[2023] KETAT 271 (KLR)

Rohto Mentholatum (Kenya) Limited v Commissioner of Customs & Border Control (Appeal 789 of 2021) [2023] KETAT 271 (KLR) (Commercial and Tax) (26 May 2023) (Judgment)

Neutral citation: [2023] KETAT 271 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Appeal 789 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, AK Kiprotich & Jephthah Njagi, Members

May 26, 2023

Between

Rohto Mentholatum (Kenya) Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a company incorporated in Kenya and whose principal activity is business development and expansion through product awareness, marketing and promotion. It also deals with product registration, licensing, import and distribution of various pharmaceutical and cosmetic products from its related entities in the United Kingdom and Vietnam for sale in the Kenyan market.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya and is responsible for the administration and enforcement of various revenue laws amongst them import duty and VAT.

3. The Respondent conducted a Post Clearance Audit (PCA) on the Appellant’s imports declarations for the period October 2014 to October 2019 in accordance with Sections 234 and 235 of EACCMA 2004.

4. The Respondent determined from the audits that there were incidences of undervaluation contrary to Section 122 as read together with the Fourth Schedule of EACCMA.

5. The Respondent subsequently issued its findings on the desk audit vide a letter dated 26th February 2021 to the Appellant indicating that the transaction value method used by the Appellant could not be fully ascertained for various reasons.

6. The Respondent consequently uplifted the value of the goods by applying the deductive valuation method and demanded payment of additional taxes amounting to Kshs.31,577,608. 00 for the period October 2014 to October 2019.

7. The Appellant did a response vide a letter dated 9th March 2021 disputing the tax demand.

8. Thereafter parties held a consultative meeting on 30th March 2021 to discuss the audit findings and the Appellant also produced various documents.

9. The Respondent reviewed the documents in issue and on 25th August 2021 responded to the Appellant’s letter revising the earlier demanded figure to Kshs. 27,434,130. 008 for the period of January 2016 to September 2019 and demanding for the same to be paid within 30 days.

10. The Appellant consequently lodged an application for review of the Respondent’s demand in the letter dated 25th August 2021 vide a letter dated 24th September 2021.

11. The Respondent rendered its decision to the application for review on 22nd October 2021 upholding its earlier decision of 25th August 2021.

12. The Appellant being aggrieved by the decision filed its Notice of Appeal dated 22nd November 2021 on 7th December 2021.

The Appeal 13. The Appeal is based on the Memorandum of Appeal dated 6th December 2021 and filed on 7th December 2021 raising the following grounds of Appeal:-i.The Respondent erred in law and in fact by issuing an application for review decision that is contrary to the provisions of Section 229 (4) of East Africa Community Customs Management Act (EACCMA).ii.The Respondent whilst disregarding the use of the transaction value method by the Appellant erred in law and in fact by failing to follow due process and to appreciate the fact that the relationship between the Appellant and its non-resident related parties, Mentholatum Company Ltd. (UK) and Rohto-Mentholatum (Vietnam) Co. Ltd, did not influence the price of the imported goods.iii.The Respondent erred in law and in fact by disregarding the transaction value method in determining the customs value of the products imported by the Appellant contrary to Section 122 as read together with the Fourth Schedule of ECCMA.iv.The Respondent in holding that the transaction value method could not be used because the relationship between the Appellant and its non-resident related parties influenced the price, failed to appreciate the contents of the Appellant’s transfer pricing policy.v.The Respondent erred in law and in fact by incorrectly applying the deductive value method and comparing the customs value of the acne range of products and deep heat range of products to determine the customs value of the Appellant’s imports contrary to the provisions of Section 122 as read together with the Fourth Schedule to ECCMA.

Appellant’s Case 14. The Appellant’s case is set on:a.The Statement of Facts dated 6th December 2021 and filed on 7th December 2021b.The written submissions dated 7th November 2022 and filed on 8th November 2022.

15. The Appellant raised 4 issues for determination in support of its case as hereunder :-

a. Whether the Respondent’s decision dated 22nd October 2021 is a valid review decision as envisaged under Section 229 (4) of EACCMA. 16. The Appellant submitted that having lodged a valid application for review, the Respondent’s decision on the same fell short of a tax decision envisaged under Section 229 (4) of ECCMA in that it did not address the substantive issues raised in the application. The Appellant added that the same did not address all the issues raised by the Appellant in the application for review and this was against the requirements of the law. That the decision only indicated that the taxes demanded were due and payable without giving reasons as to why they were due and payable. That the only justification as per the review decision was to the effect that:-“Having had a deliberation on the issues highlighted in your objection and taken you through all the concerns and technical aspects, the Commissioner has reviewed your objection under Section 229 of the EACCMA and found no new information to warrant vacation of the demand”

17. The Appellant averred that during the process of reviewing the application for review, the Respondent did not invite the Appellant to any meeting to explain or discuss the technical aspects elicited in the application. That in so failing ,the Respondent did not address itself to the merits of the application.

18. The Appellant averred that the provisions of Section 229 (4) of EACCMA are explicit on what constitutes a valid review decision and that the same requires that reasons be given for the review decision. On the issue, the Appellant relied on the case of Githima Ltd vs. Commissioner of Domestic Taxes [APPEAL NO.162/2021].

19. The Appellant submitted that in its application for review, it explained that it correctly used the transaction value method in its declarations and that the Respondent did not follow the due process in rejecting the transaction value method and that the Appellant was correct in using the transfer pricing policy to demonstrate that the dealings with Harleys were at arm’s length and that the Respondent erred in law in using the deductive value method.

20. The Appellant averred that the provisions of Section 229 (4) of EACCMA are couched in mandatory terms and have therefore to be strictly adhered to and in regard to the issue the Appellant relied on the cases of R vs. Commissioner of Domestic Taxes Large Taxpayers Office Ex-Parte Barclays Bank of Kenya Ltd [2015] ;Mount Kenya Bottlers Ltd vs. A.G. & 3 Others [2019] eKLR and Associated Manufactureres Ltd vs. Commissioner of Customs Services [2020] eKLR.

