Kenya Revenue Authority vs Mahindra & Mahindra South Africa (PTY) Limited Kenya Branch

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMMERCIAL & TAX DIVISION

MISC.CIVIL APPLICATION NO.E914 OF 2023

KENYA REVENUE AUTHORITY…………………………….…….APPLICANT

-VERSUS-

MAHINDRA & MAHINDRA SOUTH AFRICA (PTY) LIMITED KENYA BRANCH ..........................................................................................RESPONDENT

RULING

1. Before this Court is the applicant’s Notice of Motion application filed pursuant to Section 43(3), (4) & (5) of the Tax Procedures Act, Sections 3 and 3A of the Civil Procedure Act and Order 51 Rule 1 of the Civil Procedure Rules, 2010.
2. The applicant seeks an order to extend the preservation of funds as per the orders issued by it on 16/10/2023 pursuant to Section 43(2) of the Tax Procedures Act (TPA) in respect of the monies held in Absa Bank Kenya PLC (Bank) on behalf of the respondent up to Kshs.555,103,383.00 in account No.2033946425 USD, until otherwise advised.
3. The application is based on the grounds that the applicant carried out an audit and established a tax liability by the respondent amounting to Kshs..555,103,383.00. Based on the audit and the tax assessment raised, the applicant issued orders for preservation of funds to the bank on account of monies it holds on behalf of the respondent of up to Kshs.555,103,383.00 until otherwise advised.
4. The applicant averred that the respondent is a foreign entity with a branch in Kenya and is in the process of winding up its operations in Kenya, as it has moved out of its physical office in Nairobi and filed nil PAYE returns for September 2023 signaling that it no longer has any members of staff in its payroll.
5. The applicant is apprehensive that if the bank does not pay it the sum of Kshs.555,103,383.00 that it holds on behalf of the respondent, it will be left exposed as there will be no other asset to hold, to secure revenue. Further, that it has met the pre-conditions set out in Section 42(1) of the TPA to enable this Court to exercise its discretion in the applicant’s favour and to grant the orders sought.
6. In opposition to the application, the respondent relied on its replying affidavit sworn on 6/11/2023 by Parag Shah, its Tax Agent.
7. He averred that less than one working day after the respondent had filed its objection to the applicant’s assessment, the applicant issued agency notices preserving the respondent’s funds held in various banks. That the said actions were unreasonable and unfair as the appeal process had not kicked off and the applicant’s actions would render the prospective appeal of the confirmed assessments dated 13/9/2023 nugatory.
8. It was contended that the respondent has no intention of frustrating the recovery of the tax that would be deemed due and payable by the Tax Appeals Tribunal. That although the respondent had ceased its business operations, it had not initiated the winding up process.
9. Further, that the conduct of the respondent is one of a diligent Taxpayer who engages tax authorities in a bid to solve any tax disputes that may arise, and where it is in the wrong, it would pay immediately. The respondent contended that the applicant has no reasonable ground to stand on to support its prayers as per its application, as the legal threshold of reasonability has not been met.

ANALYSIS AND DETERMINATION.

1. The parties herein canvassed their respective arguments through written submissions which this Court has considered. The applicant’s written submissions are dated 7/11/2023, whereas the respondent’s written submissions are dated 27/11/2023.
2. The issue that arises for determination is whether the applicant is entitled to preservation orders under Section 43(2) of the TPA.
3. Preservation of funds is provided for under Section 43 of the TPA which states as hereunder-

“(1) This section applies if the Commissioner reasonably believes—

(a) that a taxpayer-

(i) has made taxable supplies, has removed excisable goods, or has derived an income, in respect of which tax has not been charged;

(ii) has collected a tax, including withholding tax, that has not been accounted for; and

(b) that the taxpayer is likely to frustrate the recovery of the tax.

(2) The Commissioner may by notice in writing, in respect of a taxpayer to whom this section applies, require a person—

(a) who owes or may subsequently owe money to the taxpayer;

who holds or may subsequently hold money for or on account of the taxpayer;

(b) who holds or may subsequently hold money for on account of another person for payment to the taxpayer; or

(c) who has the authority from some other person to pay money to the taxpayer,

to preserve such money, and that person shall not transfer, withdraw, dispose of or otherwise deal with that money except as provided for in the notice for a period of ten working days or until the application by the Commissioner made in accordance with subsection (3) is heard and determined by the High Court.

