[2024] KETAT 13 (KLR)

Highland Drinks Limited v Commissioner of Investigation & Enforcement (Appeal 788 of 2022) [2024] KETAT 13 (KLR) (26 January 2024) (Judgment)

Neutral citation: [2024] KETAT 13 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Appeal 788 of 2022

E.N Wafula, Chair, D.K Ngala, CA Muga, GA Kashindi, AM Diriye & SS Ololchike, Members

January 26, 2024

Between

Highland Drinks Limited

Appellant

and

Commissioner of Investigation & Enforcement

Respondent

Judgment

1. The Appellant is a limited liability company incorporated under the Companies Act of the laws of Kenya and is carrying on the business of manufacture and sale of carbonated soft drinks, drinking water and cordials within Nairobi in the Republic of Kenya.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Cap 469 laws of Kenya. Under Section 5 (1) of the Act, the Kenya Revenue Authority is an agency of the Government for the collection and receipt of all revenue. Under Section 5(2) of the Act with respect to the performance of its function under subsection (1), the Authority is mandated to administer and enforce all provisions of the written laws as set out in Parts I and II of the First Schedule to the Act for the purposes of assessing, collecting and accounting for all revenues in accordance with those laws.

3. The Appellant applied under the Voluntary Tax Disclosure Programme (hereinafter ‘VTDP’) on 14th January, 2021 with the aim of declaring unpaid Value Added Tax, variances arising out of revenue and VAT returns (Kshs 1,191,064. 00 in respect of the year 2018 and Kshs. 5,309,455. 00 in respect of the year 2019); adjustments to tax losses (from Kshs. 325,978,949. 00 to 298,697,718. 00 in respect of the year 2017 and from Kshs. 331,457,122. 00 to Kshs. 325,905,294. 00 in respect of 2018) and unpaid principal Excise duty (Kshs. 63,150,951. 00 in respect of the year 2019).

4. The total amount the Appellant calculated as payable under VTDP was a principal tax of Kshs. 170,226,467. 00. The manual application under VTDP was acknowledged by the Respondent on 26th January, 2021 and the Appellant was informed that it was under review in accordance with Section 37D of the Tax Procedures Act No. 29 of 2015 (hereinafter ‘TPA’)

5. The Appellant was issued with a notice of tax investigations on 17th September, 2021 by the Respondent who conducted an audit of the Appellant’s transactions in respect of the years 2016-2020 and issued the findings on 3rd December, 2021 demanding Value Added Tax, Corporation Tax and Excise Duty amounting to Kshs. 864,226,191. 00.

6. On 10th December, 2021 the Appellant responded to the findings and was issued with an assessment/demand on 31st December, 2021 of Kshs. 901,002,453. 02, which amount was inclusive of Principal Tax, penalties and interest. Being dissatisfied with the assessment, the Appellant objected to the assessment on 28th January, 2022 and then provided additional information to support their objection through a letter dated 16th May, 2022.

7. On 16th June, 2022, the Respondent issued its objection decision confirming the assessment for the principal taxes in respect of VAT, Corporation tax and Excise duty amounting to Kshs. 403,185,880. 52.

8. The Appellant being dissatisfied with the objection decision of the Respondent, filed its Notice of Appeal on 15th July, 2022.

The Appeal 9. The Appellant’s Memorandum of Appeal dated and filed on 29th July, 2022 set out the following grounds of appeal: -i.That the Respondent erred in fact and in law in using the Appellant’s sales volumes in charging Excise duty payable in contravention to the Excise Act, 2015 that provides that excise is chargeable on goods removed from the factory i.e.; dispatched volumes calculated by adding opening stock and production and deducting closing stock volumes.ii.That the Respondent erred in fact and in law in failing to take into consideration the Appellant’s correctly declared dispatched volumes and consequently Excise duty declared and paid by the Appellant’s manual return for the period of January, February and March, 2016. iii.That the Respondent erred in fact and in law in failing to consider that the Appellant declares and files excise for its three excisable manufactured products; water, cordials and soft drinks separately clearly declaring the dispatch volumes and excise payable for cordials and water and alleged that the Appellant did not declare any volume and excise in cordials.iv.That the Respondent erred in fact and in law charging additional Excise duty from the variance calculated by its erroneous determination of excise payable in (1) above and its erroneous calculation of declared volumes under paragraphs (2) and (3) above and charging additional excise duty.v.That the Respondent erred in fact and in law in ignoring the actual sales volume and price as provided by the Appellant and using the average price and ex-factory price for water as indicated in the excise return to determine sales and revenue for corporation taxes and VAT.vi.That the Respondent erred in fact and in law in charging additional VAT and Corporation tax on the variance of their erroneous calculation of sales and revenue in (5) above and the sales and revenue declared by the Appellant.vii.That the Respondent erred in fact and in law in failing to see that the Appellant declared and paid underpaid Excise, VAT and Corporation Tax under VTDP for the years 2017 to 2019. viii.That the Respondent erred in fact and in law in classifying the Appellant’s products, cordials as fruit juice under Chapter 20 of HS Code, i.e. tariff 20. 09. 41. 00 claiming that the cordials contain fresh fruit and charging excise duty at Kshs. 10 per litre.ix.That the Respondent erred in fact and in law in classifying the Appellant’s products, cordials, as fruit juice under tariff 20. 09. 41. 00 of the HS Code as against the Excise Duty Act, 2015 (hereinafter ‘EDA’) and the Common External Tariff and notes to the HS Code.x.That the Respondent erred in fact and in law in failing to consider the Appellant’s evidence that the Appellant’s products do not contain fresh juice but flavoring concentrates/emulsions and categorizing the cordials under Chapter 20 of the HS Code.xi.That the Respondent erred in fact and in law in failing to classify the Appellant’s products, cordials as “Miscellaneous edible preparations” under Chapter 22 of the HS Code which are not chargeable to excise duty under the EDA.xii.That the Respondent erred in fact and in law, in failing to provide the Appellant the sample laboratory test results and the tariff reclassification therefore infringing the Appellant’s right to fair administrative action under Article 47 of the Constitution.

The Appellant’s Case 10. The Appellant set out its case in the Statement of Facts dated and filed on 29th July, 2022 by stating as follows:

11. According to it, the Respondent’s findings relied on ex-factory prices indicated on excise returns filed on the iTax portal as the average retail price of various products manufactured and sold by it.

12. The Respondent used the average retail price ex-factory prices and multiplied this by the literage produced over the years to arrive at alleged expected sales and then compared the outcome with the actual sales as per both VAT returns and revenue as per financial statements and charged additional VAT and Corporation Tax on the variance.

