 2019. d.The Respondent erred in law and fact in charging VAT at the standard rate of 16% for supplies provided by the Appellant which leads to double taxation, which is unconstitutional, unlawful and economically punitive.e.The Respondent erred in law and fact by rejecting the Appellant’s refund claim covering the tax periods between August 2018 and July 2019 despite having approved VAT refund payments to the Appellant’s in the past, thus violating the Appellant’s legitimate expectations.

Appellant’s Case 11. The Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant’s Statement of Facts dated and filed on the 5th November, 2021 date together with the documents attached thereto.ii.Appellant’s witness statement of Maurice Mwaniki dated 3rd June 2022 and filed on the same day, that was admitted in evidence on oath on 12th October, 2022. iii.The Appellant’s written submissions dated 11th November, 2022

12. The Appellant stated that according to the Respondent, the Appellant does not make any zero-rated supplies i.e. its services do not qualify as services exported out of Kenya. That it was the Respondent’s claim that services offered by the Appellant are consumed in Kenya.

13. The Appellant averred that the services that it provided constitute export of services in line with Section 2 of the VAT Act which defines a “service exported out of Kenya” to mean “a service provided for use or consumption outside Kenya”. That further, Paragraph 1 of the Second Schedule to the VAT Act provided for the taxation at the rate of 0% for services exported out of Kenya during the period covered by the VAT refund application.

14. That the Appellant is a fully owned subsidiary of a non-resident company PVHFEL which is situated in Hong Kong. That PVHFEL deals in provision of sourcing services for apparel and has a brand portfolio which included Van Heusen, Calvin Klein, Tommy Hilfiger, Arrow, Speedo, Olga and Geofrey Beene, among others. That other entities within the PVH group procure the apparel directly from manufacturer in Export Processing Zones (“EPZs”) in Kenya.

15. The Appellant submitted that it is one of PVHFEL’s sourcing hubs and is responsible for providing sourcing support services to PVHFEL as provided under the Buying Support Services Agreement concluded between the two parties. It averred that the activities performed by the Appellant include the following:i.Identification of local suppliers/vendors of the apparel (EPZ companies) and collection of relevant information regarding the vendors based on predetermined criteria to enable PVHFEL make sourcing decisions.ii.Review of suppliers/vendors including the implementation of global quality assurance policies and conducting of quality testing activities on finished products.iii.Compilation of various reports for PVHFEL-sourcing support services offered by the Appellant result in reports issued by PVHFEL which are used for PVHFEL’s decision making purposes.

16. The Appellant added that PVHFEL uses the sourcing related information provided by the Appellant for its provision of sourcing services to its customers.

17. According to the Appellant, the services it provided to PVHFEL, which is situated in Hong Kong, enable the PVHFEL to make sourcing decisions for the benefit of its customers. That the Appellant bills PVHFEL for its services on a cost-plus mark-up basis every month. That it was clear from the above that the services performed by PVH are for use and consumption by PVHFEL outside Kenya, as required by Section 2 of the VAT Act, and should therefore be subject to VAT at the zero rate (0%).

18. The Appellant contended that in the objection decision, the Respondent claimed that the Appellant assists local vendors to carry out the manufacturing process. That in this case, the Tribunal should note that the local vendors are EPZ companies. The Appellant averred that the Respondent’s claim had no legal or factual merit as there was no agreement or contract between the Appellant and the local vendors for the Appellant to provide any services to the vendors.

19. The Appellant averred that the Tribunal in LG Electronics Africa Logistics Kenya Branch vs. The Commissioner of Domestic Taxes (TAT Appeal No. 359 of 2018) determined that service agreement is to be used to determine the identity of the ultimate consumer of services.

20. That PVHFEL, which is situated in Hong Kong was the consumer of the services provided by the Appellant under the Buying Support Agreement concluded between the parties.

21. It added that without prejudice to the foregoing, it should be noted that even if the Respondent’s claims were to be accepted that the services were consumed locally by vendors who are EPZ companies, the services would still be zero rated. That the supply of taxable services to EPZ companies is zero-rated under paragraph 2 of part A of the Second Schedule to the VAT Act.

22. The Appellant insisted that the Respondent erred in law and fact in claiming that the services offered by the Appellant were consumed in Kenya. That the services provided by the Appellant to PVHFEL were used and consumed in Hong Kong and were thus a service exported out of Kenya. That in accordance with the provisions of Section 17(5) of the VAT Act, the Appellant was entitled to cash refunds from the Respondent relating to the excess input tax for making the zero-rated supplies which it correctly claimed. That the Respondent’s objection decision should thus be set aside and the Appellant’s refund claim paid in full.

23. The Appellant submitted that in rejecting the Appellant’s refund claim, the Respondent placed its reliance on Regulation 13(1)(b) of the Value Added Tax Regulations, 2017. That Regulation 13(1)(b) of the Value Added Tax Regulations, 2017 describe what constitute a taxable supply in the case of exported services.

24. The Appellant averred that the legality and validity of the Value Added Tax Regulations, 2017 is in doubt for lack of compliance with the provisions of the VAT Act, specifically Section 67(2) of the VAT Act. That the Tribunal in W.E.C Lines Kenya Limited v Commissioner of Domestic Taxes (TAT Appeal Number 137 of 2018) noted as follows with regard to the Value Added Tax Regulations, 2017;“The Cabinet Secretary made the VAT Regulations 2017 in pursuant to Section 67 of the VAT Act, 2013. However, the Regulations are subject to a proviso under Section 67(2) of the VAT Act which states; “Regulations made under this section shall be tabled before the National Assembly for approval before they take effect.”. There is no evidence that the VAT Regulations 2017 were tabled before the National Assembly for approval and therefore the validity thereof is in doubt.”

