Besins Healthcare (Hong Kong) Ltd v. Commissioner of Inland Revenue

HCAL 227/2022

[2022] HKCFI 3439

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 227 OF 2022

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BETWEEN

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Before:  Hon Coleman J in Chambers (Open to Public)

Date of Written Submission:  11 and 25 October 2022

Date of Costs Ruling:  11 November 2022

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C O S T S R U L I N G

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A. Introduction

1.The background to and issues this case were explained in my Judgment dated 28 September 2022 [2022] HKCFI 2932 – the definitions and abbreviations in which I continue to adopt and where, unless otherwise made clear from the context, all references to section numbers are to the sections of the IRO.

2.In the Judgment, I granted the following orders:

(1)  a declaration that the Refusal was unreasonable and/or irrational; and

(2)  an order of mandamus requiring the Commissioner to vary the terms of the holdover orders and within 21 days to refund to the Applicant the principal sum of the Excess Amount together with the interest on that sum, calculated in accordance with the rules from the date of issue of the TRC to the date of the refund being made.

3.As to costs, I noted that though I had found in favour of the Commissioner on much of his offered interpretation of the relevant provisions in the IRO, I had in effect granted the Applicant the substance of the relief sought in the Form 86.  On that basis, it seemed to me that I should reserve the question of costs to further argument, to be dealt with on paper.

4.I have since received relevant written submissions from Mr Mariani on behalf of the Applicant dated 11 October 2022, and from Mr Liu and Ms Chan on behalf of the Commissioner dated 25 October 2022.

B.  The Contest

5.Mr Mariani submits that, because the Applicant was in all material respects the successful party, the appropriate costs order is that the costs of the application should be to the Applicant, to be taxed if not agreed.  As an alternative, if on the basis that the Commissioner’s interpretation of section 71 was preferred is taken into account, then Mr Mariani submits that there should be a split costs order so that (1) costs up to 19 September 2022, when the Commissioner filed his skeleton argument, should be to the Applicant, and (2) 75% of the costs thereafter should be to the Applicant.

6.Mr Liu submits that the appropriate costs order is a split order that (1) 90% of the costs of and incidental to the hearing on 23 September 2022 (“Hearing”)  be to the Commissioner, to be taxed if not agreed, and (2) the costs of the proceedings otherwise be to the Applicant, to be taxed if not agreed.

C.  The Applicable Principles

7.The general principles applicable to the Court’s jurisdiction in the matter of costs are well established, and can be stated briefly.

8.Costs are in the discretion of the Court, but it is common ground that RHC Order 62 rule 3(2)  provides for the general rule that costs should follow the event, except when it appears to the Court in the circumstances of the case that some other order should be made as to the whole or any part of the costs.

9.In the context of a tax appeal, the principles were canvassed by the Court of Final appeal in CIR v HIT Finance Ltd (No. 2) [2014] 4 HKLRD 412 at §§6-7, as follows:

(1)  The general rule is that costs follow the event – in other words, go to the real winner – except if and when it appears to the Court that in all the circumstances some other order as to costs should be made.

(2)  There is a discretion in the court to deprive a successful party of the whole or part of his costs because he had caused a significant increase in the length or costs of the proceedings by raising issues on which he did not succeed.

(3)  That can be done even if it was not unreasonable to have raised those issues.

(4)  Whether or not it should be done depends on all the circumstances.

(5)  The discretion exists for the purpose of avoiding the rigour of too inflexible an application of the rule that costs generally follow the event.

(6)  But it is to be approached with due circumspection, so as not to undermine the utility of that general rule.

10.It is also recognised that a single costs order following the event – as opposed to an issue-based costs order – may nevertheless be appropriate in an action where a claimant seeks and obtains a single remedy, even though in the pursuit of that remedy he may have succeeded on some issues and failed on others.  That is perhaps particularly so where the arguments ultimately go to the same issue or claimed remedy.

D.  The Argument

11.Mr Mariani submits that, in the absence of any finding that the Applicant caused a significant increase in the length or costs of these proceedings, the general rule that costs should follow the event would apply.  The Applicant has obtained all of the substantive relief sought in the Form 86. Hence, the Applicant was for all intents and purposes the successful party.

