[2012] UKFTT 573 (TC)
TC02250
Appeal number: LON/2008/0457,
LON/2008/0682 & LON/2007/1677
PROCEDURE –applications for
stay of proceedings pending two references to the CJEU – applications refused
FIRST-TIER TRIBUNAL
TAX CHAMBER
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GANDALF IT LIMITED
(in
administration)
GANDALF ASIA
LIMITED
(in
administration)
SIRRNET LIMITED
(in
administration)
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Appellants
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE SWAMI RAGHAVAN
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Sitting in public at Bedford Square , London on 8 May 2012
On the appellants’ applications
to stand over their appeals until after the Court of Justice of the European
Union (“CJEU”) has handed down judgments in the cases of Mahagében C-80/11
and Dávid C-142/11.
Mr R. Holland, solicitor, of
Dass solicitors for the Appellants
Mr S. Mehta, counsel,
instructed by the General Counsel and Solicitor to HM Revenue and Customs, for
the Respondents
© CROWN COPYRIGHT
2012
IT IS DIRECTED THAT:
1. the
appellants’ applications to stand over the appeals are refused.
2. there be a
Pre Trial Review on the first available date after 29 June 2012.
DECISION
Introduction
1. The
appellants appeal against HMRC’s refusal to allow to them to reclaim input tax
incurred by the appellants in VAT periods in 2006. The appeals are travelling
together because of commonality of ownership / management of the appellants.
HMRC say the appellants are part of closely connected network of companies
whose pattern of trading was not commercial and the companies knew or should
have known their transactions were connected with the fraudulent evasion of
VAT. Accordingly the input tax reclaims are denied following the test
established by the CJEU in Kittel C-439/04 and applied by the Court of
Appeal in Mobilx and others v HMRC [2010] EWCA Civ 517. The amount of
input tax at stake is nearly Ł7.4 million.
2. This
decision concerns the appellants’ applications to stand over their appeals
until after the CJEU has handed down judgments in the cases of Mahagében C-80/11
and Dávid C-142/11. These applications are contested by HMRC.
Stage reached in appeals before this Tribunal
3. I
understand from the parties that the evidence has largely been served. HMRC
having served replacement witness evidence (Officer Yeomans), the appellants were
due to serve any further evidence in response to Officer Yeomans’ material
and/or to earlier supplemental evidence of HMRC by 29 February 2012, but had
made applications to stay on 22 December 2011. Following closure of evidence
the next step would be to finalise the pre-hearing directions and list the
matter for hearing. Mr Mehta has indicated a time estimate in the order of 3
weeks to hear all 3 matters. Given the additional challenges of listing cases
of this length it is likely that the case would not come on until some time
next year.
Tribunal’s discretion to stay
4. Under Rule
5(3)(j) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules
2009, the Tribunal has discretion to stay (or in Scotland, sist) proceedings.
In terms of the test which I should apply I was referred to the decision of the
Inner House of the Court of Session in the case of HMRC v RBS Deutschland
Holdings GmbH [2006] ScotCS CSIH 10 and in particular the test suggested there
of first considering whether the decision in the other case would be of
material assistance to resolving issues in the current matter, and then
considering whether it was expedient to order a stay.
5.
The test was expressed by the Court as follows:
“a Tribunal or court
might sist proceedings against the wish of a party if it considered that a
decision in another court would be of material assistance in resolving the
issues before the Tribunal or court in question and that it was expedient to do
so.”
6. I was also
referred by the parties to a number of First-tier Tribunal decisions dealing
with applications to stay of similar appeals behind similar CJEU references
which amongst others included Mahagében and Dávid. These
decisions were Unistar Group Limited v HMRC MAN/07/1441, Matrix
Europe Limited v HMRC MAN/07/0671, C Narain Bros v HMRC [2012] UKFTT 188 (TC), Teletape v HMRC LON/2007/1244 and LON/2007/915, and Enta
Technologies Limited v HMRC TC/2011/4444.
Would a stay materially assist the Tribunal in resolving issues in these
proceedings?
