Hapag Lloyd Kenya Limited v Commissioner of Domestic Taxes (Tax Appeal E952 of 2023) [2024] KETAT 1577 (KLR) (22 November 2024) (Judgment)
Neutral citation:
[2024] KETAT 1577 (KLR)
Republic of Kenya
Tax Appeal E952 of 2023
Grace Mukuha, Chair, GA Kashindi, E Komolo & AM Diriye, Members
November 22, 2024
Between
Hapag Lloyd Kenya Limited
Appellant
and
Commissioner of Domestic Taxes
Respondent
Judgment
Background
1.The Appellant is a limited liability company duly incorporated in the Republic of Kenya under the Companies Act, 2015. The Appellant carries on the business of shipping agent of Hapag Lloyd AG, an international sea carrier and shipping company registered in Germany, and whose principal business is international transportation of containerized cargo by sea.
2.The Respondent is an officer appointed under Section 13 of the Kenya Revenue Authority Act (Cap. 469). Under Section 5 (1) of the said Act, the Respondent is an agency of the government for the collection and receipt of all revenue.
3.On 2nd October, 2023, the Appellant lodged VAT refund claim with the Respondent for Kshs. 1,691,316.00 covering the months of April, May, June, and July, 2023.
4.The Respondent issued VAT Claim Rejection Order on 11th October, 2023, and which was emailed to the Appellant on 14th November, 2023.
5.Aggrieved by the Respondent’s VAT Claim Rejection Order, the Appellant lodged this Appeal vide Notice of Appeal dated 7th December, 2023 and filed on the same date.
The Appeal
6.The Appeal is premised on the Appellant’s Memorandum of Appeal dated 20th December, 2023 and filed on the same date stating the following grounds: -i.That the Respondent erred in law in rejecting the input VAT refund claim properly claimed by the Appellant.ii.That the Respondent erred in law and in fact in rejecting the input VAT refund claim based on the Appellant’s agency relationship with Hapag Lloyd AG.iii.That the Respondent erred in law and fact in disregarding the clear fact that Hapag Lloyd AG (the Principal or Liner) does not reimburse Hapag Lloyd Kenya the input VAT incurred by the Appellant herein, Hapag Lloyd Kenya.iv.That the Respondent erred in law and fact in failing to address itself to and respond to the Appellant’s transaction which is in the nature of taxable services provided to the principal, an international sea carrier, and which services are VAT zero-rated under the Second Schedule to the VAT Act.v.That without prejudice to the foregoing, the Respondent erred in law and fact in failing to address itself to and properly characterizing the services offered by the Appellant, which services are VAT zero-rated as they are clearly exported taxable services in respect of business process outsourcing (BPO).
The Appellant’s Case
7.The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Appellant’s Statement of Facts dated 20th December, 2023 and filed on the same date.b.Appellant’s Witness Statement of Anthony Mukobe dated 17th May, 2024 and filed on the same date.c.Appellant’s Written Submissions dated 30th July, 2024 and filed on the same date.
8.The Appellant averred that pursuant to shipping agency services it renders and rendered to its principal in Germany, Hapag Lloyd AG, the Appellant claimed VAT refunds from the Respondent of Kshs. 1,691,316.00 for the months of April, May, June, and July, 2023.
9.The Appellant further averred that its primary basis for VAT refund claims include the following:a.The Appellant exported its shipping agency services which services are VAT zero-rated under the Second Schedule, Part A, Paragraph 23 to the VAT Act, 2013.b.The Appellant provided taxable services to Hapag Lloyd AG, an international sea carrier, which services are subject to 0% VAT under paragraph 6, Part A of the Second Schedule to the VAT Act.
10.The Appellant stated that its input VAT refund claim is based on the expenditure incurred in the performance of services of the principal, Hapag Lloyd AG, which services are zero rated under VAT Act.
11.The Appellant further stated that its functions are provided for under Article 2 of the Agency Agreement dated 1st March, 2021, and the Appellant performs these functions for the protection and benefit of the principal liner’s interest as stated in Article 8 of the annexed Agency Agreement.
