[2023] KETAT 115 (KLR)

Keroche Breweries Limited v Commisioner of Domestic Taxes (Tribunal Appeal 488 of 2021) [2023] KETAT 115 (KLR) (17 March 2023) (Judgment)

Neutral citation: [2023] KETAT 115 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tribunal Appeal 488 of 2021

E.N Wafula, Chair, Cynthia B. Mayaka, Grace Mukuha, Jephthah Njagi & AK Kiprotich, Members

March 17, 2023

Between

Keroche Breweries Limited

Appellant

and

Commisioner of Domestic Taxes

Respondent

Judgment

Background 1. The Appellant is a limited liability company carrying out the business of alcoholic beverages including beer, wines and spirits.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act, Chapter 469 laws of Kenya and Kenya Revenue Authority is an agency charged with the mandate of assessment, collection and accounting of Government revenue.

3. On 8th March, 2021 the Respondent wrote to the Appellant directing the Appellant to review the alcoholic strength of its Vienna Ice Vodka-ready to drink beverage to match 6. 0% v/v alcohol content on label or adjust the Excise Duty to Kshs. 265. 65 per litre.

4. The Appellant replied on 21st March, 2021 disputing the results of the earlier analysis of samples that culminated to the letter of 8th March, 2021.

5. The Respondent raised a demand notice vide a letter dated 13th April, 2021, for the assessed tax liability for the period of July to December 2020 of Kshs. 224,884,593. 00 and Kshs. 31,483,843. 00 for Domestic Excise Duty and VAT respectively.

6. The Appellant lodged a notice of objection to the assessed taxes vide a letter dated 10th May, 2021. The Respondent subsequently issued its Objection decision vide a letter dated 30th June, 2021 wherein it amended assessment to the sum of Kshs 220,800,886. 00 and Kshs 30,911,612. 00 for Domestic Excise Duty and VAT, respectively.

7. Aggrieved by the Respondent’s Objection decision the Appellant commended the Appeal process on 12th August, 2021.

The Appeal 8. The Appeal is based on the following grounds as set out in the Memorandum of Appeal dated 11th August, 2021 and filed on 12th August, 2011:a.That the Appellant was not accorded procedural fairness at any time or at all by the Respondent before, during and after the alleged market surveillance and analysis of products alleged to have been collected from the market.b.That the Respondent failed to accord the Appellant administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair.c.That the Respondent failed to observe the rules of natural justice, the Constitution and express provisions of the law thereby arriving at an erroneous decision and imposing an unlawful and unreasonable tax obligation.d.That the Respondent erred in law and fact by calculating excise duty on Vienna Ice Vodka, a ready to drink (RTD) brand on the basis of 12. 77% v/v alcohol content against the Appellant’s product alcohol content of 6% v/v or below.e.That the Respondent erred in law and fact by calculating excise duty at Kshs. 253. 00/265. 50 per liter against Kshs. 110. 62/116. 10 per liter used by the Appellant based on the alcohol content of the product manufactured.f.That the Respondent erred in law and fact by computing taxes based on the total stamps activated, the sales made and the unsold stocks.g.That the Respondent erred in law and fact by not making reference to the independent quality reports from Kenya Bureau of Standards (KEBS), a Government Agency mandated to ensure the products quality conform to what is on the label.h.That the Respondent unlawfully abrogated the powers of other law enforcement and Regulatory Agencies, including but not limited to the KEBS and unlawfully arrogated itself powers it did not have by single handedly and haphazardly collecting and analyzing alcoholic beverages from the market without following the basic rules of evidence in an adversarial process.i.That the Respondent erred in law and fact by ignoring the Quality Release Forms provided by the company showing all the details of the product including the alcohol content on a daily basis.j.That the Respondent erred in law and fact by not drawing and taking samples for testing from the production line in the period under review.k.That the Respondent erred in law and fact by making a decision adversarial to the Appellant after carrying out a covert Market Surveillance exercise and failed to involve the Appellant in order to authenticate the products purported to have been purchased from their depots.l.That the Respondent erred in law and fact by using “fake/counterfeit” sample products from their cover operation and used them as a basis for computing Excise Duty at the wrong rate for the whole period under review.m.That the Respondent erred in law and fact by computing additional Value Added Tax (VAT) on the basis of the unlawful, unreasonable, frivolous and vexatious Excise Duty computed and demanded.n.That the Respondent erred in law and fact in demanding additional taxes that were neither charged nor collected by the Appellant as there was no basis for additional charge or collection.o.That the Respondent erred in the manner in which they conducted the exercise that led to contravention of the KRA’s values of being trustworthy, ethical, competent and helpful.

