The High Court has overturned a ruling by the Tax Appeals Tribunal, siding with the Kenya Revenue Authority (KRA) in a dispute over whether packaging bottles used by London Distillers Ltd qualify as raw materials under the Excise Duty Act.
- •The ruling delivered by Justice Julius Kipkosgei Ng’arng’ar held that bottles used to package alcoholic beverages cannot be considered raw materials eligible for excise duty relief.
- •The decision sets aside an earlier ruling by the Tribunal that had favored the distiller, effectively reinstating the KSh 15.7 million tax demand initially raised by the Commissioner of Domestic Taxes.
- •KRA argued that provisions for excise duty relief only apply on materials that are incorporated into or transformed into the final excisable product.
“It is my view that interpreting “raw material” to include packaging materials would be to expand the scope of Section 14(1) beyond its plain meaning and the apparent legislative intent, potentially creating a new category of relief not explicitly provided for,” the court ruled.
Section 14(1) of the Excise Duty Act allows licensed manufacturers to offset excise duty paid on goods used as raw materials in producing other excisable goods.
According to the tax agency, while bottles are essential for marketing, distribution, and sales, they do not alter or form part of the composition of the alcoholic beverage and therefore fall outside the scope of raw materials as envisaged by the Act. The authority also warned against expansive interpretations that would undermine tax statutes.
London Distillers countered that bottles are essential to the manufacturing process and should be treated as qualifying inputs. The distiller argued that excluding such packaging materials from the definition of raw materials contradicted the commercial realities of production and international best practices.
In determining the appeal, the court emphasized the ordinary meaning of “raw materials” as substances that are transformed into or become part of the final product.
Justice Ng’arng’ar rejected the Tribunal’s finding of statutory ambiguity and maintained that bottles do not satisfy this definition. The court also noted that while bottles play an essential role in commercializing the product, they are not incorporated into the chemical or physical makeup of the alcoholic beverage itself.
The Double Taxation Question
The distiller had further contended that taxing both the bottles at import and the final product at sale amounted to double taxation.
Though the judge acknowledged the business rationale behind the double taxation argument, he concluded that such commercial concerns do not justify broadening the statutory meaning of raw materials.
“The costs associated with packaging are appropriately dealt with under income tax provisions as allowable deductions,” the court documents stated.
London Distillers is renowned for the production of liquor including Safari Vodka, Napoleon Brandy, and Kenya King.
