Cadbury Kenya Limited v Commissioner of Customs & Border Control [2023] KETAT 951 (KLR)

Cadbury Kenya Limited v Commissioner of Customs & Border Control (Tax Appeal 908 of 2022) [2023] KETAT 951 (KLR) (Civ) (20 December 2023) (Judgment)

Neutral citation: [2023] KETAT 951 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Civil

Tax Appeal 908 of 2022

E.N Wafula, Chair, Cynthia B. Mayaka, RO Oluoch, E Ng'ang'a, AK Kiprotich & B Gitari, Members

December 20, 2023

Between

Cadbury Kenya Limited

Appellant

and

Commissioner of Customs & Border Control

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose business is in manufacture and distribution of food products including biscuits, chocolate, gum, candy, beverages and meals.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 of the laws of Kenya. The Kenya Revenue Authority is an agency established for the purposes of assessing, collecting and accounting for tax revenues.

3. The Appellant through a letter dated 12th April 2022 requested the Respondent for advance ruling on customs valuation method with respect to products it intended to import. The Respondent replied vide a letter dated 5th May 2022.

4. The Appellant vide a letter dated 27th May 2022, requested for additional time to make an application for review. The Appellant made an application for review of the Respondent’s Advance Valuation Ruling vide a letter dated 17th June 2022.

5. The Respondent confirmed its earlier decision vide a letter dated 14th July 2022. The parties further held a virtual meeting on 26th July 2022 and further a physical meeting on 3rd August 2022.

6. The Appellant being dissatisfied with the Respondent’s decision filed a Notice of Appeal on 12th August 2022.

The Appeal 7. The Appellant cited the following as its grounds for Appeal;i.That the Respondent erred in fact and law in finding that the relationship between the Appellant and its related party suppliers influences the price of the imported products in total disregard of the circumstances of sale and test values provided by the Appellant.ii.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 the third-party importer (Hasbah Kenya Limited) in determining whether the prices declared by the Appellant are influenced by the relationship with the suppliers.iii.That the Respondent erred in fact and law by disregarding the fact that the price of the products imported by Appellant are determined in accordance with a Transfer Pricing Policy that is consistent with OECD's guidelines on arm's length principle.iv.That the Respondent in applying the transaction value of identical goods method failed to take into consideration the differences in commercial and quantity levels between the Appellant and Hasbah Kenya Limited in accordance with Paragraph 3 of the Fourth Schedule to the EACCMA.v.That the Respondent erred in law by failing to address the specific grounds cited by the Appellant in its review application.

Appellants Case 8. The Appellant’s case is premised on the following documents and proceedings before the Tribunal:-a.The Appellant’s Statement of Facts dated 26th August 2022 and filed on 28th August 2022 together with the attachments thereto.b.The Appellant’s written submissions together with bundles of authorities filed on 17th May 2023.

9. The Appellant stated that it previously provided sales support services to Mondelez Egypt Foods S.A.E("Mdlz Egypt") and Mondelez South Africa Pty Ltd ("Mdlz SA"). That separately, Mdlz Egypt and Mdlz SA appointed Hasbah Kenya Ltd ("Hasbah") to be its non-exclusive distributor of Mondelez products in the Kenyan market in accordance with a Distribution Agreement dated 1st December 2017.

10. That the Appellant changed its business operating model from providing sales support services to Mdiz SA and Mdlz Egypt to being the distributor of Mondelez Products in the Kenyan market. That Mondelez's operations globally are organized around four regions. Kenya is part of the Mondelez Asia, Middle East and Africa ("AMEA") region. That where goods are exported within AMEA, the region operates under the Global Supply Chain Principal model whereby Mondelez International AMEA PTE Ltd("MIAPL") operates as the supply chain principal, responsible and accountable for key supply chain activities.

11. The Appellant submitted that to this end it will import Mondelez products from Mondelez Companies located within the AMEA region through MIAPL in accordance with a Distribution Agreement dated 1st May 2022.

12. That MIAPL will purchase the products from the manufacturing entities within AMEA and on sell the products to the Appellant. That in this regard MIAPL will invoice the Appellant for the goods but the goods will be shipped directly from the manufacturing entities located in different countries within the AMEA region.

13. That however, countries within AMEA that are members of the Common Market for Eastern and Southern Africa (COMESA) will sell the goods directly to the Appellant. The Appellant will therefore import Mondelez products from Mondelez companies located in Member States of COMESA such as Egypt and Eswatini directly in accordance with a Master Supply Agreement dated 1st January 2022. It added that CKL will then sell the products to Customers in Kenya including Hasbah.

14. The Appellant averred that prices of Mondelez products under the new model will be based on inter-company prices as per the Mondelez Group transfer pricing policy and will be lower than the prices at which Hasbah previously purchased identical products from Mdlz Egypt and Mdlz SA under the old model.

