https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1293

Sybrin Kenya Ltd v Commissioner of Domestic Taxes (Civil Appeal E334 of 2024) [2026] KECA 1293 (KLR) (10 July 2026) (Judgment) Neutral citation: [2026] KECA 1293 (KLR) Republic of Kenya In the Court of Appeal at Nairobi Civil Appeal E334 of 2024 W Karanja, HI Ong'udi & LM Njuguna, JJA July 10, 2026 Between Sybrin Kenya Limited Appellant and The Commissioner of Domestic Taxes Respondent (Being an appeal from the judgment and decree of the High Court of Kenya at Nairobi (Mabeya, J) dated 17th January 2024 in IT Appeal No. E004 of 2022 Income Tax Appeal E004 of 2022 ) Judgment 1.This appeal arises from a dispute regarding the taxability of services provided by Sybrin Kenya Limited (“the appellant”) to its foreign affiliates. The appellant is a limited liability company specializing in software services related to bank cheque clearing processes, while the respondent is a principal officer appointed under section 13 of the Kenya Revenue Authority Act, Cap 429 of the Laws of Kenya. 2.The appellant contends that between January 2016 and December 2019, it was subcontracted by Sybrin Systems (Proprietary) Limited (“SSPL”) in South Africa and Sybrin Limited (“SL”) in Guernsey to provide contributory hardware and software services. These services, the appellant maintains, were integrated into an overall proprietary software package supplied by these foreign companies to various tier 1 and tier 2 financial institutions in Kenya. 3.The dispute arose after a VAT verification process carried out by the Commissioner of Domestic Taxes (“the respondent”) for the period from January 2016 to December 2019. Following the verification, the respondent issued an assessment on 20th February, 2020, stating that the appellant owed Kshs. 40,689,306.00 in outstanding VAT. The respondent argued that the appellant’s services were used by Kenyan banks and did not qualify as exported services under section 2 of the Value Added Tax Act. On its part, the appellant objected, asserting that its services were exported for the use and benefit of SSPL and SL, companies situated outside Kenya. 4.Following the respondent’s decision confirming the assessment, the appellant moved to the Tax Appeals Tribunal (“TAT”), which delivered its judgment on 5th November 2021 in favour of the appellant. The tribunal found that the appellant’s services were correctly characterized as exported services as defined under section 2 of the VAT Act. Consequently, the TAT found that these services were not subject to VAT and directed each party to bear its own costs. 5.Dissatisfied with the tribunal’s finding, the respondent appealed to the High Court. The main issue for determination before the High Court was whether the services rendered by the appellant qualified as exported services. This determination lay in the identification of the final jurisdiction for consumption as to whether SSPL, resident in South Africa, and SL in Guernsey were the final consumers, as alleged by the appellant, or the financial institutions in Kenya, as alleged by the respondent. On 17th January 2024, the High Court (Mabeya, J.) overturned the tribunal’s decision. 6.The High Court found that while the appellant was contracted by foreign entities, the ultimate consumers of the contributory hardware and software maintenance services were the financial institutions situated in Kenya. The court held that the services were not exported services and upheld the respondent’s original VAT assessment, setting aside the judgment of the TAT. 7.The decision by the High Court triggered this appeal. In the Memorandum of Appeal dated 8th May 2024, the appellant raises 10 grounds of appeal. The appellant contends that the learned Judge erred in law by failing to consider or apply relevant statutory provisions, decided authorities, and the OECD guidelines governing the destination principle; that the learned Judge erred in finding that the Kenyan banks were the final consumers for VAT purposes; that the learned Judge failed to appreciate the specific terms of the contracts entered into between the appellant and its foreign affiliates, SSPL and SL. As a result, the court overlooked the doctrine of separate corporate personality, as there was no contractual link between the appellant and the Kenyan banks. 8.Additionally, that the learned Judge is said to have erred in failing to recognize that the services provided to SSPL and SL were contributory components of an overall proprietary system, thus, the final consumers were actually the foreign affiliates who integrated these services into their final product. Further, that the High Court failed to address evidence tendered before the Tax Appeals Tribunal regarding reverse VAT and also erred in ordering them to pay costs. Appellant’s submissions: 9.The appellant filed submissions which were highlighted by its learned counsel, Mr. Inamdar, when this matter came up for hearing on 10th March, 2026. He argued that the High Court erred in its legal characterization of the services provided by the appellant. On the nature of the contractual relationship, counsel submitted that the services were provided under specific subcontracts between the appellant and its foreign affiliates, SSPL and SL, based in South Africa and Guernsey, respectively. He argued that the appellant was not a party to the master contracts between these foreign entities and the Kenyan banks. Consequently, there was no contractual nexus between the appellant and the banks, and the obligation to provide services arose solely from the subcontracts with the foreign affiliates. 