Appellants Case 9. Appellant’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Appellant’s Statement of Facts dated 11th August, 2021 and filed on 12th August, 2021 together with the documents attached thereto.ii.The Appellant’s witness statement of its Quality Assurance Manager Daniel Kabaki, dated 25th October, 2021 and filed on 26th October, 2021 that was admitted in evidence on oath on 17th August, 2022iii.The Appellant’s written submissions dated 1st September, 2022 and filed on 8th September, 2022.

10. The Appellant averred that the Respondent had claimed in their letter of 8th March, 2021 to have carried out an exercise to confirm the alcoholic strength of the ready to drink beverages being offered for sale in the market. That the Respondent claimed to have collected and tested a sample of Vienna Ice Vodka, RTD from an undisclosed outlet and found the same to have had an alcoholic strength of 12. 77% v/v. the date(s) on which the exercise was carried out were not indicated in the Respondent’s letter nor was the Appellant informed or involved before, during and after the said exercise.

11. The Appellant stated that on 21st March, 2021 it wrote to the Respondent disputing the results of the analysis of the samples alleged to have been collected from the market and reiterated that tests from samples retained by the Appellant had an alcoholic content of 6% v/v. The Appellant also indicated that it had discontinued production of the Vienna Ice Vodka, RTD with alcohol content of 10% v/v because the product did not gain any traction in the market.

12. It stated that in its letter of 21st March, 2021, it informed the Respondent that their sales had been adversely affected by counterfeit products and use of fake Revenue Stamps by unscrupulous traders in the market. The Appellant urged the Respondent to weed out counterfeits and promised to cooperate in the efforts and inform the Respondent of the presence of illicit products which were being passed off as its own in the market.

13. The Appellant submitted that on 31st March, 2021, the Respondent wrote to it and claimed that laboratory tests had been carried out and that the alcoholic content of Vienna Ice Vodka from a sample alleged to have been sourced from the Appellant’s depots had an alcoholic strength of 12. 77% v/v and hence the applicable rate of Excise Duty payable was Kshs. 265. 5 and not Kshs. 110. 6 the Appellant had declared in its returns.

14. It was the Appellant’s contention that the Respondent did not indicate the identity of the laboratory where the samples were alleged to have been tested nor the credentials of the chemist or expert who carried out the tests. That the Appellant was not and has never been provided with the authenticated results of the laboratory tests and analysis. The Respondent did not provide an inventory to show where and how the control samples were collected, the parties present during the collection nor an Exhibit Memorandum Form to show how the control samples were labelled transported or stored before the test and analysis were carried out.

15. That in the absence of authenticated results of the laboratory tests and analysis, it was impossible for the Appellant to trust the integrity of the alleged one-sided laboratory results or expertly respond to the Respondent’s claim and to provide answers without information on the level of contamination of the alleged control samples due to leakages, seepages and evaporation thereof owing to exposure of the alleged control samples to elements.

16. The Appellant averred that on 10th July, 2020, it had in line with its Internal Quality Assurance and Control requirements, submitted samples of the Vienna Ice Vodka, RTD to the Kenya Bureau of Standards (KEBS) for tests and analysis. That the Control Sample Ref. No. BS202023472 was tested for ethyl alcohol content and presence of other materials to confirm suitability for human consumption. That in its report dated 30th July, 2020, KEBS indicated the alcoholic content was 5. 8% v/v, the Laboratory Reference Number for the test and analysis was KEBS/TES/FOO-NAR/F/20.

17. The Appellant stated that subsequent to the issuance of the Respondent’s objection decision, it appointed the current tax agents for its case to handle the dispute. That after analysis of various documents the Appellant averred that the Respondent had gone ahead and issued a decision on the objection without regard to all the facts given. It was the Appellant’s opinion that if all the facts were objectively considered, the decision made on the objection would have been different.

18. The Appellant averred that in reaching its decision, the Respondent made the following errors:i.That the Respondent erred by calculating Excise Duty on Vienna Ice Vodka, RTD on the basis of 12. 77% v/v alcohol against the Appellant’s product alcohol content of 6% v/v or below.ii.That the Respondent erred by calculating Excise Duty at Kshs. 253/265. 50 per litre against the correct rate of Kshs. 110. 62/116. 10 per litre used by the Appellant based on the alcohol content of the product manufactured.iii.That the Respondent erred by computing taxes based on the total stamps activated in the EGMS system.iv.That the Respondent did not review the reconciliations provided by the Appellant for the stamps activated, the sales made and the unsold stocks.v.That the Respondent erred by not making reference to the independent quality reports from KEBS, a Government Agency mandated to ensure the products quality conform to what is on the label.vi.That the Respondent erred by ignoring the Quality Release Forms provided by the Company showing all details of the product including the alcohol content on a daily basis.vii.That the Respondent erred in demanding additional taxes that were neither charged nor collected by the Appellant as there was no basis for additional charge or collection.