7. In
relation to the first test of material assistance Mr Mehta drew attention to the
particular formulation given in RBS Deutschland. The test was whether
the decision in the other court will materially assist in resolving
issues. Given the inherent uncertainties in predicting what another court might
decide and on what basis I do not understand the court in RBS Deutschland to
mean that there must be absolute certainty that the case will assist. Rather,
the judgment’s reference to “would be of material assistance…” indicates I
think that where there is a high degree of probability that the decision would
materially assist in resolving issues, then that would be a reason, subject to
expediency considerations, to ordering a stay.
8. Having
said that I hesitate to interpret the test set out in RBS Deutschland in
the rigid terms that if there is not a high probability then that is the
end of the matter given the context in which the test operates is that of a
general case management discretion accorded to the Tribunal. The reference to
“might” in the extract at paragraph 4 above suggests that it was not thought
that a Tribunal must order a stay if the two part test was satisfied.
Also, given that even if the material assistance test is established, there
will be other factors to throw into the balance, I suggest it is appropriate to
consider the level of probability of material assistance and weigh that in the
scale in deciding whether or not to order a stay. That means the higher the
likelihood of material assistance the stronger the case for ordering a stay
subject to taking into account any other relevant factors. I do not think this
approach is inconsistent with RBS Deutschland. In particular, it does
not fall foul of error of law highlighted there which was that it was wrong of
the Tribunal in that matter to insist that the court decision awaited for
should be determinative of the issues.
Does Mynt bind the Tribunal?
9. Mr Holland
submits that I am bound by the Upper Tribunal decision in Mynt Limited
& Others v HMRC PTA/140/2011 not on the basis of the particular facts
of that matter but on the basis of the legal issues which were put to the Upper
Tribunal there. The determination there was that the referred decisions “may
provide answers of relevance to the outcome...” of the appeals which were under
consideration there. That determination is something I take into account but I
disagree that Mynt binds me to finding that the material assistance test
is made out for the purposes of these applications to stay.
10. The nature of the
proceedings being stayed is I think relevant to the question of material
assistance. The material assistance to be derived in the context of fact
finding proceedings such as these ones, being appeals before the First-tier
Tribunal, are different from the material assistance to be derived in the
context of proceedings which are predicated on an appeal on a point of law as
was the case for the appeals to the Upper Tribunal and the permissions to
appeal to the Upper Tribunal in Mynt. In any case the level of
probability as expressed in Mynt falls short of the high probability of
assistance I suggest was envisaged in RBS Deutschland to indicate a stay
might be appropriate, subject to expediency. At best, even if Mynt were
binding, it would only indicate the CJEU references may be of relevance.
11. I was referred to the
First-tier Tribunal decision in Enta Technologies Limited where Mynt was
regarded as binding. That does not lead me to alter my conclusion above. As
pointed out by Mr Mehta a concession was made there by the party opposing the
stay on the point of material assistance which is not made here.
Degree of probability of material assistance
12. I therefore must consider
the degree of probability that the decisions in Mahagében and Dávid will
materially assist the Tribunal in these cases in resolving the issues in these
appeals.
13. Mr Mehta in his skeleton
drew attention to the very different factual scenarios of the references. Mahagében
concerns a timber trader in possession of otherwise valid VAT invoices for the
supply of logs where the Hungarian authorities considered the alleged supplier
could not have fulfilled the order and sought to deny the right to deduct input
tax on the basis that the invoices could not be regarded as authentic. Dávid
raises the question of whether the right to deduct input tax can be denied
on the basis that the issuer of an invoice for the construction of a dam could
not guarantee the involvement of further subcontractors and such that the invoices
they had issued complied with the requisite formalities.
14. Different factual scenarios
are not in themselves a reason to refuse the stay. I must consider the
questions of interpretation referred to the CJEU and the likelihood that the
CJEU, in answering the questions referred, would uncover issues of legal
principle which will materially assist in the resolution of the issues in the
appeals before the Tribunal.
15. I have already dealt with Mr
Holland’s primary submission that the Tribunal is bound by Mynt above.
