Allied Beverages Company Limited v Commissioner Uganda Revenue Authority (Civil Appeal 39 of 2022) [2024] UGCommC 301 (18 September 2024)

# 5 **THE REPUBLIC OF UGANDA**

## **IN THE HIGH COURT OF UGANDA AT KAMPALA**

## **COMMERCIAL DIVISION**

# **CIVIL APPEAL NO. 0039 OF 2022**

## **ALLIED BEVERAGES COMPANY LTD ::::::::::::::::::::::::::::::::::: APPELLANT**

### 10 **VERSUS**

### **COMMISSIONER UGANDA REVENUE AUTHORITY ::::::::::::: RESPONDENT**

*(Appeal from the Decision of the Tax Appeals Tribunal delivered on 31st August 2022 in TAT Application No. 01 of 2019 and No. 40 of 2021)*

### **BEFORE HON. LADY JUSTICE HARRIET GRACE MAGALA**

### 15 **JUDGMENT**

### **Background**

The Appellant, on the 2nd day of July 2016 entered into a Service Agreement ('Agreement') with The Coca-Cola Export Corporation ('TCCEC'), to provide brand marketing, market research and other related services for TCCEC, which

20 is incorporated and located in the United States of America.

The brand marketing services however, were conducted in Uganda i.e. played through adverts on a Ugandan radio station to wit; 91.3 Capital FM among others.

The Respondent then carried out a Value Added Tax (VAT) assessment of UGX

25 17,400,459,133 on the Appellant for the period 2016 to 2020 on the basis that

5 the services rendered by the Appellant to TCCEC are consumed locally and thus attract VAT of 18%.

The Appellant objected to the assessment and later applied to the Tax Appeals Tribunal (*hereinafter referred to as the "*Tribunal"), which dismissed their application. Hence this Appeal.

# 10 **Decision of the Tax Appeals Tribunal**

The Tribunal in its Ruling delivered on the 31st August 2022 dismissed the Appellant's application and reasoned that:

The contract between the Appellant and TCCEC did not indicate the place of consumption or use of the service as a place outside Uganda. The contract

15 stated that the applicant was to provide services to Coca Cola company, SHL and AI by contracting with service providers for the performance of services on the continent of Africa and the United States of America is not on the continent of Africa.

That the physical location of a supplier cannot be the overriding determinate of 20 where the service or goods are consumed. Hence the services were consumed in Uganda.

The OECD Guidelines apply to countries in Europe under the OECD arrangement or those that have made provision for the guidelines to apply in their law. Uganda is not in Europe nor is it a party to the OECD.

25 Hence the Tribunal dismissed the Application with costs.

# 5 **Grounds of the Appeal**

- a) That the learned members of the Tribunal erred in law when they found that the services rendered by the Appellant to The Coca Cola Export Company (TCCEC) were exported services, contrary to the provisions of the VAT Act and Regulations. - 10 b) That the Tribunal erred in law when they found that for a service to qualify for an export, it must not have been physically performed in Uganda. - c) That the Tribunal erred in law by finding that based on the contract, the place of use and consumption could not be determined. - 15 d) That the learned members of the Tribunal erred in law by finding that the Contract between the Appellant and TCCEC did not meet the requirements of **Regulation 12 of the VAT Regulations**. - e) That the learned members of the Tribunal erred in law when they held that the OECD Guidelines are not applicable in Uganda. - 20 f) That the learned members of the Tribunal erred in law by finding that the destination principle provided for under the OECD Guidelines does not apply to Uganda. - g) That the learned members of the Tribunal erred in law in awarding the Applicant of the costs of the Application.

# 25 **Representation and hearing**

The Appellant was represented by Kampala Associated Advocates while the Respondent was represented by its Legal Services and Board Affairs Department.

5 Both parties filed their written submissions before this court and these submissions have been duly considered by the court. The Parties were also given an opportunity to highlight their submissions.

# **Determination**

## *Ground one and two*

10 I have looked at the grounds framed by the Appellant but I believe the first and second grounds are interrelated and therefore I shall resolve them together.

