[2024] KETAT 1124 (KLR)

Kenafric Beverages & Bottling Limited v Commissioner of Domestic Taxes (Tax Appeal E909 of 2023) [2024] KETAT 1124 (KLR) (1 August 2024) (Judgment)

Neutral citation: [2024] KETAT 1124 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal E909 of 2023

RM Mutuma, Chair, AM Diriye, B Gitari, EN Njeru & M Makau, Members

August 1, 2024

Between

Kenafric Beverages & Bottling Limited

Appellant

and

Commissioner of Domestic Taxes

Respondent

Judgment

Introduction 1. The Appellant is a Limited Liability Company duly incorporated in Kenya under the Companies Act whose main business is in the manufacturing and trading in various non-alcoholic beverages that include water, ready to drink carbonated soft drinks and energy drinks.

2. The Respondent is the principal officer appointed under the Kenya Revenue Authority Act, Cap 469 Laws of Kenya as an agent of the Government of Kenya for assessing, collecting, and accounting for all revenue. The Respondent is also mandated with the responsibility of the administration and enforcement of the statutes set out under the schedule to the Act.

3. The Respondent carried out a review of the Appellant’s Excise returns for the period March, April and May 2023 and issued the Appellant with a per-assessment notifying it of a short fall excise duty for claims of packaging materials made by the Appellant contrary to the provisions of Section 14 of the Excise Duty Act 2015.

4. The Appellant lodged its notice of Objection on 11th and 17th September 2023 and was subsequently issued with additional tax assessments on 3rd October 2023 demanding Kshs. 1,491,188. 88, to which the Respondent issued its Objection Decision on 10th November 2023 rejecting the Appellant’s Objection and confirming the assessments.

5. Dissatisfied with the Objection Decision, the Appellant filed this Appeal vide a Notice of Appeal dated 30th November 2023 and filed on 11th December 2023.

The Appeal 6. The Appeal as contained in the Memorandum of Appeal dated 27th November 2023 and filed on 11th December 2023 is premised on the following grounds: -a.The Respondent erred in law by completely misconstruing the provisions of Section 14 (1) of the Excise Duty Act 2015 and disallowing the Excise Duty claimed by the Appellant amounting to Kshs. 1,491,188. 88. b.The Respondent erred in law by failing to appreciate the word ‘manufacture’ pursuant to Section 2 of the Excise Duty Act and Section 14 of the said Excise Duty Act refers not only to the production of the final excisable goods, but also to intermediate or uncompleted process in the production of the final excisable goods.c.The Respondent erred in law in failing to appreciate that the word ‘raw materials’ in Section 14 (1) of the Excise Duty Act refers to any substances found in their natural modified or semi-processed state used as an input to a production process for subsequent modification or transformation into a finished good.d.The Respondent erred in law and fact in failing to appreciate that ‘preforms’ are ‘raw materials’ used in the production of bottles which ultimately used to package the Appellant’s finished goods even after expressly admitting at page three of its Objection decision dated 10th November 2023 that ‘preforms undergo some manufacturing’ to produce the bottle which is then used to package beverages to create the final finished products per HS Code 2202. 90. 00 ‘Bottled or similarly packaged waters and other non-alcoholic beverages, not including fruit or vegetable juices’.e.The Respondent erred in law and in fact by failing to appreciate that for purposes of Section 14 (1) of the Excise Duty Act, a distinction must be drawn between ‘the preforms’ and ‘the bottles manufactured from the preforms’ and ‘the final finished products’ which is then sold to the consumers.f.The Respondent erred in law by failing to appreciate the fundamental distinction between the facts of Beiersdorf East Africa Limited vs. Commissioner of Domestic Taxes (TAT Appeal No. 789 of 2022) and the facts of the Appellant’s case which rendered the TAT decision in the said case completely inapplicable given the unique and different circumstances of the Appellant’s case.g.The Respondent’s Objection Decision dated 10th November 2023 constitutes a violation of the Appellant’s right to fair administrative action under Article 47 of the Constitution as read together with the provisions of Fair Administrative Actions Act.h.The Respondent’s Objection Decision dated 10th November 2023 violated the Appellant’s legitimate expectation.i.The Respondent’s Objection Decision dated 10 November 2023 violates the Appellant’s right to property under Article 40 of the Constitution.j.The Respondent erred in law in failing to appreciate that tax legislations have to be subjected to strict interpretation.k.The Respondent erred in law in failing to appreciate that any doubt or ambiguity in a tax legislation operates in favor of the taxpayer.

The Appellant’s Case 7. The Appellant premised its case on its;a.Statement of Facts dated 27th November 2023 and filed on 11th December 2023 and the documents attached thereto; andb.Written Submissions dated 27th February 2024 and filed on 28th February 2024.

8. The Appellant stated that it relied on the Definitions of ‘manufacture’ and ‘finished goods’ under Section 14 of the Excise Duty Act and Section 5 of the Excise Duty Act arguing that the Respondent has failed to appreciate that the word ‘manufacture’ pursuant to Section 2 of the Excise Duty which not only refers to the production of the final excisable goods but also the intermediate or uncompleted process in the process in the production of the final excisable goods.

