The Place of Consumption for VAT Purposes

Case Study: Jars Transporters Limited v Commissioner of Domestic Taxes (Tax Appeal 1432 of 2022) [2024] KETAT 153 (KLR) (Civ) (9 February 2024) (Judgment)

JTL is a limited liability company incorporated in Kenya, whose principal business activity is transportation of coffee and gurney bags.

KRA issued JTL with a credit verification notice on 2nd December 2021 and subsequently with a VAT credit verification findings letter dated 27th April 2022.

JTL objected on 24th August 2022.

KRA issued its objection decision on 17th October 2022.

Following its dissatisfaction with KRA’s decision, JTL appealed by filing a Notice of Appeal to the Tribunal on 15th November 2022.

Among the grounds of appeal were:

· That KRA erred in law and fact by failing to appreciate that the cost of transport is on the farmer as part of the auxiliary activities done by the farmer in the course of supplying the coffee to the auction centres, and this falls within the ambit of Paragraph 4 of part A in the Second Schedule of VAT Act Cap 35

· That KRA erred in law and fact by failing to appreciate that coffee is not physically delivered to the auction centre and such supply being referred to by Paragraph 4 was addressing all that is related to the supply of coffee within the laid down trading framework including the physical location and the logistical activities that goes into the facilitation of the supply of the coffee to the auction, transport being part thereof.

· That KRA errored in law and fact by considering that the coffee supplier should have been charged VAT while is trite that coffee is an export commodity and all auxiliary services connected to this export are export services whose automate beneficiary is the foreign buyer and not the farmer.

· That KRA errored in law and fact by failing to consider that a transport service cannot be consumed in Kenya while the good being transported be consumed in a foreign country and that a consumer cannot benefit from goods and not services related to preparation and availing of such goods.

JTL argued that:

· Supply of coffee to the auction centers is zero rated as per Para 4 of Part A of the 2nd Schedule under the VAT Act Cap 35 laws of Kenya.

· Supply of coffee-to-coffee auction centers includes the transportation of coffee to the coffee warehouse. That the warehouse is the physical location of the auction’s coffee commodities, and the Coffee Act 2009 creates a condition that coffee is not auctioned if it is not in a registered warehouse within Nairobi Area.

· a key question is who the ultimate consumer is. The consumer of the coffee plus its incidental preparation costs are the foreign buyers’. These foreign buyers buy coffee directly from the farmers and from the auction center through their appointed agents who form part of the Kenya coffee dealership registered by the Agricultural Food Authority. For direct sales, the farmer signs a direct sale contract with the foreign buyer directly through the linkage of the Marketing Agents. This makes the transport element within the coffee commodity form part of the export.

· Coffee supply to the auction center is a zero-rated supply under the 2nd Schedule of the VAT Act, 2013. It would be grossly erroneous to assume that transportation does not form part of that supply

· the Organization for Economic Co-Operation and Development (OECD) Guidelines provide that the jurisdiction where a customer is located has the taxing rights over internationally traded services (coffee being an export supply)

KRA replied that:

· JTL is engaged in the supply of services through transportation of coffee and supply of goods, that is, gunny bags, which are general rated supplies.

· when Paragraph 4 of the Second Schedule of VAT Act,2013 refers to “supply of coffee and tea for export to coffee or tea auction centres” being zero rated supplies. That it is only zero-rated supplies where it involves the owner of the coffee supplying the coffee or tea to the auction centres and not the contracted transporter.

· as per OECD guidelines, the destination principle applies to VAT on exports where exports are free from VAT and imports are taxed on the same basis and at the same rate as local production. However, the principle does not apply in this matter as JTL does not engage in international trade and does not export any service.

In its ruling on 09/02/2024, the TAT observed that:

· Paragraph 4 of the 2nd Schedule to the VAT Act states as follows:

“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—

4. The supply of coffee and tea for export to coffee or tea auction centres.”

· Part A of the Second Schedule to the VAT Act provides for “zero rated supplies”. Specifically, it lists all the supplies that are considered VATable at zero rate under this Act.

· the Second Schedule to the VAT Act does not list “transport of coffee to auction centres” as a zero-rated supply. If the purpose of the legislature was to zero rate transportation services to coffee auction centres, then this would have been expressly listed under the Second Schedule as zero rated. A reading of the listing of zero-rated supplies under this Schedule confirms that these transportation services are not listed and are, therefore , not zero rated.

· the Tribunal reviewed contracts between JTL and its clients as well as goods dispatch notes and delivery notes provided by JTL. The Tribunal confirmed that these contracts were all with local entities, and none was with a non-resident/ foreign client. Further, transport rate cards provided in the contracts showed that deliveries were made from local origins to local destinations.

· Section 2 of the VAT Act defines a “service exported out of Kenya” to mean a service provided for use or consumption outside Kenya.

· the Tribunal that the transport services were from local origins to local destinations and that the person that contracted with JTL were local entities and not foreign entities. Consequently, the place of consumption of the said services was in Kenya, and the location of the business/ persons receiving the services was in Kenya

· KRA was justified in issuing the VAT assessment to JTL.

As such, KRA won

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