[2024] KETAT 1610 (KLR)

Buyline Industries Limited v Commissioner of Domestic Taxes (Tax Appeal E945 of 2023) [2024] KETAT 1610 (KLR) (Commercial and Tax) (22 November 2024) (Judgment)

Neutral citation: [2024] KETAT 1610 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Commercial and Tax

Tax Appeal E945 of 2023

Grace Mukuha, Chair, E Komolo, GA Kashindi, AM Diriye & B Gitari, Members

November 22, 2024

Between

Buyline Industries Limited

Appellant

and

Commissioner Of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company duly incorporated in Republic of Kenya under the Companies Act, 2015. Its principal business is manufacturing of beauty products and other personal care products.

2. The Respondent is an officer appointed under Section 13 of the Kenya Revenue Authority Act (Cap. 469). Under Section 5 (1) of the said Act, the Respondent is an agency of the government for the collection and receipt of all revenue.

3. On 3rd October, 2023, the Respondent issued the Appellant with assessment notice on account of excise duty claimed of Kshs. 8,300,174. 00 for the period January 2021 to June 2023.

4. On 24th October, 2023, the Appellant objected to Respondent’s assessment notice.

5. On 14th November, 2023, the Respondent issued its Objection Decision rejecting the Appellant’s objection and confirming its principal tax assessment of Kshs. 8,300,174. 00.

6. Aggrieved, the Appellant lodged the instant appeal vide Notice of Appeal dated and filed on 7th December, 2023.

The Appeal 7. The Appeal is premised on the Appellant’s Memorandum of Appeal dated 19th December, 2023, and filed on 20th December, 2023 stating the following grounds: -i.That the Respondent erred in fact and in law by disallowing the Appellant’s claim of excise tax paid on imported glass bottles, labels and plastic caps used for the manufacture of excisable end products which is in line with Section 14 of the Excise Duty Act.ii.That the Respondent erred in fact and in law by stating that a glass bottle does not form part of raw materials and consequently rejecting the Appellant’s claim for excise tax paid.iii.The Respondent erred in fact and law by generally assuming that the glass bottles, labels, and plastic caps are not raw materials used in the manufacture of excisable goods within Section 14 of the Excise Duty Act, 2015. iv.The Respondent erred in fact and law by failing to consider and appreciate that the glass bottles that are used for specific products like nail polish, nail polish removers and special oils for the purpose of maintaining the stability of the products thus forming part of the manufacturing process of the products, form part of the final product and without which the product is incomplete and cannot be used.v.The Respondent erred in fact by failing to acknowledge that there exists a credit system on consumption taxes such as Excise and Value Added Tax (VAT) for businesses and that consumption taxes should be borne by the final consumer.vi.The Respondent erred in fact and in law by introducing a definition of raw materials not provided for in the law.vii.The Respondent erred in fact and in law by failing to appreciate that the labels in the products contain mandatory statutory and regulatory requirements without which the products cannot be approved and offered for sale, and do not in any way contribute to introducing a definition of raw materials not provided for in the law.viii.The Respondent erred in fact and law by relying on the decision of this Tribunal in Beiersdorf East Africa -vs- Commissioner of Domestic Taxes without considering the extenuating and distinguishing circumstances demonstrated by the Appellant.

The Appellant’s Case 8. The Appellant’s case is premised on the following documents filed before the Tribunal: -a.Appellant’s Statement of Facts dated 19th December, 2023, and filed on 20th December, 2023. b.Appellant’s Witness Statement of Sanyal Shah dated 23rd July, 2024, and filed on 8th August,2024. c.Appellant’s Written Submissions dated 25th September, 2024 and filed on the 26th September, 2024.

9. The Appellant averred that on 7th September, 2023 it received a letter from the Respondent showing that the Respondent had reviewed the Appellant’s excise duty declarations and established that the excise duty payable was understated by claiming non-qualifying input excise.

10. That the Respondent stated the excise duty on packaging materials are not allowable and proceeded to advise the Appellant to amend its excise duty returns and make requisite payments.

11. That vide a letter dated 14th September, 2023 addressed to the Respondent, the Appellant clarified that its products subject of the excise input duty claim were raw materials used in the manufacturing of its glass products such as perfumes and deodorants, hair care, nail polish and treatment, colour cosmetics, men aftershaves and baby care products.