15. That the Appellant applied for an advance ruling to the Respondent on the most appropriate customs valuation method for Mondelez products to be imported by the Appellant through a letter dated 12th April 2022 in accordance with Section 248A of the EACCMA.

16. That the Respondent issued an advance valuation ruling vide a letter dated 5th May 2022 where it held that the transaction value method was not appropriate for customs valuation of goods imported by the Appellant under the new model because the Appellant's request fell short of the rules governing the acceptance of the transaction value method.

17. That the Appellant applied for a review of the advance valuation ruling through a letter dated 17th June 2022 precisely stating the grounds upon which it believes transaction value method is applicable. The Respondent proceeded to confirm the valuation ruling through a review decision dated 14th July 2022.

18. The Appellant was of the view that the issues for determination in this Appeal were follows:a.Whether the relationship between the Appellant and its suppliers will influence the prices of goods to be imported by the Appellant.b.Whether the Respondent erred in fact and law by failing to consider the differences in functions performed and risks assumed by the Appellant and HKL in determining whether the prices declared by the Appellant were influenced by the relationship with the suppliers.c.Whether the Respondent erred in fact and law by disregarding the fact that the price of the products imported by Appellant are determined in accordance with a Transfer Pricing Policy that is consistent with OECD Guidelines on arm's length principle.d.Whether the Respondent considered the differences in commercial and quantity levels between the Appellant and Hasbah Kenya Limited while applying the transaction value of identical good method in accordance with Paragraph 3 of the Fourth Schedule to the EAC CMA.e.Whether the Respondent's review decision is valid as stipulated under Section 229(4) of the EACCMA.

19. In its case, the Appellant premised its arguments on the following areas which it further expounded on the same;i.Transaction value method is the primary method of customs valuation and should be applied since the conditions prescribed therein have been fulfilled.ii.The transaction value of Mondelez products under the new model will closely approximate the customs value of identical goods determined using the deductive value method.iii.The transaction value of identical goods method has been erroneously applied.iv.The Respondent's review decision failed to specifically address itself to the various grounds cited by the Appellant in its Review Application.

20. The Appellant stated that the transaction value method is the primary method of customs valuation and should be applied since the conditions prescribed therein have been fulfilled. That Section 122 of the EACCMA provides that when goods are liable to import duty ad valorem, their value shall be determined in accordance with the Fourth Schedule of the EACCMA.

21. That Section 122 (6) of the EACCMA also prescribes that, in applying or interpreting its provisions and the Fourth Schedule, due regard should be taken of decisions, rulings, opinions, guidelines and interpretations given by the Directorate, World Trade Organization or the Customs Cooperation Council (now the World Customs Organization).

22. That further, General Note (GN) I of the interpretative notes to the Fourth Schedule of the EACCMA provides that the methods of customs valuation are set out in a sequential order of application. The primary method for customs valuation is the transaction value method and imported goods are to be valued in accordance with the transaction value method whenever the conditions prescribed therein are fulfilled.

23. It submitted that the GN further makes it clear that it is only when the customs value cannot be determined under the provisions of a particular valuation method that the provisions of the next method in the sequence can be used.

24. That Paragraph 2 of the Fourth Schedule stipulates that the customs value of imported goods shall be the transaction value, which is the price actually paid or payable for the goods when sold for export to the Partner State adjusted in accordance with the provisions of Paragraph 9 and provided that certain conditions are satisfied including:-a.There are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which:i.Are imposed or required by law or by the public authorities in the Partner State;ii.Limit the geographical area in which the goods may be resold; oriii.Do not substantially affect the value of the goods.b.The sale or price is not subject to some condition or consideration for which a value cannot be determined with respect to the goods being valued;c.No part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment can be made in accordance with the provisions of Paragraph 9; andd.The buyer and seller are not related, or where the buyer and seller are related, that the transaction value is acceptable for customs purposes under the provisions of subparagraph (2).

25. That the Respondent has argued in the advance ruling that since Mondelez products have previously been imported by a third party (Hasbah), the transaction value of goods imported by Hasbah should form the basis of the customs value of identical products imported by the Appellant. That the Respondent further stated that the Fourth Schedule of the EACCMA clearly guides on the sequential application of the customs valuation methods where the transaction value method fails as in this case.

26. That the Respondent has therefore disregarded the transaction value method on the basis that the Appellant will be importing Mondelez products from related parties. That however, the Respondent did not provide any factual basis for concluding that the relationship between it and its related parties will influence the price as required under Paragraph 2 of the Fourth Schedule to the EACCMA.

27. The Appellant submitted that in its advance ruling application, it provided justification that the sale transaction with its related parties will fulfil conditions for application of the transaction value method. That it is notable that the Respondent's conclusion that the transaction value method is not acceptable was only based on its assumption that the relationship between Appellant and the suppliers will affect the price of the goods. Further, there is no mention of the other conditions stipulated under Paragraph 2 of the EACCMA. That it was therefore not in dispute that the sale of Mondelez products to the Appellant fulfils the other 3 conditions.