10.On whether the services provided by the appellant were exported services, counsel argued in the affirmative and contended that the services were partial or contributory in nature, which the foreign affiliates then integrated into their own proprietary software packages. He maintained that first, what the appellant provided to SSPL and SL was not the same as what the Kenyan banks ultimately received. Secondly, under section 2 of the VAT Act, the status of an exported service is determined by consumption, not performance. Thirdly, according to OECD principles, for business- to-business services, the place of consumption is the location of the customer rather than the end-user. He asserted that there were two separate transactions being, an export from the appellant to the foreign affiliates, and a subsequent import from those affiliates to the Kenyan banks. 11.For this argument, the appellant placed reliance on the decision in the cases of FH Services Kenya Limited vs. Commissioner of Domestic Taxes (unreported) Appeal No. 6 of 2012; R vs. Commissioner of Domestic Taxes; Palpina Airflo Limited (Ex- Parte) [2019] eKLR; and Republic vs. Kenya Revenue Authority & Another Ex-Parte Fontana Limited [2014] eKLR where the various courts held that for a service to be deemed as exported, it matters not whether the service is performed in Kenya or outside Kenya as the determining factor is the location where the service is to be consumed or used. 12.Counsel also submitted that the learned Judge was wrong to lump all Sybrin companies into a single unit. Citing the principle in Salomon vs. Salomon & Co. Ltd [1896] UKHL 1 [1897] AC 22, he stressed that the appellant and its foreign affiliates are distinct legal entities and must be treated as such for tax purposes. Regarding the issue of reverse VAT, counsel raised several points. He submitted that evidence was presented to the tribunal that at least one bank (Barclays Bank, now ABSA Bank) had confirmed paying reverse VAT on the services it imported from the foreign affiliates. Counsel further submitted that requiring the appellant to account for VAT would result in unlawful double taxation for a single economic activity. Counsel also argued that the burden of proving whether the Kenyan banks paid reverse VAT lay with the respondent, as it is information within their knowledge under section 112 of the Evidence Act. Respondent’s Submissions 13.The respondent similarly filed submissions, which were highlighted by their learned counsel, Ms. Sega. According to the respondent, the services offered by the appellant are not export services as the final point of consumption was in Kenya and should therefore be charged VAT. While acknowledging the OECD guidelines, the respondent relied on the case of Commissioner of Domestic Services vs. Dutch Flower Group Kenya [2021] KEHC 23 (KLR), arguing that services are consumed locally if they are directed at and consumed by local suppliers, even if they are meant to shape a final product for a non-resident. Similarly, citing the case of Coca- Cola Central East and West Africa vs. Commissioner of Domestic Taxes [2023] KETAT 899 (KLR), the respondent argued that the pertinent factor is the location of the consumer, which in this case is Kenya. The respondent urged this Court to uphold the judgment delivered by the High Court and find that the instant appeal is without merit. Determination: 14.In considering the appeal herein, this Court is exercising appellate jurisdiction that is circumscribed by section 56(2) of the Tax Procedures Act, which provides that “An appeal to the High Court or to the Court of Appeal shall be on a question of law only”.The Court of Appeal in Mati vs. Returning Officer Mwingi North Constituency & 2 Others [2018] KECA 700 (KLR) summarised what amounts to “matters of law” as follows:“The interpretation or construction of the Constitution, statute, or regulations made thereunder, or their application to the sets of facts established by the trial court. As far as facts are concerned, our engagement with them is limited to background and context, and to satisfy ourselves, when the issue is raised, whether the conclusions of the trial judge are based on the evidence on record or whether they are so perverse that no reasonable tribunal would have arrived at them. We cannot be drawn into considerations of the credibility of witnesses or which witnesses are more believable than others; by law, that is the province of the trial court.” 15.It is, therefore, the considered view of this Court that the main issue for determination is whether the services rendered by the appellant can be considered to be exported services within the meaning of section 2 of the VAT Act. On this issue, parties took opposing views. The appellant contended that these services were for the benefit of SSPL and SL, who are parties domiciled outside Kenya while in its value added tax assessment dated 10th February 2020, the respondent observed that by virtue of the appellant being a subcontractor by SSPL and SL, both of South Africa, to offer services/hardware supply and invoicing them, that does not render the services to be an export since the services were consumed in Kenya. The location, the respondent stated, was immaterial.Mabeya, J, in the High Court’s decision, took a similar position, stating that the two companies were not the final consumers of the services tendered by the appellant, as the same were for consumption by Kenyan Financial Institutions. 16.Section 2 of the VAT Act, 2013 describes an ‘export’ to “mean to take or to cause to be taken from Kenya to a foreign country, a special economic zone enterprise, or to an export processing zone.” While a ‘service exported out of Kenya’ is defined as a service provided for use or consumption out of Kenya. Under the VAT Act, what is important is the place of consumption of the services. 17.The Memorandi of Agreements between the appellant and the foreign affiliates are crucial in shedding light on the relationship between the appellant, SSPL, SL, and the Kenyan banks. With this clarity comes a determination on the final jurisdiction of consumption of the services tendered by the appellant. 18.In the service and delivery agreement between the appellant and SSPL dated 1st March 2007, at Clause 1 on definitions, ‘customer’ is defined to mean: the customers of Sybrin Systems located in the territory of Kenya. At clause 3, the purpose of the agreement is defined as:“ 3. 