12.Further, when considering the conduct of the parties, Mr Mariani submits that it was reasonable for the Applicant to raise, pursue or contest all of the issues in relation to the legality of the Refusal, not least because (1) the argument on the proper construction of section 71 was a natural corollary of the position adopted by the Commissioner throughout the proceedings, especially as regards the matter of interest on the Excess Amount, and (2) as to the other issues raised and disputed, including on the issue of interest, the Applicant’s success in obtaining all the relief sought in its Form 86 demonstrated its reasonableness.

13.Mr Mariani submits that these proceedings were generated by the Refusal, which the Court found unreasonable and/or irrational, and that the grounds asserted by the Commissioner for the Refusal were therefore untenable.  As a result, the bringing of the claim for refund of the Excess Amount was necessarily reasonable.  Further, he submits, the Court’s construction of section 71 was not dispositive of the matter in the context of the Applicant’s substantive application for relief.  Rather, it was ancillary, in terms of the means by which the Commissioner would be required to effect the refund of the Excess Amount and any interest on it.

14.Mr Mariani also submits that the issue of the interest is of particular relevance, and that the issue of interest was a live dispute between the parties up to the Judgment adjudicating in favour of the Applicant.  Therefore, the Applicant was justified in rejecting the Open Offer, which was both insufficient and internally inconsistent with the construction of section 71 put forward by the Commissioner.  There can be no doubt, he says, that the Applicant was in a better position following the Judgment than it would have been had it accepted the Open Offer.

15.In the alternative, Mr Mariani submits that if the Court is to take into account the time spent arguing the meaning of “objection or appeal” in section 71 during the Hearing, that was not strictly necessary to the determination of the application on the ground of unreasonableness, and for the grant of relief sought.  Therefore, if it is to be reflected in a costs order, he submits the appropriate approach would be to entitle the Applicant to 75% of its costs from the date when the Commissioner filed his skeleton argument in effect conceding that he had authority to effect the refund under section 46 of the IGCO.

16.As importantly, Mr Mariani submits that it would not be appropriate in any event for the Commissioner to be awarded any part of his costs merely because the Court agreed with him on the construction of section 71.  The alternative he puts forward merely reduces the quantum of costs awarded to the successful party, on the basis of pursuing a point which was ultimately not necessary to the disposal of the proceedings, but where the Applicant was otherwise wholly successful in obtaining the relief sought.

17.Mr Liu submits that the circumstances of this case justify departure from the general rule, so that costs should not follow the event.  First, the Applicant did not succeed on its main ground on illegality.  As a result, the Applicant did not succeed in claiming interest pursuant to section 71(7)(d)  within the TRC regime – and interest was awarded under the other ground of irrationality.

18.Mr Liu says that the Applicant not only asked for the refund of the Excess Amount, but asked for it to be made by way of a “redemption” of the TRC pursuant to section 71(7).  Therefore, he says, the proper construction of section 71 under the tax framework of the IRO, and the meaning of “final determination of the objection or appeal” was what Mr Liu has described as the “Core Issue” for the Court’s determination – and where the Commissioner had already made the appropriate concession on the irrationality ground in the skeleton submissions filed in advance of the Hearing.  As a result, the majority of the party’s submissions, the time at the Hearing and the Judgment dealt with the Core Issue.

19.In the Judgment, the Court accepted the Commissioner’s construction of section 71, and hence the legal basis on which the refund could be made.  As a result, Mr Liu submits, the Applicant did not obtain what it applied for in the judicial review, because the Court did not make an order of mandamus requiring the Commissioner to redeem the TRC up to the Excess Amount under section 71(7)(d).  Instead, the order of mandamus granted was to endorse the Commissioner’s ultimately adopted position to vary the terms of the holdover orders.

20.Mr Liu submits that the irrationality ground as framed in the Form 86 – and which was no longer in dispute by the time of the Hearing – was ancillary to the illegality ground.  The Hearing proceeded, Mr Liu says, because the Applicant insisted on testing its proposed legal mechanism for the refund via redemption, and to claim interest.  But that legal mechanism under the illegality ground was rejected by the Court.

21.As to the interest point, Mr Liu reminds that it was not pleaded in the claim, and the Court found in the Judgment that it was not illegal or contrary to the IRO for the Commissioner to refuse to exercise his powers under section 71(7)(c)  or (d)  to repay or refund the Excess Amount and any interest accruing on it.  Rather, the Court awarded the interest to the Applicant because the principal and interest stood or fell together.