25. That if the Value Added Tax Regulations, 2017 were not tabled for approval before the National Assembly, they could not be applied as they had not taken effect. That the Respondent would thus be acting unlawfully and ultra vires in applying the Value Added Tax Regulations, 2017.

26. That without prejudice to the above, Regulation 13(1)(b) of the Value Added Tax Regulations, 2017 as applied by the Respondent in rejecting the Appellant’s refund claim, contradicted the provisions contained in the VAT Act on export services.

27. The Appellant contended that Regulation 13(1)(b) provided that exportation of services shall not include “taxable services provided in Kenya but paid for by a person who is not a resident in Kenya’.

28. The Appellant explained that Section 2 of the VAT Act provides that services exported out of Kenya means a service provided for use or consumption outside Kenya irrespective of the place of business being in Kenya, the recipient being in or outside Kenya or the place from where payment is made being in or outside Kenya. That the VAT Act further provides that exportation of taxable services is zero rated.

29. The Appellant averred that the Value Added Tax Regulations, 2017, which constitute subsidiary legislation, contradict the provisions of the primary VAT legislation by providing additional tests for the determination of whether services are exported or not i.e the location of the payer and place of performance. That this was in addition to the “use” and “consumption” tests, which are the only requirements provided for by Section 2 of the VAT Act.

30. The Appellant further averred that the Value Added Tax Regulations, 2017 are also self-contradictory. That Regulation 13(1)(b) requires that exported services ought to be provided to a recipient outside Kenya, i.e., a non-resident person. Further, that Regulation 13(2) provides that documentation to prove export of services shall be a copy of the invoice showing the recipient of the supply to be a person outside Kenya.

31. That whilst it was reasonably expected that exported services will be requested by, invoiced to, and paid for by a non-resident person in most instances (as is the case for the Appellant), such a scenario is disqualified from being an export of service under Regulation 13(1)(b). this in effect makes it impossible for services rendered in Kenya to qualify as exported services subject to VAT at the zero rate i.e., regardless of the services being used or consumed outside Kenya as is envisaged by the VAT Act.

32. The Appellant stated that clearly, Regulation 13(1)(b) of the Value Added Tax Regulations, 2017 contradicts the provisions of the VAT Act. That this Tribunal in W.E.C Lines Kenya Limited vs. Commissioner of Domestic Taxes (TAT Appeal Number 137 of 2018) held as follows in regard to paragraph 13(1)(b) of the VAT Regulations;“Even if the VAT Regulations 2017 were approved by the National Assembly, it is trite law that a subsidiary legislation, the Regulations in the instant case, cannot override the respective primary legislation, the VAT Act, 2013… The proviso(b) on services in the VAT regulations, 2017 contradicts the proviso for the export of services as per section 2 of the VAT Act, 2013 and as pointed out earlier a subsidiary legislation cannot override a primary legislation. Consequently, the Tribunal has relied on the definition of export of services as per the VAT Act, 2013 in dealing with this appeal”

33. That the VAT Appeal Tribunal in the case of FH Services Kenya Limited Vs V Commissioner of Domestic Taxes also held that:-“While making subsidiary legislation, care is taken to ensure that there is no conflict between the principal legislation and the subsidiary legislation, because if there is a conflict, the principal legislation shall prevail. The principal legislation is higher law than the subsidiary legislation…It is therefore critical for the respondent to understand that in the event that he wants to rely on regulation 20(1)(d) for this case, he must first go to the principal legislation, the main law that is contained in the main body of the VAT Act, specifically the meaning of “service exported out of Kenya”. If he finds that the regulation 20(1)(d) is in conflict with what is contained at the meaning “service exported out of Kenya”, then he must quickly abandon his proposed reliance on the regulation and concentrate his efforts on what is contained in the principal legislation”

34. That accordingly, in light of the present conflict between the VAT Act and the Value Added Tax Regulations, 2017, the Appellant averred that the key test as to whether services have been exported or not remains the use or consumption test as provided by the VAT Act. That as demonstrated earlier, the Appellant’s services are used and consumed outside Kenya by PVHFEL and as such VAT should be charged on its services at the rate of 0%. That the Respondent therefore erred in law in relying on paragraph 13(1) of the VAT Regulations, 2017 which contradicts the provisions of the VAT Act 2013.

35. The Appellant further submitted that Regulation 13(1)(b) of the VAT Regulations as initially drafted resulted in an inconsistency in interpretation which created an absurdity.

36. That the acknowledgement of this fact by lawmakers led to the amendment of Regulation 13(1) through the gazettment of legal Notice 86 of 2019 dated 13th June 2019. That the provision as amended now reads;“13(1) An exportation shall be a taxable supply- (b) in the case of services, when the taxable supply involves the services being provided to a recipient outside Kenya for use, consumption, or enjoyment outside Kenya irrespective of where the payment is made from”

37. That Regulation 13(2) still provides that documentation to prove export of services shall be a copy of the invoice showing the recipient of the supply to be a person outside Kenya. That as evidenced by the revamped provisions above, Regulation 13(1)(b) is now consistent with itself to the extent that it requires that an export of service is provided to a recipient outside Kenya and that it doesn’t matter where payment for the services comes from.