(3) The Commissioner shall apply, in the absence of the taxpayer, to the High Court for an order against any person holding funds belonging to the taxpayer, prohibiting that person from transferring, withdrawing, disposing of or otherwise dealing with such funds.

(4) The Court may issue an order under subsection (3) if the Court is satisfied that the conditions specified under subsection (1) have been met.

(5) An order made under this section shall be valid for a period of thirty days but the Commissioner may apply to the Court for an extension of the period beyond the initial thirty days.” (emphasis added).

1. From the above provisions, a Court may issue a preservation order upon application by the applicant if it satisfied that the conditions under Section 43(1) of the TPA have been met. These conditions are that a Taxpayer has collected tax which has not been charged and/or accounted for, and the Taxpayer is likely to frustrate the recovery of the tax.
2. The applicant’s prayer for preservation orders is anchored on its apprehension that the respondent is winding up its business in Kenya and has no known assets other than the money held in the subject bank account that may be used to settle the tax liability as assessed.
3. Although the respondent has been cooperative during the audit process, it has admitted in its replying affidavit that it has ceased its business operations in Kenya and is in the process of leaving the country. I note further that the respondent has not provided a proposal or a means of how it would be able to satisfy the tax amount demanded, in case the Tribunal makes a finding that the tax assessed is due to the applicant. The respondent has also not shown what other assets it has within Kenya that may be utilized to satisfy the tax demanded.
4. Based on the foregoing, this Court is satisfied that the applicant was reasonable in believing that the Taxpayer is likely to frustrate the recovery of the tax as provided under section 43(1)(b) of the TPA.
5. In the case of Kenya Revenue Authority v ECO Bank Kenya Ltd & 3 others, Mabeya J., stated the following regarding Section 43 of the Tax Procedures Act:

“It is based on the Commissioner’s reasonable belief of the twin matters set out therein, viz that there is tax due which has not been unremitted and that the taxpayer is likely to frustrate the collection of that tax. It is only when such reasonable belief exists that the draconian procedure set out in that section is to be resorted to…..……………….

Reasonable belief is the cornerstone of section 43 of the Act to this Court’s mind, reasonable belief means a belief that would be held by an ordinary and prudent man in the same circumstances as the actor. The belief is to be based on reasonable grounds. It is not necessarily that the belief should be correct, but it must pass the test of reasonableness.”

1. I concur with the above authority, which is relevant and applicable to the instant application. I am of the considered view that based on the circumstances discussed in this ruling, a prudent man in the same circumstances would find that the respondent is likely to frustrate the recovery of the tax as provided under Section 43(1)(b) of the TPA.
2. I therefore find merit in the subject application. Prayers 2, 3 and 4 of the application dated 24/10/2023 are granted to wit-
3. I hereby extend the preservation of fund orders issued by the applicant on 16^th October, 2023 pursuant to Section 43(2) of the Tax Procedures Act in respect of the monies being held at Absa Bank Kenya PLC on behalf of the respondent up to Kshs.555,103,383.00 until otherwise advised;
4. I hereby issue orders extending the preservation of funds issued by the applicant on 16^th October, 2023 pursuant to Section 43(2) of the Tax Procedures Act in respect of the respondent herein, Mahindra & Mahindra South Africa (PTY) Limited Kenya Branch at Absa Bank Kenya PLC account No.2033946425 USD;
5. That this matter will be mentioned after thirty (30) days or such other time as this Court may direct, for the applicant to report to the Court on the status of the matter on the revenue involved; and
6. Costs are granted to the applicant.

It is so ordered.

DATED, SIGNED and DELIVERED at NAIROBI on this 9th day of February, 2024. Ruling delivered through Microsoft Teams Online

Platform.

NJOKI MWANGI

JUDGE

In the presence of:

Ms Ng’ang’a for the applicant

Mr. Kiraguri for the respondent

Ms B. Wokabi – Court Assistant.