21. The Appellant submitted that the Respondent in failing to give reasons for his decision left the Appellant in a position where it was to defend itself from a point of not knowing and this is against the provisions of Article 47 of the Constitution of Kenya, and the Fair Administrative Actions Act which do provide that public bodies are required to give reasons for their administrative decisions. The Appellant on this requirement relied on the cases of Local Production Kenya Ltd Vs Commissioner Of Domestic Taxes [Tax Appeal No 15 Of 2017] and Kenya Medical Association Housing Co-Operative Society Ltd Vs A,G, and Anor [2016]Eklr.

22. The Appellant submitted that the review decision as rendered is null and void and should be vacated in its entirety.

b) Whether the Appellant was correct in using the Transaction valuation method. 23. The Appellant averred that the transaction value method as set out in Section 122 of EACCMA was appropriate in valuing its imports as it fulfilled all the conditions as set out under Paragraphs 2 (1)(a) to (d) of the Fourth Schedule.

24. The Appellant further submitted that the transaction value method is the primary method of valuation under EACCMA and the Respondent can only proceed to use the other methods under the Fourth Schedule only after the first method has failed. The other methods of valuation under the Fourth Schedule being the transaction value of identical goods, the transaction value of similar goods, the deductive value method, the computed value method and the fall back method must be used sequentially. On this the Appellant relied on the case of R Vs Kra Exparte Neolife International Ltd [2018] Eklr And Wallpaper Kenya VS Commissioner Of Customs And Border Control, Tat No 279 Of 2020.

25. The Appellant argued that it provided the Respondent with all the supporting information including commercial invoices, sales contracts and export documents from country of origin, audit confirmation, transfer pricing document as well as explanations that it correctly applied the transaction value method in valuing its products sufficient for the Respondent to make its decision and which information the Respondent did not consider while issuing its decision.

26. The Appellant further submitted that contrary to the Respondent’s Statement of Facts averring that the Respondent was unable to verify use of transaction value on the basis that the Appellant failed to produce additional documentation as required, the Appellant stated that it did provide the same. It demonstrated this by paragraphs 1. 2.5 and 1. 2.6 of its response to the Respondent’s audit findings dated 9th March 2021 where the Appellant reiterated that it provided all the information as requested by the Respondent. That the information included the cost of raw materials, unit costs, direct labour costs, other factory overheads, Rohto Vietnam’s margins on the products and all other expenses used in the manufacture of acne products.

27. That in the meeting of 30th March 2021 the Respondent acknowledged receiving the transfer pricing policy and other documents for its review and in Paragraph 1. 2.21 of the application for review dated 24th September 2021,the Appellant explained that it had provided information requested for (reattached the information as appendix 4 to the Statement of Facts) to the application and also provided the transfer pricing document to demonstrate that the prices with related parties was arrived at arm’s length and was not influenced by the relationship. That this was not addressed by the review decision.

28. The Appellant averred that upon the production of its documents, the credibility of the same did not arise either in the preliminary findings vide the letter dated 26th February 2021 and or during the review process. In the circumstances, the Appellant argued its improper for the Respondent to bring it up at this point as the same did not even form part of the review decision.

29. The Appellant argued that having provided all the documents, it was upon the Respondent to properly consider them before issuing the review decision. On this it relied on the case of KRA vs. Man Diesel & Turbose, Kenya [2021] eKLR.

30. The Appellant submitted that having provided the Respondent with the documentation and explanations to support that it correctly used the transaction value method, it discharged its burden that it paid the correct taxes as per the law. Accordingly as per the Appellant, having made a prima facie case that it had paid the correct taxes, the burden shifted to the Respondent to give reasons for rejecting the method used in the review decision and which burden the Respondent failed to discharge. To buttress the position the Appellant relied on the case of Hickman Motors Ltd vs. Canada which decision was upheld in the case of KRA vs. Man Diesel and Turbo Se Kenya [2021].

31. The Appellant also added that the provisions of Section 122 of EACCMA are couched in mandatory terms and do not give any discretionary powers to the Respondent to rely on alternative methods of valuation without following the procedure laid out in the Fourth Schedule. In this regard the Appellant averred that the Respondent has erred in law and in fact by holding that the transaction value method could not be used for purposes of valuation of the products imported by the Appellant.

c) Whether the Respondent in disregarding use of the transaction value method failed to follow due process and appreciation that the relationship between the Appellant and its non-resident related parties, Mentholatum Company Ltd (MUK) and Rohto-Vietnam did not influence the price of the imported goods. 32. The Appellant took note of the Respondent’s contention that the values declared by the Appellant were much lower as compared to the values of imports when the same were being imported by Harleys and in the Respondent’s view the relationship between the related parties influenced the price. That the Respondent further contended that it gave the Appellant the opportunity to explain the reduction of the prices but the latter failed to, a contention the Appellant disputed.

33. The Appellant averred that it gave the Respondent all the necessary documents and explanations on the reduction of the prices and during the meeting of 30th March 2021 answered all the queries raised by the Commissioner but despite the same ,the Commissioner issued a demand letter dated 25th August 2021 demanding additional tax by applying the deductive value method without stating the reasons for rejecting the Appellant’s transaction value method and without giving the Appellant the opportunity to respond contrary to the provisions of Paragraph 2 (2)(a) of the Fourth Schedule to EACCMA as read together with Article 1 (2)(a) of the Agreement on the implementation of Article VII of the GATT and Decision 6. 1 of the World Customs Organisation (‘WCO’).

34. The Appellant averred that at no point did the Respondent state the grounds for considering how the relationship between the parties influenced the prices as provided for under the strict rules of the EACCMA. It pointed out that the same was not done in the letter dated 25th August 2021 or in the review decision. The Appellant averred that in the circumstances it was unfairly prejudiced in preparing the review application and that this runs against the provisions of the Kenyan Constitution and the Fair Administrative Actions Act. It also relied on several cases to support its averments including Kenya Medical Housing Co-Operative Society Ltd vs. A.G & Another where it stated that the court held that a decision given without due regard to the principles of natural justice is void.

