Packaging Materials Excluded from Excise Duty Relief

Case Study: Commissioner of Domestic Taxes v London Distillers (K) Limited (Income Tax Appeal E097 of 2024) [2025] KEHC 11286 (KLR) (Commercial & Admiralty) (30 July 2025) (Judgment)

Background of the Dispute

The case originated from a demand by KRA for KShs. 15,712,051 in prepaid excise duty on purchases from London Distillers (K) Limited. London Distillers objected, arguing that the bottles used in their manufacturing process are essential inputs and should be considered raw materials, thus qualifying for excise duty offset under Section 14(1) of the Excise Duty Act.

The Tax Appeal Tribunal had previously sided with London Distillers on March 8, 2024, allowing their appeal and setting aside the tax demand. Dissatisfied with this decision, KRA appealed to the High Court.

KRA’s Arguments

The Tribunal erred in law by:

• Creating an ambiguity in Section 14(1) of the Excise Duty Act regarding the meaning of “raw materials,” where none exists.
• Failing to apply the ordinary meaning of “raw material” and the strict interpretation rules of tax statutes.
• Wrongly concluding that packaging materials (bottles) are raw materials for alcoholic beverages, as they do not affect the composition or state of the final product.
• Failing to acknowledge that costs related to packaging materials are allowable deductions under the Income Tax Act, not eligible for excise duty relief under Section 14(1) of the Excise Duty Act.
• Disregarding previous higher court decisions on packaging materials not being raw materials in manufacturing.

London Distillers’ Response

London Distillers maintained that bottles are “essential inputs” for their manufacturing process, crucial for identification, portability, presentation, sales, marketing, and distribution. They contended that KRA’s definition of raw materials was too narrow and inconsistent with international manufacturing practices. They also argued that excluding bottles from the definition would lead to double taxation—once on the imported or manufactured bottles and again on the final alcoholic beverage that incorporates the bottle’s cost. They advocated for a “purposive interpretation” of the statute to avoid such an outcome.

High Court’s Analysis and Decision

The High Court focused on the interpretation of Section 14(1) of the Excise Duty Act, which states that excise duty paid on excisable goods “used as raw materials in the manufacture of other excisable goods” can be offset.

The Court found that:

• The Excise Duty Act does not define “raw materials,” but its ordinary meaning in manufacturing refers to substances that undergo transformation or are incorporated into the final product’s composition.
• Bottles, while essential for packaging and commercialization, do not become an integral part of the alcoholic beverage’s composition. The beverage remains an alcoholic beverage regardless of its container.
• The phrase “used as a raw material” implies incorporation or transformation, which bottles do not undergo in relation to the alcoholic beverage itself.
• Parliament’s specific choice of “raw material” suggests a narrower scope, focusing on direct compositional inputs, rather than broader terms like “inputs” or “components.”
• The Court disagreed with the Tribunal’s finding of ambiguity in Section 14(1). The absence of an exhaustive definition does not create ambiguity in the ordinary understanding of “raw material.”
• Regarding the double taxation argument, the Court clarified that excise duty is levied on distinct excisable goods. While the cost of bottles might be reflected in the final product’s price, this does not automatically trigger a cascading excise duty scenario that Section 14(1) aims to prevent. The Court reiterated that packaging costs are typically handled as allowable deductions under income tax laws.

Conclusion

Based on its analysis, the High Court concluded that interpreting “raw material” to include packaging materials would expand the scope of Section 14(1) beyond its plain meaning and legislative intent. Such an expansion, if deemed necessary, is a matter for the legislature, not the courts.

Therefore, the High Court issued the following orders:

• The appeal by the Commissioner of Domestic Taxes(KRA) allowed.
• The Judgment of the Tax Appeals Tribunal delivered on March 8, 2024, is set aside in its entirety.

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