Genesis and Background of the Case

This judicial review application was brought by Neolife International Limited against the Kenya Revenue Authority (KRA) following a customs post-clearance audit carried out for the period 2010 to September 2015. The audit resulted in a demand for additional taxes totaling KES 98,815,351. KRA alleged that royalties paid by Neolife to its parent company GNLD US should be included in the customs value of imported goods, making them dutiable.

Neolife challenged KRA’s use of the Transaction Value Method in computing customs values, citing prior use of the Deductive Value Method for similar transactions in 2016. The applicant sought judicial review orders of certiorari, prohibition, declarations, and damages, alleging KRA’s actions were unlawful, arbitrary, and in violation of their legitimate expectation under Article 47 of the Constitution and Sections 3-7 of the Fair Administrative Action Act.

Background of the Case – Key Points

1. Audit Period & Amount: KRA conducted a post-clearance audit for 2010–2015 and demanded KES 98.8 million in additional taxes based on royalty payments.
2. Royalty Dispute: KRA claimed royalties were a condition of sale and therefore part of the customs value; Neolife argued otherwise.
3. Previous Method Used: In 2016, KRA had used the Deductive Value Method for similar imports, creating confusion and the basis for Neolife’s legitimate expectation.
4. Judicial Review Motion: Filed on 12 October 2017, seeking orders to quash the demand notice issued via KRA’s letter dated 4 August 2017.

Appellant’s Submissions (Neolife International Ltd)

1. Improper Valuation Method: Argued that the Transaction Value Method was inapplicable due to royalty payments being indeterminate and due to a related-party transaction.
2. Inconsistency and Arbitrariness: KRA had used the Deductive Value Method for similar 2016 transactions; sudden shift violated legal certainty and fairness.
3. Violation of Fair Administrative Action: The demand breached Article 47 and the Fair Administrative Action Act, given the unexplained deviation from precedent.
4. Legitimate Expectation: Based on past treatment and correspondence, the applicant expected uniform and consistent valuation methodology.
5. Royalty Not a Sale Condition: Claimed that royalty payments were not mandatory for the sale and should not be included in customs value.
6. Financial Hardship: Asserted that the additional tax demand would cripple business operations, affecting obligations to financiers.
7. Unlawful Retrospectivity: Challenged KRA’s shift in valuation method as an attempt to apply new standards retroactively.

Respondent’s Submissions (Kenya Revenue Authority)

1. Legal Basis for Audit and Demand: Cited Sections 235, 236, and 122 of the EACCMA and the Fourth Schedule, affirming lawful grounds for post-clearance audits and use of Transaction Value Method.
2. Royalty as Dutiable Component: Stated that royalties were a condition of sale, making them includable in customs value under the Fourth Schedule.
3. Independent Valuation Cases: Argued that the 2016 valuation cases (where Deductive Method was used) were unrelated and based on different facts.
4. Fair Hearing Provided: Cited multiple correspondences and meetings showing Neolife had a chance to respond and engage before the final decision.
5. No Violation of Article 47: Asserted that the assessment was fair, reasonable, and grounded in law.
6. Premature Litigation: Argued that Neolife bypassed the Tax Appeals Tribunal, the appropriate first-instance forum under the Tax Appeals Tribunal Act (Section 12).
7. No Proven Expectation: Maintained that legitimate expectation cannot override statutory requirements, especially where misdeclarations exist.

Court’s Decision – Key Points

1. No Illegality or Irrationality: The court held that KRA acted within its statutory mandate under EACCMA; use of the Transaction Value Method was lawful and justified.
2. No Legitimate Expectation: Found that no consistent practice or explicit promise existed to rely solely on the Deductive Method; each valuation must follow case-specific facts.
3. Fair Process Observed: Held that correspondence and justification for the applied method showed procedural fairness.
4. Reliefs Denied: Dismissed the application, finding that Neolife failed to meet the threshold for judicial review remedies.
5. Costs: Each party to bear its own costs.