Commissioner of Domestic Taxes v Airflo Ltd (Civil Appeal E975 of 2023) [2026] KECA 1378 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that services performed in Kenya but consumed abroad are zero-rated for VAT, entitling exporters to refunds.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.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.
- 2.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.
Key legal issues
#Relationship between Section 8(1) (place of supply) and Section 2/Second Schedule (zero-rating of exported services) of the VAT Act
The provisions serve distinct and sequential functions: Section 8(1) establishes jurisdiction to tax; Section 2 with the Second Schedule determines the rate. A supply made in Kenya may simultaneously be an exported service for zero-rating.
The court held that Section 8(1) answers only whether Kenya may impose VAT at all, while Section 5(2) and the Schedules provide for standard-rated, zero-rated, and exempt supplies - all of which are supplies made in Kenya under Section 8(1). Reading Section 8(1) as precluding zero-rating would render the Second Schedule meaningless for services performed by Kenyan residents, an absurdity Parliament could not have intended. The two provisions operate harmoniously.
Who is the user or consumer of the services for purposes of Section 2's definition of a service exported out of Kenya
The user or consumer is identified from the commercial arrangement - who commissioned the service and derived the economic benefit - not from the physical location of performance. The Dutch customers who owned the flowers were the consumers.
Under the service agreement, Airfio BV transported produce on behalf of Netherlands customers who had already acquired the flowers and bore the commercial risk, and gave instructions on packing and consignment. The services were rendered for the specific benefit of the Dutch owners, not the Kenyan farmer or export process. The school-fees analogy advanced by the Appellant failed against this commercial reality, and the physical performance at JKIA did not alter consumption.
Whether the services are exempt horticultural services under the First Schedule
No. Horticultural services are production-oriented services at the cultivation stage; the Respondent's cold room storage, vacuum cooling, X-ray screening, palletization and documentation were logistical support services ancillary to freight transport and therefore not exempt.
The term is undefined in the VAT Act and must take its ordinary meaning, construed strictly since exemptions are exceptions to the general rule of taxability. Horticulture denotes cultivation, propagation, harvesting and primary handling of plants. The subject matter of logistics being flowers does not transform the nature of the service. The court also noted the fiscal significance of the exempt versus zero-rated distinction, as exemption disentitles input tax credits, and rejected the Appellant's recharacterization as an attempt to avoid a lawful refund.
Scope of the Court of Appeal's jurisdiction on a second appeal
The Court's jurisdiction is confined to matters of law and it will not interfere with concurrent findings of fact unless based on no evidence or a misapprehension of the evidence.
The court invoked Mwangi v Kenya Airways Limited to frame its jurisdiction. Since both issues raised were questions of statutory interpretation and characterization - matters of law - the court proceeded to determine them, while acknowledging that the Tribunal and High Court concurrent factual findings stood.
Legal principles established
#- Section 8(1) of the VAT Act is a jurisdictional provision determining whether a supply falls within the Kenyan VAT net; the question of the applicable rate is determined separately under Section 2 and the Second Schedule. A supply made in Kenya under Section 8(1) can still be a zero-rated exported service under Section 2.
- For a service to be an exported service under Section 2 of the VAT Act, the determining factor is the location where the service is finally used or consumed, not where it is physically performed (the destination principle).
- The consumer of a service is the party who commissioned the contract and directly benefits from it, and the physical location of performance does not alter the commercial reality of where consumption occurs.
- Horticultural services are production-oriented services rendered at the cultivation stage; logistical services ancillary to international freight transport do not become horticultural services merely because their subject matter is horticultural produce, and exemptions must be construed strictly.
Court orders
#- 1.The Appeal is dismissed.
- 2.The Judgment of the High Court dated 15th May 2023 is hereby upheld.
- 3.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.
- 4.The Respondent is awarded the costs of this appeal and of the courts below.
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- On appeal from
- High Court of Kenya
- Not stated in the judgment
- Jurisdiction invoked
- Second appeal to the Court of Appeal confined to matters of law under the applicable appellate framework; the judgment does not cite the specific constitutional or statutory provision
Relief refused
#The Appellant's appeal against the interpretation of Section 2 and Section 8 of the VAT Act and the classification of the services as exempt horticultural services
Section 8(1) is a jurisdictional gateway while Section 2 with the Second Schedule governs the applicable rate; the services were consumed by Dutch customers and were logistical, not horticultural, services
Costs
The Respondent is awarded the costs of this appeal and of the courts below.
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
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.
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.
The mere fact that the subject matter of the logistics is horticultural produce does not transform the nature of the service itself.
The services were properly characterized as zero-rated exported services under the Second Schedule, not as exempt horticultural services under the First Schedule.
The Appellant shall process the Respondent's VAT refund claims as previously ordered by the Tribunal and afirmed by the High Court within ninety (90) days from the date of this judgment.
The Respondent is awarded the costs of this appeal and of the courts below.
Issues in the judgment
#The judgment states that the appeal was argued on 9th March 2026 and delivered on 10th July 2026, yet it cites a Court of Appeal ruling dated 30 April 2026; this is internally consistent but the appeal number of the present appeal is not stated anywhere in the judgment.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Commissioner of Domestic Taxes v Airflo Ltd (Civil Appeal E975 of 2023) [2026] KECA 1378 (KLR)", Case Analysis (2026). Not stated in the judgment. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1378/eng@2026-07-10
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.