Kuku Foods Uganda Limited v Uganda Revenue Authority (Application 71 of 2021) [2023] UGTAT 36 (31 January 2023)

THE REPUBLIC OF UGANDA IN THE TAX APPEALS TRIBUNAL OF UGANDA AT KAMPALA APPLICATION NO. 71 of 2021

KUKU FOODS UGANDA LTD .................................................. APPLICANT VERSUS UGANDA REVENUE AUTHORITY ......................................... RESPONDENT BEFORE: DR. ASA MUGENYI, DR. AKABWA Y, MR. SIRAJ ALI

RULING

• This ruling is in respect of at, application challenging the customs valuation mettiod t applied by the respondent in determining the value of tomato ketchup imported by the applicant.

The applicant operates restaurants in Uganda under the KFC franchise. The applicant imported tomato ketchup from AATCO Industries of Oman at FOB price of USO 7.85 per carton or USO 0.98/kg. In August 2018, the respondent commenced a post customs clearance audit as a result of which it rejected the value declared by the applicant. The respondent applied Method 3 of the customs valuation methods (value of identical goods) and replaced the value declared by the applicant with Shs. 153,762, 680/= in respect of which it issued an assessment. The applicant's objection to the said assessment was disallowed by the respondent. Hence this application.

The following issues were set down for determination.

- 1 . Whether the applicant is liable to pay the tax assessed? - 2. What remedies are available to the parties?

The applicant was represented by Thomas Katto while the respondent by Mr. Tony Kalungi.

The applicant's sole witness was Mr. Brian Kisembo, ifs Supply Chain Administrator testified that the applicant is a franchisee of the KFC brand under an International

franchise agreement between KFC (PTY) Ltd and Kuku Foods Uganda Ltd where the applicant is authorised to use the KFC brand in Uganda using the Franchisor's systems and according to the standards of the franchisor. He testified that in accordance with an agreement between Kuku Foods Kenya, Kuku Foods Uganda and AATCO Food Industries L. L. C of Oman (AATCO), the applicant has been importing tomato ketchup at US\$ 7.85 FOB per carton upon approval by the franchisor. Under the franchise agreement the applicant is obliged purchase from suppliers approved by the franchisor. AA TCO was one of the suppliers of tomato ketchup approved by the franchisor. The witness testified that each entity makes its own order and pays for it directly to AATCO. The witness testified that the respondent disputed the transaction value of the tomato sauce on the ground that the relationship between the supplier and the applicant had influenced the price an~ that the value declared was lower than the cost of tomato paste which is a key ingredient in the manufacture of tomato sauce. The witness testified that the applicant informed the respondent that Kuku Foods Kenya and Kuku Foods Uganda were. not related to AA TCO and therefore the transaction in question was at an arm's length whose transaction value should be relied upon for valuation purposes.

The respondent closed its case without calling any witnesses nor filing submissions.

The applicant submitted that the dispute before the tribunal was whether the price declared by the applicant of US\$ 7.85 per carton or (US\$ 0.98 per kg) for its imported tomato ketchup from AA TCO industries in Oman was the correct transaction value on which the respondent should have raised import duty. It submitted that the respondent's contended that the value of US\$ 1.82/kg was the correct value of the tomato sauce and issued an assessment of Shs. 153,762,680. The applicant submitted that the reason by the respondent for upholding the assessment was that the price was influenced by the relationship between the supplier and the applicant and that the value of tomato sauce declared was lower than the cost of tomato paste which is a key ingredient in the manufacture of tomato sauce.

