Dutch Flower Group Kenya Limited v Commissioner of Domestic Taxes

4. The respondent, being dissatised with the Tribunal’s decision, lodged an appeal in the High court. The appeal principally concerned whether the contractual relationship between the parties constituted an agency relationship and whether the services supplied by the appellant qualied as exported services for VAT purposes. 5. The learned Judge agreed with the respondent and allowed the appeal, nding that the appellant was, in substance, an agent of FRE and that not all the services it provided could properly be regarded as exported services. 6. The appellant refused to let the case rest there and it led the instant appeal raising 16 grounds in the memorandum of appeal dated 18th November, 2021. We have condensed them into three grounds and in sum, the appellant alleges that the learned judge erred: i. In nding that the service agreements created an agency relationship between the appellant, FRE and FCH, despite the appellant acting on its own behalf. ii. In treating the appellant's costs as costs belonging to FRE and FCH and consequently upholding the disallowance of the appellant's input VAT claim. iii. In nding that the appellant's services were consumed in Kenya rather than in the Netherlands and therefore failed to recognize them as exported services under the VAT Act. 7. This appeal was canvassed by way of written submissions. The appellant led submissions dated 11th September, 2023 through the rm of M/s Nema Advocates LLP, while those of the respondent dated 24th February 2026, were led on their behalf by the rm of M/s Edgar Isutsa Advocates. 8. The appellant submits that the learned Judge erred in nding that the service agreements between Dutch Flower Group Kenya Limited, FRE and FCH created an agency relationship. It argues that the agreements established a cost-plus service arrangement, under which the appellant was paid its costs together with a 5% mark-up. That budgeting and inspection of accounts were merely contractual mechanisms for determining the service fee, and the appellant had no authority to enter into contracts, or create legal relations with third parties on behalf of FRE or FCH. Therefore, it did not meet the essential characteristics of an agent. 9. The appellant urges that the costs incurred in providing the logistical services were its own, incurred during its business, and not costs belonging to FRE or FCH. It contends that the learned Judge, therefore, erred in treating those costs as belonging to the foreign companies and consequently, upholding the disallowance of the input VAT claim. The appellant argues that the learned Judge eectively rewrote the parties' service agreements by implying an agency relationship that was not contemplated by the parties. 10. On the issue of exported services, the appellant asserts that the services provided under the agreements were exported services because their use and consumption occurred outside Kenya. It relied on the destination principle, arguing that FRE and FCH, being based in the Netherlands and being the customers and beneciaries of the services, were the consumers of those services. Accordingly, the place of consumption was the Netherlands rather than Kenya. 11. Regarding the provision of ower food, sleeves and labels, the appellant argues that the High Court wrongly regarded those services as locally consumed by Kenyan suppliers. It posits that those requirements were intended to ensure that the owers met the specications and quality standards of the European customers and were therefore, ultimately for the benet and consumption of FRE and FCH outside Kenya. https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1903/eng@2026-09-25 2