12.It is the Appellant’s contention that the claim for input VAT refund is because the Appellant provides supply of taxable services to an international sea carrier, which services are zero-rated as clearly provided for in Paragraph 6 of the Second Schedule to VAT Act, 2013.
13.The Appellant’s averred that, without prejudice to the foregoing, it provided exported taxable services in respect to BPO, which services were zero rated under Paragraph 23 of the Second Schedule to VAT Act, 2013.
14.The Appellant submitted that the services it performs are for and on behalf of the principal who carries on the business of international transportation of containerized cargo by sea. As these services are VAT zero-rated, the Appellant is, by law, entitled and rightfully so, to claim excess input VAT incurred from operations and expenses, as provided under Section 17(5) of the VAT Act, 2013, for the services rendered to the principal.
15.The Appellant contended that the Respondent’s basis of rejecting the Appellant’s VAT refund claims is manifestly erroneous, not cognizant of the clear provisions of Paragraph 6 and 23 of the Second Schedule to the VAT Act, and not based on the correct facts, and thus the input VAT refund claim is properly due and payable to the Appellant.
16.The Appellant averred that the general agent under the agency law is defined by Bowsted and Reynolds as “an agent who has authority to act for his principal in all matters concerning a particular trade or business, or of as a particular nature; or to do some act in the ordinary cause of his trade, profession or business as an agent, on behalf of his principal.”
17.It is the Appellant’s contention that it is not in doubt and neither is it contested that the Appellant is a shipping agent of Hapag Lloyd AG, a company registered in Germany. As a shipping agent, the Appellant is responsible for supporting the principal regarding the arrival of ships, booking cargo, loading, and unloading vessels, tracking containers, and generally liaising with the principal’s customers on behalf of the principal. As a result, the Appellant incurs costs such as office rental, utilities, and consumables which costs have a VAT charge in providing these services to its principal in Germany.
18.The Appellant submitted that under the Agency Agreement dated 1st March, 2021, the Appellant is compensated by way of a mark-up on all net expenses incurred, net of taxes. These expenses include salaries and wages, rent, security and other business expenses.
19.The Appellant further averred that the Agency Agreement between the Appellant and its principal clearly defines net expenses to exclude VAT costs incurred. The commercial and legal rationale for excluding input VAT incurred by the Appellant from the remuneration base is that the Appellant would and is entitled to a VAT refund claim from the Respondent having supplied exported services to the principal.
20.It is the Appellant’s contention that the Respondent’s basis for rejecting the Appellant’s VAT refund claims is manifestly erroneous and is based on a misapprehension of the correct facts.
21.Furthermore, the Appellant argued that it is compensated by the principal for all costs net of input VAT plus mark-up. Accordingly, the principal does not reimburse the Appellant for input VAT, and this is the reason the Appellant claims input VAT refunds for input VAT incurred in the furtherance of its shipping agency services.
22.It is the Appellant’s further averment that the basis of its claim is that it incurred VAT in the course of its business activities for the purposes of furthering its business. The Appellant is a commercial undertaking assuming commercial risks and charging a remuneration for the services rendered to its client, much like an independent shipping agent charges an international sea carrier for shipping agency services rendered.
23.The Appellant argued that it is important to highlight that as a commercial enterprise, the Appellant contracts in its own name, for inputs that it requires to discharge its functions. The Appellant does not contract for these inputs for and on behalf of the principal.
24.The Appellant further submitted that it pays its various suppliers for its expenses that the Appellant incurs in the course of providing agency services to the principal. These costs are incurred by the Appellant in its own business and in furtherance of its business.
25.It is the Appellant’s further contention that there is an existence of a direct and immediate link between the Appellant’s input transactions and the particular output transactions giving rise to the Appellant’s entitlement to deduct input VAT.
26.In this regard, the Appellant argued that its input VAT claim is related to expenditure incurred directly by it in the course of its business of providing agency services to the principal and not expenses incurred on behalf of the principal.
27.Further, the Appellant submitted on this limb that Article 8 of the Agency Agreement clearly outlines the remuneration of the agent and provides that “the line will remunerate the agent for the protection of the line’s interest and functions performed and mentioned under Articles 2,3,4 and 5 only for business contracts concluded during the term of the contract.”
