1.The Appellant has moved this court by a Memorandum of Appeal challenging the decision of the Tax Appeal Tribunal (Tribunal) in Appeal issued on November 29, 2021 in Tax Appeal Case No 465 of 2019.
2.The Respondent, Microsoft East Africa Limited, is a company incorporated and tax resident in Kenya, while Microsoft Ireland Operations Limited is a company incorporated and resident in Ireland. Both companies are wholly owned subsidiaries of Microsoft Corporation, a company incorporated and resident in the USA.
3.MIOL entered into an intercompany agreement with Microsoft East Africa Limited for the provision of various support services such as marketing its products in Kenya, Tanzania, Uganda, Rwanda, Ethiopia and Somalia.
4.The Respondent applied for a refund of excess input VAT of Ksh 56,177,733/- for the period 1/12/2013 to 31/8/2015, Ksh 3,543,006 for September 2015 and Ksh 2,965,872/- for April 2017. Thereafter the Appellant issued an objection decision disallowing the Respondent’s refund claim of Ksh 59,261,006/-. The Respondent then appealed to the Tax Appeals Tribunal (tribunal) which determined vide a judgement delivered on October 29, 2021 that the Appellant erred in disallowing the refund claim of Ksh 59,261,006/-.
5.The Appellant being dissatisfied with the said judgement of the tribunal appealed to this court via its memorandum of appeal dated December 24, 2021 against the whole decision on the grounds that:
6.Based on the above grounds of appeal, the Appellant prayed for the following orders;
7.The Respondent opposed the appeal and filed a statement of facts dated 6/6/2022. In its opposition, the Respondent contended that the agreement between itself and Microsoft Ireland Operations Limited did not imply an agency agreement but rather that it provided marketing services to the Microsoft Ireland Operations Limited; that the fact that Microsoft Ireland Operations Limited pays Microsoft East Africa, a commission that equals a cost-plus 13% cannot be the basis of upon which the Appellant avers that there exists an agency relationship between Microsoft East Africa and Microsoft Ireland Operations Limited.
8.That the marketing services rendered by Microsoft East Africa to Microsoft Ireland Operations Limited were for the benefit of Microsoft Ireland Operations Limited, an entity incorporated in Ireland, thus the services were exported services taxable in the jurisdiction of final consumption and that the tribunal was correct in applying the OECD principles in its judgement.
9.The Respondent reiterated that input VAT was incurred in furtherance of its business hence it is claimable under the VAT Act 2013. Further that the resultant excess input tax was indeed eligible for refund since the same related to the provision of exported services to Microsoft Ireland Operations Limited.
10.Based on the above reasoning, the Respondent prayed to have the present appeal dismissed with cost.
11.I have looked at the entire record of appeal, the Tribunal’s judgement, the Respondent’s opposition to it and the submissions filed by both parties. The grounds of appeal can be condensed to the following issues:i)Whether there exists a principal-agent relationship between the Appellant and Microsoft Ireland Operations Limited.ii)Whether the services provided by the Appellant are exported services.iii)Whether the Respondent erred in disallowing the Appellant’s input VAT refund claim.
Issue one: Whether there exists a principal-agent relationship between the Appellant and Microsoft Ireland Operations Limited.
12.Vide an objection letter dated 13/9/2019 (annexed on pages 36-37 of the record of appeal), the Appellant disallowed the Respondent’s input tax refund claim and confirmed the value assessment of Ksh 59,261,006/- on the basis that the costs incurred by the Respondent are fully reimbursed by Microsoft Ireland Operations Limited plus a 13% mark-up therefore such costs do not form part of the expenses to be recognized as the Appellant’s income.
13.The Appellant further noted that under section 13(5) of the VAT Act any disbursements to third parties made by an agent on behalf of the principal from the value of taxable supply is excluded thus only the 13% commission earned by the Appellant constituted a taxable supply.
14.The basis of the objection letter was that a principal-agent relationship existed between the Respondent and Microsoft Ireland Operations Limited, that Microsoft Ireland Operations Limited fully refunded the costs of the Respondent plus a 13% mark-up therefore there was no taxable supply from the Respondent that was subject to deduction of input VAT under the VAT Act.