28. The Appellant contended that whereas it will be importing Mondelez products from related parties, Paragraph 2(2) of the Fourth Schedule to the EACCMA provides that the determination of the transaction value should not be deemed as unacceptable merely because the buyer and seller are related parties. That it goes on to provide that 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.

29. The Appellant stated that under the circumstance of sale test, Customs Department 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. That the key questions that should be addressed in the determination of the circumstance of sale, according to Note 3 to Paragraph 2(2) would include:-a.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?b.Is the price adequate to ensure recovery of all the costs plus a profit which is representative of the firm's overall profit which realized over a representative period?

30. That according to Notes to Paragraph 2, Sub-paragraph 2 (b), several factors must be considered when determining whether one value closely approximates to another. Such factors include:-i.Nature of the imported goods;ii.Nature of the industry;iii.The season in which the goods were imported; andiv.Whether the difference in values is significantly different.

31. The Appellant submitted and elaborated on the following as the facts regarding the circumstances of sale demonstrate that the relationship between the Appellant and its related parties does not influence the price under the new model.

a. Additional functions and risk borne by the Appellant should be considered when comparing the prices between the old and the new business models. 32. The Appellant contended that 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 will influence the price.

33. The Appellant further highlighted as below the differences in functions performed by itself under the new model as the distributor and the functions that were previously performed by Hasbah as the sole distributor of Mondelez products in Kenya.

i. Old Model 34. That according to Clause 4 of the Distribution Agreement between Mdlz Egypt and Hasbah, Hasbah is obligated to perform the following functions;i.Use its best efforts to promote and maximize the sale of Mondelez Products in the Kenyan market.ii.Provide timely delivery of the Products in accordance with the orders placed by its customersiii.Purchase its full needs of products the same as or similar to the Products from Mondelez Companies.iv.Be solely responsible for providing sufficient resources to ensure an adequate management organization and sales force dedicated to the distribution and selling of the Products so as to successfully promote and sell the Products in the market.v.Provide and maintain all the necessary warehousing, chilled storage, transportand other facilities and equipment to carry out its duties and responsibilities.vi.Provide such packaging, labelling and/or re-labelling services as is necessary to comply with any applicable rules or regulations for the distribution or sale of the Products in the Kenyan market, at its own expense.vii.With the approval of Mdlz Egypt carry out any advertising, marketing or promotional activities.The marketing and promotional activities to be performed by Hasbah will be limited trade marketing involving only promotional activities. The marketing activities are detailed in Schedule K of the Distribution Agreement between Mdlz Egypt and Hasbah.viii.Extend credit facilities of the kind normally available in the trade to customers at its expense as necessary to promote sales of the product.

35. It submitted that according to Schedule C of the Distribution Agreement between Mdlz Egypt and Hasbah, Hasbah will earn a margin on a sliding scale basis depending on the size of the in-Market Sales (IMS).

36. That from the above, Hasbah is compensated for costs incurred in performing its distributions functions plus a back margin of 4. 5%.

37. The Appellant added that under the old model, the Appellant provided sales support services to Mdlz Egypt and Mdlz SA that included marketing and promotion services and was reimbursed for costs incurred plus a margin of 5% as per the Transfer Pricing Documentation.

ii. New Model 38. The Appellant stated that under the new model, it is the distributor of Mondelez products in the Kenyan Market and will continue providing sales support services to the related party suppliers. That according to the Distribution Agreement between it and MIAPL, the Appellant will perform all the functions currently performed by Hasbah as highlighted above and the following additional functions:-a.Customer Support Services. The Appellant will have the right and obligation to provide or arrange for customer support services in Kenya which will include employing or engaging sufficient technical personnel or contractors to perform the customer support services. The Appellant will perform the customer support services for its own account.b.Marketing and advertising -According to Paragraph 2. 2.1. 2 of the Transfer Pricing Policy, the Appellant's marketing activities will include the following:i.Consumer marketing and advertising including on-air, print, outdoor, digital and social media, and other product promotions;ii.Consumer sales incentives such as coupons and rebates; andiii.Trade promotions to support price features, displays, and other merchandising of MDLZ products for customers.

39. The Appellant averred that the Manufacturers would not be involved in or responsible for any marketing activities with regards to the goods that are sold to the Appellant. That the related party suppliers therefore incurred additional costs paid to the Appellant for its sales support services under the old model. That these costs were factored in the prices of goods sold to HKL.

40. It added that conversely, the related party suppliers will not incur additional costs with respect to sales support services under the new model as the Appellant would continue providing these services at its own cost.

41. The Appellant submitted that this would therefore mean that the price of identical goods sold to the Appellant under the new model would be lower compared to the price charged to third parties under the old model.

42. The Appellant stated that the costs incurred per product largely explains the variance between the price of goods imported by HKL and the price of goods imported by the Appellant.

