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Summary

The Tax Appeals Tribunal (TAT) ruled that preforms used in the manufacture of nonalcoholic beverage packaging bottles should be classified as raw materials eligible for excise duty relief. This was in a case involving Kenafric Industries Limited (the Appellant) in a dispute with the Kenya Revenue Authority (KRA).

Background

The Appellant manufactures and trades in nonalcoholic beverages under the Excise Duty Act, 2015 (EDA), including bottled water, carbonated soft drinks and energy drinks. The Appellant also uses plastic bottles as the primary packaging material for its products. The Appellant manufactured the bottles using preforms that are either imported or sourced locally. Preforms are excisable goods that are subject to 10% excise duty on the value of the preforms.

Section 14 (1) of the EDA allows for relief on excise duty paid on raw materials that are used in the manufacture of other excisable goods (finished goods). The excise duty paid on raw materials is offset against the excise duty paid on finished goods.

The KRA conducted a review of the Appellant's excise duty declarations and issued an assessment for the payment of additional excise duty on the basis that the Appellant had claimed non-qualifying input excise duty on packaging materials. It was KRA's view that packaging materials were not raw materials in the manufacture of excisable goods in the context of section 14 of the EDA.

The Appellant argued that preforms undergo significant transformation during production and should be considered as qualifying raw materials. The KRA contended that because preforms are used for packaging they do not fundamentally affect the composition or quality of the final consumable product and are thus not eligible for excise duty relief.

The Appellant argued that, unlike a past similar case that decided the eligibility of excise duty relief on packaging materials, the present case involves the process of transforming preforms into packaging material for the nonalcoholic beverages and thus amounts to manufacturing.

Analysis and determination

The TAT examined the interpretation and application of the relevant legal provision, considered the manufacturing process and concluded that preforms are part of the production chain and serve as necessary raw materials for manufacturing the finished bottled products.

Based on this premise, the TAT ruled that the KRA was not justified in disallowing the Appellant's deduction of input excise duty paid against output excise duty on preforms used in the manufacture of plastic bottles for the packaging of the beverages.

Implications

The decision by the TAT is important for manufacturers that utilize intermediate goods such as preforms in their production processes. One of the definitions of "manufacture" as per the EDA is "any intermediate or uncompleted process in the production of excisable goods."