But, his submissions also made it clear that the appellants wish to stay is
founded on the expectation that the CJEU will deal with a particular legal
point of principle namely whether HMRC may deny the right of the taxpayer to
recover input tax only where there is privity of contract between the taxpayer
and the fraudulent trader.
16. Mr Holland referred to me to
the 3 questions referred to the CJEU in Mahagében (annexed to this
decision) and the 3 questions referred to the CJEU in Dávid (set out at
[18] below). Mr Holland suggested that only one of the questions, the
third question in Dávid, could be said to speak to the principle in Kittel.
The three questions are inter-linked so I set out all of them below. In the
course of his submissions on the likelihood of the CJEU tackling this issue Mr
Holland also asked me to consider certain questions which had been raised by
the European Commission in the context of the CJEU proceedings as well as
observations he states were made by the UK. The Commission observations and
details of the UK observations were not before Judge Bishopp when he gave his
decision in Mynt and Mr Holland invited me to find that both sets of
observations make it more likely to be the case that material assistance will
be provided than would have been apparent from just looking at the actual
questions referred.
17. In relation to the
Commission’s proposed answers to the questions referred to the CJEU, Mr Holland
referred to me an unofficial translation of those as taken from the French
language version of the Judge Rapporteur report.
18. I should point out that
there was some discussion at the hearing over the fact the translation of the
Commission’s answer to the second question did not make sense in English in
particular because of the inconsistency of the sentence containing both the
words “nor can” and “cannot”. I note a virtually identical unofficial
translation of this text was also put before the Tribunal in Teletape
which omits the “cannot” which gives rise to difficulties of sense and have
used that version for the second question. This version is also more consistent
with the sense of the subsequent paragraph which begins “on the other hand…” (I
have placed the “cannot” in the version which was before me in square brackets.)
In the event, given what I say below on the relevance of the Commission
observations to the application before this Tribunal little, if anything, turns
on this translation issue.
Question referred
“1. Are the
provisions relating to VAT deductions in Sixth Council Directive 77/388/EEC of
17 May 1977 on the harmonisation of the laws of the Member States relating to
turnover taxes — Common system of value added tax: uniform basis of assessment,
as amended by Council Directive 2001/115/EC of 20 December 2001 (‘the Sixth
Directive’) and, as regards 2007, in Council Directive 2006/112/EC of 28
November 2006 on the common system of value added tax to be interpreted as
meaning that the right of deduction of a taxable person may be restricted or
prohibited by the tax authority, on the basis of strict liability, if the
invoice issuer cannot guarantee that the involvement of further subcontractors
complied with the rules?”
Unofficial
translation of Commission’s suggested answer
Articles 167, 178,
220 and 273 of Directive [2006/112] and Article 17, 18(1) and 22(8) of the Sixth
Directive must be interpreted in conformity with the principles of
proportionality, neutrality and legal certainty, such that they do not permit
national legislation or administrative practice which, as regards “necessary
precautions”; makes the right to deduction conditional upon the recipient of
the invoice proving that the company drawing up the invoice respected its legal
obligations, and in that regard establishes an objective responsibility on the
part of the recipient of the invoice.
Question referred
“2. Where the tax
authority does not dispute that the economic activity detailed in the invoice
actually took place, nor that the from of the invoice complies with the legal
provisions, may the authority lawfully prohibit a VAT refund if the identity of
the other subcontractors used by the invoice issuer cannot be determined, or
invoices have not been issued in accordance with the rules by the latter?”
Unofficial
translation of Commission’s suggested answer
“Nor can the right of
deduction of VAT [cannot] be affected by the fact that the taxpayer knew or
could have known that; in the supply chain in which his own transaction – not
itself tainted with fraud – was carried out, another transaction either before
or after the said taxpayer’s transaction, amounted to VAT fraud or another
violation.”
Question referred
“3. Is a tax
authority which prohibits the exercise of the right of deduction in accordance
with paragraph 2 obliged to ensure during its procedures that the taxable
person with the right of deduction was aware of the unlawful conduct, possibly
engaged in for the purpose of tax avoidance, of the companies behind the
subcontracting chain, or even colluded in such conduct?”
