Foxconn (Far East) Ltd v. Commissioner of Inland Revenue

CAMP 16/2024, [2024] HKCA 1111

On An Intended Appeal From [2024] HKCFI 97

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 16 OF 2024

(ON AN INTENDED APPEAL FROM HCIA NO 3 OF 2023)

________________________

________________________

________________________

J U D G M E N T

________________________

Hon Chow JA (giving the Judgment of the Court):

INTRODUCTION

1.This is the Applicant’s renewed application for leave to appeal against the decision of the Board of Review (“the Board”) in Case No B/R 52/20 dated 14 February 2023 (“the Decision”) dismissing the Applicant’s appeal against the Commissioner’s determination dated 26 February 2021 (“the Determination”), whereby the Commissioner rejected the Applicant’s objection to the Profits Tax Assessments for the years of assessment 1996/97 to 2000/01 (“the Assessments”).

BACKGROUND

2.The basic facts of this case have been fully set out in the Decision. For the purpose of disposing of the present application, the following summary, based largely from a “Statement of Agreed Facts” submitted by the parties to the Board and recited at §§4 to 8 of the Decision, should suffice.

3.The Applicant is a private company incorporated in Hong Kong on 29 December 1988. It commenced business in May 1992, and maintained a place of business in an industrial building in Fotan, Shatin, New Territories (“the HK Office”).

4.The Applicant is a subsidiary of Hon Hai Precision Industrial Co Ltd (“Hon Hai”), a company incorporated in Taiwan with its shares listed on the Taiwan Stock Exchange. It is part of a group of companies known as the Hon Hai Group, which is engaged in the business of provision of contract manufacturing services for computers, and communications and consumer electronic products and parts.

5.For the years of assessment 1996/97 to 2000/01, the Applicant described its principal activities in its directors’ reports as being “manufacturing of computer connectors and cable assemblies through their own factories in China as well as the holding of investments in other countries”.

6.According to an approved agreement for the setting up of Shenzhen Fuhong Precision Components Factory (深圳富鴻精密組件廠) (“Fuhong Factory”) dated 25 August 1995 (“the Aug-25 Agreement”) entered into between the Applicant and Shenzhen Baoan Friendship General Company (深圳市寶安區友誼總公司) (“the Mainland Party”), the respective responsibilities of the contracting parties included the following:

(1)  The Applicant would provide the Mainland Party with the necessary production machinery (with an approximate value of $40 million), raw materials, ancillary materials, and package materials for processing at no consideration.

(2)  The Mainland Party would provide factory premises of 2,000 square metres, 200 production workers, and electricity and water supply facilities for processing activities to be carried out by Fuhong Factory. The processed products would be returned to the Applicant. Although the Applicant could request replacement of unproductive workers, it had no authority to dismiss them.

(3)  The Mainland Party would designate the factory manager, financial accounting personnel, and warehouse management staff, and would be responsible for the supervision and financial management of Fuhong Factory.

7.According to (i) a Guangdong Province Special Permit Certificate for Export-oriented Enterprises Engaged in Processing with Supplied Materials (廣東省對外來料加工特許營業證) and (ii) a Tax Registration Certificate (稅務登記證) issued by the Mainland authorities, Fuhong Factory was a collective enterprise (集體企業) with a registered address in Baoan, Shenzhen, and operated in the mode of contract processing (來料加工). Fuhong Factory’s scope of business was the processing and assembling of computers, connectors for communication use, and electrical connectors together with cables and parts.

8.Fuhong Factory’s responsible person was one Mr Guo, who was also a director of Hon Hai during the years of assessment 1996/97 to 2000/01.

9.Fuhong Factory was officially closed on 30 October 2001 when all the steps for its deregistration were completed.

10.The Applicant’s accounts were made up annually ending on 31 December. In the profits tax returns furnished by the Applicant to the Commissioner for the years of assessment 1996/97 to 2000/01 together with the relevant audited financial statements and profits tax computations:

(1)  The Applicant declared “nil” assessable profits, claiming that all its profits were derived outside Hong Kong.

(2)  The profits made by the Applicant for the years of assessment 1996/97 to 2000/01 were stated to be $9,101,887, $116,515,968, $145,528,110, $65,748,865 and $113,707,555 respectively.

11.At §8 of the Decision, the Board set out a number of contentions advanced by or on behalf of the Applicant which were either accepted or not disputed by the Commissioner, as follows:

“(a) The Appellant had not signed any subcontracting agreement with Hon Hai because the Appellant was controlled by Hon Hai.

(b) The manufacturing and assembling activities were carried out in the Mainland.

(c) All the purchase orders from the customers were placed directly to Hon Hai and the shipment and selling of the products to the customers were completely under the control of Hon Hai.

(d) The materials shipped from Hon Hai were manufactured in the Mainland, under the instruction of Hon Hai, into the products, as requested by customers of Hon Hai.

Fuhong Factory

(e) Technical staff of Hon Hai were assigned to Fuhong Factory as well as the Appellant’s affiliates in the Mainland to introduce and promote technical skill in the production process. The numbers of Taiwanese staff involved are as follows:

Year ended 31.12	1996	1997	1998	1999	2000
No. of Taiwanese staff	53	27	1	-	-

As from 1997, the Taiwanese staff became the staff of the Appellant’s subsidiaries and affiliated companies.