9. The Appellant further stated that its manufacturers beverages classified as excisable goods (finished goods) as per Schedule 1 under HS Code 2202. 90. 00 clearly defined as ‘Bottled or similarly packaged waters and other non-alcoholic beverages, not including fruit or vegetable juices’.

10. The Appellant contended that per the definition in the Cambridge Dictionary, ‘Bottled’ means contained, stored, or sold in bottles thus the bottled product requires raw materials inclusive of preforms to create the finished product, which in this case is developed from preforms.

11. The Appellant further contended that in order to manufacture beverages, it sources preforms both locally and internationally which undergo a further manufacturing process to create the bottles which are used for packaging of the excisable finished goods identified.

12. The Appellant stated that it rightfully paid excise duty on preforms imported which were processed to manufacture the excisable beverage product and therefore had a right to claim duty on the finished goods pursuant to Section 14 of the Excise Duty Act.

13. The Appellant averred that under Schedule 1 of the HS Code 2202. 90. 00, it is the only class that specifies the excisable product inclusive of the accompanying packaging and all the other classes of excisable beverages only specify the liquid content.

14. The Appellant relied on Section 12 of the Excise Duty Act, and stated that the Respondent erred in law by disallowing the claim by the Appellant to the Excise Duty paid on the preforms used to manufacture the finished goods.

15. It was the Appellant’s case that Section 14 of the Excise Duty Act must be interpreted strictly allowing the manufacturers of excisable goods to claim excise paid on excisable raw materials used in the manufacturing process.

16. The Appellant cited the Black’s Law Dictionary definition of ‘raw materials’ and contended that the Respondent has failed to appreciate that preforms are raw materials used in the production of bottles which are ultimately used to package the Appellant’s beverages to produce the finished goods being bottled and similarly packaged beverages.

17. The Appellant stated that the manufacturing of finished goods involves the manufacturing of bottles from preforms, preparation of the beverages and together with other components like bottle caps and labels are combined to produce the Appellant’s finished products.

18. The Appellant added that the bottles are manufactured by loading the preforms at the hopper and sorting the machine wherein the preforms are heated in the oven at a temperature of 55 to 88 degrees Celsius. The preforms are then stretched, pre-blown between 4 to 9 bars, and further blown between 28 to 32 bars according to the mould’s shape and then it goes through a cooling process at the chiller to enhance the wall and base strength at 4 to 8 degrees Celsius. This makes the preforms raw materials used in the manufacturing of the bottled beverages.

19. The Appellant reiterated that the KRA Harmonized System Handbook for the EAC Customs Administration Incorporates preforms in its definition as an incomplete/unfinished article confirming that preforms are raw materials in intermediate form.

20. The Appellant contended that the preforms are not packaging in the form they are purchased in and have to undergo a further processing to make them usable in packaging the liquid.

21. It was the Appellant’s case that preforms cannot be deemed to be finished plastic packaging products (that would be excisable goods in this case) since it is material that needs to undergo substantial modification i.e molding, would change the nature of the packaging to bottles.

22. The Appellant stated that the Respondent admits at page three of the Objection Decision of 10th November 2023 that preforms undergo some manufacturing to produce the bottles which is part of the final finished product.

23. The Appellant averred that the Respondent has always treated the imported preforms as raw materials by granting a remission in both IDL and RDL pursuant to the provisions of Sections 37 and 38 of the Finance Act 2019 which grants preferential levying of IDF and RDF at the rate of 1. 5% respectively on the customs value on imported raw materials and intermediate products approved by manufacturers.

24. The Appellant contended that whereas the Beiersdorf case involved the relationship between the glass bottle as a final product and the finished product, the Appellants case involves the Relationship between the preforms and the bottles manufactured from the preforms to be used in the packaging of the finished product.

25. The Appellant reiterated that whereas the Beiersdorf case involved the importation of glass bottles as a final product, the Appellant’s case involves the importation or local procurement of preforms in their intermediate state for further manufacturing into the final product.

26. The Appellant cited the case of Mjengo Limited vs. Commissioner of Domestic Taxes [2016] eKLR and reiterated that the Honorable Tribunal in the Beiersdorf case specified that packaging alone did not amount to manufacture and highlighted the criteria that a further alteration process was required in relation to packaging as a component of the finished product.

27. The Appellant averred that having identified the finished/excisable good as “bottled water or similarly packaged beverages”, the processing of the preforms into bottles, as an intermediate process in the production of bottled water, is part of the manufacture of the excisable good as there cannot be an excisable good (bottled water/beverages) without the bottle.

28. The Appellant reiterated that the finished product in this case and per the first Schedule of the Act is the “bottled water or beverages” and not just any water or beverage. It added that in the Beiersdorf case the Tribunal directed that the liquid content was the finished product that undergoes processing which are clearly two different subject cases and therefore not applicable to the Appellant’s case.

29. The Appellant cited Section 12 (2) of the Act and averred that the current excise duty payable for bottled beverages in this tariff is Kshs. 6. 41 per liter and therefore the Act envisioned that this Tariff class of excisable goods cannot be sold in their state other than accompanied by a type of packaging in our case being bottles. It added that the excisable goods shall be liable to excise duty according to the gross weight of the package and its contents. The bottles are used to measure the volume of the beverages clearly stated on all bottles and to which the excise duty of Kshs. 6. 41 per liter is payable.

