Samsung Sdi (Hong Kong) Ltd v. Commissioner of Inland Revenue

HCIA 7/2022

[2025] HKCFI 1282

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 7 OF 2022

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BETWEEN

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J U D G M E N T

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A. Introduction

1.This appeal concerns the profits tax assessments by the Commissioner of Inland Revenue (“CIR”)  on the Appellant (the “Company”)  for 8 years from 1998/1999 to 2005/2006.

2.On 27 October 2023, for reasons which I set out in my Reasons for Decision handed down on 17 November 2023[1] (the “Leave Decision”), I under section 69(3)(e)  of the Inland Revenue Ordinance (Cap. 112)  (“IRO”)  granted the Company leave to appeal against the Decision of the Inland Revenue Board of Review dated 28 July 2022 (the “Board”, and the “Decision”).  This is the substantive appeal.  Mr David Goldberg KC with Mr Eugene Fung SC leading Ms Kay Seto appeared for the Company.  Mr Stewart Wong SC leading Ms Elizabeth Cheung appeared for the CIR.

B.  The question on which leave was granted

3.The question of law on which leave was granted (the “Leave Question”)  is in the following terms:

Whether, upon the evidence before the Board and in all the circumstances of the case, the Board erred in law in failing to have regard to the unchallenged evidence (both documentary and otherwise)  adduced by the [Company] on the Disputed Profits whilst at the same time adopting a wrong approach to ascertain the “full picture” of the [Company’s] operations and making unjustified criticisms of the [Company’s] witness testimony.

4.On the scope of that question, I say immediately this.  There was a very substantial delay in the rendering of the Decision.  The delay by itself is neither a question of law on which leave was sought, nor relied upon by itself as “some other reason” under the “some other reason” limb under s.69(3)(e)(ii)(B)  of the IRO (as the Company’s principal case for leave was under the reasonable arguability limb, which I have explained in the Leave Decision).  Mr Goldberg in the course of the hearing readily accepted that the delay on its own would not entitle the Company to a relief.  He however relies on it as one feature in support of the Company’s appeal.  I will explain that further in latter parts of this Judgment.

C.  Background facts

5.The background facts are set out in §§1 to 14 of the Decision.  They are not in dispute.  They may be summarised as follows.

6.The Company is a private company.  It was incorporated in Hong Kong on 7 November 1995.  It was a member of the Samsung SDI Group (“SDI Group”), which was ultimately owned by Samsung SDI Company Limited (“SDD Korea”)  in Korea.

7.SDD Korea was one of the largest manufacturers of display devices products.  Those products which were of particular relevance to the Company’s business and this appeal were:

(a)  Liquid Crystal Display (“LCD”);

(b)  Electron Gun (“EG”); and

(c)  Colour Picture Tubes (“CPT”)  and Colour Display Tubes (“CDT”), which are sometimes referred to together as Cathode Ray Tubes (“CRT”).

8.On 11 December 1997, the Company entered into a processing agreement (the “Processing Agreement”)  with Dongguan Houjie Foreign Economic Development Company (the “Dongguan Factory” or simply the “Factory”)  for the manufacturing of LCDs and EGs in the Factory.  The Factory was closed down on 11 December 2003.

9.The Company had investments in five subsidiaries.  They were established and operated in the Mainland.  They were (1)  Shenzhen Samsung SDI Company Limited (“SSDD Shenzhen”), (2)  Tianjin Samsung SDI Company Limited (“TSDD”), (3)  Dongguan Samsung SDI Company Limited (“DSDD”), (4)  Shanghai Samsung Vacuum Electronics Devices Limited (“SSVD”), and (5)  Tianjin Samsung SDI Mobile Display Company Limited (“TSDIM”). 

10.The profits disputed before the Board were more extensive.  For this appeal, they are confined to the following (collectively the “Disputed Profits”):

(a)  The Factory Profits – the profits derived from the sale by the Company to SDD Korea of LCDs and EGs manufactured by the Factory, in the total amount of $600,704,766[2]; and

(b)  The Sales Profits – those which arose from the sale by the Company to worldwide customers of LCDs, EGs and batteries manufactured in the Mainland by DSDD or sometimes by TSDIM[3], in the total amount of $524,253,042[4].

11.By a Determination dated 18 May 2012 the “Determination”), the Deputy Commissioner determined, among other things, that the Disputed Profits were sourced in Hong Kong and thus were subject to Hong Kong profits tax.

12.On 18 June 2012, the Company appealed against that Determination.  The appeal took place before the Board in May 2014.  It lasted 9 days. 

13.The following features of the appeal before the Board are relevant:

(a)  The Company called 7 witnesses[5]. Amongst those, witness statements of 6 are before this Court[6]. They are those of:

(i)  Mr Ki Yon JO (“Mr Jo”).  According to his witness statement[7], he was in March 1996 dispatched from SDD Korea to the Company and became its Finance and Administration Manager (which title subsequently changed to Accounts and Administration Manager).  He had been in charge of the control of the Company’s operations and the management of its financial projects.  He was also responsible for determining which income of the Company should be returned as taxable and which not.  Immediately before the dispatch, he had been a Manager of the Management Support Team;

(ii)  Mr Kee Hwa LEE (“Mr Lee”).  According to his witness statement[8], he had in April 2000 evaluated the Company’s business models in preparation of the Company’s listing in Hong Kong.  He was in July 2000 dispatched from SDD Korea to the Company and became its Finance Manager.  He was responsible for the accounting and financial matters relating to the Company, such as controlling the budgets of the Company.  Prior to the dispatch, he had been a Manager in the Management Support Team of SDD Korea and was in charge of the consolidation accounting of SDD Korea;

(iii)  Mr Chul Ho Yun (“Mr Yun”).  According to his witness statement[9], he first joined SDD Korea in 1989.  He was dispatched in 1997 to Dongguan to conduct survey and studies in relation to the outsourcing of the LCD processing to the Mainland.  He assisted in the establishment of the Factory, and acted as its first Finance Manager until July 1998.  When back to Korea, he continued to be involved in work which related to and supported the operations of the Factory.  He also set the pricing policy for the purchase by SDD Korea of the products processed by the Factory;

(iv)  Mr Chang Hyun CHO (“Mr Cho”).  According to his witness statement[10], he assisted in the establishment of the Factory.  He stayed there until July 2003.  He managed the production of EG at the Factory, the customs clearance in respect of the import to it of raw materials and equipment for the production of EG, and the export of finished EG from it.  He was also involved in the subsequent termination of its operation and the establishment of DSDD in around 2003;

(v)  Mr Young Bae SOHN (“Mr Sohn”).  According to his witness statement[11], he joined SDD Korea in March 2001.  In October 2010, he was dispatched to work in the Company as its General Manager and had become its director since November 2010.  He had been in charge of overseeing the operations of the Company since October 2010;

(vi)  Mr Munseop EOM (“Mr Eom”).  According to his witness statement[12], between March 1993 and July 1998, he worked in the Overseas Sales Team in SDD Korea’s LCD Sales Team.  The Overseas Sales Team was responsible for promoting and selling LCD worldwide to customers other than those in South Korea.  Between July 1998 and March 2004, he was dispatched to Germany and was in charge of SDD Korea’s sales of LCD in Europe.  He returned to South Korea in March 2004.  He worked in SDD Korea’s LCD Sales Team and dealt mainly with the sales of LCDs to Europe, until April 2007 when he was dispatched to supervise the operations of SDD Korea’s branch in Frankfurt, Germany.

(b)  Divers documentary evidence was produced.  In particular, sample transactions (“Sample Transactions”)  were explained and traced through by some of the witnesses, and the relevant documents produced;

(c)  The Company submitted to the Board a document entitled “Comprehensive Statement of Facts” (“Comprehensive Statement”).  It came about as follows:

(i)  By prior directions, parties were directed to file on 17 February 2014 the agreed facts, and that the Company was directed to file its statement of additional facts.  They were ultimately produced by the company and supplied by the CIR in a single combined document (the “Combined Document”). They predated the statements of the witnesses set out above;

(ii)  On the last day of the hearing, the Company submitted to the Board the Comprehensive Statement.  It was adapted from the Combined Document.  Facts were set out therein.  Some were agreed between the parties (the “Agreed Facts”).  They were set out in plain text.  In respect of those that were not agreed, they were underlined (the “Underlined Facts”).  The Comprehensive Statement also contained cross-references to the oral evidence of witnesses called during the appeal hearing;

(iii)  2 paragraphs of the Comprehensive Statement feature heavily in this appeal.  That are, except several words underlined therein[13], part of the Agreed Facts.  They are §§6.1 and 7.1 (the “2 Agreed Paragraphs”), in the following terms:

6.1  Factory Profits arise from the sale, by the Company to SDD, of LCDs and EGs manufactured at the Dongguan Factory.  The Company carried on the sale of LCDs and EGs in the same way.

7.1  Sales Profits arose from the sale, by the Company to worldwide customers, of LCDs, EGs and batteries manufactured on the Mainland by DSDD, one of the Mainland Subsidiaries or sometimes by TSDIM, another of the Mainland Subsidiaries.  The Company carried on the sale of LCDs, EGs and batteries in the same way.

(d)  The Company suggested and submitted to the Board that in addition to the Agreed Facts, the Board should find in its favour some of the Underlined Facts.  They were put forward as “Invited Additional Findings of Facts”. There were a number of them.  Of particular relevance to the present appeal are the following 2 (collectively the “Proposed Findings”):

(i)  The 11^th Invited Additional Finding, in the following terms[14]:

None of the sales to SDD Korea of LCDs manufactured at the Factory was agreed in Hong Kong but all of them were arranged and agreed outside Hong Kong so that, as a matter of hard practical fact, the Factory Profits arose from sales made outside Hong Kong.

(ii)  The 14^th Invited Additional Finding, in the following terms[15]:

None of the sales of LCDs purchased by the Company from DSDD (or TSDIM)  and sold by it to end customers was arranged or agreed by the Company (or by anyone acting on its behalf)  in Hong Kong, but all of them were arranged and agreed by or on behalf of the Company, outside Hong Kong so that, as a matter of hard practical fact, the Sales Profits arose from sales made outside Hong Kong.

14.On 28 July 2022, 8 years 2 months after the hearing, the Board handed down its Decision.  Part of the Applicant’s appeal was allowed.  But the parts of the Determination in respect of the sources of the Disputed Profits were confirmed.

15.Against that part of the Decision on the Disputed Profits the Company is now appealing before this Court.

D.  Applicable general legal principles

16.I set out first some general legal principles relevant to this appeal.

D.1.   Appeal on question of law

17.S.69(1)  of the IRO stipulates that a taxpayer may appeal against the Board’s decision “on a ground involving only a question of law”.

18.I have set out above the Leave Question.  It involves findings of facts.

19.In the context of such points, and as to when appellant intervention is warranted, Bokhary PJ observed at §§31 to 32 of Kwong Mile Services Ltd v CIR (2004)  7 HKCFAR 275 as follows:

31.  Appeals from the Board of Review to the courts lie only on questions of law.  But intervention in an appeal on law only is not confined to instances in which it is apparent on the face of the record that the determination appealed against resulted from a specifically identifiable error of law.  Just because there is no appeal on facts, it does not mean that the appellate court is precluded from detecting and correcting errors of law buried beneath conclusions ostensibly of fact.  Sometimes, as Lord Radcliffe put it in Edwards (Inspector of Taxes)  v Bairstow [1956] AC 14 at p.36, “the true and only reasonable conclusion contradicts” the determination appealed against.  If so, the appellate court will assume that the determination resulted from an error of law.  And that opens the way for the appellate court to intervene on the ground of an error of law.

32.   Mr John Griffiths SC for the Commissioner placed reliance on — although not solely on — what Lord Millett said in his speech in Begum v Tower Hamlets London Borough Council [2003] 2 AC 430 at p.462G–H.  There Lord Millett summarised the Edwards (Inspector of Taxes)  v Bairstow basis of appellate intervention in this way:

A decision may be quashed if it is based on a finding of fact or inference from the facts which is perverse or irrational; or there was no evidence to support it; or it was made by reference to irrelevant factors or without regard to relevant factors.  It is not necessary to identify a specific error of law; if the decision cannot be supported the court will infer that the decision-making authority misunderstood or overlooked relevant evidence or misdirected itself in law.

20.Bokhary PJ explained further in the paragraphs that next follow, that:

33.   Mr Kotewall said that taking irrelevant factors into account and leaving relevant ones out of account are grounds for judicial review as explained by the English Court of Appeal in Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223 rather than grounds for appellate intervention on the Edwards (Inspector of Taxes)  v Bairstow basis.  I can see Mr Kotewall’s point.  But, as it seems to me,taking irrelevant factors into account or leaving relevant ones out of account can lead a fact-finding tribunal so far astray as to reach a conclusion contrary to the true and only reasonable one.

34.   Lord Radcliffe, having noted various ways of putting it, ultimately preferred to put it in terms of the determination appealed against being contradicted by the true and only reasonable conclusion.  And I respectfully share that preference. But I of course acknowledge, as he did, that there are other ways of saying the same thing.  To impugn a determination by saying that a contrary conclusion is the true and only reasonable one is in substance the same as saying that there was no evidence upon which the impugned determination could be reached.  An observation to this effect appears in Viscount Simonds’s speech in Griffiths v JP Harrison (Watford)  Ltd [1963] AC 1 at pp.10–11.  It is of course well-established that whether there is evidence upon which to find a fact is a question of law.  The essence of the exercise was, if I may say so, neatly captured by Nourse J (as he then was)  in Cooper (Inspector of Taxes)  v C&J Clark Ltd [1982] STC 335.  Building on the reference in Lord Simon of Glaisdale’s speech in Ransom (Inspector of Taxes)  v Higgs [1974] 1 WLR 1594 at p.1619C–D to “a ‘no-man’s land’ of fact and degree”, Nourse J said (at p.341D)  that the appellate court “can only interfere where the degree of fact is so inclined towards one frontier or the other as to lead it to believe that there is only one conclusion to which [the fact-finding tribunal] could reasonably have come.”