38. That the Committee on Delegated Legislation report on the consideration of the Value Added Tax (Amendment) Regulations, 2019 (Legal Notice No. 86 of 2019) which contains considerations made by the committee on Delegated Legislation prior to approval of the amendment indicated that the amendment to regulation 13 was meant to clarify what constitutes an exported service for VAT purposes regardless of who pays for them. That page 8 of the report indicates that the challenge that needed to be addressed through the amendment was “Regulation 13(1) on export of service provided in Kenya but paid for by a non-resident is deemed to be a local sale, effectively eliminating all export services”

39. The Appellant submitted that Parliament does not legislate in vain and as such it amended the Value Added Tax Regulations 2017 to remedy the absurdity created by regulation 13(1)(b) with regard to export services. That the Tribunal should note that the proposal to amend the offending section was backed by the Respondent and the Treasury. The Appellant therefore contended that the Respondent erred in law in rejecting the Appellant’s refund claim based on a regulation that was clearly defective.

40. That without prejudice to the aforementioned, the Appellant averred that the provisions of regulation 13(1) which was the basis of the Respondent rejecting the VAT refund claims was in force for the period up to June 2019 when the Value Added Tax (Amendment) Regulations, 2019 came into effect. That in this regard, the refund claim of Kshs. 41,339 for the month of July 2019 is not impacted and hence is due and payable.

41. The Appellant stated that the Respondent claimed that the services offered by the Appellant were services offered in Kenya and are therefore not zero-rated. That the implication is that the services should be treated as standard rated, i.e taxable at 16%. The Appellant averred that the overarching purpose of VAT is to impose a broad-based tax on final consumption which should not ordinarily be borne by businesses. That to achieve this purpose in relation to international trade, the destination principle is applied. That as a general rule under the destination principle, supplies made across boarders should be taxed in the country of destination of the supplies (normally the country of location of the customer). That the High Court of Kenya in Commissioner of Domestic Taxes vs. Total Touch Cargo Holland [2018] eKLR recognized that the destination principle is enshrined in the Kenyan VAT regime and it was for this reason that supplies exported out of Kenya are taxable at the rate of zero percent.

42. That the application of the standard VAT rate (16%) on the services provided by the Appellant would lead to double taxation on account of the fact that the country of destination will also require PVHFEL, as the recipients of the services provided by the Appellant, to account for the VAT on the imported services. As a result, levying VAT at 16% in Kenya will result in an additional tax/VAT cost as PVHFEL does not have the right to claim input tax credits in relation to VAT incurred in Kenya. That this is double taxation and clearly negates the principle that VAT should be a tax on final consumption and should not be borne by businesses in the supply chain.

43. The Appellant stated that the High Court in Stanley Waweru - Chairman & 3 others (suing as Officials of Kitengela Bar Owners Association) vs. National Assembly & 2 others, Constitutional Petition Nos. E005 of 2021 (Consolidated with petition No 1. Of 2021) held that double taxation is not only unconstitutional and unlawful, it is also economically punitive.

44. That in the present case, the jurisdictions in which final consumption occurs in Hong Kong for the reason that benefits in respect of the services supplied by the Appellant are consumed outside Kenya and therefore taxation of such services cannot be in Kenya.

45. The Appellant emphasised that the Respondent erred in law and fact in charging VAT at the standard rate of 16% for supplies provided by the Appellant which leads to double taxation, which is unconstitutional and unlawful, it is also economically punitive.

46. The Appellant stated that on 9th February, 2021, the Respondent had approved a refund payment of Kshs. 2,499,432 in relation to a VAT refund application for the tax periods between September 2015 and July 2016. That the funds, approved for payment of the refund on the basis that the Appellant had excess input tax arising from zero rated supplies, were subsequently disbursed to the company on 11th February, 2021.

47. The Appellant averred that the Supreme Court of Kenya in Communication Commission of Kenya v Royal Media Services & 5 Others [2014] eKLR held as follows on legitimate expectations;“Legitimate expectation would arise when a body, by representation or by past practice, has aroused an expectation that is within its power to fulfil. Therefore, for an expectation to be legitimate, it must be founded upon a promise or practice by public authority that is expected to fulfil the expectation.”

48. That the High Court in Star Brilliant Limited vs. Cabinet Secretary - Ministry of Agriculture, Livestock, Fisheries & Co-operatives & another [2021] eKLR held as follows on legitimate expectation;“This falls in line with the principles of legitimate expectation whereby if a person has been led or treated in a certain way by an administrative authority by dint of some consistent practice in the past, he is entitled to the reasonable expectation of such continued treatment”

49. That by approving the refund payment of Kshs. 2,499,432 in relation to a VAT refund application for the tax periods between September 2015 and July 2016, the Respondent created a reasonable and legitimate expectation that all the Appellant’s refund claims, which are based on the same circumstances, would be approved. That on 28th April, 2021, however, the Respondent rejected the Appellant’s refund claim amounting to Kshs. 3,232,755 for the periods between August 2018 to July 2019.

50. The Appellant submitted that under Section 7 of the Fair Administrative Action Act, 2015, a Tribunal can review an administrative action or decision that violates the legitimate expectations of the person to whom it relates. That the Respondent violated the Appellant’s legitimate expectation that the Appellant’s refund claims, which are based on the same circumstances, would be approved. It was within the Respondent’s powers to approve the refund claim for the periods between August 2018 to July 2019 just as it had approved the refund claims for the tax periods between September 2015 and July 2016.