30. The Appellant stated that the packaging is a necessary addition to the manufacturing process as its specific tariff class of beverage products can only be valued once contained in some form of packaging and being liquid content measured by their volume. It added that per Section 6 (1) of the Excise Duty Act 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 and the products for sale cannot be valued as they are and removed from the factory for sale and retail without being accompanied by a form of packaging.

31. The Appellant reiterated that whereas it has finished products are consumables which cannot be distributed and or sold unless packaged in excisable bottles pursuant to the first Schedule to the Excise Duty Act Tariff 3923. 30. 00 on Articles of Plastic and HS Code 2209. 90. 00, the deodorants in the Beiersdorf case could be sold through any other packaging material.

32. The Appellant contended that the Beiersdorf case is not similar to this case as the tariff classification in the Beiersdorf only reads “imported glass bottles” and not glass bottled roll-ons, which they manufacture. It added that it manufactures bottled water and similarly packaged beverages.

33. The Appellant stated that in enforcing its taxation mandate against the Appellant, the Respondent requires legitimate EGMS stamps to be placed on every bottle produced enabling it to track the revenue for collection per Section 6 of the Excise Duty Act. it added that this cannot be possible without the presence of the bottle in which the finished goods are contained.

34. The Appellant averred that it imports preforms which are excisable inputs used in the production of the packaging materials (PETs) used to manufacture the finished excisable goods but has been denied the relief as envisioned by this Section 14 of the Excise Duty Act. It added that manufacturers who are able to source materials and produce their bottles internally for packaging of their own products (that is from raising to preforms to the bottles) are however able to claim the relief of raw materials. The provisions of Section 114 are applied discriminately.

35. The Appellant relied on the case of Okiya Omtatah Okoiti vs. Commissioner General, Kenya Revenue Authority & 2 Others [2018] eKLR and asserted that per the principles in the case, there is no reasonable justification why preforms or bottles produced by manufacturers who import materials to produce preforms or bottles for production of their own bottled beverages are not given the same treatment given to importers of the same forms. It is therefore evident that the provision of Section 14 of the Act is not fairly applied in relation to the preforms which amounts to discrimination and unfair taxation. It added that in denying the Appellant’s right to offset the Input Duty, KRA acts in contravention of Article 27 (4) and Article 40, 47 of the Constitution.

36. The Appellant averred that the Respondent has acted in violation of Article 47 of the Constitution by arbitrarily declining a claim grounded in the law under Section 4 of the Excise Duty Act and the refusal to admit the claim by the Appellant is therefore ultra vires the mandate of the Respondent thereby rendering the decision void ab initio.

37. The Appellant contended that the Respondent has threatened to initiate recovery of claimed unpaid taxes amounting Kshs. 1,491,188. 88 together with additional interest of Kshs. 1,518. 92 and penalty of Kshs. 74,559. 44 which threat if made real will see to it that the Appellant to lose its property in the recovery process as envisioned under Article 40 of the Constitution.

38. The Appellant reiterated that it has a legitimate expectation that where the law permits the deduction of Excise Duty charged on raw materials imported and or used to manufacture other excisable goods from excise duty charged on the finished goods, then the Respondent is under an obligation to apply the law strictly as is and not deviate from it.

39. The Appellant further contended that where the Respondent has consistently and diligently treated preforms as raw materials pursuant to Section 37 and 38 of the Finance Act, 2019, by permitting the Appellant to enjoy remission of RDL and IDL on preforms as raw materials and thus the Appellant has a legitimate expectation that the same criteria ought to apply in determining the status of the preforms across the board and the Respondent is estopped from averring a different state of facts on the same product under Section 14 of the Excise Duty Act.

40. The Appellant stated that the Respondent, in misconstruing Section 14 (1) of the Excise Duty Act violated the construction and interpretation of tax legislations of tax legislation having to be construed as without any room for intendment, and where there exists any doubt or ambiguity, the tax provision ought to be construed in favor of the taxpayer and not vice versa.

41. In its written submission, the Appellant submitted on the following;i.On whether the Respondent has misconstrued the provisions of Section 14 (1) of the Excise Duty Act, 2015 by refusing to apply the said provision to the circumstances of the Appellant’s case.

42. The Appellant submitted that a party exempted from payment of tax under a tax regime bears no obligation to make such payment and holding otherwise is illegal, irrational and would plainly negate the intent in the tax regime.

43. The Appellant cited Section 14 (1) of the Excise Duty Act and argued that it manufactures bottled water and non-alcoholic beverages classified as excisable goods (finished foods) in the first schedule to the Excise Duty (pursuant to Section 5 (2) under HS Code 2202. 90 which describes them as “bottled water similarly packaged water and non-alcoholic beverages”.

44. The Appellant reiterated that the finished product contemplated in Section 14 (1) of the Excise Duty Act are the bottled water and non-alcoholic beverages manufactured by the Appellant, which are then subject to excise duty at the rate of Kshs. 6. 41 as prescribed in HS Code 2202. 90. Thus, the water and non-alcoholic beverages unless bottled, are not excisable goods (finished goods) within the First Schedule and/or Section 14 (1) of the Excise Duty Act.

