https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1378

Commissioner of Domestic Taxes v Airflo Limited (Civil Appeal E975 of 2023) [2026] KECA 1378 (KLR) (10 July 2026) (Judgment) Neutral citation: [2026] KECA 1378 (KLR) Republic of Kenya In the Court of Appeal at Nairobi Civil Appeal E975 of 2023 SG Kairu, HI Ong'udi & RB Ngetich, JJA July 10, 2026 Between Commissioner of Domestic Taxes Appellant and Airflo Limited Respondent (Being an appeal from the Judgment of the High Court of Kenya at Nairobi (J. W. W. Mong'are, J.) dated 15th May 2023 in HC ITA No. E063 of 2022) Judgment 1.This appeal raises a question of considerable importance in the realm of value added tax law: when does a service performed physically within Kenya qualify as a "service exported out of Kenya" for purposes of zero-rating under the Value Added Tax Act, No. 35 of 2013, the "VAT Act"? Specifically, the question is whether logistical handling services, including cold room storage, vacuum cooling, X-ray screening, and documentation rendered at Jomo Kenyatta International Airport to facilitate the export of cut flowers to the Netherlands, are "used or consumed" in Kenya or outside Kenya. 2.The appeal is brought by the Commissioner of Domestic Taxes (the "Appellant") against the judgment of the High Court of Kenya (J. W. W. Mong'are, J.) dated 15th May 2023, which dismissed the Appellant's appeal and upheld the decision of the Tax Appeals Tribunal (the "Tribunal") in favour of Airflo Limited (the "Respondent"). 3.The Respondent, Airflo Limited (formerly Panalpina Airflo Limited), is a company incorporated in Kenya. Pursuant to a service agreement dated 1st January 2018, the Respondent provides handling services to its parent company, Airflo BV, a company incorporated in the Netherlands. Airflo BV is engaged in the international transportation of cut flowers and horticultural produce from Kenya to worldwide destinations, primarily on behalf of customers in Europe who have acquired the flowers from Kenyan farmers. 4.The services provided by the Respondent under the service agreement, as recorded at page 20 of the Record of Appeal, include:a.Warehouse handling services — receiving consignments belonging to the market for export, storage of boxes in cold rooms, palletization, and handover to airlines;b.X-ray screening services on all consignments received at JKIA and destined for export, to ensure compliance with security requirements;c.Vacuum cooling services, where products are delivered with temperatures that do not conform to the standard operating procedures prescribed by Airflo BV; andd.Documentation services, including receipt and processing of shipping documents, generation of customs entries, and lodging of export consignment documentation. 5.The service agreement at page 20 of the Record of Appeal further clarifies the commercial relationship. It states that Airflo BV "transports or delivers fresh produce on behalf of its customers who are in the Netherlands and who have acquired flowers from across the world." The agreement refers to the "market" that is, Airflo BV's customers as the consignees who give instructions on how their products are to be packed and to whom they are consigned. In effect, by the time the Respondent's services are engaged, the flowers are already owned by customers outside Kenya. 6.The Respondent levied VAT at the zero rate on the services rendered to Airflo BV in the Netherlands, treating them as "services exported out of Kenya" under Section 2 of the VAT Act. As a consequence, the Respondent had excess input VAT and was entitled to a refund under Section 17(5) of the VAT Act. The Respondent accordingly filed VAT refund claims for the periods January to September 2019 (Kshs. 36,043,871) and June to October 2020 (Kshs. 10,014,465). 7.The Appellant rejected both claims through Credit Adjustment Vouchers dated 5th February 2021 and 27th January 2021 respectively, on the basis that the services were consumed in Kenya and were therefore standard-rated at 16%. The Respondent filed notices of objection, but the Appellant upheld the rejection vide an objection decision dated 21st May 2021. 8.The Respondent appealed to the Tribunal (TAT Appeal No. 367 of 2021). In a judgment delivered on 8th April 2022, the Tribunal allowed the appeal, holding that the handling services were exported services consumed outside Kenya, were zero-rated, and that the Respondent was entitled to the VAT refunds claimed. The Tribunal further held that the services were not "horticultural services" within the meaning of the First Schedule to the VAT Act. 9.The Appellant appealed to the High Court, raising six grounds challenging the Tribunal's interpretation of Section 2 and Section 8 of the VAT Act, and the classification of the services. In a judgment dated 15th May 2023, the High Court dismissed the Appellant's appeal, upholding the Tribunal's findings. 