From the reading of the grounds stated, it what comes out clearly is that the Tribunal erred in holding that the services provided under the Service Agreement by the Appellant to TCCEC were not exported services and therefore

15 nor not taxable at zero rate.

There were two arguments that were advanced to resolve this issue by each party. According to the Appellant, the services rendered to TCCEC were consumed outside Uganda and therefore are zero VAT rated as exported services. But the Respondent objected and argued that the services in question

20 were not exported services under the VAT laws of Uganda since they were used and consumed in Uganda by virtue of the fact that the services were performed in Uganda and to the Ugandan market.

According to **Section 4(a) of the Value Added Tax Act**, value added tax is chargeable on every supply made by a taxable person.

25 The services being contested by the parties, according to Paragraph 1 of the Service Agreement between the Appellant and TCCEC was for the Appellant to among others provide needed services of marketing and promotion of the Brands to TCCEC.

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5 These services were later discovered to include media advertisement of the brands of TCCEC on Ugandan media houses especially Capital FM, as per the invoices attached on the record of the Tribunal.

According to **Section 11 (1) (a) of the VAT Act**, supply of services includes performance of services for another person.

10 It is not contested that the Appellant supplied services to TCCEC, but the contest is whether the services were used and consumed outside Uganda.

**Section 16(2) (a) of the VAT Act** emphasizes that a supply of services shall take place in Uganda, if the recipient of the supply is not a taxable person, and the services are physically performed in Uganda by a person who is in Uganda at

15 the time of supply.

It should be noted that under **Section 18 of the VAT Act**, a supply is a taxable supply if it is a supply of goods or services, other than an exempt supply, made in Uganda by a taxable person for consideration as part of his or her business activities.

- 20 According to **Section 24(4) of the VAT Act**, the rate of tax imposed on taxable supplies specified in the *Third Schedule* is zero. Therefore, under the *Third Schedule item 1 (a),* a supply of goods or services where the goods or services are exported from Uganda as part of the supply is zero. For a service to qualify as zero rated under the Third Schedule of the VAT Act, according to **Regulation** - 25 **12 of the Value Added Tax Regulations S. I 349-1, as amended** provides that:

*"Where services are supplied by a registered taxpayer to a person outside Uganda, the services shall qualify for zero rating only if the taxpayer can show evidence that the services are used or consumed*

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5 *outside Uganda, which evidence can be in the form of a contract with a foreign purchaser and shall clearly specify the place of use or consumption of the service to be outside Uganda or that the service is provided for a building or premises outside Uganda."* (Emphasis added)

The Tribunal at page 10 of its Ruling held that:

10 *"Paragraph 2(b) of the Third Schedule has to be read in line with S.16(2) of the VAT Act which provides that a local supply is where services are physically performed in Uganda. If a supply is physically performed in Ugandan it is deemed to be a local supply. Therefore, for a service to quality for an export it must not have been physically performed in* 15 *Uganda. For instance, if Coca Cola company contracted the applicant to advertise, but the adverts to be an export there should be done abroad. The applicant has to show that the marketing, advertising and promotion services were not physically performed in Uganda. They were performed abroad. There is no evidence that the adverts were made in the United* 20 *States of America. Exhibits RE2 and RE5 show that that the applicant carried adverts on Capital FM which is located in Uganda. The recommendations by the applicant are supplied as soon as they are availed to the consumer at offices of the former located in Uganda."* (sic)

The Tribunal therefore, in my opinion considered the place of performance of 25 the services under **Section 16(2) of the VAT Act** in isolation of the other provisions of the Act that is, **Section 24(2) and the Third Schedule and Regulation 12** of the **VAT Regulations**.

It is a cardinal principle of statutory interpretation that statutes are to be read as a whole, in context and where possible the court should give effect to every

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- 5 word of the statute. The courts have held that where there are two or more conflicting provisions of a statute or where there are two or more conflicting statutes, they should be interpreted in harmony to meet their intended purpose. In the case of *Uganda Revenue Authority Versus COWI A/S HCCA No. 34 of 2020***, Hon. Justice Mubiru Stephen** observed that: - 10 *"The harmonious rule of legislative interpretation is adopted when there is a conflict between two or more statutes or between two provisions of the same statute. The rule requires that a legislative instrument must be construed on the prima facie basis that its provisions are intended to give effect to harmonious goals. The provisions of one statute should be* 15 *interpreted in harmony with the tenor of other statutory provisions or the overall statutory purpose."*

It is not disputed that there was a supply of services to TCCEC by the Appellant. What is disputed however, is if these services are zero rated for being exported services.

