Vitrociset S.P.A. Kenya v Commissioner of Domestic Taxes [2018] KEHC 8640 (KLR) | Judicial Review Of Tax Decisions | Esheria

Vitrociset S.P.A. Kenya v Commissioner of Domestic Taxes [2018] KEHC 8640 (KLR)

Full Case Text

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA

AT NAIROBI

JUDICIAL REVIEW NO.  28 OF 2018

IN THE MATTER OF AN APPLICATION  BY THE APPLICANT  FOR LEAVE  TO APPLY FOR JUDICIAL REVIEW  BY WAY  OF AN ORDER  OF CERTIORARI, PROHIBITION  ND  DECLARATION  PURSUANT  TO ORDER 53  OF THE  CIVIL PROCEDURE  RULES, 2010

AND

IN THE MATTER OF TAX APPEALS TRIBUNAL ACT

AND

IN THE MATTER OF TAX PROCEDURES ACT

AND

IN THE MATTER OF THE FAIR ADMINISTRATIVE ACTION ACT, 2015

BETWEEN

VITROCISET S.P.A. KENYA.............................................APPLICANT

VERSUS

THE COMMISSIONER OF DOMESTIC TAXES..........RESPONDENT

RULING

1. By chamber summons dated 22nd January 2018 and supported by a statutory statement and verifying affidavit sworn by Justus Masabe the exparte applicant VICTROCISET S.P.A a limited liability company seeks from this court leave to institute Judicial Review proceedings against the respondent.  The Commissioner of Domestic Taxes (The Commissioner) for the orders of

a) Certiorari to remove to this court for purposes of being quashed the Kenya Revenue Authority notice under Section 42 of the Tax Procedures Act to the Managing  Director of Trust bank freezing the tax payer’s account

b) Prohibition to prohibit the Kenya Revenue Authority, its agents, or servants from taking any enforcement or recovery  measures  in respect of the  tax payer  based on the demand notice dated 15th January, 2018  directed to the applicant and the notice to Managing Director Diamond Trust Bank dated 15th January 2018;

c) A declaration that the respondent has breached the tax payer’s  right to fair  administrative action guaranteed  by Article  47  of the Constitution and

d) Compensation for breach of Article 47 of the Constitution.

2. The applicant also prays that the leave so granted do operate as a stay of enforcement and collection action taken by the respondent including the demand notice dated 15th January 2018 and the notice to the Managing Director, Diamond Trust Bank dated 15th January, 2018, which notices were allegedly not brought to the attention of the applicant and which should therefore be lifted.

3. The applicant also urged the court to grant any other orders and directions as it may deem fit and just to issue under the circumstances and that costs incidental to the application to abide by the result of the substantive motion.

4. The exparte applicant claims  that on 18th January 2018, its  manager went to  the Diamond Trust  Bank to undertake  routine  transactions when they  found that  surprisingly, the account had  been frozen  and therefore  they could  not carry out the intended transactions.  That upon inquiry it was informed that Kenya Revenue Authority was demanding taxes from the applicant.

5. It is alleged by the applicant that as at the time,  it had not received any demand for tax from Kenya Revenue Authority and that neither did it have notice of the order of Kenya Revenue Authority to freeze the bank accounts and only learnt of  the freezing from the Bank.  That upon further inquiry from Kenya Revenue Authority, the applicant was handed 2 notices both dated 15th January 2018 addressed to the applicant and the applicant’s bankers demanding kshs 75,179,105 and requiring immediate payment failure to which enforcement  measures  would be  instituted.

6. The other  addressed to the  managing  director  Diamond Trust  Bank required the bank to pay kshs  75,179,105 being tax  due by the  applicant  and  to be remitted to the Kenya Revenue Authority’s accounts held at Central Bank of Kenya.