10.Aggrieved, the Appellant filed the present appeal based on six grounds, which were argued before us on 9th March 2026. Mr. Pius Nyaga appeared for the Appellant while Mr. Alex Muriuki appeared for the Respondent. 11.Mr. Nyaga condensed the grounds of appeal into three issues for determination. First, whether the High Court erred in failing to correctly identify the user and consumer of the services under Section 2 of the VAT Act. Second, whether the High Court misconstrued Section 8(1) and (2) regarding the place of supply.Third, whether the services were exempt horticultural services under the First Schedule. 12.On the first issue, counsel submitted that the terms "use" and "consumption" in Section 2 must be given their ordinary English meaning. He argued that the services being warehousing, palletizing, vacuum cooling, and x-ray screening are fully consumed within Kenya because, without them, the flowers would not obtain the necessary phytosanitary certification to leave the country. He argued that the services ensure the flowers meet international export standards while still in Kenya, and thus the benefit is enjoyed locally. He employed the analogy of a parent who pays school fees: while the parent is the beneficiary, the child in the classroom is the actual user and consumer of the educational service. By extension, he argued, even if Airflo BV pays for the services, the Kenyan export process and the farmer is the true consumer. 13.On the second issue, counsel submitted that the High Court erred by failing to accord Section 8(1) its proper statutory weight. He argued that since the Respondent performs the services in Kenya and is resident in Kenya, the supply is deemed made in Kenya under Section 8(1). In his view, finding that such services are "exported" renders Section 8 superfluous, which could not have been Parliament's intention. 14.On the third issue, counsel submitted that the services fall within "horticultural services" under the First Schedule, being services connected to flower farming and export. He argued that because the services are horticultural, they are exempt and cannot be zero-rated. 15.In response, Mr. Muriuki submitted that the VAT Act establishes a two-step analytical framework. First, Section 8(1) determines whether the supply falls within the Kenyan VAT net at all that is, whether Kenya has jurisdiction to tax the transaction. Second, once it is established that the supply is made in Kenya, the court must proceed to determine the applicable rate of tax by reference to Section 5(2) and the Schedules. He argued that Section 8 does not conflict with, and does not determine, the zero-rating inquiry under Section 2 and the Second Schedule. 16.Citing Commissioner of Domestic Taxes v Total Touch Cargo Holland [2018] eKLR and Commissioner of Domestic Taxes v W.E.C. Lines (K) Limited [2022] KEHC 57 (KLR), counsel submitted that the determinant for an exported service is the location where the service is finally used or consumed, not where it is physically performed. He submitted that under the service agreement, the flowers are already owned by Airflo BV's customers in the Netherlands, and it is these customers who derive the commercial benefit of having their flowers delivered in a fresh and marketable condition. The Respondent, in counsel's submission, merely provides logistical support to the Dutch company to enable the transport of their property. 17.On horticultural services, counsel submitted that the term is not defined in the VAT Act and must be given its ordinary meaning. He argued that horticultural services relate to cultivation, propagation, harvesting, and primary handling at the farm level. The Respondent's services which are warehousing, documentation, and security screening are logistical services ancillary to transport, not horticultural production. He relied on Kenya Revenue Authority v Republic ex-parte Fintel Limited [2019] eKLR for the principle that tax exemptions must be construed strictly. 18.This being a second appeal, our jurisdiction is confined to matters of law. We may not interfere with concurrent findings of fact by the Tribunal and the High Court unless they are based on no evidence or are the product of a misapprehension of the evidence. See Mwangi v Kenya Airways Limited [2016] eKLR. 19.Upon considering the record, parties arguments both written and oral submissions, we are of the view that the following two issues arise for determination:i.Whether the High Court erred in law by holding that the determining factor for zero-rating services under the VAT Act is the place of use or consumption, and not the place of performance or supply.ii.Whether the Respondent's services constitute exempt horticultural services under the First Schedule to the VAT Act, as opposed to zero-rated exported services under the Second Schedule. 