35.   Yet another way of putting it is to be found in the judgment of the English Court of Appeal in Coker v Lord Chancellor [2002] IRLR 80 delivered by Lord Phillips of Worth Matravers MR.  At p.82, the Master of the Rolls said that an error of law can “consist in a finding of fact which is perverse”.

21.However, in the appellant process, it is important to recognise that reasonable minds may differ.  Here, the 3 propositions explained by Bokhary PJ at §37 of Kwong Mile come into play:

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.

D.2.   Onus of proof

22.According to s.68(4)  of the IRO, in the context of hearing and disposal of appeals to the Board:

The onus of proving that the assessment appealed against is excessive or incorrect shall be on the appellant.

23.On this issue, Mr Goldberg refers this Court to Stephens v Cannon [2005] EWCA Civ 222.  He relies on the principles stated by Wilson J[16] at §46[17], with emphasis added for ease of presentation, that:

46.  From these authorities I derive the following propositions:

(a)  The situation in which the court finds itself before it can despatch a disputed issue by resort to the burden of proof has to be exceptional.

(b)  Nevertheless the issue does not have to be of any particular type.  A legitimate state of agnosticism can logically arise following enquiry into any type of disputed issue.  It may be more likely to arise following an enquiry into, for example, the identity of the aggressor in an unwitnessed fight; but it can arise even after an enquiry, aided by good experts, into, for example, the cause of the sinking of a ship.

(c)  The exceptional situation which entitles the court to resort to the burden of proof is that, notwithstanding that it has striven to do so, it cannot reasonably make a finding in relation to a disputed issue.

(d)  A court which resorts to the burden of proof must ensure that others can discern that it has striven to make a finding in relation to a disputed issue and can understand the reasons why it has concluded that it cannot do so.  The parties must be able to discern the court’s endeavour and to understand its reasons in order to be able to perceive why they have won and lost.  An appellate court must also be able to do so because otherwise it will not be able to accept that the court below was in the exceptional situation of being entitled to resort to the burden of proof.

(e)  In a few cases the fact of the endeavour and the reasons for the conclusion will readily be inferred from the circumstances and so there will be no need for the court to demonstrate the endeavour and to explain the reasons in any detail in its judgment.  In most cases, however, a more detailed demonstration and explanation in judgment will be necessary.

24.It should however be noted, as Mr Wong has pointed out, that Stephens v Cannon is not a tax case.  It related to the assessment of damages by a master arising from a claim relating to a sale and purchase of landed properties.  It concerns the rival degrees of weight 2 experts sought to place upon certain features of the comparables properties.  The master in the end “found it very difficult to satisfactorily resolve this conflict of evidence which is based upon a difference of professional opinion”, so that he found himself “unable to decide that [he] prefer[s] one view over the other, and in those circumstances the case falls to be decided on the basis of the burden of proof.”  The ground of appeal arising was that the master abdicated his judicial responsibility by failing to reach a conclusion, in the light of the two experts’ evidence, as to the price which would have been achieved upon sale. The appeal, as Wilson J observed at §2, “raises a general point about the circumstances in which a court is entitled to despatch a disputed issue of fact by resort to the burden of proof.”

25.In the context of tax appeals, given the statutory imposition of onus of proof upon the taxpayer, disposal of appeals by the Board with reference to onus of proof involves different considerations.  The specific position of tax appeals has been considered in a number of local authorities:

(a)  Yau Wah Yau v CIR [2006] 3 HKLRD 586 is enlightening, particularly when read together with Stephens v Cannon;

(i)  I have underlined the word “exceptional” in the propositions Wilson J set out in Stephens v Cannon;

(ii)  That word, as in the phrases “exceptional situation” or “exceptional case” in the context of the issue under discussion, most likely originated from the earlier case of Morris v London Iron and Steel Co. Ltd [1988] QB 493. It was cited to the English Court of Appeal in Stephens v Cannon. Wilson J at §40 said that:

May L.J. said at 504C−D [in Morris] that “in the exceptional case” a judge confronted with an issue of fact might be in breach of his judicial duty to do other than to resort to the burden of proof.

(iii)  Morris was also cited to our Court of Appeal in Yau Wah Yau. Tang JA said at §§44 and 45 in Yau Wah Yau (emphasis again added for ease of presentation)  that:

44.  … Mr Barlow also referred to Morris …, which concerned a claim in an industrial tribunal for unfair dismissal. … May LJ said at p.504 [in Morris]:

I think it unnecessary further to analyse those decisions.  In my opinion what they come to is this.  Judges and tribunals of fact should make findings of fact in relation to matters before them if they can.  In most cases, although in some cases it may be difficult, they can do just that.  Having made them, the tribunal is entitled to draw inferences from the findings of primary fact where appropriate.  In the exceptional case, however, a judge conscientiously seeking to decide the matter before him may be forced to say “I just do not know:” indeed to say anything else might be in breach of his judicial duty.  In this connection, however, I would say this. Speaking from my own experience some people find it easier to make up their minds than others and it should not be thought that a swift reliance upon where the burden of proof lies and a failure to decide issues of fact in the case, ought in any way to be considered an easy or convenient refuge for anybody who does find it difficult to make up his mind in a particular case.

45.   As is clear from the passage quoted above in an exceptional case a tribunal:

... may be forced to reach the conclusion that they do not know on which side of the line the decision ought to be.

(iv)  That was however the general position.  In the context of tax appeals, and immediately after the above passages and observations, Tang JA with reference to s.68(4)  of the IRO observed further as follows:

46.  Normally when a tribunal is presented with two different versions of a factual event, say, a claim for negligence or breach of contract, one would expect a tribunal to be able to choose between the two versions.  Here, the Board was concerned with a situation where the facts were peculiarly within the knowledge of the taxpayer.  Section 68(4)  of the [IRO] puts the onus of proof on the taxpayer.  In such situations, it is not perhaps less exceptional that decisions should turn on whether the taxpayer has discharged the onus of proof. 

(b)  CIR v Common Empire Limited (No 2) [2007] 3 HKLRD 75 is another local authority on point.  Deputy Judge Anthony To observed therein as follows:

31.   Section 68(4)  of the [IRO] as a rule of evidence is peculiar.  The parties in any civil proceedings, for example, in the Small Claims Tribunal or the Labour Tribunal, bear their burden of proof in accordance with ordinary rules of evidence subject to statutory modifications … But in respect of appeals against the determination of the Commissioner, s.68(4)  provides that the burden is borne by the taxpayer throughout the entire proceeding.  The Commissioner, or the assessor who attends on his behalf, has no burden of proving anything.  He can simply rely on the assessment as correct …

32.   Thus, the law is very well settled.  Section 68(4)  of the [IRO] imposes on the taxpayer the legal or persuasive burden of proving that the assessment appealed against is excessive or incorrect.  The Commissioner has no burden of proving that the assessment is correct.  Hence, the Board is not bound to make any finding of fact one way or the other.  If the taxpayer fails to adduce any evidence to discharge his burden, or if his evidence is disbelieved, the appeal shall be resolved on burden of proof by dismissing the appeal and upholding the assessment.

(c)  In Zarin v CIR (No 2) [2022] 3 HKC 491, Kwan VP observed at §25, that:

It is also pertinent to bear in mind that in an appeal before the Board, the taxpayer bears the burden of proof throughout, and the CIR does not have the burden of proving anything.  For that reason, an appeal before the Board may be disposed of simply on the basis of burden of proof where a taxpayer fails to discharge that burden …

(d)  The role of onus of proof in an appeal seeking appellate intervention on the “true and only reasonable conclusion” basis was explained by the Court of Final Appeal in Real Estate Investments (NT)  Ltd v CIR (2008)  11 HKCFAR 433, that:

Intervention on the “true and only reasonable conclusion” basis?

46.   On the question of whether the Property was trading stock or a capital asset, the Board stopped short of coming to any positive determination one way or the other.  It merely determined that the Taxpayer had not discharged its onus of proving that the Property was a capital asset.

47.   Suppose a tax assessment is made on the footing that the position is X and the taxpayer appeals against the assessment by contending that the position is Y.  The taxpayer will have to prove his contention.  So his appeal to the Board of Review would fail if the Board positively determines that, contrary to his contention, the position is X.  And it would likewise fail if the Board merely determines that he has not proved his contention that the position is Y.  Either way, no appeal by the taxpayer against the Board’s decision could succeed on the “true and only reasonable conclusion” basis unless the court is of the view that the true and only reasonable conclusion is that the position is Y.

48.   For “the position is X” read “the Property was trading stock”, and for “the position is Y” read “the Property was a capital asset”.  That gives you the situation in the present case.  In other words, the Taxpayer fails unless the true and only reasonable conclusion is that the Property was a capital asset.

D.3.   The law on profits tax charge

26.The charge to profits tax is contained in s.14(1)  of the IRO, which relevantly stipulates that:

… profits tax shall be charged for each year of assessment on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business ...

27.Whilst “source” as a concept is easy to understand, its application can be difficult[18]. The applicable approach and broad guiding principles have been considered in a number of high authorities:

(a)  There is CIR v Hang Seng Bank Ltd [1991] 1 AC 306 wherein Lord Bridge said at p.323A that “one looks to see what the taxpayer has done to earn the profit” (the “What Question” for ease of presentation);

(b)  In understanding the formulation of the What Question (and the “Where Question” which I will come to), it is important to bear in mind that Lord Bridge did not intend to lay down any precise rules of law.  That His Lordship intended only to explain the “broad guiding principle” is clear from Lord Bridge’s own words in Hang Seng Bank[19], that:

… But the question whether the gross profit resulting from a particular transaction arose in or derived from one place or another is always in the last analysis a question of fact depending on the nature of the transaction.  It is impossible to lay down precise rules of law by which the answer to that question is to be determined.  The broad guiding principle, attested by many authorities, is that one looks to see what the taxpayer has done to earn the profit in question.  If he has rendered a service or engaged in an activity such as the manufacture of goods, the profit will have arisen or derived from the place where the service was rendered or the profit making activity carried on.  But if the profit was earned by the exploitation of property assets as by letting property, lending money or dealing in commodities or securities by buying and reselling at a profit, the profit will have arisen in or derived from the place where the property was let, the money was lent or the contracts of purchase and sale were effected …

(c)  In CIR v HK-TVB International Ltd [1992] 2 AC 397, Lord Jauncey at 407C expanded the What Question by adding that one also looks at “where [the taxpayer] has done it” (the “Where Question” for ease of presentation). But whilst doing so, Lord Jauncey at the same time explained at 407D that it was “guiding principle” which Lord Bridge was quoting, and that His Lordship “was not intending thereby to lay down an exhaustive list of tests to be applied in all cases in determining whether or not profits arose in or derived from Hong Kong”; 

(d)  In CIR v Orion Caribbean Ltd [1997] HKLRD 924, Lord Nolan, delivering the Privy Council’s advice, again stressed that in deciding the actual source of income in the context of profits tax charge, “no simple, single, legal test can be employed”, that (931E-G):

… the proposition that Lord Bridge was laying down a rule of law to the effect that, in the case of a loan of money, the source of income was always located in the place where the money was lent, is one that cannot stand with the opening words of Lord Bridge quoted above, nor with the explanation of his remarks by Lord Jauncey in the HK-TVB case, nor with the whole range of authority starting from the judgment of Atkin LJ in F.L. Smidth & Co v Greenwood onwards, to the effect that the ascertaining of the actual source of income is a “practical hard matter of fact”, to use words employed, again by Lord Atkin, in Liquidator, Rhodesia Metals Ltd v Commissioner of Taxes [1940] AC 774 at page 789.  No simple, single, legal test can be employed.

(e)  In Kwong Mile, Bokhary PJ referred to and noted Nathan v Federal Commissioner of Taxation (1918)  25 CLR 183 and Liquidator, Rhodesia Metals Ltd v Commissioner of Taxes [1940] AC 774 at p.789, wherein the High Court of Australia (Isaacs CJ at p.190)  and the Privy Council (Lord Atkin at p.789)  respectively said that the ascertainment of the actual source is a practical, hard matter of fact.  The learned PJ explained that the word “hard” is not used to connote difficulty, but used to mean “hard-nosed in that expression’s sense of being realistic”.  The learned PJ then went on to explain the role of legal analysis in the exercise.  He observed that “[judging] the matter of source as one of practical reality does not involve disregarding the accurate legal analysis of transactions” (at §9).  The learned PJ, with reference to Hang Sang Bank and HK-TVB, further observed that the “ascertainment of the source of a profit is not hindered by technical rules, but is helped by the broad guiding principle that one looks to see what the taxpayer has done to earn the profit and where he has done it”.  He concluded at §12 that:

Although very useful in many cases including the present one, the Hang Seng Bank/HK-TVB broad guiding principle is not meant to be a universal test for ascertaining the source of a profit.  Nor would trying to formulate such a test be wise.  It is no exaggeration to describe formulating such a test as “probably an impossible task”.  We have seen it twice so described in the Appellate Division of the Supreme Court of South Africa — by Watermeyer CJ in CIR v Lever Brothers & Unilever Ltd (1946)  14 SATC 1 at p.13 and then by Centlivres CJ in CIR v Epstein 1954 (3)  SA 689 at p.698C.  The situations in which the source of a profit has to be ascertained are too many and varied for a universal judge-made test.  Apart from the words of the statute themselves, the only constant is the need to grasp the reality of each case, focusing on effective causes without being distracted by antecedent or incidental matters. (Emphasis added for ease of presentation.)