13. The Respondent re-classified the Appellant’s products, cordials from Tariff 20. 09. 10. 10 to tariff 20. 09. 41. 00 for pineapple cordials and Tariff 20. 09. 90. 00 for tropical cordials thereby subjecting the products to higher Excise duty rate of Kshs. 10. 00 per litre as of April, 2016 and charged additional Excise duty. The Respondent did not provide it with its laboratory report of the samples tested and tariff reclassification.

14. It objected to the assessment of the Respondent on 28th January, 2022 where it indicated the following:i.It clarified to the Respondent that its products were charged Excise duty by reference to its quantity in liters. The liability for Excise duty under the law is due and payable at the time of removal of the manufactured products from the factory at the excise duty rate per liter dispatched;ii.It indicated that the Respondent’s assumption that production volumes were all sold was incorrect as the sales of the Appellant were derived partly from the production of the month and partly from the stocks;iii.It indicated that the use of production volume to determine or estimate its sales was fatally defective as these were divergent and unrelated computations;iv.It indicated that the Respondent’s use of ex-factory prices in iTax to its various products of difference sizes was erroneous because it was not possible to have an accurate single ex-factory price for the total literage in relation to a specific product. Factors influencing pricing of products included first, quantities packaged; for example products packaged as 2 liters was not similar to that packaged in 500ml bottles, the Respondent therefore inaccurately considered the liters produced and multiplied it by a common/average ex-factory price; secondly, the varying customer prices influenced the pricing of products since each customer negotiated rates for various products and were granted discounts depending on several factors such as purchase frequencies, Literage purchased and existing business relationships amongst other factors.v.It provided the Respondent with actual records of its products sales, litres sold and price per customer to enable the Respondent to use actual sales records of the Appellant. When reconciled, the Appellant’s actual sales data and revenue declared for Corporation tax and sales declared in its VAT return showed that there was no VAT or Corporation tax payable by the Appellant.

15. On 16th May, 2022 it provided the Respondent with additional information to its notice of objection providing further details of its product, cordials and supporting documentation. It also requested, the Respondent, by this and its letter dated 10th December, 2021 to provide the laboratory report, made further clarifications on the composition of cordials [for purposes of classification] and was of the view that Excise duty is not chargeable on miscellaneous edible preparations.

16. On 16th June, 2022, the Respondent issued its objection decision confirming that the additional taxes amounted to Kshs. 403,185,880. 52.

17. It was of the view that the Respondent’s decision was erroneous as explained by it under each of the following headings:

(i) Excise duty - reconciliation 18The Excise duty calculation by the Respondent was not in accordance with the provisions of Section 6 (1), (2) and 12(1) of the EDA. Pursuant to Section 6(1) and (2) of the EDA, liability for Excise duty arises when goods are removed from or consumed at the manufacturer’s factory whilst Section 12(1) of the EDAapplies where the First Schedule to the EDA specifies a rate of Excise duty payable by reference to a quantity measured by volume or weight.

19. Accordingly, it charged Excise duty on litres dispatched monthly calculated by bringing forward opening stock to the production for the month, then subtracting the closing stock. Furthermore, sales volumes were different from dispatch volumes because although it paid Excise duty on some dispatch quantities, these may not have been sold but were attributable to quality assurance retentions samples, internally consumed goods or expired goods. The Respondent therefore erred by applying Excise duty on sales rather than dispatch volumes pursuant to Sections 6 and 12 of the EDA.

20. In its excise returns, it declared its production, opening and closing stock volume for three of its manufactured excisable goods namely cordials as highlands and soft drinks as club and water. The Respondent therefore erred by applying further taxes on its cordial product on the assumptions that it did not declare its cordial product.

21. The Respondent did not take into consideration and account for manual declarations for Excise tax paid in respect of the Appellant’s products for the months of January, February and March 2016. Since it correctly declared its opening stock, production and closing stock volumes in its Excise returns in accordance with the EDA, there was no further excise duty payable by it.

(ii) VAT and income tax reconciliations 22. It provided the Respondent with actual sales volumes and prices at which products were sold to determine correct revenue and sales for income tax and VAT payable. The Respondent ignored the sales and price dates and made their calculations by using average selling prices and the estimated retail price from its i-TAX declaration for water then charging VAT and income tax from the variance.

23. Its actual sales volumes were sold at the actual prices that it had provided and it therefore declared its revenue and sales and correctly paid income tax and VAT and therefore no VAT or income tax is payable by the Appellant.

(iii) Excise Tariff Re-classification 24. Its cordials were manufactured by mixing water, sugar and flavouring concentrates/emulsions to add flavour and preservatives to prevent the product from fermentation. The flavouring concentrates/emulsions used in preparation of the cordials comprised flavouring preparations and substances and not fresh juice. It relied on EC Regulation No. 1334/2008 to indicate the specifications of its flavouring concentrates/emulsions product.

25. Although the flavouring preparations and substances were used to improve or modify the odour and/or taste of foods, they did not contain fresh juice. The Respondent re-classified its cordials from tariff 20. 09. 10. 10 to 20. 09. 41. 00 for pineapple cordials and tariff 20. 09. 90. 00 for tropical cordials thereby subjecting the products to higher Excise duty of Kshs. 10. 00 per litre.

26. Under Chapter 20 Heading 20. 09 of the HS Code, the Appellant’s cordials were not obtained by pressing fresh, healthy and ripe fruit or vegetable to preserve the original character of the fruit. Accordingly, its cordials were ‘Miscellaneous edible preparations’ and ought to have been classified under Chapter 21 of the HS Codes and more particularly Heading 21. 06. Under this Chapter, the products would not have been chargeable to duty under the EDA since cordials can only be consumed upon addition of water.

27. It had in fact been erroneously classifying the cordials as flavoured juice under Chapter 22 of the HS Code thereby subjecting the cordials to Excise duty at the base rate of Kshs. 5 per litre subject to the inflation adjustments over the years.

28. The Kenya Bureau of Standards (KEBS), number 1485:2020 was developed to guide the determination of the standard required for all types of fruit flavoured drinks including that under which the cordials were classified. It specified the degree brix value of concentrated products as being required to be 30 whilst the brix value of cordials that are ready to drink was at 10. Cordials had a brix value of 10 and required the addition of 4 parts of water to make them ready to drink.

Appellant’s Prayers 29. The Appellant prayed for the following orders from the Tribunal:a.That the Respondent’s objection decision dated 16th June, 2022, assessment/demand dated 31st December, 2021 and investigation findings dated 3rd December, 2021 be struck out entirely.b.That the Honourable Tribunal declared the Appellant’s products, cordials as ‘Miscellaneous edible preparations’ under Chapter 22 of the HS Codes and declared that no Excise duty was payable by the Appellant.c.That the Respondent, its employees, agents or other persons purporting to act on its behalf be barred and /or estopped from demanding or taking any further steps towards enforcement or recovery of principal tax, penalties and interest on the Respondent’s demand as stipulated above.d.The costs of this Appeal.e.Any other Remedies that the Honourable Tribunal deemed just and reasonable.

