Tax Appeals Tribunal Decision Post Clearance Valuation Related Parties>Customs Tax Consultant Kenya

1. The Respondent carried out a Post Clearance Audit (“PCA”) of the Appellant’s import operations for the period August 2014 to July 2019. Arising from this exercise, the Respondent issued, in a letter dated 18^th December 2019, a demand for additional import duties amounting to Kshs 111,002,534.00 inclusive of penalties and interest. This amount was made up of: (i) Kshs 42,890,879.00 for undervaluation of agricultural products imported from related parties and (ii) Kshs 68,111,655.00 import duties on licence fees paid by the Appellant on Own Manufactured Products.

JUDGMENT

BACKGROUND

1. The Appellant is a limited liability company that deals in the manufacture and distributionof construction chemicals, agricultural productsand other chemical products.
2. The Appellant is also a subsidiary of BASF SE, Germany (“BASF SE”).
3. The Respondent is a principal officer of the Kenya Revenue Authority, which is established underthe Kenya Revenue Authority Act and is charged with the responsibility of assessing, collecting and accounting fortaxes on behalf of the Government of Kenya.
4. The Respondent carried out a Post Clearance Audit (“PCA”) of the Appellant’s import operations for the period August 2014 to July 2019. Arising from this exercise, the Respondent issued, in a letter dated 18^th December 2019, a demand for additional import duties amounting to Kshs 111,002,534.00 inclusive of penalties and interest. This amount was made up of: (i) Kshs 42,890,879.00 for undervaluation of agricultural products imported from related parties and (ii) Kshs 68,111,655.00 import duties on licence fees paid by the Appellant on Own Manufactured Products.

 The Appellant applied for a review of the Respondent’s decision through a letter dated 17^thJanuary 2020 stating its grounds for disputing the import duties assessed and demanded.

5. The Respondent however proceeded to confirm the tax demand vide an Objection Decision elated 14^thFebruary 2020.
6. Aggrieved by the Respondent’s decision, the Appellant filed a Notice of Appeal on 13^thMarch 2020.

APPELIANTSCASE

8. The Appellant’s grounds of Appeal are:
9. THAT the Respondent erred in fact and law in finding that the relationship between the Appellant and its related party supplier (BASF SE,Germany) influenced the price of the imported agricultural products in total disregard of the circumstances of sale test;
10. THAT the Respondent erred in fact by finding that the gross commissions paid to the Appellant were not in tandem with expected business practice, and by incorrectly adjusting the transaction value of identical goods by only 10%;

• THAT the Respondent erred in fact and law by failing to take into account the differences in functions performed and risks assumed by the Appellant and third-party importers in determining whether the prices declared by the Appellant were low.

1. THAT the Respondent erred in fact and law by alleging that the Appellant did not appropriately demonstrate that the transaction value closely approximated the customs value determined by using the deductive method.
2. THAT the Respondent erred in fact and law by disregarding the fact that the price of agricultural products imported by the Appellant was determined in accordance with the Resale Price Minus (RPM) method which is consistent with the deductive value method.
3. THAT the Respondent in applying the transaction value of identical goods did not make appropriate adjustments for differences in commercial and quantity levels in accordance with Paragraph 3 of the Fourth Schedule to the EACCMA.

• THAT the Respondent in applying the transaction value of identical goods method did not take into account time differences in accordance with Paragraph 3(1) (a) of the Fourth Schedule to the EACCMA.
• THAT the Respondent erred in fact and law by finding that the license fees paid by the Appellant to BASF Construction Research and Technology (‘BCRT’) related to the imported goods and were paid as a condition of sale in accordance with the Fourth Schedule of the EACCMA.

1. THAT the net salesvalueof the Appellant’s own manufactured products that the Respondent alleges to have relied on in assessing additional import taxes, were grossly overstated and not as reported in the Appellant’s audited financial statements.
2. THAT the Respondent erred in fact and law by compounding the late payment interest imposed on what it alleges to be outstanding import taxes relating to license fees.

RESPONDENTS CASE

9. The Respondent vide a letter dated 27^thJune 2019 notified the Appellant of the intention to conduct a Post Clearance Audit (TCA’) to review the Appellant’s customs transactions for the period August 2014 to July 2019. The PCA was conducted pursuant to Sections 235 and 236 of the EACCMA.
10. The selection of the Appellant for audit arose from a referral by the Valuation Unit as a result of the Appellant filing an application for review

of a decision to adjust the customs value of one of its products, Meltatox in a letter dated 19^th December 2018.

11. The Appellant had in its appl ication sought a review of a decision to adjust the customs value of Meltatox, a fungicide, citing the exclusion of marketing commissions due to the change in the Appellants business model from an Agency to a Merchandiser.
12. The audit commenced on 14^thAugust 2019 and was completed on 5^th November 2019 vide an exit meeting between the Respondent’s team, the Appellant’s team and its tax agent.
13. A demand note of Kshs 111,002,534.00 was raised based on two issues, namely:
14. Undervaluation of agricultural products from January 2018 to July 2019;and
15. An adjustment to the transaction value of the 4%licensing fees paid/payable to BCRT.
16. The findings of the PCA necessitated application of the Transaction Value of Identical Goods which was essentially the price during the Agency business model, but with necessary adjustment to the gross commissions in line with the Generally Accepted Accounting Principles due to the abnormal range of the gross commission.
17. That the Appellant’s contention that the transaction value closely approximated the unit value upon application of the deductive value method, was not accepted because:
18. The 15% rebate indicated did not appear in any of the commercial invoices exhibited as a term and neither were any sale agreements availed to support the same.
19. The factors of the percentage variance calculation have not been indicated.

• The exchange rate used to convert the transaction value arising from the application of deductive value method was not revealed.

16. Accordingly, the transaction values of agricultural products was deemed inadequate and had not been sufficiently demonstrated by the Appellant.

 

17. In addition, the fact that the Appellant is related to the suppliers from whom these goods are purchased further raised doubt as to whether the price of imported goods reflected an arm’s length transaction.
18. A review of the Appellant’s records established it paid license fees which ought to have formed part of the transaction value of imported goods to be used for local manufacture of construction materials since the payment was a condition of sale as determined by clauses of the Licensing Agreement.
19. The Royalties paid for 2015 were 4% ofthe net sales of KShs 394,057,820.00 as established from the Audited Accounts. This was also as per annex 2 of the Appellants licensing agreement. Annex 2 was then adjusted in 2016 to reduce royalties payable which was a consideration in charging duties on royalties paid during the audit period.

