[2024] KETAT 347 (KLR)

London Distillers (K) Limited v Commissioner of Legal Services and Board Coordination (Tax Appeal 10126 of 2022) [2024] KETAT 347 (KLR) (8 March 2024) (Judgment)

Neutral citation: [2024] KETAT 347 (KLR)

Republic of Kenya

In the Tax Appeal Tribunal

Tax Appeal 10126 of 2022

E.N Wafula, Chair, RO Oluoch, AK Kiprotich, Cynthia B. Mayaka & T Vikiru, Members

March 8, 2024

Between

London Distillers (K) Limited

Appellant

and

Commissioner of Legal Services and Board Coordination

Respondent

Judgment

Background 1. The Appellant is a limited liability company incorporated in Kenya whose principal business activity is the manufacture, marketing and sale of alcoholic beverages.

2. The Respondent is a principal officer appointed under Section 13 of the Kenya Revenue Authority Act. The Kenya Revenue Authority is an agency of the Government of Kenya mandated with the duty of collection and receipting of all tax revenue, and the administration and enforcement of all tax laws set out in Parts 1& 2 of the First Schedule to the Act, for purposes of assessing, collecting, and accounting for all tax revenues in accordance with those laws.

3. The dispute arose as a result of the Respondent disallowing the Appellant’s input deduction of Excise duty paid on bottles used in the manufacture of its alcoholic beverages.

4. In a letter dated 27th June 2022, the Respondent demanded Prepaid Excise duty claimed on purchases amounting to KShs 15,712,051. 00 after it conducted a desktop review.

5. The Appellant objected to the tax demand and assessment in a letter dated 13th July 2022. The Appellant’s objection was two-fold:i.It objected against KShs 11,130,274. 00 being Excise duty relief claimed under Section 14(1) of Excise Duty Act (“EDA”); andii.It also objected to the demand of KShs 4,581,777. 00 on account of applying the old Excise duty rate in November 2019.

6. The Respondent issued it Objection decision on 5th August 2022 upholding the assessment in the sum of Kshs.15,712,051. 00.

7. The Appellant, aggrieved by the Respondent’s decision, filed a Notice of Appeal to the Tribunal on 2nd September 2022.

The Appeal 8. The Appellant’s Memorandum of Appeal which was filed on 19th September 2022 has set out the following grounds of Appeal, that:i.The bottles are essential inputs for the Appellant’s manufacturing process and formation of its final product;ii.The Respondent has adopted a definition of raw materials that is narrow, unreasonable and not in line with international best practice.iii.The Respondent’s definition of raw materials to exclude bottles used in the manufacture of the Appellant’s products is narrow, unreasonable and contrary to the internationally accepted standards; andiv.The applicable Excise duty rate applicable between 1st and 6th November 2019 was KShs 221. 24 per litre.

The Appellants Case 9. The Appellant has founded its appeal on the Statement of Facts filed on 19th September 2022 and dated 2nd September 2022 and written submissions dated and filed on 22nd March 2023.

10. The Appellant stated that it claimed relief on prepaid Excise duty on imported bottles in its Excise returns in May, July and August 2020, on the basis that these constituted inputs in the manufacture of its products as per Section 14(1) of the Excise Duty Act.

11. That the prepaid Excise duty amounted to KShs 11,130,274. 00 broken down as follows:i.May 2022 – KShs 4,498,640. 00,ii.July 2020 – KShs 4,261,171. 00iii.August 2020 – KShs 2,370,463. 00.

12. That there was a further assessment of KShs 4,581,777. 00 in relation to the old rate of Excise duty rate in the November 2019 Excise returns.

13. That the assessment of Kshs 4,581,777. 00 arose as a result of the Finance Act, 2019, which was gazetted on 7th November 2019 and increased the Excise duty rate on portable spirit from Kshs 221. 24 per litre to Kshs 253. 00 per litre with effect on 7th November 2019.

14. The Appellant posited that it had reached an understanding with the Respondent that the application of the new rate would be effective from 7th November 2019 as contained in the Finance Act.

15. The Appellant submitted that the position taken by the Respondent to exclude imported bottles used as essential inputs for the manufacture of its products from the definition of raw materials was inherently wrong and inconsistent with the business practice of manufacturing.

16. It was its view, that it is a well-established manufacturing practice to classify raw materials into two main categories; namely direct and indirect raw materials. That direct materials are those materials that form the essential characteristics of the manufactured product and are therefore physically traceable in it, whereas indirect raw materials are the raw materials and inputs essential for the process of manufacturing but do not physically form the essential character of the product or are physically traceable in it.