20 Under **Section 24(4) of the VAT Act, Third Schedule** refers to zero tax rated supplies as a supply of services exported from Uganda as part of the supply.

**Regulation 12 (supra)** explains that for a supply of services to be termed as an exported service, there has to be evidence that the services were consumed or used outside Uganda. The evidence is deduced from the contract involving the 25 contested supplies and this contract shall specify the place of consumption or use.

To my mind, whereas the VAT Act establishes that where the services are performed in Uganda to be taxed at VAT rate of 18%, the same Act, when read wholly explains instances where there exists zero VAT rated supply of services.

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5 These instances include where the services are consumed or used outside Uganda.

I would therefore, respectfully disagree with the learned members of the Tax Appeals Tribunal and note that the determining factor is the location where the services supplied are finally consumed or used not where they are performed 10 from.

The **VAT Act** and the **VAT Regulations** however do not explain or define the words 'use' or 'consume' but the Kenyan case of *Coca Cola Central East and West Africa Ltd versus Commissioner of Domestic Taxes Appeal No. 11 of 2013* defined *'to consume'* as to 'use up' and *'use'* to mean 'to put to a particular

15 purpose.'

According to the Service Agreement between the Appellant and TCCEC, the services supplied to TCCEC by the Appellant were brand marketing services through the territories for purposes of implementing marketing strategy of the brand owners with respect to such brands owned by or licensed to the Coca

20 Cola Company, Schweppes Holdings Ltd and Atlanta Industries. These services were to impact on the perception of the brands. The Territory(ies) is/are described by the Service Agreement as the continent of Africa.

It is an agreed fact that TCCEC is incorporated and organized under the laws of the State of Delaware, United States of America with principal offices at One 25 Coca Cola Plaza, N. W Atlanta Georgia.

The Appellant's witness Ms. Sarah Edwards explained at the trial of the matter that the services provided by the Appellant were used by TCCEC to enhance the sale of the concentrate manufactured outside Uganda and thereafter imported into the country, at which time VAT is imposed on the entire purchase price of

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- 5 the concentrate. This evidence was never contested at trial by the Respondent. The contest of the Respondent is that the services were performed in Uganda and therefore consumed and used in Uganda. Counsel for the Respondent referred to the case of *Elma Philanthropies V URA TAT Application No. 046 of 2019* where it was observed that the determination of VAT can be made by - 10 looking at the tax point or the location where the service was done. The Respondent further relied on the case of *Aviation Hanger Services Ltd V URA TAT Application No. 21 of 2019* where the Tribunal observed and held that 'use and consumption of the service' should be done wholly outside Uganda and if there is a local component on the use or consumption of the services it shall be - 15 deemed to be a supply of services in Uganda. In the case of *F. H Services Kenya Ltd Versus Commissioner of Domestic Taxes Appeal No. 6 of 2012* the Tax Tribunal of Kenya observed that:

*"To our mind then, it is immaterial where the place of the performance of the services takes place, it can be in China, in Latin America, in Ireland, in* 20 *Mesopotamia, in Asia in Europe or even here in Kenya; what is material is where the use or consumption of the services takes place, not in the place of services."*

The above authority from Kenya and the observation therein are not binding to this Court but are very persuasive and assist in the determination of the

25 current dispute before the court. In the case of *Charles Onyango Obbo and another Versus Attorney General SCCA No. 2 of 2002*, the Supreme Court observed that a persuasive precedent is one that need not be followed but which is worthy of consideration and this includes decisions from other common law jurisdictions dealing with similar question as that raised before 30 the court.