12. That the Respondent, in its letter dated 3rd October, 2023 asserted that glass bottles, labels and plastic caps are not raw materials used in the manufacture of excisable goods within the meaning of Section 14 of the Excise Duty Act. The Respondent accordingly issued an assessment notice.

13. That the Appellant objected on 24th October, 2023 on the basis that inputs are part of the final excisable products that the Appellant manufactures. In addition, Section 14(1) of the Excise Duty Act, 2015 refers to raw materials generally and not necessarily raw materials in their natural state and therefore the Respondent was justified to have claimed the pre-paid excise duty paid on packaging materials for the periods under contention.

14. That the Appellant clarified in its objection that its products are basic materials used to make a product. The Appellant’s position is that the glass bottles form a critical constituent in the manufacturing process of the end product. The product is unfinished and consequently not useable without the glass bottle, thus making it a raw material.

15. That the labels in the products contain mandatory statutory and regulatory requirements without which the products cannot be approved and offered for sale. The requirement to apply labels on each cosmetic product is regulated by the Standards Act, KEBS, Standard KS 1707:2002.

16. That glass bottles that are used for specific products like nail polish, nail polish removers and special oils for the purpose of maintaining the stability of the products, form part of the final product without which the product is incomplete and cannot be used.

17. That the Respondent vide its Objection Decision dated 14th November,2023 disallowed the Appellant’s objection and erroneously concluded that the Appellant’s products were packaging materials. The Respondent, therefore, concluded that there was no relief for excise duty incurred in purchasing the materials.

Appellant’s Prayers 18. The Appellant prayed to the Tribunal for the following orders: -i.That the Respondent’s assessment and Objection Decision dated 14th November, 2023 rejecting excise duty claimed on glass bottles, labels and unit boxes in the excise tax returns be vacated.ii.That the excise tax claims for the period March, May, August 2021 and January, February, May, June, September and November 2022, and March and July 2023, forming the basis of this appeal be allowed.iii.A declaration that the Appellant’s glass bottles, labels and unit boxes are raw materials used in the manufacturing process and should be treated as such by the Respondent.iv.The Respondent be restrained from rejecting excise tax claims on glass bottles, labels and unit boxes going forward.v.The Appeal be allowed with costs to the Appellant; andvi.Any other remedies that the Honourable Tribunal deems just and reasonable.

The Respondent’s Case 19. The Respondent’s case is premised on the following document(s) filed before the Tribunal: -a.Respondent’s Statement of Facts dated 17th January, 2024, and filed the same date.b.Respondent’s Written Submissions dated 23rd September, 2024.

20. The Respondent averred that it reiterates its position as stated in the Objection Decision communicated to the Appellant.

21. The Respondent further reiterated that excise duty paid on packaging materials are not raw materials used in the manufacture of excisable goods and therefore not claimable as relief under Section 14(1) of the Excise Duty Act. This is because whereas packaging material may be essential at the end of the processing of the product, it is not used in the manufacturing process as the process would still be complete in the absence of the packaging materials.

22. It is the Respondent’s contention that from ordinary meaning, raw materials are the input goods or inventory that a company needs to manufacture its products. It may also entail unfinished materials or natural resources used to produce or manufacture finished products for sale. From the foregoing, packaging materials do not confirm to this definition nor are they used in the manufacture of excisable goods as per Section 14 of the Excise Duty Act.

Respondent’s Prayers 23. The Respondent prayed to the Tribunal for the following orders: -a.That the Appeal be dismissed with costs to the Respondent.b.That the confirmed assessments amounting to Kshs. 8,300,174. 00 vide Objection Decision dated 14th November, 2023 be upheld.

Issues For Determination 24. Having carefully reviewed the pleadings and submissions by both parties together with annexures thereto, the Tribunal is of the considered view that the following issue falls for its determination: -a.Whether the Respondent erred in law and in fact by disallowing the Appellant’s claim of excise tax paid on imported glass bottles, labels and plastic caps used for the manufacture of excisable end products which is in line with Section 14 of the Excise Duty Act.

Analysis And Findings 25. The gist of the dispute before us is that the Appellant imported excisable goods, specifically imported glass bottles, labels and plastic caps, that it uses in packaging its excisable products, which specifically are nail polish, nail polish removers and special oils amongst others.