28.The Appellant contended that from the provision of the Article as read with Exhibit A, it is clear that the remuneration of the Appellant is limited to the net expenses incurred by the Appellant, plus a mark-up, net of taxes. On this basis, the Appellant prayed that the Respondent’s rejection order be vacated and the Appellant’s VAT claim be found to be rightfully claimed and payable.
29.The Appellant submitted it is not in doubt that it provides taxable services to the principal, an international sea carrier, and these services are VAT zero-rated as provided for in paragraph 6 of the Second Schedule to the VAT Act.
30.It is the Appellant’s case that without prejudice to the above, the Respondent grossly erred in failing to properly characterize the Appellant’s transaction as a supply of services to an international sea carrier, all facts which are not disputed.
31.The Appellant stated that the Respondent’s decision rejecting the Appellant’s VAT refund claims lacks a sound basis and ought to be vacated and the Appellant paid its VAT refund claims.
32.The Appellant further stated that, without prejudice to the foregoing, it is not disputed that it is a shipping agent of the principal in Germany, and as part of its functions, the Appellant is responsible for supporting the principal regarding the arrival of ships, booking cargo, loading, and unloading vessels, tracking containers, and generally liaising with the principal’s customers on behalf of the principal.
33.It is the Appellant’s case that it provides services which the principal would either have performed itself or, by virtue of not being present in Kenya, would have contracted independent third parties to provide these services.
34.Accordingly, the Appellant argued that though the VAT Act refers to exportation of taxable services in respect of business process outsourcing (BPO), the VAT Act does not define what a BPO is. In the absence of a definition, the common understanding and trade usage of a BPO ought to apply.
35.The Appellant submitted that Black’s Law Dictionary, 21st Edition defines “an outsourcing agreement” as an agreement “in which the service provider promises to provide necessary services esp. data processing and information management, using its own staff and equipment, usually at its own facilities.”
36.The Appellant argued that the reasonable test that ought to apply in determining whether a service is a BPO service and therefore VAT zero rated for purposes of paragraph 23 of the Second Schedule to the VAT Act is: -a.Is the service one that the recipient would have performed for themselves internally? - The principal in Germany would, in the absence of the Appellant, have to perform these services itself, or at the very least, engage an independent third party to provide these shipping agency services.b.Is the outsourced service critical to the functioning of the business or delivery of the services? - Without the support services provided by the Appellant or an independent third-party shipping agent, the principal would not deliver on its contractual obligations to its global clients. Thus, for example, without coordination of arrival of ships, unloading and loading of cargo and marshalling of containers, Hapag Lloyd AG would not deliver to its international sea freight service to its clients; andc.Is the BPO service used and consumed outside Kenya? - It is clear that the shipping agency service is used, consumed and for economic benefit of the principal, Hapag Lloyd AG Germany. Accordingly, this shipping agency service is a service exported outside of Kenya as provided for in Section 2(1) of the VAT Act. The High Court has on several occasions defined a service exported outside Kenya, as stated in F.H. Services Kenya -vs- Commissioner of Domestic Taxes (Appeal No. 6 of 2012); and Commissioner of Domestic Taxes -vs- W.E.C. Lines (K) Ltd (2022), where the determining fact was stated to the be location where the services was to be used or consumed.
37.The Appellant argued that using its own staff, equipment, and facilities, it provides necessary services to the principal to ensure that the principal’s international sea transportation business is carried on. The Appellant, by way of example, attached a list of employees, sample rental invoice and sample invoice for printers that it uses in providing the services to the principal.
38.Further and without prejudice to the above, the Appellant urged the Honorable Tribunal to take judicial notice and draw an analogy from the definition of a BPO under the Special Economic Zones Act, 2015, which defines a BPO as “the provision of outsourcing services to business for specific business functions or processes such as back-office support services in human resource, finance, accounting, procurement amongst other services.”
39.Accordingly, it is the Appellant’s case that its shipping agency services are BPO services, which are exported and therefore subject to 0% VAT under paragraph 23 of the Second Schedule to VAT Act.
40.The Appellant argued that it provides and at the material time, provided BPO services which were VAT zero-rated. Accordingly, the Appellant is entitled to the VAT refund claims as claimed from the Respondent.