45. The Appellant cited the Cambridge Dictionary’s definition of “bottled” and asserted that the water and non-alcoholic beverages it produces are only finished (excisable) goods as contemplated in HS Code 2202. 90 when they are contained or sold in bottles.

46. The Appellant reiterated that the HS Code 2202. 90 is the only class in the First Schedule to the Excise Duty Act that incorporate the packaging element as part of the excisable goods whereas all other classes of excisable beverages specify the liquid content only without reference to the packaging and therefore the water and non-alcoholic beverages are not subject to excise duty and are incapable of sale unless bottled as provided in HS Code 2202. 90. 00.

47. The Appellant cited Section 12 of the Excise Duty Act and the case of Republic vs. Kenya Revenue Authority & Another ex-parte Fontana Limited JR Misc. Civ. Appl. 442 of 2013 [2014] eKLR where the court cited the principles in the case of Republic vs. Commissioner of Domestic Taxes Large Taxpayers Office Ex parte Barclays Bank of Kenya Ltd [2012] eKLR and maintained that the Respondent has erred in treating only the water and non-alcoholic beverage content as the finished product to the exclusion of the bottle contrary to the provisions of HS Code 2202. 90. 00 and added that any tax imposed on a subject must be dictated by the terms of the governing legislation and a taxing authority has an obligation to satisfy itself that its actions fit within the provisions of the governing statute.

48. The Appellant contended that the Respondent erred in treating the bottles as packaging material separate from the finished product envisaged in HS Code 2202. 90. 00 and Section 14 of the Act as read together with Section 5 of the Excise Duty Act and HS Code 2209. 90. 00 of the Excise Duty Act must be interpreted strictly as stated to allow manufacturers of Excisable goods to claim excise duty paid on raw materials used in the manufacturing of the finished product stipulated by law.ii.On whether the Respondent erred in its definition of the word ‘raw material’ and ‘packaging’ in Section 14 (1) of the Excise Duty Act.

49. The Appellant cited the Black’s Law Dictionary’s definition of ‘raw materials’ and submitted that preforms are raw materials used in the production of bottles, which are ultimately used in the production of bottles, which are ultimately used to package the water and non-alcoholic beverages to produce the finished goods being ‘bottled water and similarly packaged non-alcoholic beverages’ in line with HS Code 2202. 90. 00 therefore making them not packaging material.

50. The Appellant relied on the definition of preforms from the Kenya Revenue Authority Harmonized System Handbook for the EAC Customs and Administration and argued that preforms are articles in semi-processed/unfinished state that are used in the intermediate process of production of final excisable goods, the bottled water and non-alcoholic beverages as described in HS Code 2202. 90. 00. It reiterated that preforms are therefore raw materials/inputs used in the production of bottles that are ultimately used to package the water and non-alcoholic beverages to produce the finished products.

51. It asserted that the production of the bottled water and non-alcoholic beverages (finished goods) involves manufacturing of bottles from preforms, preparation of the beverages, together with the components such as bottle caps and labels that are combined to produce the final finished good.

52. The Appellant argued that preforms are therefore not packaging in the form they are purchased, rather, they must undergo further processing and modification to make bottles used for packaging the liquid content. The provisions of HS Code 2202. 90. 00 imply that the liquid content alone is not the finished product unless and until it is bottled and/or packaged therefore both the liquid content and the preforms undergo a manufacturing process to create the finished product particularized in HS Code 2202. 90. 00.

53. The Appellant asserted that the Respondent erred in treating the preforms as the packaging materials rather than as raw materials used in the production of the packaging material being bottles, which comprise the finished product contemplated in HS code 2202. 90. 00. The finished product manufactured by the Appellants is the bottled water and similarly packaged non-alcoholic beverages.

54. The Appellant submitted that the Respondent has always treated imported preforms as raw materials by granting remission on both IDL and RDL pursuant to the provisions of Sections 37 and 38 of the Finance Act 2019 which grant preferential levying of IDF and RDF at the rate of 1. 5% respectively on the Customs value on imported raw materials and intermediate products approved by manufacturers and cannot therefore approbate and reprobate by treating preforms differently under Section 14 (1) of the Excise Duty Act.

55. The Appellant submitted that in treating the preforms as raw materials under Sections 37 and 38 of the Finance Act of 2019 which amended the Miscellaneous Fees and Levies Act of 2016, the Respondent created the expectation that preforms are raw materials, and they must subsequently be treated as such under any other legislation unless expressly stated otherwise by such legislation.

56. The Appellant cited Section 12 (2) of the Excise Duty Act and asserted that the excise duty payable for beverages in HS Code 2202. 90. 00 was 6. 41 per liter in the period March and May 2023 thus making it clear that the Excise Duty Act envisioned that this tariff classification of excisable goods cannot be sold in their state other than accompanied by a type of packaging which in this case is the bottles.

57. The Appellant contended that, per Section 12 of the Excise Duty Act, the bottles are used to measure the volume of the beverages clearly stated on all bottles and to which excise duty is payable.

58. The Appellant asserted that packaging is a necessary addition to the manufacturing process as its specific tariff class of beverage products can only be valued once contained in some form of packaging and being liquid content measured by their volume.