(f)  As we shall see, that “only constant” explained by Bokhary PJ (“Only Constant”)  has been referred to and affirmed in subsequently cases; 

(g)  S.14(1)  of the IRO reached the Court of Final Appeal again in ING Baring Securities (Hong Kong)  Ltd v CIR (2007)  10 HKCFAR 417.  Therein, Ribeiro PJ explained and summarised the law as follows:

33.   As pointed out in Commissioner of Inland Revenue v Hang Seng Bank Ltd, [s.14(1)  of the IRO] lays down three conditions for a charge to tax, namely:

(1)  the taxpayer must carry on a trade, profession or business in Hong Kong; (2)  the profits to be charged must be “from such trade, profession or business,” which their Lordships construe to mean from the trade, profession or business carried on by the taxpayer in Hong Kong; and (3)  the profits must be “profits arising in or derived from” Hong Kong.

34.   In the present case, we are concerned with the third condition[20]. It is common ground that the Taxpayer carries on a business in Hong Kong and that the profits referred to in its tax returns are the profits of that business.  What follows from the third condition is that:

… a distinction must fall to be made between profits arising in or derived from Hong Kong (Hong Kong profits)  and profits arising in or derived from a place outside Hong Kong (offshore profits)  according to the nature of the different transactions by which the profits are generated.

35.   Accordingly, to decide whether certain profits arose offshore one must focus on the nature of the taxpayer’s transactions which gave rise to such profits.  This is particularly apposite in a case like the present where the Taxpayer, carrying on business in Hong Kong, seeks to distinguish between profits deriving from its transactions within the jurisdiction and its transactions effected outside Hong Kong.

36.   It is in that context that Lord Bridge’s “broad guiding principle” is to be applied.  One has to consider “what the taxpayer has done to earn the profit in question”, looking at the nature of the transactions in question.  As the Taxpayer provided agency brokerage services it is relevant to note that:

If he has rendered a service … the profit will have arisen or derived from the place where the service was rendered …

37.   In Commissioner of Inland Revenue v HK-TVB International Ltd, Lord Jauncey added:

… Lord Bridge’s guiding principle could properly be expanded to read “one looks to see what the taxpayer has done to earn the profit in question and where he has done it.

(h)  It is material to note that the absence of any universal test on source, and the Only Constant as observed by Bokhary PJ in Kwong Mile, were picked up in ING Baring by both Ribeiro PJ and Lord Millett NPJ:

(i)  per Ribeiro PJ at §38, that

In Kwong Mile…, applying the abovementioned authorities, this Court noted the absence of a universal test but emphasised “the need to grasp the reality of each case, focusing on effective causes without being distracted by antecedent or incidental matters.”  The focus is therefore on establishing the geographical location of the taxpayer’s profit-producing transactions themselves as distinct from activities antecedent or incidental to those transactions.  Such antecedent activities will often be commercially essential to the operations and profitability of the taxpayer’s business, but they do not provide the legal test for ascertaining the geographical source of profits for the purposes of s.14.

(ii)  per Lord Millett NPJ at §§130 and 131, that:

130.    The principles governing the determination of this question were revisited by this Court in Kwong Mile … Mr Justice Bokhary PJ observed at p.283 that Lord Bridge’s broad guiding principle was not intended to be a universal test for ascertaining the source of profit.  Nor would attempting to formulate such a test be wise.  He said that …

Having cited the part of §12 of Kwong Mile which I have underlined above, the learned NPJ continued:

131.    It is well established in this as in a number of other jurisdictions that the source of profits is a hard practical matter of fact to be judged as a practical reality.  It is, in other words, not a technical matter but a commercial one.

(i)  The net effects of the authorities discussed, even individually but a fortiori collectively, are clear.  There is no universal test for ascertaining source of profit in the context of profits tax charge.  The What and Where Questions have been formulated and applied.  They are useful.  But they are only part of the broad guiding principles.  They are not the sole questions.  They do not exclude the relevance of other factors which the tribunals or court may need to consider when addressing the Only Constant, bearing in mind the “need to grasp the reality of each case, focusing on effective causes without being distracted by antecedent or incidental matters”.  The source of profits is a hard practical matter of fact to be judged as a practical reality.  It is not a technical matter but a commercial one;

(j)  The case of CIR v NV Philips’ Gloeilampenfabrieken [1955] NZLR 868 offers an useful illustration of the above, that depending on the facts of each case, it may be necessary to ask a Why Question:

(i)  Whilst the Philips case predated the authorities discussed above, the judgment of Gresson J was in 2018 described by Arden LJ in Ardmore Construction Ltd v Revenue and Customs Commissioners [2018] 1 WLR 5571 (at §19)  as “illuminating”;

(ii)  The issues in the Philips case were summarised by Arden LJ in Ardmore Construction at §19 as follows:

… The issue in the Philips case was whether interest paid by a New Zealand company to a lender in the Netherlands pursuant to a loan raised in the Netherlands and governed by Dutch law was the Netherlands for the purpose of section 87(n)  of the Land and Income Tax Act 1923 of New Zealand.  Section 87(n)  rendered assessable to income tax “income derived directly or indirectly” from money lent in New Zealand.  The New Zealand Court of Appeal held that the source did not mean the place from which moneys came, but the originating cause of the payment being made.  Gresson J, delivering the first judgment of the Court of Appeal, gave an illuminating judgment about determining source (applying the practical approach described below).  He held, relying on the judgment of Watermeyer CJ in the South African case of Comr for Inland Revenue v Lever Bras and Unilever Ltd (1946) 14 SATC 1, that the “source” was the originating cause of the interest paid on a loan was the place where the loan was made …

(iii)  In relation to the “source”, and as summarised in the headnote in the Philips case:

… the actual source of the income was a business transaction, which did not take place in New Zealand, but was carried out in the Netherlands, whereby the credit was made available by way of a loan in the Netherlands in the course of the lender’s business in that country.

(iv)  In holding that the interest was not taxable under New Zealand law, Greeson J observed at 883(10)  to 884(25)  that (with emphasis added):

The ordinary meaning of “source” is the starting-point which, when used in relation to physical things, e.g., a river, is a matter of location.  But it is a word of flexible meaning, especially when used of something non-material or abstract.  It can, and often does, mean the chief or prime cause of something[21]. What has to be determined is the sense in which the Legislature used the word in s 87(n).  The test – what a practical man would regard as the real source as a practical, hard matter of fact – which was formulated in Nathan v Federal Commissioner of Taxation ((1918)  25 C.L.R 183), approved as it has been by the Privy Council in Liquidator,Rhodesia Metals, Ltd (In Liqdn.)  v Commissioner of Taxes [1940] AC 774, must be adopted.  The answer which I should expect the “practical man” to make to a question – What was the source of the money which was received by the Dutch company? – would be the loan it made which means, in effect, the lending of the money – the transaction.  The money was paid because the New Zealand company had contracted to pay it; so that, in some sense, it can be said the obligation which had been entered into was the source of the payment made.  But one must look behind that.  It is seldom that a person makes a payment except under an obligation to do so, and it is, I think, unreal and incompatible with a practical approach to regard the obligation as the source.  It is what produced the obligation that is important.  A lessee pays rent because he has entered into an obligation to do so, but he has only done this on terms that land is made available to him.  An obligation is seldom, if ever, accepted in vacuo: it requires some transaction to give it birth.  The obligation arises from something which has been, or will be, done to warrant it, e.g., rendering services, making land or other property available.  The practical man, in regarding the loan as the source of the payment, would mean, I think, the conduct or the action which was the reason for the obligation being accepted … It appears to me that in interpreting s 87(n), proper regard must be paid to the word “derived”; it should not be read as “received”.  The word “derived” means more than received; it connotes the source or origin, rather than the fund or place, from which the income was taken.  It means flowing, springing, emanating from, or, as was said in Commissioners of Taxation v Kirk ([1900] A.C. 588, 592), arising from or accruing.  To be a “source” of the income within the meaning of the subsection, it is necessary, I think, to look to the originating cause.  It is not sufficient to ascertain the fund out of which the income was in fact paid, which is no more than the reservoir from which it was drawn.  It is not whence it was paid, but why it was paid, that is the determining factor.  The emphasis is not upon the receipt, but upon the derivation of the income. …

E.  Mr Goldberg’s submissions

28.In summary, Mr Goldberg submits that in deciding whether the Factory Profits and Sales Profits are chargeable to profits tax, the questions to ask are the What Question and the Where Question.  There is no a third Why Question – why the taxpayer did what they did.  He submits[22] that:

1.2.2  The Board rejected the agreed facts and all the evidence.  It should have accepted all of it … It should then have decided that the profits arose outside Hong Kong because, on the agreed facts and the evidence before it, that was the true and only reasonable conclusion open to it.  It follows that the Board erred in law in failing to have regard to highly relevant matters and in not reaching that conclusion.

1.3  The Board had before it, as an agreed fact, that the profits in issue arose from sales of goods by the Appellant to a purchaser.  That agreement limited the scope of the enquiry which the Board was permitted to make: it was a given, which the Board should have accepted as a given, that the profits arose from sales of goods.  The Board did not like that agreement, so it wrongly held … that it could decide what the facts were or, more accurately, not decide what they were, for itself. That is an error of law.

1.4.1  The Board, in reaching its lack of a conclusion, erred in law again by misapplying both the burden … and the standard of proof … : its duty was to strive to reach a conclusion on a balance of probabilities, but, instead of doing that, it relied on the burden of proof to avoid reaching a conclusion and looked for clarity and certainty rather than probability; in these respects, it failed in its duty.  Because of the errors it made in relation to the agreed facts, in relation to the burden and in relation to the standard of proof the Board made yet another error.  It did not ask itself the right question.

1.4.2  The right question was “On the agreed facts and the evidence before the Board, is it more probable than not that the sales, from which it was agreed the profits in question arose, were effected outside Hong Kong?”.  But the Board did not ask that question: still less did it attempt to answer it. What the Board did instead was, as can be seen from §§230, 233 and 236 of the Decision …, to seek an absolute answer to a roving enquiry into matters which were irrelevant to a determination of where the profits arose.  That is again an error of law.

1.5  The Decision needs to be remade by the Court.  Fortunately, the Court is in a position to remake it.  All it needs to do is to ask itself the right question and then to answer it by reading the agreed facts and the unchallenged evidence recorded in the Decision itself, and it will be led inevitably to the true and only reasonable conclusion, that the profits in issue arose outside Hong Kong.

29.§§5.14 to 5.16 of Mr Goldberg’s written submissions contain a useful summary of the Company’s case on appeal, that:

5.14.  Upon an analysis of the case which takes account of the Agreed Facts and the evidence, the true and only reasonable conclusion is that the Disputed Profits arose offshore in Korea because that is where the sales from which the Disputed Profits arose were effected.

5.15    The need for the Court to remake the Decision is reinforced by the misconceived approach to the Agreed Facts discussed in detail at §6 below, by the Board’s failure to recognise that it should not decide this case by reference to the burden of proof discussed at §7 below, by its search for an answer beyond reasonable doubt rather than on a balance of probabilities discussed at §§4.2 to 4.5 above and by its rejection of the evidence when it should, for the reasons given at §8 below have accepted it.  Nor do any of the Board’s criticisms of the Appellant’s witnesses justify upholding the Decision: none of those criticisms is sustainable (see §9 below).

5.16.  It is now 26 years after the first year of assessment in question and more than 10 years after the Board’s hearing.  Following Ribeiro PJ’s approach in ING at §83 …, it would be wrong and unfair to remit the case back to a newly constituted Board for a retrial on the “narrow issue of geographical source”.  As endorsed by the CFA in ING, this Court is fully justified and able to examine the unchallenged evidence to decide the “where” question.

30.In the course of his oral submissions, and along the line of those paragraphs reproduced immediately above, Mr Goldberg orally regrouped the Company’s complaints into 5 errors (“Alleged Error (i)” to “Alleged Error (v)”)  and 1 feature (the “Delay Feature”):

(a)  Alleged Error (i)  – Failure by the Board to make up its mind on certain issues when it was the Board’s duty to do that, such that it misapplied the burden of proof on the Company;

(b)  Alleged Error (ii)  – Wrongful refusal to accept the witness’ evidence presented to it, when the evidence was not challenged and should have been accepted; and in doing so, the Board breached 2 principles, namely (i)  rejecting evidence without any rational basis, and (ii)  not accepting evidence which was not subject to challenge;

(c)  Alleged Error (iii)  – Application of the wrong standard of proof;

(d)  Alleged Error (iv)  – Failure to accept that it was bound by the Statement of Facts agreed between the parties;

(e)  Alleged Error (v)  – Consequent on Alleged Error (iv)  above - Failure to identify the question which was properly before it, so that instead of focusing on the correct question, the Board went on a roving inquiry into matters not relevant to the issue before it; and 

(f)  The Delay Feature – that there had been more than 8 years’ delay from the hearing till the Decision, so that no favourable assumptions may be made in the Board’s favour on any finding of facts, so that this Court is in no worse position than the Board when it comes to considering the case.

31.During his oral reply:

(a)  Mr Goldberg referred to the part of Lord Millett’s speech in Begum v Tower Hamlets London Borough Council [2003] 2 AC 430 at p.462G-H which Bokhary PJ cited in Kwong Mile (which I have reproduced above);

(b)  Mr Goldberg, relying upon the above decisions, with reference to the document entitled “THREE ERRORS OF LAW BY THE BOARD (IDENTIFIED BY THE APPELLANT” which Mr Goldberg handed up in the course of his oral reply, further pinpointed what he submitted to be 3 errors of law made by the Board (the “Alleged Error 1”, “Alleged Error 2” “Alleged Error 3” and collectively the “3 Alleged Errors”), as follows:

1.  Failure to take account at §§226 to 240 of the Decision of §§6.1 and 7.1 of the Comprehensive Statement of Facts, so failing to take proper account of relevant matters.