Issue 1; Whether a principal-agent relationship exist between the Respondent and Microsoft Ireland Operations Limited?
15.The Inter-company Commission Agreement which explains the relationship between the Respondent and Microsoft Ireland Operations Limited is found on pages 46-51 of the record of appeal. Paragraph 2.1 thereto states:Paragraph 4.1 states:Paragraph 5.4 states:
16.A plain reading of the paragraphs above indicates to this court that a principal-agent relationship was not established in the agreement. Paragraph 5.4 explicitly states that the Respondent did not have the authority to enter into any contracts on behalf of Microsoft Ireland Operations Limited unless otherwise authorised. According to the agreement, the Respondent was contracted by MIOL to primarily market Microsoft products and services and to provide support services in the East African region.
17.In its objection decision the Appellant assumed that a principal-agent relationship exists between the Respondent and Microsoft Ireland Operations Limited due to the fact that Microsoft Ireland Operations Limited paid a commission plus a markup of 13% for the services offered. I agree with the Tribunal in finding that the Appellant did not prove why such reimbursement implied a principal-agent relationship. In the absence of proof of an implied principal-agent relationship, the express terms of the agreement stand.
Issue 2: Whether the services provided by the Appellant are exported services.
18.The Appellant submitted that the place of consumption of the services provided by the Respondent is within the jurisdiction of Kenya and are therefore vatable at 16% and that the tribunal failed to consider this thereby arriving at a wrong decision.
19.The Respondent submitted that the determining factor is where that service is to be finally used or consumed; that while the products were consumed locally, the marketing support services were consumed by the non-resident parties outside Kenya hence exported services.
20.The Tribunal in its judgement found that the consumption of the actual benefits of the marketing services accrue to Microsoft Ireland Operations Limited, an entity incorporated in Ireland and not the Kenyan people.
21.Paragraph 2 of the Intercompany Commission Agreement provides the services rendered by the Appellant. They include marketing of Microsoft products in the East African Region, liaising and meeting with customers, acting as a consultant for the dissemination of information and considering the feasibility of new markets for Microsoft products in the region.
22.Section 2 of the VAT Act states that a “service exported out of Kenya" means a service provided for use or consumption outside Kenya. Similarly, in the case of Commissioner of Domestic Taxes v Total Touch Cargo Holland (2018) eKLR the court held that 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. The court relied on the Indian case of Paul Merchants Ltd –vs- Cce Chandigarh [2012 (12) Tmi 424 – Cestat, Delhi Lb] where the tribunal was of the view that even though the services in question were rendered in india the word “used” could not be equated with the word “performed” especially where the benefit of the service provided accrued outside india. Further in the case of Ms Microsoft Corporation (1)(p) –vs- Commissioner Of Service New Delhi Wp (c) No 1460/2009 (Also an Indian Authority) the Tribunal concluded that the words “used outside India” referred to the place where the benefit of the service accrued.
23.I concur with the finding in the above authority. In this case the benefit of the services offered by the Appellant to the Respondent as highlighted under Paragraph 2 of the agreement accrued outside of Kenya ie in Ireland. The benefit of the marketing services carried out by the Appellant in Kenya were enjoyed by Microsoft Ireland Operations Limited. This is despite the fact that the Appellant carried out those services in Kenya. The Microsoft products, that were the subject of the marketing, were consumed in Kenya by Kenyans but the marketing services were consumed in Ireland by Microsoft Ireland Operations Limited.
24.I find therefore that the services provided by the Respondent fell within the scope of exported services and are VAT exempt.
Issue 3: Whether the Respondent erred in disallowing the Appellant’s input VAT refund claim.
25.Section 7(1) of the VAT Act states:Section 17(1) of the VAT Act states:Section 17(5) of the VAT Act states:
26.Guided by the provisions above and the fact that the court has established that the services provided by the Respondent are exported services and are taxable supplies, I find that the Respondent is entitled to a refund of its input tax incurred in generating sales to Microsoft Ireland Operations Limited.
27.The upshot of the above deliberations is that the court does not find merit in the present appeal and the same is dismissed with costs awarded to the Respondent. The tribunal’s judgement of October 29, 2021 is upheld.