BACKGROUND OF THE TAX DISPUTE
Keroche Industries applied for a licence to the Customs Department to manufacture wines between on or about 1996-1997 and a licence was granted which licence classified the Applicants products under Tariff Heading 22.04.
KRA’s CASE
The KRA in their case, state that the licence granted to Keroche Breweries did not include other products such as spirits, fruit juices or opaque beers that Keroche had admittedly been manufacturing and that for any such manufacture of the other products, Keroche needed to seek recognition or formal permission from the Commissioner of Customs and Excise Duty and have the licence extended or amended to cover the other products that are not wines.
Initially, according to KRA, Keroche Breweries in its application for a license only disclosed that it would be manufacturing grape based wines, which was not the case and at the same time it applied for licenses from the Municipal Council of Naivasha and the Kenya Bureau of Standards disclosing to them that it was producing three main products namely: Vienna Special Alcoholic drink, Vienna Special & Cheers wine and that all these products were not wines except cheers wine which was also not grape based. This information was not disclosed to the KRA during the licence application although it was well within the knowledge of Keroche Breweries when they applied for the initial licence.
The KRA argued that alcoholic drinks are cereal based spirits and opaque beer and have nothing to do with grapes and cannot therefore be classified under tariff 22.04 for tax purposes as they fall under tariff 22.06.
The KRA contended that as per section 90, of Excise & Customs Act (now repealed), no person can manufacture excisable goods unless he is licensed by the Commissioner of Customs and Excise duty and that an application for a licence was made sometimes by Keroche in May 1996 and was issued in December 1996.
The KRA state that because of the dispute on tariff, they sought for technical analysis from the Customs Laboratory for clarification and on 23rd February 2006. The Customs Laboratory confirmed that Keroche’s products were based on pineapple juice classifiable under tariff head of other fermented beverages, which is 22.06 and not tariff head 22.04 of wines which are based on fresh grapes or grape must. KRA confirmed the use of pineapple juice on the brewer’s products at a visit to their factory at Naivasha on 14th March 2006.
KEROCHE’S CONTENTION
Keroche contend that they paid duty under Tariff 22.04 from 1997 to 2006, that is, until the decision to change tariff was communicated to it vide a letter dated 29th November, 2006. The communication meant that Keroche’s fortified wine products were not classified under Tariff Heading 22.04 but should have been classified under tariff Heading 22.06. The latter Tariff, namely 22.06, attracts a higher rate of duty than tariff 22.06 in that it attracts 60% instead of 45%.
The change of tariff, according to Keroche, and the retrospective demand of arrears as set out above, was an afterthought, so as not to receive their refund and to punish them for allegedly having successfully lobbied Parliament, to reject 65% taxation of their product and the zero rating of their rivals’ products. (There is a pending case before another Judge concerning the alleged selective taxation)
By the same letter, the KRA issued tax assessments based on the new Tariff 22.06 from the year 2002 to 2005. Consequently the KRA letter demanded from Keroche Breweries a payment of KShs 1.108B.
As required by the law, Keroche Breweries have a bonded warehouse. The purpose of this was to ensure that since they manufactured excisable goods, the KRA would have at site all the information necessary for the determination of the nature and class of the excisable goods manufactured and the materials used in the manufacture. It cannot be true that the licence was granted and renewed over the years without the knowledge that the brewer’s fortified wines were pineapple based. It is apparent, according to Keroche, that even the KRA had over the years always understood the correct tariff to be 22.04 Keroche strongly contended that a tariff cannot be changed retrospectively as the KRA had purported to do in this case in view of the provisions of s 137(1) of the Customs and Excise Act.
Additionally, Keroche Breweries stressed that right from the beginning all their Tax returns have been checked and countersigned by the Authority’s agents and payments thereto made every month and that the production records were prepared on daily basis and have always been availed to the KRA. In addition, the KRA have had their officers at the factory as required and the products are released from a bonded warehouse over the years and therefore the Authority have had knowledge of the products and the level of production because this is the purpose of having the bonded warehouse manned by the KRA’s agents. They contend that over the years, KRA have also conducted audits, and out of all the audits carried out the issue of change of tariff never arose at all and has over the years never been an issue. It became an issue after their application for an Excise Tax Refund claim.