Production instructions

(f) Hon Hai used a computer system (‘the CSD System’) to record the orders received from its customers in Taiwan and other places. The production operations were controlled by Hon Hai through the connection of the CSD System.

(g) The production arrangement was based on the sales orders contracted by Hon Hai. Fuhong Factory had linkage to the CSD System. The production department could retrieve all the quantities and requirements of the goods of such sales orders from the CSD System and hence no job orders were issued to Fuhong Factory. The production manager in Fuhong Factory planned for the production of the goods in respect of which Fuhong Factory had the licence to produce.

Materials

(h) It was the legal requirement in the Mainland (under the Processing and Assembly Regulations) that the materials delivered to the processing factory in the Mainland had to be done by the foreign party of the processing agreement. The [Applicant] had to be the ‘supplier’ of the materials as named on the import declaration documents of Fuhong Factory.

(i)  Hon Hai was responsible for inspection and shipping of the materials to Hong Kong.

(j) The staff in the HK Office received instructions from Hon Hai when the materials were shipped to Hong Kong. They handled the customs declaration in respect of the import of materials into Hong Kong and the export of the same to the Mainland factories. They used the Tradelink system for reporting to the Hong Kong Customs and Excise Department electronically.

Products

(k) To comply with the Mainland’s Processing and Assembly Regulations, all the products of Fuhong Factory had to be delivered back to the [Applicant]. Before the products were shipped out, the technical staff and inspectors carried out the quality control and inspection work. Fuhong Factory prepared the packing list and the relevant shipping documents for customs clearance and shipment of the products. The products were shipped to the HK Office for sending out to Hon Hai or its customers under the instruction of Hon Hai. The products were shipped out in accordance with the customers’ orders received by Hon Hai.

Proceeds from sale of residual materials

(l) The residual materials disposed of were copper and plastic, which came out from the production process performed by Fuhong Factory and the [Applicant]’s subsidiaries and affiliates companies in the Mainland with the materials and parts provided by Hon Hai.

(m) The residual materials were sold to companies that were authorised to buy and sell residual materials in the Mainland.

(n) For the sales of residual materials, the manager contacted the buyers and received the price they offered.

The HK Office

(o) The HK Office has a floor area of approximately 100 square metres.

(p) There was only one department in the HK Office, viz. shipping and trans-shipment department (船務與轉運部). All the staff in the HK Office were employed by the [Applicant]. They arranged shipping and customs declarations of goods imported to or exported from Hong Kong. They carried out their duties in Hong Kong. Details of the staff in the HK Office were as follows:

		No. of staff in the year
Post title	Responsible for	1996	1997	1998	1999	2000
文員	Handling import & export documents	4	8	14	36	26
報關員	Handling import & export declarations	-	1	1	1	1
倉庫管理員	處理倉庫每日進出貨物的 管理 (Handling daily movement of goods in warehouse)	1	1	1	2	2
管理員	督導物流作業 (Supervise logistics)	-	-	-	1	1
行政人員	辦公室日常用品採購及維 修等雜項行政工作 (Daily office administration)	1	1	1	1	1
Others	[Not specified]	3	-	-	-	-
	Total	9	11	17	41	31”

12.The Commissioner took the view that the Applicant’s profits arose in or were derived from Hong Kong, and were chargeable to profits tax under Section 14 of the Inland Revenue Ordinance, Cap 112 (“the Ordinance”)[1], and issued the Assessments accordingly. The Applicant objected to the Assessments pursuant to s 64. By the Determination, the Commissioner rejected the Applicant’s objections. The Applicant appealed the Determination to the Board pursuant to s 66.

THE DECISION

13.The Board heard the Applicant’s appeal on 16 and 17 November 2021 and 2 June 2022. Before the Board, the Applicant raised the following grounds of appeal:

(1)  The Determination was made unlawfully and irrationally and therefore ultra vires the Ordinance, because the Commissioner had acted in defiance of binding principles of law stated in ING Baring Securities (Hong Kong) Ltd v CIR (2007) 10 HKCFAR 417, and irrationally and ultra vires determined that the Applicant’s offshore profits were assessable not because they were within s 14, but because of the Commissioner’s “disingenuous” argument that the Applicant’s offshore business was set up in order to circumvent a trade barrier which, even if correct, could not bring offshore profits onshore.

(2)  The conduct of the Commissioner in deferring the performance of his statutory duty, ie to issue the Determination within a reasonable time, for 18 years (“the Unlawful Deferral”) was ultra vires the requirements of the Ordinance.

(3)  The Unlawful Deferral was the culmination of the Commissioner’s abuse of statutory powers in bad faith by resiling from a summary of relevant facts which had previously been admitted and agreed by both parties, whilst pressing the Applicant to settle the notices of objection by paying 50% of the wrongfully-assessed profits tax. Knowing that no profits tax was exigible and by prolonging the Unlawful Deferral, the Applicant would be prejudiced by the extreme difficulty in discharging its evidential onus of proving the admitted facts some 24 years after the events concerned had taken place.

(4)  Alternatively, each of the Assessments and the Determination was incorrect and/or excessive insofar as they unlawfully and impermissibly excluded the Applicant’s deductible expenditures and allowances which had been incurred in the production of the Applicant’s gross receipts from the computation of the Applicant’s assessable profits.