2.  Failure to take account of contemporaneous documents, the inclusion of which was required by the CIR, at §§57.3 and 235 of the Decision, so again failing to take proper account of relevant matters.

3.  Considering arguments based on points not put to the witnesses, so taking account of irrelevant matters.

F.  The Decision

32.I have considered the Decision in full.

33.In the light of Mr Goldberg’s submissions, 3 specific aspects of the Decision are of particular significance.  I set them out for ease of reference.

F.1.  The “Precluded Question Point”

34.The Board explained what it calls the “Precluded Question Point” in §24 of the Decision, as follows:

The Company submits that given the Respondent’s agreement on four paragraphs[23] of agreed facts in the Combined Document the “Why Question” is precluded (the “Precluded Question Point”).  Thus, The Company submits, the preclusion of the “Why Question” runs through all four disputed aspects of Loss on Forward Contracts, Commission Income, Factory Profits, and Sales Profits[24].

35.The Board set out in §25 inter alia §§6.1 and 7.1 of the Combined Document, which are the same as the 2 Agreed Paragraphs.

36.The Board set out the Company’s position, and in so far as still relevant, that:

26.  It was submitted on behalf of the Company that under those paragraphs the answers to the “What Question” have been agreed as regards the legal nature of each of the four types of transaction.

27.  As such, the Company submitted that in this case:

…

27.3.  The Factory Profits arose from the sale by the Company of products which it had manufactured, pursuant to a Processing Agreement, on the Mainland.  Accordingly, the Factory Profits will have arisen where the contract for the sale of the relevant products was effected: ING Baring at paragraphs 150 and 151.

27.4.  The Sales Profits arose from the sale by the Company of products purchased by it from certain of its subsidiaries on the Mainland.  The Sales Profits will, accordingly, have arisen where the contract for sale of the relevant products was effected: ING Baring at paragraphs 150 and 151.

28.  The Company therefore submitted that the Respondent should not be allowed to recharacterise the nature of the 4 types of transaction otherwise than as agreed and the Why Question is irrelevant in each case and is therefore a precluded question.

37.The Board then set out the CIR’s position, as follows (with bundle references omitted):

29.   The Respondent’s position is best illustrated by his response as regards the agreed facts on Factory Profits and Sales Profits.  In Para 111 of the Closing submission, the Respondent said

“111.   Whilst the CIR accepts that the Factory Profits and Sales Profits “arose” from the sale of products (ASF §§6.1 and 7.1 …), that is no more than saying, in the words of the Company’s Leading Counsel, “no sales, no profits” … The ASF, however, does not provide the answer to the real question that the Board has to determine, namely what was the “effective cause” of the earning by the Company.”

30.  From the discussion during the Respondent’s submission this Board understands that Respondent in essence draws a distinction in that admitting a connection between the income, profit, or loss as the case may be portrayed in each the 4 paragraphs of agreed facts does not mean also admitting to the characterisation that such connection is the only or most germane connection.

38.The Board then set out its view on the Precluded Question Point.  It did not accept the Company’s contention.  The Board’s reasons and reasoning were as follows:

31.  The nature of the Board is to provide an administrative avenue to hear and determine taxpayers perceived grievances over the Commissioner’s assessments.  The stakeholders served by the Board ranges from individual with meagre means to international conglomerates.  Unlike the classical courts, no detailed technical procedures anything like the Rules of the High Court or the Rules of the District Court is in place.  Formal technical rules have no place and under Section 68(7)  of the Inland Revenue Ordinance (Cap. 112)  the provisions of the Evidence Ordinance (Cap. 8)  relating to the admissibility of evidence shall not apply.

32.  The only rule akin to pleadings rules is the requirement that under section 66(3)  without leave of the Board and the Company cannot rely on any ground not contained in the notice of appeal filed with the Board under section 66(1).

33.  At the core of Hong Kong’s simple tax system is the recognition that in each case it is the potential taxpayers who know best their businesses and for them to formulate and disclose all facts relevant to their tax liabilities if any.  The Commissioner must therefore be in a position to levy tax in response to the case as formulated and disclosed by potential tax payers from time to time.  It will be difficult for the Commissioner to plead his case and be bound by such pleaded case without knowing the exact evidence that would be presented by an appellant.

34.  It is true that the Board is vested with a wide discretion to determine the procedure adopted for any particular case and in the present case both sides are represented by legal team of the highest calibre.

35.  However, unless a party has specifically drawn to the attention of the Board and the other party beforehand the intention to use any technical procedure to facilitate the determine the issues more effectively and procedural directions have been sought and obtained, all stakeholders are entitled to proceed on the more informal basis normally adopted by Board hearing.  We are therefore not prepared to ascribe to the agreed facts any technical interpretations as if they were pleadings.

36.   We are therefore not prepared to hold as suggested by the Company.

37.   To the extent that the Company position is that of there being a mechanical rule of law as formulated in the dicta of Lord Bridge in Commissioner of Inland Revenue v Hang Seng Bank cited above[25], that position must be rejected.  Lord Bridge was only giving “broad guiding principles” and expressly acknowledged that “It is impossible to lay down precise rules of law ...” for such purpose.

38.   To the extent that the Company’s position is that guided by the broad principles and grasping the reality of the case the Board should find and come to the legal conclusions contended for, that is the task which this Board must discharge.

39.   We will deal with the proper construction of each of the four paragraphs again in context of each issue.

F.2.  The witnesses

39.The Board at between §§40 and 63 set out its overall observations on the witnesses:

(a)  It set out what it accepted and found (§43 in relation to Mr Jo, §46 in relation to Mr Lee, §48 in relation to Mr Yun, §50 in relation to Mr Cho, §52 in relation to Ms Ng, §55 in relation to Mr Sohn, §58 in relation to Mr Eom, and §60 in relation to Mr Hahn);

(b)  It:

(i)  noted specific parts of their respective evidence on the matters in dispute (§44 in relation to Mr Jo, §47 in relation to Mr Lee, §49 in relation to Mr Yun, §51 in relation to Mr Cho, §57 in relation to Mr Sohn, and §59 in relation to Mr Eom); and

(ii)  in the process set out and italicized shortcomings of their evidence (both written and oral, “Shortcomings of the Evidence”)  – e.g. areas which they did not give evidence on, absence of awareness, knowledge or involvement in respect of specific areas in dispute, absence of reasons or justifications as to why they said they knew of certain matters. 

(iii)  Notable examples of those Shortcomings of the Evidence are (all emphasis being the Board’s):

(1)  In relation to Mr Jo, §§44.3 and 44.4 of the Decision, that:

44.3.  Factory Profits in the period between 1998/99 to 2003/2004 tax years are concerned, he was Finance and Administration Manager until May 2001 when he became the Managing Director of the Company until May 2002 and transferred back to South Korea in July 2002 and worked in SDD Korea’s Management Support Team and remained in that position until the end of the Factory Profits period in dispute but gave no evidence of his role therein and why he would know of the matters on which he gave evidence

44.4.   He did not give evidence on Sales Profits as such in his witness statement.

(2)  In relation to Mr Lee, §§47.2.(g)  and 47.3.(d)  of the Decision, that:

47.2.   Factory Profits in the period between 1998/99 to 2003/2004 tax years are concerned,

…

(g)  he also gave evidence that “I do not know in detail how the contracts of sale and purchase between the Company and SDD Korea in relation to the products processed by Dongguan Factory were made.  However,I can confirm that none of the staff of the Company based in Hong Kong ever dealt with the purchase of raw materials from SDD Korea for the processing at Dongguan Factory, or with the sale to SDD Korea of products processed by Dongguan Factory.  Further, it was an understood custom and practice within the SDI Group that persons working in the Management support Team of SDD Korea [or as the Respondent would put it in another way, people at headquarter] could create contractual relations (including contracts of sale and purchase)  between SDD Korea and a member of SDI Group, amongst the members of the SDI Group and between a member of the SDI Group and a third party.” but his evidence is not that in his capacities in the Company he instructed others in, mainland China, South Korea or elsewhere outside Hong Kong to do the things that he said he expected them to do.

47.3.   Sales Profits between 2003/04 to 2005/06 tax years are concerned,

…

(d)  However, he does “not know in detail the arrangement for sales entered into by SDD Korea for and on behalf of the Company with a third party customer”

(3)  In relation to Mr Yun, §§49.1.(d)  and (e)  of the Decision, that:

49.1.   Factory Profits in the period between 1998/99 to 2003/2004 tax years are concerned,

…

(d)  in his statement para 16 he stated what the LCD Resources Management Team and the staff at the Dongguan Factory, would do together including “… (c)  arrange (and so create contract)  for the purchase of those materials from SDD by the Company at prices and on terms determined by the Resources Management Team; … (f)arrange (and so create a contract)  for the sale of the manufactured LCDs by the Company to SDD at prices and on terms determined by the Resources Management Teams.” and in para 19 states that “… After I was relocated back to South Korea to work in the LCD Resources Management Team, I was involved in South Korea in the steps set out in Paragraph 16(c)  and (f).” which at first blush will give an impression that he was involved and attended to all those matters to the same degree of details;

(e)  however, on cross examination extracted below, he said he was not as concerned with some areas as for others [See Transcript Day 5 Page 29 line 8]

“Q. Just to be clear, you obviously say that you’re not in charge of production management, you were in charge of accounting, so the sorts of functions that you describe in paragraphs 16 and 17, for example, determining delivery of materials, production schedules, how many LCDs needed to be processed, they would not be matters with which you were directly concerned; is that correct?

“A. That’s right.

Q. You were concerned with the practical outcome of those sorts of decisions insofar as they affected the costs and the pricing and the accounting for all of that, which was more your function?

 A.  Yes, that’s correct. The reason why I actually mentioned (d), (e), (f) of paragraph 16 and 17 is I just wanted to explain that those things happened pursuant to the processing agreement, which is described in paragraph 10.”

and he was not re-examined thereon.

(4)  In relation to Mr Cho, §§51.1. and 51.2. of the Decision, that:

51.1.  Factory Profits in the period between 1998/99 to 2003/2004 tax years are concerned,

(a)  by and large he is in a position to give evidence on the electronic guns (EG)  product operation which is one component of the Factory Profits;

(b)  he was not involved in the processing of LCD which is the other component of Factory Profit;

(c)  he frankly admits that he “… was not involved in the sale of LCD or EG and hence have no personal knowledge as to how [SDDs]’ Sales Team sold LCD and EG to third party customers worldwide”

(d)  he only worked in Dongguan from the beginning of the period from 1 April 2003 to July 2003 (about 4 months)  when he ended his tour of duty there but he stated

(i)  “SDD Korea’s Sales Team (working in South Korea)  was in charge of and conducted the relevant marketing and selling activities for the sale of LCD and EG to third party customers worldwide.  I was not involved in the sale of LCD or EG and hence have no personal knowledge as to how SDD Korea’s Sales Team sold LCD and EG to the third party customers worldwide.”

(ii)  he was “aware”, without explaining why,“However, I was aware that after a contract for sale and purchase of LCD or EG had been concluded with a third party customer [without stating by whom], staff of SDD Korea’s Sales Team (working in Korea)  would inform SDD Korea’s Resource Management Team (also working in South Korea), which would take steps to fulfil the order of the customer.”

(iii)   “These involved communicating with staff of Dongguan Factory working in the Mainland (including myself).  It was the understanding of the staff of Dongguan Factory (including myself)  that, in arranging for the import of raw materials and/or equipment (paid/or by the Company)  to Dongguan Factory and the export of processed EG to SDD Korea’s customer (or designated forwarder by SDD Korea), we were acting for the Company in accordance with the arrangement within the SDI Group.”

51.2.   Sales Profits between 2003/04 to 2005/06 tax years are concerned, he“… worked in the Support Team of the Battery Pack Business Division of SDD Korea… responsible for managing the sale and delivery of raw materials and equipment to DSDD.”in that period but he gave evidence not just on battery pack business but generally on all Sales Profits products without distinction.

(5)  In relation to Mr Sohn, §§57.2. and 57.3. of the Decision, that:

57.2.   Factory Profits (1998/1999 to 2003/2004)  including the Processing Agreement role of SDD Korea and typical arrangement with Kessel and KPMG report on 2 sample transactions and we note

(a)  he would not have personal knowledge of the events in 1998/99, 1999/20 and 2000/01 before he joined the group in March 2001 but he purports to give evidence on what he “understands” to be the position at the inception of the Processing Agreement in 1997;

57.3.   Sales Profits (2003/2004 to 2005/2006)  including SDD Korea Sale Team and typical Supply Contracts and we note

(a)  he has not explained why and in what position he would have knowledge of the matters for the Company for the year 2003/2004 to 2005/2006 before his posting to Hong Kong when he was in an undisclosed position in Korea but he purports to give evidence on what he “understands” to be the position.

and

(6)  In relation to Mr Eom, §59.1. and 59.2. of the Decision, that:

Factory Profits

59.1.  Factory Profits in the period between 1998/99 to 2003/2004 tax years are concerned, he was in Germany at that time.  However,

(a)  in respect of Sale of LCD by SDD Korea to third party customers Para 6-15, he purports to give evidence of the “typical sale process” from his previous experience working in Korea in the SDD Korea’s Overseas Sales Team for a long time (in fact between 1992 and 1998).  There is no information on his capacity or rank within the Overseas Sales Team to justify his assertion that he was “aware of the typical sale process” on how things were done so as to justify his assertions that after he was dispatched to Germany in 1998 things must still have worked that way and that everything was done in South Korea.