51. The Appellant requested the Tribunal to set aside the Respondent’s decision to reject the Appellant’s refund claim for the periods between August 2018 to July 2019 as it violates the Appellant’s legitimate expectations.

52. The Appellant submitted that at the time the Appellant lodged its refund claim, Part A of the Second Schedule to the VAT Act, 2013 provided as follows;“Where the following supplies…take place in the course of a registered person’s business, they shall be zero-rated in accordance with the provisions of Section 7-BThe exportation of goods or taxable services”1. That the implication of the above provision and Section 2 of the VAT Act is that a service is considered as being exported outside Kenya and thus attracting VAT at the rate of zero-rate as long as the service is provided for use and consumption outside Kenya.2. To support its arguments, the Appellant cited the High Court case in Commissioner of Domestic Taxes vs. Total Touch Cargo Holland [2018] eKLR .3. That under the agreement, the Appellant has been contracted by PVHFEL (non-resident entity) to provide a multitude of services to PVHFEL, which include;a.Identification of local suppliers/vendors of the apparel (EPZ companies) and collection of relevant information regarding the vendors based von predetermined criteria to enable PVHFEL make sourcing decisions.b.Review of supplier/vendors including the implementation of global quality assurance policies and conducting of quality testing activities on finished productsc.Compilation of various reports for PVHFEL- that sourcing support services offered by the Appellant result in reports issued by PVHFEL which are used for PVHFEL’s decision making purposes.

56. It stated that the services provided by the Appellant to PVHFEL, which is situated in Hong Kong, enable PVHFEL to make sourcing decisions for the benefit of its customers.

57. That in the objection decision and at paragraph 6 of the Respondent’s Statement of Facts, the Respondent claimed that the Appellant assists local vendors to carry out the manufacturing process. The Appellant averred that the Respondent’s claim had no legal or factual merit as there was no agreement or contract between the Appellant and the local vendors for the Appellant to provide any services to the vendors.

58. The Appellant submitted that the Respondent does not have the authority to impute a legal relationship or a contract where none exists. That furthermore, the Respondent’s position was contrary to the doctrine of privity of contract, under which a contract cannot confer rights or impose obligations upon a party who is no party to the contract. That the court upheld this principle in James Kamau Gitothu Njendu vs. Commissioner of Domestic Taxes [2019] eKLR where it was stated;

59. The Appellant submitted that the agreement was entered into between the Appellant and its non-resident parent PVHFEL. That the local manufacturers, who are strangers to the contract do not and cannot obtain any rights nor do they have any obligations under this agreement. The Respondent’s unsubstantiated claim that the Appellant provides local services to the local manufacturer’s flies in the face of this principle and remains untrue and unsupported by the facts.

60. According to the Appellant, the Respondent submitted that the direct contractual relationship between a supplier and its customer’s as a recipient of the supply, dictates the nature of the supply. That in CSARS vs. Respublica (Pty) Ltd (1025/2017) [2018] ZASCA 109, the South African Supreme Court of Appeal in determining whether a supply had been made to an end user, held;“Respublica’s approach is contrary to the general principle (as recognised in other VAT jurisdictions) that the VAT consequences of a supply must be assessed by reference, first and foremost, to the contractual arrangements under which the supply is made…[14] so viewed, one cannot legitimately attribute to Respublica’s supply, governed as it was by its own contractual terms, the characteristics of an altogether different supply of accommodation to third parties under separate contracts, with whom it had no contractual nexus”

61. The Appellant insisted that it has a contractual relationship with its non-resident parent, that is, PVHFEL. That the Agreement between these two parties determines the nature of the supply and the VAT consequences of supply. That the local manufacturers were not privy to the agreement. That the Respondent cannot attribute the characteristics of a different supply apparently offered to the local manufacturers with whom the Respondent had no contractual nexus with.

62. To support its arguments, the Appellant cited the following cases;a.Coca-Cola Central East Africa Limited vs. Commissioner of Domestic Taxes [2020] eKLR where the High Court held that marketing services provided by a Kenyan subsidiary of a non-resident company under a service agreement were used and consumed in the jurisdiction of the non-resident company.b.Commissioner of Domestic Taxes vs. Total Touch Cargo Holland [2018] eKLR, where the court made reference to the business agreement between the resident service provider and the non-resident and rejected implying an agreement where there was an express contract.c.The High Court case in Panalpina Airflo Limited vs. Commissioner of Domestic Taxes [2019] eKLR.d.That the use of the business agreement to determine the identity of the customer was accepted by the Tribunal in LG Electronics Africa Logistics Kenya Branch vs. The Commissioner of Domestic Taxes (TAT Appeal No 359 of 2018).e.The High Court case in Commissioner of Domestic Taxes vs. W.E.C Lines (K) Limited (Tax Appeal E084 of 2020) [2022] KEHC 57 (KLR).

63. The Appellant added that all facets of the service provided by the Appellant were for the benefit of its non-resident parent, PVHFEL, who is the person who used and consumed this service. That in essence, these are services provided by a Kenyan entity to a non-resident person. They therefore fall within the ambit of the definition of a service exported out of Kenya and are zero-rated for VAT purposes. That in accordance with the provisions of Section 17(5) of the VAT Act, the Appellant is entitled to cash refunds from the Respondent relating to the excess input tax for making the zero-rated supplies which it correctly claimed.