The Respondent’s Case 30. The Respondent’s case was as set out in its Statement of Facts dated and filed on 26th August, 2022 and its Supplementary Statement of Facts dated 14th March, 2023 and filed on 17th March, 2023. The Respondent stated as follows:

31. It received intelligence that the Appellant was under declaring sales for purposes of evading payment of taxes and to ascertain the information received, it issued a notice of tax investigations on 17th September 2021 and conducted an audit of the Appellant's transactions in respect of the period January 2016 to December 2020 with the aim of assessing the Appellant's correct taxable income.

32. Its investigation involved comparative analysis for the purposes of establishing the correct income chargeable to tax as well as examination of records to establish any undeclared income. The tests involved comparison of sales declared for Excise duty, sales declared for VAT, sales declared for income tax, declarations made by customers, reports from issuance of stamps and net bank deposits made by the Appellant.

33. Upon conclusion of the investigations and various communication and correspondence, in its objection decision dated 16th June, 2022, it partially allowed the objection and confirmed an assessment for Kshs.403,185,880. 52 with respect to Corporation tax, VAT and Excise duty.

34. It responded to the Appellant’s Memorandum of Appeal by making an averment pursuant to Section 36 of the EDA that Excise duty is payable at the time the excisable goods leave the factory. More particularly, the Section states as follows:‘The excise duty payable by a licensed manufacturer in respect of excisable goods removed from a manufacturer's factory during a calendar month shall be paid not later than the twentieth day of the succeeding month.’

35. Accordingly, in view of the above provisions, its view was that for a product to be sold the first step was to get it out of the factory for distribution to the respective retailers. It further averred that Excise duty charged was derived from production volumes provided by the Appellant. Gross income was derived from the estimated retail prices from the Appellant's i-Tax declarations.

36. It assumed that all production volumes were all sold as there was no data on opening and closing stock on the tax return to warrant adjustments for the period under review. In responding to the 2nd ground of Appeal, it stated that all the Excise duty paid or payable was considered in the computation of income tax.

37. Its response to the 3rd ground of the Appeal was that contrary to the allegations of the Appellant, it relied upon the respective production volumes provided by the Appellant for all categories of items.

38. In response to the 4th ground of Appeal, it analysed the production volumes, and found a variance between the production volumes provided by the Appellant during the investigation and the declared volumes in the Appellant's returns. It then used the undeclared volumes to compute the additional taxes for each of the products.

39. In respect to the 5th and 6th grounds of the Appeal, it adopted the price for water as per i-Tax declarations by the Appellant and for cordial and soft drinks. The Respondent adopted prices provided by the Appellant during its objection. The production volumes relied upon by it were provided by the Appellant and at the objection review stage, the Appellant provided more records supporting the declared production volumes.

40. It considered the representations made by the Appellant and adopted the data presented to it as production volumes for all categories of items including cordials, soft drinks and water.

41. It computed the taxes payable on each of the products on the basis of undeclared production volumes and the retail prices derived for each of the products. It determined how variances from the Income tax payable arose and further how additional VAT and corporation tax, had been charged on the undeclared production volumes established by it on all the Appellant’s products.

42. With regard to the 7th ground, it was of the view that the Company undertook a VTDP and that although the tax station of the Appellant covered some turnover reconciliation, that exercise did not deter the Respondent from conducting the investigation as any income established in the exercise was considered against the taxable amount established by the investigation as the same is self-adjusting on i-Tax.

43. As regards the 8th and 9th ground of the Memorandum of Appeal, it took samples of the 3 major products from the Appellant's factory to its laboratory for chemical composition analysis and the lab results showed that the Appellant's products contained fruit juices and could not be classified under the HS Code the Appellant had classified them. Subsequently, it classified cordials into two tariffs namely 20. 09. 41. 00 and 20. 09. 90. 00 for the flavor cordials and tropical cordials, respectively.

44. It relied on the laboratory result, which from the classification, showed that both tariffs attracted excise at Kshs. 10 per litre as at January 2016. The applicable rates as per the tariffs established period were therefore applied on the literage to get the expected Excise duty payable.

45. As regards the 10th ground of the Appeal, it reiterated and maintained that the classification of the cordial under Chapter 20 tariff 20. 09. 90. 00 of the HS Code resulted from its laboratory findings which confirmed the chemical composition of the Appellant’s product from the information on its package which indicated that one of the ingredients of the cordial was juice concentrate. According to health authorities and KEBS, fruit concentrate is ‘fruit juice from which most of the water has been extracted. When most of this liquid is removed, the result is a thick syrupy product known as juice concentrate.’

46. To support its argument that the Appellant’s product was to be classified under the Heading 20. 09, it outlined the Explanatory notes in respect of the said heading which states as follows:“Fruit juices (including grape must) and vegetables juices, unfermented and not containing added spirit, whether or not containing added sugar or sweetening matter.”

47. That the tariff code 20. 09. 90. 00 refers to mixtures of juices and the same attracts Excise duty at Kshs. 10 as at Jan 2016.

48. Its response to the 11th ground of Appeal was that classification of the cordials under Chapter 20, tariff code 20. 09. 90. 00 resulted from the laboratory findings after the products were tested. The laboratory findings were that the Appellant’s product contained 11% fructose which confirmed that indeed the Appellant’s products contained fruit juice concentrate.

49. As regards the 12th and final ground of the Appeal, the Appellant was provided with all information including documents that it relied upon in issuing its additional assessment for tax during the meeting held at the Respondent's office and that therefore the allegations of the Appellant as laid out in its Memorandum of Appeal and Statement of Facts unless where in agreement by the Respondent were unfounded in law and not supported by evidence.

50. In view of the foregoing, it prayed that the Appeal be dismissed with costs and that the additional income tax, VAT and Excise duty assessments raised by the Respondent be confirmed and the principal taxes, interest and penalties be found due and payable as per the objection decision rendered by the Respondent.

Submissions By The Parties. 51. In its Written Submissions dated and filed on 8th May, 2023 the Appellant submitted five issues for determination whilst in its Written Submissions dated 29th March, 2022 and filed on 5th April, 2023 the Respondent submitted and analyzed two issues for determination.i.Whether the Respondent erred in disregarding excise duty paid manually in January, February and March 2016 as well as excise duty declared and paid for cordials between 2016 and 2020.

52. The Appellant submitted as hereunder regarding this issue for determination:

53. The Respondent’s computation of Excise duty volumes declared, and Excise duty paid in the objection decision only referred to the returns filed by it but ignored the returns filed manually between the months of January and March, 2016. It duly filed Excise duty returns for water, soda and cordials dispatched from its factory in respect of those months.