26. The Appellant submitted extensively that its imported products subject of excise duty claim are raw materials used in the manufacturing of its glass products such as perfumes, deodorants, hair care, nail polish and treatment, colour cosmetics, men aftershaves and baby care products. In this regard, the Appellant argued that the imported goods constitute raw materials for which it is entitled to excise tax claims within the meaning of Section 14(1) of the Excise Duty Act.

27. The Appellant further argued that the glass bottles form a critical constituent in the manufacturing process of the end product, and the product is unfinished and unusable without glass bottle. The Appellant equally argued that glass bottles are used for specific products like nail polish, nail polish removers and special oils for the purpose of maintaining the stability of the products, thus forming part of the manufacturing process of the product without which the product would be incomplete and cannot be used.

28. With respect to labels, the Appellant argued that they are mandatory statutory and regulatory requirements without which the products cannot be approved and offered for sale. In this regard, the Appellant argued that they are constituent raw materials for purposes of manufacturing and selling its finished products.

29. On its part, the Respondent submitted that glass bottles, labels and plastic caps are not raw materials used in the manufacture of excisable goods within the meaning of Section 14 of the Excise Duty Act, and therefore do not qualify as raw materials for which excise tax is claimable.

30. From the above contestations, it is apparent that the dispute is whether the Appellant’s imported products identified above are raw materials used for manufacturing of its finished products within the meaning of Sections 2 and 14 of the Excise Duty Act (No. 23 of 2015).

31. The Black’s Law Dictionary defines raw materials as follows:“…any substances found in their natural, modified or semi-processed state used as an input in the production process for subsequent modification or transformation into a finished good.”

32. Section 2 of the Excise Duty Act, 2015, defines manufacture to include: -“(a)the production of excisable goods;(b)any intermediate or uncompleted process in the production of excisable goods; or(c)the distilling, rectifying, compounding, or denaturing of spirits”

33. Section 14 (1) of the Excise Duty Act, 2015 provides for relief on raw materials in the following terms: -“Where excise duty has been paid in respect of excisable goods imported into, or manufactured in Kenya by a licensed manufacturer and which have been used as raw materials in the manufacture of other excisable goods (hereinafter referred to as “finished goods”), the excise duty paid on the raw materials shall be offset against the excise duty payable on the finished goods.”

34. Evidently, the Excise Duty Act does not define ‘raw materials’, whilst the definition proffered in Black’s Law Dictionary is broad to include products in their natural, modified or semi-processed state provided they are an input in a production process.

35. Equally, we note that the definition assigned to ‘manufacture’ under Section 2 of the Excise Duty Act is broad and is not necessarily limited to a chemical process. Of relevance is that ‘manufacture’ is taken to also include ‘production of excisable goods’ , which is a rather broad definition.

36. It is now settled dictum that tax laws must be interpreted strictly to accord with the meaning assigned by the legislature. Where there is any ambiguity, then the statute should be interpreted contra fictum, to mean the ambiguity should be settled in favour of the tax payer.

37. Put differently, the failure by legislature to define ‘raw material’ within the meaning of Section 14(1) of the Excise Duty Act creates an ambiguity and should be resolved in favour of the tax payer in the instant case. In any case, it is not disputed that the impugned products are integral to the Appellant’s products, and without them the products would not be finished products for purpose of use and distribution.

38. The Tribunal reiterates its decision in London Distillers Ltd -vs- Commissioner of Domestic Taxes (TAT No. 1026 of 2022), which addressed itself to the same issues as in the instant Appeal.

39. Consequently, the Tribunal finds and holds that the Appellant was justified to offset the excise duty due on its finished product from the excise duty paid on the imported raw materials.

Final Determination 40. Accordingly, it is the determination of the Tribunal that the Appeal is merited and we proceed to issue the following orders: -a.The Appeal is hereby allowed.b.The Respondent’s Review Decision dated 14th November, 2023 is hereby set aside.c.No order as to costs.

41. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 22ND DAY OF NOVEMBER 2024GRACE MUKUHA - CHAIRPERSONDR. ERICK KOMOLO - MEMBERGEORGE A. KASHINDI - MEMBERABDULLAHI DIRIYE - MEMBERBERNADETTE GITARI - MEMBER