14.By the Decision given on 14 February 2023, the Board dismissed the appeal, upheld the Determination and confirmed the Assessments. We shall refer to the relevant findings made by the Board when we consider the Applicant’s grounds for seeking leave to appeal below.

THE PRESENT APPLICATION FOR LEAVE TO APPEAL

15.The Applicant was not satisfied with the Board’s Decision and sought leave to appeal against the Decision from the Court of First Instance under s 69(1). The application for leave to appeal was refused by Au-Yeung J by her decision dated 5 January 2024[2] (“the Leave Decision”).

16.The Applicant renewed the application for leave to appeal by a summons filed on 19 January 2024 (“the Summons”) in the Court of Appeal pursuant s 69(4). In the Summons, the Applicant identified three questions as questions of law for the purpose of the intended appeal:

(1)  Question 1 concerns the geographical source of the Applicant’s profits, and constitutes the main ground of the Applicant’s objections to the Assessments.

(2)  Question 2 (which arises only if Question 1 is decided against the Applicant) concerns two items of expenditures or allowances which the Applicant contends ought to have been deducted from its assessable profits in the computation of its tax liability.

(3)  Question 3 concerns the power of the Board to determine “public law” challenges.

DISCUSSION

(i)  Scope of application for leave to appeal

17.Where the Board of Review has made a decision on an appeal under s 68, the taxpayer or the Commissioner may appeal to the Court of First Instance against the Board’s decision on a ground involving only a question of law (s 69(1)). However, no appeal may be made under s 69(1) unless leave to appeal has been granted by (i) the Court of First Instance, or (ii) if leave to appeal is refused by the Court of First Instance, the Court of Appeal.

18.In either case, leave to appeal must not be granted unless the Court of First Instance or the Court of Appeal (as the case may be) is satisfied that (i) a question of law is involved in the proposed appeal, and (ii) the proposed appeal has a reasonable prospect of success, or there is some other reason in the interests of justice why the proposed appeal should be heard (s 69(3)(e) and (5)(d)).

19.As pointed out by the Judge in the Leave Decision, at §4, the threshold for finding that a proposed appeal has a reasonable prospect of success is not high. It requires only that the appeal is reasonably arguable.

20.Nevertheless, the proposed appeal must involve a “question of law” before leave to appeal may be granted. For this purpose, where the complaint is about an inferential fact or conclusion found or made by the Board, the test for determining whether there is a question of law involved (or whether the Board has made an error of law) can be found in the following often quoted passage in the judgment of Lord Radcliffe in Edwards (Inspector of Taxes) v Bairstow [1956] AC 14, at 36 –

“I do not think that inferences drawn from other facts are incapable of being themselves findings of fact, although there is value in the distinction between primary facts and inferences drawn from them. When the case comes before the court it is its duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that, this has been responsible for the determination. So there, too, there has been error in point of law. I do not think that it much matters whether this state of affairs is described as one in which there is no evidence to support the determination or as one in which the evidence is inconsistent with and contradictory of the determination, or as one in which the true and only reasonable conclusion contradicts the determination. Rightly understood, each phrase propounds the same test. For my part, I prefer the last of the three, since I think that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves, and only to take their colour from the combination of circumstances in which they are found to occur.”

21.In Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275, at §37, Bokhary PJ also explained the court’s proper approach to the question of whether a question of law is involved in relation to a complaint against an inferential fact found by the Board –

“In an appeal on law only the appellate court must bear in mind what scope the circumstances provide for reasonable minds to differ as to the conclusion to be drawn from the primary facts found. If the fact-finding tribunal’s conclusion is a reasonable one, the appellate court cannot disturb that conclusion even if its own preference is for a contrary conclusion. But if the appellate court regards the contrary conclusion as the true and only reasonable one, the appellate court is duty-bound to substitute the contrary conclusion for the one reached by the fact-finding tribunal. The correct approach for the appellate court is composed essentially of the foregoing three propositions. These propositions complement each other, although the understandable tendency is for those attacking the fact-finding tribunal’s conclusion to stress the third one while those defending that conclusion stress the first two.”

22.In short, an inference drawn from other facts found by the Board is still a finding or determination of fact. However, if the true and only reasonable conclusion on the facts found contradicts the inferential finding or determination, there would be error of law made by the Board which could justify leave to appeal being granted.

23.There is one other matter which we should mention before we consider whether leave to appeal should be granted upon any one or more of the three questions raised by the Applicant in the present case. In the Applicant’s “Statement of Grounds and Reasons Made Pursuant to Section 69(5)(a)(ii) of the Inland Revenue Ordinance (Cap. 112) (in support of the Applicant’s Summons herein)” dated 19 January 2024 (“the Applicant’s Statement”), a repeated criticism raised against the Leave Decision is that the Judge failed to “engage” with the Applicant’s grounds of appeal[3]. This complaint is not justified. When considering an application for leave to appeal under s 69, the Court of First Instance or the Court of Appeal (as the case may be) is under no obligation to deal (or “engage”) with each and every point raised by an applicant. Where the court decides to refuse to grant leave to appeal, it is necessary only to deal with the major points raised by the applicant, focusing on the questions identified in the application for leave to appeal, and give brief reasons for refusing the application. To require the court to deal with all the points raised by the applicant substantively, or in detail, would be contrary to the legislative scheme under s 69 that no appeal may be brought against a decision of the Board without leave of the court. The leave requirement under s 69 serves the function of a quick filtering process to weed out proposed appeals which do not meet the statutory conditions for appeal under s 69(1), and is not intended to give an applicant effectively a full hearing of his proposed appeal.