54. The total Excise duty declared and paid for in the specified three months in respect of a volume of 5,350,606. 61 litres was Kshs. 26,753,033. 00. However, the Respondent stated that the total volume declared by it in 2016 was 17,629,056 litres instead of 22,949,514 litres. The difference in the amounts arose from the fact that the Respondent did not consider 5,350,606. 61 litres which had been declared by it manually.

55. The Respondent’s computations indicated that it did not declare any volumes in relation to cordials produced between 2016 and 2020 and infact it appeared that there was a claim that it underdeclared 21,704,704. 00 litres. However, it declared and filed returns in respect of cordials on iTax. The filing related to soft drinks included cordials as the excise rates for soft drinks and cordials is similar.

56. It therefore filed returns and paid Excise duty for cordials contrary to the Respondent’s assertion that it did not declare any volumes for cordials in the period under investigation.(ii)Whether the Respondent erred in failing to consider that the Appellant declared and paid underpaid excise duty, VAT and corporation tax for the years 2017 -2019 under the VTDP.

57. The Appellant submitted as follows regarding this issue for determination:

58. On 14th January, 2021, 8 months before the Respondent issued a notice of tax investigations, it applied for VTDP after conducting a health check in respect of the years 2017 and 2018. The process revealed it had underdeclared VAT and Corporation taxes arising out of the variance between revenue as per the accounts and sales returns. It adjusted its tax losses and discovered declared unpaid principal Excise duty amounting to Kshs. 63,150,951. 00 in respect of the year 2018.

59. The declarations made by it were not disputed by the Respondent. The Respondent instead, falsely alleged that any amount paid was considered by the investigations as the same was self-adjusting in i-TAX. Contrary to the Respondent’s allegation the assessment and objection decision did not consider the disclosures made under the VTDP as well as the payments made by it.

60. The Respondent’s analysis of the literage declared tallied with that in its objection decision and there was no indication that information reflected and declared in the VTDP and any payments made had been updated on its I-TAX portal. In fact, VTDP was declared and payable as per the tax heads per year of income under separate returns and therefore the amounts were not updated on historic monthly, Excise duty, VAT and corporation i-TAX returns as used by the Respondent. The Respondent was misleading the Tribunal that these amounts had self-adjusted on i-TAX.

61. The total Excise duty calculated as payable was Kshs. 62,143,265. 21 in respect of the year 2018 which tallied with the declared and paid Excise duty of Kshs. 63,150, 951. 00 paid in respect of the same year under VTDP. Its prayer was that the Respondent’s assessment for Excise duty be struck out as outlined in the objection decision. The amount outlined in the objection decision of the Respondent, was Kshs. 87,823,192. 16 and the same would have to be struck out as the amount arose out of the Respondent’s failure to consider the January-March, 2016 manual excise returns for which it paid Kshs. 26,753,033. 00 and its declaration and payment of Excise duty under VTDP in respect of 2018 amounting to Kshs. 63,150,951. 00. It was notable that both figures amounted to KShs. 89,903,984. 00. iii.Whether the Respondent erred in applying Sales Volumes rather than the dispatched volumes in its assessment of excise duty

62. The Appellant submitted as follows regarding this issue for determination:

63. The Respondent in its objection decision applied sales volumes in its computation of Excise duty instead of dispatched volumes. At the assessment stage, the Respondent used the average ex-factory prices indicated in its excise return and multiplied this by the literage produced to arrive at an alleged expected comparing it in the books of the Appellant to sales as per VAT and revenue as per its corporation returns.

64. At the objection stage it provided a detailed actual sales analysis indicating the literage sold and actual sales value to cater for the different selling prices due to quantities packaged and varying customer prices. The Respondent erroneously referred to Sales volumes as production volumes in its objection decision.

65. Section 6(1) of EDA provides for the timing of the liability to Excise duty for a manufacturer, Section 36 OF EDA provides for the date at which payment for goods removed from the factory ought to be paid and finally Section 12 of EDA provides for the quantity of excisable goods that ought to be applied in computing the amount of Excise duty payable.

66. It indicated that Excise duty rate could be based on literage, for example the rate of Kshs. 5. 20 per litre and further that liability for Excise duty in relation to a manufacturer arises at the point of removal of goods from the manufacturer’s factory. The quantity removed in a particular month is chargeable to tax in the subsequent month.

67. Where rates of duty payable for excisable goods were provided by reference to a quantity measured by volume or weight, and the quantity was indicated in its packaging, then that quantity was applicable in computing the Excise duty payable and/ or actual quantity of goods removed from the factory and the same in this particular case would be chargeable at Kshs. 5. 2 per litre.

68. It was of the opinion that it was important for the Tribunal to understand three volumes, namely production volume which related to what is manufactured at the factory at a specific period of time; the dispatch volume being the volume of excisable goods that were removed from its factory, the dispatch volume being the net of the opening stock plus production volumes less the closing stock. The Sales volume refers to the quantity of goods sold to wholesalers or retailers for sale. VAT was payable on sales volumes.

69. It was notable that not all goods removed from the factory were sold, some were retained for quality assurance purposes, some are consumed internally or others may have expired or been damaged whilst in storage. It was also important to note that not all dispatch volumes would be sold within the same period of income/month. Dispatch volumes varied from sales volumes.

70. It based its computation of Excise duty on goods removed from the factory and dispatch volumes in accordance with the EDA. The calculations were declared in its i-TAX returns and it was therefore absurd for the Respondent to justify its use of sales volume claiming them as production volumes to support the claim that it did not indicate the opening and closing stocks in its tax returns.

71. Variances between the dispatch volumes and declared volumes in 2016, 2017 and 2019 netted off to overdeclared literage of 375,527 and overpaid Excise duty amounting to Kshs. 1,991,357. 88. The undeclared amount of Excise duty amounting to Kshs. 63,150,951. 00 in respect of the 2018 financial year was paid by it under the VTDP.

72. The Respondent departed from the clear provisions of the EDA by computing excise duty based on sales volumes instead of dispatch volumes and thereby exposing it to additional liability.

73. It admitted that the Respondent was allowed to make alterations and additions to its assessments based on available information and their judgement pursuant to Section 31 (1) of the TPA. The Respondent had however, acted contrary to the law by failing to rely on information which it had in its manual returns, its VTDP application and the fact that the Respondent placed reliance on calculating excise duty on sales volumes rather than dispatch volumes.

74. To buttress its arguments, it cited Cussens v Revenue and Customers Commissioners [2019] UKFTT 543(TC) which laid out the following principles in determining whether the assessment made was in the Respondent’s best judgement, namely:i.The Respondent must be in possession of some material upon which a best assessment can properly be based; andii.The Respondent was entitled to exercise its best judgement power by making a value judgement on the material available;

75. It asserted that the Respondent disregarded its volumes as declared and excise paid in its manual returns and VTDP application and that therefore the Respondent did not exercise its best judgement with the information available. The Respondent was being unreasonable and unfair as it sought to charge the Appellant with Excise duty that it has already declared and paid. This would lead to double taxation of the Appellant and unjust enrichment of the Respondent.

