Automated Summary
Key Facts
Cale Infrastructure Construction Company Limited was subcontracted for the Nairobi Expressway Project, initially granted tax exemptions for Customs Duty, VAT, IDF, and RDL on construction-related goods. After an audit (2020-2022), the Commissioner of Customs assessed Kshs. 6,924,759,976 in taxes. The appellant paid Kshs. 3,505,951 but contested the remaining amount. The Tax Appeals Tribunal dismissed the appeal, upholding the tax demand. The High Court affirmed this, ruling that project completion (via a May 2022 certificate) and bond cancellation terminated exemptions, and the National Treasury's payment undertaking did not absolve the appellant of tax liability.
Tax Type
Customs Duty, Value Added Tax (VAT), Import Declaration Fees (IDF), and Railway Development Levy (RDL)
Issues
- Whether the appellant was entitled to continue enjoying tax exemptions on machinery, equipment, and motor vehicles valued at Kshs. 359,047,353/=, given that the Tribunal and respondent argued the project was substantially completed on 13th May 2022, as evidenced by the Completion Certificate and public opening of the expressway, thereby rendering the exemptions inapplicable.
- Whether the Tribunal erred in concluding that the cancellation of customs security bonds in 2022 for hardware tools and spares extinguished the tax exemption, with the appellant contending that the bond cancellation did not explicitly cover these items and that the exemption should persist during the defect liability period.
- Whether the respondent erroneously demanded Kshs. 5,698,971,927 in taxes on materials for which the National Treasury had undertaken to settle, with the appellant arguing that the government's commitment should absolve it of liability, while the Tribunal held that the statutory duty to pay taxes remained with the appellant as the importer.
Tax Years
- 2021
- 2022
- 2020
Holdings
- The court confirmed the Tribunal's ruling that the primary tax liability for materials (Kshs. 5.698 billion) remained with the appellant despite the National Treasury's undertaking to pay. It emphasized that the letter of undertaking did not transfer legal responsibility from the taxpayer to the Treasury, and the respondent was entitled to recover taxes from the appellant if the Treasury defaulted.
- The court rejected the appellant's challenge regarding the Kshs. 863 million tax demand on hardware tools and spares. It found that the Tribunal's determination, based on bond cancellation requests explicitly listing these items, was legally sound. The court clarified that the cancellation of customs bonds, even without explicit mention of all categories, conclusively ended the exemption regime for the listed items.
- The court upheld the Tax Appeals Tribunal's decision that the tax exemption for machinery, equipment, and motor vehicles lapsed upon the issuance of the Completion Certificate on 13th May 2022, which marked the end of the construction phase. The tribunal correctly distinguished between substantial and final completion, noting that the Performance Certificate was not required for the exemption to lapse. The court emphasized that the appellant cannot claim continued exemption after the project was operational and bonds were canceled.
Remedies
The appeal was dismissed as devoid of merit. The Tax Appeals Tribunal's decision dated 19th July 2024 is upheld in its entirety. Each party shall bear its own costs of the appeal.
Tax Issue Category
- Deductibility / Allowances
- Customs Valuation / Classification
- Other
Legal Principles
- The court ruled that the statutory duty to pay taxes under applicable tax statutes remains with the importer (appellant), regardless of any undertakings by the government. The respondent was lawfully entitled to seek recovery from the appellant as the primary taxpayer.
- The court held that the appellant's legitimate expectation based on the government's undertaking to pay taxes did not extinguish their primary legal obligation as the taxpayer. The National Treasury's commitment did not legally transfer the duty to pay from the appellant to the Treasury, and thus the respondent was entitled to recover the taxes from the appellant.
- The court emphasized that the issuance of a Completion Certificate under the project agreement indicated substantial completion sufficient for handover, even without a Performance Certificate. The absence of a Performance Certificate does not imply the project is incomplete for tax exemption purposes.
Disputed Tax Amount
6921254025.00
Precedent Name
Tax Appeals Tribunal in TAT Appeal No. E416 of 2023
Cited Statute
Tax Procedures Act
Judge Name
Frank Mugambi
Passage Text
- 32. The letter of undertaking did not have the legal effect of transferring the statutory liability from the appellant to the National Treasury, nor did it create an enforceable obligation on the part of the respondent to pursue payment from the Treasury in place of the appellant.
- 15. On that account, I agree with the Tribunal that the appellant cannot, on the one hand, benefit from the commercial operation of the expressway, cancellation of its bonds, and commissioning of the road, and on the other hand claim that the project is still incomplete for purposes of retaining exemption privileges. The issuance of the Completion Certificate under Clause 17.2(d)(A), together with the supporting documentation, conclusively indicates that the construction phase had come to an end.
- 24. In any event, the Tribunal correctly observed that the tax exemption granted to the appellant was conditional upon the provision and maintenance of customs security bonds. The request for, and eventual cancellation of, those bonds signified the end of the construction phase and extinguished the corresponding tax privileges. Once the bonds were released, particularly with respect to hardware tools and spares, the appellant could no longer assert entitlement to duty-free treatment of those items.