35. The Appellant submitted that the Respondent erred in law and fact in holding that the transaction value method used by the Appellant was not acceptable because the buyer and the seller are related entities and therefore their relationship influenced the price. It argued that as per Paragraph 2 (2) (a) of part 1 of the Fourth Schedule, the relationship between the parties solely cannot be the basis for rejecting the transaction value method. Other factors and circumstances surrounding the sale process must come into play. The Appellant submitted that the Respondent failed to take that into consideration.

36. The Appellant argued that for Mentholatum products, the terms of agreement between MUK and Harleys and the agreement between MUK and the Appellant are different as follows:a.Distribution function - The Agreement between MUK and Harleys provided that MUK was to undertake the distribution function of the Mentholatum products. However, this changed after incorporation of the Appellant in Kenya and the Appellant is in charge of the distribution function;b.Advertising function - MUK was in charge of the costs of the function but now the costs are borne by the Appellant;c.Registration and licensing function of the imported goods - Previously borne by MUK but currently undertaken by the Appellant.

37. The Appellant averred that the changes in costing justifies the changes in pricing as the costs incurred locally by the Appellant cannot be added to the unit costs of the products. That this explained the shift in margins and the allegations by the Respondent that there was a sudden and huge drop of prices which could not be explained was erroneous. The explanations of the changes in ex-work prices offered by the Appellant and Harleys are laid out in Appendix 10 to the Appellant’s Statement of Facts.

38. The Appellant therefore stated that it would be erroneous for the Respondent to compare the Appellant’s imports to those of Harley’s without factoring in the costs incurred by the Appellant that Harleys did not incur as required by Paragraph 2 (2) (a) of the fourth Schedule.

39. The Appellant also added that Paragraph 9 (1) of the Fourth Schedule grants the Commissioner powers, in determining the custom values under the provisions of Paragraph 2, to adjust the customs value of imported goods by adding to the price actually paid or payable other costs as laid there. That the Respondent did not adjust the prices as per the proviso.

40. The Appellant submitted that it provided all the necessary documents to show that the relationship between it and MUK did not influence the value of the imports. In this regard it added that the Respondent’s decision to reject the transaction value without looking at the differences in commercial levels, quantity levels with respect to the earlier transaction arrangements between MUK and Harleys and now between MUK and the Appellant contravenes the law and the World Trade Organisation (WTO) Customs Valuation Agreement.

41. The Appellant urged the Tribunal to vacate the tax demand entirely. In this regard it relied on the case of Glaxosmithkline (Kenya) Ltd vs. Commissioner of Customs And Border Control - TAT NO 340/2020 where the Commissioner had demanded additional taxes on the basis that the relationship between the Appellant and its related manufacturer of the products it was selling was influencing the prices of the imports.

d. Whether the Appellant was justified in relying on the transfer pricing policy in justifying the use of the Transaction Value Method. 42. The Appellant stated that the Respondent had alleged in its Amended Statement of Facts that the transfer pricing policy of an organization is not applicable in determining the customs value of goods imported into partner states. On the contrary the Appellant submitted that this contention is an utter misconstruction of the provisions of EACCMA, the World Customs Organisation (WCO) Guide on Customs Valuation and Transfer Pricing Guidelines for Multinationals and Enterprises and Tax Administration, 2017 and the EAC Valuation Manual.

43. That the WCO Guide to Customs Valuation and Transfer Pricing Guidelines provide that in proving the circumstances surrounding a sale and that the price was not affected by the relationship, transfer pricing study prepared in accordance with OECD Transfer Pricing Guidelines and provided by importers as a basis for examining “circumstances surrounding the sale.” It specifically provides that:“the use of transfer pricing study as a possible basis for examining the circumstances of the sale should be considered on a case-by-case basis. As a conclusion, any relevant information and documents provided by an importer may be utilized for examining the circumstances of the sale. A transfer pricing study could be one source of such information”.

44. That the 2017 OECD Guidelines provide that:“The arm’s length principle is applied, broadly speaking, by many customs administrations as a principle of comparison between the value attributable to goods imported by associated enterprises, which may be affected by the special relationship between them, and the value for similar goods imported by independent enterprises”.

45. That the EAC Customs Valuation manual at Paragraph 5 provides:“Customs officers remain aware that a large percentage of today’s international trade is made up of the transfer (or movement) of goods and/or services between multinational enterprises (MNE’s) and their subsidiaries. In doing their business, MNE’s will develop transfer pricing policies between the parent company and its subsidiaries. Transfer pricing with MNE’s is an everyday practice in international trade. Where Customs is dealing with a declared related party transaction and the parties were not previously known to Customs, the transfer pricing agreement is an essential document to review as it contains all aspects of the transfer pricing arrangements as well as (usually), the formulae………..In related party transactions, the majority of MNEs openly declare their related party and subsidiary status regarding imported goods. As earlier mentioned, just because an importation is between related parties, there is no need for customs to jump to the conclusion that there will be some form of price manipulation. A related party transaction does not mean that the price has been influenced by the relationship…………”.

46. The Appellant submitted that its transfer pricing policy with the related parties documents the arm’s length policy. That one of the related party transactions documented in the TP policy is the purchase of tangible goods by the Appellant from Rohto group entities. That the Appellant carried out a comprehensive benchmarking analysis of comparable companies involved in the purchase of similar groups and has annexed to the submissions a copy of the TP policy.

47. That based on the benchmarking analysis, the Appellant averred that it established that its Operating Margins are within the identified inter-quantile range of operating margins of comparable companies hence the pricing of the products purchased from non-resident related parties was considered to be at arm’s length and does not pose a transfer price risk from a Kenyan perspective.