43. That the Respondent averred in its advance ruling that the mere change in the business model does not impact the value of the products since distributors under both models (Hasbah and the Appellant) will perform the same functions. It stated that based on this, the Respondent's allegation was incorrect, not factual and unsubstantiated.

44. The Appellant stated that the Respondent had also stated in its advance ruling that there was no transaction between the Appellant and the related party suppliers. That this was also incorrect since a sale transaction will exist between the Appellant and the suppliers as per the distribution agreements. That the fact that the Appellant would be purchasing the products from related parties and onward sell to other customers means that a transaction exists.

45. That the Advisory Opinion 1. 1 of the WCO provides that the Agreement on implementation of Article VII of the General Agreement on Tariffs and Trade 1994, contains no definition of sale. That nevertheless, in conformity with the basic intention of the Agreement that the transaction value of imported goods should be used to the greatest extent possible for Customs valuation purposes, uniformity of interpretation and application can be achieved by taking the term "sale" in the widest sense, to be determined only under the provisions of Articles 1 and 8 read together.

46. The Appellant stated that the Advisory Opinion listed various transactions that do not constitute a sale including goods imported under hiring or leasing contracts, free consignments, goods imported by branches which are not separate legal entities etc. That with reference to the latter example, it was noted that subsidiaries within a MNE are often independent legal entities, rather than branches, hence in such cases, sales between, for example, parent and subsidiary, are treated as sales within the meaning of Article 1.

47. That the WCO has previously addressed itself on the acceptability of a price below prevailing market prices for identical goods for purposes of applying the transaction value method. It averred that the Technical Committee considered this question and concluded through WCO Advisory opinion 2. 1 that the mere fact that a price is lower than prevailing market prices for identical goods should not cause it to be rejected for purposes of applying the transaction value method.

48. That the WCO Technical Committee also addressed cases where customs administrations have reasons to doubt the truth or accuracy of the declared value and emphasized through Decision 6. 1 that in so doing, customs administrations should not prejudice legitimate commercial interests of the importer.

b. The prices of goods to be imported by the Appellant will be adequate to ensure recovery of all the costs plus a profit. 49. The Appellant submitted that the Interpretative Notes of the Fourth Schedule of the EACCMA provides that one of the key questions to be addressed in establishing whether the relationship between related parties has influenced the price is whether the price is adequate to ensure recovery of all the costs plus a profit which is representative of the firm's overall profit realized over a representative period of time.

50. That Schedule A of the Master Supply Agreement provides that the initial transfer price of Mondelez products delivered to a purchaser by a supplier should be determined by applying a mark-up on the production costs available at the time of invoicing. The transfer price may be adjusted based on actual production costs for the fiscal year on a periodic basis respectively.

51. That further, Schedule B of the Master Supply Agreement provides that the mark-up will be six per cent (6%) of supplier's production costs for products sold from supplier to purchaser. That is;Price= Production Cost +(6%*Production Cost)

52. The Appellant contended that the production costs are defined under Schedule A of the Master Supply Agreement to mean Supplier's full costs associated with manufacturing and any corresponding obligations of Supplier such as delivery, as appropriate, as outlined in the Agreement including, but not limited to, fixed costs, variable costs, and any reasonable variances, as updated and amended on a periodic basis and discussed and agreed upon between supplier and purchaser, as deemed necessary and appropriate.

53. That the pricing method above is based on the Transfer Pricing Policy which was prepared in accordance with OECD Guidelines arm's length principle specifically, Paragraph 3. 2.1 of the Policy.

54. That the above approach applies in cases where the Appellant imports products directly from related production entities such as Mdlz Egypt and Chapelat Swaziland as demonstrated in the diagrammatic flow below:MDLZ Manufacturing entitiesMCadbury Kenya (Kenya)3P Distributor (Hasbah, Kenya)

55. The Appellant stated that in cases where the Appellant imports the products through MIAPL, the price of the goods will also include a distribution markup of 4% as per Exhibit A of the Distribution Agreement between the Appellant and MIAPL.Price =(4% * transfer price) + transfer price

56. That Paragraph 3. 3.1 of the transfer pricing policy provides as follows:“For goods purchased by the Covered Entity from MIAPL, the Covered Entity is characterized as a Distributor. MDLZ Affiliates that are characterized as Distributors are remunerated such that they are intended to achieve a targeted 4% operating margin"

57. It averred that in this arrangement MIAPL will purchase the goods from Mondelez entities located in the AMEA region at Cost plus 6% margin and onward sell the products to the Appellant at a price that will include a 4% distribution margin. That in this regard the total mark up on productions costs will be 10%.

58. The Appellant further provided the below diagrammatic flow of the arrangement in support of its arguments;MDLZ Manufacturing entities (EMEA Region)C MIAPI (Singapore)Cadbury Kenya LTDKenya3P Distributor(Hasbah Kenya)ost+% Target OM 4% PARAGRAPH 59. That in view of the above, the price at which the Appellant will be purchasing products from its related suppliers will adequately cover the production costs and include a markup that will be representative of the supplier's overall profit. That this was also evident from the price list.