76. The Respondent’s use of sales volumes in spite of the availability of dispatched volumes was methodologically flawed making the Respondent’s assessment unreasonable. It cited the following cases in this regard to indicate that the Respondent’s action of charging excise on sales volume had no basis in law:i.Republic vs. Commissioner of Domestic taxes Large Tax payer’s office Exparte Barclays Bank of Kenya Limited [2012] eKLR; andii.Equity Holdings Limited Vs. Commissioner of Domestic Taxes [regarding the literal interpretation of tax law].

77. That the Respondent could not purport to charge Excise duty outside the confines of the EDA for example, it could not purport to charge Excise duty rather than on volumes of excisable goods removed from the factory. Its assessment was erroneous and ought to be struck out.iii.Whether the Respondent erred in computing VAT and Income Tax based on expected sales calculated from Ex-Factory prices and/or average prices instead of considering actual sales volumes and retail prices.

78. The Appellant submitted as hereunder regarding this issue for determination:

79. At the objection stage, it provided to the Respondent, the actual sales volumes and the prices at which its products were sold in order for the Respondent to determine the correct revenue and sales when computing VAT and income tax payable in the period under investigation. The Respondent disregarded the data provided by it and used average selling prices of cordials and soft drinks and the ex-factory prices of water [per litre] obtained from its excise iTax declaration and multiplying the same to the sales literage.

80. That the Respondent acted arbitrarily ‘plucking figures from the air’ since the water ex-factory prices in its objection decision do not even tally to those indicated in its letter of preliminary findings. Similarly, the Respondent never explained how it computed the selling price of cordials and soft drinks per litre from actual sales based on packaging of products and the customer pricing provided by it in its notice of objection.

81. It quoted Section 5 of the VATAct, which is the charging Section and Section 13 (1) of the VATAct which defines the taxable value of a supply as the consideration for the supply, Section 13(1) of the VATAct also prescribes how such consideration is to be determined. These Sections of the VATAct clearly provide that VAT is chargeable on the taxable value of a taxable supply. The taxable value of the supply is the consideration of the supply which is money paid or payable, directly or indirectly by any person for the supply or actual sale.

82. VAT is chargeable on the actual selling price indicated on an invoice. An invoice ought to be issued for a taxable supply pursuant to Section 42(1) and 17 of the VATAct. It was therefore absurd, erroneous and gravely unlawful for the Respondent to go against the clear provisions of the VATAct, by ignoring its actual sales as per its invoices and calculating an expected sales value from an ex-factory price and average price.

83. Section 3(1) and (2) of the Income Tax Act, Cap 470 of Kenya’s laws (hereinafter ‘ITA’) brings to charge actual gains or profits of a business and not expected income estimates or projected income as determined by the Respondent. This was illegal and ought not stand. The Respondent applied ex-factory prices and average prices to calculate expected sales in charging VAT and income Tax on expected sales as opposed to the taxable value of a supply and income from the gains and profits of the business.

84. To buttress its arguments regarding the Respondent’s illegal, arbitrary and erroneous use of ex-factory prices, it cited Barclays Bank of Kenya (Supra) and Equity Group Holdings Limited (Supra) together with Section 9 and 11 of the EDA. Whereas Section 9 of the EDAprovides for what the excisable value of goods is, Section 11 provides for the meaning of ex-factory selling prices of goods.

85. That a plain reading of the Sections made it clear that there were two ways of calculating Excise duty. First the application of a rate of Excise duty on the ex-factory price of a manufacturer’s goods. Where this was applicable and the Excise duty was indicated in terms of a rate to be applied to the ex-factory price of the goods, a manufacturer would indicate the ex-factory price on i-TAX platform and the percentage would be applied on the ex-factory selling price.

86. Where the Excise duty payable was expressed in reference to the quantity of goods for example ‘Kshs. 5. 20 per litre’ the ex-factory selling price was irrelevant and any indication on the i-TAX platform was merely for purpose of complying with system requirements. Section 12 of the EDA applies in this situation and the rate is determined in reference to a specific quantity.

87. In view of the foregoing, it was of the view that the Excise rate is determined on the basis of its products in litres and the Respondent’s i-TAX excise return required irrelevant information in terms of the ex-factory prices under this method. The ex-factory prices for its products under the i-TAX platform were inaccurate as its products were sold in different varying sizes and had different prices. For example, the ex-factory price of products packaged in 2 litres would not be similar those packaged in 500ml. On this basis the ex-factory prices of such products could not be averaged.

88. That customer prices varied due to the discounts granted to them based on their negotiating power because of frequency of purchase, literage purchased and existing business relationships. The Excise i-TAX return did not give it an opportunity to segregate the applicable ex-factory prices on its package sizes and customer relationships and is therefore forced due to limitations on the ITax platform to provide irrelevant average ex-factory prices per litre.

89. That since the ex-factory selling price is a general value, VAT should only apply to actual selling prices on the tax invoices, rather than on estimates. The use by the Respondent, of the expected sales based on the ex-factory selling price was therefore an attempt to import a provision pertaining to the imposition of Excise duty and apply it to the imposition of VAT and Income tax where relevant laws do not provide for it.

90. To buttress its position, it cited Commissioner of Domestic Taxes vs. Co-operative Bank of Kenya Limited [2022] where the Court cautioned against the importation of provisions of other tax statutes to impute meanings. It produced documents including its actual monthly sales volumes and sale prices for each product, it prepared reconciliations of its revenue in its financial statements and sales in its VAT returns and any variances paid under the VTDP program. It amended its 2016 and 2017 returns which the Respondent was yet to approve.

91. It paid the resulting VAT Variance for the years 2018 and 2019 amounting to Kshs. 1,191,064. 00 and Kshs. 5,309,455. 00 respectively and therefore reiterated that the Respondent’s assessments of VAT being Kshs. 179,954,034. 22 and Income Tax being Kshs. 21,734,792. 62 that were based on expected sales and average selling prices that were both erroneous and ought to be vacated.

92. The Respondent submitted as hereunder as a rejoinder to this issue for determination by the Appellant:

93. That from its analysis it established that the Appellant had produced volumes worth Kshs. 1,457,446,614. 00 in respect of bottled water; carbonated soft drinks worth Kshs. 6,838,349,999. 00 and cordials worth Kshs.1,977,351,261. 00 totaling production volumes worth Kshs. 10,273,147,874. 00. The Appellant had declared a total cumulative declaration of Kshs. 9,288,082,485. 00 in respect of water (Kshs. 1,442,231,268. 00) and soft drinks (Kshs. 7,845,851,218. 00).