48. The Appellant averred that as per Subparagraph 2 of the Interpretive Notes under Part 11 of the Fourth Schedule to the EACCMA, it has demonstrated that for the period under review, the Appellant realized gross margins of between 20% and 65% for most of the products sold in Kenya and the realized margins are annexed to the submissions.

49. That the realized profits, as per the Appellant are a demonstration that the relationship between the Appellant and the related entities did not influence the price of the imported goods. It added that its ability to operate at a profit is evidence that the transfer prices charged by the non-resident sellers to the Appellant is at arm’s length.

50. The Appellant therefore averred that as argued, the WCO Guide to Customs Valuation and Transfer pricing and the EAC Valuation Manual guides revenue Authorities on the relationship between Customs valuation and transfer pricing. That this guide recognizes that a review of the transfer pricing policy is necessary to determine whether the prices set are at arm’s length.

51. That the Respondent’s review decision is a clear demonstration of lack of understanding of the circumstances of the sale when the Respondent averred that expenses incurred in distribution, advertisement and registration should not be considered. On this it relied on the case of BASF East Africa Ltd vs. The Commissioner of Customs & Border Control - TAT NO, 115/2020.

52. The Appellant also averred that the transaction value of identical goods or similar goods could not be used in the determination of the test value as the Appellant is the sole importer of the acne products. That in addition, test values of similar goods would not be applied because the brand of products involved is unique and there are no similar goods in the market. Further, that deductive value could not be used in absence of similar or identical products in the market and therefore no comparative unit price at which the imported goods or identical/similar goods are sold in the greatest aggregate quantity.

53. The Appellant averred that the computed value of the imported (acne products and Mentholatum products) as per the information provided closely approximates the customs value of the goods declared hence the transaction value declared by the Appellant is acceptable. That a comparison of the values for the acne range of products which form the bulk of the assessment is tabulated below:SUBDIVISION - Comparison of transaction value declared by the Appellant and computed value in USDPRODUCT NAME UNIT SIZE DECLARED CUSTOMS VALUE (USD) COMPUTED VALUE (USD)

Acne Creamy Wash 50g 0. 51 0. 504

Acnes Creamy Wash 100g 0. 77 0. 815

Acnes Sealing Gel 9g 0. 60 0. 712

Acnes Scar Care 12g 0. 74 0. 643

Acnes Soothing Toner 90g 1. 03 1. 019

Acnes Pure White Cream 40g 1. 69 1. 919

Acnes C10 15ml 3,13 2. 482

Acnes Vitamin Cleanser 50g 0. 56 0,554

Selsun anti-dandruff shampoo 50ml 0. 93 0. 918

Selsun anti -dandruff shampoo 100ml 1. 459 1. 443

54. The Appellant added that the TP policy stipulates the functions performed, assumed, and assets utilized by each of the transacting entities which the Appellant is now performing but were not being undertaken by Harleys. The Appellant in consideration of this failure urged the Tribunal to vacate the Respondent’s demand as was held in the case of Glaxosmithkline (K) Ltd. vs. Commissioner Of Customs & Border Control - TAT NO.340/2020.

v) Whether the Respondent has incorrectly applied the deductive value method to imports by the Appellant 55. The Appellant submitted that the Respondent invoked and incorrectly applied the deductive value method. That the first issue to be considered on this aspect as per Paragraph 6 of the Fourth Schedule is comparing the imports value to the values of “similar or identical goods” and that the parties are in agreement that there are no similar or identical goods in the market as the ones sold by the Appellant.

56. That the next issue as per the law is to determine the customs value on the basis of the unit price at which the imported goods are sold to an unrelated buyer in the greatest aggregate quantity in the Country of importation. That this is the sale at the first commercial level after importation at which such sales take place.

57. The Appellant averred that the first commercial level sale after importation is the sale to Harleys which is the sole distributor of the imports. That the Respondent on the other hand erroneously justified its use of the deductive value method and identified the retailers as the first commercial level buyers of the imports. It adds that the greatest aggregate quantity is concerned with the highest units sold at a price as opposed to the highest number of units sold at the highest price.

58. The Appellant argued that the deductive value method results in unreasonable increase in the value of goods. The Appellant stated that the (FOB) value under evaluation does not include costs such as insurance costs, freight costs and taxes further included. That once the Appellant includes these expenses on the FOB computed using deductive method, the value will increase beyond the price charged to Harleys.

59. The Appellant further submitted that the values determined by the Respondent using the deductive method are unreasonable as the percentage in prices increase up to 191% in certain circumstances and the Appellant has annexed the analysis of the percentages to the Statement of Facts.

vi) Whether the Respondent’s comparison of the customs value of the acne range of products and deep heat range of products is erroneous and lacks legal backing 60. The Appellant submitted that the Respondent’s contention that the deductive value method was only applied in respect to the acne products and not the Mentholatum products is erroneous as the tax demand in issue relates to both.

61. The Appellant also averred that the Respondent’s comparison of the customs value of the acne range of products and deep heat range of products imported by Harleys prior to the year 2016 lacks legal backing as the products being compared are not similar or identical and that the origin, manufacturer, nature and pricing structure and terms and conditions of the two are different and thus their customs value are not comparable.

62. The Appellant therefore avers that the assertation by the Respondent, while justifying use of deductive value method that the transaction values declared by previous importers of Mentholatum products (Harleys) were in variance with the current value is erroneous as the two products are not comparable.