60. It submitted that the WCO TCCV under J Study 10. 1 considers a situation where Customs examined the circumstances surrounding the sale of two products sold between related parties. That in the first case, the product concerned was sold by the seller to a related buyer in the Country of importation and to an unrelated buyer at a higher price. That it was established that the costs incurred by the exporter were the same in the sales to both the related and unrelated buyers. That the importer failed to explain why the price differed in each case and there were insufficient grounds to take the view that the price difference was not significant. That in the instant case, the price difference between the Appellant and the third party can be explained by the additional functions which were separately paid for by suppliers under the model and which are currently incurred by the Appellant.

61. It added that in the case of the other product, which was sold only between related parties, Customs established that the prices charged to the related buyer were adequate to recover all the seller's costs, including the costs of acquisition plus the costs of repacking, handling, and freight charges, as well as to recover a profit that was representative of the firm's overall profit over a representative period of time. That the transaction value in this case was therefore accepted.

62. That the transaction value method is the primary method of customs valuation and must be applied whenever the conditions prescribed under Paragraph 2 have been fulfilled. That the transaction value method of identical goods may only be considered after exhausting the application of the transaction value method after carefully evaluation the circumstances of sale.

63. The Appellant referred to the cases of Wallpaper Kenya versus Commissioner of Customs and Border Control and Tax Appeals Tribunal Appeal No.279 of 2020, where it averred that the Tribunal relied on Testimony Motors Limited Vs the Commissioner of Customs (Uganda Revenue Authority) 2012 HC Civil Suit No. 212 where the Court affirmed the position that the transaction value method must always be used except in very exceptional circumstances.

64. The Appellant submitted that the transaction value of Mondelez products under the new model will closely approximate the customs value of identical goods determined using the deductive value method.

65. That Paragraph 2(b) of the Fourth Schedule of the EACCMA provides an opportunity for an importer to demonstrate that the transaction value closely approximates to a "test" value previously accepted by the Customs administration and is therefore acceptable under the provisions of Paragraph 2. That where a test under paragraph 2(b) is met, it is not necessary to examine the question of influence under paragraph 2(a). That further, if the Customs administration has already sufficient information to be satisfied, without further detailed inquiries, that one of the tests provided in paragraph 2(b) has been met, there is no reason for it to require the importer to demonstrate that the test can be met.

66. The Appellant stated that 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 similar goods as determined under the deductive value method.

67. The Appellant averred that it had computed the customs value of Mondelez products to be imported by it under the new model in accordance with Paragraph 6 of the Fourth Schedule of the EACCMA.

68. That Paragraph 6 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 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 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 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; where appropriate, the costs and charges referred to in Paragraph 9 (2); andiii.The customs duties and other national taxes payable in the Partner State by reason of importation or sale of the goods.

69. That 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.

70. That Note 7 to Paragraph 6 provides that “general expenses” include direct and indirect costs of marketing the goods.

71. The Appellant averred that in view of the above, it had applied the unit price at which it will sell the 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.

72. The Appellant asserted that it had applied actual figures applied by it in computing the selling price for the Kenyan market. That it should be noted that Note 6(1) to Paragraph 6 of the Fourth Schedule of the EACCMA provides that the figures for purposes of deduction of profit and general expenses should be 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.

73. That to this end, the Appellant had established that the test value (customs value computed based on the deductive value method) closely approximates the transaction value declared by the Appellant on imported products.

74. It stated that in BASF East Africa Ltd Vs the Commissioner of Customs and Border control, TAT No 115 of 2020, the Tribunal held that where test values computed based on the deductive value method closely approximates the transaction value, the transaction value method should be accepted. The Appellant therefore contended that the transaction value of the products it imported should be accepted.

75. The Appellant submitted that the transaction value of identical goods method had been erroneously applied. That notwithstanding and without prejudice to the foregoing, the Respondent did not consider the differences in commercial level of operation between HKL and the Appellant under the 2 models in applying the transaction value of identical goods method.

76. That HKL imports Mondelez products as a distributor for sale to retailers in Kenya. On the other hand, the Appellant will import Mondelez products for onward selling to other distributors in Kenya including HKL.

77. The Appellant submitted that it will also sell the products to distributors located in other African countries. That this implies that the volume of Mondelez products procured by the Appellant from Mondelez companies is significantly higher than the volumes that HKL procured from Mdlz Egypt and Mdlz SA as per the distribution agreement between HKL and the Appellant.

78. That Note I 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.

79. That 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:a.a sale at the same commercial level but in different quantities;b.a sale at a different commercial level but in substantially the same quantities; orc.a sale at a different commercial level and in different quantities.