Unofficial
translation of Commission’s suggested answer
“On the other hand,
once it is established, in the light of objective elements, that the delivery
is made to a taxpayer who knew or ought to have known that, in making the
purchase, he was participating in an operation that was part of [literally
“implicated in”] VAT fraud, it is at the point possible to refuse the right of
deduction.”
Commission observations and their relevance
19. The relevance of the
Commission observations needs to be put into the context of the CJEU proceedings.
While the observations will no doubt put before the CJEU the perspective of the
Commission and may, as Mr Holland pointed out, raise matters of general
importance from a Community point of view which might not otherwise have been
brought to the CJEU’s attention, the CJEU is under no obligation to reframe the
scope of its questions or to specifically address the Commission observations
in giving its judgment. This is consistent with Article 63 of the Court’s Rules
of Procedure, which contains the mandatory contents for the judgment, and
beyond a requirement to state the grounds for the decision and the operative
part of the judgment, says nothing about the judgment being required to address
the observations the Commission have made. Kittel is an example of a
judgment which, while it records the Commission’s observations, does not then
specifically deal with the points raised.
20. In addition when it comes to
the content of the Commission observations while this is not directionally
inconsistent with the finding in Mynt that the references may be of
assistance to the proceedings I do not agree that they make it more likely that
the reference will be of material assistance to the proceedings before this
Tribunal. The likelihood of the CJEU finding that privity of contract is
essential to the application of Kittel is analysed at [27] – [33] of Teletape.
I agree with what is said there that it seems very unlikely that the CJEU
would diverge from its earlier decisions in Kittel and Optigen
& ors C-484/03 and rule that privity of contract is a prerequisite to liability
under Kittel. Even if the Commission observations can be interpreted as
suggesting that privity of contract is required between the defaulter and the
taxpayer, which is by no means clear, the likelihood of the CJEU adopting that
approach and thereby, in Mr Holland’s submission rendering fact-finding on
actual or constructive knowledge of fraud irrelevant, is low.
UK observations at oral hearing of Mahagében and Dávid and their relevance
21. Mr Holland referred to me to
correspondence between himself and HMRC in which he had sought confirmation
that a summary of the points he understood had been raised by the UK in its oral submissions to the CJEU was correct. These included points stressing the
importance of Kittel and Optigen and a caution against departing
from the general principles in those cases. HMRC not having availed itself of
the several opportunities to correct the summary, Mr Holland invited me find
that the summary recorded the UK submissions at the hearing. This was on the
basis that the submissions were relevant to the question of whether the
references would offer material assistance in resolving issues.
22. From the correspondence it
is clear to me that HMRC responded to Mr Holland did not confirm the summary
was correct. I decline to make the finding I am invited to in those
circumstances. But, in any case even if the summary is correct I do not think
it would change my view on the probability of material assistance being derived
from the references. Probably even more so than with the Commission
observations there is no indication one way or the other that the CJEU would
choose to specifically deal with points raised by a Member State in its judgment. Further, even if the observations were addressed they would appear to
point the CJEU towards confirming privity of contract between the taxpayer and
the defaulter was not required.
Conclusion on likelihood of material assistance
23. While it cannot be ruled out
that the CJEU decisions may be of material assistance in so far as its is
possible they may recall or review the legal principles underpinning the
current appeals, I find the likelihood that those decisions will materially
assist resolution of issues in these appeals, and in particular that they will
require there to be privity of contract between the taxpayer and defaulter to
be low.
Expediency
Prejudice if stay not ordered
24. Mr Holland submits that if
the CJEU decisions are answered in the way suggested by the Commission answers,
with the effect that privity of contract is required between the taxpayer and
the defaulter, findings of fact on actual or constructive knowledge will not be
of any relevance. The prejudice in not ordering a stay in such circumstances
lies in the significant wasted time and costs of the parties in preparing for a
lengthy hearing, and the wasted time of the parties and the Tribunal in hearing
the matter unnecessarily.
25. It was not put to me that
this was a case where the CJEU decisions would be likely to give rise to the
need to file additional evidence so there are not additional resources issues
flowing from further evidence gathering to weigh in the balance as there might
be in other cases.
