The Commissioner of Inland Revenue v. Slipform Engineering International (HK) Ltd

DCTC 1325/2016

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO 1325 OF 2016

-------------------------

-------------------------

Before: His Honour Judge Andrew Li in Chambers

Date of Hearing: 7 August 2017

Date of Decision: 18 August 2017

----------------------

DECISION

----------------------

INTRODUCTION

1.This is an application by the plaintiff for summary judgment under Order 14, rule 1 & 2 of the Rules of the District Court (“RDC”) and sections 71 & 75 of the Inland Revenue Ordinance, Cap 112 (“the IRO”) against the defendant for the sum of HK$31,511,209.91 (“the assessed tax”) plus interest and costs.

2.As pleaded in the statement of claim (“SoC”), the assessed tax is the tax due and payable by the defendant under section 75 of the IRO in respect of the years of assessment 2008/09 and 2009/10.

BACKGROUND

3.It is not disputed that notices of assessment have been issued in respect of the assessed tax and a certificate has been issued by the Commissioner of Inland Revenue (“the Commissioner”) under section 75(3) of the IRO in respect of the tax assessed. Under section 75 of the IRO, the certificate shall be sufficient evidence of the amount so due and sufficient authority for this court to give judgment for the amount due. 

4.The following facts and allegations have been raised and relied on by the defendant in its defence (“the defence”):-

“10. The Taxpayer is and was a Hong Kong registered company incorporated on 8 October 1997, carrying on the business of investment holding and provision of project management services for construction contracts including the development of natural gas and power infrastructure.

11. At the material times during the years of assessment of 2008/2009 and 2009/2010, substantially all of the Taxpayer’s relevant income was derived from project management fee income paid or receivable under various management and construction contracts entered into between 2006 and 2007 with Energy World Corporation Limited (“EWC”), an Australian company listed on the Australian Stock Exchange which contracts form part of fixed price engineering procurement and construction contracts with EWC entered into between 2009 and 2012 (the “EWC Project Management Contracts”).

12. EWC has interests in and operates gas fields and a gas power generating infrastructure in Australia and Indonesia. It also carries on the development of power, gas and liquefied nature gas infrastructure projects in Australia, Indonesia and the Philippines. The Taxpayer is a related party of EWC for the purpose of the Australian securities law and Listing Rules by virtue of the Taxpayer being a controlled company of a substantial shareholder of EWC. The Australian Securities regulations and Listing Rules require that any contracts between EWC and such related parties be scrutinized and approved by independent directors or independent shareholders of EWC to ensure such contracts are on arm’s length terms or better in favour of the listed corporation. The relevant contracts were so approved and EWC’s Stock Exchange fillings and audited financial reports reflect the contracts with the Taxpayer and the projects, further described below:

(1) The EWC Project management Contracts require the Taxpayer to undertake the design, project management, engineering, procurement and construction of several substantial infrastructure projects for the development of gas fields, power generation facilities and liquefied natural gas export and import and distribution facilities located in Indonesia and in the Philippines.

(2) The terms in the EWC Project Management Contracts also require the Taxpayer to provide all the services and materials or to procure all the services and materials required to design, construct and bring into operation the above referenced projects on a fixed price basis.

(3) The relevant projects all necessarily require several years’ work to discharge the Taxpayer’s obligations and necessary must involve the Taxpayer in very material costs to earn the relevant income. The projects must also require substantial performance of the Taxpayer’s contractual obligations outside of Hong Kong and in the locations of the projects.

