THE REPUBLIC OF UGANDA
IN THE COURT OF UGANDA AT KAMPALA
CIVIL APPEAL NO. 17 OF 2010
(On appeal from a decision of the Tax Appeals Tribunal in TAT No. TAT 4 of 2009 dated 29th June 2010)
SAVANNAH COMMODITIES LTD::::::::::::::::::::::::::::: APPELLANT
UGANDA REVENUE AUTHORITY:::::::::::::::::::::::::::: RESPONDENT
BEFORE HON. LADY JUSTICE HELLEN OBURA
This is an appeal against part of the decision of the Tax Appeals Tribunal (TAT) on the ground that TAT erred in law in holding that processing charges were liable to Value Added Tax (VAT). The appellant company procures, processes and exports grain and coffee. It also does local sales.
Uganda Revenue Authority, the Respondent, conducted a VAT audit of the appellant company for the period of October 2003 to June 2008. Thereafter it raised an assessment of Ushs. 642,720,372/= for VAT due and payable. The assessment arose mainly out of output tax allegedly not charged on the sale of coffee beans and processing charges not subjected to VAT by the appellant.
The appellant applied to TAT to have the assessment set aside as being bad in law. The application was based on two grounds, namely;
- That the supply of unprocessed agricultural products was exempt under the law.
- That the applicant is involved in the business of exporting which is Zero rated under the law.
At the hearing before TAT four issues were framed by the parties. These were:
- Whether the sale of hulled coffee constitutes the supply of unprocessed agricultural products.
- Whether the processing charges are liable to VAT.
- Whether the applicant is required to pay the assessed tax of Ushs. 642,720,372/=.
- What remedies are available to the parties?
Each party called one witness and after the hearing TAT decided the first issue in favour of the appellant, while the second issue was decided in favour of the respondent. The respondent conceded the third issue and TAT decided to remit the matter to the decision maker for reconsideration in accordance with its findings. The appellant was also awarded half the costs of the application.
The appellant now appeals to this court against part of the decision of TAT. The only ground of appeal is that TAT erred in law in holding that processing charges were liable to VAT.
According to the record of proceedings before TAT, AW1 Mr. Alfred Anthony Mwangi, testified that when coffee is brought to the appellant’s premises by the third parties for processing, the coffee undergoes various stages which he described in details so as to meet the standard for export as per the Uganda Coffee Development Authority (UCDA) Regulations.
As regards the VAT on processing the coffee, Mr. Mwangi testified that the appellant charges VAT on processing charges where the coffee is processed and returned to third parties. It was his testimony that no VAT is charged where the appellant processes the coffee and buys it for export because it would be incidental service to the export.
AW1 testified that the appellant could buy Fair Average Quality (FAQ) coffee in two forms. It could either buy unprocessed FAQ coffee or it could agree with the owner/supplier that the coffee would be processed at the appellant’s premises in which case the appellant would levy processing charges and buy the coffee after the grading and colour sorting stage
For the respondent RW1 Ms. Robinah Nakakawa testified that the processing charges are liable to VAT since they were provided before the appellant bought the coffee. These services were provided to various suppliers of coffee to the appellant.
I have carefully considered the submissions and critically analysed the relevant provisions of the VAT Act. Section 4(a) of the Value Added Tax Act (herein after called VAT Act) provides:
“A tax to be known as Value Added Tax shall be charged in accordance with this Act on every taxable supply in Uganda made by a taxable person.”
According to section 11(1) (a) of the VAT Act, a taxable supply includes the performance of a service for another person. AW1 testified that the appellant processed coffee for third parties who either took it away or sold it to the appellant for export. In that sense the appellant provided a service to other persons and it is not in contention that this service was paid for by those persons. However, the issue is whether those services are taxable where the appellant bought the coffee after processing it.
Section 18(1) of the VAT Act provides:
“A taxable supply is a supply of goods or services, other than an exempt supply made by a taxable person for consideration as part of his/her business activities.(Emphasis added).
Section 18(4) of the VAT Act provides:
A supply is made for consideration if the supplier directly or indirectly receives payment for the supply, whether from the person supplied or any other person, including any payment wholly or partly in money or kind.”