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12. The appellant maintains that its services were zero-rated exported services and that it was entitled to a refund of excess input VAT under section 17(5) of the VAT Act. It, therefore, urges this Court to allow the appeal, set aside the High court judgment, and uphold the decision of the Tax Appeals Tribunal. 13. In its submissions, the respondent opposes the appeal based on four issues: whether the appeal raises questions of law; whether the service agreements create an agency relationship; whether an agent could claim input VAT on behalf of its principal; and, the treatment of the services as exported services. 14. The appellant contends that the appeal is incompetent because, under section 56(2) of the Tax Procedures Act, a second appeal to the Court of Appeal lies only on a question of law. It argues that grounds 1–16 of the appellant’s memorandum principally challenge the factual ndings and evaluation of evidence by the High Court, rather than raising questions of law. The respondent urges the Court to decline the invitation to re-evaluate the evidence, or reconsider the factual ndings of the High court. 15. On the question of agency, the respondent submits that the service agreements clearly established an agent-principal relationship between the parties. That the terms of the agreements expressly referred to FRE as the “Principal” and required the appellant to undertake services on its behalf. The services included maintaining relationships with African Breeders, assisting in sourcing owers, checking quality and ensuring compliance with the principal’s specications. The respondent argues that an agency relationship may be inferred from the conduct of the parties and the substance of their contractual obligations even where the word “agent” is not expressly used. 16. It is submitted that the cost and payment provisions demonstrate the extent of FRE’s control over the appellant. The appellant was remunerated on a cost-plus 5% basis, the parties agreed on annual budgets, and FRE had the right to inspect the appellant’s books where there was doubt regarding the costs incurred. According to the respondent, these provisions demonstrate that the costs incurred by the appellant were, in substance, costs of the principal and that the appellant operated subject to FRE’s control. 17. The respondent rejects the appellant’s contention that the learned Judge rewrote the service agreements. It posits that the court properly interpreted the agreements as a whole and according to their legal eect, rather than relying on isolated clauses or the labels adopted by the parties. The respondent relies on the doctrine of substance over form, arguing that the true nature of the relationship must be determined from the totality of the contractual terms and the parties’ actual dealings. 18. On input VAT, the respondent argues that, having been found to be an agent of FRE and FCH, the appellant could not claim input VAT in respect of costs incurred on behalf of its principals. In reliance of section 13(5) of the VAT Act and the decision in Cotea Agencies Limited v Commissioner of Domestic Taxes [2016], the respondent submits that the tax burden associated with the relevant costs had already been borne by the principals. That the appellant, having been reimbursed for its costs, could not subsequently claim input VAT on expenditure that was not attributable to it. 19. Regarding exported services, the respondent submits that the issue was substantially resolved once the appellant was found to be an agent. In any event, it supports the nding of the learned judge that although most of the appellant’s services were exported, the service concerning the provision of ower food, sleeves and labels was consumed locally by Kenyan suppliers. The respondent maintained that this service was directed at the suppliers in Kenya and therefore, did not qualify as an exported service or for zero-rating. https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1903/eng@2026-09-25 3

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20. The respondent posits that even if the appellant was entitled to claim input VAT generally, not all the services under the service agreement were exported services. That in any event, an agent cannot claim input VAT on costs incurred by the principal. 21. The appeal came before this Court for plenary hearing on 3rd March, 2026. Mr. Manani and Mr. Ogutu, learned counsel appeared for the appellant and reiterated their submissions and the supplementary submissions. They identied the main issue for determination as the eligibility of the appellant to claim. Mr. Ochieng, Mr. Isutsa and M/s Mwongera, learned counsel appeared for the respondent and relied on their led submissions. They asserted that this appeal to the Court of Appeal is only on questions of law as provided by section 56(2) of the Tax Procedures Act. 22. This being a second appeal, we are alive to our duty to determine matters of law only, unless it is shown that the courts below considered matters they should not have considered, or failed to consider matters they should have considered, or looking at the entire decision, it is perverse. This duty is well stated in Leting v Express (K) Limited & another [2018] KECA 187 (KLR), where this Court held that: “ This is a second appeal. Our mandate is as has been enunciated in a long line of cases decided by the Court. See Maina v Mugiria [1983] KLR 78, Kenya Breweries Ltd v Godfrey Odongo, Civil Appeal No. 127 of 2007, and Stanley N. Muriithi & Another v Bernard Munene Ithiga [2016] eKLR, for the holdings inter alia that, on a second appeal, the Court connes itself to matters of law only, unless it is shown that the Courts below considered matters they should not have considered or failed to consider matters they should have considered or looking at the entire decision, it is perverse. See also the English case of Martin v Glywed Distributors Ltd (ta MBS Fastenings) 1983 ICR 511 where in, it was held inter alia that, where a right of appeal is conned to questions of law only, an appellate court has loyalty to accept the ndings of fact of the lower court (s) and resist the temptation to treat ndings of fact as law, and, it should not interfere with the decisions of the trial or rst appellate court unless it is apparent that, on the evidence, no reasonable tribunal could have reached that conclusion, which would be the same as holding the decision is bad in law.” 23. 24. Upon considering the rival arguments in this appeal, we discern the following three issues to be for our determination: i. Whether the appeal raises questions of law within the jurisdiction of this Court on a second appeal; ii. Whether the contractual relationship between the appellant, FRE and FCH constituted an agency relationship and, if so, whether the appellant was entitled to claim input VAT on costs incurred on behalf of its principals; and iii. Whether the services supplied by the appellant qualied as exported services for purposes of VAT. As stated earlier, this is a second appeal and the jurisdiction of this Court is limited to questions of law pursuant to section 56(2) of the Tax Procedures Act. This section provides that: “ An appeal to the High Court or to the Court of Appeal shall be on a question of law only.” This Court has consistently armed this position as stated in Leting v Express (K) Limited & another (supra), emphasizing that on a second appeal the Court must conne itself to matters of law. https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1903/eng@2026-09-25 4