7. The applicant  acknowledges  that  parties have been disputing over taxes claimed and that there is  a judgment delivered by the Tax Appeals  Tribunal  on 11th November  2017 in Tax Appeals No. 109  of  2015 Vitrociset SPA vs Commissioner of Domestic Taxes  where the  Tribunal annulled  the withholding  tax  assessment  issued  by Kenya Revenue  Authority against  the applicant  but upheld Kenya Revenue Authority’s assessment in respect of corporation tax, value  added tax and  disallowed  expenses.

8. It is however claimed by the applicant that following the  annulment, it would not  have been possible for  Kenya Revenue Authority to collect the taxes without amending the  assessment  in accordance with Section 31 of the Tax Procedures  Act whose  purpose “is to ensure the taxpayer is liable for the correct amount of tax payable in respect of the reporting period to  which the  original assessment  relates.”Further, that the judgment of the Tax Appeals Tribunal did not decree the tax which is now being demanded by the Respondent.

9. Accordingly, it  was  asserted  that the demand notices dated  15th January 2018  constitute  an amended  assessment and is  issued contrary to law as it does not provide the 30 days  period.

10. According to the applicant, it ought to have been given 30 days notice to pay up any taxes assessed.  Secondly, that obligation to pay tax as per the impugned notice should not be simultaneous with enforcement  proceedings for recovery of the demanded tax and thirdly that freezing of  the tax payer’s accounts  without  notice  amounts to breach of the tax payer’s right to fair administrative action guaranteed  by Article  47 of the Constitution and the Fair Administrative Action Act, 2015.

11. Further, that Section  42  of the  Tax  Procedures Act  relied  on by the respondent  is inapplicable  to  the circumstances  of this case.  It was asserted that a demand notice which does not  allow the taxpayer time to settle  the tax allegedly due is illegal, defective  and  null and  void and  malicious  and  that therefore  contrary  to Article  47  of the Constitution.

12. It is alleged  that the applicant  has already filed  a notice of  appeal to challenge the judgment and decision of the Tax Appeals Tribunal but that the demand notices by the Commissioner  are administrative decisions  which  were  made  in excess of jurisdiction and intended to paralyze the  applicant’s  operations  and  obligations hence  this court should intervene.

13. The respondent filed grounds of opposition and a preliminary objection both dated 1st February 2018 contending that the applicant’s  chamber summons is filed outside the provisions  of Section  29(6) and  (7)  of the Tax  Appeals Tribunal Act, 2013; that the application is filed in the wrong forum outside the provisions of Section 32 of the Tax Appeals Act, 2013; and that the application is filed contrary to legal notice No. 226 of 2015 (The Tax Appeals Tribunal, (Appeals to the High Court Rules).

14. In the grounds of opposition, the respondent adds that the applicant is challenging the judgment of the Tax Appeals Tribunal by way of Judicial Review proceedings.

15. Further, that the demand letter of 15th January 2018 is not a fresh assessment but what was contained in the judgment of the Tax Appeals Tribunal.

16. The respondent  contends  that the applicant  should prefer  an appeal  to the Commercial and  Tax Division of the High Court  and  that the orders sought  herein cannot  issue because this  court’s jurisdiction is ousted by virtue of Section 9(2) of the Fair Administrative Action Act, 2015.

17. It is further contended that the orders sought are a back door challenge to the findings of the Tax Appeals Tribunal.  It was further contended that Section  31  of the Tax Procedures Act  does not apply in this instance  because what is being  undertaken  is the enforcement  of the judgment of the Tax Appeals Tribunal as provided for by Section  29(6) of the Tax Tribunal’s Act hence the  applicant   is abusing  the  court process by hood winking  the court that  there are administrative issues, in order to simply obtain a stay of the judgment  of the Tribunal.

18. The respondent further contends that the application by the applicant/tax payer  is frivolous, vexatious  and  an abuse of the  court process, only meant to  delay  and  halt  the  collection of the taxes found to be due and  payable  hence it  is misconceived  and that the same  should be dismissed  with costs.

