kobo safaris ltd vs commissioner of income tax kobo safaris ltd vs commissioner of income tax

{Being an Appeal from the Judgment of Tax Appeal Tribunal at Nairobi dated 2^nd August 2017 in TAT Appeal No. 63 of 2016}

Introduction

The Appellant is a limited liability company incorporated under the Companies Act, Cap 486 Laws of Kenya and is engaged in the business of destination management services or ground handling of tourists from overseas by providing, arranging and managing services such as transfers, safaris and tours, ground transportation, air travel, booking of accommodation, management of tourists and related services.
The Respondent, is the Commissioner appointed under and in accordance with Section 13 of the Kenya Revenue Authority Act (Cap 469), and is charged with the responsibility of among others, assessment, collection, accounting and the general administration of tax revenue on behalf of the Government of Kenya.

Background

On 12^th of October 1998, the Appellant entered into an Agreement with a Spanish based company known as Africae Safaris (hereinafter \'‘Africae”) for provision of the aforesaid services. Through a contract signed on 22^nd August 2006, the parties to the agreement incorporated further terms and conditions into the said Agreement in which the Appellant agreed to handle Africae’s clients destined to Kenya, sourced from Spain, Spanish speaking countries and Portugal (hereinafter referred to as ‘territory’).
Sometime in the year 2013, the Respondent issued the Appellant with a Notice of Intention to audit its accounts vide a letter dated 24th May 2013.
On 27th of September 2013, the Respondent informed the Appellant of the findings of the audit in respect of withholding tax and reverse VAT on commissions, being the percentage of the agent’s income value refund by Africae that was not subjected to withholding tax (WHT) contrary to Section 35 of the Income Tax Act, Cap 470 Laws of Kenya, (ITA) and VAT on the services imported from Africae pursuant to the VAT Act, Cap 476 (repealed).
The Appellant objected to the assessments vide a letter dated 7^th October 2013 after which the parties exchanged further correspondence whereupon the Appellant forwarded to the Respondent additional information thus prompting the Respondent to issue an Amended Assessment for Ksh: 158,535,817.91 for WHT and further with the sum of Ksh: 7,291,938 in respect of exchange rate as a result of computations on forex.
The Respondent’s additional assessments prompted the Appellant to file an Appeal before the defunct, Local Committee which appeal was subsequently heard by the Tax Appeals Tribunal. In its judgment rendered on 15^th November 2017, the Tribunal upheld the Respondent’s Objection Decision thereby precipitating the filing of the instant appeal.