20.Regarding “place of use or consumption” visa vis “place of performance”, the starting point is the statutory framework. Section 2 of the VAT Act defines "service exported out of Kenya" as "a service provided for use or consumption outside Kenya." At the material time, Paragraph 1 of Part A of the Second Schedule provided that the "exportation of goods and taxable services" is a zero-rated supply. This provision has since been renumbered as Paragraph 23 of Part A by the Finance Act, 2023, but its substance remains unchanged. Section 5(2)(a) provides that the rate of tax for a zero-rated supply is zero per cent. 21.Section 8(1) provides:“A supply of services is made in Kenya if the place of business of the supplier from which the services are supplied is in Kenya." 22.The Appellant's central contention is that Section 8(1) is the decisive provision because the Respondent's place of business is in Kenya, the supply is made in Kenya and must be standard- rated. In the Appellant's view, the High Court's reliance on the "use or consumption" test in Section 2 renders Section 8(1) superfluous. 23.With respect, we do not agree. The two provisions serve distinct and sequential functions within the statutory architecture of the VAT Act. Section 8(1) is a jurisdictional provision: it determines whether a supply falls within the Kenyan VAT net at all. It establishes the threshold question of whether Kenya has the competence to impose VAT on the transaction. Section 2, read with the Second Schedule, addresses a subsequent and separate question: assuming the supply is made in Kenya, what rate of tax applies? 24.This two-step framework is not a matter of judicial invention; it is dictated by the structure of the Act itself. Section 5(2) provides for three possible rates: the standard rate, the zero rate, and exemption (which is not a rate but a removal from the tax net). The First Schedule lists exempt supplies; the Second Schedule lists zero-rated supplies. All three categories — standard-rated, zero-rated, and exempt are supplies that are "made in Kenya" under Section 8(1). Section 8(1) therefore does not answer the question of rate; it merely establishes the jurisdictional gateway. 25.To hold, as the Appellant urges, that a supply "made in Kenya" under Section 8(1) cannot simultaneously be a "service exported out of Kenya" under Section 2 would render the zero-rating provision in the Second Schedule meaningless in respect of services performed by Kenyan residents. Parliament could not have intended such an absurdity. The two provisions operate harmoniously: Section 8(1) brings the transaction within Kenya's taxing jurisdiction; Section 2 and the Second Schedule provide for zero-rating where the service, though supplied from Kenya, is for use or consumption abroad. There is no superfluity. 26.The question then reduces to: who is the user or consumer of the Respondent's services? The answer, in our view, is to be found in the commercial arrangement between the parties, not in the physical location where the services are rendered. The contract identifies who commissioned the service and who derived the economic benefit. 27.The law is well settled that for a service to be deemed an "exported service," the determining factor is the location where the service is to be finally used or consumed, not where it is physically performed. This principle, known as the "destination principle," was persuasively articulated by the High Court in Commissioner of Domestic Taxes v Total Touch Cargo Holland [2018] eKLR, where the court held:“A clear reading of this provision is that for a service to be deemed an 'exported service', 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. Therefore, an exported service will be one which is provided for use or consumption outside Kenya." 28.Similarly, in Commissioner of Domestic Taxes v W.E.C. Lines (K) Limited [2022] KEHC 57 (KLR), the High Court reiterated that the consumer of the service is the party who commissions the contract and directly benefits from the service provided. This position was upheld by this Court in Commissioner of Domestic Taxes v WEC Lines Kenya Limited (Civil Appeal (Application) 198 of 2021)[2026]KECA 829(KLR) (30 APRIL 2026) (Ruling). 29.The Appellant's "school analogy," advanced during oral submissions, does not withstand scrutiny when tested against the actual commercial arrangement. Under the service agreement, Airflo BV transports produce on behalf of its customers in the Netherlands who had already acquired the flowers from Kenyan farmers. The "market" gave specific instructions on packing and consignment. The flowers were not being processed for the benefit of the Kenyan farmer or the Kenyan export process in the abstract; they were being processed for the specific benefit of the Dutch owners who had already acquired them and bore the commercial risk. As was held in Commissioner of Domestic Taxes v Coca-Cola Central East and West Africa Limited [2023] KEHC 1407 (KLR), the consumer of a service is the party who commissioned the contract and who directly benefits from the service provided. 