80. The Appellant further stated that Note 5 to Paragraph 3 of the Fifth 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 clearly establishes the reasonableness and accuracy of the adjustments. E.g., valid price lists containing prices referring to different levels or different quantities. For instance, if the imported goods being valued consist of a shipment of 10 units and the only identical imported goods for which a transaction value exists involved a sale of 500 units, and it is recognized that the seller grants quantity discounts, the required adjustment may be accomplished by resorting to the seller's price list and using the price applicable to sale of 10 units. That Note 5 goes on to make it clear that in the absence of such an objective measure, the determination of a customs value under the provisions of Paragraph 3 is not appropriate.

81. That in light of this, if the transaction value of identical goods method is to be applied in the instant case, differences in commercial level and quantities between HKL and the Appellant under the 2 models must be considered and appropriate adjustments made to the prices based on demonstrated evidence that clearly establishes the reasonableness and accuracy of the adjustments. That in the absence of such adjustments, the transaction value of identical goods would not be appropriate.

82. The Appellant submitted that the Respondent's review decision failed to specifically address itself to the various grounds cited by the Appellant in its review application. That Section 229(4) of the EACCMA requires the Commissioner to state reasons for its decision when communicating its review decision to the person who has lodged a review application.

83. The Appellant contended that its review application dated 17th June 2022, cited various grounds to support its position that the transaction value was the most appropriate method of customs valuation for Mondelez products imported by CKL. That it further enclosed in its review application various documents to corroborate its arguments.

84. That however, the Respondent in its review decision dated 14th July 2022 simply stated that it scrutinized the Appellant's application but did not find any new information that would make it rescind its advance ruling. That the Respondent did not address itself to the specific grounds stated by the Appellant in its application as required under Section 229(4) of the EACCMA.

85. The Appellant stated that by simply stating that the additional information provided did not convince the Commissioner to rescind its decision the Respondent failed to provide the Appellant with reasons to support its decision as envisioned under Section 229(4) of the EACCMA.

86. The Appellant submitted that Section 229(2) of the EACCMA requires the person lodging the review application to state the grounds upon which the application is being lodged. That it is further expected under Section 229(4) of the EACCMA that the Commissioner must provide reasons for its decision based on the grounds provided by the persons lodging the application.

87. The Appellant contended that failure by the Respondent to address itself to the grounds stated by the Appellant therefore invalidates the Respondent's review decision.

88. In light of the foregoing, the Appellant contended that the Respondent erred in fact that no new information was found to make the Respondent rescind or vary its previous position. That this was inaccurate as all the above-mentioned grounds was new information furnished to the Respondent.

Appellant’s Prayers 89. The Appellant prayed that;a.The Tribunal sets aside the Respondent’s review decision and finds that the transaction value method is the most appropriate method of customs valuation for Mondelez products imported by the Appellant.b.That the Tribunal orders that the costs of this Appeal be awarded to the Appellant

Respondent’s Case 90. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated 28th September 2022 and filed on the same date together with the documents attached thereto.ii.The Respondent’s written submissions dated 4th June 2023 and filed on 5th June 2023.

91. It was the Respondent’s contention that the crux of the dispute at hand is the method applied in the determination of the value of the Appellant's imported goods that is liable to ad Valorem import duty.

92. That an additional issue is whether the Respondent's decision was erroneous on the basis that it was not in line with provisions of Section 229(4) of the East Africa Community Custom Management Act of 2004(EACCMA).

93. The Respondent stated that the Appellant argued that the transaction value as stipulated under Paragraph 2 of the 1st Schedule of EACCMA should be applied because all the necessary conditions prescribed therein are fulfilled. That additionally, the Appellant rehashes that the method of custom valuation are set out in sequential order of application and further re-emphasized the same using the case of Wallpaper Kenya versus Commissioner of Customs and Boarder Control

94. The Respondent contended that the transaction value method would not be opportune in the instant case and instead thought should be shifted to the transactional value of identical goods methodology as the most fitting methodology.

95. That the basis of this, the Respondent contended that the transaction did not fulfill the conditions as set out in Paragraph 2 of the 4th Schedule. That the new model as set out by the Appellant in its Memorandum of Appeal allows the Appellant to take up the supply chain obligation previously taken up by a third party.

96. The Respondent contended that the Appellant is to subsequently sell the imported products at an operating margin which would only be enough to foster the company's self-reliance while maintaining its marketing and promotional costs and obligations. That this implies that there is no transaction between the related parties hence the transactional value method does not apply upon the adoption of the new model.

97. The Respondent further contended that the change in business model is an internal affair issue as both the Appellant and the third party have the same role of importation of goods. That this will not affect the value of the goods being traded. That it was based on this that the valuation used with the third party can be used in this case where transactional value of identical goods is used.

98. The Respondent submitted that the first methodology based on transactional value as outlined in Paragraph 2 of the 4th Schedule had failed and applying a sequential application of valuation methods, the most suitable method would be transactional value on identical goods.