64. The Appellant contended that in rejecting its refund claim, the Respondent placed its reliance on paragraph 13(1)(b) of the Value Added Tax Regulations, 2017. That paragraph 13(1)(b) of the Value Added Tax Regulations describe what constitutes a taxable supply in the case of exported services.

65. That Regulation 13(1)(b) of the VAT Regulations, 2017 as applied by the Respondent in rejecting an Appellant’s refund claim, contradict the provisions contained under Section 2 of the VAT Act on export services.

66. It averred that Regulation 13(1)(b) provided that exportation of services shall not include taxable services provided in Kenya but paid for by a person who is not resident in Kenya.

67. The Appellant stated that Section 2 of the VAT Act provides that services exported out of Kenya means a service provided for use or consumption outside Kenya irrespective of the place of business being in Kenya, the recipient being in or outside Kenya or the place from where payment is made being in or outside Kenya. That the VAT Act further provides that exportation of taxable services is zero-rated.

68. The Appellant averred that the VAT Regulations, which constitute subsidiary legislation, contradict the provisions of the primary VAT Legislation by providing additional tests for the determination of whether services are exported or not i.e, the location of the payer and place of performance. This was in addition to the use and consumption tests, which are the only requirements provided for by Section 2 of the VAT Act.

69. The Appellant further averred that the VAT Regulations, 2017 are also self-contradictory. That Regulation 13(1)(b) indicated earlier requires that exported services ought to be provided to a recipient outside Kenya, i.e, a non-resident person. That further, Regulation 13(2) provides that documentation to prove export of services shall be a copy of the invoice showing the recipient of the supply to be a person outside Kenya.

70. That whilst it was reasonably expected that exported services will be requested by, invoiced to, and paid for by a non-resident person in most instances (as is the case for the Appellant), such a scenario was disqualified from being an export of service under regulation 13(1)(b) . that this in effect makes it impossible for services rendered in Kenya to qualify as exported services subject to VAT at zero rate i.e., regardless of the services being used or consumed outside Kenya as is envisaged by the VAT Act.

71. To support its arguments, the Appellant relied on the findings in the following cases;a.The Tribunal’s case in W.E.C Lines Kenya Limited vs. Commissioner of Domestic Taxes (TAT Appeal Number 137 of 2018).b.The High Court case in Commissioner of Domestic Taxes vs. W.E.C Lines (K) Limited (Tax Appeal E084 of 2020) [2022] KEHC 57 (KLR) which upheld the Tribunal’s judgement in W.E.C Lines Kenta Limited v Commissioner of Domestic Taxes (TAT Appeal Number 137 of 2018).c.The VAT Appeals Tribunal in the case of FH Services Kenya Limited vs. Commissioner of Domestic Taxes.d.The High Court case of Diamond Trust Kenya Ltd vs. Daniel Mwema Mulwa Milimani HCCC No. 70 of 2022. e.The Supreme Court of Kenya case in Evans Kidero & 4 others vs. Ferdinand Ndungu Waititu & 4 others [2014] eKLR.

72. The Appellant contended that it then follows that from the laws applicable here shall be the Act of parliament followed by the regulations which form part of subsidiary legislation. That subsidiary legislations draw their power from Acts of parliament. That in relation to the issue at hand, the hierarchy in contention was whether the application of these laws shall allow the VAT Regulations to be applied superiorly to the VAT Act. The principal established is that Acts of parliament are supreme to subsidiary legislation and as such, the VAT Act shall inform what the regulations shall apply and to what extent that application shall be.

73. The Appellant stated that in light of the present conflict between the VAT Act and the VAT Regulations, 2017, the Appellant averred that the key test as to whether services have been exported or not remains the use or consumption test as provided by the VAT Act. That as demonstrated earlier the Appellant’s services are used and consumed outside Kenya by PVHFEL and as such VAT should be charged on its services at the rate of 0%.

74. That Regulation 13(1)(b) of the VAT Regulations as initially drafted resulted in an inconsistency in interpretation which created an absurdity. It was the Appellant’s submission that the acknowledgement by the lawmakers led to the amendment of regulation 13(1) through the gazettement of Legal Notice 86 of 2019 dated 13th June, 2019.

75. It averred that Regulation 13(2) still provides that documentation to prove export of services shall be a copy of the invoice showing the recipient of the supply to be a person outside Kenya.

76. According to the Appellant the parliamentary Committee on Delegated Legislation report on consideration of the VAT (Amendment) Regulations, 2019 (Legal Notice No. 86 of 2019) contains considerations made by the committee prior to approval of the amendment. That on page 6 to 13, the report indicates that the amendment to Regulation 13 was meant to clarify what constitutes and exported service for VAT purposes regardless of who pays for them.

77. That page 8 of the report indicates that the challenge that needed to be addressed through the amendment was “Regulation 13(1) on export of service provided that a service provided in Kenya but paid for by a non-resident is deemed to be a local sale, effectively eliminating all export of services”.

78. The Appellant submitted that the Respondent alleged at paragraph 16 of their Statement of Facts that paragraph 1(b) of the Regulations had not changed and therefore if services are offered in Kenya then regardless of where the payment is made from cannot be deemed an export of a service. That the Respondent’s averments ignores that the Regulation 13(1)(b) no longer contains a condition for where the services are performed unlike the previous provision prior to its amendment through the Value Added Tax (Amendment) Regulations, 2019.