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25. In the present appeal, although the respondent contends that the appellant's grounds invite this Court to re-evaluate the evidence, the substance of the appeal concerns the interpretation of the service agreements, the legal eect of the parties' relationship, and the application of the VAT Act to the established facts. These are questions of law falling within the jurisdiction of this Court. However, in determining those questions, we shall not revisit the factual ndings of the High court, or substitute our own assessment of the evidence, save where such ndings disclose an error of law, or are unsupported by the evidence. 26. On the second issue, the appellant submits that no agency relationship arose, as it was an independent service provider operating under a cost-plus 5% arrangement. It contends that the budgeting provisions and FRE’s right to inspect its accounts were merely mechanisms for determining the service fee. That it had no authority to enter into contracts or create legal relations with third parties on behalf of FRE, or FCH and, therefore, lacked an essential characteristic of an agent. 27. The respondent on the other hand, contends that the relationship was one of agency if the Service Agreements are considered holistically. It points to the express designation of FRE as the “Principal”, and the appellant’s obligation to maintain relations with breeders on behalf of the principal, source owers, check their quality and ensure compliance with the principal’s specications. It further refers to FRE’s control over the appellant’s costs, including the agreed annual budgets, cost-plus remuneration and the right to inspect the appellant’s books. 28. The learned Judge found that the appellant and FRE had an agency relationship and rendered himself thus: 15. “ 14. The Court’s conclusion is that, notwithstanding the wording of the agreement, the net eect is that the respondent is an agent of FRE. A clear agency relationship is created by the said agreement as FRE retains control over the respondent in the nature of the business the two are engaged on. That is the reason why FRE has the right under the agreement ‘to inspect the books of the Service Provider at rst request’ in the event there is doubt as to the cost incurred by the respondent. It is unheard of where an independent entity will have to inspect the books of accounts of another entity to ascertain what costs have been incurred for purposes of re-imbursement. 15. Further, the relationship between the two is such that, all the costs incurred by the respondent are those of FRE. This is so because, the agreement itself spells out that in the event the invoices raised by the respondent provisionally and paid by FRE exceed the actual cost incurred in any year of operation, FRE is entitled to a credit from the respondent. Why would a consumer of a service control the actual expenses of a service provider if the latter was not its agent or subject to it in the execution of the services contracted? The answer is such control presuppose an agency relationship such that the principal is able to control the costs of execution of the services contracted for. In view of the foregoing, I rmly hold that notwithstanding that the agreement does not expressly state that the respondent is a commission agent of FRE, the net eect of the clauses, set out above, which spell the relationship between the two, the two are in an agency relationship. The income of the respondent is controlled by FRE in that, the two agree at the beginning of the year on a budget on the cost for which FRE pays the same to the respondent plus 5% thereon as the income for the latter.” https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1903/eng@2026-09-25 5

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29. A principal – agent relationship is a legal and economic arrangement where one party (the principal), hires or appoints another party (the agent), to act on their behalf, make decisions and conduct business with third parties. This Court dened an agent and how to recognize the agency relationship in Industrial & Commercial Development Corporation (ICDC) v Patheon Limited [2015] KECA 96 (KLR) as follows: “ The Concise Dictionary of Law, 2nd Edition, page 17 denes an “agent” as, “a person appointed by another (the principal) to act on his behalf, often to negotiate a contract between the principal and a third party.” In Garnac Grain Co. Inc. v H.M. Faure & Fair Dough Ltd and Bunge Corporation (1967] 2 All E.R. 353 Lord Pearson with the concurrence of the House used the words: The relationship of the Principal /Agent can only be established by the consent of the Principal and Agent. They will be held to have consented if they have agreed to what amounts in law to such a relationship, even if they do not recognize it themselves and even if they have professed to disclaim it… the consent must, however, have been given by each of them, either expressly or by implication from their words and conduct.” 30. The foregoing decision demonstrates that the existence of agency is not necessarily dependent upon an express declaration that one party is an “agent”. In that case, this Court inferred the principal-agent relationship from the appointment, reporting arrangements, control and conduct of the parties. 31. We have combed through the agreements between the appellant and FRE. The cumulative eect of the contractual provisions in the agreement leads us to the conclusion that the appellant was performing the relevant functions on behalf of FRE and FCH and subject to their control. The use of the term “Service-Provider” cannot, by itself, displace the substantive legal relationship created by the agreements. The nding of the learned Judge that the appellant was, in substance, an agent of FRE and FCH was, therefore, properly founded in law and in the contractual arrangements between the parties. 32. In Cotea Agencies Ltd v Commissioner of Domestic Taxes [2016], the Tax Tribunal considered the question of who between the principal and the agent may deduct input VAT, on the supply made to the agent on behalf of the principal and held that: “Based on the foregoing, the Tribunal is of the view that the taxable supply is deemed to be made to the principal and not the agent and that though a supplier may issue a tax invoice to the agent as if such supply was made to the agent in those circumstances, it is only the principal who may deduct input VAT on the supply made to the agent on behalf of the principal. The Tribunal’s considered view is that there must be the existence of a direct and immediate link between a particular input transaction and a particular output transaction or transactions giving rise to an entitlement to deduct input VAT and further that the right to deduct VAT charged on the acquisition of input goods or services presupposes that the expenditure incurred in acquiring such goods or services was a component of the costs of the output transactions that gave rise to the right to deduct the related input VAT.” 33. The principle emerging from that decision is that where an agent procures goods or services on behalf of, and at the expense of the principal, the agent cannot claim the input VAT relating to those acquisitions as its own. A supply made to an agent, on behalf of a principal is therefore deemed to be made directly to the principal, making the principal the sole party entitled to deduct input VAT. https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1903/eng@2026-09-25 6