Appeal

The Appellant filed this appeal seeking to reverse the decision made by the Tax Appeals Tribunal (hereinafter “Tribunal”) delivered on 15^th November 2017, in Tax Appeals Tribunal Appeal No. 79 of 2015: Kobo Safaris Limited vs. Commissioner of Domestic Taxes. The Appellant filed a Memorandum of Appeal in which it enumerated eighteen (18) grounds of appeal as follows: -
1. Tax Appeals Tribunal erred in law by failing to appreciate the legal framework prevailing at the material time in Kenya and overseas source markets in the tourism sector, and the applicable tax liabilities arising within the said legal framework.
2. The Tax Appeals Tribunal in particular erred in its appreciation of the said legal framework when it found and held that the Appellant sold outbound tour packages to customers or purchasers in the European source markets through Africae as its agent and was therefore liable to pay withholding tax on the agency fees, to Africae which said agency relationship was a legal impossibility within the said legal framework.
3. The Tax Appeals Tribunal erred in law and fact by failing to appreciate, find and hold that within the said legal framework the Appellant was at the material time carrying on a regulated tourist enterprise in Kenya under the provisions of the Tourist Industry Licensing Act Cap 381, Laws of Kenya (now repealed).
4. The Tax Appeals Tribunal further erred in law and fact by failing to appreciate, find and hold that within the said legal framework the said statute regulated tourist enterprises in Kenya and licensed them according to the categories prescribed in the statute and these categories comprise mainly of service providers and product providers that include proprietors of tented camps and hot air balloon which sell and provide to tourists products such as accommodation, food, drinks and game viewing in hot air balloons.
5. Further and having erred as above, the Tax Appeals Tribunal also erred by failing to appreciate, find and hold that the regulated tourist enterprise which the Appellant was licenced at the material rime to carry on under the said statute was restricted to a tour or safaris operator only which is a management service provided to tourist to enable them to reach their tourist destinations in the country and enjoy tourist products of their choice.
6. The Tax Appeals Tribunal erred in law and fact by failing to appreciate, find and hold that like in Kenya, tourism business in source markets and in this case European source markets, is regulated and/or conducted on the legal basis as explained in Halsbury’s Laws of England Volume 41 referred to in the Appellant’s submissions.
7. The Tax Appeals Tribunal failed to appreciate, find and hold that outbound tour packages in the said source markets are sold or offered for sale in accordance with the regulations or practices contained in the said Halsbury’s Laws of England 4th Edition, 651 from paragraphs 838 to 864, which prescribe stringent conditions to be complied with by the sellers of the said packages, that carry both serious or tough civil and criminal consequences.
8. The Tax Appeals Tribunal in particular failed to appreciate, find and hold that in accordance with the said regulations and conditions in the European source markets, the sellers of the said outbound tour packages are required, upon making the sale, to enter into contracts of sale with the purchasers, for the due performance of the contract, holding the sellers liable, inter alia, for the refund of the money paid and the repatriation of the consumer in the event of non-performance due to insolvency, and further to provide security and/or insurance issued by an insurer in the source market as a guarantee for the due performance of the contract.
9. The Tax Appeals Tribunal having failed to appreciate the above stringent regulations or conditions for the sale of outbound tour packages in the European source markets, erred by failing to appreciate, find and hold that based on the conditions of the contract between the Appellant and Africae, the Appellant does not and did not at the material time meet the requirements and could be a seller of outbound tour packages in the said source markets, either as a principal or through an agent.
10. The Tax Appeals Tribunal having further erred by failing to appreciate, find and hold that where the sellers of the above outbound tour packages in the European source market had no licence at the material time to operate in Kenya under the provisions of the Tourist Industrial Licencing Act, they could only perform their sale contracts by engaging and/or subcontracting domestic destination management service providers to perform their contractual obligations, under the said sale contracts in Kenya on their behalf.
11. The Tax Appeals Tribunal erred by failing to appreciate, find and hold the true purpose and object of the brochures, information and documentation provided by the Appellant to Africae under the said contract or arrangement and within the said legal framework.
12. The Tax Appeals Tribunal particularly erred by failing to appreciate, find and hold that within the said legal framework, since Africae was not licenced under the said Cap 381 Laws of Kenya to carry on destination management services for its customers coming to Kenya, it had to obtain the said brochures and documents from the Appellant in order to meet the source market mandatory pre-contract requirements of providing proper information to its consumers regarding Kenya as a destination, including the places to visit, the accommodation, the meals, the transport, places, etc, before entering into a valid contract of sale of its outbound tour packages to its customers.
13. The Tax Appeals Tribunal having further erred by failing to appreciate, find and hold that within the said framework the relationship between Africae and the Appellant was modelled on the above arrangement, Africae being the sellers of the outbound tour packages in the source market to their consumers or customers and therefore owners of the clients, and the Appellant being the destination management service provider in Kenya as the locally licenced tour and agent of Africae to perform the said sale contract in Kenya on its behalf.
14. The Tax Appeals Tribunal having failed to appreciate the law regarding the sale of outbound tour packages in the source market within the said legal framework, erred when it found and * held that the Appellant sells its services or products to consumers in the source market through Africae as its agent and further that the purchasers of outbound tour packages under which the Appellant provides destination management services are customers of the Appellant, with contractual obligations to make payments directly to the Appellant as the seller, from which payment the Appellant paid an agency fee to Africae.
15. The Tax Appeals Tribunal having failed to appreciate the above correct legal position as regards the sale-of outbound tour packages and the contractual obligations arising therefrom, erred by finding and holding that the Appellant is the agent of Africae and was therefore liable to pay withholding tax for the payments that it made to Africae under the said agency relationship.
16. The Tax Appeals Tribunal having erred by failing to understand the underlying legal relationship between the Appellant and Africae further erred by attaching undue weight to the fact that there was an exclusive clause or arrangement between the Appellant and Africae by reason thereof the Appellant restricted Africae from dealing with other local tour operators, which is purely a commercial business decision between contracting parties that is permitted by law, and which does not alter the above legal position.
17. The Tax Appeals Tribunal further erred in law by failing to appreciate and find the proper purpose or object of the exclusion clause in the contract which was to secure business for the Appellant against competition from other local tour operators, who all compete to secure local destination management service business from tour operators in the source markets, being their source of business.
18. \"The Tax Appeals Tribunal erred in law and fact by failing to appreciate find and hold, that under the above arrangement or contract between Africae and the Appellant, Africae as the seller of the outbound tour package in the source market, receives the purchase price from the purchaser in the source market, deducts the cost incurred in the source market including Africae\'s own income, and remits or pays to the Appellant the balance to meet all the costs of the destination management services, and the Appellant’s charges which are based on margins on these costs.
The Respondent filed a Statement of Facts in response to the grounds of appeal wherein it outlined the following issues: background of the case, the Appellant’s contention over its agreement and relationship with Africae, the issues for determination and the Respondent’s contention over the said relationship, the applicable tax laws and the earnings received by the Appellant and Africae.
According to the Respondent, the Tax Appeals Tribunal (TAT) arrived at the correct finding when it held that the Appellant and Africae had an agency relationship where Africae marketed the products to the tourists in Spain, Spanish speaking countries and Portugal.
The Respondent argued that the 11% margin paid by the Appellant to Africae was not a discount as the Appellant had alleged but was a commission given to Africae by the Appellant from the sale of tour packages made within Spain, Spanish speaking countries and Portugal for which the Appellant was liable to pay withholding tax and reverse VAT on the services offered.
The Respondent urged this court to uphold the decision by the TAT.
The Appeal was canvassed by way of written submissions which I have considered.