19. The parties’ advocates made oral submissions to canvass the application with Mr Kashindi advocate arguing the application on behalf of the applicant tax payer whereas the respondent was represented by Miss Mburugu advocate.

20. Mr Kashindi reiterated the grounds, facts and depositions of the  applicant  and  maintained  that the  respondent  should  have issued  notice and  given  time to the  applicant  to  settle  the taxes  demanded  before proceeding to enforce by freezing the applicant’s  accounts  with Diamond Trust Bank  which is contrary to Section 32 of the Act that requires  notice of 30  days prior  to enforcement, not to demand  and  enforce  simultaneously.

21. According to the applicant, failure to allow it time to pay is abuse of statutory power as Section 42 of the Act, under which the 2 notices were issued had not crystallized.

22. Mr Kashindi maintained that his client is challenging the administrative power exercised by  the Commissioner hence the matter lies within the Judicial Review jurisdiction.  He relied on the case of Council of Civil Service Union vs Minister for Civil Servicewhere the learned Lord Diplock defined what Judicial Review is.

23. It  was submitted that the Commercial  and  Tax Division  of the High Court  will not  issue Judicial  Review  reliefs  sought herein which are intended to deal with breach of the Constitution.

24. Further, that whereas the applicant is appealing against the decision  of the Tax  Appeal’s Tribunal made in  11th December  2017, but that the breach complained of hereto is the infringement of the right to fair administrative action and as such, it is  only this court which has  jurisdiction  to hear and  determine  the fairness, legality or procedural propriety  of the impugned notices  issued on  15th January  2018.

25. It was further submitted that when enforcing the judgment of the Tribunal, the law must be followed. In this case, it was submitted that the respondent must  recompute figures  of assessment  because the  tribunal did not  give any specific  figures  for collection by the Commissioner  as required under Section 31 of the tax Procedures Act. Counsel for the applicant maintained that it is impossible to collect tax without reassessing  the collectable amount and that there is no decree issued stating the amount  assessed  for  collection. It was therefore submitted that the applicant had shown an arguable prima facie case for consideration at the substantive stage.

26. With respect  to the prayer  for stay, it  was submitted that  the  applicant  company’s  operations  had been disrupted  by the freezing of its account  and that it was unable to  pay its  suppliers, salaries  or operating  expenses which act  on the part of  the  respondent  is considered to be an economic sabotage as it will cause  redundancy and closure, hence, a stay of implementation of the notices should issue, since  taxes  will be only be  paid  if the  company is in operation. It was submitted that the applicant had  paid taxes from 2014 todate and that so far, it has paid 173  million income tax; 162 million VAT and other taxes during  the  pendence of this dispute.

27. It was further submitted that the tax payer had submitted 7. 5  million security when the matter was before the Tax Appeals Tribunal, which is adequate  security.

28. In opposition to the application by the applicant, and relying on the preliminary objection and the grounds  of objection filed, the  respondent’s counsel Miss Mburugu submitted that there is a judgment by the Tax appeals Tribunal made on 11th December  2017 and that it was clear that the Tribunal never interfered with  the assessments which are claimed herein in the notices.

29. Further, that the applicant is enforcing the judgment of the Tribunal and that Section 29(6) of the Act stipulates that when the judgment is delivered, it takes effect on the date of judgment hence, the aggrieved  tax payer could only  appeal the decision  and seek stay in the Commercial and Tax Division of  the High Court, and not to approach this court by way of Judicial  Review.

30. It  was submitted that albeit  an appeal was filed  against the judgment  of the Tribunal, an appeal  perse is not  a stay  and that only the court handling the appeal could grant stay of  execution of the  judgment of the Tribunal as stipulated  in Rule  20 of the Tax Appeals Tribunal Act Rules  which confirms Order  42  of the Civil Procedure  Rules  on stay pending appeal.