- 5 From the Record, the services were supplied to TCCEC which is located in the United States of America. This is expressly stated in the Service Agreement between the Appellant and TCCEC. The Appellant's witness Ms. Sarah Edwards explained that the services supplied by the Appellant are used by the TCCEC to determine the perception on the brands of The Coca Cola Company to enhance - 10 the sale of concentrates by its Concentrate manufacturers. At this point, the services of the Appellant are consumed and used by the TCCEC i.e. put to a particular purpose, which is the determination of the proprietary concentrate for each brand sold to the bottlers.

The services, which include research, marketing and promotional services were

- 15 provided by the Appellant to TCCEC, which has an obligation to the Coca Cola Company to engage in brand marketing throughout the territory for purposes of implementing the marketing strategy of the brand owners in respect of the brands owned by or licensed by the Coca Cola Company. Therefore, the questioned services are used and consumed by the TCCEC to assist in the - 20 determination of the brand concentrate to be used by the manufacturers of The Coca Cola Company.

The fact that the services are performed in Uganda by the Appellant, as per the invoices on record is immaterial. Ugandans or people in Uganda who listen or watch the adverts do not qualify as the consumers or users of the Appellant's 25 services provided to TCCEC.

In the case of *LG Electronics Africa Logistics FZE Kenya Branch Versus The Commissioner Domestic Taxes Tax Appeal No. 359 of 2018*, a case with similar facts like the instant facts, the Kenya Tribunal observed that the services were supplied to the Appellant's head office in Dubai and not to the distributors in

30 Kenya. - 5 In *Coca Cola Central East and West Africa Ltd Versus Commissioner Domestic Taxes Tax Appeal No. 5 of 2018*, the Kenya Tax Tribunal on answering the question of who was the consumer of the services of the Appellant (which services therein and in this case are alike), held that the Kenyan consumers of the beverage are the target audience of the advertising services; however, the - 10 benefit is accrued by Coca- Cola Export, who enhances the business and sales of selling manufacture of concentrate.

Both the above decisions are persuasive in guiding this court and shaping the jurisprudence of the country and I agree with the opinions espoused therein.

The Respondent fronted the argument the Appellant was contracted to market,

15 promote and advertise TCCEC's brands in Uganda with the sole purpose of increasing and impacting the perception of TCCEC's brand on the local market of Uganda and therefore consumed and used in Uganda.

However, the above argument is respectfully flawed because, as already observed the consumption of the services occurs in the USA where TCCEC is

20 located and when TCCEC receives the research from the Appellant and puts it to the purpose of implementing the brand marketing strategy of the brands owned by the Coca Cola Company, at this point consumption and use occurs. This is the tax point.

The particular purpose of the Appellant's services is to enhance the market of 25 particular concentrate of the brands, and this is consumed by TCCEC not the people in Uganda that listen to the adverts. Thus, the services supplied by the Appellant to the Coca Cola Export Company were exported services that qualify to be zero VAT rated under the **VAT Act and the VAT Regulations**.

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5 Hence, the learned members of the Tribunal erred when they held that the questioned services were not exported services and that for a service to qualify for export it must not be physically performed in Uganda.

Ground one and two therefore succeed.

## *Ground three and four*

10 I also find that Grounds three and four are interrelated and they shall be determined together.

With regard to grounds three and four, the Tribunal held that:

*"The evidence in question can be in the form of a contract with a foreign purchaser of the service. This contract shall clearly specify the place of* 15 *use and consumption of the service to be outside Uganda…… a perusal of the contract does not indicate the place of use or consumption of the service, whether it is in or outside Uganda."*

According to **Regulation 12 of the VAT Regulations**, evidence of services being exported is to be deduced from the contract and the contract shall clearly 20 specify the place of use or consumption as outside Uganda.

The **VAT Regulations** use the word 'shall,' which is a mandatory requirement. Counsel for the Respondent cited the case of *Kampala Nissan (U) Ltd Versus URA HCCA No. 7 of 2009* where **Hon. Justice Madrama J** (as then he was) observed that what Parliament directs in mandatory language by using the 25 words 'shall' in tax law should generally be obeyed.