SUBMISSIONS BY THE PARTIES

1. That the relationship between the Appellant and fts related party supplier did not influence the price of the agricultural products sold.
2. The Appellant submits that the relationship between BASF SE and BASF EA did not influence the price actually paid or payable, and therefore the Transaction Value method was correctly applied in declaring the customs value of the goods in question.
3. According to the Respondent, the transaction values of agricultural products was deemed inadequate and was not sufficiently demonstrated by the Appellant. Furthermore, the fact that the Appellant is related to the suppliers from whom these goods are purchased also raised doubt as to whether the price of imported goods reflected an arm’s length transaction.
4. However, the Appellant argues that Section 122 of the EACCMA provides that when goods are liableto import duty ad valorem,their value shall be determined in accordance with the Fourth Schedule of the Act. The said Section of EACCMA provides as follows:-

^ft(1) Where imported goods are liable to import duty ad valorem, then the value ofsudi goods shall be determinedin accordance with the Fourth Schedule and import duty shall be paid on that value.

• Upon written request, the importer shall be entitled to an explanation in writingfrom the proper officer as to how the Customs value of the importer’s goods was determined.
• Where, in the course of determining the customs value of imported goods, it becomes necessary for the Customs to delay the final determination of such customs value, the delivery ofthegoods shall, at the request of the importer be made:

 

may receive the importerto provide sufficient guarantee in the form

 

of a surety, a deposit or some other appropriate security as the proper officer may determine, to secure the ultimate payment of customs duties for whidi the goods may be liable.

• Nothing in the Fourth Schedule shall be construed as restricting or calling into question the rights of the proper officer to satisfy himseifor herseifas to the truth or accuracy of any statement, document or dedaration presented for customs valuation purposes.
• The Councilshaiipublish in the Gazette Judidai decisions and administrative rulings of general application giving effect to the Fourth Schedule.
• in applying or interpretingthis section and the provisions of the Fourth Schedule due regard shaii be taken of the decisions, rulings, opinions, guidelines, and interpretations given by the Directorate, the World Trade Organisation or the Customs Cooperation Council.
• The rate of exchange to be used for determining the equivalent of a Partner State currency of any foreign currency shall be the selling rate iast notifiedby the Centra! Bank of the respective Partnerstate when an entry is presented to and accepted by the proper officer. ”

23. The Appellant submits that the Interpretative Notes to the Fourth Schedule ofthe Act provide forthe transaction value method as the primary method for customs valuation, and imported goods are to be valued in accordance with the transaction value method whenever the conditions prescribed therein are fulfilled. The notes make it clear that it is only when the customs value cannot be determined under the provisions of a valuation method that the provisions of the next method in the sequence can be used.
24. Paragraph 2(2)further clarifies that the determination of the transaction value should not be deemed as unacceptable merely because the buyer and sellerare related parties. That, in instances where the buyer and seller are related parties, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted provided the relationship did not influencethe sale.

Paragraph 2(2) (a) provides:

“In determining whether the transaction vaiue is acceptable for the purposes of subparaffsph (i)₉ the fact that the buyer and the seller are related within the meaning of Paragraph (1) shailnot 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 that the relationship did not influence theprice. if₉ in light of information provided by the importer or otherwise, the proper officer hasgrounds 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.”

25. That under the ‘circumstance of sale test’, Customs is required to examine 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 the relationship influenced the price. The key questions to be addressed in the determination of the circumstance of sale, according to Note 3 to Paragraph 2(2), include:
26. Has the price been settled in a manner consistent with the normal pricing practices of the industry in question or the way in which the seller settles for buyers who are not related to the seller?
27. Is the price adequate to ensure recovery of ail the costs plus a profit which is representative of the firm’s overall profit realised over a representative period of time?
28. Sub-paragraph 2 (b) provides that several factors must be considered when determining whether one value closely approximates to another. These include:
29. Nature of the imported goods;
30. Nature of the industry;

• The season in which the goods were imported; and

1. Whetherthe difference in values is significantly different.

Paragraph 2(2):

“2. Subparagraph 2 (a) provides that where the buyer and the seller are related, the circumstances surrounding the saleshallbe examined and the transaction value shaii be acceptedas the customs value provided that the relationship did not influence the price, it is not intended that there shouidbe an examination of the circumstances in aii cases where the buyer and the seller are related. Such examination wiii only be required where there are doubts about the acceptability of the price. Where the proper officer has no doubts about the acceptability of the price it should be accepted without requesting further information from the owner. For example, the proper officer may have previously examined the relationship, orit may already have detailed infbrmationconcemingthebuyerand the seller, and may already be satisfied from such examination or information that the relationship did not influence theprice.

3. Where the proper officer is unabie 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 th e 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 seller organise 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 i, 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, ifthepiice had been settiedin a manner consistent with the normaipridngpractices 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 ofthefirm^fs overall profit realised o ver 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 hadnot been influenced. ”

27. The Appellant submits that the followingfacts regarding the circumstances of sale demonstrate that the relationship between the Appellant and BASF SE did not influence the price, i.e.:
28. Whereas the price of goods imported under the Agency Model included commissions, the price of identical goods imported under the Merchandiser Model did not include commissions.
29. The Appellant entered into an Agency Agreement with BASF SE Germany dated 22^ndAugust 2014 under which BASFwas to act as agent of BASF SE for sales transactions in products between BASF SE and its third-party customers. The role of the Appellant under the agreement was to obtain customer offers and to submit them to BASF for conclusion of the sales contract. The goods were then imported directly and cleared through customs by the third-party customers.

• Per Clause 4.1 of the Agency Agreement, the Appellant earned a gross commission as compensation for performance of duties assigned under the agreement. The gross commission was computed by multiplying the Gross Commission Rate (‘GCR’) by the brokered sales, i.e.:

Commission = A dual brokered sales X GCR

28. Per the BASF group’s Inter Company Transfer Pricing (‘ICTP’) Guidelines, the GCR was computed as follows:

CCR (%) = (Costs incurred/Brokered Sales) + Target Earnings Before Interest and Taxes (EBIT) Margin.

29. The gross commission was to cover the costs incurred by the Appellant in relation to the Agency business and allow an appropriate profit in light of the functions performed and risks assumed in accordance with Clause 4.3 of the Agency Agreement. Furthermore, the gross commission is calculated on a product group basis (i.e., Strategic Business Unit orSBU) which would implythat for instance the GCR for fungicides in a specific period may vary from the rate applied on pesticides.
30. That since the demand for agricultural products is seasonal and varies considerably depending on the weather and other risk factors, a decline in the sales value in aparticular period would increase the GCR as there would be no significant change in costs incurred. Hence the variation of the GCR applied over the period under review.
31. That the Respondent has not in any way supported its allegation or demonstrated what ‘the expected business practice’ is as far as the Appellant’s business is concerned.
32. That the WCO Technical Committee on Customs Valuation (TCCV) has addressed cases where customs administrations have reasons to doubt the truth or accuracy of the declared value. In Decision 6.1 TCCV emphasized that in so doing, customs administrations should not prejudice legitimate commercial interests of the importer. As mentioned above, the gross commissions were determined in accordance with the Appellant’s ICTP Guidelines based on legitimate commercial interests by the Company. As an agent of BASF SE, the Appellant incurred various costs in performing its

functions per the terms of the Agency Agreement. In line with general accounting principles, the gross commissions paid to the Appellant were to coverthe Appellant for costs incurred in relation to the agency business and also allow for an appropriate profit.