Furthermore, section 21(1) of the VAT Act provides:
“Except as otherwise provided under this Act, the taxable value of a taxable supply is the total consideration paid in money or in kind by all persons for that supply.” (Emphasis added).
It was submitted for the appellant that processing of coffee by the appellant was incidental to exportation. On the other hand, it was submitted for the respondent that processing of coffee were supplies liable to VAT since the services were provided before the appellant bought the coffee.
In determining whether or not the processing of coffee by the appellant was incidental to exportation and therefore zero rated, it is imperative to establish whose coffee the appellant processed and whether the service was offered for a consideration. This will also involve looking at what stage the appellant purchased the coffee from third parties for export. The argument for the respondent that if the services were severable, then they are not incidental to the exportation of coffee will also be taken into account.
Section 12(1) of the VAT Act provides that a supply of services incidental to the supply of goods is part of the supply of goods. The term “incidental” is not defined in the Act, however in the case of Card Protection Plan Limited v Commissioner Customs and Excise  STC 270 at 293 Lord Slynn of Hadley referred to the case of Customs and Excise Commissioner v Madgett and Baldwin (trading as Howden Court Hotel) (1998) ECR 6229 and stated:
“A service must be regarded as ancillary to a principal service if it does not constitute for customer an aim in itself, but a means of better enjoying the principal service supplied”
It was the evidence of AW1 that the appellant would process FAQ coffee for third parties (farmers) and would either buy it for export or return it to the third party. In both scenarios processing charges were levied on the coffee but VAT was charged on the processing charges only when the coffee was not bought by the appellant. The justification for not charging VAT when appellant bought the coffee for export was that the processing was incidental to the exportation.
It was contended that the appellant entered into contract to buy the coffee as the farmer entered the appellant’s premises in which case the coffee became the appellant’s at that stage but actual sale took place after the coffee was processed. I find this argument unconvincing and in conflict with the established principle on when property in the goods passes to the buyer.
Section 17 of the Sale of Goods Act provides that:
“Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer until the goods are ascertained.”
It was clearly stated by AW1 that the appellant would opt to either buy the coffee or return it to the farmer after it had been processed. I believe this was done because at that stage both the quantity and quality of the FAQ coffee could not be ascertained for purposes of attaching exportable value to it. I do not therefore see how that coffee would be said to be the appellant’s property at that stage.
In any event, why would the farmer pay processing charges if the coffee belonged to the appellant at that stage? It would be illogical and for that reason, I find that before the coffee was processed it belonged to the farmer. That is why the appellant was at liberty to either buy it or return it to the farmer after it was processed.
While this court agrees that processing of coffee was/is necessary for purposes of meeting exportable standards, the way the appellant did the processing in my view removed it from the ambit of what is anticipated by section 12 (1) of the VAT Act. Payments were made for the services by third parties thereby bringing the supplies squarely within the provisions of section 18 (4) of the VAT Act.
From the above critical analysis of the appellant’s transactions based on its own evidence, this court agrees with the submission of the respondent that the processing services offered by the appellant were not incidental to the exportation of coffee because it was done before the appellant acquired the coffee. This court would have been convinced by the appellant’s arguments if it was buying the coffee before they were processed and processing it for export at its own costs. It is only in those circumstances that the processing service would be regarded as ancillary to exportation.
Otherwise, the evidence adduced by the appellant confirmed that the processing services it offered to third parties were for a consideration and the appellant did receive payments for the same as a separate business activity. They are therefore chargeable to VAT because they amount to a taxable supply.
For the above reasons, this court finds that it is not even necessary to consider the alternative submission by the appellant that additional evidence be admitted for purposes of proving that the appellant exported the coffee it processed. I hold the firm view that processing coffee for third parties at a fee and later buying them for export were two separate transactions.
In the circumstances, I cannot fault TAT for finding and ruling that the processing of coffee for third parties by the appellant is liable to VAT. I therefore do not find merit on the only ground of this appeal and it must fail. In the result, the decision of TAT is upheld and this appeal is dismissed with costs in this court and before TAT.
Dated this 14th day of November 2012.
Judgment delivered in chambers at 3.00 pm in the presence of Bruce Musinguzi holding brief for Mr. Oscar Kambona and Ms. Hilda Bakanasa holding brief for Ms. Nakku Mwajjuma.