[2017] KEHC 3390 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

CONSTITUTIONAL & HUMAN RIGHTS DIVISION

MISCELLANEOUS CIVIL APPLICATION NO. 27 OF 2014

IN THE MATTER OF CUSTOMS AND EXCISE ACT CHAPTER 472, LAWS OF KENYA, THE VALUE ADDED TAX CAP 476 OF THE LAWS OF KENYA (REPEALED) THE KENYA REVENUE AUTHORITY ACT AND THE EAST AFRICAN COMMUNITY CUSTOMS MANAGEMENT ACT, 2004

AND

IN THE MATTER OF AN APPLICATION BY BETA HEALTHCARE INTERNATIONAL LIMITED FOR LEAVE TO APPLY FOR JUDICIAL REVIEW ORDERS OF CERTIORARI AND PROHIBITION

BETWEEN

REPUBLIC…………………………………………..APPLICANT

VERSUS

KENYA REVENUE AUTHORITY……….……….RESPONDENT

EX PARTE- BETA HEALTHCARE INTERNATIONAL LIMITED

JUDGEMENT

1. In these proceedings, the ex parteapplicant herein, Beta Healthcare International Limited, seeks the following orders:

(1)THATthis Honourable Court be pleased to grant the Applicant Company an ORDER OF CERTIORARI to remove into the High Court and quash the decision made by the Respondent requiring the Applicant Company to pay the Respondent Kshs 111,147,413/- as VAT for the period of January 2008 to November 2013.

(2)THATthis Honourable Court be pleased to grant the Applicant Company an ORDER OF PROHIBITION directed at the Respondent prohibiting it, whether by itself, its agents, and/or its servants or otherwise howsoever from purporting to take any action against the Applicant Company in attempt to recover the total sum of Kshs 111,147,413/-.

(3)THATthis Honourable Court be pleased to grant the Applicant an ORDER OF PROHIBITION directed at the Respondent prohibiting it, whether by itself, its agents, and/or its servants or otherwise howsoever from purporting to take any action that may violate the rights of the Applicant Company.

(4)THATthe costs of this application be in the cause.

2. The grounds upon which the application was based were as hereinbelow.

3. The Applicant is a limited liability company involved in the production, manufacturing and packaging of pharmaceutical products. As early as the year 1995, there was a general consensus between the then Ministry of Health, the Treasury and the Federation of Kenya Pharmaceutical Manufacturers, that all taxes (i.e. Value Added Tax and Customs Duty), normally levied on raw materials for packaging and manufacture of medicaments were to be exempted.

4. Following that understanding, both the Value Added Tax Act (hereinafter referred to as the VAT Act) and the Customs and Excise Act, which had the same exemptions regime, under Item 26 of Part B of the Eighth Schedule exempted from all taxes, raw materials and packaging for the manufacture of medicaments.

5. It was averred that in the year 2001, both the VAT Act and the Customs and Excise Act were amended vide the Finance Act of 2001, which inadvertently removed the exemptions regime in both Acts. Without noticing the error and being aware that the spirit of both legislations was that both VAT and Customs Duty for raw materials and packaging materials for the manufacture of medicaments ought to be exempted, the Respondent ensured that the administrative systems of exemptions remained in force. Further, the Respondent and the Treasury continued to exempt from payment of all taxes, raw materials and packaging for the manufacture of medicaments. In a nutshell, all clearance systems remained as before. However, when the Federation of Kenya Pharmaceutical Manufacturers noticed that there was an error in the Finance Act, 2001, which operated to delete the provisions of both CEA and VAT Act that had exempted raw materials and packaging materials from payment of VAT and Customs Duty, they wrote to the Minister of Finance asking him to immediately correct the anomaly. The Minister at the time being of Finance corrected the anomaly in 2002 in two ways: The exemptions regime was re – introduced in the CEA and the CEA was amended to include a definition that broadened the meaning of duty to include VAT.

6. It was averred that in the year 2004, the East African Community Customs and Management Act (hereinafter referred to ‘EACCMA’) was passed, which Act operated to repeal the provisions of the Customs and Excise Act and under the fifth schedule, Part B, Item 16 of EACCMA, packaging materials and raw materials for the manufacture of medicaments are exempted upon recommendation of the authority responsible for the manufacture of medicaments. Accordingly, the Minister for that time being of Health periodically made recommendations to the Treasury and the Respondent to have raw materials exempted from payments of VAT and Customs Duty in accordance with section 23 of the VAT Act which allowed him to do so and fifth schedule, Part B, Item 16 of EACCMA. Additionally, the Respondent established a system known as the Simba System for collection of revenue wherein they introduced an exemption code number B0260, which code automatically operated to exempt all raw materials raw materials and packaging materials for the manufacture of medicaments from payment of VAT and duty.