31. It was further submitted that there is no order freezing the  applicant’s accounts but that the respondent only issued  a notice to the tax payer to settle the tax decreed by a competent  Tribunal as per Section 42 of the Tax Appeals Tribunal Act, as the power to collect tax had crystallized immediately the decision of the  tribunal  was  delivered.

32. On allegations that a reassessment ought to have been done, it was submitted that no fresh assessment was necessary as that would be subject to another objection to the Tax Appeals Tribunal hence the application is an abuse of court process.

33. It  was  also submitted that should the court  grant  leave  and  stay, it  should order  that a full guarantee of the claimed  tax be  given  since the applicant  is a subsidiary  company  of an Italian Company whose contract with the Kenyan Government had lapsed .

34. In a brief  rejoinder, Mr Kashindi submitted on behalf of the applicant stating that the sums of money claimed are not  contained in  the  judgment  of the Tax Appeals Tribunal  and were not the same sums of money in contest before the Tax Appeals Tribunal.

35. Further, that these proceedings are not challenging  the decision of the Tribunal but the demands and enforcement without notification. It  was also submitted that the tax payer  has been in Kenya  for the last 20 years managing a space station in Malindi and involved in Government to Government contracts hence it  cannot  ran away  as it  has been paying  taxes.

36. It  was further submitted  that there  was no rebuttal  of the depositions in the affidavits and that due  to the hardship occasioned by  the enforcement notice freezing the applicant’s account, the company should be allowed  to operate before the Government  can collect tax.

DETERMINATION

37. I have carefully considered the  applicant’s  chamber summons the statutory statement, grounds, annextures and verifying  affidavit I have also considered  the respondent’s grounds of opposition and preliminary objection, as  well as the  respective  parties’ advocates  oral submissions.

38. The main issues for determination in my humble view are

1) Whether this court has jurisdiction to hear and determine  this matter.

2) Whether the applicant is entitled to the orders for leave and stay sought.

3) What orders should the court make.

39. On the first  issue of  jurisdiction of the court, the  respondent  in its  preliminary objection notice filed on 2nd February 2018 contends that  this court’s  jurisdiction  in the matter is  divested  for reasons that the application seeks to challenge  the  judgment of the Tax Appeals Tribunal made on 11th December  2017 yet the law under Section 32 of the Tax Appeals Tribunals Act, 2013 and LN No. 226/2015 the Tax Appeals Tribunals (Appeals to the High Court  Rules provides for an appeal process from the Tax Appeals Tribunals to the High Court and not a challenge   by way of  Judicial Review.

40. It also contended that Section 9(2) of the Fair Administrative Action Act, 2015 bars this court from hearing a matter where an alternative remedy is provided for.

41. The respondent  further contends that  Section 29(6)  of the Tax Appeals Tribunal  stipulates  when the decision  of the tribunal takes  effect which  is on the date of notice  of the decision  and that therefore the applicant cannot seek to challenge that decision by way of Judicial Review  but in the appeal already filed where it can also seek for stay under Order  42  of the Civil Procedure Rules. The first question is whether the preliminary objection raised meets the threshold laid in the Mukisa Biscuits manufacturing Company Ltd vs West End Distributors Company Ltd [1969] EA 696in that it must raise a pure point of law which can determine the application without delving into the merits.

42. A preliminary objection consists of a point of law which had been pleaded, or which arises by clear implication out of pleadings, and which if argued as a preliminary objection may dispose of the application or suit.  In the Mukisa biscuit case(supra), it was held that examples of preliminary objection are (1) an objection to the jurisdiction of the court or a plea of limitation or a submission that the parties are bound by the contract giving rise to the  suit to refer the dispute to arbitration.

43. The court further held that a preliminary objection raises a pure point of law which is argued on the assumption that all the facts pleaded by the other side are correct. It cannot be raised if any fact has to be raised if any fact has to be ascertained or if what is sought is the exercise of judicial discretion.