Appellant’s Prayers 63. The Appellant prayed for orders that:a.The decision of the Respondent in the letter dated 22nd October 2021 demanding payment of ksh.27,434,130 be set aside in its entirety.b.The decision of the Respondent in the letter dated 22nd October 2021 is not a valid review decision as it contravenes Section 229 (4) of EACCMA and should be vacated in its entirety.c.The Respondent in disregarding the use of the transaction value method failed to follow due process and appreciate the fact that the relationship between the Appellant and its non-resident entities, Mentholatum Co. Ltd (UK) and Rohto Mentholatum (Vietnam) Co. Ltd did not influence the price of the imported goods.d.The Appellant was correct in using the transaction value method as the customs valuation method for its imported products as provided for under Section 122 and the Fourth Schedule of EACCMA.e.The Respondent in uplifting the customs value incorrectly applied the deductive value method to value imports of the Appellantf.The Appeal be allowed with costs to the Appellant

Respondent’s Case 64. The Respondent’s case is set on the following:a.The Respondent’s Statement of Facts dated 6th January 2021 and filed on the same dateb.The Respondent’s Supplementary Statement of Facts dated 6th April 2022 and filed on the same datec.The Respondent’s witness statement of Kennedy Wambua dated 25th August 2022 and filed on 26th August, 2022 and the evidence made on oath on 12th October 2022. d.The Respondent’s written submissions dated 26th October 2022 and filed on the same date

65. The Respondent raised 4 issues for determination as hereunder:

a. Whether the Respondent’s tax decision dated 22nd October 2022 contravened Section 229 of EACCMA 66. The Respondent stated that an examination of the letter of findings dated 26th February 2021 would clearly show why it deviated from the transactional value method and applied the deductive value method. In the letter, the Respondent stated that:a.The accuracy of the transaction method applied by the Appellant in its import declarations could not be fully ascertained due to the failure of the company to produce additional supporting documentation requested by the Respondent. That this included the unit cost information for acne products which was required to confirm the accuracy of the declared transaction values given the supplier-importer relationship (documents to demonstrate computed value method);b.The transaction values declared by the previous importer of Mentholatum products varied with the current values (FOB values) declared for customs purposesc.The deductive method was used because the transaction value was not acceptable due to the fact that the buyer and the seller are related entities and therefore their relationship influenced the priced.The transaction value of identical goods was not used as the Appellant is the sole importer of acnes, selsun goods in Kenya and there is no other importer to compare withe.The transaction value of similar goods was not taken into account because the brand of products involved are unique to the demographic and the brand is well differentiatedf.The team did not use the computed value since the costing were not availed and thus the information provided was not sufficient to enable use of the same

67. The Respondent also averred that it held several meetings with the Appellant in which it explained the reasons for the deviation from the transactional value method to the deductive method and upon review of the Appellant’s grounds for appeal the Respondent argued that there was nothing new that had not been canvassed in the previous engagement to warrant vacation of the assessment.

68. The Respondent averred that it acted within the confines of the law and did not violate the provisions of the Kenyan Constitution and or The Fair Administrative Actions Act since it accorded the Appellant an opportunity to avail documents and offer explanations on the issues raised. It added that its action was not illegal, irrational or unreasonable and the Appellant’s rights to fair administrative action were not violated and, on this issue, relied on the cases of Associated Provincial Picture Houses vs. Wednesbury Corp. (1948)1KB and Bernard Murage VS Fineserve Africa Ltd & Others (2015) eKLR.

69. The Respondent submitted that it followed the right procedure in the whole process from assessment to review decision and the decision made was valid having met the requirements under Section 229 (4) of EACCMA and the Appellant’s allegations to the contrary were baseless and brought in bad faith.

b.Whether the Respondent erred in disregarding the Transactional Value Method and adopting the deductive value method 70. The Respondent averred that contrary to the Appellant’s allegations that the Respondent whilst disregarding use of transactional value method failed to follow due process and appreciate that the relationship between the Appellant and its non-related parties, Rohto Mentholatum -UK and Rohto-Vietnam did not influence the price of the imported goods, it submitted that during the audit it noted instances of undervaluation of the consignment.

71. The Respondent stated that there was a sudden drop beyond allowable discounts on the values declared by the Appellant as compared to those declared by Harleys Ltd a non-related entity which used to import the same products before the Appellant was incorporated.

72. The Respondent stated that Harleys used to import the products in the year 2015 until the Appellant was incorporated. That over the years it was noted that the prices were going down despite various factors affecting manufacturing and production globally so that when the Appellant started importing the products in issue the prices were much lower than they had been 3 years earlier when Harleys was importing. The Respondent then concluded that the relationship between the parties was influencing the prices for the purpose of reducing the import duty and increasing the profit margins.

73. The Respondent averred that it used the invoices of Harleys only to show that other suppliers of similar and identical goods from the same geographical region were compensating at the invoice value but the same was not a basis of computation of taxes.

74. The Respondent added that it was not under any obligation to rely solely on the information supplied by the Appellant and that upon carrying out an audit on the latter’s operations it concluded that the information supplied was irrelevant and unreliable.

75. The Respondent submitted that in determining the value of imports, it is guided by the provisions of Section 122, and the Fourth Schedule to EACCMA 2004, which lays out the manner of determining the value of imports and sets out the methods of valuation which are applied in a consequential order. It is only where the value cannot be determined in one method that the next method is considered.

76. The Respondent submitted that the method of valuation used depends on the facts of each case and the information available in the matter indicated that the relationship between the Appellant and the persons they were importing from affected the transactions value and therefore the transactions value method was inapplicable.

77. That the reasons for deviating from the transactional method were explained to the Appellant in accordance with Article 2 (1)(d) and 2 (2)(a) of the Fourth Schedule of EACCMA vide a letter dated 26th February 2021. The Respondent added that it gave the Appellant the opportunity to explain the huge drop on the prices but the Appellant was unable to satisfactorily explain the application of the transactions values in its imports as the same were much lower than the values declared by the former importer and the Respondent proceeded to duty uplift using the available methods.

78. That Section 122 of EACCMA read together with the Fourth Schedule as the Interpretive Section defines how the value of the imported goods is to be determined and Paragraphs 2,3,4,5,6,7 and 8 of the Schedule are applied sequentially through the succeeding Paragraphs.

79. That Paragraph 2 of the Fourth Schedule provides that the customs value of the imports shall be determined by the transaction value and which is the actual price paid for the goods when sold for export to the Partner State which is adjusted in accordance with the provisions of Paragraph 9.

80. The Respondent averred that the transaction value method should not be used to determine the custom value of goods in circumstances where the sale price of the goods being valued is subject to some conditions or consideration for which a value cannot be determined.