13. The Taxpayer had a limited Hong Kong establishment comprising between 9 and 12 employees in the relevant years of assessment, mainly providing clerical and administrative services together with support by executive management services provided by EWI referred to at 15 below. In order to discharge its obligation under the EWC Project Management Contracts, which of their nature are substantially required to be performed outside of Hong Kong, the Taxpayer is required to engage and pay various third party service providers and suppliers, including connected companies of Slipform and EWI established and operating in the relevant project jurisdictions. By a Management Services Agreement between the Taxpayer and CEPA dated 1 January 2009 (the “CEPA Consultancy Agreement”), the Taxpayer had engaged CEPA to be in charge of consultancy for the projects of EWC under the EWC Project Management Contracts as listed in Appendix 1 the CEPA Consultancy Agreement. The CEPA Consultancy Agreement refers to a consideration of US$10,867,030 in total being the amount receivable from EWC by the Taxpayer under the EWC Project Management Contracts. Clause 1 of the CEPA Consultancy Agreement provides that CEPA will be paid only when the Taxpayer received payment from EWC. In fact CEPA did not carry on any operations and the sums received from Slipform were held on account for performance of the Taxpayer’s relevant obligations and were so applied in the years of assessment and subsequent periods.

14. Subsequently, CEPA has applied funds received under the CEPA Consultancy Agreement to meet the obligations of the Taxpayer, performed through other overseas affiliated companies of the Taxpayer established and operating in Indonesia and the Philippines and through non-related third party sub-contractors, service providers and suppliers.

15. By an Agreement dated 1 January 2009 between the Taxpayer and EWI (the “EWI Agreement”), the Taxpayer engaged EWI to provide executive management services, key staff and administrative support service and office service facilities. The consideration is not stated but is charged based on the costs of services provided from time to time.

16. The Taxpayer filed its profits tax returns together with its audited financial statements in respect of the years of assessment 2008/2009 and 2009/2010 on 31 December 2010:

(1) In respect of the year of assessment 2008/2009, the Taxpayer’s profits tax return supported by the Taxpayer’s statement of revenue reflects revenue of of HK$156,318,547 which was received or receivable in respect of project management fees received under the EWC Project Management Contracts and represented substantially all the Taxpayer’s income. Expenses in relation to the CEPA Consultancy Agreement and EWI Agreement were booked and deducted from the revenue. However, in this tax assessment raised by the Revenue dated 9 January 2016 in respect of the year of assessment 2008/2009, the expenses relating to CEPA and EWI were disallowed, and the assessable profits of the Taxpayer was treated as HK$152,926,182, that is some 97 per cent of its total income.

(2) In respect of the year of assessment 2009/2010, the Taxpayer’s profits tax return supported by the Taxpayer’s statement of revenue reflects revenue of HK$90,690,372 which was received or receivable in respect of project management fees received under the EWC Project Management Contracts and represented substantially all the Taxpayer’s income. Expenses in relation to the CEPA Consultancy Agreement and EWI Agreement were booked and deducted from the revenue. However, in the tax assessment raised by the Revenue dated 12 January 2016 in respect of the year of assessment 2009/2010, the expenses relating to CEPA and EWI were again disallowed. The assessable profits of the Taxpayer was treated as HK90,645,079, that is all of the Taxpayer’s revenue in the period.

17. In making the Assessment the Revenue has relied on Sections 61 and 61A of the Inland Revenue Ordinance to wholly disregard transfers of receivables of the Taxpayer and payments made by the Taxpayer to its affiliated companies, CEPA and EWI, and the Revenue alleged that the transactions between the Taxpayer and CEPA and EWI respectively were artificial or fictitious, and/or effected for the sole or dominant purpose of gaining the Taxpayer a tax benefit.

18. The Taxpayer has strongly objected to such allegations and has filed official objections to the Revenue on 6 February 2015, 21 May 2015, 9 October 2015 and 26 January 2016.

19. On 8 October 2015, the Taxpayer paid to the Revenue a total amount of HK$300,546.87 (comprising of HK$124,190.29, US$4,288.95, GBP11,866.62 and AUD757.07) to the Shroff Account No 1-1178241-09-0, ie for the year of assessment 2008/09.”