33. In addition, the amount of the gross commissions paid to the Appellant is supported by the amounts reported in the Appellant’s audited financial statements. It is clear from the enclosed excerpts of the audited financial statements that the reported gross commissions are consistent with the gross commission computations which the Respondent alleges are overstated. The Respondent cannot therefore claim that the commissions earned by the Appellant were overstated and not in tandem with ‘expected business practice.’
34. Differences in functions performed and risks assumed by the Appellant and thM-party importers should be considered when comparing the prices
35. The Appellant submits that the Fourth Schedule of the EACCMA mandates Customs to examine the 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 the relationship influenced the price, under the circumstances of sale test.
36. That the details of the way the Appellant organizes its commercial relations with BASF SE is contained in the Distribution Agreement dated 13^th November 2017 and the 1CTP Guidelines. They oblige the Appellant to perform various functions, assume risks and owns assets in the course of distributing products imported from BASF SE. These include performing marketing, customer services and warehousing functions at its own expense as per Clause 9.3 of the Distribution Agreement and Clause 6.2 of the ICTP Guidelines. That the functions performed by BASF are further supported by the costs reported in the Appellant’s financial statements. For example, in 2018, the Appellant incurred KES 49,301,584 in advertising expenses.
37. That the Appellant wishes to point out that the third-party customers whom the Respondent is seeking to compare the Appellant with, did not

perform similar marketing and customer services. These functions were still performed by the Appellant even under the agency model and that BASF SE factored these costs in its selling price to third party customers. Therefore, the transaction value of identical goods should be adjusted for the cost element related to functions performed, risks assumed and assets owned by the Appellant

1. The transaction value of identical goods method was envneous!v applied
2. The Appellant submits that in computing the assessed customs value, the Respondent adjusted the customs value of identical goods previously declared by third-party importers for commissions paid under the agency model at the rate of 10%.
3. The Appellant however submits that the 10% adjustment is a gross understatement of the actual gross commissions paid to the Appellant That this is demonstrated by the Appellant’s financial statements and summary of commissions paid.
4. The Appellant submits that the Respondent erred in fact and law by failing to make appropriate adjustments for the differences in quantity and commercial level in its application of the transaction value of identical goods method.
5. Note 1 of the Interpretative Notes to Paragraph 3 of the Fourth Schedule to the EACCMA provides that in applying the transaction value of identical goods, the proper officer shall wherever possible, use a sale of identical goods at the same commercial level and in substantially the same quantities as the goods being valued. Further, where no such sale is found, a sale of identical goods that takes place under any one of the following three conditions may be used:
6. a sale at the same commercial level but in different quantities;
7. a sale at a different commercial level but in substantially the same quantities; or

• a sale at a different commercial level and in different quantities.

41. Having found a sale under any one of these three conditions adjustments will then be made, as the case may be, for:
42. quantity factors only;
43. commercial level factors only; or

• both commercial level and quantity factors.

42. Further, Note 5 to Paragraph 3 of the Fourth Schedule of the EACCMA stipulates that the adjustment for different commercial level or different quantities shall be made only on the basis of demonstrated evidence that clearlyestablishesthereasonablenessandaccuracy of the adjustments, e.g. a valid price list containing prices referring to different levels or different quantities.
43. The Appellant is the sole and exclusivedistributorof the BASF SE products for markets in Kenya and the East African region. The third-party customers who previously imported directly from BASF SE under the agency model, currently purchase the same products from the Appellant. Therefore, the Appellant and the third-party customers operate at different commercial levels. The Appellant imports significantly higher quantities of the products compared to quantities previously imported by third party customers.
44. Time differencesu/g/e not considered fn applying the transaction value of identical goods method
45. The Appellant submits that the Respondent erred in both fact and law by applying the transaction value of identical goods method in disregard of the time differences as provided for under Paragraph 3(1) (a) of the Fourth Schedule to the EACCMA.
46. Paragraph 3 of the Fourth Schedule to the EACCMA provides that when the transaction value of identical goods method is used, the identical goods must have been exported to the Partner State at or about the same time as the goods being valued.
47. The WCO TCCV has addressed the matter of time element in relation to transaction value of identical goods method. The Committee advised in Explanatory Note 1.1 that “at or about the same time” should be taken to cover a period of time, as close to the date of exportation as possible,

withinwhich commercial practices and market conditions which affect the price remain the same.

47. The EAC Customs Valuation Manual provides that the allowable period is flexible but commercial practice and market conditions must be taken into account. To be pragmatic, it is advisable to allow a 90-day period for comparison but it can be altered if circumstances dictate.
48. In this case, the identical goods were imported by the third parties before November 2017 whereas the goods being valued were imported by the Appellant between 2018 and 2019. The Respondent is therefore seeking to compare the customs value declared by the Appellant with the customs value declared by third party importers over a period of between 1 to 3 years in total disregard ofthe changes in commercial practices and market conditions.

£ The prices ofagriajltural products sold to the Appellant are based on the Resale Price Minus method which is consistent with thedeductive

value method under the Fourth Schedule ofthe

49. The Appellant submits that the Respondent has erred in fact and law by disregarding the fact that the price of agricultural products imported by the Appellant was determined in accordance with the RPM method which is consistent with the deductive value method.
50. That the TCCV issued in Commentary 23.1 sought to provide guidance on the use of a transfer pricing study, prepared in accordance with OECD Transfer Pricing Guidelines, and provided by importers, as a basis for examining “the circumstances surrounding the sale” under Article 1.2 (a) of the General Agreement on Tariffs and Trade (GATT). Paragraph 9 of this WTO Commentary states as follows:

“The use of a transfer pricing study as a possible basis for examining the circumstances ofthe 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 ofthe sale. A transfer pricing study couid be onesource of information. ”

51. The Appellant submits that the price at which the Appellant imports finished products from related parties within the BASF Group is based on the BASF ICTP Guidelines which have been prepared in accordance with the OECD guidelines and therefore consistent with the arm’ s length principle.
52. Per the ICTP Guidelines, the Comparable Uncontrolled Price (CUP) method is applied where third-party comparable transactions exist. However, where the third-party comparable transactions do not exist, as is the case for the aforementioned agricultural products, the RPM is applied. Underthe RPM method, the price is determined by deducting the gross margin from the appropriate resale price at which the products are sold by the Appellant to third party customers. The computation of the intercompany price is done on product article level based on the formula below:

Intercompany Price = Resale price – (l-Cross Margin)

Whereas, the gross margin is computed based on a SBU level per the formula below:

Cross margin = (Costs incurred/Sales) 4- EBIT

53. The resale price is derived from the average preceding resale prices or actual resale prices. The costs included in the above calculation are costs which are directly and indirectly attributable to the merchandise business of the product group and include marketing costs, distribution costs, import duties, inland transport costs etc.
54. In a nutshell, the price of products imported by the Appellant from BASF SE is the unit price at which identical products are sold by the Appellant to third party customers less the profit margin and general expenses incurred in distributing the goods. This method is therefore in line with the deductive value method as stipulated under Paragraph 6 of the Fourth Schedule to the EACCMA.
55. That the Respondent in its letter dated 14^thFebruary 2020 agrees that the basis of computing the prices of agricultural products imported by the

Appellant is consistent with the deductive value method. However, the Respondent avers that the gross commission paid to the Appellant is not at arm’s length.