81. It is also the Respondent’s submissions that in computing taxes due using the transaction value method for sales between related persons, the method can only be recognized as the method used by the importer if its value closely approximates one of the following occurring at or about the time of importation:i.The transaction value in sales between buyers and sellers who are not related for identical or similar goodsii.The customs value of identical or similar goods which have been determined under the deductive or the computed methodsThat this is premised under Article 2 (1)(d) and 2 (2) (a) of the Fourth Schedule 2004.

82. The Respondent submitted that the transaction value method applied by the Appellant being doubtful, the Respondent had to use other methods in the manner stipulated under Article 3 of the Fourth Schedule of EACCMA 2004.

83. The Respondent therefore refuted the allegation that it arbitrarily shifted from one method to another as the first three methods failed and the next sequentially acceptable method under the Fourth Schedule was the deductive value method and the Respondent therefore observed the Statutes and, on this issue, relied on the case of R vs. Commissioner of Domestic Taxes Large Tax Payers Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR.

84. The Respondent reiterated that in disregarding the transactional value method, it followed the law and also took into consideration the fact that the Appellant failed to provide the information required including the actual costs of the products.c)Whether the Respondent erred in disregarding the Appellant’s Transfer pricing policy in determining the custom’s value of the goods

85. The Respondent submitted that the Appellant’s transfer pricing policy is not one of the valuation methods envisaged under EACCMA. However, the OECD Guidelines have allowed consideration of the transfer pricing policy in determining value of goods.

86. The Respondent submitted that transfer pricing allows for the establishment of the prices of the goods and services exchanged between subsidiaries, affiliates or commonly controlled companies that are part of the same large enterprise. They guide on the price for goods and services exchanged between subsidiaries, affiliates or commonly controlled companies of the goods.

87. The Respondent took note of the arm’s length principle which is integral to transfer pricing. That the principle requires that related parties price their transactions with each other as if they were wholly independent of each other.

88. That in looking at the transaction and the Appellant’s transfer policy, it is indicated that the Appellant was responsible for the overall license registration, advertising, distribution and management. The Respondent disagreed with this position on the basis that the consumers who purchased the items from the retail stores bore the final cost burden and the custom’s value should be the same value the product would have been sold to a none related 3rd Party.

89. The Respondent averred that on reviewing the Appellant’s documents noted that the Appellant’s prices were significantly lower than those of Harleys Ltd contrary to the requirements of the Arm’s length principle which requires that prices quoted in a transaction between related parties ought to be the same as the price placed before an unrelated party. That the Appellant was requested to give an explanation on the same and which itfailed to satisfactorily provide.

90. The Respondent averred that the Appellant did not adhere to the transfer pricing policy and the OECD guidelines and that it was upon the Appellant to demonstrate the elements of the transfer pricing which the Respondent had not considered but the Appellant failed to discharge the duty.

91. The Respondent maintained that it considered the Appellant’s transfer pricing policy but the same did not have the effect of altering the assessment.

d) Whether the Respondent in uplifting the custom’s values incorrectly applied the deductive value method 92. The Respondent submitted that when the customs value cannot be determined through the transaction value method or identical or similar goods, it will be determined on the basis of the unit price at which the imported goods or identical or similar goods are sold to an unrelated buyer in the greatest aggregate quantity in the country of importation. The buyer and the seller in the importing country must not be related and the sale must take place at or about the time of importation of the goods being valued. If no sale took place at or about the time of importation, it is permitted to use sales up to 90 days after importation of the goods being valued.

93. The Respondent argued that under Article 5. 1 the unit price at which the imported goods or identical or similar imported goods are sold in the greatest aggregate quantity is to be the basis for establishing the customs value. The greatest aggregate quantity is, according to the Interpretative Note to the Article, the price at which the greatest number of units is sold to unrelated persons at the first commercial level after importation at which such sales take place. To determine the greatest aggregate quantity all sales at a given price are taken together and the sum of all the units of goods sold at that price is compared to the sum of all the units of goods sold at any other price. The greatest number of units sold at one price represents the greatest aggregate quantity. On this point, the Respondent also relied on the provisions of Paragraph 6 of the Fourth Schedule to EACCMA.

94. The Respondent also added that it applied the deductive method correctly after factoring in all the available information. The Respondent stated that Harley’s as argued by the Appellant is not the first commercial level after importation. It stated that the Appellant took over all the roles and responsibilities previously undertaken by Harleys and therefore the first commercial level after importation at which such sales were picked is to be Naivas Supermarket, My Dawa etc. The Respondent also argued that the first commercial level after importation would not be Harleys because the selling price to Harleys by the Appellant is limited to conditions related to its position as an exclusive distributor and which value cannot be determined.

95. The Respondent averred that the values identified to be “the unit price at the greatest aggregate quantity” the FOB is determined by reduction of the costs that accrue on the goods from the point of exportation. The Respondent reduced Government taxes, distribution cost (20%) and a mark-up of 40% to arrive at the customs value.

96. The Respondent also submitted in support of its case the holding in R vs. Commissioner Of Domestic Taxes Large Taxpayers Office Ex-Parte Barclays Bank of Kenya Ltd [2012] eKLR.

97. The Respondent finally submitted that the Appellant has not demonstrated how the Respondent misapplied the deductive value method to arrive at the alleged incorrect customs value and that the Appellant has also not proved that the Respondent erred in deviating from the transactional value and applying the deductive method.

Respondent’s Prayers 98. The Respondent prayed for:a.Dismissal of the Appeal with costsb.Upholding of the Respondent’s review decisionc.A finding that the additional import of Kshs. 27,434,130. 00 raised by the Respondent be confirmed and the principal taxes, interests and penalties be found due and payable as per the objection decision rendered by the Respondent

Issue For Determination 99. The Tribunal upon consideration of the pleadings, evidence, and the submissions filed by both parties concluded that there is only one issue for determination as set out hereunder:Whether the Respondent erred in law in departing from the transaction value method in valuing the Appellant’s goods

ANALYSIS AND FINDINGS 100. The Appellant submitted that it declared the value of its products (acne and mentholatum) using the transaction value method (TVM or Method 1) pursuant to the Fourth Schedule of the EACCMA and the World Trade Organization Agreement on Customs Valuation.