30.The ultimate economic benefit and consumption of the Respondent's logistical services accrued to the Dutch entities that required their flowers delivered in a pristine condition in Europe. The physical location of the performance of the services at JKIA does not alter this commercial reality. We therefore find no error in the High Court's conclusion that the determining factor for zero-rating was the place of use or consumption, which in this case was the Netherlands. 31.On the second issue of exempt horticultural services versus zero- rated exported services, the Appellant's alternative argument is that even if the services were not standard-rated, they were exempt "horticultural services" under the First Schedule to the VAT Act, and could not therefore be zero-rated. We reject this submission. 32.The term "horticultural services" is not defined in the VAT Act. It must therefore be given its ordinary meaning, construed strictly in light of the fact that exemption provisions are exceptions to the general rule of taxability. In Kenya Revenue Authority v Republic ex parte Fintel Limited [2019] eKLR, this Court reaffirmed the principle, borrowing from Mangin v Inland Revenue Commissioner [1971] AC 739, that in tax matters:“The words are to be given their ordinary meaning, looking only at what is clearly said. There is no room for any intendment. There is no presumption so to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used…" 33.In its ordinary meaning, horticulture refers to the cultivation, propagation, harvesting, and primary handling of plants. Horticultural services are therefore production-oriented services rendered within the horticultural value chain at the cultivation stage, such as planting, tending, harvesting, and grading. 34.The Respondent's services — cold room storage, vacuum cooling, X-ray screening, palletization, and customs documentation- are logistical support services rendered at an airport facility. They are ancillary to international freight transport, not to cultivation. The mere fact that the subject matter of the logistics is horticultural produce does not transform the nature of the service itself. To hold otherwise would expand the exemption beyond its ordinary meaning, effectively converting a sector- based commercial relationship into a statutory exemption without textual foundation. The Tribunal and the High Court correctly distinguished between the industry of the client (flowers) and the nature of the service supplied (logistics). 35.Furthermore, the Appellant's attempt to classify these services as exempt horticultural services raises a further conceptual difficulty. Exempt supplies under the First Schedule remove a transaction from the VAT net altogether, thereby disentitling the supplier from claiming input tax credits. Zero-rated supplies under the Second Schedule, by contrast, remain taxable supplies at a rate of 0%, preserving the supplier's entitlement to input tax deduction. The distinction is substantive and carries significant fiscal consequences. The Appellant's position amounts to an impermissible attempt to recharacterize the services as exempt merely to avoid processing a refund lawfully due, without any proper statutory basis. 36.The services were properly characterized as zero-rated exported services under the Second Schedule, not as exempt horticultural services under the First Schedule. 37.From the foregoing, we find that the High Court correctly interpreted the VAT Act. The services provided by the Respondent were for the benefit and consumption of its parent company's customers in the Netherlands and were therefore zero-rated as exported services. The services were not exempt horticultural services. The appeal lacks merit and is hereby dismissed. 38.From the foregoing, we issue the following orders:a.The Appeal is dismissed.b.The Judgment of the High Court dated 15th May 2023 is hereby upheld.c.The Appellant shall process the Respondent's VAT refund claims as previously ordered by the Tribunal and affirmed by the High Court within ninety (90) days from the date of this judgment.d.The Respondent is awarded the costs of this appeal and of the courts below. DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF JULY 2026.S. GATEMBU KAIRU, FCIArb, CArb..………………………………….JUDGE OF APPEALH. I. ONG’UDI……….……….……………….JUDGE OF APPEAL RACHEL NGETICH…….………….……………….JUDGE OF APPEALI certify that this is a true copy of the original.SignedDEPUTY REGISTRAR.