Appellant’s Submissions

A summary of the Appellant’s submissions were that the Tribunal committed several errors which it highlighted as follows: -
1. Failure or omission to refer to the Tourism Act Number 28 of 2011.
2. Error by the Tribunal in failing to appreciate the correct nature of the Appellant’s business conducted in terms of the above statute.
3. Fatal error by the Tribunal in the Judgment
4. Legal impossibilities
5. Tribunal’s failure or error in appreciating the commercial relationship between the Appellant and Africae Safaris.
6. Tribunal’s error in failing to properly appreciate the pricing mechanism of the Appellant’s business and the income earned by the different participants in the said business including the Appellant.
The Appellant faulted the Tribunal for failing to refer to the Tourism Act (the Act) even though the dispute related to taxation of income generated from tourism, which is a regulated business in the country. The Appellant emphasized that the Act comprehensively provides for almost every aspect of tourism business in Kenya including the definitions of the key terms or phrases used in the sector such as; a tourist, a visitor, a tourism product and tourism activities and services. The Appellant added that the Act also establishes various tourism entities or agencies and vests in these entities various functions of control and management of tourism related activities and services.
This Act or statute states at the commencement that it is:

“An Act of Parliament to provide for the development, management, marketing and regulation of sustainable tourism and tourism-related activities and services and for connected purposes” (emphasis added).

It was submitted that because of its failure to refer to the Act, the Tribunal did not appreciate the correct nature of the Appellant’s business as provided for in the Act. The Appellant was of the view that the Tribunal should have made reference to the Act as the revenue or income that was the subject matter of the impugned decision was generated by the Appellant in the marketing or sale of its tourism activities or services as licensed under the said Act.
It was submitted that the Act contains legislative provisions of what should be prescribed in the said National Tourism Strategy which includes incentives for the development, management and marketing of sustainable tourism with emphasis on, inter alia, the packaging of niche tourism.
The Appellant submitted that in the implementation of the said National Tourism Strategy, the statute establishes Kenya Tourism Board as an entity to undertake this duty or function of marketing Kenya as a tourist destination. Section 30 and 31 respectively provides as follows:

Section 30

The object and purpose of the Tourism Board shall be to market Kenya as a tourist destination.