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34. Turning to the third issue, the appellant submits that its services were exported services under section 2 of the VAT Act because FRE and FCH were based in the Netherlands and were the ultimate recipients and beneciaries of the services. It argues that the relevant test was the place of use or consumption, rather than where the services were physically performed. 35. The respondent contends that not all the services were consumed outside Kenya. In particular, the services relating to ower food, sleeves, labels and packaging requirements were provided to and utilized by Kenyan ower suppliers in preparing the owers for export and were, therefore, consumed in Kenya. 36. The learned Judge accepted that the location where the service is performed is not, by itself, determinative. However, he distinguished between the dierent services supplied by the appellant and found that the service concerning packaging requirements and consumables, including ower food, sleeves and labels, was consumed in Kenya. This was for the reason that it was provided to, and utilized by the Kenyan ower suppliers in preparing the owers for export. 37. Section 2 of the VAT Act denes exported services as follows: “ service exported out of Kenya" means a service provided for use or consumption outside Kenya.” The focus is not simply on where the service is performed, but on where the service is ultimately used or consumed. The Second Schedule to the VAT Act provides for the zero-rating of exported taxable services. 38. This interpretation has consistently been adopted by the Kenyan courts. In Commissioner of Domestic Taxes v Airo Limited [2026] KECA 1378 (KLR), this Court held that: “ 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 nally 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 nally used or consumed. Therefore, an exported service will be one which is provided for use or consumption outside Kenya." 39. The proper interpretation of tax legislation relies on a strict and literal construction of the statutory text. This Court has repeatedly armed that tax statutes must be construed according to the plain, ordinary meaning of the language used by the legislature and without importing words which Parliament has not used. In Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] eKLR, it was held that: “48. The above principles apply to general interpretation of statutes. However, when it comes to interpretation of tax legislation, the statute must be looked at using slightly dierent lenses. With regard to tax legislation, the language imposing the tax must receive a strict construction. https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1903/eng@2026-09-25 7

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Judge Rowlett in his decision in Cape Brandy Syndicate v I.R. Commissioners [1921] 1KB (cited by the appellants), expressed the common law position in this area when he stated; ‘…in a taxing Act one has to look at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used'.(Emphasis ours)” 40. Applying the statutory test of ‘use and consumption outside Kenya’ and without substituting the place of payment, contracting or performance for statutory test, we nd that the provision of ower food, sleeves, labels and packaging requirements was directed at the Kenyan suppliers. It was utilized in Kenya to prepare and package the owers for export. The immediate benet and use of those services therefore occurred in Kenya. Consequently, we nd no basis to fault the holding of the learned Judge. In the premise we nd that this appeal is lacking in merit, and is, therefore, dismissed with costs to the respondent. It is so ordered. DATED AND DELIVERED AT NAIROBI THIS 25TH DAY OF SEPTEMBER, 2026. W. KARANJA ............................. JUDGE OF APPEAL L. ACHODE ............................ JUDGE OF APPEAL L. NJUGUNA ............................. JUDGE OF APPEAL I certify that this is a true copy of the original Signed DEPUTY REGISTRAR https://new.kenyalaw.org/akn/ke/judgment/keca/2026/1903/eng@2026-09-25 8

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