19. The Appellant maintained that it had always been tax compliant and had no intention to evade taxes and that it was cooperative in providing all documents and explanations to the Respondent for purposes of the review.

20. It averred that the Respondent had always treated the Appellant with a cavalier attitude and had failed to accord it the right and opportunity to challenge the one-sided laboratory results from sample which may as well have been obtained from competitors or tampered with and contaminated by the Respondent and/or its agents and associates with a view to making unreasonable and unlawful tax demands with the sole intention of driving the Appellant out of market.

21. It was the Appellant’s opinion that the issues for determination in this Appeal were:a.Whether the Appellant was accorded fair administrative action by the Respondent’s action of covertly obtaining samples from the market without involving the Appellant.b.Whether the Respondent erred by going to the Market that is full of counterfeit products which can be construed as a fishing expedition instead of drawing samples from the production line of the Appellant.

22. The Appellant averred that Article 47 of the Constitution of Kenya, 2010 (the Constitution) as read together with Section 4 of the Fair Administrative Action Act stipulates that every person is entitled to administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair. That a decision to impose Domestic Excise Duty and VAT is a tax decision within the meaning of Section 31(8) of the TPA.

23. That in Vivo Energy vs Commissioner of Customs & Border Control Nbi HC JR No 346 of 2019, the court held that where the Commissioner had failed to make a decision in the manner and within the timelines stipulated by the law, his subsequent decision to demand taxes appurtenant to that decision was unlawful, irrational and procedurally unfair.

24. That in the present Appeal it was the Appellant’s submission that the decision was made in flagrant disregard of the procedural fairness the Appellant is entitled to as a taxpayer. The decision of the Respondent to draw samples from the market without involving and in absence of the Appellant was a gross abuse of administrative power and this Tribunal should not allow the Respondent to get away with it.

25. The Appellant then dealt with the question of whether the Respondent erred by disregarding the test results of an independent Government Agency, KEBS, mandated with quality assurance of products.

26. It averred that the mandate of standardization, metrology and conformity assessment services through promotion of standardization in commerce and industry, provision of testing and calibration facilities, control of the use of standardization marks, product quality assurance, inter alia, lies with the KEBS established under Section 3 of the Standards Act, Chapter 496 of the Laws of Kenya and not with the Respondent.

27. It stated that once products have been tested and certified as compliant with the standards set by the KEBS, no other person or body can render them as non-conforming without reference to the Bureau. That to do so would be arbitrary. It added that the Appellant is entitled to equal protection and equal benefit of the law as enshrined in Article 27(1) of the Constitution, 2010. That what is right under the Standards Act cannot be rendered null and void at the whims of the Respondent. The Respondent clearly acted arbitrarily and outside its statutory mandate.

28. Regarding the test results of March 2021 which was used to compute taxes, the Appellant stated that it is trite law that laws do not apply retrospectively. That in Kenya Bankers Association vs Kenya Revenue Authority JR Misc. Application No. 510 of 2017, the High Court of Kenya ruled that retrospective imposition of higher Excise Duty on fees for money transfer services charged by financial institutions for the period 1st July, 2018 to 28th September, 2018 was unfair and unreasonable. That the decision by the Respondent to compute taxes retrospectively from July to December 2020 after procedurally testing products alleged to belong to the Appellant in March 2021 was not only irrational but grossly unfair and unreasonable.

29. Regarding the imposition of excise duty, the Appellant insisted that it neither charged nor collected taxes at the rate of Kshs. 253 per litre as its products were within the alcohol threshold of Kshs. 110. 62 excise duty per litre.

30. It stated that the actions of the Respondent amount to harassment and have resorted in the numerous and unjustified closure of the Appellant’s business because the officers of the Respondent had been unhelpful and inconsiderate. To support its arguments, the Appellant relied on the case in Silver Chain Limited vs Commissioner Income Tax & 3 others [2016] eKLR and the case in Mount Kenya Bottlers vs Kenya Revenue Authority [2021] eKLR.

31. The Appellant contended that the Respondent had clearly departed from its statutory responsibility to treat all taxpayers fairly and apply the law evenly. That the intention of the Respondent was not to collect taxes but to frustrate the business of the Appellant for nefarious reasons and outside the confines of the law.