99. That it was the Appellant's contention that the Respondent erred in its decision because it failed to address all grounds raised by the Appellant in its review application. That additionally, its argument is that the grounds presented in its request for review was all new information that would make the Respondent rescind its previous decision.

100. The Respondent contended that the request made by the Appellant was not a valuation request as envisaged in under the WTO Trade Facilitation Agreement but was instead a request made for application of a particular valuation method.

101. That essentially, the Appellant wanted to use a particular method in custom valuation and sought the concurrence of the Respondent on the same. It averred that the Appellant elaborately drew out why the particular methodology would be most suitable in its opinion and expected concurrence from the Respondent.

102. In support of this position, the Respondent quoted the Appellant's letter where the third last paragraph of the second page, the Appellant says:.........we seek your concurrence to our understanding that the Transactional Value Method will be the most appropriate valuation methodology applicable between the related parties inside and outside Kenya per the applicable legislation'

103. That the Respondent made it clear to the Appellant in a subsequent letter that what was sought was not a valuation request and the Respondent further discussed why the Appellant's method would be erroneous.

104. The Respondent contended that merely stating that a letter is an application for an advance ruling in accordance with the provisions of EACCMA will not suffice and that the same must be in line with the provisions of the law. That in this case, the Appellant's application was not in line with the law and therefore the same was not an application for advance ruling.

105. The Respondent therefore contended that the correspondences between the Appellant and itself following the first letter from the Appellant was not subject to the provisions of the law in line in so far as advanced ruling on valuation is concerned. That the Respondent therefore could not have been said to have acted out of scope of the provisions of EACCMA.

Respondent’s Prayers 106. The Respondent prayed that this Tribunal considers and finds:a.The Appeal lacks merit and ought to be dismissed.b.The Respondent is entitled to the costs of the Appeal.

ISSUE FOR DETERMINATION 107. Having read the pleadings and submissions by both parties the Tribunal is of the respectful view that the only issue falling for determination in this Appeal is:-Whether the Respondent erred in its decision to depart from the Appellant’s proposed transaction value method as the valuation method for goods to be imported by the Appellant.

Analysis and Determination 108. The genesis of this dispute is the Respondent’s confirmed decision dated 14th July 2022 wherein it held that the transaction value method was not the appropriate method for valuation of goods to be imported by the Appellant.

109. It was the Appellant’s contention that the Respondent erred in fact and law in finding that the relationship between the Appellant and its related party suppliers influences the price of the imported products in total disregard of the circumstances of sale and test values provided by the Appellant.

110. The Appellant explained that it previously provided sales support services to Mondelez Egypt Foods S.A.E("Mdlz Egypt") and Mondelez South Africa Pty Ltd ("Mdlz SA"). That separately, Mdlz Egypt and Mdlz SA appointed Hasbah Kenya Ltd ("Hasbah") to be its nonexclusive distributor of Mondelez products in the Kenyan market in accordance with a Distribution Agreement dated 1st December 2017.

111. That the Appellant changed its business operating model from providing sales support services to Mdlz SA and Mdlz Egypt to being the distributor of Mondelez products in the Kenyan market. That Mondelez's operations globally are organized around four regions. Kenya is part of the Mondelez Asia, Middle East and Africa ("AMEA") region. That where goods are exported within AMEA, the region operates under the Global Supply Chain Principal model whereby Mondelez International AMEA PTE Ltd("MIAPL") operates as the supply chain principal, responsible and accountable for key supply chain activities.

112. The Appellant submitted that to this end it will import Mondelez products from Mondelez Companies located within the AMEA region through MIAPL in accordance with a Distribution Agreement dated 1 May 2022.

113. It was the Appellant’s contention that the Respondent failed to take into account the differences in functions performed and risks assumed by the Appellant and the third-party importer (Hasbah Kenya Limited) in determining whether the prices declared by the Appellant are influenced by the relationship with the suppliers.

114. The Respondent on its part contended that the Appellant’s transaction did not fulfill the conditions as set out in Paragraph 2 of the 4th Schedule. That the Appellant’s new business model as set out by the Memorandum of Appeal allows the Appellant to take up the supply chain obligation previously taken up by a third party.

115. The Respondent contended that the Appellant is to subsequently sell the imported products at an operating margin which would only be enough to foster the company's self-reliance while maintaining its marketing and promotional costs and obligations. That this implies that there is no transaction between the related parties hence the transactional value method does not apply upon the adoption of the new model.

116. The Respondent further contended that the change in business model is an internal affair issue as both the Appellant and the third party have the same role of importation of goods. That this will not affect the value of the goods being traded. That it was based on this that the valuation used with the third party can be used in this case where transactional value of identical goods is used.