17. The Appellant stated that its bottles are used in its production line to facilitate identification by labelling, portability, presentation, sales, market distribution and consumption of its products. That as such they are critical and essential raw materials in the production process and must be classified as such.

18. The Appellant was of the view, that only a narrow and mechanical interpretation of Section 14(1) of the Excise Duty Act would exclude bottles from the definition of raw materials. That a progressive and dynamic interpretation of raw materials in line with the industry practice would be consistent with the spirit of Article 259(3) of the Constitution of Kenya.

19. The Appellant relied on the case of Mackenzie Maritime (K) Limited-v-Commissioner of Customs and Border Control [TAT No. 263 of 2021] where it stated that the TAT had discouraged mechanical interpretation of the law.

20. The Appellant submitted that the Respondent’s definition of raw materials as “the basic material from which a product is made or materials that are in their natural state.” is wrong and erroneous because products like molasses are directly used as raw material in the manufacture of alcoholic, products and yet molasses is not a product in its natural state. It also gave examples of other products like table sugar which are manufactured or finished products that are used as raw materials in the manufacture of other finished products.

21. The Appellant stated that the Respondent defined raw material in its Statement of Facts dated 24th November 2022 as:“input goods or inventory that a company needs to manufacture its products” and “natural unfinished materials or natural resources used to produce or manufacture finished goods for sale”.

22. In the Appellant’s opinion, this definition implied that raw material can be unfinished, in its natural state, as a a natural resource or a fully finished product.

23. The Appellant submitted that the bottles which are used as the packaging materials are essential in its manufacturing process to help it complete the formation of the product.

24. The Appellant faulted the Respondent’s argument that its product is complete and ready for consumption even without the packaging material by stating that the product can neither be identified nor consumed without the bottles. That the finished product can only be in a consumable state upon combination of the product and the bottle.

25. It concluded its argument under this issue by asserting that the Appellant’s submission that the essence of Section 14(1) of the Excise Duty Act was to prevent double taxation so that Excise duty paid on goods used in the manufacturing of other excisable goods is recoverable from Excise Duty payable on the final product.

26. The Appellant proffered that the new rate was applicable upon the date of assent which was 7th November 2019. That the Respondent's demand for Excise duty at the new rate for November 2019 before the commencement date of the Gazette Notice was illegal.

27. The Appellant submitted that it applied the old rate between 1st and 6th November 2023 and thereafter commenced the application of the new rate on the 7th November 2019. That the Respondent’s decision to apply the new rate before the effective date was unlawful.

Appellant’s Prayers 28. The Appellant’s prayers are is for the Tribunal to find that:i.The bottles are essential inputs for the Appellant’s manufacturing process and the formation of the final product.ii.The bottles are classified as indirect raw materials in line with manufacturing business practice under Section 14(1) of the EDA.iii.The applicable rate of Excise duty between 1st and 6th November 2019 was Kshs 221. 4 and not Kshs 253 per litre.iv.The application of the new Excise duty rate commenced on the 7th of November 2019. v.The Appeal be allowed with costs.

Respondent’s Case 29. The Respondent set out its response to the Appellant‘s case its Statement of Facts which was dated and filed on 24th November 2022 together with documents attached thereto, and, written submissions dated 4th April 2023.

30. The Respondent was of the view that the Appellant’s packaging materials are not raw materials used to manufacture excisable goods and therefore Excise duty paid thereon does not qualify for relief under Section 14(1) of the EDA.

31. The Respondent submitted that raw materials in their ordinary meaning are the input goods or inventory that a company needs to manufacture its products. It added that it may also include unfinished materials or natural resources used to produce or manufacture finished goods for sale.

32. The Respondent submitted that the manufacture of alcoholic beverages is a multi-stage process which involves the mixing of various inputs to arrive at the final product ready for consumption. That packaging cannot be construed to be raw materials in the manufacturing process unless it is demonstrated how the same is used in the value chain other than for storage purposes.

33. The Respondent submitted that to constitute a raw material used for the manufacture of the final product, the material must be an essential ingredient of the final product that ultimately affects the composition or state of the final product. That in the absence of the stated raw material in the manufacturing process, the final product cannot be attained in its desired form and ultimately consumed or used in the completed form.

34. The Respondent submitted that the Excise Duty Act defines “manufacture” to mean:i.The production of excisable goods;ii.Any intermediate or uncompleted process in the production of excisable goods; oriii.The distilling, rectifying, compounding, or denaturing of spirits

35. According to the Respondent, for a raw material to be construed as a material in the manufacturing process, it must either be used:i.In the production of excisable goods;ii.In any intermediate or uncompleted process in the production of excisable goods; oriii.In the distilling, rectifying, compounding, or denaturing of spirits.