The use of the word 'shall' in statutes is mandatory than discretionary but in some cases it can construed to be discretionary. *See. Sitenda Sebalu Versus*

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5 *Electoral Commission and another Election Petition Appeal No. 26 of 2007.* In that case, the Supreme Court observed that:

*"The contention is on how to determine where the word has been used in either sense. Much as we agree with learned counsel for the appellant to the extent that where a statutory requirement is augmented by a* 10 *sanction for non-compliance it is clearly mandatory, that cannot be the litmus test because all too often, particularly in procedural legislation, mandatory provisions are enacted without stipulation of sanctions to be applied in case of non-compliance. We also find that the proposal by counsel for the 2nd respondent to restrict the directory interpretation of* 15 *the word "shall" to only where it is shown that interpreting it as a mandatory command would lead to absurdity or to inconsistence with the Constitution or statute or would cause injustice, to be an unreliable formula, which is not supported by precedent or any other authority."*

The Court then concluded that reserve should be left on the purpose and 20 intention of the legislature in the framing of the clause of the Statute.

I am alive to the fact that tax statutes are strictly interpreted and also mindful that the purposive and holistic approaches of statutory interpretation require courts to give effect to the purpose and intention of the legislation by perusing the entire provisions of the Statute.

25 **Regulation 12 of the VAT Regulations** states that the place of consumption or use shall be clearly specified to be outside Uganda. To 'specify' is 'to name or state explicitly or in detail.'

According to the Service Agreement between the Appellant and TCCEC, the location of TCCEC is stated as Atlanta, USA. The Agreement in its preamble

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5 states that the services of the Appellant shall be engaged by TCCEC in the 'Territory(ies).' The preamble notes the Territory(ies) to be the continent of Africa.

It can be seen from the Service Agreement that, TCCEC will use the services in continent of Africa, which then includes Uganda. The Tribunal ruled that the

10 United States of America is not on the Continent of Africa. But this is the place where the services were to be performed not consumed since performance and use or consumption are distinct terms.

To give purpose to **Regulation 12 of the VAT Regulations**, I am of the opinion that if the place of use or consumption of the services that are contested can

15 be ascertained from the contract between the parties by the court, it need not be strictly construed that for example, the contract must not *per se* state that *'the services herein shall be consumed and used in Europe or America."*

Considering that the Service Agreement well establishes the location of the consumer of the services to be outside Uganda, in addition to the application

20 of services being outside Uganda is convincing that the place of use or consumption can be ascertained from the Service Agreement.

Grounds three and four therefore succeed.

## *Grounds five and six.*

*The learned members of the Tribunal erred in law when they held that the OECD* 25 *Guidelines are not applicable in Uganda and;*

*The learned members of the Tribunal erred in law by finding that the destination principle provided for under the OECD Guidelines does not apply to Uganda.*

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5 Both these grounds are on the application of the OECD Guidelines and their principles in the determination of tax disputes in Uganda.

The Tax Tribunal observed at page 13 of its Ruling that:

*"Those guidelines apply to countries in Europe under the OECD arrangement or those that have made provision for the guidelinesto apply* 10 *in their law. Uganda is not in Europe nor is it a party to the OECD. The OECD has 38 members which Uganda is not a party."*

It was the submission of the Appellant that Tribunal rejected the application of the OECD Guidelines yet the same considered the guidelines and particularly the destination principle in *Golden Leaves Hotels and Resorts Ltd and Apollo Hotel*

- 15 *Cooperation Versus URA Civil Appeal no. 64 of 2008* in determining the issue of export of a service for VAT purposes. Counsel for the Appellant further pointed out that this court considered the application of the destination principle in *URA V COWI URA Civil Appeal No. 34 of 2020*. He concluded by stating that the guidelines applied in Uganda and in determination of such disputes. - 20 For the Respondent, counsel submitted that the OECD Guidelines were not applicable since the VAT Act is clear on transactions and this overrides the guidelines. That Uganda has not adhered to the guidelines and neither was it a member of the OECD.

The **OECD International VAT/GST Guidelines ('Guidelines')** are a matter of fact 25 soft law i.e. not legally binding that were developed by the *Organization for Economic Cooperation and Development (OECD)*. The Guidelines aim at reducing the uncertainty and risks of double taxation and unintended non taxation that results from inconsistencies in the application of VAT in a cross

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5 boarder context. It is worth noting that Uganda is neither a member of the OECD nor has it adhered to the OECD Guidelines.