101. The Fourth Schedule which is the reference point in determining the value of imported goods liable to ad valorem import duty provides six methods of determining the customs value of imported goods namely:i.Transaction Value Method (Method 1)ii.Transaction Value Method of identical goods (Method 2)iii.Transaction Value Method of similar goods (Method 3)iv.Deductive Value Method (Method 4)v.Computed Value Method (Method 5)vi.Fallback Value Method (Method 6)

102. The Interpretive Notes in Part 11 of the Fourth Schedule (Interpretive Notes) set out the applicability of the valuation in that they should be applied in “sequential order of application” as follows:i.Method 1 must be attempted firstii.Method 2 can only be considered if the customs value cannot be determined under the first methodiii.Method 3 to 6 follow the same procedure as Method 2iv.Method 6 can only be applied where all the previous methods are not applicable andv.The only exception is that the sequence of methods 4 and 5 may be reversed.

103. The Appellant also submitted that under EACCMA the transaction value method is the primary method of valuation and that the Respondent can only resort to the other methods of valuation after the first method fails.

104. The Appellant added that the default method of customs valuation is transaction value method whether or not the parties are related. That even if the parties are related, the Commissioner should give the taxpayer the opportunity to supply further information in support of its case.

105. The Respondent’s letter dated 26th February 2020 communicating the Commissioner’s position on the post audit indicated why the deductive value method was used and stated:i.Transaction value was not accepted because the buyer and seller are related entities and the relationship influenced the price. This was demonstrated in the case of the Mentholatum products. The products were previously imported and distributed by Harleys Limited and the prices at that time were higher.ii.Transaction Value of identical goods was not used as Rhoto Mentholatum Kenya was the sole importer of the acnes, selsun goods in Kenya and there was therefore no other importer to compare with.iii.Transaction value of similar goods was also not taken to account. This was because the brand of products involved are unique to the demographic and the brand is well differentiated.iv.The team did not use computed value as all the costings were not availed and thus the information provided was not sufficient to enable use of the same.

106. Paragraph 2 (2) (a) of the Fourth Schedule, Part 1, provides as follows regarding related party transactions:“In determining whether the transaction value is acceptable for the purposes of subparagraph (1), the fact that the buyer and the seller are related within the meaning of Paragraph (1) shall not in itself be a ground for regarding the transaction value as unacceptable. In such case the circumstances surrounding the sale shall be examined and transaction value shall be accepted provided the relationship did not influence the price. If, in light of information provided by the importer or otherwise, the proper officer has grounds for considering that the relationship influenced the price, he shall communicate his grounds to the importer and such importer shall be given reasonable opportunity to respond and where the importer so requests, the communication of the grounds shall be in writing”.

107. Subparagraphs (2) (a) and (3) of the Notes to Paragraph 2 of the Interpretative Notes provide that:(2)“….Where the buyer and the seller are related, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted as the customs value provided that the relationship did not influence the price. It is not intended that there should be an examination of the circumstances in all cases where the buyer and the seller are related. Such examination will only be required where there are doubts about the acceptability of the price…”(3)”Where the proper officer is unable to accept the transaction value without further inquiry, it should give the owner an opportunity to supply such further detailed information as may be necessary to enable it to examine the circumstances surrounding the sale. In this context, the proper officer should be prepared to examine relevant aspects of the transaction including the way in which the buyer and the seller organize their commercial relations and the way in which the price in question was arrived at, in order to determine whether the relationship influenced the price. Where it can be shown that the buyer and seller, although related under the provisions of Paragraph 1, buy from and sell to each other as if they were not related, this would demonstrate that the price had not been influenced by the relationship. As an example of this, if the price had been settled in a manner consistent with the normal pricing practices of the industry in question or with the way seller settles prices for sales to buyers who are not related to the seller, this would demonstrate that the price had not been influenced by the relationship. As a further example, where it is shown that the price is adequate to ensure recovery of all costs plus a profit which is representative of the firm’s overall profit realized over a representative period of time e.g. on an annual basis in sales of goods of the same class or kind, this would demonstrate that the price had not been influenced.”

108. Paragraph 6 of the Fourth Schedule on application of the deductive value method provides as follows:“(1)(a)Where the imported goods or identical or similar imported goods are sold in the Partner State in the condition as imported, the customs value of the imported goods under the provisions of this paragraph shall be based on the unit price at which the imported goods or identical or similar imported goods are so sold in the greatest aggregate quantity, at or about the time of the importation of the goods being valued, to persons who are not related to the persons from whom they buy such goods, subject to deductions for the following:(i)either the commission usually paid or agreed to be paid or the additions usually made for profit and general expenses in connection with the sales in such country of imported goods of the same class or kind;(ii)the usual costs of transport and insurance and associated costs incurred within the Partner State;(iii)Where appropriate, the costs and charges referred to in Paragraph 9 (2); and(iv)the customs duties and other national taxes payable in the Partner State by reason of importation or sale of goods(b)Where neither the imported goods nor identical nor similar imported goods are sold at or about the time of importation of the goods being valued, the customs value shall, subject to the provisions of subparagraph (1) (a),be based on the unit price at which the imported goods or identical or similar imported goods are sold in the Partner State in the condition as imported at the earliest date after the importation of the goods being valued but before the expiration of 90 days after such importation”.

109. Note 1 to Paragraph 6 of the Interpretive Notes gives guidance that the term “unit price at which goods are sold in the greatest aggregate quantity” means “the price at which the greatest number of units is sold in sales to persons who are not related to the persons from whom they buy such goods at the first commercial level after importation at which such sales take place”.