Section 31

The Tourism Board shall-

market Kenya at local, national, regional and international all levels as premier tourist destination;
perform tourism market needs and trends and advise tourism stakeholders accordingly; and
perform any other functions that are ancillary to the object and purpose for which the Tourism Board is established. (emphasis added)
The Appellant submitted that it is a stakeholder within the meaning of Section 31(c) of the Act and having been duly licensed under the Tourism Act and markets its services within the market needs and trends as advised or set by the Kenya Tourism Board.
The Appellant explained, in detail, the nature of the contracts that it entered into with Africae and the roles of each party to the said contract. It submitted that under the said contract, the overseas tour operator organizes or makes travel arrangements for the tourists to travel from the outbound market into Kenya at the destination and notifies the local tour operator of the date of the travel details.
It was submitted that the Tribunal failed to appreciate the said true nature and conduct of the Appellant’s business and the role of the Appellant as a stakeholder actively involved in the actual trade which is conducted within the framework of the National Tourism Strategy as enacted under the Tourism Act.
The Appellant submitted that the Tribunal’s failure to comply with the mandatory provisions of the Act resulted in erroneous findings of fact and wrong conclusions of law that have had the effect of defeating the objectives of the statute thereby failing to give effect to the National Tourism Strategy.
It was the Appellant’s case that the finding of fact by the Tribunal that the Appellant was carrying on the business of outbound tour operator in European source markets from Kenya was a legal impossibility.
The Appellant submitted that it was specifically licensed to carry out tourism business in Kenya and that it could not, under the said licence, carry on business as “outbound” tour operator in source markets where the tourist come from or depart from when travelling to Kenya. The Appellant held the view that the Tribunal did not appreciate the commercial relationship that it had with Africae, a tour operator in the source market who actually carried out the outbound tour business.
It was submitted that since the sale transaction related to both the Appellant and Africae providing complimentary services in the same supply chain to the same customer/tourist at different locations, the use of the term or phrase ‘principal’ and ‘agent’ in the commercial sense may not have the same meaning in the legal sense. The Appellant argued that the correct relationship between the parties is that of an overseas supplier and a local service provider.
It was further submitted that the Tribunal did not properly appreciate the pricing mechanism of the Appellant’s business and the income earned by the different participants in the said business.
The Appellant argued that having failed to appreciate the nature of the Appellant’s business as stated above, the Tribunal erred by holding that Africae Safaris earned fees, being income accrued on or derived in Kenya, which is subject to Withholding Tax (WHT) and reverse Value Added Tax (VAT) being services imported to Kenya.
The Appellant maintained that this was clearly an error as Africae earned fees or income at the point of sale for services rendered in the source market for procuring the customers and arranging for their safari to Kenya as a destination. It added that the entity in the above supply chain that provided tour services and activities to the customers/tourist in Kenya and earned money or income for these services in Kenya was the Appellant.
It was submitted that Africae could not and cannot carry on tourism business or earn any income from the said tourism business or activities in Kenya without a valid licence issued to it under Section 98(1) of the Tourism Act.