24.It should also be noted that a renewed application for leave to appeal in the Court of Appeal is not an appeal against the decision of the Court of First Instance refusing to grant leave to appeal. The Court of Appeal looks at the application afresh. The focus is not whether the Court of First Instance has made any error(s) in its decision, but whether an applicant’s proposed appeal satisfies the statutory conditions for appeal under s 69(1) by reference to the questions identified in the application for leave to appeal.

(ii)  Question 1

25.Under Question 1, the Applicant argues that:

(a)  the Board misconstrued ss 14 and 16 and applied the incorrect legal test concerning the source of the Applicant’s trading profits;

(b)  the Board misidentified the Commissioner’s preliminary burden of proving that profits tax was exigible upon the Applicant’s (returned, but offshore) trading profits and/or erroneously failed to decide the Applicant’s appeal upon the balance of probabilities; and

(c)  the Board’s findings of primary fact required the conclusion in law (ie the true and only reasonable conclusion) that the Assessments upon the Assessed Profits were outwith the s 14 charge since they were derived from an offshore business.

26.In respect of the Applicant’s argument at §25(a) above, the Applicant’s contention that the Board misconstrued ss 14 and 16 concerning the correct legal test for determining the geographical source of profits can be disposed of shortly. The Board stated the applicable principles for determining the geographical source of profits at §§24-31 of the Decision. Those principles are taken from, and entirely consistent with, the leading authorities in Hong Kong on this topic, including CIR v Hang Seng Bank Ltd [1961] AC 306; CIR v HK-TVB International Ltd [1992] 2 AC 397; Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275; and ING Baring Securities (Hong Kong) Ltd v CIR (2007) 10 HKCFAR 417.

27.The Applicant’s real complaint is that the Board misapplied the correct legal test concerning the source of the Applicant’s trading profits. The Applicant argues that, had the correct legal test for determining the geographical source of profits been applied by the Board to the facts of this case, the obvious and inevitable conclusion would be that:

(1)  The Applicant’s “profit producing transactions” came from its rendering to Hon Hai the required manufacturing or processing services, either within Fuhong Factory or elsewhere in the Mainland, whereby Hon Hai’s raw materials were manufactured into finished products, for which the Applicant was directly remunerated by the “Subcontracting fees” and indirectly by Hon Hai allowing the Applicant to retain and sell raw materials surplus to the manufacture of Hon Hai’s finished products.

(2)  The various antecedent matters (such as Hon Hai’s decision, prior to any trade or profit-producing transactions commencing, to have the Applicant providing the contract processing services in Shenzhen, plus the import via Hong Kong to Mainland China of Hon Hai’s raw materials) and incidental matters related to those profit-producing transactions (such as the shipment via Hong Kong of Hon Hai’s raw materials and finished products), while significant, did not themselves generate any trade receipts; and consequently were not “profit-producing”. As a matter of language, those activities could not be characterised as a “business”.

(3)  Consequently, the Applicant’s assertion within its 1996-2001 tax returns that its trading profits all arose offshore was not only obviously correct, but was throughout known by the Commissioner to be correct - as had been admitted by the Commissioner in 2008.[4]

28.We do not accept the Applicant’s arguments. The Applicant’s claim that its “profit producing transactions” came from its rendering to Hon Hai manufacturing or processing services in the Mainland was rejected by the Board. In particular, the Board made, inter alia, the following material findings:

(1)  There was no subcontracting agreement entered into between Hon Hai and the Applicant at all material times[5].

(2)  Despite being a named party to the Aug-25 Agreement, the Applicant played very little or no part in the operation of the manufacturing and assembly work carried out by Fuhong Factory. There was very limited interaction or communication between the Applicant and Fuhong Factory. Despite the assertion that Hon Hai engaged the Applicant to provide manufacturing and assembly services within Fuhong Factory, Hon Hai was in fact in full control of the whole subcontracting process at all material times. All the manufacturing operations were handled by the staff from Hon Hai and local staff and workers who were recruited and employed in the name of Fuhong Factory[6].

(3)  The Applicant did not provide any subcontracting/processing service to Hon Hai through Fuhong Factory, which was a separate entity[7]. Fuhong Factory, a “collective enterprise” in the Mainland, was not established or owned by the Applicant. Neither could it be considered an agent of the Applicant[8].

(4)  As far as manufacturing/processing work was concerned, the Applicant had done very little. It played no part in deciding what quantity and what materials should be ordered and shipped to Fuhong Factory. It did not issue any instructions to Fuhong Factory on what products or semi-products were to be manufactured. No one from the Applicant went to supervise the work of Fuhong Factory, and it had no say in the timing of finishing the products and in scheduling their shipment. Given that there was no evidence to prove that Fuhong Factory carried out any manufacturing and assembly activities in Shenzhen upon the instructions of the Applicant or for the Applicant’s account and that it was Hon Hai which effectively controlled and supervised the whole process from placing of orders to the shipment of finished products out of Shenzhen, the Applicant’s profits could not be ascribed or attributed to the manufacturing/processing activities of Fuhong Factory. The assertion that Hon Hai had engaged the Applicant to provide subcontracting/processing service within Fuhong Factory in Shenzhen had not been established[9].