32. The Appellant averred that the vindictive and capricious actions of the Respondent’s officers towards the Appellant had not helped either in collection of taxes or promotion of local business. That the numerous closures and interference with the Appellant’s business is the very reason the Appellant had fallen back in meeting its tax obligations.

33. The Appellant stated that it provided a detailed reconciliation of the quantities produced based on the activated stamps, the quantities sold and the products not sold and remaining stock. That the Respondent disregarded the reconciliation provided and used the quantities as per the activated stamps without taking into consideration the unsold stocks. That it was the norm to adjust for taxes on unsold stocks.

34. The Appellant asserted that the Respondent had never acted in good faith in dealing with the tax affairs of the Appellant. That this was apparent from the malicious, capricious and vindictive manner the officers of the Respondent had acted towards it. It averred that this matter was in the public domain and the Appellant had become the poster boy of the Respondent’s unfairness and uneven application of tax laws in Kenya. That this Tribunal had previously relied on the decision of Righubur Mandal Harihar Mandal vs The State of Bihar AIR 1952 Pat 235.

35. It averred that the Respondent erred and arrived at a wrong conclusion because the assessment of the Appellant’s tax obligation was actuated by malice. The officers of the Respondent did not consider the circumstances or presentations of the Appellant in computing the taxes due.

36. The Appellant urged the Tribunal to exercise its powers under the overriding objective principle and allow this Appeal, strike out the tax assessment made by the Respondent on 30th June, 2021 and award the costs of this Appeal.

The Appellant’s Prayers 37. The Appellant prayed that:a.The Respondent’s amended tax assessment dated 30th June, 2021 be struck out.b.The Respondent through itself, employees and agents be restrained from demanding and or collecting any additional taxes for the period under review from the Appellant.c.The Appellant be granted the right to adduce any further oral or written evidence during the hearing of the Appeal.d.The Appeal be upheld.

Respondent’s Case 38. The Respondent’s case is premised on the hereunder filed documents and proceedings before the Tribunal:i.The Respondent’s Statement of Facts dated 10th September, 2021 and filed on the same date together with the documents attached thereto.ii.The Respondent’s witness statement of Joan Mwangi filed on 25th July, 2022 and admitted in evidence on oath on the 17th August, 2022. iii.The Respondent’s written submissions dated 9th September, 2022 and filed on the same date.

39. The Respondent submitted that it conducted a market surveillance exercise that focused on alcoholic drink by the name Vienna Ice Vodka which is a ready to drink brand, with an alcohol content indicated on the label as 6. 0% v/v.

40. That its officers covertly visited the Appellant’s depots in Naivasha, Nakuru and Muranga and bought samples that were then taken to the Respondent’s Laboratory for testing. It averred that upon testing, the lab results indicated that the actual alcohol content on the samples tested was 12. 77% as opposed to the 6% displayed on the labels.

41. The Respondent stated that on 17th July, 2020, it issued a Public Notice to the effect that spirits, liquors and other spirituous beverages of alcoholic strength exceeding 6% would be charged excise at the rate of Kshs. 253 per litre while those of 6% would be charged at the rate of Kshs. 110. 62.

42. The Respondent submitted that it further established that the volumes declared by the Appellant were different from the expected sales volume based on activated excise stamps, i.e. if one stamp is to be affixed on one 500ml bottle, it would be expected that once 1m stamps have been issued and activated, the company had manufactured 1,000,000 bottles of the brand.

43. It contended that when excise stamps are issued, they have a certain code which is “dormant” until the point when they are affixed to a product upon which “activation” is done. That based on the market surveillance and the lab results findings, the Respondent issued the Appellant with an assessment vide a letter dated 13th April, 2021.

44. The Respondent insisted that in arriving at its objection decision, it reviewed the Appellant’s cash sale receipt for purchases of the samples from one of the Appellant’s depot, lab test analysis and results for two samples tested, quality release forms issued by the Appellant, product label for Vienna Ice and tax invoices issued to various distributors during the period.

45. It stated that the lab results for the two samples tested by the Respondent returned results of 12. 77% and 12. 97% v/v. That the quality release forms provided by the Appellant indicated the alcohol volume to be in the range of 5. 4 to 5. 9% v/v, while the labels affixed on the product indicate the content to be 6% v/v.

46. The Respondent submitted that the samples were bought from the Appellant’s depots located in Naivasha, Nakuru and Muranga. That all the samples had excise stamps affixed on them and whose origin and authenticity were checked using SICPA mobile and found to be within what had been issued to the Appellant.