59. The Appellant reiterated that per Section 6 (1) of the Excise Duty Act, 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 and the products for sale cannot be valued as they are removed from the factory for sale and retail without being accompanied by a form of packaging.

60. The Appellant submitted that preforms are raw materials subject to Excise Duty under Tariff 3923. 30. 00 at the rate of 10% of their value. The Appellant paid excise duty on the preforms on various dates between March and May 2023 and having paid the excise duty on the preforms and using them as raw materials to manufacture plastic bottles which comprise the finished excisable good as outlined under HS Code 2209. 90. 00, the excise duty paid on preforms (as raw materials) must be offset from the excise duty payable on the finished goods being the bottled water and non-alcoholic beverages manufactured by the Appellant thus the Respondent erred in dismissing the Appellant’s claim on the preforms on grounds that preforms re packaging materials and not raw materials.iii.On whether the Respondent has failed to appreciate the fundamental distinction between the facts of Beiersdorf East Africa Ltd vs. Commissioner of Domestic Taxes (TAT Appeal No. 789 of 2022) and the facts of the Appellant’s case which rendered the TAT decision in the said case completely inapplicable given the unique and different circumstances of the Appellant’s case.

61. The Appellant submitted that the Beiersdorf case which the Respondent placed heavy reliance on while dismissing the Appellants claim is not applicable to the circumstances herein as whereas the Beiersdorf case involved the relationship between the glass bottler and the finished product, the Appellant’s case involves the relationship between the preforms and the bottles manufactured from the preforms that are ultimately used to package water and other non-alcoholic beverages to produce the finished product as described in HS Code 2209. 90. 00.

62. The Appellant further submitted that the Beiersdorf case involved the importation of glass bottles as a final product whereas the instant case involves the importation or local procurement of preforms in their intermediate state for further manufacturing into botts to produce the final finished good being bottled water and non-alcoholic beverages.

63. The Appellant cited the case of Mjengo Limited vs. Commissioner of Domestic Taxes [2016] eKLR and reiterated that the Honorable Tribunal in the Beiersdorf case specified that packaging alone did not amount to manufacture and highlighted the criteria that a further alteration process was required in relation to packaging as a component of the finished product.

64. The Appellant submitted that it has proven that the preforms undergo a manufacturing process to produce the packaging that comprise the finished product in line with HS Code 2202. 90. 00 which fact is further acknowledged expressly by the Respondent in its Objection Decision.

65. The Appellant contended that in the instant case, there was an alteration required in relation to the packaging as a component of the finished product and having identified the finished/excisable good as bottled water or similarly packaged beverages, the processing of the preforms into bottles as an intermediate process in the production of bottled water is part of the manufacture of the excisable good as there cannot be an excisable good without the bottle.

66. The Appellant reiterated that the finished product in the instant case and per the First Schedule of the Act is “Bottled Water or beverages” and not just any water or beverages wherein the preforms also undergo processing to form part of the finished product unlike in the Beiersdorf case where the Tribunal directed that the liquid content was the finished product that undergoes processing and not the glass bottles which are two different subject cases and not applicable to this case.

67. The Appellant submitted that its finished products are consumables which cannot be distributed and or sold unless packaged in excisable bottles pursuant to the First Schedule of the Excise Duty Act Tariff 3923. 30. 00 on Articles of plastic and HS Code 2202. 90. 00 whereas the deodorants in Beiersdorf case could be sold through any other packaging material.

68. The Appellant contended that the Beiersdorf case is not similar to the circumstances of the Appellant as the tariff applicable to their case only reads “imported glass bottled” and not glass bottled roll-ons, which they manufacture. It added that it manufactures bottled water and similarly packaged beverages as described in HS Code 2202. 90. 00. iv.On whether the Respondent acted in breach of the Constitution.

69. The Appellant submitted that it deems the acts of the Respondent as not only discriminating and unfair but also illegal and amounting to violations of its fundamental rights and freedoms.

70. The Appellant asserted that the Respondent violated Article 27 (4) of the Constitution by denying the Appellant the relief on raw materials under Section 14 (1) of the Excise Duty Act while granting the same relief to other manufacturers who source materials and produce preforms for packaging of their own products.

71. The Appellant relied on the case of Okiya Omtatah Okoiti vs. Commissioner General, Kenya Revenue Authority & 2 Others [2018] eKLR and asserted that per the principles in the case, there is no reasonable justification why preforms or bottles produced by manufacturers who import materials to produce preforms or bottles for production of their own bottled beverages are not given the same treatment given to importers of the preforms. It is therefore evident that the provision of Section 14 of the Act is not fairly applied in relation to the preforms which amounts to discrimination and unfair taxation. It added that in denying the Appellant’s right to offset the Input Duty, KRA acts in contravention of Article 27 (4) and Article 40, 47 of the Constitution.

72. The Appellant averred that the Respondent has acted in violation of Article 47 of the Constitution on fair administrative action when it declined the Appellant’s Excise duty declarations more than a year after the date they were lodged, in contravention of the requirement to discharge administrative duties in an expeditious, efficient, reasonable and procedurally fair manner.

