The High Court has ordered Jomo Kenyatta University of Agriculture and Technology (Jkuat) to foot a Sh296 million bill in unpaid value added tax (VAT) and interest following the purchase of the ICEA building in Nairobi from an insurance firm about seven years ago.
Justice Peter Mulwa said that the Deed of Indemnity issued by Jkuat to the seller of the building, ICEA Lion Life Assurance Company Limited, was binding, hence the need for the university to foot the tax liabilities arising from the deal.
“Judgment be and is hereby entered for the plaintiff (ICEA) against the defendant (Jkuat) directing the defendant to honour the terms of the Deed of Indemnity dated 1st August 2019 and filed in court on 5th August 2019 and to forthwith pay to the plaintiff, Sh296,000,000 being VAT paid to KRA pursuant to the terms of the Settlement Agreement dated September 30, 2019,” the court said in its October 4, 2024 decision, ending a seven-year legal battle over tax liabilities.
The dispute arose from the sale of the iconic ICEA towers along Kenyatta Avenue in Nairobi 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 sale agreement, Jkuat was to settle VAT obligations amounting to Sh296 million. However, the university sought a waiver of this VAT through the KRA and in a letter dated September 4, 2017, the taxman confirmed that the transaction was eligible for zero-rating.
Based on this confirmation, Jkuat declined to pay the VAT, believing that the transaction was exempt. ICEA Lion, however, expressed concern about future liabilities and requested that Jkuat provide written assurances or indemnification in the event that the KRA reversed its position.
Jkuat subsequently issued a Deed of Indemnity on August 1, 2019, undertaking to compensate ICEA Lion if any VAT or penalties were later demanded.
Taxman demand
In October 2019, the KRA issued ICEA Lion with a formal demand for VAT, which totalled Sh347 million with accrued penalties and interest. ICEA Lion, in a bid to avoid further penalties, entered into a settlement agreement with the KRA and paid the VAT in instalments, totalling Sh296 million.
However, when ICEA Lion sought reimbursement from Jkuat under the indemnity, the university refused, citing the KRA’s earlier zero-rating confirmation. This refusal prompted ICEA Lion to file a suit in the High Court.
ICEA Lion argued that the Deed of Indemnity was clear and unconditional, requiring Jkuat to cover any VAT liabilities arising from the property sale. The company claimed that it had acted in good faith by settling the VAT demand with KRA to prevent further penalties from accumulating.
ICEA emphasised that the validity of the indemnity was not in dispute and that Jkuat had to honour its obligations under the agreement. The insurance company also rejected Jkuat’s claim that it should have been involved in the VAT settlement negotiations, stating that there was no legal or contractual requirement to involve the university.
In response, Jkuat argued that it relied on KRA’s letter of September 4, 2017, confirming the transaction’s zero-rating status. The university maintained that it had fulfilled its obligations by obtaining the KRA exemption, and that ICEA Lion’s unilateral settlement with the taxman was both unwarranted and malicious.
Jkuat further contended that it was unfairly blindsided by the proceedings between ICEA and KRA. The university claimed it was unaware of the tax tribunal proceedings and the resulting settlement agreement. It asserted that ICEA Lion acted in bad faith by not informing them of the negotiations and accused the insurer of unfairly using the situation to demand the indemnity payment.
KRA defended its reversal on the VAT status, arguing that the initial zero-rating confirmation was based on incorrect information. KRA explained that Jkuat was not registered for VAT in 2015, a requirement under the VAT Act for such transactions to qualify as zero-rated. As a result, KRA’s earlier decision to grant the zero rating was invalid.
KRA emphasised that private tax rulings 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 VAT was lawfully due and ICEA Lion was correct in paying it.
In his judgment, Justice Mulwa ruled that Jkuat must honour the indemnity agreement and reimburse ICEA Lion the Sh296 million it paid to KRA.
The judge rejected Jkuat’s argument that it should have been consulted on the VAT settlement. The court found that the indemnity did not require ICEA Lion to involve the university in negotiations with KRA.
Justice Mulwa noted that Jkuat had already agreed to bear any VAT liabilities under the indemnity, which made ICEA’s actions reasonable and lawful.