Citing S. 122 and Paragraphs 1(1) and 2(1) of the Fourth Schedule of the East African Community Customs Management Act and the High Court decision of *Testimony Motors Ltd v Commissioner of Customs Uganda Revenue Authority* Civil Suit 212 of

2012 and *Agaba Henry v URA* Application 83 of 2021, the applicant submitted that it was clear that other customs valuation methods were to be applied if the method prescribed under Paragraph 2 fails to establish the customs value. It that in this case, the applicant and Kuku Foods Kenya contracted AATCO Food Industries LLC ('AATCO') to supply it with tomato ketchup branded as 'KFC' at a price of US\$ 7.85 per 1000 pack or US\$ 0.98 per kg. The supply agreement, exhibit AE2, arose from an International Franchise Agreement entered by the applicant as a franchisee and KFC (Pty) Ltd, as a Franchisor and owner of the KFC brand under which rights were granted to the applicant to use the franchisor's systems to deal in KFC products. The applicant submitted that under clause 5 of the international franchise agreement, it was required to obtain supplies from suppliers approved by the franchisor prior to supply. AA TCO was one such supplier with whom the applicant and Kuku Fooc:#s Kenya entered into an agreement for the supply of tomato ketchup. Throughout the contract period the applicant imported tomato sauce from AA TCO at the price declared in the contract and was availed to the respondent at importation. The applicant submitted documents which included commercial invoices, packing lists, certificate of health for exported products and proof of payment to AA TCO where the said price

was quoted in the commercial invoice. The price paid by the applicant was easily ascertainable by the respondent from the documents it was availed with. The applicant submitted that the transaction value ascertainable ought to have been used by the respondent for the purpose of determining the customs value of the imported tomato ketchup. The applicant submitted that consequently the use by the respondent of the value of identical goods exported to a partner State had no basis.

The applicant submitted that the respondent's argument that the relationship between it and the supplier influenced the price had no basis. It submitted further that the respondent relied on speculation as there was no basis for its conclusion. The documents provided including the international franchise agreement, supply agreement and commercial invoices were clear on the relationship between the applicant and KFC. The applicant submitted that it wrote to the respondent explaining that the former and Kuku Foods Kenya are subsidiaries of Kuku Foods East Africa resident in Mauritius. The administration of the Kuku Foods group is based in Kenya where provision of shared services such as procurement and finance are handled. In order to benefit from economies of scale, the contract with AA TCO for the supply of

tomato ketchup was negotiated at group level where the price of US\$ 0.98/kg was agreed upon for Uganda and Kenya. The applicant submitted further that while Kuku Foods Kenya and Kuku Foods Uganda are related entities, they are not related to AA TCO. Both companies make independent orders to AA TCO. Kuku Foods Kenya cannot therefore offset AA TCO liabilities since each entity deals independently with AATCO. The respondent contention that the relationship between the applicant and the supplier influenced the price has no basis. The applicant submitted also that tomato paste and tomato ketchup are not identical goods and their prices cannot be compared. The applicant concluded that the respondent's decision to disregard the transaction value of US\$ 7.85 per 1000 pack or US\$ 0.98/kg as the appropriate Customs Value for the tomato sauce imported by Kuku Foods Uganda Ltd from AA TCO Food Industries Llt is unlawful. . ·

Having heard the evidence and perused the exhibits and read the submissions of the parties, this is the ruling of the tribunal.

The applicant imported tomato ketchup from AA TCO Industries of Oman at FOB price of US\$ 7.85 per carton or US\$ 0.98/kg. This value was rejected by the respondent who applied Method 3 of the customs valuation methods -value of identical goods. The respondent issued an assessment of Shs. 153,762,680.

The law relevant to the above application is to be found in the East African Community Customs Management Act (EACCMA). S. 122(1) reads

"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."

Part 2 of the Fourth Schedule of the EACCMA states as follows:

- 2(1) 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. - 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 exported at or about the same time as the goods being valued.

- 4(1 )(a) Where the customs value of the imported goods cannot be determined under the provisions of Paragraph 2 and 3, the customs value shall be the actual value of similar goods sold for export to the Partner State and exported at or about the same time as the goods being valued. - 5. Where the customs value of the imported goods cannot be determined under the provisions of paragraphs 2, 3 and 4, the customs value shall be determined under the provisions of paragraph 6 or when the customs value cannot be determined under that paragraph, under the provisions of paragraph 7 save that, at the request of the importer, the order of application of paragraphs 6 and 7 shall be reversed. - 6(1 )(a) Where the imported goods or identical or similar goods are sold in the Partner State in the condition as imported, the customs value of the imported goods under the provisions of this paragraph shall be based on the unit price at which the imported goods or identical or similar imported goods are so sold .... - 7(1) The customs value of imported goods under the provisions of this paragraph shall be based on a computed value which shall consist of the sum of: (a) the cost or value of materials and fabrication or other processing employed in producing the imported goods: (b) an amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind

as the goods being valued which are made by producers in the country of exportation for export to the Partner State. - 8 (1) Where the customs value of the imported goods cannot be determined under the provisions of paragraphs 2,3,4,5,6 and 7, inclusive, the customs value shall be determined using reasonable means consistent with the principles and general provisions of this Schedule and on the basis of data available in the Partner State."