In the Kenyan case of *Uniliver Kenya Ltd Versus The Commissioner of Income Tax Income Tax Appeal No. 753 of 2003***, Judge Alnashir Visram** when faced with the question of application of foreign law and OECD Principles on transfer 10 pricing observed that:

*"We live in what is now referred to as a "global village". We cannot overlook or sideline what has come out of the wisdom of tax payers and tax collectors in other countries. And especially because of the absence of any such guidelines in Kenya, we must look elsewhere. We must be* 15 *prepared to innovate, and to apply creative solutions based on lessons and best practices available to us. That is indeed how our law will develop and our jurisprudence will be enhanced. And that is also how we shall encourage business to thrive in our country. Therefore, I cannot ignore the time-tested experiences and best practices of others, in the argument that* 20 *section 18(3) of the Act brooks of no ambiguity, and that it is unnecessary to look elsewhere. That would be too limiting an approach to take."* (Emphasis added)

The learned Judge went ahead to observe that:

*"The ways of doing modern business have changed very substantially in* 25 *the last 20 years or so and it would be fool-hardy for any court to disregard internationally accepted principles of business as long as these do not conflict with our own laws. To do otherwise would be highly shortsighted."* (Emphasis added)

- 5 The OECD Guidelines have developed the 'destination principle' which emphasizes that goods and services are taxed in the jurisdiction where they are consumed. The Appellant's witness Mr. René Nicolaas explained that is designed to ensure that the taxing rights on cross boarder supplies are granted to the country of the customer/recipient of a service and exported service is - 10 not taxed in the country of the supplier of the service thereby maintaining neutrality within the VAT system as it applies to international trade. To the witness, the services supplied by the Appellant to TCCEC can be regarded as business to business services.

In the case of *Apollo Hotel Corporation Ltd Versus URA (supra)*, the Tax 15 Tribunal itself considered the destination principle to determine the tax questions there regarding importation and exportation services. This court in *Uganda Revenue Authority Versus COWI A/S Tax Appeal No. 34 of 2020*, considered the destination principle to determine if the services were imported under **Section 4(c) of the VAT Act** and **Regulation 13 of the VAT Regulations**.

20 The Tribunal and courts have previously relied on the application of the OECD Guidelines and the destination principle as seen in the above cited authorities.

The Tribunal therefore erred when it disregarded the destination principle without departing from its earlier decision and also given the fact that there exists a decision of a superior court applying that principle.

25 This court is of the opinion that there is need to put up with the pace at which international trade and business is fast growing.

Whereas the VAT law is clear and plain and Uganda is not a member of the OECD, the OECD Guidelines provide guidance in tax law interpretation and application. The Guidelines are not in conflict with any of the laws of the

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5 Country but rather give an elaborate approach to their interpretation and application to achieve a greater goal.

The relationship between the Appellant and TCCEC is a cross boarder business to business relationship. The services herein contested should be taxed from the destination of their consumption i.e. the country of import. This is because

10 TCCEC is based in the USA therefore the USA should tax the services. This assists in achieving neutrality in the international trade.

Ground five and six therefore succeed.

## *Ground 7*

*The learned members of the Tribunal erred in law in awarding the Respondent* 15 *costs*

It is trite law that costs follow the event unless the court is of the opinion that the successful party ought not to be awarded costs and for good reason. An award of costs is a matter of court's discretion and courts are reluctant to interfere with this discretion. See. *Impressa Ing. Fortunato Federice V Irene*

20 *Nabwire SCCA 003 Of 2000.*

The Tribunal ruled in favor of the Respondent and hence granted it costs. I cannot fault the Tribunal since the successful party was the Respondent. This ground therefore fails.

5 In conclusion, save for ground 7 of the appeal which has failed, the Appellant's grounds 1-6 of the Appeal have succeeded. The costs of the Appeal are awarded to the Appellant.

**Signed and dated at Kampala this 18th day of September 2024.**

10 **Harriet Grace MAGALA**

**Judge**

**Delivered online via ECCMIS this 27th day of September 2024.**

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