Respondent’s Submissions

The Respondent submitted that its understanding of the Agreement dated 12^th October 1998 between the Appellant and Africae was that at the request of Africae the Appellant would deal directly with Africae’s clients once initial contact had been made. According to the Respondent, the Appellant was to follow through with the proposals made until business is operated which meant that the Appellant sold outbound tour packages to customers or purchasers in the European source markets in Spain, Spanish Speaking countries and Portugal through Africae Safaris as its Agent.
The Respondent submitted that the stipulated margin of 11% that Africae earned was built into the tour packages provided by the Appellant and added that the said margin could not be changed without the Appellant’s consent since any increase would negatively impact on the uptake of the Appellant’s products in the face of competition from the other tour operators. The Respondent observed that the Appellant was the designer, owner and operator of the tour packages.
The Respondent maintained that there existed a principal/agent relationship between the Appellant and Africae in which the Appellant was the principal and Africae, their sales and marketing agent in the territories agreed upon. The Respondent was of the view that this is the reason why Africae earned commissions in accordance with the established margin rates as a percentage of the sales made on behalf of the Appellant.
The Respondent further noted that the Appellant had similar contractual arrangements with other agents, where such agents were also earning commissions. In this regard, the Respondent drew this Court’s attention to pages 179 to 187 of the Record of Appeal for a copy of the said contract wherein at paragraph 2.8 thereof the contract provides for the commission paid by the Appellant to its agent one Volmar Safaris.
To support its position that the Africae was the Appellant’s agent in the European Spanish speaking countries, the Respondent analyzed the invoices by the Appellant to Africae and those from Africae to the Clients and observed that the latter always had an 11% margin on those of the former. The Respondent further noted that for every invoice by Africae to a client, there was always a corresponding invoice by the Appellant to Africae, with a similar invoice number or reference.
The Respondent argued that it was evident from the contract and the correspondence between the Appellant and Africae, that the Appellant had control over the activities of Africae. It noted, the contract of 12th October 1998 contains a non-compete clause (clause 3) where Africae is the sole and exclusive supplier of business from the territories and cannot without written authorization of the Appellant provide identical services to the Appellant’s competitors. The Respondent noted that for the invoice paid directly to the Appellant, the Appellant would still pay Africae its margin.
Apart from the Contract, the Respondent further noted that the 11% margin, or any margin utilized by Africae could not be adjusted or varied without the consent or authority of the Appellant.
With regard to the law on principal agent relationship, the Respondent cited the decision in the case of Heifer Project International v Forest City Export Services Limited & another [2017] eKLR, where the court stated as follows: -

“An agency relationship is created in several ways. It can also be construed from the conduct of the parties.

According to Halsbury’s Law of England 4th Edition Volume 1(2) para 19 and 20 a principal agency relationship is created by the express or implied agreement of principal and agent or by ratification by the principal of the agent’s acts done on his behalf.

Express agency is created where the principal or some person authorized by him, expressly appoints the agent whether by deed, by writing under hand or orally. Implied agency arises from the conduct or situation of parties.

“No one can become an agent of another person except by the will of that person. His will may be manifested in writing or orally or simply by placing another in a situation in which according to the ordinary rules of law, or perhaps it would be more correct to say, according to the ordinary usages of mankind, that other is understood to represent and act for the person who has so placed him... this proposition, however, is not at variance with the doctrine that where one has acted as from his conduct to lead another to believe that he has appointed someone to act as his agent, and knows that the other person is about to act on that behalf, then unless he interposes, he will in general be stopped from disputing the agency, though in fact no agency really existed. ”

Reference was also made to the decision in Garnac Grain Co. Inc, -vs- H.M. Faure & Fair Dough Ltd and Bunge Corporation (19671 2 All E.R. 353) where Lord Pearson with the concurrence of the House used the words-

“The relationship of the Principal Agent can only be established by the consent of the Principal and Agent. They will be held to have consented if they have agreed to what amounts in law to such a relationship, even if they do not recognize it themselves and even if they have professed to disclaim it... the consent must, however, have been given by each of them, either expressly or by implication from their words and conduct.”