110. Notes 6 and 7 to Paragraph 6 of the Interpretive Notes provide that “general expenses” include direct and indirect costs of marketing the goods, and that the figures for purposes of deduction of profit and general expenses should be determined based on information supplied by or on behalf of the importer unless the importer’s figures are inconsistent with those obtained in sales in partner states of imported goods of the same kind.

111. The Tribunal noted that the Appellant made available to the Respondent its transfer pricing documentation, valuation methodology and the schedule of prices supporting the same. All these is well laid out in the Appellant’s letter dated 9th March 2021 and the minutes of the meeting held on 30th March 2021. The documents in issue were also annexed to the Appellant’s Statement of Facts. However, there is no evidence that this information was taken into consideration by the Respondent in arriving at its decision. This is clearly the case taking into account the review decision.

112. During the hearing, it also came out very clearly that the Respondent had not formally and specifically sought out of any particular details from the Appellant and which was not provided for. In the letter of 26th February 2021 to the Appellant from the Respondent on the last paragraph on page one its clearly stated as follows:“You have provided books of accounts including purchase ledger, accounts payables/receivables and bank records. The records produced confirmed that you keep proper books of accounts as per the requirements of the International Financing Reporting Standards (IFRS).

113. The Respondent did not demonstrate to the Appellant or the Tribunal whether it observed “the circumstances of sales test” provided for under Paragraph 2 of the Interpretive Notes to the Fourth Schedule by examining relevant aspects of the transaction, including the way in which the buyer and seller organize their commercial relations and the way in which the price in question was arrived at in order to determine whether or not the relationship had influenced the price.

114. The Tribunal thus found that the Respondent’s decision was arbitrary and not objective. The Respondent did not demonstrated that the relationship between the Appellant and its suppliers influenced the valuation to justify its application of an alternative method to the transaction value method.

115. The Tribunal reiterates the decision in Glaxosmithkline (K) Ltd vs. Commissioner of Customs & Border Control [TAT NO.340 of 2020] and while citing the case of Autopress Ltd vs. Commissioner, Customs and Border Control [Appeal No.33 of 2018] held that:“….That Section 122 (1) is couched in mandatory terms. It provides that the value of such goods shall be determined in accordance with the Fourth Schedule and import duty shall be paid on that value. It does not give any discretionary powers on the Commissioner to rely on alternative methods without following the procedure or directives laid out in the Fourth Schedule. In other words, it is the price paid for the goods by the buyer or importer which forms the basis for assessing the customs duty payable on the goods…”

116. The Tribunal in the same case also added that:“Section 122 (4) of the EACCMA allows a customs officer the right to satisfy themselves as to the truth or accuracy of any statement, document or declaration. This position is also supported by Text 1. 1 of the commentary by the WCO Technical Committee on Customs Valuation (TCCV). However, in doing so, the TCCV also advises (in Decision 6. 1) that in so doing, Customs administrations should not prejudice legitimate commercial interests of the importer.”

117. The Tribunal also took into consideration the holding in the case of Wallpaper Kenya Ltd vs Commissioner of Customs & Border Control (TAT Case No.279/2020) where the Tribunal while reiterating the holding in Testimony Motors Ltd vs The Commissioner of Customs (2012 HC Civil Suit No.212) affirmed the position that the transaction Value Method must always be used except in very exceptional circumstances and stated :“I agree with the plaintiff’s submissions that Section 122 of East African Community Customs Management Act,2004 subsection 1 thereof is couched in mandatory terms .It provides that the value of such goods shall be determined in accordance with the fourth schedule and import duty shall be paid on the value.It does not give any discretions powers on the Commissioner to rely on alternative methods without following the procedure or directive laid out in the Fourth Schedule.The primary method which was agreed upon is the method that must be first attempted.It is only upon failure of the primary method that alternative methods can be applied…”

118. The Tribunal also notes that the interpretation of the Respondent of the provisions of Section 122 of EACCMA was misleading and geared towards uplifting of further import duty against the Appellant.This scenario had been envisaged by the courts earlier on when the holding of the famous Cape Brandy case was made and the same was meant to discourage inclusion of persons into the bracket of tax payers when the law did not provide for that inclusion. In other words it is trite law that one can only be taxed against clear provisions of the taxing law. That the rationale behind this doctrine is that levying of tax is burdensome and tax should only be imposed if the language of the statute unequivocally says so. That Rowlatt J in the famous case of The Cape Brandy Syndicate –v- The Commissioner of Inland Revenue (1) (1930) 12 TC 358 expressed as follows:“In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied’ and ‘subsequent legislation, if it proceeded on an erroneous construction of previous legislation, cannot alter the previous legislation”.

119. The Tribunal also took into consideration the holding in the High Court case Export Trading Company vs. Kenya Revenue Authority [2018] eKLR where it was held as follows:“This court notes that the importance of taxation and the collection of taxes for any government cannot be gainsaid. It must however be noted that the processes and procedures leading to the collection of the said taxes must meet the relevant legal and constitutional thresholds in order to ensure the citizen’s rights have not been violated and/or are threatened with violation”.

120. The Tribunal therefore found that the Respondent erred in its decision to depart from the use of the transaction value method in valuing the Appellant’s goods.

Final Decision 121. The upshot of the foregoing analysis is that the Appeal is merited and the Tribunal accordingly proceeds to make the following final Orders:a.The Appeal be and is hereby allowed.b.The Respondent’s review decision dated 22nd October 2021 be and is hereby set aside.c.Each party to bear its own costs.

122. It is so ordered.

DATED AND DELIVERED AT NAIROBI ON THIS 26TH DAY OF MAY, 2023………………………ERIC N. WAFULACHAIRMAN.……………………CYNTHIA MAYAKAMEMBER..............................GRACE MUKUHAMEMBER………………..…..……..……MEMBER........................ABRAHAM KIPROTICH..................MEMBER......................JEPHTHAH NJAGIMEMBERJudgment– 789 of 2021 - Rohto Mentholatum (K) Ltd -vs- Commissioner of Customs & Border Control Page 13