94. That the Respondent undertook comparative analysis of the turnover declared for Excise returns vis a vis VAT and corporation tax to establish if there were variances and in doing so confirmed that there was a variance in turnover declared of Kshs. 1,764,896,081. 00 and Kshs. 2,623,089,534. 00 in respect of income tax as compared to the Turnover declared for domestic excise duty.

95. That whereas Section 5 of the EDA imposes Excise duty, Section 6 (1) and (2) of the EDA provides for the timing on liability of Excise duty; Section 9 of the EDA provides for the determination of excisable values and Section 11 of the EDA establishes how to determine ex-factory selling prices.

96. It therefore relied on the production volumes provided by the Appellant to determine the Excise duty charged since the first step to selling the products would be to have them removed from the factory, sell them to distributors who then sell to retailers. It assumed that all production volumes were sold since the Appellant did not provide data on opening and closing stock on the IT2C to warrant adjustments for the period under review. The Appellant is therefore estopped from disowning its own figures since it self-declared its own sales volumes.

97. Section 56 (1) of the TPA and Section 30 of the Tax Appeals Tribunals Act No. 40 of 2013 (hereinafter ‘TAT’) places the burden of proof on the Appellant to demonstrate that an assessment was excessive and the Appellant had failed to discharge this burden.

98. To buttress this argument, it cited KRA vs. Man Diesel Turbo SE, Kenya [2021] at para 31 and 32 where it was stated:“The import of the above provision is that the Party with the obligation of persuasion (what Wigmore termed the risk of non-persuasion) is said to bear the burden of proof. The flip side of the foregoing is the effect of non-persuasion on a party with the burden of proof which is that the particular issue at stake in the litigation will be decided against him/her. Generally, the tax payer has the burden of proof in any tax controversy. The Taxpayer must demonstrate that the Commissioners’ assessment is incorrect. The tax payer has a significantly higher burden. The taxpayer must prove the assessment is incorrect. …..”

99. It maintained that since the Appellant did not provide alternative workings and analysis or explanations to counter its computation on the variance noted between sales for purposes of domestic excise duty and sales for purpose of VAT and Corporation tax, it prayed that its objection decision would be upheld on this basis.iii.Whether the Respondent erred in re-classifying the Appellant’s products (cordial) to tariff 2009. 41. 00 for pineapple cordials and tariff 2009. 90. 00 for tropical cordials.

100. The Appellant submitted as follows regarding this issue for determination:

101. It was issued with an excise manufacturing licence for its products; pineapple cordials and tropical cordials by the Respondent as ‘other non-alcoholic beverages not including fruit nut or vegetable juices of heading 20. 09’.’ Under chapter 22. 02, tariff 2202. 99. 00 of the HS Codes which was chargeable to Excise duty under the EDA at Kshs. 5. 00 per litre.

102. The Respondent upon completing its investigations, claimed that the cordials contained fresh fruit and re-classified the pineapple cordial to tariff 20. 09. 41. 00 and tropical cordials to tariff number 20. 09. 90. 00 under chapter 20 of the HS Code 20. 09. 49. 00. The applicable rate after reclassification is Kshs. 10. 00 per litre. The re-classification was upheld in the Respondent’s objection decision indicating that the re-classification was based on laboratory results. The resultant additional excise shortfall was Kshs. 113,673,923. 81.

103. It disputed the fact that the cordial drink contained fruit as the product specifications included emulsions which were the primary ingredients used to manufacture both pineapple and tropical cordials. Emulsions are described as flavouring substances or components under regulation Article 3 of EC 1334/2008. The Kenya Bureau of Standards specifies requirements sampling and test methods for fruit flavoured drinks made from water, permitted sweetening either nutritive or non-nutritive sweeteners used singly or in a combination, permitted food additives, natural or synthetic colourings, flavouring emulsions among other permitted ingredients. According to KEBS standards, fruit flavoured drinks are different and some may not retain the original character of fresh fruits.

104. That cordials are concentrated fruit flavoured drinks that require addition of 4 parts of water to make them ready to drink. According to the Respondent, their brix values are 32. 05 for the 2 litre pineapple cordial, 31. 71 for the 500ml pineapple cordial and 31. 5 for the tropical cordial. The findings of the Respondent’s laboratory tests were in line with the KEBS standard on concentrated fruit (water-based) flavoured drinks.

105. That fruit juices falling under the Heading 20. 09 of the HS Code are those manufactured directly from fresh healthy and ripe fruits by mechanisms such as pressing, crushing or squeezing to obtain juice without changing the original and natural character of the juice. Cordials do not contain fresh juice but are manufactured from mixing water, sugar and flavouring concentrates/emulsions to add flavour and preservatives to prevent the product from fermentation. Furthermore, emulsions used to manufacture cordials have purely chemical components.

106. The Respondent’s laboratory analysis for both pineapple and tropical cordials concluded that there is a presence of glucose, sucrose and fructose but there is no indication that they contain actual fruits in their original character. The presence of these sugars is not an indication that cordials fall within the description of fruit juices. For example, its products such as club soda, club passion, bazuu energy and club orange contain these sugars but were classified under tariff 22. 02. 10. 00.

107. It is also notable that the presence of a high fructose content is not an indication that there is fresh pineapple or mixed fruit since fructose is also a component of sugar. The Respondent also erroneously used the Brix Value to determine the classification of the cordial.

108. During the period when it was under investigation, the cordials were classified under tariff 22. 02. 10. 00. Section 17 and 18 of the EDAwhen read together make it a requirement for a manufacturer of excisable goods to obtain a licence which should contain the class or classes of the excisable goods as well as the factory or factories at which the manufacturer is permitted to manufacture the goods. It had a license issued by the Commissioner allowing it to manufacture cordials under tariff 22. 02. 10. 00 and consequently the Respondent’s decision to reclassify goods retrospectively is in breach of its legitimate expectation that it would continue to manufacture cordials under the specific tariff.

109. To buttress its arguments on legitimate expectation, it cited the court’s ruling in Kenya Revenue Authority & 2 others v. Darasa Investments Limited (2018) eKLR and Commissioner of Domestic Taxes vs. Mennonite Board of East Africa t/a Rosslyn Academy (High Court Income Tax Appeal No. E047 of 2020)]. By issuing a licence to it, the Respondent made a representation that was unambiguous as to the applicable Excise duty rate and this created a reasonable expectation held by it by passing Excise duty at the rate of Kshs. 5. 00 per litre. The Respondent breached its legitimate expectation.

110. The Respondent’s classification of cordials as indicated in its investigation and upheld in its objection decision was erroneous and should not be allowed to stand and the additional Excise duty liability of Kshs. 113,673,923. 81 should be vacated.