44. In the instant case, considering the issue raised on jurisdiction  of this court to hear and determine the matter, I am satisfied  that the preliminary objection is a pure point of law as it is grounded on the issue of jurisdiction of the court.

45. This is so because in the celebrated case of Motor Vessel ‘Lilian S’vs  Caltex  Oil (K) Ltd  CA 50/1989, the court held that  a  question of jurisdiction  may be raised by a party  or by a court  on its own motion and  must be decided  forthwith  on the evidence  before the court. In the aforesaid case of Motor Vessel ‘Lilian S’ the Court of Appeal made it clear that jurisdiction is everything, without  which a court of law  acts in vain.  Further, that once a court of law establishes that it has no jurisdiction to hear and determine a matter, it must down its tools and do/say no more.

46. The respondent  contends that this court  is bereft of jurisdiction to hear  and  determine the application  as intended because the application seeks to challenge the judgment  of the Tax Appeals Tribunal made on  11th December  2017  yet Section 32  of the Tax Appeals  Tribunal Act and  LN No. 226/2015(Tax Appeals  Tribunal Appeals to the High Court  Rules 2013) clearly stipulate that an appeal from the Tax Appeals  Tribunals lies to the High Court  and  therefore judicial review  jurisdiction  herein is ousted  as provided for by Section  9(2)  of the Fair  Administrative  Action Act,  2015. Further, that what the respondent was doing by issuing  enforcement  notices  was to implement  the  judgment  of Tax Appeals  Tribunals of  11th December  2017  as there is no stay issued by  the High Court.

47. It  was also contended that in any event, only  the High Court  in an appeal  as filed by  the  applicant  can  stay the  enforcement  of the  assessed  tax as  the  said judgment  took effect  on the date of judgment as per Section 29(6) of the Tax Appeals  Tribunal Act.

48. The impugned notices dated 15thJanuary 2018 demand immediate payment of tax arrears amounting to kshs 75,179,105 made out as follows

Tax head Principal Penalty Interest Total

1. VAT 31,379,125 - 174483323 48,827,4482

2. Corporate tax 15,032,253 3,773,133 7,546,266 26 351,657

Total 46,411,383 3,773,133 24,994,589 75,179,105

49. The notices are addressed to the applicant and its bankers Diamond Trust Bank Ltd under Section 42 of the Tax Procedures Act, 2015.

50. The respondent claims that it  was  by the two  named notices, simply enforcing  the judgment  of  11th December  2017  hence  this court  cannot interfere  with the process which process can only be interfered with by  the High Court  on appeal vide Order  42  of the Civil Procedure  Rules.

51. I have read the judgment  dated  11th December  2017, I have not  seen any figures  similar  or closer  to the amounts  of tax under the  three heads  forming the  subject  of the  appeal proceedings before the Tax Appeals Tribunal.

52. For this court to find that the respondent was implementing judgment of 11th December 2017, it must be shown copy of decree and also a comparison of the amounts claimed before the appeal was filed to the Tax Appeals Tribunal and how those figures had accumulated to over seventy five million  now being claimed.

53. Further, if the tax due as per the judgment is recoverable  immediately  on the date the notice of the  decision is  given, or  on such date as the tribunal may give  in the notice, then it is expected  that the decision  of the Tribunal discloses exactly  how much tax  is due for collection.

54. For  this court  therefore to find that  it is the  judgment  of  11th December  2017 which  was  under implementation through the impugned notices, there  must be disclosure of the total sum of tax claimed. There is no affidavit  evidence disclosing  how the  over Ksh 75 million  was  arrived  at by the respondent  which then raises  a triable issue  capable of  indepth investigation  at the substantive stage, and whether  the notices given were indeed intended to implement the  judgment of 11th December  2017  or contained reassessed  tax  which would  be subject of another  Notice and possible objection altogether.

55. This court at this stage entertains  doubt  as to whether  there is full  disclosure  by the respondent  and that  doubt must go to the  benefit  of the  applicant.