79. The Appellant stated that Parliament does not legislate in vain and as such it amended the VAT Regulations 2017 to remedy that absurdity created by regulation 13(1)(b) with regard to export of services. That the Tribunal should note that the proposal to amend the offending section was backed by the Respondent and the National Treasury. The Appellant submitted that the Respondent erred in law in rejecting the Appellant’s refund claim based on a regulation that was clearly deficient.

80. Regarding double taxation, the Appellant averred that the overarching purpose of VAT is to impose a broad-based tax on final consumption which should not ordinarily be borne by businesses. That to achieve this purpose in relation to international trade, the destination principle is applied. As a general rule under the destination principle, supplies made across borders should be taxed in the country of destination of the supplies (normally the country of location of the customer). That the High Court in Commissioner of Domestic Taxes vs. Total Touch Cargo Holland [2018] eKLR recognised that the destination principle is enshrined in the Kenyan VAT regime, and it is for this reason that supplies exported out of Kenya are taxable at the rate of zero rate percent.

81. The Appellant submitted that the destination principle ensures that exports are not subjected to tax and that exporters get refunds for input VAT incurred. That the guarantees that goods leave the jurisdiction free of VAT to enable the jurisdiction of use or consumption levy the same without any distortion or double taxation.

82. The Appellant reiterated that the destination principle, is destined to ensure that tax on services and intangibles traded internationally, is ultimately levied only on the final consumption that occurs within the taxing jurisdiction and thereby to maintain neutrality within the VAT system as it applies to international trade.

83. That the application of the standard VAT rate (16%) on the services provided by the Appellant lead to double taxation on account of the fact that the country of destination will also require PVHFEL, as the recipient of the services provided by the Appellant, to account for VAT on the imported services. As a result, levying VAT at 16% in Kenya will result in an additional tax/VAT cost as PVHFEL does not have the right to claim input tax credits in relation to VAT incurred in Kenya. That this is double taxation and clearly negates the principle that VAT should be a tax on final consumption and should not be borne by businesses in the supply chain.

84. On legitimate expectation, the Appellant added that on 9th February, 2021 the Respondent had approved a refund payment of Kshs. 2,499,432 in relation to a VAT refund Application for the tax periods between September 2015 and July 2016. That the funds approved for payment of the refund on the basis that the Appellant had excess input tax arising from zero rated supplies, were subsequently disbursed to the company on 11th February 2021.

85. The Appellant averred that by approving the refund payment of Kshs. 2,499,432 in relation to a VAT refund application for the tax periods between September 2015 and July 2016, the Respondent created a reasonable and legitimate expectation that all the Appellant’s refund claims, which are based on the same circumstances would be approved.

Appellant’s Prayers 86. The Appellant prayed for orders that;a.This Appeal be allowed.b.The Respondent’s decision dated 24th September, 2021 be set aside and annulled.c.The Appellant be paid the VAT refund claim amounting to Kshs. 3,232,755 for the periods between August 2018 to July 2019. d.The costs of and incidental to this appeal be awarded to the Appellant.e.Any other orders that the Tax Appeals Tribunal may deem fit.

Respondent’s Case 87. The Respondent’s case is premised on:a.Its Statement of Facts dated 1st December 2021 and filed on 2nd December 2021 together with the documents attached thereto, and proceedings before the Tribunal.b.Its written submissions dated 2nd December 2022 and filed on 8th February 2023.

88. The Respondent reiterated that the Appellant entered into an agreement with PVH Far East Limited to:i.Coordinate and act as the channel of communication between PVH Far East and the Indian suppliers.ii.Identify local suppliers and recommend potential suppliers for preliminary consideration of the PVH Far East.iii.Comply with PVH Far East shipment and deadlines calendar and report any delays.iv.Liaise with vendors on cost and communicate with PVH Far East.v.Coordinate with material suppliers to develop a preliminary sample based on material specifications and review for consistency.vi.Communicate PVH Far East design specifications to vendors.vii.Carry out quality assurance and control.viii.Organize local training of suppliers/vendors to educate them on quality requirements.

89. The Respondent stated that the contract between the Appellant and PVH Far East Limited provides that the Appellant may act in its own name and shall have authority to represent and bind PVH Far East directly vis-à-vis manufactures where it has received a purchase order from PVH Far East.

90. That the services offered by the Appellant are consumed in Kenya while assisting local vendors to carry out the manufacturing process. The goods manufactured by the vendors may be shipped to PVH Far East or other destinations as may be appointed by PVH Corporation.

91. It averred that the Appellant made a refund application on the basis that there was excess input VAT as a result of making zero rated supplies. That the refund was rejected by the Respondent because there were no zero-rated sales to support the claim.

92. The Respondent submitted that the Appellant lodged an objection on 20th May, 2021 urging that the services it provides constitute a supply of services for use and consumption outside Kenya hence taxable at a rate of 0% among other grounds.

93. That it reviewed the objection and issued an objection decision on 24th September, 2021 rejecting the refund for VAT on the grounds that the services offered by the Appellant were offered in Kenya hence not zero rated.