56. The Appellant submits that the gross commissions do not feature anywhere in the computation of the intercompany price using the RPM. The Respondent’s argument is therefore unrelated to the above-mentioned argument and should be disregarded.
57. The transaction value of agricultural products Imported by the Appellant closely approximates the customs value of Identical goods determined using the deductive value metlKxi
58. The Respondent erred in fact and law by alleging that the Appellant failed to appropriately demonstrate that the transaction value ofthe agricultural products closely approximates the customs value of identical goods determined using the deductive value method. Specifically, the Respondent’s allegation was based on the following:
59. The 15% rebate was not supported by commercial invoices or the sales agreement provided by the Appellant.
60. The factors of percentage variation calculation have not been indicated

• The exchange rate used in the computation was not indicated.

58. The Appellant disagrees with the above allegations on the following basis:
59. Paragraph 2(b)(ii) of the Fourth Schedule to the EACCMA provides that in a sale between related persons, the transaction value shall be accepted whenever the importer demonstrates that such value closely approximates to inter alia the customs value of identical or similargoods as determined under the deductive value method.
60. Further, Paragraph 6 of the Fourth Schedule, on application of the deductive value method, provides that the customs value of imported goods shall be based on the unit price at which the imported goods or

identical or similar imported goods are 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 of the following:

1. either the commissions 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 ofimported goods of the same class or kind;
2. the usual costs of transport and insurance and associated costs incurred within the Partner State; and

• the customs duties and other national taxes payable in the Partner State by reason of importation or sale of the goods.

60. Notes to Paragraph 6 further guide 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.
61. Further Note 7 to Paragraph 6 provides that “general expenses” include direct and indirect costs of marketing the goods. It is worth noting that Note 6(1) to Paragraph 6 of the Fourth Scheduleof the EACCMA provides 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 the Partner States of imported goods of the same kind.
62. That the Appellant has computed the customs value of the agricultural products based on the deductive value method in accordance with the provisions of the Fourth Schedule of the EACCMA as highlighted above. Specifically, the Appellant has applied the unit price at which it sells the agricultural products to its customers (being its first commercial level sale) and deducted its gross margin, post importation costs, inland transport, sea freight, distribution costs and import duties paid in Kenya. The Appellant grants its customers a rebate of 15% upon meeting certain

 

performance targets including achieving certain set sales target, timely payment of accountsand market strategy targets. According to Paragraph 3.1 of the Distributor Commercial Policy, rebates are based on the exwarehouse price and will be paid at the end of each financial year. Annex 2 of the Distributor Agreement provides that the rebates shall be paid by way of netting off of receivables of the Appellant. Where there are no outstanding receivables, the rebates shall be paid out to the distributor. In view of the above, The Appellant adjusted the unit selling price by deducting the 15% rebate explained above.

63. The Respondent’s allegation that the Appellant’s workings did not indicate the exchange rate is inaccurate and has no basis in law. The Appellant submitted that the computed customs value was provided in both currencies and the Respondent could easily derive the exchange rate based on the information provided.
64. The Respondent has argued that the Appellant did not indicate the factors of the percentage variance calculation. The Appellant submitted that Paragraph 2(b) (ii) of the Fourth Schedule to the EACCMA only requires the importer to demonstrate that the transaction value closely approximates the customs value of identical or similar goods as determined under the deductive value method.
65. The percentage variance between the transaction value and the customs value computed based on the deductive value method ranged between – 5% to 1% with an outlierof-17% for one of the products (The transaction value being higher). The Appellant stated that the variance of between – 5% to 1% demonstrates that the values closely approximate each other and even in the case of the 17% variance the transaction value declared by the Appellant is higher.
66. License fees paid bv the Appellant to BCR Tshould not be includedin the customs value in accordance with Paragraph 9 (1) (c) of the Fourth Schedule to the
67. The Respondent erred in law and fact by contending that the license fees paid by the Appellant to BCRT related to the imported goods being valued and were paid asa condition of sale.
68. The Appellant entered into a license agreement in January 2014 with BCRT wherein the Appellant was granted a non-exclusive, non- transferable license to use the intellectual property and know-how relating to the products owned or controlled by BCRT as listed in Annex 1 of the agreement.
69. Article VII and Annex 2 of the license agreement provided for BASF to pay BCRT a license fee of 4% of the net sales of all products. In January 2016, BASF entered into a separate license agreement with BCRT. The notable changes from the previous agreement included:
70. Royalties would only be payable with respect to own manufactured goods; and
71. The basis for royalty computation would be the net sales value of own manufactured goods.
72. Thus, beginning January 2016, royalties were not payable on imported merchandise. Royalties would only be based on the sales value of products manufactured by the Appellant.
73. Paragraph 9 (1) (c) of the Fourth Schedule to the EACCMA provides that royalties and license fees should be included in the customs value to the extent that the royalties and fees:
74. are related to the goods being valued;
75. are paid as a condition of sale of the goods being valued; and

• are not included in the price actually paid or payable.

71. Accordingly, in determining whether royalties paid by the Appellant to BCRT should be included in the customs value, one should answer the following questions:
72. Is the royalty paid related to the imported goods?
73. Is the royalty paid as a condition of sale?
74. The WCO Commentary 25.1 provides guidance regarding the interpretation and application of Article 8 (1) (c) of the Agreement on Implementation of Article Vll of the General Agreement on Trade and Tariff (GATT). The commentary provides that in determining whether royalties should be included in the customs value, it is important to examine all the relevant documents, including the royalty or license fee agreement.
75. Commentary 25.1 further states that a key determinant in whether royalties are paid as a condition of sale is establishing whether the buyer is unable to purchase the imported goods without paying the license or royalty fees.
76. The facts surrounding the sale and importation of the goods including contractual and legal obligations contained in relevant documents such as the royalty agreement must be analysed.
77. Where it is abundantly clear that the buyer cannot purchase imported goods without payment of royalty or license fees; and the same is embedded in the sales documentation, the fees would have been paid as a condition of sale and therefore qualify to be added to the price paid or payable.