(b)  in respect of Sale of LCD by the Company to SDD Korea Para 16-19. he purports to give evidence of of [sic] the “customary arrangements” in the SDI Group” and describe the steps taken by the LCD Resource Management Team in which he never worked.

Sales Profit

59.2.   He gave evidence in respect of the Sales Profits (2003/2004 to 2005/2006)  in respect of Sale of LCD by the Company to third party customers Para 21 to 23, and Sale of LCD by DSDD or TSDIM to the Company Para 24 to 26.  During these 3 years, he was in Germany during the 1^st year and was with the LCD Sales Team for the last 2 years.  However, he purports to give evidence of the role of the LCD Resources Management Team [para 22] and justifies his knowledge because he “was involved in purchase of LCDs from the Company” From his experience in Germany for one product he was able to extend that to negative any participation in similar process anywhere else in the world except Korea.

40.At §§62 to 63, the Board set out CIR’s observations on the evidence, and the Board’s view on the same, that:

Respondent’s Observation

62.  The Respondent generally observed as follows:

62.1.   It is obvious that the witness statements have been tailor-made to fit the particular case that the Company’s lawyers want to put forth.  Certain similar phrases are repeatedly used throughout different statements; for example

(a)  “customary arrangement” (Jo §39; Yun §19 … ; Eom §16),

(b)  “understood custom and practice within the SDI Group” (Lee §27).

62.2.   Similarly, when the witnesses gave evidence, it was apparent that there was a well-rehearsed and memorised “script” that they often stuck to, such that “answers” given to questions were not in answer to the question posed at all.  A prime example was when asked about what other documents he had read to prepare his statement, Sohn out of the blue suddenly said:

“So after I got dispatched to SDI(HK), upon reviewing the accounting record, it was clear and simple. In order to confirm additionally, I decided to meet those people who were working at the time to reconfirm. When I reviewed the accounting records, there was a sales in SDI(HK). I’m referring to the sales between the Dongguan factory and also the SDI office Hong Kong. Since there was a sales, that’s why the profit incurred. My understanding was that SDI staff in Korea in charge of the sales conducted the sales activity on behalf of Hong Kong office. That’s why it was returned as a nontaxable income. That was my understanding. That was my simple understanding. So in order to reconfirm my understanding, so when I had a chance to meet, for example, Mr Eom, then I met him and reconfirmed. (Sohn XXN …)”

63.  These are valid criticisms and affects the overall creditability of some significant elements of the evidence.  However, we generally find the witnesses to have tried to be helpful to the Board and not out to mislead.

41.When considering the Company’s appeal in relation to the Disputed Profits, the Board set out and considered the witnesses’ evidence specifically relied upon and highlighted by the Company – see below.

F.3.  Consideration of the 11^th and 14^th Invited Additional Findings, and dismissal of the appeal in relation to the Disputed Profits

42.The Board correctly stated the general law on profits tax at §§16 to 21 of the Decision.  ING Baring, HK-TVB, Kwong Mile, and Hang Seng Bank were referred to.  Various passages were cited, which included §38 of ING Baring wherein Ribeiro PJ reiterated the Only Constant. 

43.The Board focused upon the Company’s appeal in relation to the Disputed Profits in §§179 to 241 of the Decision.

44.The Board set out the related background materials (in particular the Processing Agreement, the Sample Supply Contracts, the Four Sample Transactions, and the Overseas Sales Arrangement), the contended factual bases in relation to the Factory Profits (in particular §6.1 of the Combined Document and the 11^th Invited Additional Finding[26])  and the Sales Profits (in particular §7.1 of the Combined Document and the 14^th Invited Additional Finding[27]).  The Board in particular referred to and reproduced the parts of the witnesses’ evidence which the Company relied upon[28] (as set out in Appendix 3 of the written submissions made on behalf of the Company (which written submissions were entitled Nutshell on Factory Profits and Sales Profits, (“Nutshell on DPs”))), and noted the Company’s submissions on the absence or limited scope of CIR’s cross-examination in respect of those matters.

45.The Board next set out the Company’s and CIR’s respective characterization of the Disputed Profits.  In the process:

(a)  the Board in particular referred to and reproduced the parts of the witnesses’ evidence which the Company relied upon to show that Sales in relation to Factory Profits (as set out in Appendix 2 of the Nutshell on DPs)[29] and Sales Profits (as set out in Appendix 1 of the Nutshell on DPs)[30] were both effected in South Korea.  The Board also noted the Company’s submissions on the absence or limited scope of CIR’s cross-examination in respect of those matters;

(b)  the Board set out the “Interposition Theory” put forward by CIR, that the Company was interposed after each relevant transaction, and that:

222.4.  In both instances, what the Company could contribute, and what SDD wanted it to contribute (in return for which SDD allowed the Company its cut), was its Hong Kong presence.  What the Company did to earn the Factory Profits was its service as a signatory to the Processing Agreement with a presence in Hong Kong and thereafter to book the sales into its accounts in Hong Kong.  What the Company did to earn the Sales Profits was its service as a reinvoicing company in Hong Kong.  Everything that the Taxpayer did to fulfil its functions was done by it in Hong Kong.  As in Kim Eng, the source of the Factory Profits and the Sales Profits was Hong Kong.

46.The Board then stated its findings on the 11^th and 14^th Invited Additional Findings and the conclusions it reached, as follows:

Conclusions on Disputed Profits

Findings on the 11^th to 14^th Invited Additional Findings

226.  We have found for the Company on the 13^th Invited Additional Findings.

227.    Even as we have noted that the Company has correctly pointed out that the witnesses have not been specifically challenged in cross-examination by the Respondent on the 11^th and 14^th Invited Additional Findings, we are not bound to make the findings as invited by the Company.

228.    We repeat our observations in paragraphs 74 and 75 herein and especially the quotation therein Mortimer J.’s observations.[31]

229.    We have to do our own assessment of the evidence.

230.    The scale of operations underlying the Disputed Profits are much more complex than those for the Commission Income.  Fundamentally, we do not have a clear picture of the roles and extent of the roles or the overall in charge position in the direct chain of command of the such witnesses to enable him to give evidence to negative the participation of others for any particular role in relation to the Disputed Profits.

231.    To the extent that Mr. Yun have tried to explain the basis of his knowledge in his witness statement, he did not assert that position with any certainty in cross-examination.

232.    What is more, we note that the witnesses giving evidence on the Disputed Profits tend to assert understanding of customs and practices or assume certain practice they encounter in their work and extrapolate it to the work of other departments as norms or general practices and say that they are the same without explaining why.

233.    Instead of giving factual evidence within their own sphere of knowledge, they give evidence of assumed practices, give opinions, and draw legal conclusions.  Although there is absolutely not basis to conclude they intend to mislead this Board, such tendency has made their evidence unreliable.

234.    We are therefore not comfortable to find for the 11th and 14^th Invited Additional Findings as suggested by the Company.

235.    This Board notes the submission of the /Respondent that even Mr Eom (see his statement paragraphs 6-15 …)  especially paragraph 8 states that “general terms and framework” of supply contracts, of which the ones with Nokia Supply Contract and Motorola Supply Contract were “examples”, “applied to all supplies of LCDs by SDD to the customer”.  However, just as we are not comfortable to extrapolate from the small and dated samples in the 4 sample transactions, we are not prepared to find as fact the 12^th Invited Additional Findings on the invitation of the Respondent just on Mr. Eom’s say so.

Board’s Conclusions

236.    As noted above in relation to the witnesses presented by the Company on the Factory Profits and the Sales Profits, we are not satisfied that they are in a position to give factual evidence of who is and, more importantly, who is not involved in the transactions and a fortiori, where.

237.    We are in agreement with the Respondent’s submission in paragraphs 70.2 and 70.3 herein.

238.    We therefore dismiss the Company’s appeal in respect of the Disputed Profits.

239.    For completeness, we have to decide whether the Disputed Profits have been sourced in Hong Kong on the basis as suggested by the Respondent.

240.    The evidence presented by the Company piecemeal and incomplete.  The underlying facts are just too uncertain.  The interposition theory as suggested by the Respondent could well be one cause or factor.  The question is whether it is in reality the effective cause rather than one cause.

241.    Thus, we are also not prepared to positively so find.

47.In the parts of the Decision reproduced above, the Board referred to other paragraphs of the Decision.  They are, for the sake of completeness, reproduced here also:

BURDEN AND EVALUATION

…

70.  The Respondent further submitted as follows:

…

70.2  It is evident that the Company has chosen to present a very piecemeal, selective and oftentimes cryptic picture in their evidence to the Board: clearly, the CIR and the Board are not in a position to piece together the full story as to, for example in relation to the Commission Income, Factory Profits and Sales Profits, what the different departments and organs within the SDI Group and the Company were doing, and the precise role they were playing, to effect the transfer of goods that had been taking place during the relevant period.  A prime example of this was when the Board was still being given new evidence on the afternoon of 20.5.2014 (Day 7), upon being told for the first time that there had been weekly meetings with Nokia, something which had hitherto never been mentioned.

70.3.  Where the Company falls short in presenting the full picture to the Board such that the Board is left unable to reach a conclusion as to what was happening for the Company to have earned the income, it is the Company that would have failed to satisfy the burden on it to set aside the CIR’s assessments.

…

FURTHER REQUESTED FINDINGS OF FACTS

…

74.   The Respondent referred us to All Best Wishes Ltd. v. CIR (1992)  3 HKTC 750 at 773 where Mortimer J said:

“[A] tribunal which hears oral evidence and considers documents, is not in the position (as is submitted)  that it has to find what the witnesses says is the fact, even if he is not cross-examined, and even if he is not contradicted by other evidence. A tribunal, in those circumstances, may look at the whole of the circumstances presented to it and may find that the oral evidence is not acceptable on particular matters. Or may find certain facts contrary to the evidence that has been given and, indeed, contrary to what appears in the documents and other material before it.”

75.   Further the Respondent points out that all the witnesses, none of whom are legally qualified, try to offer “evidence” as to when a contract was concluded or created.  Indeed, Mr. Sohn states

“The witness statement was prepared by Kalra and our legal team, and each witness confirmed. ... I have explained my understanding, and the legal team helped in drafting. After I read the final version, I confirmed and signed. ... the confirmation was arranged between the head of the legal team and then local legal team in Hong Kong.”

G.  Mr Wong’s submissions in summary

48.Mr Wong summarises the CIR’s response at §§3 to 5 of his written submissions, that:

3.  Simply put, to discharge properly its onus of proving that the assessments appealed against in relation to the Disputed Profits are excessive or incorrect, the Company needed the Board to make certain findings of fact, namely the 11^th and the 14^th Invited Additional Findings.  It failed and this appeal is just an attempt to try again when this is not what an appeal on points of law is about.

4.  The Board noted and set out carefully the evidence and submissions of the Company in this regard, considered and assessed it and, as it was entitled to do as a tribunal of fact, refused to make the Proposed Findings.  It came to a view on the nature and quality of the evidence adduced and its view and conclusion thereon is one which it was fully entitled to make (no matter what this Court would have done had it been the fact-finding tribunal itself).

5.  The Company is simply repeating the same arguments that were made to the Board below and which were not accepted.  It has identified no error of law and the appeal is little more than an attempt to overturn decisions on facts that the Board made against the Company and asking the Court to substitute itself as a fact-finding tribunal. This is wrong.

49.Specifically, Mr Wong submits as follows:

(a)  Given the statutorily-imposed burden of proof, the Board is duty bound to apply it[32], so that where the Board is of the view that the evidence adduced by a taxpayer is insufficient for it to make the necessary findings in its favour, it is plainly right for the Board, and indeed it must, dismiss the tax appeal;

(b)  On the 2 Agreed Paragraphs[33]:

(i)  the CIR adopts his position taken before the Board, as summarised in §§29 and 30 of the Decision.  The 2 Agreed Paragraphs are not an agreement on the effective cause, or what the Company did to earn the profits in question. They do not answer the What Question.  They are a generic description of the nature of the profits;

(ii)  The What Question was therefore open before the Board.  It is hence for the Company to convince this Court that the refusal by the Board to make findings as per the Proposed Findings involves an error of law;

(c)  In respect of the Proposed Findings:

(i)  Each of the Proposed Findings comprises 2 limbs (the “First Limb” and “Second Limb”)  and one “Implicit Proposition” [34]:

(1)  The First Limb is a factual premise, that the sales were arranged or agreed (and thus effected)  outside Hong Kong;

(2)  The Second Limb is that the relevant profits arose from sales made outside Hong Kong; and

(3)  The Implicit Proposition underpins and focuses upon the so that, to the effect that the geographical source of the trading profits here was the place where the sales were arranged or agreed (or effected)  (Section D2 of his written submissions);

(ii)  Even if the What Question and the First Limb were to be resolved in the Company’s favour[35]:

(1)  the Company could only succeed if the effecting of sales in Korea was the effective cause (i.e. the Implicit Proposition), and the failure by the Board to so find involves an error of law;

(2)  The Implicit Proposition is however not a proposition or principle of universal application, and the Board committed no error of law in not finding the Implicit Proposition on the facts of this case;

(3)  The Board was entitled to have the full picture so as to decide on the effective causes.  The Company’s criticisms that the Board had engaged in a “roving enquiry” in this regard is not justified;

(iii)  In respect of the First Limb, and despite the “unchallenged evidence”, the Board was in any event entitled to refuse to make findings of facts thereon, and such refusal is not an error of law[36];

(d)  In the absence of the other complaints (or at least as they are not made out), the delay alone cannot succeed as a ground.

H.  Consideration of the Alleged Errors

50.I now proceed to consider the errors which the Board is submitted to have made.  I will focus upon the 3 Alleged Errors pinpointed by Mr Goldberg.  I will however also deal with a number of points that relate to them.