94. The Respondent stated that Regulation 13 of Legal Notice no 48 of 2017, paragraph (1)(b) states that;“13. (1)An exportation shall be taxable supply-a.…b.In the case of services, when the taxable supply involves the services being provided to a recipient outside Kenya for use, consumption or enjoyment outside Kenya.Provided that the exportation of services shall not include-a.Taxable services consumed on exportation of goods unless the services are in relation to transportation of goods which terminates outside Kenya.b.Taxable services provided in Kenya but paid by a person who is not a resident of Kenya”

95. That this paragraph describes what constitutes a taxable supply in cases of exported services and it provides that it will not include services provided in Kenya but paid by a non-resident.

96. The Respondent averred that if services are provided in Kenya it places the burden on the place of consumption even though the payment may have been made by a non-resident. That this proviso was enhanced in June 2019 by deleting the place of payment. Therefore, for as long as the services are provided in Kenya, they are deemed taxable at the general rate regardless of the payment being from a resident or non-resident.

97. The Respondent emphasised that the services offered by the Appellant were consumed in Kenya by the local vendors to ensure that their products are of an agreeable quality to its customers. That there was no contradiction created by paragraph 1(b) of regulation 13 to the VAT Act and that deletion of the proviso was not meant to clear absurdity.

98. That the provisions of Paragraph 1(b) of the regulation 13 have not changed and therefore if services are offered in Kenya then regardless of where the payment is made from cannot be deemed an export of a service.

Respondents Prayers 99. The Respondent prayed that the Honourable Tribunal dismisses the Appeal with costs.

Issue For Determination 100. Having carefully studied the parties’ pleadings, submissions and all documentation provided, the Tribunal is of the respectful view that the only issue for its determination is: Whether the Respondent was justified in rejecting the Appellant’s VAT refund claim.

Analysis And Findings Whether the Respondent was justified in rejecting the Appellant’s VAT refund claim. 101. The genesis of the dispute is the Respondent’s decision to reject the Appellant’s VAT refund claim amounting to Kshs. 3,232,755. 00 which claim the Appellant had lodged on 21st August, 2019 for the periods between August 2018 and July 2019.

102. While justifying rejecting the Appellant’s refund claim vide its Objection decision dated 24th September, 2021, the Respondent relied on Paragraph 1(b) of Regulation 13 of the VAT Regulations when it stated in part as follows;“(a)Paragraph 1(b) of Regulation 13 of the VAT Regulationsi.This paragraph describes what constitutes a taxable supply in cases of exported services and it provides that it will not include services provided in Kenya but paid by a non-resident.ii.If services are provided in Kenya it places the burden on the place of consumption even though the payment may have been made by a non-resident. This proviso was enhanced in June 2019 by deleting the place of payment. Therefore, for as long as the services are provided in Kenya, they are deemed to be taxable at the general rate regardless of the payment being from a resident or non-residentiii.The services offered by PVH Kenya Limited are consumed in Kenya by the local vendors to ensure that their products are of an agreeable quality to its customers.iv.There is no contradiction created by paragraph 1(b) of the regulation 13 to the VAT act and that deletion of the proviso was not meant to clear absurdity.v.The provisions of paragraph 1(b) of the regulation 13 have not changed and therefore if services are offered in Kenya they cannot be deemed an export of a service regardless of where the payment is made from.”

103. It was further the contention of the Respondent that the services offered by the Appellant are consumed in Kenya while assisting local vendors to carry out the manufacturing process. That the refund was rejected because there were no zero rated sales to support the claim.

104. The Appellant on its part submitted that it is one of PVHFEL’s sourcing hubs and is responsible for providing sourcing support services to PVHFEL as provided under the Buying Support Services Agreement concluded between the two parties.

105. According to the Appellant, the services it provided to PVHFEL, which is situated in Hong Kong, enable the PVHFEL to make sourcing decisions for the benefit of its customers. That the Appellant bills PVHFEL for its services on a cost-plus mark-up basis every month. That it was clear from the agreement that the services performed by PVH are for use and consumption by PVHFEL outside Kenya, as required by Section 2 of the VAT Act, and should therefore be subject to VAT at the zero rate (0%).

106. Section 2 of the VAT Act defines exported services as follows;“service exported out of Kenya” means a service provided for use or consumption outside Kenya”

107. The Appellant insisted that PVHFEL, which is situated in Hong Kong was the consumer of the services it provides under the Buying Support Agreement concluded between the parties.

108. The Tribunal perused through the submissions and noted that the Appellant attached the “Buying Support Services Agreement” dated 6th May 2014 between it and PVH Far East Limited whose address indicated that it was based in Hon Kong. The Agreement states in part as follows;“Under Clause 5Duties Of The PartiesProvider would assist Recipient in routine coordination and support services relating to the purchase / sourcing needs (“sourcing support services”) of Recipient. Provided shall provide Services to the Recipient as enlisted in Exhibit A...................................Exhibit A –Services Coordinate and act as the channel of communication between Recipient and the Indian suppliers.

Provide routine co-ordination and support services based on the standards developed and communicated by the Recipient, which includes the following

……………

Assistance of local implementation of the Recipients’ global Quality assurance and Control policies communicated by the Recipient, which includes the following-

…………..

…………..

Assist in implementation of the Recipient global Human Rights standards.

Act as a communication channel between local vendors and Recipient in relation to shipping of goods”

109. From the above agreement it was notable that the Appellant was providing services to PVH Far East (Recipient) and not any local companies in Kenya as averred by the Respondent.