47. The Respondent stated that the Excise stamps found on the labels had been activated by the Appellant prior to their being affixed to the products. That the Appellant did not demonstrate the possibility of having counterfeit goods being sold from its depots.

48. That further to the foregoing, the Appellant failed to demonstrate the possibility of having Excise stamps issued to it being activated by another user or whether such stamps found on the samples could have been stolen or how they could have in any other way landed in the hands of a counterfeiter.

49. That the Appellant did not seek to reconcile the variances between the volumes per EGMS activation and what was declared. That in light of this, the grounds of objection were thus fully rejected and the assessments confirmed as issued.

50. In response to the Appellant’s contentions, the Respondent submitted that the it duly obtained samples through its officers who covertly disguised themselves as customers, visited the Appellant’s depots and bought the samples without identifying themselves.

51. That in further exercise of its statutory mandate, it proceeded to test the samples which returned alcoholic content of 12% contrary to the 6% shown on the labels. That having established that the alcohol content on the samples tested was higher than 6% the Respondent sought to charge excise duty at the applicable rate of Kshs. 253 per litre as opposed to the Kshs. 110 declared by the Appellant.

52. Regarding stamp activation, the Respondent stated that its actions were premised on the fact that all the stamps activated had been affixed to the bottles and the products sold. That it is an established industry practice that excise stamps are normally affixed at the tail end of the production process, once the caps have been placed on the bottles.

53. That the Appellant provided a reconciliation of the product in terms of opening stock, units produced, what had been sold and closing stock as per its records. That on its part it sought to reconcile the excise stamps issued, what had been activated and the closing stock of the excise stamps.

54. That the Appellant was given an opportunity to engage on the excise stamp reconciliation but was not keen to engage in the reconciliation exercise leaving the Respondent with no option but to exercise its best judgement and deducing that all activated stamps meant that the goods had left the factory and that Excise Duty was payable based on those numbers.

55. The Respondent stated that it obtained the samples from the Appellant’s depots, did the testing at its labs, found a higher alcohol content and proceeded to assess for extra taxes. It averred that the samples were obtained from the Appellant’s depots as per the cash sale receipts obtained.

56. That the Appellant didn’t discharge the burden of proving its allegation that the samples were counterfeits. Further excise stamps affixed on the sampled product were in the range of what had been issued to the Appellant.

57. The Respondent contended that the Appellant could not demonstrate any record of lost stamps which could have landed in the hands of a counterfeiter or demonstrate how anyone else would be able to activate stamps issued to them.

58. Regarding whether the Appellant was accorded fair administrative action by the Respondent’s action of covertly obtaining samples from the market without involving the Appellant, the Respondent stated that these were not proper for adjudication before the Tribunal but are issues to be raised in a Judicial Review or Constitutional Court.

59. That under Section 12 of the Tax Appeals Tribunal Act (TATA) which makes provision for appeals to the Tribunal, provides that a person who disputes the decision of the Commissioner on any matter arising under the provisions of any tax may upon giving notice appeal to the Tribunal. That the issues raised hereinabove were procedural issues whose determination belong to a different forum from what is envisaged under Section 12 of the TATA. To support this argument, the Respondent relied on the decision in the Court of Appeal case of Kenya Revenue Authority & 2 others vs Darasa Investments Limited [2018] eKLR.

60. That notwithstanding the foregoing, it was the Respondent’s submission that the Appellant was accorded fair administrative action in the process of covertly obtaining samples from the market without involving the Appellant. To support its case, the Respondent cited the provisions of Article 47(1) and (2) of the Constitution and Section 4(1), (2) and (3) of the Fair Administrative Action Act.

61. It averred that what the Constitution requires is the notification of the intention to take an action against a person likely to be adversely affected thereby and the reasons for the intended action. That the said reasons, must depend on the peculiar circumstances of each case and it was those peculiar circumstances which ought to be considered which consideration must under Article 47 of the Constitution entail an opportunity to the Applicant to be heard on the circumstances alleged to constitute satisfactory reasons for the taking of the adverse action.

62. That through the witness statement of Joan Mwangi which remained unchallenged and uncontroverted despite rigorous cross examination, the Respondent led evidence of the step by step process duly undertaken in obtaining samples from the market.

63. It was the Respondent’s submission that it accorded the Appellant fair and just treatment by issuance of the Public Notice dated 17th July, 2020 to the public.

64. The Respondent submitted that it would be against the principles of fair administrative action to treat some taxpayers differently by asking some to adjust the alcohol contents and demanding taxes from others who were in the Appellant’s category.