73. The Appellant asserted that the Respondent breached Article 47 of the Constitution by arbitrarily declining a claim grounded in the law under Section 14 (1) of the Excise Duty Act and the refusal to admit the claim by the Appellant is therefore ultra vires the mandate of the Respondent thereby rendering the decision void ab initio.

74. The Appellant cited the case of Republic vs. Kenya Revenue Authority & 4 Others v Flamingo Hardware & Paints & 22 Others in Nairobi HC Misc JR. Application no 211 of 2018 [2020] and submitted that having failed to follow the law, the Respondent’s decision which is ultra vires its mandate should be quashed and set aside by this Honorable Tribunal to keep the Respondent within the boundaries of defined legislative mandate.

75. The Appellant contended that the Respondent has threatened to initiate recovery of claimed unpaid taxes amounting Kshs. 10,284,384. 59 which threat if made real will see to it that the Appellant to lose its property in the recovery process as envisioned under Article 40 of the Constitution.

76. The Appellant reiterated that it has a legitimate expectation that where the law permits the deduction of Excise Duty charged on raw materials imported and or used to manufacture other excisable goods from excise duty charged on the finished goods, then the Respondent is under an obligation to apply the law strictly as is and not deviate from it.

77. The Appellant also relied on the case of Supreme Court Petition No. S 14, 14A, 14B and 14C of 2014 Communications Commission of Kenya & 5 Others vs. Royal Media Services & 5 Others and further contended that where the Respondent has consistently and diligently treated preforms as raw materials pursuant to Sections 37 and 38 of the Finance Act, 2019, by permitting the Appellant to enjoy remission of RDL and IDL on preforms as raw materials and thus the Appellant has a legitimate expectation that the same criteria ought to apply in determining the status of the preforms across the board and the Respondent is estopped from averring a different state of facts on the same product under Section 14 of the Excise Duty Act.

78. The Appellant cited the case of Republic vs. Kenya Revenue Authority, Proto Energy Limited (Ex Parte) (Judicial Review Application E023 of 2021) [2022] KEHC 5 (KLR) (24 January 2022) (judgment) where the court quoted the case of C-80/89. Behn vs. Hauptzollamt ltzehoe, 1990 E.C.R. 1-2659 and asserted that the Respondent, in misconstruing Section 14 (1) of the Excise Duty Act violated the construction and interpretation of tax legislations of tax legislation having to be construed as without any room for intendment, and where there exists any doubt or ambiguity, the tax provision ought to be construed in favor of the taxpayer and not vice versa.

The Appellant’s prayers. 79. The Appellant prayed for orders that the Tribunal:a.Allows the Appeal herein;b.Annuls the Respondent’s Objection Decision dated 10th November 2023 and uphold the Appellant’s respective Notice of Objection dated 11th September 2023 and 17th October 2023; and,c.Awards costs of this Appeal to the Appellant.

The Respondent’s Case 80. The Respondent’s case is premised on its;a.Statement of Facts dated 10th January 2024 and filed on 15th January 2024, together with the documents attached thereto; and,b.Written submissions dated and filed on 2nd May 2024.

81. The Respondent stated that it carried out a review of the Appellant’s excise duty declarations, and that the analysis established that the Appellant claimed non-qualifying excise input for the period September 2021 to June 2022.

82. The Respondent issued the Appellant with a pre-assessment notice on 6th September 2023 and requested them to amend its returns within 7 seven days thereof to be in line with the provisions of Section 14 of the Excise Duty Act.

83. It stated that the Appellant failed to amend its returns and the Respondent proceeded to raise assessments on 14th September 2023.

84. The Respondent contended that the Appeal is invalid as it has been filed contrary to Section 13 of the Tax Appeals Tribunal Act.

85. The Respondent stated that it was the Appellant’s case that the pre-forms used to make the bottling containers are considered raw materials for the manufacture of finished bottles. However, the Respondent relied on the Black’s Law Dictionary’s definition of raw materials and Section 14 of the Excise Duty Act and stated that it found that raw materials are the basic material from which a product is made or materials that are in their natural state before they are processed or used in manufacturing and thus, while packaging material is essential to complete the formation of the product, it is not a raw material and the product is complete the formation of the product, it is not a raw material and the product is complete and ready for consumption even without the packaging material.

86. The Respondent contended that though the preform undergoes processing (blowing), it is not the final product, water and beverages are the final process and thus there is no relief for excise duty incurred in purchasing packaging materials.

87. The Respondent cited the case of TAT Appeal No. 789 of 2022 Beiersdorf East Africa Limited vs. Commissioner of Domestic Taxes, the case of Kenya Revenue Authority vs. Eric Ogola Adula [2021] eKLR: HCCIMMITA E003 of 2021 together with Section 2 of the Excise Duty Act and contended that it correctly concluded that mere fact that bottled or similarly packaged waters and non-alcoholic beverages are charged excise duty does not automatically qualify them for a set-off in accounting for excise duty on the finished product.

88. The Respondent averred that per Section 24 (2) of the Tax Procedures Act, it is not bound by the tax information provided by the Taxpayer and that it is empowered to assess any taxpayer based on information available to it.

89. The Respondent averred that Section 31 of the Tax Procedures Act allows the Respondent to make additional assessment based on the information placed before it used its best judgment.