36. The Respondent stated that for an item to be considered a raw material then it ought to go into the composition of the final product. That packaging materials do not go into the composition or state of the Appellant's finished product as they are only used as a storage facility once the manufacturing process is complete.

37. It was the Respondent’s view that the Appellant’s finished product can be ultimately consumed/used as desired by the manufacturer even in the absence of the storage or packaging materials. That in any case, the packaging is a storage mechanism that happens way after the manufacturing process is complete and has no nexus with raw materials used in the manufacturing process. It supported its argument with the case of Mjengo Limited-vs-Commissioner of Domestic Tax [2016]

38. The Respondent posited that the Appellant had misdirected itself based on the assessment by introducing the alleged use of the wrong Excise duty rate. That its assessment and Objection decision was based on Excise duty claims made under Section 14(1) of the Excise Duty Act.

39. The Respondent asserted that the assessment solely relates to the claim of Excise duty on raw materials. In any event, the Respondent submitted that the Appellant has not presented any evidence to demonstrate that the Excise duty rate it applied between 1st and 6th November 2019 was the prevailing rate relating to the tax point for determining the liability for Excise duty as per Section 6 of Excise Duty Act.

40. The Respondent further asserted that the Appellant did not provide any records under Section 34 of the EDA to demonstrate the point of liability for Excise duty or adduce any evidence before the Tribunal to support its contention.

41. The Respondent further averred that the Appellant had not discharged its burden of proof under Section 56 of the Tax Procedures Act, Section 30 of the Tax Appeals Tribunal Act and Section 107 of the Evidence Act.

Respondent’s Prayers 42. The Respondent’s prayers before the Tribunal were for orders that:-i.The Appeal be dismissed with costsii.The confirmed assessment amounting to Kshs 15,712,051. 00 vide objection decision dated 5th August 202 be upheld.

Issues For Determination 43. The Tribunal having considered the filings and submissions by the parties is of the view that the Appeal herein distils into two issues for determination, namely;-i.Whether the Appellant was justified in claiming Excise Duty relief on imported bottles?ii.Whether the Appellant’s assessment was based on an erroneous Excise Duty rate?

Analysis And Findings 44. The Tribunal shall now proceed to analyse the identified issues for determination as follows:

i. Whether the Appellant was justified in claiming Excise Duty relief on imported bottles? 45. The crux of this dispute was whether the bottle that is used by the Appellant to package its alcoholic beverage was a raw material used to manufacture excisable goods and therefore capable of qualifying for relief under Section 14(1) of the Excise Duty Act.

46. The Appellant submitted that the bottle in issue is a crucial input in the manufacture of its products and that bottles are used in the production line to facilitate identification by labelling, portability, presentation, sales, market distribution and consumption of its products. That as such, they are critical and essential raw materials in the production process and must be classified as such.

47. The Appellant was also of the view that finished products in their natural state like molasses or sugar can also be used as raw materials in manufacturing. That such products qualify as raw materials qualifying for relief under Section 14(1) of the Excise Duty Act. That any other interpretation would result in double taxation on the bottle and the finished product contrary to the intention of Section 14(1) of the Excise Duty Act.

48. The Respondent, on its part, reiterated that packaging materials are not raw materials, unfinished products or natural resources used to manufacture excisable goods and therefore Excise duty paid thereon does not qualify for relief under Section 14(1) of the EDA.

49. The Respondent submitted that the manufacture of alcoholic beverages is a multi-stage process which involves the mixing of various inputs to arrive at the final product ready for consumption. That packaging cannot be construed to be raw materials in the manufacturing process unless it is demonstrated how the same is used in the value chain other than for storage purposes.

50. Section 14(1) of the Excise Duty Act provides as follows regarding relief for raw materials.“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.”

51. The hinging provision of Section 14(1) of the Excise Duty Act is that a manufacturer is allowed to offset the cost of the raw materials that it applied in its manufacturing process against the Excise duty payable on the finished goods. It is the relief that is offered against raw materials used in the manufacture of finished goods that has precipitated this dispute.

52. The determination of this dispute therefore lies on the answer to whether the bottle used by the Appellant for the manufacture of its alcoholic beverage is a raw material. Indeed both parties have not agreed on whether the bottles in question constitute raw materials.