H.1.   Deciding the appeal on onus of proof

51.Both in his written submissions and orally, Mr Goldberg made repeated complaints against the Board’s decision refusing to find the Proposed Findings in favour of the Company.  In doing so, Mr Goldberg relied heavily on Stephens v Cannon.

52.I have considered Stephens v Cannon above.  As I have observed, Stephens v Cannon is not a tax case.  I have also considered Yau Wah Yau, Morris, Common Empire, Zarin and Real Estate Investments.  In my view, given the statutorily-imposed burden of proof, in the light of the local authorities discussed above, and where a Board is of the view that the evidence adduced by a taxpayer is insufficient for it to make the necessary findings in its favour, the Board is entitled to decide an appeal on onus of proof.  I accept Mr Wong’s submissions that the Board is indeed duty bound to apply the statutorily-imposed burden of proof.

53.Mr Goldberg at §1.1 of his written submissions submits that “the Board decided that it could not make up its mind where certain profits arose.” He repeated it as Alleged Error (i).  It is with respect unfair to put it such. The criticism is also not made out.  The Board decided that in the light of the evidence the Company had adduced, it was not in a position to make the Proposed Findings.  It was not a case of the Board not being able to make up its mind. Of course, whether the evidence adduced by the Company was indeed insufficient to support the Proposed Findings involves other considerations, which is more related to the 3 Alleged Errors.

H.2.   The 2 Agreed Paragraphs, the What Question, and the Precluded Question Point

54.The captioned matters embrace Alleged Error 1.

55.I deal with a preliminary point first:

(a)  Mr Wong submits that any arguments relating to the effects of the Agreed Facts, and the Board’s rejection of the Company’s arguments thereon, are not open to the Company for it never applied for, nor has it been given, leave to argue this point;

(b)  I do not accept that submission.  In my view, the Leave Question (and in particular the term “unchallenged evidence”)  is of sufficient width to cover the point.  Mr Wong has in any event made full written submissions on the points.  There is no injustice in allowing the Company to run the same.

56.I have specifically considered §3.3 and §§6.1 to 6.18 of Mr Goldberg’s written submissions, where he focuses upon the Company’s complaint in relation to the Board’s treatment of the 2 Agreed Paragraphs.

57.Mr Goldberg points to §24 of the Decision.  He submits that that paragraph fails to reflect the Company’s submissions.  He states at §§6.3 and 6.7 of his written submissions that:

6.3  The Appellant’s submission was not that the “why” question is precluded but that asking and answering a “why” question does not in this case help to identify the source of profits: it does not tell the enquirer the answer to the “what” question and asking “why did you sell that” cannot tell the enquirer where the sale was made.  The idea that the law is in this case at all interested in the answer to a “why” question is a fiction.

6.7  What the Appellant was actually submitting and submits on this appeal is that in relation to the Disputed Profits, the “what” question is answered by §§6.1 and 7.1 of the Comprehensive Statement of Facts … and the answer which those paragraphs give is “sales”.

58.On top, Mr Goldberg further submits that the wording of the 2 Agreed Paragraphs responds precisely to the language of s.14(1)  of the IRO. They mean what they say.  It is sophistry for CIR to say that agreeing that the Disputed Profits arose from sales does not mean that the profits arose from sale.  Parties had been directed to agree facts.  The Company had given to CIR copies of all the documents it intended to rely on.  The agreement was voluntary.  There was no trickery.  It was not the Company’s case that some technical interpretation had to be ascribed to the 2 Agreed Paragraphs.  It would be highly prejudicial if parties had agreed facts and were then allowed to walk away from them.  The purpose of agreeing facts is not to allow one party to trap another.

59.I have summarised above the CIR’s stance.  I have also reproduced §§29 and 30 of the Decision, which the CIR adopts.

60.For the following reasons, I do not accept the Company’s submissions:

(a)  First off, I am of the view that the Board quite clearly understood and appreciated the Company’s stance.  That becomes clear when §§24 to 39 of the Decision are read in their totality, when §24 is read in the context provided by those paragraphs, and when §28 is specifically taken into account;

(b)  As will be clear from the discussions below, I am of the view that the way the Board formulated the Precluded Question Point in fact encapsulated the core differences between the CIR and the Company well;

(c)  I have discussed above the law on profits tax charge.  I do not repeat them here;

(d)  To those discussions I add at this stage the case of Transvaal Associated Hide and Skin Merchants v Collector of Income Tax, Botswana (1967)  29 SATC 97:

(i)  The appellant in that case was a company incorporated in South Africa. The case concerned the source of the profits derived from sales the appellant effected from its offices in South Africa of hides it purchased and cured in Botswana;

(ii)  The Collector of Income Tax of Botswana assessed the company to income tax on those profits;

(iii)  In dismissing the appellant’s further appeal to the Court of Appeal of Botswana, Schreiner JA acknowledged that it was the sales which produced the money.  But the learned judge likened the sale of cured hides to the cases of ore mined and treated in one country and sold in another, or goods manufactured in one and sold in another.  The characteristic feature of a hide merchant’s business is not that he buys and sells goods, but that he cures hides which can then be sold.  In such a business, there is no need to have elaborate selling offices.  Nor need the offices be situated in any particular place.  But there must be sufficient curing facilities, and they must be situated at the site of the abattoirs.  The curing is dominant over the selling.  The learned judge reasoned and observed that[37]:

… it is necessary to choose between the country where the hides were cured and the country where they. were sold.  In such a situation, it has been held that the dominant (or main or substantial or real and basic)  cause of the accrual of the income must be sought. Other ways of putting the matter have been used but they are all governed by the consideration that, since it is impossible to frame a precise and generally applicable legal test, the question must always be one of fact.

No doubt selling the cured hides is necessary to bring an income to hand, so that it might be said of the sales, as much as of the curing, that they are a causa sine qua non of the accrual of the income.  But the place where a causa sine qua non exists cannot be decisive of the place of origin of the income, for there may be a number of causae sine qua non.  One must look for something more – something like the dominance or basicality used in the abovementioned list of expressions; or like what I venture to call the highest. or higher, degree of essentiality.

When all the activities giving rise to the income consist of buying and selling, the country where the sales were made is generally held to be the source of the trading profit.  But one can imagine cases where there is an unlimited market for the goods at a fixed price and the only business problem is to find sellers of the goods.  In such cases the country where the goods were bought, if it was different from that in which they were sold, might properly be held to have been the source of the profit.

But the present case is not a simple one of purchase and sale.

It is more like a case where ore is mined and treated in one country and sold in another, or where goods are manufactured in one country and sold in another.  It would be unreasonable and artificial to attribute the origination of the profit wholly to the sales, which in the end produced the money.  Before the sale of any parcel of mined and treated ore or of manufactured goods takes place it is natural to say, as was substantially said by Dixon J. in Angliss’s case, 1931 Ratcliffe & McGrath 252 at 270, that there is an unrealized profit in the ore or the goods which the sale only turns into cash.

(e)  Schreiner JA’s observations cited above in relation to causae sine qua non are in particularly entirely consistent with Ribeiro PJ’s observations at §38 of ING Baring.  As submitted by Mr Wong[38] which I accept, there is no “but for” test in the search for source of profits;

(f)  Mr Goldberg accepts[39] that there may be cases where the answer to the What Question is unclear, in which case a Why Question might help to illuminate the answer to the What Question.  He submits however that this case is not of that type, and that the answer to the What Question is a given;

(g)  CIR disagrees.  Mr Wong submits[40] that the 2 Agreed Paragraphs mean no more than that the Company had a role, or was involved, in sales of products from which the Disputed Profits arose.  They mean no more than “no sale, no profits” – a causa sine qua in other words.  The phrase “profits arose from the sales of products” tell one nothing about the What Question.  The effective cause would still have to be identified;

(h)  There lies in my view the core differences between the parties, such that if the Company’s stance was accepted, it could be said that the Why Question would become irrelevant and precluded, in the way as the Board formulated the Precluded Question Point;

(i)  The law is in my view clear.  The formulation of the What and Why Questions are only part of the broad guiding principles in addressing the Only Constant.  Mr Goldberg is in effect seeking to argue that the 2 Agreed Paragraphs identified the “effective causes”, so that what was left was answering where the Company did them (the Where Question);

(j)  If deemed appropriate, the CIR may indeed agree to the “effective causes” as part of the agreed facts.  In the present case, the CIR denies having done so.  Whilst I heed Mr Goldberg’s submissions on the wording of the 2 Agreed paragraphs vis-à-vis that of s.14(1)  of the IRO, and the circumstances in which they were reached, the language of the 2 Agreed Paragraphs is far from clear.  They do not say that the “effective causes” are agreed.  They permit the interpretation and effects the CIR puts forward, that they mean no more than “no sale, no profits” – a (but not the only)  causa sine qua;

(k)  The duty of the Board was to consider the evidence to identify the effective causes.  The Why Question could be engaged.  The 2 Agreed Paragraphs are far from clear in their effects.  The Board did not refuse to accept them, as the Company claims it did.  The Board just did not give them the effects which Mr Goldberg put to them.  I reject Mr Goldberg’s submissions that the 2 Agreed Paragraphs limited the scope of the enquiry which the Board was permitted to make, at least not to the extent that the answer to the What Question had become a given, that the Why Question been rendered irrelevant, and the identification of the effective causes be dictated entirely thereby. In my view, given the equivocal meaning of the 2 Agreed Paragraphs, it would have been wrong for the Board to have so concluded;

(l)  I note in this regard the Interposition Theory:

(i)  As I have set out above, CIR put it forward before the Board;

(ii)  In my view, despite the 2 Agreed Paragraphs, there was indeed room for the CIR to put it forward.  I do not accept Mr Goldberg’s submissions to the contrary[41];

(iii)  I will come back to the Interposition Theory latter and deal with it further in another context;

(m)  In my view, once the law and the scope of the 2 Agreed Paragraphs have been properly looked at, Mr Goldberg’s complaints of unfairness also go away;

(n)  Mr Goldberg submits[42] that the “Board did not like that agreement”.  I see no basis for that submissions.  Quite the contrary, as I have analyzed above, given the law and the language of the 2 Agreed Paragraphs, it would have been wrong for the Board to have regarded itself bound by them in the way Mr Goldberg submitted they should have been; 

(o)  Mr Goldberg speaks about the Company being trapped[43]. Mr Wong on the other hand submits that it is the Company which is seeking to trap the CIR.  “Trap” is a strong word.  But this case serves as an example that if and where either party perceives any difference in the interpretation of important agreed facts like the present ones (like the Company which sought to rely on the 2 Agreed Paragraphs to establish important facades of its case), it will be useful for that party to spell out the intended use expressly, put the other side on notice, so that the facts can be agreed on a fully informed basis.  Agreement on facts is to save costs and time.  The creation of agreed facts which subsequently calls for adjudication of their breadth and implication serves the contrary purpose;

(p)  Mr Goldberg submits[44] that the Board, despite what it said at §39 of the Decision:

… does not do that in relation to the Disputed Profits, so demonstrating that it did not have proper regard to the agreed facts: it just ignored them; if that were not so, it would have had to say what they mean though, of course, there is no doubt about what they mean.

(q)  I do not accept those submissions.  The Board referred again to the 2 Agreed Paragraphs at §§200 and 210 of the Decision.  The Board clearly did not ignore them, but, in conjunction with the Proposed Findings, considered them as the contended factual bases for effective sources of the Disputed Profits.  I also do not agree that “there is no doubt about what [the 2 Agreed Paragraphs] mean”.  I have stated my reasons above.   

61.In my view, and for the above reasons, the complaint based on Alleged Error 1 fails.

62.The above also deals with Alleged Error (iv), which in my view is not made out.

H.3.   Alleged Errors 2 and 3

63.I consider Alleged Errors 2 and 3 together.

H.3.1.  The approach to “unchallenged evidence”

64.I have summarised the parts of the Decision where the Board set out its overall observations on the witnesses and the specific matters which it noted.  I have also summarised how the Board specifically set out the relevant evidence when considering the Company’s appeal in relation to the Disputed Profits.

65.The Board found as correct that the witnesses had not been specifically challenged in cross-examination on the Proposed Findings.  It said that it was, despite that, not bound to make the Proposed Findings.  It referred, amongst other matters, to All Best Wishes.  It says that “[w]e have to do our own assessment of the evidence.”  Having down so, and for reasons given primarily in §§226 to 239, the Board decline to make the Proposed Findings.

66.2 questions arise from that.  The first one is the overall approach, and in particular whether the Board has made any error in adopting that approach. The second one is whether the Board has made any error in its assessment of the evidence.

67.I in this sub-section focus upon the question of approach.

68.Under the heading “The Proper Approach to the Appellant’s Evidence”, Mr Goldberg submits in §§8.1 to 8.7 of his written submissions subject as follows:

(a)  He submits that the “Board may not reject evidence without a good reason”, and “there is not anywhere in [the Decision] a reason for rejecting evidence” (§8.2);

(b)  He refers to ING Baring at §§50 and 53 where the Court of Final Appeal criticized the Board there in having placed an erroneous emphasis on matter regarded as antecedent or incidental to the profit-generating operations (§8.3);

(c)  He submits at §8.4 that:

As there is no rational basis for ignoring the evidence led by the Appellant in relation to the one matter which is significant (where were the sales effected?)  the Board was not allowed to ignore the evidence – see Markem Corporation v Zipher Ltd [2005] RPC 31 at §62 (Jacob LJ)  … .  The Board made a serious error in ignoring it here.