41.It is the Appellant’s assertion that, without prejudice to the above, the Respondent’s decision disallowing the Appellant’s VAT refund claims disregards and ignores the clear definition of a service exported out of Kenya.
42.The Appellant argued that it is providing shipping agency services, which are exported out of Kenya and, therefore, VAT zero-rated in line with the Organization for Economic Cooperation and Development (OECD) Guidelines on VAT, which guidelines have been accepted and endorsed by the High Court in Kenya.
43.In conclusion, the Appellant submitted that the Respondent’s Objection Decision lacks a legal basis and cannot stand, and in the premises, the Respondent’s rejection order rejecting the Appellant’s VAT refund claims ought to be vacated in toto.
Appellant’s Prayers
44.The Appellant prayed to the Tribunal for the following orders: -a.That the Commissioner’s rejection order rejecting the Appellant’s VAT refund claims of Kshs. 1,691, 316.00 for the period April to July 2023 be declared null and void, and be set aside in its entirety.b.That the Respondent do forthwith process and pay the Appellant’s VAT refund claims of Kshs. 1,691,316.00 for the period April to July, 2023.c.That the Appeal be allowed with costs to the Appellant; andd.Any other remedies that the Honorable Tribunal deems just and reasonable.
The Respondent’s Case
45.The Respondent’s case is premised on the following document(s) filed before the Tribunal: -a.Respondent’s Statement of Facts dated 19th January, 2024 and filed on 22nd January, 2024.b.Respondent’s Written Submissions dated 23rd July, 2024.
46.The Respondent averred that its decision to decline the Appellant VAT application is legally correct and the same should be upheld by the Honorable Tribunal.
47.The Respondent further averred that it made the decision to decline the Appellant VAT refund application upon reviewing an agency agreement between the Appellant and its parent holding company, Hapag-Lloyd AG, dated 15th September, 2021, for provision of agency services where it noted that the Appellant incurs expenses on behalf and in the name of its principal and is reimbursed all costs incurred plus a 3% mark up.
48.The Respondent averred that based on the agency agreement dated 15th September, 2021, the Appellant is an agent of Hapag-Lloyd Aktiengesellschaft Hamburg, and thus all sales and inputs belong to Hapag-Lloyd Aktiengesellschaft, Hamburg (principal), and not Hapag-Lloyd Kenya Limited (agent).
49.The Respondent stated that it is only the principal who may deduct input VAT made to an agent on behalf of the principal.
50.It is the Respondent’s case that Section 13(5) of the VAT Act, 2013 provides that “…in calculating the value of any services for the purposes of subsection (1), there shall be included any incidental costs incurred by the supplier of the services in the course of making the supply to the client; provided that, if the Commissioner is satisfied that the supplier has merely made a disbursement to a third party as an agent of this client, then such disbursement shall be excluded from the taxable value.”
51.The Respondent argued that the aforesaid position was upheld by the Tribunal in the case of Cofftea Agencies -vs- Commissioner of Domestic Taxes (TAT No. 74 of 2016), where the Tribunal ruled that payments made by an agent on behalf of the principal should be precluded from deducting input VAT from the subject payments.
52.It is the Respondent’s case that the services offered by the Appellant are purely shipping management services to its parent holding company, Hapag-Lloyd AG, where the Appellant is reimbursed costs plus mark-up, which the parent company caters for as per the definition of expenses in the contract.
53.The Respondent argued that “net expenses” is defined in Paragraph 1 of the Agency Agreement as “all expenses necessary to provide agency services to the line, comprising (non-exhaustive list) wages and salaries including social security, pensions and other related expenses, depreciation, amortization, office and administration expenses, other non-income taxes, less recoveries of those expenses or other income, according to local GAAP (Generally Accepted Accounting Principles)”.
54.In this regard, the Respondent argued that the Appellant is reimbursed for all costs that it incurs in its activities plus a mark-up and therefore it is not entitled to a refund from the Respondent.
55.Finally, the Respondent submitted that it is only the principal who may deduct input VAT made to an agent on behalf of the principal.