• Where the sales documents do not contain such explicit provision, it may be necessary to consider other factors to determine whetherthe payment is made as a condition of sale includinginteralia:

1. According to the terms of the sales agreement or the royalty or license agreement, the sales agreement can be terminated as a consequence of breaching the royalty or license agreement, because the buyer does not pay the royalty or license fee to the licensor. This would indicate a linkage between the royalty or license fee payment and the sale of the goods being valued;
2. There is a term in the royalty or license agreement that indicates if the royalties or license fees are not paid, the manufacturer is forbidden from manufacture and sale of goods incorporating the licensor’s intellectual property to the importer; and
3. The royalty or license agreement contains terms that permit the licensor to manage the production or sale between the manufacturer and importer (sale for export to the country of importation) that go beyond quality control.
4. The Appellant has relied on the case of BATA SHOE COMPANY (KENYA) LIMITEOvs-KENYA REVENUE AUTHORITY『20mwhere the High Court held that KRA had exceeded its powers in finding that the royalties paid to Bata B rands by the Applicant ought to be added to the transaction value for purposes of customs valuation. In its judgment, the High Court defined ‘condition of sale’ to mean that” unless the vendor is entitled to refuse to sell the goods to the purchaser or repudiate the contract of sale where the purchaser fails to pay royalties or licence fees then condition of sale is inapplicable!’
5. The Bata Case relied on the judgment of the Canadian case, DEPUTY MINISTER OF NATIONAL REVENUE・vs・MATTEL CANADA INC r20011 S.C.R. 100; 2001 SCC (JUNE 7,2001).In this case, the Supreme Court of Canada (SCOC) dismissed the sufficient nexus and control tests that had been used by both the lower courts, and applied the ‘ condition of sale of good/ test based on the traditional legal principles under common law and sale of goods legislation.
6. The SCOC held that the royalties were not paid as a condition of sale because even if Mattel Canada (‘MC) refused to pay royalties to the licensor, Mattei US could not refuse to sell the goods to MC or repudiate the sales contract. The sale contract and the royalty were separate agreements between different parties. The SCOC decided the indirect royalty payments are not paid as a condition of sale under the Canadian Customs Act and thus MC’s Appeal was allowed.
7. The Appellant submits that based on the SCOC’sjudgment in the MC case, royalty payments made based on separate contracts for the intellectual property are not deemed to have been paid as a condition of sale, hence should not be added to the price paid or payable for customs valuation purposes. It is only if the vendor can rescind the sales contract and refuse to sell the goods to the importerthat the payment ofthose royalties would be considered to be a condition of sale and therefore dutiable.
8. The Appellant submits that it imports raw materials used to manufacture goods covered underthe license agreement from third parties who are not necessarily related to BCRT. That BCRT has no control over the sale of these raw materials to the Appellant and cannot prevent the suppliers from selling the raw materials to the Appellant even if the Appellant does not pay the license fees.
9. The Appellant further argues that the License Agreement makes no reference to the sale of raw materials imported by the Appellant and that the license fees paid relate to the manufactured finished products and not raw materials imported by the Appellant.
10. According to the Respondent, Clause 1 of the License Agreement stipulates that the IPR, Know-how and Trademarks relate to products of the licensor and therefore the license fees are in respect of the goods beingvalued.
11. The Respondent has argued that its decision is in line with Commentary 25.1 of the WCO which states that when the royalty or license fee is paid to a third-party related to the sei ler of the imported goods, it is more likely that the fee is paid as a condition of sale. The Respondent has on this basis, alleged that since the Appellant was related to BCRT then the royalties were paid as a condition of sale.
12. The Appellant submits that the Respondent has inaccurately applied the commentary in the instant case. Whereas the quoted paragraph relates to royalties paid to third parties related to the seller of the goods, in the

instant case, royalties are paid to a related party. Further, the raw materials are imported from a third party who is not related to the licensorand the license fees did not relate to the imported goods being valued and were not paid as a condition of sale.

83. The Appellant further submits that the Respondent has erred in fact by assessing additional import taxes based on erroneously computed license fees. That whereas the Respondent claims to have relied on the net sales values of own manufactured products reported in BASF EA’sfinancial statements, the Appellant contends that the net sales amount applied by the Respondent in its workings is inclusive of merchandise sales and that its audited financial statements do not contain a breakdown of net sales amounts of own manufactured products and imported merchandise.
84. Compounding of I ate payment interest has no legal basis
85. The Appellant submits, without prejudice to its case, that the Respondent has erred in fact and law by compounding the late payment interest imposed on the import taxes demanded on license fees.
86. Section 249 of the EACCMA provides that where an amount of duty or other sum of money which is due under this Act remains unpaid after the date upon which it is payable, an interest of two per cent per month or part of the month, of the unpaid amount shall be charged.

S.249- “Where an amount of duty or other sum of money which is due under this Act remains unpaid after the date upon which it is payable, an interest of two per cent per month or part of the month, of the unpaid amountshaii be charged. ”

86. Section 249 of the EACCMA does not specify as to whether the late payment interest should be simple interest or compounded interest. That the Respondent has erred by compounding the late payment interest in its computation.
87. That in the case of COMMISSIONER OF INCOMETAX-VS.-WESTMONT

POWER (K) LTD, INCOME TAX APPEAL NO. 626 OF 2002, the High Court while citing INLAND REVENUE VS. SCOTTISH CENTRAL ELECTRICITY COMPANY ri931115 TC 761 expressed itself as follows: “Even though taxation is acceptable and even essential in democratic societies, taxation laws that have the effect of depriving citizens of their property by imposing pecuniary burdens resulting also in penal consequences must be interpreted with great caution. In this respect, it is paramount that their provisions must be express and clear so as to leave no room for …any ambiguity in sudi a law must be resolved in

favourofthe taxpayerand not the Public Revenue Authorities which are responsibie for their implementation. ”

88. The Appellant submits that Section 249 ought to be interpreted in favour of the Appellant and the late payment interest, if applicable, be computed as simple interest.

!SSUES FORDETERMINAT1ON

89. Having considered the arguments of the parties, theTribunal has identified and framed the following issues for determination:-
90. Whether the Respondent erred in finding that the relationship between the Appellant and its related party supplier (BASF SE, Germany) influenced the price of the imported agricultural products.
91. Whetherthe Respondent erred in applying the transaction value of identical goods method for customs valuation of the imported goods.

• Whetherthe Respondent erred in disregardi ng the fact that the price of agricultural products imported by the Appellant was determined in accordance with the Resale Plus Minus (RPM) method which closely approximated the customs value of identical goods determined using the Deductive Value method.

1. Whether the Respondent erred in finding that the license fees paid by the Appellant to BASF Construction Research and Technology (‘BCRT’) related to the imported goods and were paid as a condition of sale in accordance with the Fourth Schedule to the EACCMA.
2. Whether the Respondent erred in compounding the late payment interest imposed on import taxes demanded on the license fees.