The Respondent submitted that there existed a principal agent relationship between the Appellant and Africae.
It was the Respondent’s case that having established the relationship between the parties, and having noted that the contract dated 12^th October 1998 states that the Appellant was to “provide destination management services to the customers of Africae Safaris,” a wholesome reading of the contract shows that the Appellant had actual control of the clients and not Africae.
The Respondent argued that since it had established that Africae earned a margin of 11% under the contract, it was clear that Africae provided a service to the Appellant in exchange for the 11% margin on the sales thus falling under the definition of management and professional as stated in section 2(1) of the Income Tax Act.
It was further submitted that the agency fees earned by Africae Safaris amounting to the 11% margin on the sales confirmed is an income that ought to have been subjected to tax pursuant to section 35(1) as read together with paragraph 3 of the Third Schedule of the Income Tax Act.
In response to the Appellant’s submissions to the amended Memorandum of Appeal, the Respondent submitted that the issues raised over the Tourism Act as the applicable law that the Tribunal should have made reference to were not part of the issues raised before the Tribunal. The Respondent noted that the issue of the Tourism Act was introduced in the Amended Memorandum of Appeal contrary to the adage that ‘parties are bound by their pleadings.’
The Respondent submitted that it is not open for the Appellant to raise new issues in its submissions, which were not subject to the Appeal at the Tribunal.
The Respondent further submitted that the Tourism Act in question was not applicable to this case as the said Act was assented to on 16th September 2011 with a commencement date of 1^st September 2011 yet the tax audit on the Appellant for Corporation tax was for the income of 2009 and 2010. It was also submitted that the Tourism Act is not a taxing statute for purposes of Income Tax Act and VAT and that the Appellant cannot therefore seek to establish whether or not the services offered to it are subject to Income Tax Act or VAT using the Tourism Act.

Analysis and Determination

I have carefully considered the Record of Appeal, the parties’ respective submissions together with the law and the authorities that they cited. I find that the main issue for determination is whether the instant appeal is merited. In dealing with the main issue, this court will be required to determine, firstly; the applicability the Tourism Act to this case, secondly; whether the relationship between the Appellant and Africae was that of a principle and an agent and lastly, whether the percentage of invoice values and eleven per cent (11%) margin earned by Africae Safaris on payments made for tour packages by tourists from Spain, the Spanish speaking countries and Portugal is subject to Withholding tax and reverse VAT.

The Tourism Act

As I have already noted in the summary of the parties’ submissions, the Appellant faulted the Tribunal for failing to refer to the provisions of the Tourism Act when determining the dispute before it thereby arriving at an erroneous verdict. According to the Appellant, since the dispute related to taxation of income generated from tourism, which is a regulated business, the Tribunal was required to refer to the said Act as it comprehensively provides for almost every aspect of tourism business in Kenya. It was the Appellant’s case that failure to refer to the Tourism Act resulted in the Tribunal not appreciating the correct nature of the Appellant’s business, activities and services as provided for in the Act.
In a rejoinder, the Respondent submitted that the issue of the Tourism Act was not raised before the Tribunal but was raised in the Amended Memorandum of Appeal filed before this court. According to the Respondent, parties are bound by their pleadings and since the said Act did not form the subject of the appeal before the Tribunal, the Appellant could not raise it before this court.
The Respondent further submitted that the matter before this court relates to the taxation of income which is governed by the Income Tax Act and the VAT Act and not the Tourism Act which is not a tax statute.
My finding is that while there is justification in the Respondent’s contention that the Appellant should have raised the issue of the applicability of the Tourism Act in its pleadings and submissions before the Tribunal for determination, that fact alone cannot preclude the Appellant from raising the provisions of the said Act before this court. I say so because the issue of the Act and its provisions are points of law which may be raised at any stage during the proceedings. (See Republic vs. Chief Registrar of the Judiciary & 2 others Ex parte Riley Services Limited [2015] eKLR (Nairobi Judicial Review Miscellaneous Application No 2 Of 2015).
My above finding notwithstanding, I am still minded to determine if, as the Appellant opined, the Tribunal’s decision was erroneous for failure to refer to the Tourism Act. My answer to this question is to the negative as the Tourism Act, by its own definition at its introductory section is defined to be:

“An Act of Parliament to provide for the development, management, marketing and regulation of sustainable tourism and tourism-related activities and services and for connected purposes.”