Respondent’s Prayers
56.The Respondent prayed to the Tribunal for the following order(s): -a.That the Appeal be dismissed with costs to the Respondent as the same is without merit.
Issues For Determination
57.Having carefully reviewed the pleadings and submissions by both parties together with annexures thereto, the Tribunal is of the considered view that the following issue falls for its determination: -a.Whether the Respondent was justified in rejecting the Appellant’s input VAT Refund Application.
Analysis and Findings
58.From the outset, the Tribunal notes that the factual background in the instant Appeal is not contested. The primary issue of contestation is whether the Appellant was entitled to claim input VAT refunds as applied for on 2nd October, 2023. In its Application, the Appellant contended that it supplied zero-rated supplies inform of exported services.
59.To support its case on this limb, the Appellant relied on several precedents including Commissioner of Domestic Taxes -vs- Total Touch Cargo Holland HC ML ITA No. 17 of 2023; Panalpina Airflo Limited -vs- Commissioner of Domestic Taxes (2019) eKLR; Commissioner of Domestic taxes -vs- Fortune Container Depot (2020); Commissioner of Domestic Taxes -vs- Dodwell EA Limited (2020); and Commissioner of Domestic Taxes -vs- W.E.C. Lines (K) Limited (2022).
60.On its part, the Respondent, in issuing its Rejection Order dated 11th October, 2023 claimed that the Appellant is an agent and is thus not entitled to claim input VAT on behalf of the principal. In this respect, the Appellant sought to rely on Section 13(5) of the VAT Act, which has a proviso for excluding input VAT claims in agent-principal relationship.
61.To buttress its case, the Respondent relied on precedents established in Cofftea Agencies Limited -vs- Commissioner of Domestic Taxes (TAT No. 74 of 2016); Commissioner of Domestic Services -vs- Dutch Flower Group Kenya (No. E101 of 2020); and Jasbir Singh Rai & 3 Others -vs- Tarlochan Singh Rai & 4 Other (2013) eKLR.
62.The Tribunal notes that the applicable law governing input VAT claims regarding exported services is to be found in Sections 2, 17 (5) and Paragraph 6 of the VAT Act, which provide as follows:
63.On the other hand, Section 13(5) provides for taxable value of supply in the following terms: -
64.The Appellant submitted that it provides international shipping services to its principal, Hapag Lloyd AG, based in Germany, and that its contractual arrangement is governed by the Agency Agreement annexed to its pleadings. The said Agency Agreement outlines duties of the Appellant and payment terms. In particular, the Appellant is remunerated “net expenses” arising from services provides to the principal plus mark-up of 3 percent, but minus third party revenue net of taxes.
65.The Appellant further submitted that from the Agency Agreement, it is an independent firm from the Respondent supplying standard international shipping services for which it qualifies for input VAT claims. The Appellant annexed various documents to support its contention including invoices and employee schedules.
66.In this regard, the Appellant sought to distinguish the case of Commissioner of Domestic Taxes -vs- Dutch Flower Group Kenya (ITA No. E101 of 2020), relied upon by the Respondent in claiming that the Appellant, as an agent, is not entitled to claim input VAT as its costs as it belongs to the principal.
67.It is the Appellant’s submission that in the Dutch Flower Group Kenya case (supra), the High Court reviewed the Service Agreement between the parties which was largely distinct and different from the Agency Agreement in the instant Appeal. In that case, for instance, the Appellant submitted that ‘costs’ included full cost of service and the degree of control was also different.
68.Finally, it is the Appellant’s submission that the doctrine of privity of contract universally applies and the parties are free to constitute the rights and obligations within the wording of their contracts, and therefore the Respondent or any third party should not rewrite its contract/agency agreement.
69.On its part, the Respondent largely emphasized that the Appellant herein is an agent of its principal and is therefore not entitled to apply input tax refund, as the same is to be borne by the person who has incurred the cost, which, according to the Respondent, is the principal in this case. The Respondent supported its position by relying on the Appellant’s annexed Agency Agreement and the precedent in the Dutch Flower Group Kenya case (supra).