ANALYS1S&FINDINGS

1. i) Whether the Respondent erred in finding thatthe relationship between the Appellant and its related party supplier, BASF SE, influenced the price of the imported agricultural products,
2. The Appellant submits that the relationship between BASF SE and BASF EA did not influence the price actually paid or payable, and therefore the transaction value method was correctly applied in declaring the customs value of the goods in question. That according to Paragraph 2(2) (a),Part 1, of the Fourth Schedule, the determination of the transaction value should not be deemed unacceptable merely because the buyer and seller are related parties. That in instances wherethe buyer and sellerare related parties, the circumstances surrounding the sale should be examined and the transaction value shall be accepted provided the relationship did not influencethe sale.

Paragraph 2(2) (a):

“/n determining whether the transaction vaiue is acceptable for the purposes of subparagraph (1), the fact that the buyer and the seller are related wfMn the meaning of Paragraph f!) shallnot in itself be a ground for regardir^ the transaction value ax unacceptable. In such case the circumstancessurrounding the sale shall be examined and transaction value shall be accepted provided that the relationship did not influent the price. If,in light of information provided by the importer or otherwise, the proper officer hasgrounds 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 shaii be in writing.”

91. Under the circumstance of sale test provided for in Paragraph 2 of the Interpretative Notes to the Fourth Schedule, Customs was obliged to examine 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. In doing so, the factors to be considered include whether the price was determined at an arm’s length basis and whetherthe price is adequate to ensure recovery of all the costs plus a profit.

Paragraph 2(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 providedthat the relationship did not influence the price, it is not intended that there should be an examination ofthecircumstancesin aiicases where thebuyerandtheseiier are related. Such examination will only be required where there are doubts about the acceptability of the price… ”

Paragraph 2(3)- “Where the proper officer Zr unable to accept the transaction value wHhout further inquiry, it should give the owner an opportunity to supply such further detailed infdrmation ar may be necessary to enaMeit to examine the circumstances surrounding the sale. in this context, the proper officer should be prepared to examine relevant aspects of the transaction, indudir^ the way hi which the buyer and seller organise their commercial relations and the u/a v /n whidi the price in Question u/ay arrived at, in order to determine whether the relationship influenced the price. Where it can be shown that the buyer and seiier, 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 hadnotbeen influenced by the relationship. As an example of this, if theprice had been settledin a manner consistent with the nomaipridng practices of the industry in question or with the way seller setties 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 aii costs plus a profit which is representative of the firm^s overall profit realised over a representative period of time, e.g. on an annual basis in sales of goods of the same ciass or kind, this would demonstrate that the price had not been influenced. ”

92. The Appellant attributed the price differences between the Agency and Merchandiser Model to the factors below:
93. The price of goods imported under the Agency Model included commissions whilst the price of goods imported under the Merchandiser Model did not include commissions.
94. Under the Agency Model,the Appellant earned a gross commission as compensation to cover the costs incurred and also allow it to make an appropriate profit.

• The gross commission was computed by a formula of multiplying the gross commissions rate by the amount of brokered sales, and was calculated on a product category basis. As such, the commission rates and amounts varied depending on the season and product category.

93. The Respondent, on the other hand, argued that the customs values for majority of the products in its agricultural division dropped significantly after the change of business model from an agency to a merchandiser in January 2018. The Respondent further argued that the GCR was not stipulated in the addenda to the Distribution Agreements after 2013. In the Respondent’s opinion, the fluctuation of the GCR was not in accordance with the “expected business practice” and hence its view that transaction values were affected by the relationship between the Appellant and BASFSE.
94. Section 122 of the EACCMA provides that when goods are liable to import duty ad valorem,their value shall be determined per the Fourth Schedule to the Act. The interpretative notes to the Fourth Schedule of the

EACCMA specify that the primary method for customs valuation is the transaction value method (‘TVM’). Imported goods are to be valued using TVM whenever the conditions prescribed therein are fulfilled. It is only when the customs value cannot be determined under the provisions of a valuation method that the provisionsof the next method in the sequence can be used.

95. Paragraph 2(2) of the Fourth Schedule further clarifies that the determination of the transaction value should not be deemed as unacceptable merely because the buyer and seller are related parties. In such instances where the buyer and seller are related parties, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted provided the relationship did not influence the sale.
96. Under the circumstance of sale test, Customs is required to examine 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 the relationship influenced the price. The key questions to be addressed in the determination of the circumstance of sale are indicated in Note 3 to Paragraph 2(2) ofthe Fourth Schedule
97. It is the view of the Tribunal that the Respondent focused on the fluctuations and variations of the GCR and commissions paid in the period 2014-2017 when the Appellant operated the Agency Model. Whereas the Respondent has expressed doubt regarding the formula, amounts and reliability of the Appellant’s computation of the commissions, the Respondent neither challenged nor disputed the valuation of the imported goods during the period in question. The Tribunal further notes that the commissions earned have also been declared by the Appellant in its financial statements and, by implication, are subjected to income tax assessment.
98. The Tribunal further noted that the GCR and the basis of its computation are provided for in the Appellant’s ICTP Guidelines. The Respondent has neither faulted the formula nor challenged the correctness of the Appellant’s computations. Instead, the Respondent based its decision on the ground that the commissions were not in tandem with the expected business practice. Unfortunately, the Respondent did not expound further on what the ‘expected business practice’ should have been nor demonstrated what the industry practice is.
99. The dispute on the valuation of imported goods arose after the Appellant changed its business model from an agency to a merchandiserand this is governed by the Distribution Agreement between the Appellant and BASF SE dated 13^thNovember 2017. According to the Appellant, due to this new arrangement, it assumed greater responsibilities with regard to risks, assetsand functions. In view of these greater responsibilities, the brokerage commission it previously earned as an agent had been factored in the transaction values from January 2018.
100. Section 122(4) of the EACCMA allows a customs officer the right to satisfy himself as to the truth or accuracy of any statement, document or declaration. This position is also supported by Text 1.1 ofthe Commentary by the WCO Technical Committee on Customs Valuation (TCCV). However, TCCV advises in Decision 6.1 that in so doing, customs administrations should not prejudice legitimate commercial interests ofthe importer.
101. The Tribunal therefore finds that the Respondent herein did not adequately subject the Appellant’s transactions and the commercial relationship with BASF SE to the ‘circumstance of sale’ test before concluding whether or not the relationship between the Appellant and its parent company had influenced the price.

“) Whether the Respondent erred in applying the transaction value of identical goods method for customs valuation of the imported goods.

102. Paragraph 3 of the Interpretative Notes of the Fourth Schedule to the EACCMA provides that in applying the transaction value of identical goods, Customs shall wherever possible, use a sale of identical goods at the same commercial level and in substantially the same quantities as the goods being valued. Where no such sale is found, a sale of identical goods that takes place under any one of the following three conditions may be used:
103. a sale at the same commercial level but in different quantities;
104. a sale at a different commercial level but in substantially the same quantities; or

• a sale at a different commercial level and in different quantities.