My understanding of this definition is that while the said Act governs every aspect of the Tourism industry, it is not a tax statute. As correctly submitted by the Respondent, all matters of income derived from the tourism industry will still be subjected to the applicable tax laws in the country and in this case, the Income Tax Act and the VAT Act. It is instructive to note that while the Appellant submitted, at length, on the Tourism Act and its provisions, the Appellant was very silent on how the Respondent ought to have treated the income it derived from the tourism activities part of which was shared with Africae as margin consideration.

Principal/Agent Relationship

At the heart of this appeal is the issue of the relationship that existed between the Appellant and a foreign company known as Africae. The Respondent argued that the relationship between the Appellant and Africae was that of a principal and an agent. The Respondent added that based on the said relationship, Africae provided a service to the Appellant for which it earned a margin of 11% on the sales as stipulated under their contract thus falling under the definition of management and professional as stated in section 2(1) of the Income Tax Act.
The Appellant, on the other hand, argued that the relationship and transaction between it and Africae related to both of them providing complimentary services in the same supply chain to the same customer/tourist at different locations. According to the Appellant, the use of the term ‘principal’ and ‘agent’ in the commercial sense may not have the same meaning in the legal sense. The Appellant argued that the correct relationship between the parties is that of an overseas supplier and a local service provider.
A principal agent relationship (agency) occurs where one party (the principal) delegates authority to another party (the agent) to act on their behalf. The agent is expected to make decisions and take actions that align with the principal’s best interests. An agency relationship may be created in several ways but can also be construed from the conduct of the parties.
Halsbury’s Law of England 4^th Edition Volume 1(2) para 19 and 20 posits that a principal agency relationship is created by the express or implied agreement of principal and agent or by ratification by the principal of the agent’s acts done on his behalf. Express agency is created where the principal or some person authorized by him, expressly appoints the agent whether by deed, by writing under hand or orally. Implied agency arises from the conduct or situation of parties.
Cheshire and Fifoot, the Law of Contract, 5^th Edition page 386-394, also states that an agency can be created in various ways that may include agency by Estoppel. Lord Cransworth is quoted therein as follows on how this form of agency is created:

“No one can become an agent of another person except by the will of that person. His will may be manifested in writing or orally or simply by placing another in a situation in which according to the ordinary rules of law, or perhaps it would be more correct to say, according to the ordinary usages of mankind, that other is understood to represent and act for the person who has so placed him… this proposition, however, is not at variance with the doctrine that where one has acted as from his conduct to lead another to believe that he has appointed someone to act as his agent, and knows that the other person is about to act on that behalf, then unless he interposes, he will in general be stopped from disputing the agency, though in fact no agency really existed….”

In the present case, it was not disputed that the Appellant and Africae entered into a contract dated 12^th October 1998 wherein it was agreed, that Africae will procure and supply a set target number of tourists to the Appellant, source new customers, increase the volume and business lines, use the appellant’s collateral materials in marketing and promotion activities, sell the appellant’s products in trade fairs/shows among other roles.
The role of the Appellant on the other hand was, inter alia, to provide destination management services, provide Africae safaris with sufficient brochures, information and documentation necessary for the marketing activity, provide tour package proposals and quotations, itineraries and corresponding costs.
In an earlier agreement, dated 1st August 2006, between the Appellant and Africae, the Appellant is referred to as the Service Supplier, and Africae Safaris as the Client, Clauses 2 and 3 of the agreement provides that:-

“2. the Client will receive net rates from the supplier, which will be used to sell directly to our operators, travel agents and direct clients in the above specified countries.

The Client will earn an eleven per cent (11%) on this sales confirmed and paid for by the tour operators from the countries included in this agreement even if directly paid to Kobo Safaris.”
A perusal of both agreements reveals that Africae marketed and promoted the Appellant’s activities in the specified territories.
The question which arises is whether, the Tribunal arrived at the correct verdict when it found that there was a principal/agent relationship between the Appellant and Africae. My answer to the above is to the positive for several reasons the most glaring one being the above analysis of the circumstances under which an agency relationship may occur. It is not in doubt that the Appellant (principal) delegated authority to Africae (the agent) to act on its behalf by procuring and supplying a set target number of tourists to the Appellant including sourcing new customers so as to increase the volume and business lines. In this regard, the Appellant Authorized Africae to use its brochures in marketing and promotion activities. Indeed, Africae made decisions and took actions in the Appellant’s best interests as the principal.
It is also noteworthy that the agreements between the Appellant and Africae had an exclusivity and non-compete clauses which meant that Africae was to maintain exclusivity on all sales made in Spain while clause 3 of the agreement dated 12^th October 1998 provides that:-