26. I have found above that the
probability of the CJEU decisions requiring privity of contract is low but even
if that were not the case and the probability were higher it would still seem
necessary for the prejudice to the parties and the Tribunal of proceeding with
the stay and issues such as deterioration of evidence to be weighed in the
balance. In conducting this weighing exercise I need to consider the likely
length of the delay occasioned by the proposed stay.
Likely length of delay if stay ordered
27. Mr Holland emphasised that
in contrast to other applications for stay that had come before the First-tier
Tribunal which had asked for a stay behind a number of the other cases
mentioned in Mynt the appellants here were only asking for a stay behind
the two specific cases. There had been an oral hearing on Mahagében and Dávid
back on 15 March 2012, no Advocate General opinion had been sought which was
anticipated to speed matters up, and Mr Holland estimated the decision could
well be given by October of this year. He acknowledged his suggestion that the
decision would be made in October was based on his experience of waiting for
CJEU decisions rather than on particular piece of intelligence. Noting that
other First-tier Tribunal decisions on similar applications to stay had expressed
reservations about the unpredictability of the length of the stay I understood
Mr Holland to be inviting me, if I had similar concerns, to order a stay not by
reference to the decisions but until October this year. Mr Mehta raised the
possibility that the CJEU might choose to defer giving its judgment in Mahagében
and Dávid until the other associated references mentioned in Mynt
had progressed. Mr Holland suggested there was no reason to think the CJEU
would adopt that approach.
28. Beyond it being possible in
principle that the CJEU might choose to hold off making its decision pending
the other associated references there was no particular material before me to
lead me to believe that that was a likely outcome. In the absence of any
evidence to the contrary on timing I do not think Mr Holland’s estimate is unreasonable
and for the purposes of these applications to stay will proceed on the
assumption that the CJEU decisions would be given by October 2012 or at the
very least by the end of the year.
Impact of timing of CJEU decision on prejudice in terms of wasted resource
in hearing time and preparation
29. While the evidence round in
this case is not complete the proceedings are already fairly advanced, the bulk
of the evidence has been served, and the parties are in a reasonable position
to give a rough time estimate for the hearing. As mentioned above at [3] Mr Mehta
suggests this is in the order of 3 weeks. Mr Holland did not dispute that
figure and in any case his submissions on the issue of expediency and the worry
that significant hearing costs will be unnecessarily incurred indicate to me
that it is not in issue that the hearing will be relatively lengthy. Given the
capacity of the Tribunal, and the Tribunal’s experience in listing cases of
this kind of length it is very likely that the hearing of these appeals would
not come on until some time in 2013.
30. That means it is highly
likely that, if the CJEU decisions came out in October those decisions could be
taken account of appropriately in the preparation of submissions in the run-up
to the hearing and at the hearing itself. In terms of the resources spent in dealing
with the outstanding issues of evidence, in the unlikely event those did prove
to be wasted, I do not understand those resources to be significant in the
context of the appeals as a whole.
Impact of timing of CJEU decision and prejudice in terms of deterioration
of evidence
31. As is typical with appeals
of this nature it is anticipated that there will be a significant amount of
oral evidence that will need to be given on behalf of the parties. The
transactions having taken place in 2006, witnesses will be called upon to
recall matters which happened nearly 7 years ago by the time the hearing comes
on. I understood Mr Holland’s submissions on this point to be to the effect
that the prejudice is more acute to the appellants. HMRC witnesses are likely
to speak to documents drawn from a centralised database and are often replaced
by officer colleagues. This mitigates the prejudice caused officers moving on as
time goes on. The appellants were however less able to make use of replacement
evidence when witnesses move on. The appellants would rather suffer the
prejudice to them if it meant the proceedings could have the benefit of the law
being applied as determined by the CJEU decisions.
32. I am not persuaded the
appellants are prejudiced by the delay to a greater extent than HMRC or that
even if they were that this would be something they can effectively ask the
Tribunal to waive. Mr Mehta mentioned that not all of HMRC’s evidence was of
the character suggested by Mr Holland, HMRC do have witnesses who attest to their
dealings with the appellants. A similar point about the appellant suffering
greater prejudice was also made in the application before Judge Canaan in Enta
Technologies Limited. In my view his response at [20] applies equally here.