(5)  The Applicant simply did not carry on any business outside Hong Kong[10].

29.The above findings were made by the Board on the basis of the evidence (including the Statement of Agreed Facts as well as the oral evidence of witnesses called by the Applicant) before it. Those findings were not perverse or irrational, and were fairly open to the Board to make on the evidence before it. The Applicant’s claim that it rendered to Hon Hai manufacturing or processing services in the Mainland from which it derived its profits cannot be said to be the true and only reasonable conclusion on the evidence before the Board or the facts found by it.

30.Mr Barlow, SC (for the Applicant) places great emphasis on the Statement of Agreed Facts to contend that the Applicant rendered manufacturing or processing services to Hon Hai in the Mainland and its profits were generated from subcontracting fees paid by Hon Hai for such services. However, there is nothing in the Statement of Agreed Facts which compels the conclusion that the Applicant rendered any manufacturing or processing services to Hon Hai in the Mainland. It is important to appreciate that the Board was not bound to accept at face value the matters stated in the Applicant’s financial statements or directors’ reports for the years of assessment 1996/97 to 2000/01, eg that it carried on the business of “manufacturing of computer connectors and cable assemblies through their own factories in China …”, or the descriptions of its income as “Subcontracting fee from Hon Hai” or its profits as “Subcontracting profit”. The financial statements or directors’ reports were simply items of evidence which the Board was entitled to evaluate and give such weight to them as it considered appropriate having regard to the totality of the evidence before it. As observed in the joint judgment of Bokhary and Chan PJJ for the Court of Final Appeal in Real Estate Investments (NT) Ltd v CIR (2008) 11 HKCFAR 433, at §§33 and 34:

“[33] As noted above, the Property had been described in the Taxpayer’s accounts from 1980 to 1995 as a fixed asset. It is argued on the Taxpayer’s behalf as follows. Such accounting treatment gave rise to a prima facie case that the profits in question arose from the sale of a capital asset. Consequently, the onus of proof shifted so that the Revenue had to show by evidence that the assessments were correct.

[34] That argument is misconceived. Consistency between a taxpayer’s audited accounts and its stance does not go so far as to set up a prima facie case of that stance’s correctness in law. Where a taxpayer’s audited accounts are consistent with its stance, such consistency is some evidence in support of that stance. Even where accounting treatment amounts to strong evidence, it still falls to be considered together with the rest of the evidence adduced in the case.”

31.The Applicant’s further contention that various antecedent matters and incidental matters referred to at §27(2) above did not themselves generate any trade receipts, and consequently were not “profit-producing”, is also contradictory to the facts found by the Board. In particular, the Board found that:

(1)  During the relevant years of assessment, there were prevailing restrictions on direct trade between the Mainland and Taiwan. Hon Hai, being a Taiwanese company, would not have been able to set up any subsidiaries or production facilities in the Mainland. It also would not be able to import any raw materials to Shenzhen, or export any finished products from and to Taiwan[11].

(2)  All these hurdles were overcome by incorporating the Applicant in Hong Kong[12]. The Applicant was created for the specific purpose of playing the important role of an intermediary or middleman to allow the transactions to take place despite the aforesaid trade barrier. In the tripartite relationship between Hon Hai, the Applicant and Fuhong Factory, each of them played an independent but essential role. Hon Hai would receive purchase orders from its customers, Fuhong Factory would, through the CSD system, carry out the manufacturing/processing work in Shenzhen, and the requisite raw materials were shipped by Hon Hai to the Applicant in Hong Kong, which in turn would ship the same to Fuhong Factory in the Mainland under the Applicant’s name. The same modus operandi was employed in shipping the finished products to Hon Hai from Fuhong Factory[13].

(3)  The effective cause of the Applicant’s profits arose from its critical role of a middleman and its business activities including importing raw materials and exporting finished products into and out of the Mainland, engaging in customs declaration and making arrangements for shipment. All these activities of the Applicant were done by its staff in the HK Office, and they were profit-producing activities which should be subject to profits tax[14].

(4)  The profits generated by the “Scrap Material Receipts” (referred to at §11(l) to (n) above) were incidental to the Applicant’s other profits, and the same treatment should apply to the gain on disposal of the residual materials. The gain was additional income from Hon Hai and incidental to the Applicant’s role and activities in Hong Kong[15].

32.In other words, the Board found that the so-called “antecedent” and “incidental” matters in fact constituted the business activities of the Applicant as a middleman or intermediary in Hong Kong which were critical to the success of the business model of Hon Hai (insofar as manufacturing of products in Mainland China was concerned). They were not antecedent and incidental to some other business activities carried on by the Applicant outside Hong Kong. In view of the Board’s finding that the Applicant simply did not carry on any business outside Hong Kong, the inevitable conclusion is that the profits made by the Applicant were generated from its business activities in Hong Kong.

