In this ruling Bondo Tea Estates Ltd. challenged an adjustment made by the tax authorities to the price at which green leaf tea was supplied by the applicant to Kijura Tea Company Limited, a related party. The ruling also concerns disallowance of an assessed loss of Shs. 220,985,115.
Bondo Tea Estates Ltd. is an out grower of tea which it supplies to an associated company, Kijura Tea Company Limited. In 2018, the tax authorities conducted an audit for FY 2016/2017 which purportedly revealed that the company had under declared its sales (price of 320 compared to range of 500-700) and that it had unreconciled retained earnings and current liabilities. On that basis the tax authorities adjusted the price of the related party transactions and issued an assessment of Shs. 544,409,110 of which Shs. 174,409,650 was principal income tax, Shs. 348,819,302 penalty and Shs. 20,929,158 interest.
Bondo Tea Estates Ltd. did not agree with the assessment and filed an appeal with the Tax Appeals Tribunal where the following issues were set down for determination.
- Whether there was under-declaration of sales by the applicant to the respondent for the financial year ending 31stMarch 2017?
- Whether the average price adjustment by the respondent is in conformity with the law?
- Whether there was loss incurred by the applicant for the year ending 31stMarch, 2017 which was not recognized by the respondent?
- What remedies are available to the parties?
Judgement of the Tax Appeals Tribunal
The tribunal allowed the appeal of Bondo Tea Estates Ltd. and set aside the assessment issued by the tax authorities in regards of transfer pricing.
“The question the Tribunal has to ask itself, was the price set by the applicant and its associate, Kijura Tea Company limited, one that could be considered as one between unrelated parties?
In order to understand whether the applicant’s price to Kijura Tea Company was at arm’s length one has to ask how was the price set? The minutes of a tea stakeholders meeting of 7th January 2015 at Toro Club, Fort Portal, exhibit A5 show that it was attended by representatives of all the major green leaf buyers, namely; Mpanga Growers Tea Factory, Kijura Tea Company, Mabale Growers Tea Factory, Rusekere Growers Tea Factory and others. The meeting agreed to reduce the price of green leaf from the current Shs. 350 per kg to Shs, 280 per kg with effect from 16th January 2016 due to the fall in prices at the auction market. The meeting also reduced transport cost from Shs. 100 to Shs. 80 per kg of green leaf. The meeting resolved that stakeholders using the services of transporters should ensure that the prices offered to farmers did not exceed Shs. 280 per kg. By April 2016, 14 months after the price was fixed by the tea factories, the applicant was selling Shs. 320 per kilogram, an increment of Shs. 40. The price of the applicant was above the price set by the different stakeholders. It would have been a different matter if the price was below that set by the stakeholders. One cannot say the applicant’s price to Kijura Tea Company was not at arm’s length.
Further the applicant contended that its price did not include transport charges which varied from where the out growers came from. The applicant contended that the respondent did not state whether the Shs. 500 per kilogram paid to out growers included transport costs.
The field report the respondent conducted was on 12th September 2018. The income tax period in issue is April 2016 to March 2017. The prices of tea is not static. One cannot use the price of tea in September 2018 to ascertain the price from April 2016 to March 2017. The prices at the auction market in September 2018 may have increased. The said inspection report is not signed.
Furthermore it does not disclose which unrelated companies and their officials the respondent interacted with. No sale invoices of unrelated companies are attached. Further, the interview was not representative of the local green leaf market, only five out growers were interviewed. The minutes of the stakeholders show that there are more than 5 tea factories in the Toro tea growing region which rely on hundreds of individual out growers for their supply of green leaf.
The respondent’s representatives ought to have interviewed out growers selling green leaf to Kijura Tea Company to establish what price they were charging. The representatives only interviewed out growers selling their green leaf to Rusekere Growers Tea Company, McLeod Russell Uganda Limited and Mabale Growers Tea Factory Limited. This would enable establish if the differences between the applicant’s sale price and that of other out growers were not due to distortions arising from factors like transport costs or the quality of green leaf. The report does not state the locations of fields of the five to determine the distance between their fields and the tea factories. The report does not show whether the out growers incurred additional expenses such as transport.
The respondent’s failure to take these factors into account substantially affect the credibility of the field inspection report.
From the evidence before us, we have failed to find sufficient justification for the adjustment by the respondent of the applicant’s sales price. We accordingly find that there was no under-declaration by the applicant of its sales of green leaf to Kijura Tea Company limited for the financial year 2016/2017. We also find that the average price adjustment by the respondent was, for the above reasons, not in conformity with the law.”Uganda vs Kijura Tea Company Limited ITAT Case no 65 of 2018