(d)  He submits at §8.6 of his written submissions that “an even more serious departure from the correct principles is to be found in the Board’s refusal to accept evidence which was not challenged by cross-examination.” He refers again to Markem Corporation v Zipher Ltd[2005]RPC 31 at§§58-60 and 62 (per Jacob LJ), and the UK Supreme Court in Griffiths v Tui (UK)  Ltd [2023] 3 WLR 1204.  He then submits at §8.7 of his written submissions that:

The authorities referred to at §8.6 above are recent and came after the decision in All Best Wishes …  At §74 of the Decision …, the Board refers to a well-known passage in the judgment of Mortimer J at p773 of the report which suggests that the Board has unlimited freedom to find certain oral evidence unacceptable.  That passage has, however, been taken out of context and it does not control this case.  It is apparent that, in the light of the authorities cited above, the Board is not entitled to reject evidence unless it has a reason to do that and there is no reason to do it in this case.  Indeed a fair reading of the whole of Mortimer J’s judgment in All Best Wishes shows that he was not intending to say more than that.

(e)  Mr Goldberg’s submissions summarised above embrace Alleged Errors 2 and 3.

69.The law on the Board’s approach to the unchallenged evidence is hence engaged.

H.3.2.  The law

70.I consider in this section the authorities that have been cited to me.

71.In respect of All Best Wishes:

(a)  All Best Wishes was a tax case.  The main issue was a factual one – whether the profits concerned were trading profits from the sale of current assets (as the Board found)  and not capital gains from the sale of fixed assets (as the taxpayer contended).  The taxpayer’s ground of appeal was not dissimilar to the Leave Question that:

… the Board’s decision … was wrong in law.  Either on the facts found, or alternatively, that there was no evidence upon which the relevant facts listed in the case could be found. Also, it is submitted, that the decision was itself unreasonable and perverse in the sense that no reasonable tribunal could have reached this conclusion on the facts found and the evidence before it.[45]

(b)  In dismissing the appeal, Mortimer J observed as follows:

The Board considered the whole of the evidence, including the oral evidence of Mr. LI, the written evidence and the documents.  They considered the whole picture, from beginning to end.  It may not have been completely straightforward.  It is a fact that other tribunals could have reached a different conclusion.  I am not saying that I would have done so, for it is not my task to even consider that.  My task is simply to decide whether there was evidence upon which the Board could properly reach the findings which are challenged.  The answer I do not find difficult.  Looking at the whole of the evidence, there is no question in my mind but that the Board were entitled to find, or infer, those matters.

[The paragraph which the Board has cited at §74 of the Decision (which I have reproduced above and do not repeat.)]

The Board’s approach to the whole of the evidence including the oral evidence … in detail.  I do not propose to rehearse it.  Was the conclusion that this was trading, unreasonable or perverse?  As I have said, even if other tribunals may have reached a different conclusion, on the whole of the evidence of what was done and said and the whole nature of this enterprise as presented to the Board, I cannot say that the Decision was either unreasonable or perverse.  In my judgment it was a conclusion which was plainly open both on the evidence and on facts found.

72.All Best Wishes was referred to by Deputy Judge Reyes SC in Kaifull Investments Ltd v CIR [2002] 1 HKLRD 858:

(a)  Kaifull concerned the profits the taxpayer earned from the sale of a property.  The Board concluded that the taxpayer’s intention at the time of purchase of the property had been in the nature of trade.  The taxpayer appealed, arguing that the Board’s conclusion was erroneous because the primary facts did not admit the inferences it had drawn from them, and that the Board erred in relying on issues which were not at the hearing put to the Director of the taxpayer;

(b)  Deputy Judge Reyes referred to Browne v Dunn (1893) 6 R 67 and addressed the principles discussed therein.  He observed that the scope of the principles had been refined over time.  He referred to White v Flower & Hart (1988) 29 ACSR 21 (Federal Court of Australia)  at pp.68-73 and All Best Wishes:

(i)  In respect of White v Flower & Hart, the learned Deputy Judge cited observations from Goldberg J which explained 2 aspects to the rule in Browne v Dunn, the first being the rule of practice itself, and the second being the consequence of non-compliance.  In respect of that second aspect, Goldberg J said:

That aspect is not inflexible and it does not inexorably follow that if the rule is not observed the party in default is precluded from relying on evidence not put to the other party or its witnesses or from relying on inferences to be drawn from evidence which inferences have not been put to the other party or its witnesses …

The second aspect of the rule relates to the manner in which, and the extent to which, the evidence or inferences said to be relied upon in breach of the rule may be used.  This aspect of the rule relates to the weight to be given to the evidence and its cogency.  This second aspect does not require the rejection of evidence or an inference to be drawn from it if it is sought to use it to contradict evidence not the subject of cross-examination.  Putting the matter another way a failure to observe the rule in Browne v Dunn does not mean that where evidence of a witness is not the subject of cross-examination and where evidence is led in contradiction of that evidence, the court is required to accept the former evidence.  It is a matter of weight for the court to take into account.

(ii)  In respect of All Best Wishes, the learned Deputy Judge observed that on the face of the report, it was not clear whether Mortimer J’s[46] attention was specifically drawn to cases on the rule in Browne v Dunn.  He cited the same passage from the judgment in All Best Wishes which the Board herein cited, and observed that it “plainly accords with common sense”;

(iii)  The learned Deputy Judge then stated:

31.   Given the above-mentioned dicta, the following propositions appear to demarcate the bounds of the rule in Browne v Dunn …:-

(1)  The general principle is that, where an attack on a witness’ evidence is to be made, notice should normally be given to the witness in cross-examination of the nature of the attack if such is not otherwise obvious.

(2)  There is no breach of the principle if the witness knew or ought to have known that his version of events was being challenged or that adverse inferences might be drawn against him.

(3)  Even if the procedural rule is transgressed, it does not inexorably follow that matters which have not been put to a witness in cross-examination cannot be relied on.  It may be a question of the weight to be given to a witness’ testimony taking into account all the available evidence.  Thus, for example, a witness’ evidence may be so incredible as to be incapable of belief or his evidence may be unsupported or contradicted by known facts and contemporaneous documents.

(4)  The principle does not inflexibly require every point which might be used against the witness to be put to him.  There can be no hard-and-fast rule.  The paramount consideration is fairness to the witness.  In essence, the principle is breached if in all the circumstances an omission to cross-examine on a specific point is unfair to a witness.

32.  Further, in the context of an appeal by way of case stated, a breach of the principle in Browne v Dunn … on one or more specific points may not be fatal to the Board’s decision.  Thus, it may still be that while it is unsafe for a Board of Review to rely on specific points because the same were not put to a witness, the remaining point or points on which the Board wishes to rely in arriving at its conclusion are individually or collectively sufficient to support its decision.  In such a case it would still not be possible to attack the Board’s decision as unreasonable.

(iv)  In the end, and on the evidence, the learned Deputy Judge dismissed the appeal.  The following observations made by the Deputy Judge in the process are relevant:

44.   Mr Ho argues that the Board did not cross-examine Mr Wan on the constituents of the group responsible for the purchase of the Locwood Properties.  Mr Ho says that had Kaifull known of the Board’s concerns, it could have applied for an adjournment to gather more evidence to address the point worrying the Board.

45.   Mr Ho’s argument ignores the burden imposed on Kaifull to establish its case.  It is not for the Board to signal the weaknesses of Kaifull’s evidence or help Kaifull make good breaks in its chain of proof.  In short, it is not for the Board to teach Kaifull how to argue Kaifull’s case.  That forms no part of the rule in Browne v Dunn ….

73.All Best Wishes was referred to and applied by Tang JA in Yau Wah Yau:

(a)  In Yau Wah Yau, the issue was whether the payments concerned were refunds of rental (as the taxpayer contended)  or cash allowance (as the CIR said). The submissions made by counsel for the taxpayer (Mr Barlow)  were again not dissimilar with those made by Mr Goldberg, that:

… on the evidence the Board should make up its mind and decide of the two versions which was more probable.  He submitted that since there was no evidence to support the case that the payments were cash allowances, whereas, despite the inconsistencies described by the Board and which he did not dispute, the evidence from the taxpayer showed that the payments were refund of rent.

(b)  Tang JA referred to the same 3 paragraphs from All Best Wishes which I have reproduced above.  His Lordship also referred to:

(i)  Rhesa Shipping Co SA v Edmunds & Another [1985] 1 WLR 948 at 955 that:

The first reason is one which I have already sought to emphasise as being of great importance, namely, that the judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties.  He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden.  No judge likes to decide cases on burden of proof if he can legitimately avoid having to do so.  There are cases, however, in which, owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take.

and

(ii)  Real Estate Investments (NT)  Ltd v Commissioner of Inland Revenue [2006] 1 HKLRD 821 at p.831;

(c)  Having referred to those authorities, Tang JA held[47] that:

These authorities show that Mr Barlow’s submission is unsound.

(d)  At §58, Tang JA further observed that:

Nor do I accept that if a taxpayer can present a case which, if believed, establishes a prima facie case, the Board, is bound, in the absence of evidence from the Commissioner to the contrary, to accept the taxpayer’s case.  If authority is needed, All Best Wishes … is clear authority to that effect.

(e)  I add that whilst His Lordship observed that All Best Wishes is clear authority for the proposition he set out in §58, I do not believe it was His Lordship’s view that All Best Wishes is confined to that proposition.  The width of the 3 paragraphs from All Best Wishes which His Lordship cited are clearly beyond that of that proposition;

(f)  Mr Wong submitted that Yau Wah Yau is binding on this Court.  It clearly is.

74.Mr Goldberg has referred to Markem and Griffiths which he submits All Best Wishes should be read subject to.

75.In Markem:

(a)  The judge, despite absence of challenge by cross-examination, and despite not even having been asked to do so by counsel in closing submissions, disbelieved the witnesses, held that certain evidence given in chief was false, and that certain witnesses had “concocted a tale of collective amnesia”;

(b)  Jacob LJ considered and discussed Browne v Dunn as cited in the Australian case of Allied Pastoral Holdings v Federal Commissioner of Taxation (1983)  44 ALR 607.  He held that the rule had been infringed. Indeed, counsel for the respondent did not support the judge’s findings (§61). The Court of Appeal was also satisfied that the judge’s reasoning for the adverse findings was inadequate (§62 and onwards).

76.Griffiths is heavily relied upon by the Company.  Some details are warranted:

(a)  The facts and procedural history are summarised in the headnote:

While on an all-inclusive foreign holiday purchased from the defendant [TUI], the claimant [Griffiths] fell ill with acute gastroenteritis.  He subsequently brought a claim against the defendant for breach of contract, alleging that his illness had been caused by consuming contaminated food or drink whilst staying at the hotel.  In support of his case on causation, the claimant relied at trial on the expert evidence contained in the report of a consultant microbiologist and the consultant’s answers to written questions put to him by the defendant pursuant to CPR r 35.6.  Although the defendant did not seek to contradict the consultant’s report by way of competing expert evidence or cross-examination, in closing it submitted that the consultant’s evidence was insufficient to discharge the burden of proof on causation.  The judge in the County Court dismissed the claim, holding that the claimant had failed to discharge the burden of proving causation.  In particular, the judge found a number of deficiencies in the consultant’s report and in his answers to written questions including, inter alia, a lack of sufficient reasoning.  The judge in the High Court allowed the claimant’s appeal, holding that the court was not entitled to assess for itself the substance of a CPR-compliant expert report which was “uncontroverted”, in the sense that there was no factual evidence undermining the factual basis of the report, no competing expert evidence and no cross-examination of the expert had taken place.  The Court of Appeal allowed the defendant’s appeal and restored the decision of the judge in the County Court, holding that she had made no error of law.

(b)  To the above these I add these.  As part of the trial case management, both parties were given permission to rely on expert evidence from a gastroenterologist and a microbiologist.  Griffiths obtained and produced one report from each.  The evidence on causation came from the microbiologist (Professor Pennington).  TUI adduced neither.  It had in fact obtained a report from an expert microbiologist, but chose not to lodge it.  Professor Pennington produced his report, and was asked questions under CPR 35.6.  According to §9 of the Judgment:

TUI did not seek to have Professor Pennington attend the trial for cross-examination with the result that his evidence was accepted on paper.  His expert evidence was therefore uncontroverted in the sense that it was not in conflict with any other evidence led at the trial and was not subjected to challenge by cross-examination.

(c)  When before the Court of Appeal, one submissions made on behalf of Griffiths was that it was unfair to challenge an expert’s evidence only in closing submissions.  Several cases, including Browne v Dunn and Markem were referred to.  Asplin LJ of the Court of Appeal delivered the leading judgment.  She distinguished the cases on the basis that they had been concerned with circumstances in which there was a challenge to the credibility of a witness in relation to a significant part of the witness’ evidence, but that Professor Pennington’s credibility was not in issue.  Nugee LJ agreed.  Bean LJ dissented.  He recognised inadequacies in the reasoning in Professor Pennington’s report, but expressed the view that TUI should have challenged by cross-examination his conclusion on causation;

(d)  Griffiths appealed to the Supreme Court.  His appeal was allowed.  Lord Hodge at §§2 and 34 of the Judgment set out the issues raised in the appeal:

2.  The appeal raises a question of the fairness of the trial.  The question is whether the trial judge was entitled to find that the claimant had not proved his case when the claimant’s expert had given uncontroverted evidence as to the cause of the illness, which was not illogical, incoherent or inconsistent, based on any misunderstanding of the facts, or based on unrealistic assumptions, but was criticised as being incomplete in its explanations and for its failure expressly to discount on the balance of probabilities other possible causes of Mr Griffiths’ illness.

34.  The principal questions raised on this appeal are: (i) what is the scope of the rule, based on fairness, that a party should challenge by cross-examination evidence that it wishes to impugn in its submissions at the end of the trial? (ii)  in particular, does the rule extend to attacks in submissions on the reliability of a witness’s recollection and on the reasoning of an expert witness? and (iii)  if the rule does so extend, was there unfairness in the way in which the trial judge conducted the trial in this case?