5.Based on the above, the defendant denies the plaintiff’s claim on the following grounds in the defence:-

(a) the assessments are “oppressive, arbitrary or capricious”: §§2-3 & 6-7;

(b) the assessments were “null and void” because there was no assessable profit in those 2 assessment years and because of the Commissioner’s alleged subsequent admission of “the existence of the project”: §3 & §§20-22;

(c) the Commissioner has “acted improperly” in bringing an action to recover tax in respect of those 2 assessment years: §5;

(d) the Commissioner has acted “unreasonably” by refusing to allow the expenses incurred by the defendant: §§ 10-19; and

(e) the Commissioner was “unreasonable and improper” when he issued duplication of assessments on the same source of income: §§23-28

DISCUSSION

The underlying principle

6.Mr Suen Sze Yick, senior government counsel, for the plaintiff submits that there is a long and weighty line of authorities that the IRO provides 2 sets of separate and distinct statutory mechanism: one for objection and appeal against tax assessment (ie under Part 11), and another for recovery (ie under Part 12).  This case falls within the latter category. 

7.As a result of such demarcation, the IRO imposes an underlying principle that a taxpayer should always “pay first, argue later”.  In more precise term, tax should always be paid first under section 71 notwithstanding any notice of objection or appeal, and any allegation which relates to the assessment being excessive or incorrect should not be entertained in a recovery proceeding (see section 75(4)):-

(See CIR v Au Yuk-shuet (1966) 1 HKTC 489, Ng Chun-kwan v CIR [1976] HKLR 94 (CA), CIR v Choy Sau Kam (1983) 2 HKTC 10 (CA), CIR v Lai Yin Ha formerly trading as China Skin Specialist Clinic (1988) 2 HKTC 374 (CA), CIR v Lee Lai Ping (1993) 3 HKPLR 141, CIR v Edkon Enterprises Ltd (1995) 2 HKPLR 322, Tak Wing Investment Co Ltd v CIR [2001] 2 HKLRD 266 (CA), CIR v Lau Chi-sing DCCJ 12121/2000 (26 April 2001), CIR v Chia Tai Conti-Hong Kong Limited DCTC 9755/2006 (16 November 2007), CIR v Nam Tai Trading Co Ltd [2010] 3 HKC 1 CIR v Chan Chun Chuen & Another DCTC 2290/2010 (15 April 2013), CIR v Gennon Enterprises Limited DCTC 773/2015 (4 February 2016).

8.I respectfully would agree with the above trite and well established principle relied on by the plaintiff.

The defendant’s general objections

9.Mr Jonathan Chang, counsel for the defendant, firstly submits that the court should not embark upon a mini-trial on affidavits.  He claims that where there are doubts or unexplained features over the plaintiff’s case, the court should give unconditional leave to defend to the defendant. In this regard, he relies on the case of Billion Silver Development Ltd v All Wide Investments Ltd [2002] 2 HKC 262 at 268C-269E. 

10.With respect, the above case deals with a summary judgment application in a general civil case and in my view does not apply in a tax recovery case where the scope of the court is very limited: see Lau Chi-sing, supra.

11.Mr Chang further submits that, contrary to the plaintiff’s submissions in its skeleton argument, a tax assessment made by the Commissioner is not immune to challenge by the defendant in the context of a tax claim in the District Court.  He says it is trite law that where the Commissioner in making the assessment has failed to take into account a relevant factor or has acted in breach of natural justice, the assessment can be treated as a nullity: Anisminic v Foreign Compensation Commission & Anor [1969] 2 AC 147 at 171C – E; Ng Chun Kwan v CIR [1976] HKLR 94; and A-G v Chino Industries (In Voluntary Liquidation) [1997] HKLRD 833.  He further claims that an assessment which the court treats as a nullity means there is no assessment at all based on which the plaintiff may make the present tax claim.

12.With respect, it is a flawed argument as none of the above cases in my opinion would assist the defendant. 

13.First, the passage cited in Anisminic is a classic general statement on the public law and private law divide.  In Hong Kong, only the higher courts have jurisdiction to deal such matters by way of judicial review.  This court has no such jurisdiction.

14.Second, in Ng Chun Kwan, Brigg CJ has clearly stated at p 97 that “(T)o plead that the Commissioner acted ultra vires when the “assessment” was made is merely saying that there was a wrong or incorrect assessment” (emphasis added).  The learned Chief Justice went on to say that he would not decide the case on that point as the IRO distinguishes carefully between assessment and tax and has provided an elaborate method of appealing against the assessment of tax.  He further added that the question of whether an assessment is a nullity or not can be raised by way of an objection in an appeal under the provisions of Part XI of the IRO.  There is therefore no question of “shutting out the appellant” from the court.  He stated that there are specific provisions which include an appeal to a Board of Review and from the Board to an appeal lies to the then Supreme Court”: see §§2-3 on p 97 of the judgment. 

