Executive summary

The Tax Appeals TAT (TAT) ruled in favor of Buyline Industries Limited (the Appellant) in a dispute against the Kenya Revenue Authority (KRA) regarding the treatment of packaging materials (glass bottles, labels and plastic caps) used in the manufacture of beauty and personal care products.

The TAT set aside KRA's assessment of 8,300,174 Kenya Shillings (KES) relating to excise duty claimed by the Appellant on packaging materials.

Background

The Appellant manufactures and trades in beauty and personal care products. The Appellant uses imported as well as local glass bottles, labels and plastic caps as packaging materials for its products. The packaging materials are subject to excise duty which the Appellant pays to the suppliers.

Section 14(1) of the Excise Duty Act, 2015 (EDA) allows for relief on excise duty paid on raw materials used in the manufacture of excisable goods. The manufacturer is allowed to offset input excise duty against output excise duty when determining excise duty payable to the KRA.

The KRA conducted a review of the Appellant's excise duty declarations and issued an assessment demanding additional tax, arguing that packaging materials were not raw materials in the manufacture of excisable goods. It was KRA's contention that although packaging materials may be essential at the end of the processing of the product, they are not used in the manufacturing process, as the process would still be complete even in the absence of the packaging materials.

Facts of the case

The core dispute centered on whether packaging materials (glass bottles, labels and plastic caps) should be classified as raw materials eligible for excise duty relief.

The Appellant argued that packaging materials are integral to their products and should be considered raw materials because the products would be incomplete and unusable without them. The Appellant also noted that labels contain mandatory statutory and regulatory requirements without which products cannot be approved for sale.

The KRA held that packaging materials do not qualify as raw materials because they are not used in the manufacturing process and the process would be complete without them.

Analysis and determination

The TAT's analysis focused on the interpretation of key provisions in the EDA and established legal principles. The EDA does not define the term "raw materials," while the definition of the term "manufacture" is broad and encompasses the production of excisable goods.

The TAT applied the settled legal principle that tax laws must be interpreted strictly according to legislative intent, and any ambiguity should be resolved in favor of the taxpayer. Given the EDA's lack of definition of the term "raw materials," the ambiguity worked in favor of the Appellant.

The TAT also considered that the disputed packaging materials were integral to the Appellant's products, without which the products would not be finished or suitable for distribution. In reaching its decision, the TAT referenced its previous ruling in a similar case involving a manufacturer of excisable goods that addressed similar issues. (For more information on the previous ruling, see EY Global Tax Alert, Kenya Tax Appeals Tribunal rules on excise duty relief for packaging preforms, dated 24 September 2024.)

The TAT's ruling in Buyline Industries was, however, a departure from an earlier case in which the TAT had ruled that imported roll-on packaging glass bottles did not qualify as raw materials in the context of manufacture of excisable goods.

Implications

The decision is significant for manufacturers of excisable goods who use packaging materials in the production process. It establishes that packaging materials can qualify for excise duty relief when they are integral to the finished product.