22.Further, Mr Liu submits that the CJR underlying objectives were not observed by the Applicant where there was only a small amount of interest at stake – less than HK$20,000, as compared to the Excess Amount exceeding HK$6 million – when the Commissioner had already agreed to refund Excess Amount in advance of the Hearing.  Mr Liu submits that the further costs of the Hearing were clearly disproportionate to the amount of interest. Acknowledging that the Judgment stated that the small amount of interest did not make that issue of interest academic, Mr Liu nevertheless submits that the small amount of interest cannot justify the cost effectiveness in light of the CJR objectives.  Indeed, Mr Liu says, the Commissioner had only proposed to defer and not decline the issue of interest, which is consistent with the proper construction of section 71 as upheld by the Court.

23.Even if I do not specifically mention them below, I take all these points into account.

E.  The Appropriate Order

24.Though by a mechanism and grant of relief appropriate in judicial review proceedings, what the Applicant really pursued in this action was repayment or refund of the Excess Amount.  Further, though not specifically prayed for in the Form 86, that seems to me necessarily to have triggered consideration of the repayment or refund of any interest accruing on the Excess Amount.

25.By my Judgment, I required the Applicant to be refunded the Excess Amount and the interest.  In that regard, it seems to me clear that the Applicant is to be regarded as the real winner.  The Applicant ultimately fared better by the Judgment than was even on offer by the Open Offer made shortly before the Hearing.  (I might also point out that the Open Offer was not put forward fully on the stance ultimately adopted by the Commissioner at the Hearing.)  Further, until the Open Offer, the Applicant had to have pursued these proceedings in order to obtain any part of its intended refund.

26.That all points strongly in favour of a costs order to follow that event.

27.In the overall circumstances, I see no reason to award the Commissioner any costs.  The real question to be determined in the exercise of my discretion seems to be whether there should be any reduction in the costs payable by the Commissioner to the Applicant as a result of my determination on the proper interpretation of the words “final determination of the objection or appeal” in section 71.

28.I acknowledge that the Applicant’s case was primarily predicated on the offered construction of section 71 which was rejected in the Judgment.  I also acknowledge that most, indeed nearly all, of the focus of argument at the Hearing – and most of the focus in the prior written submissions – was on the illegality point turning on the proper construction of section 71. As a result, a good part of the Judgment had the same area of focus.

29.Whilst not exactly proceeding on an issue-based approach to costs, it does seem to me to be appropriate to reflect the result of the argument on the construction of section 71 within the overall costs order.  In other words, it appears to me that in all the circumstances there is justification for a departure from the general rule, and some other order as to costs should be made.

30.I also take into account that in addition to the Excess Amount, I awarded to the Applicant the return of the interest accruing on it.  Whilst the interest is rather small in dollar terms (as the direct result of the imbalanced approach to interest within the TRC, as canvassed in the Judgment)  I do not think that of itself makes the interest argument significantly disproportionate to the costs of the Hearing.  What the Judgment decided as a whole was the appropriate approach to both the principal sum and the interest on it in circumstances such as arose in the present case, and as might arise in future cases.  Of course, the fact that the claim did not originally include the claim to the interest is a factor to be given some, albeit not much, weight in the overall consideration.

31.I also take into account that by the time of the Commissioner’s skeleton submissions filed on 19 September 2022, much of the Applicant’s costs would already have been incurred.  This is because all papers had been filed and the Applicant’s skeleton submissions had already been filed, and (subject only to awaiting sight of the Commissioner’s written submissions)  much of the preparation for the Hearing would have already taken place.  Further, the Hearing itself took an appropriate length of time when considering the issues in dispute, and the matters at stake.

32.Ultimately, in the exercise of my discretion, with a split order either side of the date of the Commissioner’s skeleton submissions, it seems to me that the appropriate costs order is as follows:

(1)  the costs of the application up to and including 19 September 2022 be to the Applicant;

(2)  60% of the costs from 19 September 2022 to the date of the Judgment be to the Applicant;

(3)  both elements of costs to be taxed if not agreed.

33.I so order.

34.Further, as neither party has been entirely successful in relation to the costs order proposed by each of them, in the further exercise of my discretion I make no order as to the costs of the argument on costs.

Mr Stefano Mariani, of Deacons, for the applicant

Mr William Liu, Deputy Law Officer (Civil Law)(Ag.), and Ms Jess Chan, Assistant Law Officer (Civil Law)(Ag.), of the Department of Justice, for the respondent