103. Specifically, Paragraph 3(5) of the Interpretative Notes stipulates that the adjustment for different commercial levels or different quantities shall be made only on the basis of demonstrated evidence that clearly establishes the reasonableness and accuracy of the adjustments, e.g., a valid price list containing prices referri ng to different levels or different quantities.

Paragraph 3(5):

“A condition for adjustment because of different commercial level or different quantities is that such adjustment, whether it leads to an increase or a decrease in the value, be made only on the basis of demonstrated evidence that dearly establishes the reasonableness and accuracy of the adjustments, e.g. valid price lists containing prices referring to different levels or differentquantities. Asan exampfeofthis, iftheimport- edgoods being valued consist of a shipment of iO units and the only identical imported goods for whidi a transaction value exists involved a safe of500 units, and it is recognised that the sellergrants quantity discounts, the required adjustment maybe accomplished by resortingto the seller’s price list and using that price applicable to sale ofiO units. This does not require that a saiehadto have been made in quantities of 10 as iongas the price has been established as being bona fide through sales at other quantities.

In the absence of such an objective measure, however, the determination of a customs value under the provisions of Paragraph 3 is not appropriate. ”

104. The Appellant submits that it is the sole and exclusive distributor of the BASF SE products in Kenya and the East African region. That the third- party customers who previously imported directly from BASF SE under the Agency Model, currently purchase the same products from the Appellant. Therefore, it is logical to conclude that the Appellant and the third-party customers operate at different commercial levels and that the Appellant imports significantly higher quantities of the products compared to quantities previously imported by the individual third-party customers.
105. Paragraph 3 of Part 1 of the Fourth Schedule provides that when the transaction value of identical goods method is used, the identical goods must have been exported to the Partner State at or about the same time as the goods being valued.

Paragraph 3(1) (a):

“Where the customs value of the imported goods cannot be determined under the provisions of paragraph 2, the customs value shall be the transaction value of identical goods sold for export to the Partner State and exportedat or about the same time as thegoods being valued. ”

106. The WCO TCCV 1.1 advises that “at or about the same time” should be taken to cover a period of time, as close to the date of exportation as possible, within which commercial practices and market conditions which affect the price remain the same. The EAC Customs Valuation Manual provides that the allowable period is flexiblebut commercial practice and market conditions must be taken into account. It advises a 90-day period for comparison but it can be altered if circumstances dictate.
107. The identical goods were imported by the third-parties prior to November 2017 whereas the goods being valued were imported by the Appellant between 2018 and 2019. In the majority of cases this would not be considered to “at or about the same time” in view of the 1-2 year

timespan. As such it is tenable to argue that the market conditions and commercial practices affecting the price had, most likely changed.

108. It is the view of the Tribunal that the sale of identical goods did not take place at the same commercial level and in substantiallythe same quantities as the goods being valued.

• Whether the Respondent erred in disregarding the fact that the price of agricultural products imported by Appellant was determined in accordance with the Resale Plus Minus (RPM) method which closdv approximated the customs value of identical goods determined using the Deductive Value method.

109. TCCV Commentary 23.1 on the examination of the expression “circumstances surrounding the sale” in relation to the use of transfer pricing studies provides guidanceon the use of a transfer pricing study, prepared in accordance with OECD Transfer Pricing Guidelines, and provided by importers as a basis for examining “the circumstances surrounding the sale. Paragraph 9 of this WTO Commentary states as follows:

“The use of a transfer pricing study as a possible bash for examining the circumstances of the saleshouldbe consideredon a case-by<ase basis. As a conclusion, any relevant information and documents provided by an importer may be utilized for examining the circumstances of the saie. A transfer pricing study couid be one source of information. ”

110. The price at which the Appellant imported goods from related parties within the BASF Group is based on the BASF 1CTP Guidelines. According to the guidelines, the Comparable Uncontrolled Price (CUP) method is applied where third-party comparable transactions exist. Where the third- party comparable transactions do not exist, theRPMis applied. Under the RPM method, the price is determined by deducting the gross margin from the appropriate resale price at which the products are sold by the Appellant to third-party customersand a formula is provided.
111. According to the Appellant, the price of imported goods is the unit price at which identical products are sold by the Appellant to third-party customers less the profit margin and general expenses incurred in distributing the goods and that this method corresponds with the deductive value method as stipulated under Paragraph 6 of the Fourth Schedule to the EACCMA.
112. The Respondent appears to agree with the rationale that the computed prices of agricultural products imported by the Appellant is consistent with the deductive value method, but questions the following:
113. The 15% rebate which was not supported by commercial invoices or the sales agreement provided by the Appellant.
114. The factors of percentage variation calculation have not been indicated

• The exchange rate used in the computation was not indicated.

113. The Appellant however submits that Paragraph 2 (b) of Part 1 of the Fourth Schedule to the EACCMA provides that in a sale between related persons, the transaction value shall be accepted whenever the importer demonstrates that such value closely approximates the customs value of identical or similar goods as determined under the deductive value method.

Paragraph 2(b):

“In the sale between related persons, the transaction value shall be accepted and the goods valued in accordance with the provisions of subparagraph (1) whenever the importer demonstrates that such value closely approximates to one of the following accruing at or abmt the same time.

• the transaction value in sales to unrelated buyers of identical or simiiargoods for export to the PartnerState;
• the customs value of identical or simiiargoods as determined under the provisions of Paragraph 6;

 

• the customs value of identical or similar goods as determined under the provisions of Paragraph 7. ”

114. Paragraph 6 of the Fourth Schedule to the Act on application of the deductive value method, provides that the customs value of imported goods shall be based on the unit price at which the imported goods or identical or similar imported goods are 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.
115. Notes to Paragraph 6 further guide 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.

Paragraph 6 (1) (a):

^tfWhere the impoitedgoods 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 theprowions of this paragraph shallbe basedon the unit price atwhidi the importedgoodsor identical orsimilarlmported goods are so soldin thegreatest 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:

• eitherthe commissions usually paid or agreed to bepaidor the additions usuallymade for profit and genera! expenses in connection with thesaies in such country of imported goods of the same class or kind;
• the usuaicosts of transport and insurance and associated costs incurred within the Partner State;

(iiijwhere 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 the goods. ”