90. The Respondent stated that the Appellant bears the burden of proving that the additional assessments were excessive or improper and from the documents adduced in support of their appeal, the same is not evident and therefore the Appellant has failed to discharge this burden as required by Section 56 (1) of the Tax Procedures Act and Section 30 of the Tax Appeals Tribunal Act.

91. The Respondent contended that the Appellant cannot purport to claim that the Respondent failed to accord it an opportunity to be heard and that it acted at all times pursuant to the relevant tax laws including the Constitution and considered all the documentation availed thus the Respondent’s conduct is faultless as it followed due process and arrived at a logical assessment.

92. The Respondent stated that the Appellant has failed to prove that the assessment was excessive and/or the Respondent’s Objection Decision ought to have been made differently adding that the Appellant had sufficient time to avail documentation and thus no fault has been proved to have been found on the Respondent by the Appellant.

93. In its submissions, the Respondent submitted that the Appellant in paragraph 5 of its statement of facts contends that it uses plastic bottles as its primary packaging material for products and it manufactures its own plastic bottles internally by procuring preforms locally and internationally, and subjecting the same to an industrialized process to produce bottles for packaging of the beverage products. It further submitted that the Appellant claimed to be paying excise duty of 10 % on the value of the preforms either upon importation or upon local purchase.

94. The Respondent also submitted that it is erroneous for the Appellant to conclude that the packaging materials imported cannot be construed as a raw material for the manufacture of the Appellant’s excisable beverages.

95. The Respondent submitted that Section 2 of the Excise Duty Act defines “manufacture” to mean and 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;”

96. The Respondent also submitted on the definition of “raw materials” as per Black’s law dictionary and Merriam Webster Dictionary, and cited the case of Stearns Coal & Lumber Co. vs. Thomas, where it was found that, when a raw material is converted into a finished product complete and ready for the final intended use, it ceases being a raw material.

97. It was a submission of the Respondent that the industrialized process alluded to by the Appellant affect the packaging of the bottled water and beverages. The water and beverages are the finished goods and are ready for consumption even without the packaging.

98. It was a further submission of the Respondent that packaging is a medium of storage that happens way after the manufacturing process is complete and has no nexus with the raw materials used in the manufacturing process. The ultimate product can be consumed with or without the packaging material. The packaging is consequently not as construed under sections 2 and 14 of the Excise Duty Act to be eligible for relief of excise duty paid on raw materials used in the manufacture of excisable goods.

99. The Appellant cited the case of Mjengo Ltd vs. Commissioner of Domestic Taxes [2016] eKLR, to buttress its submission .

100. The Respondent consequently submitted that the Appellant ought not to be allowed to offset excise duty on packaging as it is distinct from the finished product, and further submitted that it applied Section 14 of the Excise Duty Act appropriately and its decision to disallow the Appellant’s claim was justified.

101. The Respondent also submitted that for the Appellant’s preforms to qualify as part of the raw materials, it has to be demonstrated that it underwent a manufacturing process as a component of the finished product and any industrialized process that is done to the packaging is immaterial to the finished product in question i.e. Water/beverages, as per the finding in TAT No. 789 of 2022 Beiersdof East Africa Ltd vs. Commissioner of Domestic Taxes.

102. It submitted that in the Beiersdorf case (supra), the liquid content packaged in the glass bottle is the product that undergoes processing, while in the instant case, the beverages that is packaged in the plastic bottle is the product that undergoes processing. Secondly, both the Appellant ‘s liquid product and Beiersdorf’s liquid product can be packaged in different materials or containers, such as sachets or tetra packs. It therefore submitted that the Beiersdorf case is the best fit and appropriate point of reference by the Respondent.

103. The Respondent submitted that the Appellant has failed to prove that the assessment was excessive and or the Respondent’s Objection Decision ought to have been made differently.

104. The Respondent prayed that the Tribunal finds that:a.The Appellant’s appeal be dismissed with costs;b.The Objection Decision dated 22nd June 2023 issued by the Respondent confirming total assessments of Kshs. 10,094,055. 48 be upheld; and,c.The principal taxes and interest be found due and payable per the decision rendered by the Respondent.

ISSUES FOR DETERMINATION 105. The Tribunal upon consideration of the pleadings and submissions filed by the parties is of the considered view that the Appeal crystallizes into an issue for its determination as follows:Whether the Respondent erred in disallowing the Appellant’s claim of excise tax in respect of imported preforms for making plastic bottles for packaging of its bottled products under Section 14 of the Excise Duty Act.

Analysis and Findings 106. The Tribunal wishes to analyze the issue as hereunder.

107. The Appellant contended that preforms are raw materials used in the production of bottles which ultimately are used to package it’s finished products i.e. water, juices and energy drinks, since preforms undergo some manufacturing to produce the bottle by subjecting the same to an industrialized process to produce bottles for packaging of the beverage products to create the final finished products.

108. The Appellant impugns the decision of the Respondent dated 10th November 2023 arguing that it is founded on misapprehension of Section 14 (1) of the Excise Duty Act. The relevant section states:“14. Relief for raw materials(1)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.”

