Civil Reference No. 7 of 2004
Tanzania Tobacco Processors Limited (TTPL), a green tobacco processing company, entered a 10-year US$15,000,000 Loan Agreement in 2000 with its related lender, Universal Leaf Tobacco Co. Inc. (ULTC) of the USA, at an interest rate of 2% above the Standard Chartered Bank US Dollar loan rate. Under the agreement, TTPL did not draw down cash but recorded invoices from ULTC for equipment, installation and related costs as a long-term obligation. For the years of income 2006, 2007 and 2008, the Tanzania Revenue Authority (TRA) audited TTPL and issued Additional Final Assessments disallowing the interest expense claimed on the ULTC loan, initially on the basis that interest was charged 'above market rate' (tax avoidance via debt financing from a related/holding company). TTPL objected; TRA maintained its position and issued Amended Notices of Assessment (which did not repeat the 'above market rate' language) together with interest charged under section 99 of the Income Tax Act, 2004 (ITA). TTPL appealed to the Tax Revenue Appeals Board (Board), which dismissed the appeal, and then to the Tax Revenue Appeals Tribunal (Tribunal), which also dismissed the appeal, albeit finding that TRA had not complied with section 35 of the ITA regarding notice and that the 'interest rate not at arm's length' issue was not part of TRA's final decision but had been properly pleaded in TRA's reply before the Board. TTPL appealed further to the Court of Appeal.
(1) Whether the Tribunal erred in upholding the Board's decision to determine the appeal on the basis of whether the interest rate charged was at arm's length, where that issue was allegedly not part of the Commissioner's final decision, was not raised by the appellant in its grounds of appeal, and was raised only by the respondent in its reply, without a requisite notice under section 35 of the ITA and allegedly in violation of the appellant's right to be heard. (2) Whether the Tribunal erred in upholding the Board's finding that the respondent was justified in disallowing the loan interest on the ground that it was not wholly and exclusively incurred for production of income. (3) Whether the Tribunal erred in failing to hold that the Board lacked jurisdiction to determine whether instalment taxes had been paid, as that issue allegedly did not arise from the Commissioner's decision under appeal.
The appellant (through Mr. Nyika) argued that: the Board exercised only appellate jurisdiction and could not entertain issues outside the grounds of appeal or the Commissioner's decision; the 'interest rate not at arm's length' issue was never part of the Commissioner's final decision (only 'loan drawdown' was), was abandoned by the respondent, and was improperly introduced for the first time in the respondent's reply to the statement of appeal without the appellant having an opportunity to amend its pleadings; the appellant's submissions on interest rate before the Board were made under protest; the loan and its use for equipment were genuine, registered with the Bank of Tanzania and Tanzania Investment Centre, and the interest was tax-deductible under sections 11 and 12 of the ITA; the Commissioner had no power to deem the loan not at arm's length without complying with section 35 of the ITA (issuing a notice), and failure to do so vitiated the disallowance; and the third ground on instalment tax payment was a pure point of law regarding the Board's jurisdiction. The respondent (through Ms. Achimpota and Mr. Tito) argued that: the central issue was disallowance of interest under section 33(1) of the ITA (arm's length principle for related-party arrangements) because TTPL, being related to ULTC, was paying above-market interest and therefore less tax; the issue of interest rate not being at arm's length was communicated to the appellant well before the Board proceedings (in earlier correspondence and the original assessment) and was not new; the appellant bore the burden under section 18(2)(b) of the TRAA to prove the interest was at arm's length and never discharged that burden before the Commissioner, Board, or Tribunal; the appellant's own submissions before the Board (made in chief, not under protest) conceded the interest rate calculation; the word 'may' in section 35 of the ITA meant a notice was not mandatory; and the Board had authority under Rule 15(3) and (5) of the TRAR to hear both parties' submissions, including matters raised in the reply. On the third ground, the respondent argued it was purely factual, already conclusively determined below, and not appealable since appeals to the Court lie only on points of law under section 25(2) of the TRAA.
The Court of Appeal dismissed the appeal in its entirety with costs. It held that the issue of the interest rate not being at arm's length was not raised for the first time in the respondent's reply before the Board; rather, the correspondence trail (including the letter of 29 September 2009 referencing tax avoidance via above-market interest from a related holding company, and the letter of 14 June 2012) showed the appellant had notice and knowledge of this issue well before lodging its appeal, and the appellant itself referenced and responded to the interest issue in its own statement of appeal and submissions before the Board (not under protest). The Court found the appellant failed to discharge its statutory burden under section 18(2)(b) of the TRAA to prove the interest rate was at arm's length as required by section 33(1) of the ITA; merely asserting the loan arrangement was a globally accepted practice and registered with the Bank of Tanzania and Tanzania Investment Centre was insufficient. The Court disagreed with the Tribunal's view that section 35 of the ITA mandated a formal notice in the circumstances, given the extensive prior correspondence putting the appellant on notice. Consequently, grounds 1, 2, 4, 5 and 6 were found without merit. On the third ground concerning instalment tax payments, the Court held that although couched in terms of 'jurisdiction,' the substance was a factual dispute already conclusively determined by the Board and Tribunal, and since appeals to the Court of Appeal under section 25(2) of the TRAA lie only on points of law, this ground was not entertainable and was dismissed.
The judgment reinforces the principle that parties are bound by their pleadings, but clarifies that an issue raised in a reply to a statement of appeal is not necessarily a new or improperly introduced matter where the substance of that issue had already been communicated to the taxpayer through prior correspondence and assessment notices, and where the taxpayer itself had engaged with the issue. It underscores the taxpayer's persistent burden under section 18(2)(b) of the TRAA to affirmatively prove that a related-party transaction or interest rate is at arm's length under section 33(1) of the ITA, and that this burden is not discharged merely by pointing to regulatory registration of a loan agreement (e.g., with the Bank of Tanzania or Tanzania Investment Centre). The decision also confirms that the word 'may' in section 35 of the ITA does not necessarily require a fresh formal notice where the taxpayer has otherwise been made aware of the tax authority's position through the course of correspondence, thereby narrowing the practical scope of procedural notice requirements in tax avoidance assessments. Finally, it reaffirms the settled jurisdictional limitation that appeals to the Court of Appeal under section 25(2) of the TRAA are confined to points of law, and that factual determinations conclusively made by the Board and Tribunal (such as disputed instalment tax payments) cannot be re-litigated by recharacterizing them as jurisdictional issues.
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