7. The applicant averred that this been the position to date, and all local players in the pharmaceutical industries involved in either importation of raw materials and production and packaging materials for the manufacture of medicaments have benefitted from these exemptions which exemptions applied to all local manufacturers of pharmaceutical products and not just the Applicant Company. It was explained that the main reason for the exemptions regime was to make the costs of basic health care and medicines affordable to the ordinary Kenyans.

8. The applicant’s position was that owing to the fact that it is involved in the production, manufacture and packaging of pharmaceutical products was entitled to such exemption.

9. However, contrary to natural expectations, the Respondent wrote a letter dated 23rd December 2013 to the Applicant Company alleging that there was unpaid VAT. Further, the Respondent made the said decision requiring the Applicant Company, who has been exempted from paying VAT, to pay VAT amounting to Kshs 111,147,413/- for the entire period covering of January 2008 to November 2013 within 30 days from the date thereof. Further, to the foregoing, the Respondent seeks to advance the position that only Customs Duty is exempted and not VAT.

10. In the applicant’s view, the Respondent’s decision is unreasonable, oppressive and excessive and unfair for the following reasons:

i. Under the EACCMA, duty means, ‘includes any cess, levy, imposition, tax or surtax imposed on any tax.’ Duty in this context must therefore include VAT.

ii. Further, it was settled practice that both VAT and Customs Duty were exempted on raw materials and packaging materials for the manufacture of medicaments. The fact that there were some errors by the Respondent and the Treasury which inadvertently led to omissions of the exemptions regime by the Respondent and the Treasury should not be visited upon the Applicant Company.

iii. The Respondent’s mandate under the Kenya Revenue Authority Act includes, accessing and collecting all taxes. The Respondent, in pursuit of this mandate created the Simba System and further introduced the exemption code B0260, whereby, once an entry is made, it indicates whether it falls under raw materials and packaging materials for the manufacture of medicaments, and as such VAT is automatically removed, which was so for the Applicant Company. It is therefore the Respondent’s own infrastructure that operated to automatically exempt the Applicant Company from the payment of VAT, and therefore the Respondent cannot seek to benefit from its own wrongdoing.

iv. In any event, there was no loss occasioned to the government. Even if duty had been paid, it would follow that the Respondent would pass the tax burden to the ultimate consumers of pharmaceutical products as the Applicant Company would be able to claim back refunds. As a result, the net loss would be nil for the Respondent. The Respondent has instead purported to ask for VAT at a time when the Applicant Company cannot claim refunds and as such will have to bear the loss themselves. The Respondent is therefore enhancing injustice, inequity and unfairness upon the Applicant Company especially since the government has been occasioned no loss by the failure of the Applicant Company to pay VAT.

v. Further, assuming tax was due, although the position of the Applicant Company is that it was not, the industry players would have been ready and willing to pay the said tax. The industry players however never paid for the reasons that:

1. The legislation at the time did not provide for the exemptions but the Respondent continued with the administrative systems of exemptions. The mistake was therefore on the part of the government for failure to correct error in the legislation. It was therefore absolutely no fault on the part of the industry players.

2. In any event, this is one of the circumstances contemplated by Section 20 of the VAT Act 2013, and ideally the Commissioner should rely on the said section and by not doing so he is choosing to be unreasonable.

vi. It is the government through the Ministry of Health in conjunction with the Treasury, the Respondent and the Federation of Kenya Pharmaceutical Manufacturers who made the decision to exempt from VAT and Customs Duty all local players involved in importation of all raw materials and packaging materials for the manufacture of medicaments.

vii. The exemption applied to all local manufacturers of pharmaceutical products and was never meant to apply specifically to the Applicant Company alone.

viii. The Applicant Company is by law entitled to the said exemption from paying VAT and has been enjoying that right.

ix. The aforementioned decision was made in view of the talks the Government through the Treasury had with the Federation of Kenya Pharmaceutical Manufacturers wherein the latter explained that were the local players in the pharmaceutical industry to be subjected to payment of VAT and Customs Duty, the resulting effect would be that the cost of medicine would be too high and beyond the reach of ordinary Kenyans.

x. Accordingly, the aforementioned decision was made in an attempt to make basic health care and cost of medicine affordable to ordinary Kenyans.

xi. The Applicant Company has been enjoying the exemptions since the year 2006 but the Respondent has without just cause woken up and purported to make the said decision.