56. Accordingly, I find and hold that the preliminary objection as raised invites discretion of the court hence it cannot stand.  It must be disallowed and I hereby disallow it.

57. This court agrees that section 32 of the Tax Appeals Tribunal Act and the procedures thereunder stipulate that an appeal from the decision of the Tribunal lies to the High Court. Further, that Section 9(2) of the Fair Administrative Action Act 2015 bars this court from hearing and determining Judicial Review proceedings where there is an effective alternative remedy by way of internal review or appeal. However, the respondent has not at this stage demonstrated that the demanded tax is related in any way to the judgment of the tax Appeals Tribunal.

58. This finding does not, however, preclude the respondent from enforcing the judgment of the Tax Appeals Tribunal where there is no stay of its implementation and neither has this court precluded the applicant from seeking for stay of enforcement of the judgment of the Tax Appeals Tribunal, which stay can be sought from the court hearing the appeal.

59. For  the above reasons , this  court finds  that the application  for leave  to apply  is not frivolous  or vexatious  or abuse  of legal process.  It raises a prima facie arguable case which may or may not succeed but the applicant in such circumstances must be given the benefit of doubt to ventilate its grievances.

60. Accordingly, I grant  to the applicant  leave to  institute  Judicial Review  proceedings  to challenge  the  respondent’s  decisions  made vide two demand  letters dated  15th January 2018 as prayed  in prayers Nos 2 a-d of the chamber summons dated 24th January 2018.

61. The substantive motion shall be filed and served within 10 days from the date hereof.

62. I however must  mention  that the applicant  did not  require  any leave of court to institute Judicial Review  proceedings  where the prayers sought are for  compensation and  a declaration. Leave is only necessary in seeking the traditional judicial review orders of mandamus, certiorari and prohibition as stipulated in sections 8 and 9 of the Law Reform Act and Order 53 of the Civil Procedure Rules, 2010.

63. On the prayer for stay of implementation of the said notices, the applicant claims that it was never given an opportunity to consider the claimed taxes as the notices demand for immediate payment of tax, which tax it was never made aware of prior. There is no denial that the notices as issued demand for  immediate payment of the claimed tax, which presupposes  that  the applicant  was aware of the sums  claimed  in  the notices  prior  to that date, yet the respondent has not demonstrated at this stage as to when the alleged tax became due and payable by the applicant, especially where the notices  issued do not make any reference to the judgment of 11th December  2017.

64. Thus, there is nothing to demonstrate that the applicant had been notified that it owed over shs 75 million prior to the date of the notices.  An agency notice to the bank effectively freezes the tax payer’s accounts until all the demands are met.

65. That being  the case, and  in the absence of any  rebuttal that the applicant stands to suffer from redundancy as well as non payment  of salaries and other obligations to its  suppliers, I find  that the applicant  has demonstrated that unless  a stay is granted, the application as intended, if successful shall be rendered nugatory and  the applicant  shall be  rendered  a mere pious  explorer in the judicial  process  as it  shall not be  in existence.

66. Accordingly, I hereby order  that the leave herein  granted   shall operate as stay of implementation of the two notices issued on 15th January 2018 to the applicant and to the applicant’s  Bankers Diamond Trust Bank Ltd respectively as sought in prayer No. 3 of the chamber summons  dated  24th January  2018  until further  orders of  this court. However, this stay shall be conditional upon the applicant providing a BANK GUARANTEE of Kenya Shillings Fifty Million (Kshs50,000,000) from a reputable local Bank within 14 days from the date of this ruling, which guarantee shall also be filed in court for approval as security.

67. Costs shall be in the main motion as may be ordered.

Dated, signed and delivered in open court at Nairobi this 7th day of February, 2018.

R.E. ABURILI

JUDGE

In the presence of:

Miss Musau h/b for Kashindi advocate for applicant

Mir Ochieng h/b for Miss Mburugu for advocate for the respondent

CA: Kombo