The company in 2019, sold its 27.6 percent stake in Nairobi Bottlers and 53.9 percent interest in Almasi Beverages to Coca-Cola Beverages Africa (CCBA) for Sh19.3 billion.
The KRA was seeking a total of Sh5.6 billion from the bottlers.
The Supreme Court said the KRA should let the matter rest after losing in lower courts.
Centum Investment Company #ticker:CTUM has been spared from compensating the buyer of its Coca-Cola bottling businesses Sh3.7 billion after the Supreme Court stopped the Kenya Revenue Authority (KRA) from demanding the billions.
The company in 2019, sold its 27.6 percent stake in Nairobi Bottlers and 53.9 percent interest in Almasi Beverages — the owner of Mt Kenya Bottlers, Kisii Bottlers and Rift Valley Bottlers — to Coca-Cola Beverages Africa (CCBA) for Sh19.3 billion.
The transactions were completed despite the KRA seeking Sh3.7 billion excise taxes on returnable bottles and Centum gave CCBA a bank guarantee that it would settle the bill if the taxman won the legal battle to enforce its claim.
KRA’s tax demand was thwarted in a Supreme Court ruling delivered on February 10, which stopped the taxman from reopening the matter, freeing the Nairobi Securities Exchange #ticker:NSE -listed firm from the obligation.
“The matter has now been closed,” said Centum chief executive James Mworia, noting that the guarantee has ended in light of the court’s decision.
The KRA was seeking a total of Sh5.6 billion from the bottlers.
Centum’s exposure was, however, smaller at Sh3.7 billion because it did not fully own the businesses at the time of selling them to CCBA, which is majority-owned by Atlanta-based soft drinks giant The Coca-Cola Company.
After agreeing on the compensation deal with CCBA, Centum obtained a guarantee from Stanbic Bank Kenya Limited to cover the full amount and the facility was charged on Centum’s portfolio of marketable securities, which also include Treasury bonds.
The Supreme Court said the KRA should let the matter rest after losing in lower courts.
“We note that the dispute commenced in the High Court in October 2012, 10 years ago, then moved to the Court of Appeal, over nine years ago in July 2013,” the apex court said in the ruling.
“To start the case all over again, for no fault of the respondents, is not only unconscionable but also insensitive and cruel.”
The KRA sought to collect excise taxes on costs incurred during washing and sanitising returned bottles between 2006 and 2009.
Had the KRA been successful, the bottlers now owned by CCBA would have been required to pay the tax through Stanbic Bank.
The lender was to then seek compensation from Centum and had secured the right to liquidate the investment firm’s portfolios that are held as security.
Such arrangements are common in mergers and acquisitions, with buyers hedging against liabilities such as taxes and contract disputes that may materialise after the deal is closed.
The taxman and the bottling companies fought a drawn-out legal battle over 10 years, with the case revolving on whether or not excise duty ought to be levied on returnable bottles.
The High Court, in 2012, allowed the KRA to collect the taxes, a decision that the Court of Appeal overturned in July 2019. The taxman subsequently appealed the ruling at the Supreme Court of Kenya, which has made the final decision.
Before 2004, the Customs & Excise Act made exceptions in respect of determining the ex-factory selling price and expressly excluded the cost of returnable bottles.
There was, therefore, no excise duty charged on the cost of returnable containers.
A 2004 amendment to the law, however, deleted the entire subsection that dealt with the returnable containers, effectively going silent on how they should be treated.
The KRA interpreted this to mean that it could collect taxes on these goods, a move the bottlers said would amount to multiple taxations on the same items.
The soft drinks manufacturers argue that bottles are manufactured once and used many times, with distributors paying a refundable deposit on the goods.
The KRA, on the other hand, argued that the bottles and drinks are sold as one package, saying this justified the tax demand on the bottles.
Judges said the taxman could not take advantage of ambiguity in the law to collect taxes.