33.Lastly, there is no basis for the Applicant’s contention that the Commissioner knew, or ever admitted, that Applicant’s trading profits all arose offshore. Insofar as the Applicant is seeking to rely on a letter dated 4 December 2008 from a Senior Assessor to the Applicant’s tax representative as an “admission” binding on the Commissioner, the Judge agreed with Mr Ma, SC’s submission that the Applicant is merely “cherry picking” two paragraphs in a series of correspondence over 18 years in which the issue of the source of the Applicant’s profits was hotly contested[16]. We have not been taken through the series of relevant correspondence between the parties to enable us to form a view on this issue. Nevertheless, as observed by the Judge, “there was nothing peculiar in a party making concessions in negotiation for settlement but withdrawing them when settlement failed”[17]. In any event, the Board was plainly aware that the Applicant relied on various alleged admissions by the Commissioner (or his officers), but took the view while it would look at all the facts which had been agreed between the parties and stated in the Statement of Agreed Facts as well as further facts which were borne out by the evidence adduced at the hearing, it was “not bound to accept those facts which had allegedly been admitted or accepted by one party before the hearing including facts alluded to by the [Commissioner] in correspondence or in the Determination which were identified by the [Applicant] and included in Annex A of its Opening Submission”. The Board went on to state the following:

“The Board’s attention was drawn to Re Herald[18], in which Blair-Kerr J. held that in an assessment, the assessor is an administrative officer, and not a tribunal, and that the Board is truly a reviewing body and, in so far as the facts are not agreed by the parties, the Board is the fact-finding body. In short, under Section 68(4) of the Ordinance, the onus of proving that the assessment is excessive lies on the [Applicant] of certain facts are not agreed, the onus of introducing evidence before the Board in the first instance lies upon the [Applicant].”[19]

34.The Board’s above approach cannot be faulted. The Board’s function, when hearing an appeal under s 68, is to consider the matter de novo: see Shui On Credit Co Ltd v CIR (2009) 12 HKCFAR, at §30. The alleged “admission” in the letter of 4 December 2008 was not conclusive evidence which the Board was bound to accept on the issue of the source of the Applicant’s profits, regardless of other relevant evidence before it on that issue.

35.In respect of the Applicant’s argument at §25(b) above, there can be no doubt that the Applicant’s profits are of a kind falling within the sphere of profits tax under s 14 and are properly “exigible” in the sense as explained by Roberts CJ in Wing Tai Development Co Ltd v CIR [1979] HKLR 642, at 646. The “preliminary burden” of the Commissioner to show that tax was exigible in relation to the Applicant’s profits could not be in issue before the Board. As for the substantive issue of whether the Applicant’s profits were derived offshore, the Board correctly directed itself that the onus of proof lies on the Applicant under s 68(4)[20] (see Zarin v CIR [2022] 3 HKC 491, at §25 per Kwan VP).

36.There is also no basis for the Applicant’s argument that the Board failed to decide the appeal “upon the balance of probabilities”.

37.The Applicant’s argument at §25(c) above adds nothing of substance to its argument at §25(a) above, which we have already dealt with.

(iii)  Question 2

38.Question 2 can be disposed of shortly. Under this question, the Applicant argues that, upon the true construction of ss 16 and 18F and by reason of the facts agreed by the parties and/or found by the Board, the Board erred in law by incorrectly upholding the Assessments’ exclusion of two principal deductible expenses (ie salaries and allowances paid to Fuhong Factory’s staff, and depreciation and industrial building allowances in respect of the Applicant’s plant and equipment used by Fuhong Factory under Part 6 of the Ordinance) which Applicant had incurred to produce its profits.

39.The short answer to this argument is that the Board found that “no sufficient evidence was produced at the hearing to contradict the assessment made by the [Commissioner] in relation to deductibility of allowances including Hon Hai’s Staff Salaries, Capital Expenditure as well as Industrial Building Allowances”, and hence there was “no reason to disturb the Determination in these respects”[21]. The Applicant has not pointed to any material which show that the said expenses were properly deductible or allowable in the computation of its assessable profits. As noted by the Judge at §35 of the Leave Decision, the mere fact that the Applicant’s audited accounts referred to certain items of expenses does not mean that they are deductible or allowable for tax purposes. The onus lies on the Applicant to show that the Assessments appealed against were excessive or incorrect. In the absence of relevant evidence on this issue, the Board was entitled not to disturb the Determination in these respects.

(iv)  Question 3

40.Question 3 raises the power of the Board to determine “public law” challenges. The Applicant argues that upon the true construction of Part 11 of the Ordinance and in particular ss 64 and 68, the Board erred in law –

(1)  by incorrectly concluding that s 66 does not confer jurisdiction upon the Board to determine public law challenges relating to the manner in which the Commissioner’s officials had exercised the statutory powers conferred upon them by the Ordinance, both when they made the ultra vires Assessments and also during the 18 years during which they calculatedly and unlawfully deferred the determination of the Applicant’s s 61 objections to the Assessments, before confirming the Assessments pursuant to s 64(2); and/or

(2)  in refusing to rule upon the Applicant’s case before the Board that the Commissioner’s officials had willfully abused their statutory powers because s 64(2) requires the Commissioner or his officials to determine taxpayers’ notices of objection “within a reasonable time” and does not permit or empower the Commissioner to defer making a determination for 18 years, during which time his officials (i) resiled from their previous agreements concerning the facts material to the Assessments, (ii) pursued Assessments known to have been made ultra vires upon offshore profits, (iii) pressed the Applicant to “settle” those ultra vires Assessments by agreeing to pay half the tax assessed; (iv) when no such agreement was forthcoming, unlawfully and ultra vires excluding from the Assessments the Applicant’s two principal deductible expenditures in earning those offshore profits, and (v) throughout, relying upon the inevitable prejudice, within any subsequent appeal to the Board, to the Applicant’s ability to discharge the evidential onus of proving (previously admitted) material facts 24 years afterwards.