116. The Appellant avers that it computed the customs value ofthe agricultural products based on the deductive value method in accordance with the aforementioned provisions. That it applied the unit price at which it sells the agricultural products to its customers (being its first commercial level sale) and deducted its gross margin, post-importation costs, inland transport, sea freight, distribution costs and import duties paid in Kenya. The Appellant grants its customers a rebate of up to 15% upon meeting certain performance targets including achieving certain set sales target, timely payment of accounts and market strategy targets (as provided for in Paragraph 3.1 ofthe Distributor Commercial Policy and Annex 2 of the Distributor Agreement)
117. On the percentage variance in the calculation, the Appellant submits that the Act only requires the importer to demonstrate that the transaction value closely approximates the customs value of identical or similargoods as determined under the deductive value method.
118. The Tribunal is inclined to agree with the Appellant that the variance of between -5% to 1% demonstrates that the values closely approximate each other and the exchange rate could easily have been derived by the Respondent based on the information provided.
119. In view ofthe above, theTribunal finds that the Appellant has adequately demonstrated that the transaction value closely approximated the customs value determined using the deductive method, and that the Respondent erred in disregarding the fact that the price of agricultural products imported by the Appellant had been determined in accordance with the Resale Price Minus (R.PM) method which was consistent with the deductive value method.
120. Whether the Respondent erred in finding that the license fees paid bv the Appellant to BASF Construction Research and Technology (‘BCRT) related to the imported goods and were paid as a condition of sale in accordance with the Fourth Schedule of the EACCMA.
121. The first License Agreement was entered into on 1st January 2014 between Construction and Research Technology GmbH (‘the Licensor’) and the Appellant (‘the Licensee’). In the agreement, the Licensor grants the Appellant non-exclusive and non-transferable rights to use its IPR, knowhow and trademarks in the Territory (Kenya and the East Africa Region). In consideration of the license, the Appellant pays a license fee which is a percentage of its net sales (imported goods and own manufactured products).
122. The parties thereafter entered into a new License Agreement elated 1st January 2016. In the new agreement the Appellant is only required to pay a license fee on own manufactured products (‘OMP’).
123. Both agreements provide for termination by either party upon issuance of a6-month notice, for an act of bankruptcy or insolvency, nonperformance or changes inthe control of the Licensee. Termination would also take place if the Licensor were to sell, assign, transfer or abandon its assets relating to the 1PR.
124. Neither agreement specifies explicitly that non-payment of the license fees is a condition for importing the goods and/or producing the goods. Also, the License Agreement is with BCRT whereas the Agency and Distribution Agreements are with BASF SE. However, it appears that BCRT and BASF SE are related parties though this has not been categorically confirmed or stated.
125. Paragraph 7 of the WCO Commentary 25.1 provides that a key consideration in determining whether royalties are paid as a condition of sale is establishing whether the buyer is unable to purchase the imported goods without paying the license or royalty fees. When royalty or license fee is payable to a third-party related to the seller of the imported goods then it is more likelythat the fee is paid as a condition of sale.

 

125. In the BA TAca/ethe court held intera/ia that:

“… The question wouldthen be whether the royalty fee paid to Bata Brands is a condition ofsaie. in my view, it is not. The TIA between the Applicant and Bata Brands has no nexus between the purchases the Applicant makes from China through BSS. Bata Brands cannot stop the Applicant from purchasing Bata products from third parties, if the Applicant faiis to pay the royalty fee the only thing Bata Brands cando is to pursue the options found in the TIA. Of course, the Applicant cannot legally use the Bata trademarks if the TLA is terminated but this does not stop it from purchasing Bata products forwhateverfanaful reason it may have. There is no evidence the Bata brands has any control over BSS or CFS. Where the nexus between the sale and the royalty payment is remote, itcannotbe saidthat the royalty payment is madeasa condition ofsaie. Asto whethertheterm “condition of sale” should be given a iegai construction or an ordinary common sense meaning, i would say that the EACCMA is an Act of Parliament and the words found therein can eithertakea iegai connotation or the ordinary meanings ascribed to them, in my view, the words should be given the meaning attributed to them in contracts relating to saie of goods, if the lawmaker hadintended otherwise, nothing wouidhave been easier than to state thatroyaities and licence fees shouidbe addedto the value of the goods for customs purposes.

it is also observed that the royalty fees paid to Bata Brands by the Applicant are payable in respect of imported goods as weii as goods manufactured locaiiy. The royalty fees, in my view, are paid for the use of the trademarks in Kenya and they have nothing to do with the prices of imported products.

The royalties paid are therefore too remote from the value of the imported goods. The Respondent has therefore stepped out of its boundaries and the remedies of judicial review are available to the Applicant. ”

126. The 8ATA caserelied on the decision of the MA TTEL CANADA ca/ewherc the court held inter alia at Paragraph 68:

“/n summary, s. 48(5)(a)(iv) requires that royalties and licence fees be paid “as a condition of the sale of the goods for export to Canada ”• The words incorporate traditional concepts foundin sale of goods legislation andthe common law of contract. Unless a vendor is entitled to refuse to sell licensed goods to the purchaserorrepudiatethe contract of sale where the purchaser fails to pay royalties or licence fees, s. 48(5)(a)(iv) is inapplicable. Theroyalties that Mattei Canada paid to iJcensorX are not royalties within the meaning of s. 48(5)(a)(iv) of the Customs Act. ”

127. The decisions in the cases cited above emphasize that the test for determining whether licence fees and royalties should be included in the customs value lies on whether they are paid as a ‘condition for sale’ for the imported goods. The courts appear to have taken the view that unless a vendor is entitled to refuse to sell licensed goods to the purchaser or repudiate the contract of sale where the purchaser fails to pay royalties or licence fees, then the fees shall not be considered to have been paid as a condition of sale.
128. The Tribunal, having perused both license agreements, notes that they do not provide for termination in the purchase of raw materialsand imported goods in the event of non-payment of license fees. In any case, the raw materials and imported goods are acquired from other parties and not purchased from BCRT.
129. Whether the Respondent erred in compounding the late payment interest i mposed on what it a”eges to be outstanding import taxes relating to license
130. Section 249 of the EACCMA provides that where an amount of duty or other sum of money which is due under this Act remains unpaid after the

date upon which it is payable, an interest of two per cent per month or part of the month, of the unpaid amount shall be charged.

130. The Tribunal notes that Section 249 of the EACCMA does not indicate whether the late payment interest should be simple interest or compounded interest and taking cognizance of the High Court decision in the Westmont Power case that in the event of an ambiguity in iaw then the matter be resolved in the taxpayer’s favour, this means that interest payable, if any, is simple interest.

FINAL DETERMINATION

131. The Tribunal on the basis of the foregoing analysis makes the following final Orders:
132. The Appeal is hereby allowed.
133. The additional taxes demanded by the Respondent are hereby set aside.

• The Respondent is instructed to review the assessment of import duties with respect to the imported agricultural products in dispute.

1. The Appellant do pay any taxes that may arise or be at liberty to seek for a refund of any taxes found paid in excess following the reassessment exercise.
2. Each party shall bear its costs
3. It is so ordered.

 

MEMBER

MEMBER

———————————————————————————————————————–

Janron Consult, Tax Consultant Kenya, Customs Tax Consultant Kenya, Tax Advisory Kenya

Talk to Janron Consult for the following:

Ministry of Health Exemptions

Treasury Exemptions

Advance Ruling Application to KRA

Objection to KRA Rulings on Customs Value

Objections to KRA Rulings on HS Classification