Appeals court upholds ruling on export of cut flowers

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The Court of Appeal has upheld a High Court decision declaring that airport handling services provided for the export of cut flowers qualify as zero-rated exported services under the Value Added Tax (VAT) Act, dismissing an appeal by the Commissioner of Domestic Taxes.

A three-judge bench comprising Justices Gatembu Kairu, Hedwig Ong’udi and Rachael Ngetich ruled that the logistical services offered by Airflo Limited at Jomo Kenyatta International Airport were consumed outside Kenya and therefore attracted a zero-rated VAT status.

The dispute arose after Airflo Limited, formerly Panalpina Airflo Limited, sought VAT refunds amounting to about sh46 million for tax periods in 2019 and 2020.

The company provides export handling services for its Netherlands-based parent company, Airflo BV, including warehouse handling, cold room storage, X-ray screening, vacuum cooling, customs documentation and palletization of flowers destined for Europe.

The Commissioner of Domestic Taxes rejected the refund claims, arguing that because the services were physically performed in Kenya by a Kenyan company, they were standard-rated at 16 percent rather than zero-rated.

Both the Tax Appeals Tribunal and the High Court ruled in favour of Airflo, prompting the Commissioner to challenge the decisions before the Court of Appeal.

At the centre of the appeal was whether services physically performed in Kenya could qualify as exported services for VAT purposes.

“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,” ruled the court.

The judges warned that interpreting the law to mean services supplied in Kenya could never qualify as exported services would defeat Parliament’s intention and render the zero-rating provisions meaningless.

In reaffirming the destination principle, the court held that the decisive factor is where the service is ultimately used or consumed, not where it is physically performed.

The bench relied on its earlier decision in Commissioner of Domestic Taxes v Total Touch Cargo Holland (2018), which established that exported services are determined by the location of final consumption.

“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,” said the court.

“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.”

The Commissioner had argued that the true beneficiaries of the services were Kenyan flower farmers rather than the Dutch company paying for them, likening the arrangement to a parent paying school fees for a child.

However, the court rejected that analogy, finding that the flowers had already been purchased by customers in the Netherlands before the services were rendered.

It held that the handling, cooling and documentation services were performed for the benefit of the Dutch owners, who bore the commercial risk and required the flowers to reach Europe in good condition.

The appellate court also dismissed the Commissioner’s alternative argument that the services should be treated as exempt horticultural services.

The judges ruled that horticultural services ordinarily relate to activities including cultivation, harvesting and primary handling at the farm level, whereas Airflo’s services were logistical support services carried out at an airport in preparation for international freight.

According to the court, the fact that the goods being handled were flowers did not change the nature of the services provided.

Consequently, the Court of Appeal dismissed the appeal, upheld the High Court judgment delivered on May 15, 2023, and directed the Commissioner of Domestic Taxes to process Airflo Limited’s VAT refund claims within 90 days.

The court also awarded Airflo the costs of the appeal as well as the proceedings before the High Court and the Tax Appeals Tribunal.

“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, ” ruled the court.