The response was to the effect that impairment to the appellant’s evidence may
also prejudice HMRC in conducting effective cross-examination of the witnesses,
given that it will be for HMRC to, amongst other matters, establish the
appellants knew or should have known of the connection to fraud.
33. Further I agree with Mr
Mehta that it is not enough to consider the prejudice to the parties, the
Tribunal also has an interest in having the best evidence put before it so far
as possible. That becomes more difficult with the passage of time where oral
evidence is in issue. The fact that the delay occasioned by a stay is of a more
limited period than may have been the case in other applications to stay before
the Tribunal does not detract from there being prejudice which is avoidable. It
does not change my view that concerns about prejudice in terms of evidence
becoming stale are of significance.
34. If it turns out that the CJEU
decisions are received later than the end of the year then that would only in
my view serve to increase the prejudice in terms of deterioration in evidence.
If the decisions were received significantly later, so much so that the hearing
in the appeals would already have taken place that would not alter my
conclusion. The likelihood of the CJEU decisions rendering the fact-finding
unnecessary and any ensuing prejudice in terms of wasted resource is insufficiently
high to counter-balance the prejudice in terms of the evidence which is put before
the Tribunal.
Conclusion
35. There is a probability that
the references will materially assist in resolving the issues, but this is low.
There is prejudice, not just to the parties, but to the Tribunal in having
evidence before it which will become increasingly stale with further delay. In
terms of resources being spent unnecessarily, the bulk of the evidence has
largely been served and it is quite likely that the CJEU decisions will be
received before the hearing of these appeals in any event. Taking all of these
factors into account it would not, in my view, be fair and just to stay these
proceedings.
36. The appellants’ applications
to stay are dismissed.
37. This document contains full
findings of fact and reasons for the decision. Any party dissatisfied with this
decision has a right to apply for permission to appeal against it pursuant to
Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules
2009. The application must be received by this Tribunal not later than 56
days after this decision is sent to that party. The parties are referred to
“Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)”
which accompanies and forms part of this decision notice.
SWAMI
RAGHAVAN
TRIBUNAL JUDGE
RELEASE DATE: 31 August 2012
ANNEX – Full text of Reference to CJEU on Mahagében
Mahagében
Kft v Nemzeti Adó és Vámhivatal Dél-dunántúli Regionális Adó
Főigazgatósága
(Case
C-80/11)
Questions
referred
1.
Must Directive 2006/112/EC ( 1 ) be interpreted as meaning that a taxable
person who fulfils the material conditions for the right to deduct VAT in
accordance with the provisions of that Directive may be deprived of his right
to deduct by national legislation or practice that prohibits deductions in
respect of VAT paid when a product is bought, where the invoice is the only
valid document that confirms that the product was sold, and the taxable person
is not in possession of any document from the issuer of the invoice which
certifies that it was in possession of the product, and could have supplied it
or satisfied its obligations as regards declaration? May a Member State require the recipient of the invoice to be in possession of a document proving
that it is in possession of the product, or that the product was supplied or
delivered to it, to ensure the correct collection of VAT and to prevent evasion
under Article 273 of the Directive?
2. Is
the concept of due diligence set out in Paragraph 44(5) of the Hungarian Law on
VAT compatible with the principles of neutrality and proportionality already
upheld several times by the European Court of Justice in connection with the application
of the Directive if, in applying that concept, the tax authority and
established case-law require the recipient of the invoice to ascertain whether
the issuer of the invoice is a taxable person, whether it has entered goods
purchased in its records and is in possession of the purchase invoice, and
whether it has satisfied its obligations as to declaration and payment of VAT ?
3. Must Articles 167 and 178(a)
of the Directive 2006/112/EC on the common system of value added tax be
interpreted as meaning that they preclude national legislation or practice that
requires a taxable person receiving an invoice to verify compliance with the
law by the company issuing the invoice in order for the former to assert his
right to deduct?