70.From the totality of the evidence placed before us, there is no doubt that the services offered by the Appellant herein fall within the meaning of “Service exported out of Kenya” as envisaged under Section 2 of the VAT Act, 2013. This is supported by the detailed description of the obligations of the Appellant in the Agency Agreement and is not controverted by the Respondent at all. In this regard, we reiterate the celebrated precedent by the High Court in Commissioner of Domestic Taxes -vs- W.E.C Lines (K) Limited 2020.
71.We are equally in no doubt that such exported services, to the extent that they relate to international sea and aircraft carriers, which is the primary business of the Appellant’s principal in the instant Appeal, are zero-rated supplies for VAT purposes within the express meaning and provision of Paragraph 6 of Part A of Second Schedule to VAT Act.
72.This leaves us with the nature of the relationship between the Appellant and its principal, Hapag Lloyd AG, to determine. On this issue, the Respondent sought to rely on Section 13(5) of the VAT Act, 2013 to contend that the principal, Hapag Lloyd AG, was merely making reimbursements to the Appellant as its agent, and that therefore the principal remained liable for paying VAT.
73.The Tribunal notes that Hapag Llyod AG controlled the actions of the Appellant since the Agreement at Clause 1.4 prohibited the Appellant from rendering services equal or comparable to the services rendered to Hapag Llyod AG without prior approval in writing. The main bone of contention in this case arises from the fact that under the Agreement, the principal reimburses the Appellant net costs incurred by it, meaning that the Appellant is not reimbursed the VAT costs incurred.
74.The Tribunal has reviewed Exhibit 1A which is annexed to the Agency Agreement and which outlines the agreement regarding the remuneration of the Appellant. The same provides that the agency remuneration would recover the "Net Expenses" of the Appellant arising in connection with services provided to Hapag Llyod AG under the Agreement plus a mark-up of 3%, minus third-party revenue net of taxes.
75.The Tribunal also notes that under the remuneration clause, the Appellant is reimbursed all expenses necessary to provide the agency services to the Line. The list is non-exhaustive and includes wages and salaries, social security, pensions and other related expenses, depreciation, amortization, office and administration expenses and other non-income taxes, less recoveries of those expenses or other income, according to local GAAP.
76.The Tribunal is guided by the decision of the High Court in the case of Commissioner of Domestic Services vs Dutch Flower Group Kenya (Income Tax Appeal E101 of 2020[2021] KEHC 23(KLR) (Income Tax Appeal E101 of 2020) where Justice Mabeya held as follows:
77.The Tribunal is of the view that the Agency Agreement provided that the Appellant would be remunerated for all costs incurred in acting for Hapag Llyod AG within Kenya and other jurisdictions covered under the Agreement. This was because the Appellant was undertaking work to protect Hapag Llyod AG interests and functions performed, and as mentioned under the Clauses 2,3,4 and 5 of the Agreement.
78.In the circumstances of this case, it is the finding of the Tribunal that the VAT cost ought to have been borne by the person who incurred the cost of the services rendered or the goods purchased, in this case Hapag Llyod AG. The Appellant could not claim to have incurred the cost, as it was the principal who bore or ought to have shouldered the VAT cost.
79.The Tribunal has perused and reviewed Exhibit A, annexed to the Agency Agreement and finds that the definition of net expenses includes “other non-income taxes”. This supports the basis for the Tribunal’s finding that it was Hapag Llyod AG that ought to have borne the VAT cost since the Appellant was at liberty to load VAT on the costs incurred by it in rendering the services under the Agreement.
80.Having established that the Appellant acted as agent of its principal, Hapag Llyod AG, the claim for input VAT would therefore belong to the principal, Hapag Llyod AG. Consequently, the Tribunal finds and holds that the Respondent was justified in rejecting the Appellant’s input VAT refund application.
Final Determination
81.Accordingly, it is the determination of the Tribunal that the Appeal is not merited and we proceed to issue the following orders: -a.The Appeal is hereby dismissed.b.The Respondent’s VAT Claim Rejection Order dated 11th October, 2023 is hereby upheld.c.Each party to bear its costs.
74.It is so ordered.
DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER 2024GRACE MUKUHA - CHAIRPERSONGEORGE KASHINDI - MEMBERDR. ERICK KOMOLO - MEMBERABDULLAHI DIRIYE - MEMBER