41.On the issue of whether the Board had jurisdiction to determine public law challenges, the Board held that:

(1)  The Board did not have jurisdiction to entertain the Applicant’s public law challenges to the Commissioner’s assessments insofar as they related to abuse of power or bad faith, and it would refrain from expressing any views on such matters concerning abuse of power and bad faith[22].

(2)  On the other hand, allegations of ultra vires and inordinate delay were within the remit of the Board, and the Board would deal with such allegations[23].

(3)  Although there had been a period as long as 18 years from the time when the Applicant submitted the relevant tax returns in November 2002 to the time when the Determination was made, having considered all the facts and reviewed all the documents and correspondence in a chronological order, it could not be said that there had been inordinate delay on the Commissioner’s part. There was evidence suggesting there might have been some delay on both sides. A substantial part of the unduly lengthy period of time spent on protracted correspondence and discussions, especially those concerning the draft statement of facts, could be equally attributed to the Applicant and its tax representatives[24]. The Commissioner’s conduct could not be held to be unlawful, irrational or ultra vires.

(4)  In any event, a failure on the part of the Commissioner to act within a reasonable time would not deprive him of his jurisdiction to make a determination, or render any determination made by him null and void. Where there was unreasonable delay, that did not mean that the assessment should be quashed. Instead, an order of mandamus requiring the Commissioner to issue his determination was the appropriate remedy. Hence, even if the Board had jurisdiction to entertain the public law challenges in respect of inordinate delay, and even if there had been inordinate delay on the part of the Commissioner, the Board did not consider that the Commissioner’s assessments could be annulled by it under s 68(8)[25].

42.In our view, the question of whether the Board has power to determine “public law” challenges should be approached from a consideration of the nature of its statutory jurisdiction:

(1)  Under s 64(1), any person aggrieved by an assessment made under the Ordinance may, by notice in writing to the Commissioner within 1 month after the date of the notice of assessment[26], object to the assessment stating precisely the grounds of objection.

(2)  On receipt of a valid notice of objection under s 64(1), the Commissioner shall consider the same and within a reasonable time may confirm, reduce, increase or annul the assessment objected to. For the purpose of considering such an objection, the Commissioner is given the power to require the person giving the notice of objection to furnish such particulars as the Commissioner may deem necessary with respect to the matters which are the subject of the assessment and to produce all books or other documents in his custody or under his control relating to such matters, and may summon any person who in his opinion is able to give evidence respecting the assessment to attend before him and may examine such person on oath or otherwise (s 64(2)).

(3)  In the event of the Commissioner failing to agree with any person who has validly objected to an assessment made upon him as to the amount at which such person is liable to be assessed, the Commissioner shall, within 1 month after his determination of the objection, transmit in writing to the person objecting to the assessment his determination together with the reasons therefor and a statement of the facts upon which the determination was arrived at, and such person may appeal therefrom to the Board as provided in s 66 (s 64(4)).

(4)  Under s 66(1), any person who has validly objected to an assessment but with whom the Commissioner in considering the objection has failed to agree may within 1 month after the transmission to him under section 64(4) of the Commissioner’s written determination together with the reasons therefor and the statement of facts[27], give notice of appeal to the Board.

(5)  Every appeal under s 66 shall be heard by the Board in accordance with s 68 unless (i) a notification of consent in respect of the transfer of the appeal to the Court of First Instance for hearing and determination is received by the Board under s 67, or (ii) a settlement of the appeal is endorsed by the Board under s 68(1B)(b) (s 68(1)).

(6)  The onus of proving that the assessment appealed against is excessive or incorrect shall be on the appellant (s 68(4)).

(7)  After hearing the appeal, the Board shall confirm, reduce, increase or annul the assessment appealed against or may remit the case to the Commissioner with the opinion of the Board thereon (s 66(8)(a)).

43.It is clear from the above statutory provisions that the jurisdiction of the Board is to determine whether an assessment the subject matter of an appeal is excessive or incorrect and, upon such determination, confirm, reduce, increase or annul the assessment appealed against or remit the case to the Commissioner with the opinion of the Board thereon. It bears emphasis that the Board does not sit as a court exercising “supervisory” jurisdiction over the conduct of the Commissioner or his officers. It is not the function of the Board to determine whether the decisions made by the Commissioner or his officers may be open to review in the public law sense, or deal with pure public law issues, eg whether, in the course of making an assessment, the Commissioner or his officers have acted in a procedurally unfair manner, or whether there has been an abuse of power in making an assessment (see Aspin v Estill (Inspector of Taxes) [1987] STC 723, at 725g-727b per Sir John Donaldson MR, and 727b-e per Nicholls LJ ). On the other hand, where the matters complained of would have an impact on whether an assessment under appeal is excessive or incorrect (eg where the assessment is ultra vires the power of the Commissioner to issue), the Board would be entitled to deal with such matters even though they may also give rise to public law grounds to challenge the relevant decision of the Commissioner or his officers (subject to the question of whether the taxpayer should be permitted to launch an application for judicial review where there is available an alternative, adequate remedy[28]). This, we understand, is the effect of the judgment of Lord Jauncey of Tullichettle in Harley Development Inc v CIR [1996] 2 HKLR 147, at 150J-151B:

“Mr. Gardiner argued that neither the commissioner nor the board of review had power to consider an assessment which had been made ultra vires. Such an assessment could only be challenged by way of judicial review. This argument fails for two reasons. In the first place the right of objection in section 64(1) is, validity of notice apart, unqualified and does not purport to restrict in any way the circumstances in which a taxpayer may be aggrieved by an assessment. Furthermore the use of the words ‘confirm, reduce, increase or annul’ appear to cover every situation in which an assessment might be challenged. If the commissioner thinks it is for the correct amount he confirms, if for too much he reduces, if for not enough he increases and if he considers that, for some reason or other which necessarily includes questions of vires it should not have been made at all, he annuls. The objection and appeals procedure is accordingly perfectly competent to deal with the type of challenge to the decisions to assess which Mr. Gardiner mounts.”

44.The above reasoning of Lord Jauncey in Harley Development Inc was adopted by Bokhary PJ in Lam Soon Trademark Ltd v CIR (2006) 9 HKCFAR 391, at 30-31:

“[30] … Harley Development Inc v Commissioner of Inland Revenue [1996] 2 HKLR 147, a decision of the Privy Council on appeal from Hong Kong, illustrates the width of the objection and appeals procedure under the Inland Revenue Ordinance. In that case the Taxpayer challenged the assessment as ultra vires. The Privy Council said (at pp. 150J-151B) that the objection and appeals procedure is perfectly competent to deal with that type of challenge.

[31] For the foregoing reasons, I am of the view that an assessor’s omission to deduct outgoings and expenses incurred in the production of a taxpayer’s chargeable profits does not render an additional assessment void. It merely provides the taxpayer with a ground of objection or appeal. So I reject the Taxpayer’s argument on voidness.”

45.In relation to the allegations that (i) the Assessments or Determination were ultra vires the powers of the Commissioner to issue or make, or (ii) the Commissioner’s officers had willfully abused their statutory powers in deferring the making of the Determination, the Applicant’s complaint that the Board erred in holding that it had no jurisdiction to determine public law challenges is academic because there is no proper basis or foundation for those allegations. In respect of the specific matters relied upon by the Applicant in support of the allegation that the Commissioner’s officers wilfully abused their statutory powers –

(1)  The complaint that the Commissioner’s officers resiled from their previous agreements concerning facts material to the Assessments has already been dealt with above.

(2)  There was no evidence to support the Applicant’s serious accusations against the Commissioner’s officers that they wilfully abused their statutory powers as mentioned at §40(2) above.

(3)  As for the question of whether the Applicant had in fact suffered any “evidentiary” prejudice, as observed by the Judge at §48 of the Leave Decision –

“… the issue of whether Foxconn’s profits were taxable had always been a live issue, arising latest by 2003, 4 months after the tax returns were filed. Foxconn had engaged tax representatives throughout. It would have been apparent to Foxconn and its tax representative that the burden of proving that the profits were offshore and that the expenses were deductible and, hence, the burden of preserving the documentary evidence, rested on Foxconn. Foxconn could not benefit from its own failure to preserve the evidence and/or scarcity of evidence”.

We agree with the Judge’s observation.

46.In relation to the Applicant’s complaint about the Commissioner’s delay in making the Determination, on the face of the matter, a period of 18 years for making the Determination is plainly something which calls for an explanation. The Board examined the evidence in detail (in particular the protracted correspondence and discussions between the Commissioner and the Applicant/its tax representatives), and came to the view that there might have been delay on both sides and a substantial part of the unduly lengthy period of time spent on protracted correspondence and discussions could be equally attributed to the Applicant and its tax representatives. The Board concluded that there had not been inordinate delay on the Commissioner’s part. This is a finding of fact which cannot be said to be perverse or irrational. No error of law was made by the Board in coming to this finding.

47.In any event, even if there had been inordinate delay on the part of the Commissioner or a breach of his obligation to render a determination within a reasonable time under s 64(2), that is not the end of the matter. The Applicant’s remedy in such a situation was to apply to the Court of First Instance for an order of mandamus to compel the Commissioner to make a determination (see Nina T H Wang v CIR [1994] 2 HKLK 356, at 366 lines 22-41; Yue Yuen Marketing Co Ltd v CIR [2012] 4 HKLR 761, at §49). As stated by Lord Slynn of Hadley in Nina T H Wang (at p 366), a failure to act within a reasonable time would not deprive the Commissioner of jurisdiction to make a determination, or render any determination by him null and void. In order to succeed in its appeal against the Determination before the Board, the Applicant would still have to show that the Assessments were excessive or incorrect. This the Applicant failed to do. The Board was correct not to annul the Assessments under s 68(8) even if the Applicant had succeeded in establishing undue or inordinate delay on the part of the Commissioner.

48.In all, none of Questions 1, 2 and 3 has any reasonable prospect of success. We also do not see any other reason in the interests of justice why the Applicant’s proposed appeal should be heard.

DISPOSITION

49.The Summons is dismissed with costs to the Commissioner, to be taxed if not agreed.

Mr Barrie Barlow, SC, instructed by K B Chau & Co., for the Applicant

Mr Johnny Ma, SC, instructed by Department of Justice, for the Respondent