1)A company registered and incorporated in Kenya, Sybrin Kenya is contracted by Sybrin Systems to carry out specific activities as directed. 3.2)Sybrin Systems directly provides the following goods and services to its customers in Kenya;3.2.1.Hardware spares for maintenance3.2.2.Software Maintenance 3.3)Syrbin Kenya, on the verbal and written instructions of Sybrin Systems as the main contractor, may be required to provide specific systems to Sybrin Systems customers, without any direct contractual obligation with Sybrin customers, and that all work done be invoiced and collected from Sybrin Systems only.” 19.Similarly, in the Memorandum of Agreement between SL and the appellant, Clause 1 defines ‘Customer’ as the customer of Sybrin Limited within the territory, ‘service/s’ means the services provided by Sybrin Limited in selling and installing software, and all other services ancillary thereto, and ‘territory ' means each and every area forming part of Kenya. 20.In the preamble at clause 2, it is provided that:“Sybrin Limited has entered into various software and hardware sales, service, and delivery agreements with customers in the territory.” 21.Clause 3 on services and remuneration then proceeds as follows:“ 3. 1.Software products required by the customer in the territory shall be sourced by Sybrin Limited from Sybrin Kenya at a commission payable of 35% of the selling price of the software as sold by Sybrin to the customer. 3. 2All software provided by Sybrin Limited to the customer will continue to be licensed to the customer by Sybrin Limited, and all current and future licensing fees shall be paid to Sybrin Limited from the customer directly, there shall be no consideration payable to Sybrin Kenya.” 22.It is this Court's view that the appellant operates within the jurisdiction of Kenya, providing specialized contributory hardware and software maintenance services for consideration to its non- resident affiliates, Sybrin Systems (Proprietary) Limited (SSPL) and Sybrin Limited (SL). It is these foreign entities that utilize and consume the appellant’s specific taxable supplies. These foreign affiliates commission the appellant’s fractional services to fulfill their own proprietary obligations to third-party financial institutions in Kenya. They are, in this Court’s view, the primary consumers or beneficiaries of the services provided by the appellant. The location of the consumer is also clearly provided for in the agreements, as SSPL is domiciled in South Africa, and SL in Guernsey. 23.The appellant also placed reliance on the destination principle set out in the OECD International VAT/GST guidelines under which services are subject to tax in the jurisdiction in which they are consumed. Guideline 3.2 of the OECD Guidelines reads as follows:“For business-to-business supplies, the jurisdiction in which the consumer is located has the taxing rights over internationally traded services and intangibles.” 24.Guideline 3.3 then provides as follows:“For the application of Guideline 3.2, the identity of the customer is normally determined by reference to the business agreement.” 25.This Court takes note of the High Court decision in Commissioner of Domestic Taxes vs. Total Touch Cargo Holland [2018] KEHC 859 (KLR), which addressed the destination principle in detail as follows;“(27)The respondent referred to the VAT guidelines on International Trade and services in intangibles developed by the Organization For Economic Co- Operation and Development (OECD). The said guidelines are applicable in interpreting Kenyan Tax Law as was held in the case of Unilever Kenya Limited vs. The Commissioner Of Income Tax – Income Tax Appeal No.753 of 2003) where the court held…“The ways of doing modern business have changed very substantially in 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 short sighted.”The respondent submitted that under the “destination principle” in the OECD guidelines, goods, services and intangibles are zerorated when leaving one jurisdiction and are taxed upon importation in another jurisdiction. In OECD guidelines the “destination principle” is preferred to the “origin principle” as it helps to achieve VAT neutrality. The “origin principle” which is the opposite of the “destination principle” provides that tax accrues to the jurisdiction from which supply is made. In OECD guidelines export of a service is associated with the place of consumption of the service. The guidelines and the main rule by OECD on tax for internally traded services are as follows:- Guideline 1 - For consumption tax purposes internationally graded services and intangibles should be taxed according to the rules of the jurisdiction of consumption. Guideline 2 - For business-to-business supplies, the jurisdiction in which the customer is located has the taxing rights over internationally traded services or intangibles. Guideline 3 – The identity of the customer is normally determined by reference to the business agreement. Main Rule – the jurisdiction where the customer is located has the taxing rights over a service or intangible supplied across international borders.” 26.Applying the destination principle, tax paid in relation to supplied goods is determined by the rules applicable in the jurisdiction of consumption, in this case, the jurisdiction of the affiliate companies. Following the analysis above, this Court finds a basis to overturn the High Court’s finding and finds merit in this appeal. The upshot is that this appeal is allowed with costs to the appellant. 27.Orders accordingly. DATED AND DELIVERED AT NAIROBI THIS 10TH DAY OF JULY 2026.W. KARANJA............................ JUDGE OF APPEALH. ONG’UDI............................ JUDGE OF APPEALL. NJUGUNA............................ JUDGE OF APPEALI certify that this is a True copy of the originalSignedDEPUTY REGISTRAR