110. The Tribunal however noted that the Respondent in its objection decision relied on Regulation 13 of legal notice no 48 of 2017, Paragraph (1)(b) which provided as follows;“13(1)An exportation shall be a taxable supply……(a)……(b)in the case of services, when the taxable supply involves the services being provided to a recipient outside Kenya for use, consumption or enjoyment outside Kenya.

Provided that the exportation of services shall not include-a.Taxable services consumed on exportation of goods unless the services are in relation to transportation of goods which terminates outside Kenya.b.Taxable services provided in Kenya but paid by a person who is not a resident of Kenya.”(Emphasis added)This provision was however deleted in 2019

111. The Respondent had stated that the above Paragraph describes what constitutes a taxable supply in cases of exported services and it provides that it will not include services provided in Kenya but paid by a non-resident.

112. However, Part A of the Second Schedule to the VAT Act provides as follows regarding zero rated supplies;“Where the following supplies, excluding hotel accommodation, restaurant or entertainment services where applicable, take place in the course of a registered person’s business, they shall be zero rated in accordance with the provisions of section 7— 1. The exportation of goods or taxable services

2. ……………”(Emphasis Added)

1. It follows therefore from the VAT Act in the above provision that where a service has been confirmed to have been exported out of Kenya, the same shall be zero rated.2. Further, as cited earlier in its definition, exported services only refers to “service provided for use or consumption outside Kenya”. In other words, the only condition to be fulfilled in confirming whether a service is exported is the ‘use or consumption’ outside Kenya. It follows therefore that contrary to the Respondent’s averments, the issue of where the services are provided or who pays for the service is immaterial in determining whether a service qualifies to be an exported service.3. The Appellant in this case provided clear evidence in form of an agreement to demonstrate that it was providing services to PVHFEL which is a company based in Hong Kong. The Respondent on the other hand did not provide any evidence to demonstrate that the Appellant provided any other services to local companies.4. Going by the definition of exported services, the place of performance of the services is not relevant. This was the finding in Commissioner of Domestic Taxes vs. Total Touch Cargo Holland [2018] eKLR where it was held that:“A clear reading of this provision is that for a service to be deemed an “exported service”, it matters not whether that service was performed in Kenya or outside Kenya. The determining factor is the location where that service is to be finally used or consumed. Therefore, an exported service will be one which is provided for use or consumption outside Kenya.”

117. Further, to determine the place of consumption, the court in Total Touch Cargo Holland applied its mind to the question of the purpose of the services and who ultimately enjoyed the same and stated as thus:-“It is not in any dispute that the purpose of the services provided by KAHL was to ensure that the Respondent delivered the horticultural produce and flowers to their customers in Europe a fresh state. The Respondent on whose behalf the services were being performed was also based outside Kenya (in Holland). It is clear therefore that the services being provided by KAHL were consumed by the Respondent (a foreign based company) and said services were ultimately enjoyed or used by the buyers (consumers) of the horticultural produce and flowers who were also outside of Kenya.

118. In the present case the Appellant has described in detail the purpose of its services and demonstrated that the consumer of its serviced is PVHFEL who is based in Hong Kong.

119. Furthermore, it is trite law that provisions of a substantive Act of Parliament overrides subsidiary legislations in case a subsidiary legislation contradicts a substantive Act. This was the position taken by the High Court in the case of Diamond Trust Kenya Ltd vs. Daniel Mwema Mulwa Milimani HCCC No. 70 of 2002 (Suppra) where Court stated as follows;“We have in this country a three-tier hierarchy of laws. At the apex is the Constitution of Kenya, which is the supreme law of the land, to which all other laws are subservient. Next in rank are Acts of Parliament, followed by subsidiary legislation at the bottom of the pile”

120. The Tribunal is further persuaded by the holding in Commissioner of Domestic Taxes vs. Total Touch Cargo Holland Income Tax Appeal No. 17 of 2013 where the Judge stated as follows;“Based on the above it is clear that principal legislation overrides subsidiary legislation, thus the Appellant cannot rely on Regulation 20 to override the definition provided by Section 2 of the repealed Act of “Services Exported out of Kenya”.(Emphasis added)

121. Going by the above case laws, it follows that the provisions of the VAT Act would ordinarily override the subsidiary legislation such as the Regulation 13 relied on by the Respondent to reject the Appellant’s refund claim. It was therefore the Tribunal’s view that it was improper for the Respondent to rely on a subsidiary legislation while completely ignoring the provisions of a substantive Act of Parliament (in this case the VAT Act).

122. Consequently, the Tribunal finds that the Respondent was not justified in rejecting the Appellant’s VAT refund claim.

Final Decision 123. The upshot of the foregoing is that the Appeal is merited and the Orders that commend themselves are as follows:i.The Appeal be and is hereby allowed.ii.The Respondent’s Credit Adjustment Vouchers issued following the rejection of the Appellant’s VAT refund claim are hereby revoked.iii.That the Objection decision dated 24th September, 2021 be and is hereby set aside.iv.The Respondent to process the Appellant’s VAT refund claim lodged on 21st August, 2019 amounting to Kshs. 3,232,755. 00 within Ninety (90) days of the date of delivery of this Judgment.v.Each Party to bear its own costs.

124. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF MAY, 2023………………………ERIC N. WAFULACHAIRMAN………………….……..CYNTHIA MAYAKA……....………..…………MEMBERGRACE MUKUHA……....………..…………MEMBER…………………...…….…ABRAHAM KIPROTICH…………..…..……..……MEMBERJEPHTHAH NJAGI…………..…..……..……MEMBER