15.In my view, the passage of Higgins J relied on by Mr Chang in effect is saying the same thing just in another way.  In my judgment. if the defendant is in any way dissatisfied with the assessments, it is entitled to appeal against the decision under the provisions of Part XI of the IRO to the Board of Review.  It is not appropriate to raise them in a recovery proceedings in this court.  

16.Third, the case of Chino Industries Ltd, supra is entirely different in nature to our present case in that it deals with a liquidator’s rejection as proof of debt relating to tax assessment.  In that case, the Commissioner was seeking to recover under that part of the proof of debt which was rejected as a nullity.  It was held in that case that there was simply no assessable profits tax for that year and therefore it was ultra vires and beyond the Commissioner’s jurisdiction.  It is significant to note that Le Pichon J (as she then was) held in that case there was no ambiguity that, on its terms, section 75 of IRO facilitated the recovery of tax as a civil debt was limited to proceedings in the District Court. It laid down a special procedure design to expedite and facilitate the recovery of tax as a civil debt from any person who made default: see p 839 D-F.     

The defendant’s main grounds of challenge

17.Mr Chang principally relies on the following 2 main grounds of challenge in his submissions:-

(1) The Commissioner has acted against natural justice and abused its power in failing to make a determination of the defendant’s objections to the assessments within a reasonable time.

(2) No reasonable assessor could have arrived at the figures set out in the assessments, and the plaintiff has therefore acted unreasonably, oppressively, arbitrarily or capriciously.

18.For the breach of natural justice / abuse of power ground, the defendant submits that under section 64(2) of IRO, upon receiving a notice of objection to a tax assessment, the Commissioner shall consider the objection and “within a reasonable time” confirm, reduce, increase or annual it.  If there had been inordinate delay by the Commissioner to determine the objection, the court may find the Commissioner has acted ultra vires.  In this regard, the defendant relies on the case of Kong Tai Shoes Manufacturing Co Ltd v CIR [2012] 4 HKLRD 780 at [46] as an authority to support the proposition.

19.With respect, this is a non-starter.

20.First, there is a factual dispute in our present case as to whether the objection to the 2009/10 assessment has been lodged within time: cf §25.1.2 of the affirmation of Ng Chou Ping for the plaintiff and §12.3 of the affirmation of Stewart William George Elliott for the defendant.  It is not within the scope of this court to determine such a factual dispute in a recovery of unpaid tax case under section 75.    

21.Second, Kong Tai Shoe Manufacturing is a judicial review case heard in the Court of First Instance in the High Court where the taxpayer was seeking an order of mandamus.  Reyes J acknowledged in that case that in a judicial review case, it would be wrong for the court to determine the taxpayer’s source of profits and the court should not usurp the functions expressly reserved to the Commissioner and the Board of Review by the IRO: see §23 and the case of Yuen Yuen Marketing Co Ltd v CIR [2012] 4 HKLRD 761 at §§16-19.  This court does not have such jurisdiction to deal with any alleged ultra vires due to any inordinate delay on the part of the Commissioner.      

22.For the argument based on no reasonable assessor could have arrived at the figures set out in the assessments and therefore the Commissioner has acted “unreasonably, oppressively, arbitrarily and capriciously”, it is really another way of saying the tax was wrong or incorrect: see CIR v Choy Sau Kam (1983) 2 HKTC 10 (CA) at pp 14-15 citing Briggs CJ in Ng Chun-Kwan, supra.

Findings of the Court

23.In the light of the underlying principle, the plaintiff submits and I accept that there is no triable issue in this case as all the allegations pleaded in the defence are caught by section 75(4) of the IRO:-

(1) the allegation that assessed tax is null and void because there was no assessable profit in the years of assessment 2008/09 and 2009/10 (§§4, 10–19) is effectively a different way in saying that the tax is “excessive and incorrect”: (see Nam Tai Trading Co Ltd, §30, and Au Yuk-Shuet, at pp 493-494).