117. That the Interpretative Notes at Part II of the Fourth Schedule of the EACCMA provides as follows at Paragraph 1 regarding determination of customs value;“Paragraph 2, 3, 4, 5, 6, 7 and 8 define how the customs value of imported goods is to be determined under the provisions of this Schedule. The methods of valuation are set out in a sequential order of application. The primary methods for customs valuation is defined in Paragraph 2 and imported goods are to be valued in accordance with the provisions of this paragraph whenever the conditions prescribed therein are fulfilled.”

118. The Tribunal notes that Section 122 of the EACCMA as read together with the Fourth Schedule of the EACCMA provides for the manner in which Customs valuation should be undertaken. Specifically, 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. Section 122(1) of EACCMA provides as follows;“Where imported goods are liable to import duty ad valorem, then the value of such goods shall be determined in accordance with the Fourth Schedule and import duty shall be paid on that value.”

119. The Fourth Schedule to the EACCMA 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)

120. 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.

121. Customs valuation shuns the use of arbitrary values or use of arbitrary methods of determining the value of goods for purposes of levying import duties. In this regard, Section 122 prescribes the six methods of determining value. The law prescribes that these methods are to be applied in a hierarchy one after another until the value is determined. Thus, the valuation methods represent positive actions of dealing with Customs dissatisfaction with a declaration of value.

122. It is further clear to the Tribunal that under the 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.

123. Paragraph 2(1) of the Fourth Schedule of EACCMA states as follows regarding the transaction value of goods:“The customs value of imported goods shall be the transaction value, which is the price actually paid or payable for the goods when sold for export to the Partner State adjusted in accordance with the provisions of Paragraph 9, but where –”

124. The Appellant had explained that it was the distributor of Mondelez products in the Kenyan Market and would continue providing sales support services to the related party suppliers. That according to the Distribution Agreement between it and MIAPL, the Appellant will perform all the functions currently performed by Hasbah and the following additional functions:a.Customer Support Services. The Appellant will have the right and obligation to provide or arrange for customer support services in Kenya which will include employing or engaging sufficient technical personnel or contractors to perform the customer support services. The Appellant will perform the customer support services for its own account.b.Marketing and advertising -According to Paragraph 2. 2.1. 2 of the Transfer Pricing Policy, the Appellant's marketing activities will include the following:i.Consumer marketing and advertising including on-air, print, outdoor, digital and social media, and other product promotions;ii.Consumer sales incentives such as coupons and rebates; andiii.Trade promotions to support price features, displays, and other merchandising of MDLZ products for customers.

125. The Appellant had explained that the Manufacturers would not be involved in or responsible for any marketing activities with regards to the goods that are sold to the Appellant. That the related party suppliers therefore incurred additional costs paid to the Appellant for its sales support services under the old model. That these costs were factored in the prices of goods sold to HKL.

126. The Tribunal perused the documents submitted by the Appellant plus the pleadings and noted that, in its new model of operation and supported by the agreement, the Appellant was indeed to be at a different commercial level with the previous distributor (Hasbah) who previously imported the same products and the Respondent had sought to use its price in the transaction value on identical goods.

127. Further, it was not in dispute that the Appellant was a related party to Mondelez International AMEA PTE. LTD whom the Appellant was to import the goods from. However, this on itself is not reason for rejection of the transaction value method as provided for at Paragraph 2(2)(a) of the Fourth Schedule to the EACCMA which states:“…the fact that the buyer and the seller are related….shall not in itself be a ground for regarding the transaction value as unacceptable. In such a case the circumstances surrounding the sale shall be examined and transaction value shall be accepted provided that the relationship did not influence the price…”

128. The Appellant in this case demonstrated that it was indeed at a different commercial level with Hasbah Kenya Limited which previously imported the products due to the additional responsibilities it would take over from the parent company (Mondelez International AMEA PTE. LTD). These responsibilities and the fact that it would even supply Hasbah Kenya Limited meant that even the volumes would be different from that previously handled by Hasbah.

129. After taking into account the circumstances of the trade between the Appellant and the exporter, and after considering the pleadings, submissions and documents presented by both parties, the Tribunal was persuaded that the relationship between the Appellant and the related company (Mondelez International AMEA PTE LTD will not affect the price of goods to be imported by the Appellant.

130. Consequently, the Tribunal finds that Respondent erred in its decision to depart from the Appellant’s proposed transaction value method as the valuation method for goods to be imported by the Appellant.

Final Decision 131. On the basis of the foregoing analysis the Tribunal finds the Appeal to be merited and the Orders that commend themselves are as follows:-a.The Appeal be and is hereby allowed.b.The Respondent’s Advance Ruling dated 5th May 2022 be and is hereby set aside.c.The Appellants goods to be valued using transaction value method.d.Each party to bear its own costs.

132. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2023. ERIC NYONGESA WAFULA.........CHAIRMANCYNTHIA B. MAYAKA.............MEMBERDR. RODNEY OLUOCH............MEMBEREUNICE NG’ANG’A..................MEMBERABRAHAM K. KIPROTICH....MEMBERBERNADETTE GITARI............MEMBER