“AFRICAE Safaris shall not except with the written authorization of KOBO Safaris, directly or indirectly exercise by itself or through an intermediate company or individual on its own account or on account of third parties, any professional or business activity relating to the services of an identical nature for travel companies competing with KOBPO Safaris in the same destination (Kenya & Tanzania) throughout the terms of this contract...”

The above clause is clear proof that Africae was, under their agreement, an agent of the Appellant as shown in the manner in which the Appellant restricted Africae’s operations in the target destinations in order to safeguard the Appellant’s interests as the principal. I find that the non-compete clause is also clear proof of control by the Appellant over Africae and as such, the Appellant’s contention that Africae was an independent overseas supplier to it as a local service provider does not correspond with the clear terms of the contract.
In addition to the exclusivity and non-compete clauses of the agreements, it was also not disputed that the agreements provided that the margin of 11% that Africae earned from the sales was built into the tour packages that were provided by the Appellant and that the said margin could not be altered without the Appellant’s consent since any increase would negatively impact on the uptake of the Appellant’s products in the face of competition from the other tour operators. To my mind, this aspect of the agreement shows that the Appellant was the designer, owner and mastermind behind the tour packages.
I find that the clause on the margins to be earned by Africae, and the Appellant’s role in determining and adjusting the same together with the non-compete/exclusivity clause leaves no doubt in my mind that the Appellant was the principal in the relationship that it had with Africae as its agent who earned commissions or agency fees from a percentage of the sales.
On the issue of the Respondent’s tax assessments in respect to the Appellant’s earnings, the Appellant faulted the Respondent for failing to appreciate the nature of the Appellant’s business and for holding that Africae earned fees being income accrued on or derived in Kenya which is subject to Withholding Tax (WHT) and reverse Value Added Tax (VAT) being services imported to Kenya. The Appellant argued that Africae earned fees or income at the point of sale for services rendered in the source market for procuring the customers and arranging for their safari to Kenya as a destination. It was the Appellant’s case that the entity that provided tour services and activities to the tourists in Kenya and earned money or income for these services in Kenya was the Appellant since Africae could not carry on tourism business in Kenya without a valid licence issued to it under Section 98(1) of the Tourism Act.
The Respondent, on its part, maintained that since Africae earned commissions in accordance with the established margin rates as a percentage of the sales made on behalf of the Appellant, and in view of the fact that the margin was part of money paid in respect of tour services undertaken in Kenya by the Appellant, such income is in the form of management or professional fees that accrued in or was derived in Kenya which is then subject to withholding tax pursuant to section 10(a) and 35(l)(a) as read together with paragraph 3(a) of the third schedule.
It was the Respondent’s case that the said services offered by Africae to the Appellant were taxable supply that is subject of reverse VAT pursuant to section 6(6) of the VAT Act CAP 476 repealed being services imported into Kenya.
I note that apart from faulting the Tribunal for failing to appreciate the nature of its business and the relationship that it had with Africae, the Appellant did not state or specify if the earnings that Africae received from Kenya were subject to any form of taxation. My finding is that the tribunal arrived at the correct decision in holding that services offered by Africae to the Appellant were taxable supply.

Disposition

Having regard to the findings and observations that I have made in this judgment, I find that the instant appeal is not merited and I therefore dismiss it with costs to the respondent.
Orders accordingly.

Judgment dated, signed and delivered virtually via Microsoft Teams this 3^rd day of October 2024.

In the Presence of: -

Ms. Kioki & Tugee for the Appellant

Ms. Almadi for the Respondent

C/A – Anita

kobo safaris ltd vs commissioner of income tax

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