The High Court has ordered the Jomo Kenyatta University of Agriculture and Technology (Jkuat) to pay a bill of Sh296 million in unpaid value-added tax (VAT) and interest after purchasing the ICEA building in Nairobi from an insurance company about seven years ago.
Justice Peter Mulwa said the indemnity instrument issued by Jkuat to the seller of the building, ICEA Lion Life Assurance Company Limited, was binding, hence the need for the university to pay the tax liabilities arising from the deal.
“Judgment is hereby rendered for the Plaintiff (ICEA) against the Defendant (Jkuat) to direct the Defendant to respect the terms of the Indemnity Deed dated August 1, 2019 and submit it to the Court on August 5, 2019 and to immediately pay the Plaintiff,” the court said in its decision dated October 4, 2024, which terminated Seven-year legal battle over tax liabilities: “Sh296,000,000 is VAT paid to KRA in accordance with the terms of the settlement agreement dated 30 September 2019.”
The dispute arose from the sale of the iconic ICEA Towers along Kenyatta Street in Nairobi’s central business district, in which the Kenya Revenue Authority (KRA) was also involved as an interested party.
ICEA Lion sold the property to Jkuat in 2015 for Sh1.85 billion. Under the terms of the sales agreement, Jkuat was to settle VAT liabilities amounting to Sh296 million. However, the University sought to waive this VAT through the KRA and in a letter dated 4 September 2017, the tax official confirmed that the transaction was eligible for zero-rating.
Based on this confirmation, JKWAT refused to pay the VAT, believing that the transaction was exempt. However, ICEA Lion expressed concern about future liabilities and asked Jkuat to provide written guarantees or compensation if KRA backs down from its position.
Jkuat subsequently issued a deed of indemnity on 1 August 2019, pledging to compensate ICEA Lion if any VAT or fines are later claimed.
Tax application
In October 2019, KRA issued a formal VAT demand from ICEA Lion, which totaled Sh347 million with penalties and interest due. In an attempt to avoid further penalties, ICEA Lion entered into a settlement agreement with KRA and paid the VAT in installments totaling Sh296 million.
However, when ICEA Lion sought compensation from Jkuat under the compensation, the university refused, citing KRA’s previous confirmation of the zero rating. This refusal prompted ICEA Lion to file suit in the Supreme Court.
ICEA Lion argued that the indemnity bond was clear and unconditional, requiring Jkuat to cover any VAT liabilities arising from the sale of the properties. The company claimed that it acted in good faith by settling the VAT claim with the KRA to prevent further penalties from accumulating.
ICEA stressed that the validity of compensation was not in dispute and that Jkuat must fulfill its obligations under the agreement. The insurance company also rejected Jacquat’s claims that it should have participated in the VAT settlement negotiations, stating that there was no legal or contractual requirement for the university to be involved.
In response, Jkuat said it relied on the KRA’s letter dated 4 September 2017, confirming the zero rating status of the transaction. The university maintained that it had fulfilled its obligations by obtaining the KRA exemption, and that ICEA Lion’s unilateral settlement with the tax levy was unjustified and malicious.
Jkuat also claimed that she was unfairly blindsided by the proceedings between ICEA and KRA. The university claimed it was unaware of the Tax Court proceedings and the resulting settlement agreement. It asserted that ICEA Lion had acted in bad faith by not being informed of the negotiations and accused the insurer of unfairly using the situation to demand payment of compensation.
The KRA defended its reversal on the VAT case, arguing that the initial zero per cent assertion was based on incorrect information. The KRA explained that Jacquat Island was not registered for VAT in 2015, which is a requirement under the VAT Act for such transactions to qualify as zero-rated VAT. As a result, KRA’s previous decision to grant a zero rating was invalid.
The KRA emphasized that the special tax provisions are only binding between the applicant and the tax authority and cannot be extended to other parties such as ICEA Lion. The authority insisted that the VAT was legally due and that ICEA Lion was right to pay it.
In his ruling, Justice Molowa ruled that Jkuat must honor the compensation agreement and compensate ICEA Lion with the Sh296 million it paid to KRA.
The judge rejected Jaquat’s argument that she should have been consulted about the VAT settlement. The court found that the indemnification did not require ICEA Lion to involve the university in negotiations with KRA.
Justice Mulwa noted that Jakwat had already agreed to assume any VAT liabilities under the compensation, making ICEA’s actions reasonable and legal.