Exported Services ‘Use or Consumption’ Test Ruling

Case Study: Commissioner Legal Services & Board Coordination v PVH Kenya Limited (Income Tax Appeal E112 of 2023) [2025] KEHC 14833 (KLR) (Commercial and Tax) (23 October 2025) (Judgment)

Case Summary

This was a tax appeal before the High Court of Kenya concerning a dispute over a Value Added Tax (VAT) refund. The Kenya Revenue Authority appealed a decision of the Tax Appeals Tribunal that had ruled in favor of PVH Kenya Limited, ordering the KRA to process its VAT refund.

The core legal issue was whether support services provided by PVH to its non-resident parent company in Hong Kong qualified as “exported services” and were therefore zero-rated for VAT, making the company eligible for a refund on input VAT.

Background Facts

• PVH Kenya Limited provides sourcing support services (e.g., identifying local suppliers, quality testing) to its affiliated non-resident company, PVH Far East Limited (PVHFEL) in Hong Kong.
• PVH Kenya filed a VAT refund claim of Kshs 3,232,755/- with KRA.
• The basis of the claim was that its services to PVHFEL were “exported out of Kenya” and thus zero-rated under the VAT Act. Since the company incurred input VAT on local expenses but had no output VAT (due to zero-rating), it was in a refundable credit position.
• The KRA rejected the refund, arguing that the services were actually consumed locally by the Kenyan apparel vendors who benefited from the quality control, and were therefore subject to standard 16% VAT.
• The Tax Appeals Tribunal allowed PVH Kenya’s appeal, finding that the services were provided to and consumed by PVHFEL in Hong Kong. The Tribunal held that the definition in the parent VAT Act overrode a conflicting regulation KRA relied on

Issues for Determination by the High Court

The Court framed the issues as follows:

1. Whether the Tribunal erred in law by applying the definition in the VAT Act over the definition in Regulation 13(1)(b) of the VAT Regulations, 2017.
2. Whether the Tribunal correctly determined the user and consumer of the services provided by PVH.

Court’s Analysis & Decision

Hierarchy of Law: VAT Act vs. VAT Regulations

This was the central legal conflict.

• VAT Act (Section 2): Defined an “exported service” simply as a “service supplied for use or consumption outside Kenya.” This is known as the “use or consumption test.”
• VAT Regulations, 2017 (Regulation 13(1)(b)): This regulation, which KRA relied on, added an extra condition that effectively disqualified a service if it was “provided in Kenya” and paid for by a non-resident.

The Court held that the Tribunal was correct to disregard the regulation. It invoked the fundamental principle of the “hierarchy of norms,” stating that subsidiary legislation (like regulations) cannot be inconsistent with or override the provisions of its parent Act (the VAT Act).

The Court found Regulation 13(1)(b) to be in “direct and irreconcilable conflict” with the VAT Act, as it sought to nullify the Act’s core provision for zero-rating exported services.

The “User and Consumer” of the Services

The Court endorsed the “destination principle” or “benefit accrual” test. This test looks at where the economic benefit of the service is ultimately realized and consumed.

KRA’s Argument: The Kenyan vendors were the direct beneficiaries (the “consumers”) because the services improved their products.

Court’s Finding: The Court rejected this argument. It distinguished between the subject of a service and the consumer of a service.

• The vendors were the passive subjects of the quality control and data-gathering exercises.
• PVHFEL in Hong Kong was the active consumer. It was the entity that, Contracted for the services, Received the output (reports, data, analysis).,paid for the services, Used the intelligence to make its global sourcing and business decisions.
• The physical location where the service is performed is not the determining factor; it is the location of the customer who utilizes the service for their economic benefit.

Final Order

KRA was obligated to process and pay the VAT refund as originally ordered by the Tribunal.

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