65. That many taxpayers adjusted the alcohol contents of their products and paid the demanded taxes without any objection. As such, it was the Respondent’s submission that it did not have any ill motive but was simply discharging its Constitutional duty.

66. It averred that taking into account the foregoing, and that acting as it did, the Respondent did not violate the Appellant’s right to a fair administrative action contrary to Article 47 of the Constitution. That the administrative actions of the Respondent met the Constitutional test of legality, reasonableness and procedural fairness.

67. The Respondent contended that it did not err by going to the market full of counterfeit products in a fishing expedition as alleged by the Appellant. It insisted that samples were bought from the Appellant’s depots which the Appellant confirmed their existence in Naivasha, Nakuru and Muranga.

68. It averred that drawing of samples from the Appellant’s depot was in effect carrying out the mandate of the Enforcement Division and that the same cannot and ought not to be termed as a fishing expedition. The Respondent added that it did not draw and take samples from the production line in the period under review, as it was interested in products that were already in the market. That this was to ensure fairness in terms of products being offered for sale and their pricing.

69. It was the Respondent’s submission that it had noted that players who had adjusted the alcohol contents of their products were having a very difficult time in competing with those who never adjusted both the alcohol contents and the tax rates. It insisted that it was just discharging its mandate by trying to ensure that all players were equally treated.

70. The Respondent emphasized that using its SICPA devise it was able to confirm that indeed the product in question had legitimate excise stamps. That further test by its Lab test result also confirmed the same. The legitimate excise stamps is a property of the Respondent and is only issued to licensed excise manufacturers. That it further managed to demonstrate to the Appellant during a meeting held on 16th March, 2021 that indeed the products were theirs since the Appellant had declared and activated the same.

71. On whether it disregarded the test results of KEBS, the Respondent stated that on its part it is duly authorized by the law to collect samples from the market as they did and perform lab analysis on them to confirm the alcoholic content for tax purposes. That its lab was well accredited by the Government of Kenya to carry out any lab test within its jurisdiction.

72. Regarding the reasons for not making reference to quality reports from KEBS, the Respondent averred that the samples used by the two agencies were different and the mere fact that the labels used deduced that the products therein had 6% alcohol content does not confirm that indeed its 6%.

73. On the issue of Quality Release Forms provided by the company showing all details of the product including the alcohol content on a daily basis, the Respondent submitted that it had earlier requested for samples from all alcohol manufacturers and were all assumed to have come from their factories.

74. That since all the samples availed met the alcoholic content mark, the Respondent embarked on sourcing its samples from the market, an exercise that cut across the alcohol sector.

75. Regarding whether it erred by using the test results of March 2021 and applying them in computing taxes retrospectively for the period July 2020 to December 2020, it stated that the rationale behind it was the fact that the products sampled had left the factory and were already in the market. That it ignored goods produced and activated between January to March 2021 since they were presumed to be in stocks. The Respondent relied on the provisions of Section 6 and 27 of the Excise Duty Act, 2015 to support its arguments.

Respondent’s Prayers 76. The Respondent prayed that the Tribunal finds that;a.The Respondent’s objection decision dated 30th June 2021 be upheld.b.The Appellant’s Appeal be dismissed with costs to the Respondent.

Issue For Determination 77. The Tribunal respectfully considered the parties' pleadings, documentation, submissions, evidence from the witnesses and authorities and is of the respectful view that the only issue that fell for its determination was: Whether the Respondent was justified in its demand for additional Domestic Excise Duty and VAT on the Appellant’s Vienna Ice Vodka Ready to Drink product.

Analysis And FindingsWhether the Respondent was justified in its demand for additional Domestic Excise Duty and VAT on the Appellant’s Vienna Ice Vodka Ready to Drink product. 78. The dispute arose from the Respondent’s assessment for additional Domestic Excise Duty and VAT based on what the Respondent averred was the actual alcohol content from samples of the Appellant’s product named Vienna Ice Vodka Ready to Drink which it tested and found to have 12. 77% v/v as opposed to the 6% v/v displayed on the labels.

79. It was the Respondent’s submission that it bought the samples from the Appellant’s depots located in Naivasha, Nakuru and Muranga. That all the samples had excise stamps affixed on them and whose origin and authenticity were checked using SICPA mobile and found to be within what had been issued to the Appellant. The Respondent also attached a cash sale receipt to demonstrate that it bought the samples from the Appellant’s outlet.

80. The Appellant on the other hand contended that the Respondent did not indicate the identity of the laboratory where the samples were alleged to have been tested nor the credentials of the chemist or expert who carried out the tests. That the Appellant was not and has never been provided with the authenticated results of the laboratory tests and analysis. The Respondent did not provide an inventory to show where and how the control samples were collected, the parties present during the collection nor an Exhibit Memorandum Form to show how the control samples were labelled, transported or stored before the test and analysis were carried out.