The first 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 Paragraph ~- Where the transaction method is rejected, it must be shown that it cannot be determined under Paragraph 2. Where it cannot be determined under Paragraph 2 the respondent is entitled to use the transaction value of identical goods sold for export to the Partner State and exported at or about the same time as the goods being valued. Where the customs value of the imported goods cannot be determined under Paragraph 2 and 3, the customs value shall be the actual value of similar goods sold for export to the Partner State and exported at or about the

same time as the goods being valued. It follows from the above that the valuation methods are to be applied sequentially. The only consideration for rejection of one $\mathstrut$ method for another is proof of failure to determine the customs value of the imported goods under the method in question.

The grounds given by the respondent for rejecting the transaction method are set out in the Statement of Reasons for taxation decision filed on $23^{\circ}$ September 2022. These grounds are that no agreement existed between the applicant and AATCO as the supply agreement presented was between AATCO Food Trading L. L. C Oman and Kuku Foods Kenya. That the relationship between the applicant and Kuku Foods Kenya was not declared and yet it seemed that the applicant had imported the goods under contract terms negotiated between Kuku Foods Kenya and AATCO. That the price was influenced by the relationship between the supplier and the applicant and that the value of tomato sauce declared was lower than the cost of tomato paste, a key ingredient in the manufacture of tomato sauce.

The ground that no agreement existed between the supplier and the applicant contradicts the allegation that the price in question was influenced by the relationship between the supplier and the applicant. If no agreement existed between the applicant and the supplier how was it possible that the price of the goods could have been influenced by a relationship between the applicant and the supplier? Non declaration of the relationship between the applicant and Kuku Foods Kenya Ltd has no bearing on the application of the transaction method nor does the fact that the value of tomato sauce declared by the applicant was lower than the cost of tomato paste.

The applicant has adduced evidence namely commercial invoices, packing lists and payment receipts which clearly show the price actually paid for the imported tomato goods. The onus therefore falls on the respondent to show that the customs value of the said goods could not be determined under the transaction method. In Testimony Motors Ltd. v The Commissioner Customs, Uganda Revenue Authority Civil Suit 212 of 2012 the High Court stated that.

"... I agree with the plaintiff's submission that section 122 of the East African Community Customs Management Act, 2004 subsection 1 thereof is couched in mandatory terms. It provides that the value of such goods shall be determined in

accordance with th f e ourth schedule and Import duty shall be paid on the value. It does not give any d' t· · . . ,sere ionary powers to the Commissioner to rely on alternative methods with0ut following the procedure or directive laid out in the fourth schedule. The primary meth0d which was agreed upon is the method that must first be attempted. It is only upon failure of the primary method that alternative methods can be applied'·.

Apart from the grounds set out in its Statement of Reasons the respondent has not shown that the value of the goods in question could not be determined by the transaction method. The applicant has established in accordance with Part 2 of the Fourth Schedule of the East African Community Customs Management Act that the value declared by it was the value actually paid for the goods in question. In the circumstances we find that the respondent was · not justified in rejecting the yalue declared by the applicant.

For the above reasons this application is allowed with costs. It is ordered as follows:

- 1. The application by the respondent of the . identical method in determining the value of the tomato sauce is hereby set aside. - 2. The correct valuation method for the purpose of determining the value of the goods in question is the transaction method. - 3. The applicant is awarded the costs of the application.

Dated at Kampala thisr '6 (~t /,

day oklci~023.

MR. SIRAJ ALI MEMBER

DR. STEPHEN AKABWA Y MEMBER