11. To the applicant, the decision of the Respondent is malicious, grossly unfair and disproportionate for the reasons that:

i. The Respondent was always involved in the decision to exempt from the payment of VAT and Customs Duty all importation of raw materials and packaging for the manufacture of medicines. Accordingly, demanding for the payment of VAT from the Applicant Company for the period covering January 2008 to November 2013 is punishing the Applicant Company for the decision made by the Government in conjunction with the Respondent.

ii. Tax legislation always gives the government and the Respondent’s Commissioners the discretion with regard to assessment of tax, which decision is to be exercised judicially and quasi – judicially. The Respondent, having looked at the implications of the exemptions, has always cleared and certified the goods of the Applicant Company. It is therefore grossly unfair for the Respondent to require the Applicant Company to suffer for the lawful exercise of the Respondent’s discretion.

iii. In any case, assuming that the discretion was not exercised it would follow that the Respondent would pass the tax burden to the ultimate consumers of pharmaceutical products and the Applicant Company would be able to claim back refunds. As a result, the net loss would be nil. The Respondent has instead purported to ask for VAT at a time when the Applicant Company cannot claim refunds and as such will have to bear the loss themselves. The Respondent is therefore enhancing injustice, inequity and unfairness upon the Applicant Company.

iv. The Government has all along implemented the exemption scheme. It therefore breathes of malice that the Respondent wakes up after a very long time and after the scheme is in motion to claim VAT from the Applicant Company and especially at a time when the Applicant Company cannot claim a tax refund. This goes against the policy of tax legislation.

v. Furthermore, the Respondent confirmed and certified all the entries of the Applicant Company. It is therefore callous for the Respondent to wake up and claim that they did not.

12. According to the applicant the amount of Kshs 111,147,413/- the Respondent demanded from the applicant would translate into loss of millions of shillings for the Applicant Company, which money, the Applicant Company would not be able to recover.

13. The facts of this application were similar to those in Nairobi High Court JR Misc. Appl. No. 460 of 2013 – Republic vs. Kenya Revenue Authority ex parte Universal Corporation Ltd in which this Court expressed itself inter alia as follows:

“In this case, it is clearthat prior to the year 2001, the applicant enjoyed tax exemptions on VAT in respect of raw materials and packaging for manufacture of medicaments. Whereas in 2001, the said exemption was removed, no VAT was claimed from the applicant whether deliberately or inadvertently. By the time the Respondent sent its demand on28th November, 2013, the applicant contends, which contention is not seriously contested thatthe Applicant was nolonger in a position to claim refunds which it would have otherwise been in a position to claim had the demand been prudently made. The Applicantcontended that ithadalready lost opportunity to adjust the prices of its products in order to factor in the cost of production which would have included the import VAT. The effect of this is that the applicant would have to bear the loss which but for the inaction on the part of the Respondent, it would have otherwise not absorbed. That the applicant is in control of the instruments through which the actual taxes are payable is not in doubt. By not regularly monitoring its said instruments with a view to determining the actual taxes payable, the Respondent placed the applicant in the unenviable position where the applicant is being exposed to shouldering the burden which legally ought not to have been shouldered by it. In my view the circumstances of this case cry loud against the imposition of the burden on the applicant. The Respondent, in my view by its failure to act prudently, cultivated in the applicant legitimate expectation that the position prevailing before 2001 would continue to prevail notwithstanding the 2001 amendments to the Finance Act.”

14. Having so found the Court proceeded to find for the applicant and granted the orders sought therein.

15. As the facts are substantially similar to this case, I arrive at the same finding in this application.

16. Having considered the issues raised in this application, it is my view and I so hold that on the ground of legitimate expectation, abuse of or wrongful exercise of power and irrationality the Respondent’s decision cannot be allowed to stand.

17. In the premises, it is my view and I hereby find that it would be contrary to justice to compel the applicant to pay the sum demanded by the Respondent. To do so would be contrary to substantive fairness which dictates that a body must not act conspicuously unfairly, nor unfairly as to abuse its power, nor in unjustified breach of legitimate expectations.

18. Accordingly, based on the said grounds, the Notice of Motion filed herein is merited.

Order

19. Consequently, I issue the following reliefs:

1. An Order of Certiorari removing into this Court and the decision made by the respondentrequiring the Applicant Company to pay the Respondent Kshs 111,147,413/- as VAT for the period of January 2008 to November 2013which decision is hereby quashed.

2. An order of prohibition directed to the respondent prohibiting it, whether by itself, its agents, and/or its servants or otherwise howsoever from purporting to take any action against the Applicant Company in an attempt to recover the said sum ofKshs 111,147,413/-.

3. There will be no order as to costs.

20. Orders accordingly.

Dated at Nairobi this 3rd day of October, 2017

G V ODUNGA

JUDGE

Delivered in the presence of:

Miss Njebiu for Mr Makhanu for the applicant

Miss Almadi for Mr Ado for the Respondent

CA Ooko