109. The genesis of the contention is the Respondent’s assessment and demand dated 3rd October 2023 wherein it required the Appellant to pay Kshs. 1,491,188. 88 as wrongly claimed non-qualifying input Excise Duty for the period March April and May 2023. The Respondent accused the Appellant in the assessment of claiming input excise on packaging products which is not envisioned by Section 14 (1) of Excise Duty Act.

110. The Tribunal notes that the contest revolve around the interpretation of preform, whether it is a finished product for packaging of products as claimed by the Respondent or is a raw material for manufacture of bottles for packaging products as asserted by the Appellant.

111. According to the Black’s Law Dictionary, a raw material is defined as“basic substances found in their natural, modified or semi processed state, used as an input to a production, process for subsequent modification or transformation into a finished good”

112. While the Respondent considers preform as a finished product for packaging hence not a raw material, the Appellant maintains that preform is a raw material for manufacture of bottles to be used in packaging bottled water and non-alcoholic beverages that they manufacture.

113. To support its position, the Appellant stated that the manufacturing of its finished goods involves the manufacturing of the bottles from preforms, preparation of the liquid beverages and together with other components such as the bottles caps and labels are combined to ultimately produce the Appellant’s finished products.

114. The Appellant stated that the bottles are manufactured by loading the preforms at the hopper and sorting the machine. While in the machine, the preforms are subjected to heating at the oven at a temperature of 55 to 85 degrees Celsius. The preforms are then stretched, pre-blown (between4 to 9 bars), and further blown (between 28 to 32 bars in accordance with the mould’s shape. It then undergoes a cooling process at the chiller for enhancing their wall and base strength at 4 to 8 degrees Celsius. Preforms are therefore raw materials used in the manufacturing of the bottled beverages. The above cited position has not been rebutted by the Respondent.

115. It is also not in contention that the Appellant engages in manufacture and trade in wide range of non-alcoholic beverages, including bottled water, carbonated soft drinks, ready to drink and energy drinks.

116. The Tribunal refers to the Cambridge Dictionary to define “Bottled” as contained, stored, or sold in bottles and observes that, a bottled product requires raw materials inclusive of preforms to create the finished product, which in this case is developed from preforms. As such, the Tribunal holds and find that preforms are raw materials that are used to manufacture bottles that are necessary for the finished products of the Appellant.

117. The Tribunal notes that both the Appellant and the Respondent cited the case TAT Appeal No.789 of 2022 Beiersdorf East Africa Limited vs. Commissioner of Domestic Taxes. While the Respondent’s analysis and conclusion of the case is that facts are similar with the present case, the Appellant maintained otherwise stating that whereas the Beiersdorf case (supra) involved the importation of glass bottles as a final product, the instant case involves the importation or local procurement of preforms in their intermediate state for further manufacturing into the final product.

118. Tribunal has perused the cited case and notes that it revolved around the nexus between the glass bottle and finished product contrary to the present case where the bone of contention is the relationship between preforms and bottles used for packaging the final product.

119. In the Beiersdorf case (supra), what the Appellant manufactured was the roll-on liquid as its final product and imported packaging materials in its finished state.

120. In the present case, the Tribunal finds that the fact that the end product is known as bottled water and similarly packaged non-alcoholic beverages means that, as long as the Appellant doesn’t import the bottles but import preforms to manufacture the same, it is to be treated as a raw material.

121. Therefore, the instant case is distinct from the Beiersdorf case (supra), because in that case the Appellant only imported glass bottles (finished product) purposely to package roll-on while in this case the preform is a raw material as it is an intermediate product in the production chain of bottled water (finished product).

122. The Respondent also cited the case of Mjengo Ltd vs. Commissioner of Domestic Taxes [2016] eKLR, the distinction is the same, the rice imported was only sorted and packaged. Preforms undergo an elaborate process resulting in a finished product in the form of a bottle.

123. In view of the reasons afore cited, the Tribunal departs with the position taken by the Respondent that the preforms are finished products. For all intents and purposes, the Appellant does not use preforms to package its products. It manufactures bottles from the preforms.

124. Additionally, Tariff per Schedule 1 under HS Code 2202. 90. 00 is the only class that specifies the excisable product inclusive of the accompanying packaging. All the other classes of excisable beverages only specify the liquid content.

125. This position is supported by the provisions of Section 12 of the Excise Duty Act which specifies that a class of excisable goods cannot be sold in their state other than accompanied by a type of packaging, in the Appellant’s case being bottles.

126. It is therefore our finding that the Respondent erred in disallowing the Appellant’s claim of Excise Duty in respect of imported preforms for making plastic bottles for packaging its bottled products under Section 14 of the Excise Duty Act.

127. Consequently, the Appellant Appeal succeeds.

Final Determination 128. The Appellant’s Appeal having succeeded, the Tribunal makes the following orders; -a.The Appellant’s Appeal be and is hereby allowed;b.The Respondent’s Objection Decision dated 10th November 2023 be and is hereby set aside; and,c.The parties to meet their own costs.

129. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 1ST DAY OF AUGUST 2024. ROBERT M. MUTUMA - CHAIRPERSONABDULLAHI DIRIYE - MEMBERBERNADETTE GITARI - MEMBERELISHAH N. NJERU - MEMBERMUTISO MAKAU - MEMBER