111. The Respondent submitted as follows as a rejoinder to this issue for determination by the Appellant:

112. That on the i-TAX platform the Appellant declared water under the tariff 2201. 10. 00 which attracts Excise duty at Kshs. 5. 00 per litre as at January 2016 and then soft drinks under 21. 06. 90. 99 and 20. 09. 90. 00. The tariff 21. 06. 90. 99 attracts Excise duty of Kshs. 5. 00 per litre but as at January 2016, the Appellant was applying a rate similar to that of bottled water.

113. Tariff 20. 09. 90. 00 attracts Excise duty at Kshs. 10. 00 per litre as at January, 2016 and the Appellant applied this code from August, 2016 to May, 2017 for the cordials. It further established, upon testing samples of 3 main products from the Appellant’s factory that the correct classification of cordials was under tariffs 20. 09. 41. 00 and 20. 09. 90. 00 and this attracted Excise duty at Kshs. 10. 00 per litre as at January, 2016.

114. It had also seen from the i-Tax returns of the Appellant, that bottled water and soft drinks were properly classified and the correct excise rate applied. The Appellant however merged soft drinks with cordials and proceeded to pay Excise duty at Kshs. 5. 00 despite the two falling under different tariffs. It also noted that ‘juice concentrate’ was one of the ingredients used in the production of cordial.

115. That juice concentrate as defined by Health authorities and the Kenya Bureau of standards is ‘fruit juice from which most of the water has been extracted. When most of this liquid is removed, the result is thick, syrupy product known as juice concentrate.’ In order to make juice concentrate whole fruits are washed, scrubbed then crushed or blended to produce pulp. The water content in the pulp is then extracted and evaporated and since the fruit’s natural flavour may be diluted as a result, artificial compounds made from fruit by-products are used to enhance original flavour. The Appellant’s cordial contains fruit concentrate whose source is fresh fruits.

116. The Appellant in paragraph 43 of its Statement of Facts admitted to erroneously classifying cordials as flavoured juice under Chapter 22 of the HS Code and subjecting cordials to Excise duty at the base rate of Kshs. 5. 00 per litre, subject to inflation adjustments. It further admitted that the Respondent was right in failing to classify the product under Chapter 22.

117. The Appellant further stated in its Statement of Facts that the cordials ought to be classified under Heading 21. 06 of the HS Code which deals with ‘Food preparations not elsewhere specified or included’. The Appellant did not provide laboratory results to counter the Respondent’s findings.

118. It cited Bidco Africa Limited Vs. Commissioner of Customs [Appeal No. 595 of 2022] in which the Tribunal indicated in para 57 of its judgement that:“Our interpretation of this subheading guided by the explanatory notes and the chapter notes is that this Heading classification is intended to be used for preparations used in the manufacture of beverages and food, and certain preparations of this kind are intended for adding to other food preparations.”

119. It further cited Kenya Breweries Limited Vs. Commissioner of Customs and Border Control [No. 282 of 2020] which it used to buttress its position that the Appellant’s products were ‘ready to drink juices’ as they did not require further processing. Furthermore, the dilution of cordial with water before consumption did not amount to manufacture and accordingly, classifications under Heading 21. 06 of the HS Code did not apply to the Appellant’s case.

120. It further cited Puratos Canada Inc vs. Canada (Customs and Revenue) and Proctor & Allan EA Limited Vs. Commissioner of Income Tax [2014] to outline how the General Rules of Interpretation of the Harmonized Commodity Description and Coding System are structured to allow for classification of goods in a sequential manner for example, a taxpayer, unable to classify goods in accordance with the first rule, must look at the second rule and so on and so forth. Headings which provide the most specific description are however, preferred where a product is classifiable under two or more headings.

121. It therefore reiterated and maintained that classification of cordials under tariff 20. 09. 90. 00 resulted from its laboratory findings and that the Appellant did not provide different laboratory results. In view of the foregoing, its prayer was for this Appeal to be dismissed with costs to it.

Issues For Determination 122. The Tribunal having carefully considered the pleadings and submissions made by the parties is of the considered view that the Appeal herein distils into two (2) issues for determination:i.Whether the Respondent lawfully re-classified the cordial drinks manufactured by the Appellant.ii.Whether the Assessment in respect of VAT, Corporation Tax and excise duty was excessive.Analysis And Findingsi.Whether the Respondent lawfully re-classified the Cordial Drinks manufactured by the Appellant.1. The Harmonized Commodity Description and Coding System (HS Code) is nomenclature which enables all physical goods moving across or within borders to be assigned to a class in a uniform manner. While the HS Code has many uses, its first and fundamental purpose is the categorisation of goods so that Governments can assign and collect taxes including Excise duty. Under the General Rules for the Interpretation of the Harmonized System, the General Interpretative Rule 1 (GIR 1) is the foremost rule of classification. For legal purposes classification is determined by the terms of the Headings, the Section or Chapter Notes where relevant, and, if necessary and allowable, the other GIRs.2. Rule 1 of the GIRs provides that:“The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions, i.e.: GIR 2 to 6. ’

125. The Tribunal has noted and observed that in order for products to be categorised into particular codes various process including but not limited to laboratory testing can be carried out on the product. The Tribunal is of the view that the Respondent rightfully carried out laboratory testing but is of the further view that this ought to have been done in the first place without it being prompted by an investigation. For example, when granting a manufacturing licence to the Appellant, the Respondent ought to have carried out laboratory testing to establish the correct categorization of the products of the Appellant under the HS Code.

126. The Tribunal notes that according to the Appellant, both tropical and pineapple cordial product ought to be classified under tariff 21. 06. 90. 99 of the HS Code since Heading 21. 06 indicates that such preparations are intended to be consumed as beverages after dilution with water.

127. The Tribunal further notes that the Appellant did not provide its own basis for such classification by for example, carrying out its own laboratory tests. The Tribunal further notes that the Appellant instead contradicted itself by waiting until the investigation to determine the correct categorisation of the product after categorising it under Chapter 22 and then changing and replacing to Chapter 21 on its whims. The Tribunal will place reliance on the available laboratory tests carried out by the Respondent.

128. The Tribunal finds that according to the Appellant, both tropical and pineapple cordial product ought to be classified under tariff number 21. 06. 90. 99 of the HS Code, since heading 21. 06 of the HS Code indicates that such preparations are intended to be consumed as beverages after dilution with water. However, the Appellant did not provide the basis for such classification through carrying out its own laboratory tests and further contradicted itself by waiting until the investigation to determine that correct categorisation of the product after categorising it under Chapter 22 and then changing and replacing with Chapter 21 on its whims. The Tribunal has therefore placed reliance on the available laboratory tests carried out by the Respondent.