81. That in the absence of authenticated results of the laboratory tests and analysis, it was impossible for the Appellant to trust the integrity of the alleged one-sided laboratory results or expertly respond to the Respondent’s claim and to provide answers without information on the level of contamination of the alleged control samples due to leakages, seepages and evaporation thereof owing to exposure of the alleged control samples to elements.

82. The Tribunal noted from the Respondent’s submission that on 17th July, 2020, it issued a Public Notice to the effect that spirits, liquors and other spirituous beverages of alcoholic strength exceeding 6% v/v would be charged excise at the rate of Kshs. 253 per liter while those of 6% v/v would be charged at the rate of Kshs. 110. 62. This was not disputed by the Appellant in this case.

83. The Appellant’s Vienna Ice Vodka ready to drink with alcoholic content declared of 6% v/v would therefore attract Excise Duty of Kshs. 110. 62 per liter. The Respondent however reassessed the Appellant’s product using the rate Kshs. 253 per liter for the period July to December 2020 on account of the laboratory test results it averred to have conducted from samples collected from the market and found the alcoholic content to be in the range of 12. 77% and 12. 97% v/v, which the Appellant disputed leading to this Appeal.

84. The Appellant had further argued that in its letter of 21st March, 2021, it informed the Respondent that its sales had been adversely affected by counterfeit products and use of fake revenue stamps by unscrupulous traders in the market.

85. During the hearing, the Respondent’s witness explained to the Tribunal how it had taken the samples it tested and how it could identify them to have come from the Appellant. The witness explained that the essence of having the stamp as an identifier was for the Respondent to be able to trace back the source of this product. That they were able to trace the samples back from the market all the way to the source manufacturer in this case the Appellant.

86. On further examination the witness stated that in some instances the bottles with time can become disfigured and therefore cannot give information upon scanning. That tampering with them, or even some water or any liquid touching the stamps, would result in difficulties in scanning and identification of the stamps. The witness added that there was very high chance that the moment the cap is opened it cannot be able to give that information if it is returned to any bottle.

87. The Tribunal notes that the origin of the samples allegedly tested by the Respondent was in itself in dispute. The Appellant’s witness questioned how samples collected in February/March 2021 could still be the ones used for assessments for July to December 2020. The Appellant had further stated that the samples did not provide the details for the batch since such details for the batch would have been checked against the samples retained in the company. Although the Respondent explained that its stamps indicate that they were activated from the Appellant’s end, it was the Tribunal’s view that the issues such as the actual dates of production or batch number were equally important in addition to the stamps findings in order to corroborate the test results by connecting the samples to the Appellant.

88. In the Tribunal’s view, it would have equally been important to get a documented procedure from the Respondent of how samples are ordinarily collected and preserved to avoid disputes in adversarial cases such as the instant one. The procedure should ordinarily have been made known to the Appellant and other manufacturers just like the Public Notice of 17th July, 2020 regarding applicable rates based on the alcoholic content.

89. At this point the Tribunal found it appropriate to cite the observation in Silver Chain Limited vs. Commissioner for Income Tax and 3 others (2016) eKLR where Justice S. J. Chitembwe opined as thus:“The task of collecting taxes should not lead to discouraging taxpayers from carrying on with their businesses. If the taxpayer’s close shop, there will be no taxes to be collected. On the other hand, if no taxes are paid, there will be no funds to run government operations. This calls for a balance between the tax collectors and taxpayers whereby the process becomes inclusive as opposed to being unilateral. There must be fairness in the process of tax assessment.”

90. Regarding stocks reconciliation that was the basis of the assessment, the Respondent confirmed that the Appellant provided a reconciliation of the product in terms of opening stock, units produced, what had been sold and closing stock as per its records. That on its part it sought to reconcile the excise stamps issued, what had been activated and the closing stock of the excise stamps.

91. The Respondent averred that the Appellant was given an opportunity to engage on the excise stamp reconciliation but was not keen to engage in the reconciliation exercise leaving the Respondent with no option but to exercise its best judgement and deducing that all activated stamps meant that the goods had left the factory and that Excise Duty was payable based on those numbers.

