Kenya vs Cummins Car and General Limited, September 2024, Tax Appeals Tribunal, Case no. TAT E450 OF 2023

Posted on | By Courts of Kenya
Category: Arm's Length Principle, Transfer Pricing Methods | Tag: , , , , , , ,
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Cummins Car & General had priced goods purchased from a related party for sale to external customers using the CUP method based on prices that had previously agreed between the two parties before they became related parties.

An assessment was issued by the tax authorities where the pricing of the goods had instead been determined using the resale price method. According to the tax authorities, the CUP method could not be used as there was a significant time lag between the previously agreed prices and the current controlled transactions. In the assessment, the tax authorities had also adjusted the commission rates in relation to a transaction between unrelated parties.

An appeal was lodged with the Tax Appeals Tribunal.

Judgment

The Tribunal upheld the tax assessment relating to the use of the RPM method instead of the CUP method, but overturned the assessment relating to the commission rate on the unrelated party transaction.

Excerpts

“The Tribunal in the circumstances concludes that the Appellant did not make adjustments for the timing difference under the CUP method and therefore was not justified in using the same. Further, while RPM is the more appropriate method for this transactions based on Paragraph 2.27 of the OECD TP Guidelines, the Respondent did not make adjustments for other costs associated with the purchase of the product. In regard to the Appellant’s transactions, these costs were workshop costs and service costs associated with distribution of the Appellant’s products.
As a result of the foregoing, the Tribunal finds that the Respondent was justified in making adjustments to the Appellant’s TP method. However, it must make the necessary costs adjustments as per Paragraph 2.27 of the OECD TP Guidelines.”

“The Tribunal further notes that CCG Kenya and Safaricom are unrelated parties dealing at arms-length and there are no legal restrictions as to how transactions between the two parties are priced. In this regard, the Tribunal posits that the Respondent has no obligation to re-write contracts between parties in a bid to collect additional taxes.”

“ii. The assessment in relation to the Transfer Pricing method applicable on the purchase of products by CCG Kenya from CMI be and is hereby upheld.
However, the Respondent shall only apply it by making adjustments for costs as per the Tribunal’s findings.
iii. The assessment in relation to commissions on Safaricom income be and is hereby set aside.”

 

Related Guidelines

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TPG2022 Chapter II paragraph 2.116As is noted in paragraph 2.2, the selection of a transfer pricing method always aims at finding the most appropriate method for a particular case, taking into account the respective strengths and weaknesses of each method, its appropriateness in view of the nature of the accurately delineated controlled transaction, the...
TPG2022 Chapter VI paragraph 6.207Where the need to make comparability adjustments arises because of differences in the intangibles used by the tested party in a controlled transaction and the intangibles used by a party to a potentially comparable uncontrolled transaction, difficult factual questions can arise in quantifying reliable comparability adjustments. These issues require thorough...

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