53. Section 2 of the Excise Duty Act has not defined the term raw materials. The parties did not also share any case law that has defined this term with the Tribunal. Considering the settled dicta that tax legislation must be construed strictly without implication or intendment, the Tribunal shall decline the invitation that this Appeal has offered it to imply, construe or impute the intention of the legislature and what it meant by the term ‘raw materials’ under Section 14(1) of the Excise Duty Act.

54. This position was restated by the Court of Appeal in Commissioner of Domestic Taxes (Large Taxpayers Officers) v Barclays Bank of Kenya Ltd NRB CA Civil Appeal No. 195 of 2017 [2020] eKLR where the court stated as thus:-“There is no doubt in our minds that the decisions in Adamson v Attorney General [1933] AC 247, Cape Brandy Syndicate v. Inland Revenue Commissioners [1920] 1 KB 64, T. M. Bell v. Commissioner of Income Tax [1960] EA 224, Republic v. Commissioner of Income Tax ex parte SDV Transami [2005] eKLR and the first judgment represent a correct statement of the law, namely strict construction of tax legislation, so that the tax demand must fall within the terms of the statute without ambiguity. If there’s any ambiguity in the legislation, it is not to be rectified by considerations of intendment, but by amending the legislation.”

55. The Tribunal cannot, therefore, prescribe or dictate what Parliament had intended to include under the definition of the term ‘raw materials’ If it intended to allow for such a wide or narrow definition of this term then the statute would have specifically stated so. As stated earlier, nothing is to be read in or implied in tax law and a strict constructionist interpretation must be adopted until such time that Parliament intervenes and defines the extent or limit of what constitutes raw materials in the manufacturing process.

56. Given this ambiguity, the Tribunal has adopted the settled practice that tax statutes should be interpreted contra fiscum which provides that any ambiguity in the statute must be resolved in the taxpayer's favour. This position has been approved in a plethora of cases including Mount Kenya Bottlers Ltd & 3 others v Attorney General & 3 others [2019] eKLR, where the Court of Appeal stated as follows:“The norm is that a taxing legislation must be construed with perfect strictness whether or not such construction is against the State or against the person sought to be taxed. If however there is any real ambiguity in a taxing Act, such ambiguity may be resolved in favour of the taxpayer, or, as it is sometimes stated: contra fiscum.”

57. The Tribunal therefore finds that the ambiguities in the law meant that the provisions of Section 14(1) of the Excise Duty Act had to be interpreted in favour of the Appellant. Meaning that the Appellant was justified to offset the duty paid on its finished product from the Excise duty paid on the raw materials. The Respondent therefore erred by disallowing the Appellant’s claim of relief on the packaging materials as per Section 14(1) of the Excise Duty Act.

ii. Whether the Appellant’s assessment was based on an erroneous Excise Duty rate? 58. The question before the Tribunal under this head is a determination of the effective date of when the increased Excise duty rate in the Finance Act 2019 would come into operation.

59. The Appellant held the view that the effective date was 7th November 2019. The Respondent held the view that it came into operation on 1st November 2019 and hence the reason for its tax demand of Kshs 4,581,777. 00 being tax due between 1st to the 6th November 2019.

60. The Tribunal has gleaned through the Finance Act, 2019 and has confirmed that the date of its assent was 7th November 2019. Section 1 of the Finance Act, 2019 provided as follows regarding the commencement date of the Act:“This Act may be cited as the Finance Act, 2019, and shall come into operation, or be deemed to have come into operation, as follows —(a)sections 7, 8, 10, 14 and 49, on the 1st January,2020; and(b)all other sections, on the assent.”

61. The increased Excise duty rates were contained in Section 26 of the Finance Act, 2019. A plain reading of this legislation makes it clear that Section 26 was to come into operation on the 7th of November 2019.

62. The Finance Act, 2019, did not provide for a retrospective application of Section 26. This meant that the increased Excise duty under dispute kicked in on the 7th of November 2019, and not a day earlier as asserted by the Respondent.

63. The Respondent’s assessment of increased duty rates for the periods between 1st to 6th November 2019 was thus erroneous.

Final Decision 64. The upshot of the above is that the Appeal is merited and the Tribunal accordingly proceeds to make the following final Orders:-a.The Appeal be and is hereby allowedb.The Respondent’s Objection decision dated 5th August 2022 is hereby set aside; andc.Each party to bear its own cost.

65. It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 8TH DAY OF MARCH, 2024ERIC NYONGESA WAFULA - CHAIRMANDR. RODNEY O. OLUOCH - MEMBER.ABRAHAM K. KIPROTICH - MEMBER.CYNTHIA B. MAYAKA - MEMBER.TIMOTHY B. VIKIRU- MEMBER.