92. The Tribunal notes that the parties did not agree on the method of reconciling the stocks produced and sold. While the Appellant provided its reconciliation of the stocks of the product actually sold, the Respondent sought to rely on the stamps activated from their own records. The Tribunal is aware that in any manufacturing establishment where Excisable goods are involved such as the Appellant’s, there is usually a resident officer of the Respondent who ordinarily would also monitor the stocks sold and keep independent records. Curiously, at no point in the proceedings or in the pleadings was the report of this officer provided to corroborate the figures used by the Respondent to assess the taxes on the Appellant.

93. The Tribunal notes that from the point the Respondent decided to test the samples of the Appellant in order to determine the alcoholic content of the same up to the point that they gave the results as per the Memo dated 8th March 2021, in as much as the Respondent alluded to meetings with the Appellant, nothing was placed before the Tribunal to demonstrate the occurrence or the outcome of the said meetings or any involvement of the Appellant in this process. In the circumstances, the Tribunal observes that the Respondent acted unilaterally contrary to the dictates of the law on fair administrative actions.

94. As observed in the aforementioned Silver Chain Limited vs. Commissioner for Income Tax and 3 others (2016) eKLR case, the Respondent’s assessment did not strike any balance to make it inclusive as opposed to being unilateral. The Respondent in this case unilaterally took samples, tested and made conclusions on them, then used its own stamps to reconcile the stocks of the Appellant and finally assessed taxes based on its own findings in total disregard of the reconciliations provided by the Appellant which could have easily been corroborated or otherwise disabused by the Respondent’s own officer based at the Appellant’s premises

95. Regarding the alcoholic content of the Appellant’s product, the Appellant in support of its contention that the RTD Vienna Ice it produces qualifies for Excise Duty at the rate due for products of 6% v/v produced the following documents:i.KEBS laboratory test reports containing the following tested parameters:a.Ethyl alcohol content of 5. 81%b.Arsenic – not detectedc.Copper - not detectedd.Lead - not detectede.Zinc – 0. 62ii.Quality Release Forms from the Appellant’s factory for diverse dates between 3rd September 2020 and 30th December 2020. These release forms contained parameters including but not limited to the brand being tested (being Vienna Ice), visual clarity, odour/flavor, alkalinity, pH, volume and alcohol content all being below 6% v/v.

96. On the other hand, the Respondent, to support its averments that the samples in dispute, purported to have been manufactured by the Appellant, contained alcoholic content higher than what is on the label, produced the following documents:i.Two internal memos:a.one requesting for laboratory analysis of samples of four (4) samples of Vienna Ice (two (2) from Murang’a and (2) from Naivasha).b.the second one indicating that the sample tested was found to be an alcoholic beverage of an alcoholic strength by volume of 12. 77 %.ii.A cash sale receipt with the heading “KEROCHE BREWERIES LIMITED” dated 10th February 2021. The cash sale receipt was not supported by an ETR receipt or any other feature to link it to the Appellant.

97. In regard to the aforesaid internal memo, provided by the Respondent, the Tribunal noted that the Memo as presented was not supported by a laboratory result “document” to confirm the parameters declared in the said Memo.

98. The Tribunal noted that in its submissions, the Appellant had challenged the source of the samples presented by the Respondent to support its assessment indicating that some of the outlets/ depots that sell its products belong to third parties. In this regard, the Appellant argued that it could not tell whether the products belong to it or was a counterfeit.

99. Further, the Tribunal observed that at no point did the Respondent challenge the authenticity of the KEBS laboratory tests results and Quality Release Forms that the Appellant submitted in support of its contention.

100. The Tribunal wishes to at this point rely on the finding in the case of Cape Brandy Syndicate vs Inland Revenue Commissioners (1920) 1KB as applied in TM Bell V Commissioner of Income Tax (1960) EALR 224 where Roland J held as follows:“….If a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the law the case may otherwise appear to be…” (Emphasis added)

101. Consequently, the Tribunal finds that the Respondent did not justify either in law or otherwise its demand for additional Domestic Excise Duty and VAT on the Appellant.

Final Decision 102. In view of the foregoing analysis, the Tribunal finds the Appeal to be merited and accordingly proceeds to make the following Orders: -i.The Appeal be and is hereby allowed.ii.The Respondent’s Objection decision dated 30th June, 2021 be and is hereby set aside.iii.Each party to bear its own costs.

103. It is so ordered

DATED AND DELIVERED AT NAIROBI THIS 17TH DAY OF MARCH, 2023. ……………………………………………………ERIC N. WAFULACHAIRMAN……………………………………………………CYNTHIA B. MAYAKAMEMBER……………………………………………………GRACE MUKUHAMEMBER……………………………………………………JEPHTHAH NJAGIMEMBER……………………………………………………ABRAHAM K. KIPROTICHMEMBER……………………………………………………