129. The Appellant averred that it was granted a manufacturing licence for its products under tariff code 22. 02. 99. 00 of the HS Code chargeable to Excise duty at the rate of Kshs. 5. 00 per litre, the said licence was neither adduced as evidence during the Objection nor the Appeal stage and the Tribunal therefore disregards the Appellant’s assertions regarding the contents of its manufacturing licence. The Tribunal further observes in this regard, the Appellant contradicted itself when it admitted that it had infact been erroneously classifying cordials under Chapter 22 of the HS Code.

130. The Tribunal notes that although the Appellant has emphasised that cordials do not contain fresh fruit, it contradicted itself by specifying the ingredients used to manufacture the cordial drink by stating that it is manufactured ‘using water, sugar and flavouring concentrates/emulsions to add flavour and preservatives to prevent the product from fermentation’.

131. The Tribunal observed that the Appellant referred to Article 3 of Regulation (EC) No. 1334/2008 of the European Parliament and of the Council of 16 December 2008 on flavorings and certain food ingredients with flavouring properties for use in and on foods. This Regulation amended Council Regulations (EEC) No 1601/91, Regulations (EC) No 2232/96 and (EC) No 110/2008 and Directive 2000/13/EC. Under the said Article 3, Flavourings are defined as follows:“For the purposes of this Regulation, the following definitions shall also apply:(a)‘flavourings’ shall mean products:(i)not intended to be consumed as such, which are added to food in order to impart or modify odour and/or taste;(ii)made or consisting of the following categories: flavouring substances, flavouring preparations, thermal process flavourings, smoke flavourings, flavour precursors or other flavourings or mixtures thereof;(b)‘flavouring substance’ shall mean a defined chemical substance with flavouring properties;”

132. In view of the foregoing, the Tribunal found that the Appellant stated as follows in its pleadings regarding the definition of emulsions used to make cordials: ‘Emulsions are the primary ingredients used to manufacture both pineapple and tropical cordials provided by its supplier and the same are described as flavouring substances or components under regulation Article 3 of EC 1334/2008. ’

133. The Tribunal also finds that according to the said Regulations, there is no definition of ‘flavouring components’ and therefore the Tribunal will rely on the part where the Appellant indicated that emulsions are described as ‘flavouring substances’; flavouring substances according to the said Article 3 of EC 1334/2008, are chemicals with flavouring properties. In this regard the Tribunal has observed two issues which the Appellant did not outline clearly in its pleadings. First, the Appellant did not base its conclusion on the meaning of an emulsion by carrying out laboratory tests to confirm whether or not it is a chemical substance. Secondly, the Appellant seems unable to prove its case on the need for preservatives to prevent the cordials from fermentation. According to the Oxford Dictionary fermentation is:‘the chemical breakdown of a substance by bacteria, yeasts, or other microorganisms, typically involving effervescence and the giving off of heat.

134. Accordingly, the Tribunal has noted that there is a need for the cordials to have preservatives added to prevent fermentation. The Appellant could have provided the Tribunal with laboratory tests explaining the need for preservatives to prevent fermentation on products which it has indicated are made from chemicals, yet it did not.

135. Furthermore, the Respondent averred that one of the ingredients indicated on the package of the cordial drinks was fruit concentrate. The Tribunal, having reviewed the laboratory results provided by the Respondent, finds that the applicable Heading of the HS Code is 20. 09 which states as follows:“20. 09 Fruit juices (including grape must) and vegetable juices, unfermented and not containing added spirit, whether or not containing added sugar or other sweetening matter.-2009. 41. 00 -- Of a brix value not exceeding 20 kg …………2009. 90. 00 - Mixtures of juices ……………”

136. In view of the foregoing, the Tribunal finds that the Respondent lawfully re-classified the cordial drinks manufactured by the Appellant. However, based on the Laboratory results carried out by the Respondent, it is notable that the brix values of the cordial drinks in all the instances exceeded 20 Kg and, on that basis, both cordials should be classified under tariff 20. 09. 90. 00. i.Whether the Assessment’s in respect of VAT, Corporation tax and Excise duty was excessive.

137. The Respondent issued the Appellant with an assessment for Kshs. 403,185,880. 52. This was inclusive of assessment arising out of variances in turnovers, production and sales volumes and a shortfall on Excise duty due to reclassification.

138. Pursuant to Section 6(1) of the EDA, the liability for Excise duty arises when goods are removed from a manufacturer’s factory. The Tribunal therefore notes that indeed the Appellant’s assertion that duty is levied on production volumes rather than sales volumes is correct since not all the volumes produced, are sold. More particularly, section 6(1) and (2) of the EDA state as follows:(1)The liability of a licensed manufacturer for excise duty on excisable goods manufactured in Kenya shall arise at the time of removal of the goods from the manufacturer's factory.(2)For the purposes of this Act, excisable goods that are consumed in a licensed manufacturer's factory shall be treated as removed from the factory at the time of consumption.”

139. The Tribunal has noted that the Appellant averred that in its calculations, the Respondent used production volumes in respect of the Appellant’s products, namely water, soft drinks and cordials and applied average prices on the products. The Appellant objected to this fact since it stated that it adduced data which it shared with the Respondent, regarding the differences in the production/dispatch volumes and sales volumes. However, at the Appeal stage the Appellant did not provide the documentation to support its assertions against the Respondent nor did it confirm the actual sales prices.

140. The Tribunal has found that although the Respondent did not seem to challenge the documentation produced in support of the Appeal, in the absence of the documentation which formed the basis for partial allowance of the objection [ leading to the reduction of the assessment from Kshs. 901,002,453. 02 to Kshs. Kshs. 403,185,880. 52], it is not clear to the Tribunal whether there is duplication of documents provided at both the Objection and Appeal stage.

141. On the above basis the Tribunal finds and agrees that the Respondent, was not provided with the correct information and therefore had to estimate the production and sales volumes. It is notable that the Appellant was unable to adduce evidence during the Appeal to enable the Tribunal ascertain whether the confirmed assessment of Kshs. 403,185,880. 52 is excessive. The Tribunal is of the further opinion that since the classification of the cordial drinks was lawfully carried out by the Respondent, the shortfall in respect of Excise duty arising out of re-classification of the cordial drink, was due and payable by the Appellant.

142. In view of the foregoing the Tribunal finds that the assessment in respect of VAT, Corporation tax and Excise duty was not excessive.

Final Decision 143. The upshot of the foregoing is that the Appeal lacks merit and the Tribunal accordingly proceeds to make the following Orders:a.The Appeal be and is hereby dismissed.b.The Respondent’s objection decision dated 16th June, 2022 be and is hereby upheld.c.Each party to bear its own costs.

144. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 26TH DAY OF JANUARY, 2024. ERIC NYONGESA WAFULACHAIRMANDELILAH K. NGALA CHRISTINE A. MUGAMEMBER MEMBERGEORGE KASHINDI MOHAMMED A. DIRIYEMEMBER MEMBERSPENCER S. OLOLCHIKEMEMBER