(2) §§5, 20 – 22 allege that the basis for the assessment is no longer maintained by the plaintiff.  First, such allegation has been denied by the plaintiff by way of affirmation evidence (see §25.3 of the affirmation of Ng Chou Ping filed on 27 March 2017).  Second, I agree with the plaintiff that the court should not in this application be engaged in a trial by affidavit evidence. Third, regardless whether the plaintiff still maintains the basis for the assessment, the defendant is actually saying here that the assessed tax is baseless.  In my judgment, even if the Commissioner did change stance (which is denied by the plaintiff), the defendant’s case in this regard is still caught by section 75(4) of the IRO (see Lai Yin Ha, supra).  Therefore, I accept that such argument should not be entertained either.

(3) The third line of challenge in the defence is that no reasonable assessor could have reached the assessed tax, and therefore the plaintiff has acted unreasonably, oppressively, arbitrarily or capriciously for (a) the profits assessed to the defendant could not have been earned by it (§6); and (b) there has been overlapping tax assessments in respect of the defendant and its affiliated companies (§7 & §§23–28).  In my judgment, such arguments have also been dealt with in the decided cases (see Nam Tai Trading Co Ltd, §28 citing Briggs CJ’s judgment in Ng Chun-kwan (pp 100–101, 103), in which case, HH Judge Ng held that “it is in effect a plea that the tax assessed in incorrect or excessive”).

24.Similarly, I find all the allegations put forward in the affirmation of Stewart William George Elliott of the defendant are along the same lines of argument as stated in the defence and as summarized above.  In my view, they should not be entertained in this case either due to section 75(4) of the IRO.

25.§§5 and 26 of the defence allege that it is “improper” for the plaintiff to commence the present recovery action in the District Court under section 75 of the IRO as “summary proceedings”.  I agree with the plaintiff that this is a misconception due to the disregard of the demarcation mentioned in §7 above. As held by HH Judge Lam (as the learned Vice-President then was) in Lau Chi-sing:-

“7. … It is important to appreciate that under the scheme of the Inland Revenue Ordinance, the proceedings before the District Court for the purpose of recovery of tax is limited in scope. …

8. … In the proceedings before the District Court, the court is only required to be satisfied that the assessment has been made against the defendant and he has not paid. If a defendant wishes to raise other matters, the proper avenue is to follow the objection procedures laid down in Ordinance.” (emphasis added)

The recovery action is not a “summary proceeding” in the sense that certain procedural safeguards which are ordinarily inbuilt a “substantive proceeding” are dispensed with as a matter of judicial discretion.  Instead, the recovery action is ordained by clear legislative intent to be a proceeding which allows very limited scope of challenge from a taxpayer.  Such legislative intent is discerned from the dichotomy of the two distinct and separate statutory regimes on objection and appeal and on recovery.  Most significantly, the courts have all along consistently acknowledged and applied this legislative intent in recovery actions commenced by the Commissioner.

26.In the aforesaid premises, I find there is no merits in any of the arguments raised on behalf of the defendant in this case.     

CONCLUSION

27.In light of the aforesaid, I order summary judgment be entered against the defendant with costs (including those previously reserved) in favour of the plaintiff, with certificate for counsel.  I therefore enter judgment against the defendant in the sum of HK$31,511,209.91 together with interest thereon at the rate of 8% per annum from 15 November 2016 to the date of judgment and thereafter at judgment rate until payment, pursuant to sections 49 & 50 of the District Court Ordinance, Cap 336.

28.I also direct that the costs should be summarily assessed on paper.  I direct the plaintiff do lodge a statement of costs with the court within 7 days with copy served on the defendant and the defendant do lodge a statement of objections within 7 days thereafter with copy served on the plaintiff.  A hearing on costs can be dispensed with.

Mr Suen Sze Yick, senior government counsel of Department of Justice, for the plaintiff

Mr Jonathan Chang, instructed by Hogan Lovells, for the defendant