(e)  His Lordship analyzed the law at section (4)  of the Judgment.  A considerable number of authorities were referred to, the more important ones were as follows:

(i)  Browne v Dunn was cited at length.  Amongst the speeches cited[48] was that of Lord Halsbury, as follows (emphasis added by Lord Hodge):

To my mind nothing would be more absolutely unjust than not to cross-examine witnesses upon evidence which they have given, so as to give them notice, and to give them an opportunity of explanation, and an opportunity very often to defend their own character, and, not having given them such an opportunity, to ask the jury afterwards to disbelieve what they have said, although not one question has been directed either to their credit or to the accuracy of the facts they have deposed to.

(ii)  At §49, Lord Hodge came back to the cited speech of Lord Halsbury in Browne v Dunn and observed as follows:

It is clear, as Mr Stevens submits, that the case was concerned with a challenge to the credibility of witnesses.  But the passages in the speech of Lord Halsbury, which I have emphasised, envisage a rule of wider scope, giving a witness the opportunity to explain his or her evidence if it is to be impugned on other grounds.

(iii)  Markem was also referred to.  At §52, Lord Hodge observed that:

While Markem was concerned with an attack on the credibility of witnesses, the passage in Allied Pastoral[49] which the Court of Appeal approved was, like the speech of Lord Halsbury in Browne v Dunn, framed in broad terms and not confined to attacks on a witness’s credibility.

(iv)  The following excerpts from paragraph 12-12 of Phipson on Evidence, 20th ed. (2022)  was cited and, as we shall see, approved:

In general a party is required to challenge in cross-examination the evidence of any witness of the opposing party if he wishes to submit to the court that the evidence should not be accepted on that point.  The rule applies in civil cases ...  In general the CPR does not alter that position. 

This rule serves the important function of giving the witness the opportunity of explaining any contradiction or alleged problem with his evidence.  If a party has decided not to cross-examine on a particular important point, he will be in difficulty in submitting that the evidence should be rejected.

(v)  The Privy Council decision in Chen v Ng [2017] UKPC 27 was another one considered, in respect of which Lord Hodge at §§57 and 58 observed that:

57.  The Board expressed the general rule in these terms (para 53):

“In other words, where it is not made clear during (or before)  a trial that the evidence, or a significant aspect of the evidence, of a witness (especially if he is a party in the proceedings)  is challenged as inaccurate, it is not appropriate, at least in the absence of further relevant facts, for the evidence then to be challenged in closing speeches or in the subsequent judgment.”

It advised that it was appropriate to take a nuanced approach to the general rule.  The Board stated (para 52):

“In a perfect world, any ground for doubting the evidence of a witness ought to be put to him, and a judge should only rely on a ground for disbelieving a witness which that witness has had an opportunity of explaining. However, the world is not perfect, and while both points remain ideals which should always be in the minds of cross-examiners and trial judges, they cannot be absolute requirements in every case. Even in a very full trial, it may often be disproportionate and unrealistic to expect a cross-examiner to put every possible reason for disbelieving a witness to that witness, especially in a complex case, and it may be particularly difficult to do so in a case such as this, where the Judge sensibly rationed the time for cross-examination and the witness concerned needed an interpreter. Once it is accepted that not every point may be put, it is inevitable that there will be cases where a point which strikes the judge as a significant reason for disbelieving some evidence when he comes to give judgment, has not been put to the witness who gave it.”

58.  The [Judicial Committee of the Privy Council in Chen v Ng] concluded that the question for an appellate court was the overall fairness of the trial; the Board stated (para 54): “Ultimately, it must turn on the question whether the trial, viewed overall, was fair bearing in mind that the relevant issue was decided on the basis that a witness was disbelieved on grounds which were not put to him.

(vi)  Various authorities illustrating the circumstances in which the rule may not apply were referred to in §§61 to 68.  Given the issues involved in that appeal, the emphasis of the discussion appeared to be on circumstances more applicable to expert evidence.  The 3^rd example of circumstance may nonetheless be relevant to our discussions here, that:

63.   Thirdly, there may be a bold assertion of opinion in an expert’s report without any reasoning to support it, what the Lord President (Cooper)  in Davie v Magistrates of Edinburgh described as a bare ipse dixit. But reasoning which appears inadequate and is open to criticism for that reason is not the same as a bare ipse dixit.

(vii)  MBR Acres Ltd v McGivern [2022] EWHC 2072 was another case discussed, in the following context:

69.   Because the rule is a flexible one, there will also be circumstances where in the course of a cross-examination counsel omits to put a relevant matter to a witness and that does not prevent him or her from leading evidence on that matter from a witness thereafter.  In some cases, the only fair response by the court faced with such a circumstance would be to allow the recall of the witness to address the matter.  In other cases, it may be sufficient for the judge when considering what weight to attach to the evidence of the latter witness to bear in mind that the former witness had not been given the opportunity to comment on that evidence.  The failure to cross-examine on a matter in such circumstances does not put the trial judge “into a straitjacket, dictating what evidence must be accepted and what must be rejected”: MBR Acres Ltd v McGivern [2022] EWHC 2072 (QB)  at [90] per Nicklin J.  This is not because the rule does not apply to a trial judge when making findings of fact, but because, as a rule of fairness, it is not an inflexible one and a more nuanced judgment is called for.  In any event, those circumstances, involving the substantive cross-examination of the witness, are far removed from the circumstances of a case such as this in which the opposing party did not require the witness to attend for cross-examination.

(f)  Having considered the authorities, Lord Hodge at §70 concluded as follows:

In conclusion, the status and application of the rule in Browne v Dunn and the other cases which I have discussed can be summarised in the following propositions:

(i)  The general rule in civil cases, as stated in Phipson, 20th ed, para 12-12, is that a party is required to challenge by cross-examination the evidence of any witness of the opposing party on a material point which he or she wishes to submit to the court should not be accepted.  That rule extends to both witnesses as to fact and expert witnesses.

(ii)  In an adversarial system of justice, the purpose of the rule is to make sure that the trial is fair.

(iii)  The rationale of the rule, ie preserving the fairness of the trial, includes fairness to the party who has adduced the evidence of the impugned witness.

(iv)  Maintaining the fairness of the trial includes fairness to the witness whose evidence is being impugned, whether on the basis of dishonesty, inaccuracy or other inadequacy.  An expert witness, in particular, may have a strong professional interest in maintaining his or her reputation from a challenge of inaccuracy or inadequacy as well as from a challenge to the expert’s honesty.

(v)  Maintaining such fairness also includes enabling the judge to make a proper assessment of all the evidence to achieve justice in the cause.  The rule is directed to the integrity of the court process itself.

(vi)  Cross-examination gives the witness the opportunity to explain or clarify his or her evidence.  That opportunity is particularly important when the opposing party intends to accuse the witness of dishonesty, but there is no principled basis for confining the rule to cases of dishonesty.

(vii)  The rule should not be applied rigidly.  It is not an inflexible rule and there is bound to be some relaxation of the rule, as the current edition of Phipson recognises in para 12-12 in sub-paragraphs which follow those which I have quoted in para 42 above.  Its application depends upon the circumstances of the case as the criterion is the overall fairness of the trial.  Thus, where it would be disproportionate to cross-examine at length or where, as in Chen v Ng, the trial judge has set a limit on the time for cross-examination, those circumstances would be relevant considerations in the court’s decision on the application of the rule.

(viii)  There are also circumstances in which the rule may not apply: see paras 61-68 above for examples of such circumstances.

(g)  Lord Hodge then at section (5)  of the Judgment applied the law to the facts:

(i)  His Lordship had regard to the approach which TUI’s legal team adopted in response to the claim.  TUI put Griffiths to strict proof.  It chose not to lodge the report of an expert microbiologist even though it had obtained one.  The CPR r 35.6 questions were not clearly focused on the challenges subsequently launched. Professor Pennington was not put on notice of the challenges.  TUI chose not to request him to attend and be cross-examined.  The challenges were not intimated to Griffiths’ legal team until the submission of its skeleton arguments;

(ii)  His Lordship considered the factual evidence which was available to Professor Pennington and was before the trial judge;

(iii)  Professor Pennington’s report on causation, albeit terse, was far from a bare ipse dixit;

(iv)  Professor Pennington’s assessment was at a high level of generality but was not irrational and might have been proportionate in the circumstances of the claim, which was regarded as a low-value one;

(v)  None of the exceptions identified in paragraphs 61-68 of the Judgment applied;

(vi)  The majority of the Court of Appeal “erred in limiting the scope of the rule to challenges to the honesty of a witness.”  As a result, the Court of Appeal did not properly address the application of the rule to the facts of the case[50];

(h)  The appeal was hence allowed.

H.3.3.  The approach adopted by the Board by itself not an error of law

77.I come back to Alleged Errors 2 and 3, and §8.7 of Mr Goldberg’s written submissions. 

78.In my view, neither Mortimer J at the cited passages in All Best Wishes, nor the Board at §74 of the Decision in citing the same, suggested that the Board had “unlimited freedom to find certain oral evidence unacceptable”. 

79.In my view, and properly understood in the light of the authorities:

(a)  As observed by Deputy Judge Reyes in Kaifull, there are 2 aspects to the rule in Browne v Dunn, (1)  the rule of practice itself; and (2)  the consequences if the rule has not been complied with;

(b)  The consequences in turn involve 2 principal aspects:

(i)  Whether the evidence unchallenged by cross-examination should be accepted; or

(ii)  Whether, in the words of Goldberg J in White v Flower & Hart, it “inexorably follow[s] that if the rule is not observed the party in default is precluded from relying on evidence not put” (and see §31(3)  of Kaifull);

(iii)  There is no rigid rule that either consequence will necessarily follow. The observations of Nicklin J in MBR Acres, as cited by Lodge Hodge in Griffiths, summarise the position succinctly, and I repeat, that “the failure to cross-examine on a matter in such circumstances does not put the trial judge ‘into a straitjacket, dictating what evidence must be accepted and what must be rejected’ ”.  As the Board in Chen v Ng advised, it is appropriate to take a nuanced approach to the general rule, and that ultimately the question for an appellate court was the overall fairness of the trial. That is also the main consideration which Lord Hodge in Griffiths on a number of occasions stressed;

(iv)  In both Markem and Griffiths, the facts were engaged.  I have summarised them above, and how the Court of Appeal and Supreme Court relied on them in allowing the appeals;

(v)  The approach observed by Mortimer J in All Best Wishes is entirely consistent with the above.  Mortimer J obviously had the overall fairness of the proceedings in mind.  His Lordship clearly did not intend to say that the Board had “unlimited freedom to find certain oral evidence unacceptable”.  That would have been perverse and unjudicial.  In his written submissions, Mr Wong accepts on behalf of the CIR that “while a fact-finding tribunal is entitled not to accept unchallenged evidence, it cannot do so perversely”.  He repeated it in the course of his oral submissions.  That is clearly correct;

(vi)  As I have discussed and observed above, All Best Wishes was applied with approval by the Court of Appeal in Yau Wah Yau, and that Yau Wah Yau is binding on the Court;

(vii)  But having looked at all the authorities in the round, whilst I am of the view that Yau Wah Yau is binding on this Court, I would in any event apply All Best Wishes as being consistent with all the other subsequent authorities as discussed above.

80.In my view, the application by the Board of the approach explained by Mortimer J in All Best Wishes is by itself not an error of law. 

H.3.4.  The Board’s assessment of the evidence  

81.I have set out above Alleged Error 2 and Alleged Error 3 which Mr Goldberg has put forward.  They are couched, with reference to Begum, in terms of failure to take account of relevant matters and taking into account irrelevant matters.

82.I have summarised the Decision above.  The Board clearly did not simply ignore the relevant matters, or for no justified reasons took into account irrelevant matters.  They heeded the documents produced.  They heeded the fact that the witnesses had not been specifically challenged.  They have given reasons for not accepting the documents and the witnesses’ evidence despite absence of specific challenge.

83.What the Company is saying in fact is that the basis given by the Board for not accepting the unchallenged evidence is irrational, and the Board’s criticisms of the evidence were in any event unjustified.  The ultimate question is whether the Board, in doing its own assessment of the evidence, and in refusing to find in favour of the Company the Proposed Findings, has made any error of law, in the sense as explained by Bokhary PJ in Kwong Mile (which I have set out above). 

84.In the above regard, Mr Wong has also referred to me the following observations by Godfrey Lam J (as he then was)  in CIR v Right Margin Ltd [2017] 5 HKLRD 398 at §10, which I respectfully agree, that:

It is well-established that attacks on findings of fact only raise questions of law in very limited circumstances, such as where it is said there is no evidence at all to support the finding.  The extent to which a particular piece of evidence should be accepted or rejected, and the weight to be given to it, are matters for the Board and not the court: Aust-Key Co Ltd v Commissioner of Inland Revenue [2001] 2 HKLRD 275, 281H; [Begum] at [99].  In this context, the cautionary notes sounded by Evans LJ in Georgiou v Customs and Excise Commissioners [1996] STC 463, 476 are well worth bearing in mind:

It is right, in my judgment, to strike two cautionary notes at this stage.  There is a well-recognised need for caution in permitting challenges to findings of fact on the ground that they raise this kind of question of law.  That is well seen in arbitration cases and in many others.  It is all too easy for a so-called question of law to become no more than a disguised attack on findings of fact which must be accepted by the courts.  As this case demonstrates, it is all too easy for the appeals procedure to the High Court to be misused in this way.  Secondly, the nature of the factual inquiry which an appellate court can and does undertake in a proper case is essentially different from the decision-making process which is undertaken by the tribunal of fact.  The question is not, has the party upon whom rests the burden of proof established on the balance of probabilities the facts upon which he relies, but, was there evidence before the tribunal which was sufficient to support the finding which it made?  In other words, was the finding one which the tribunal was entitled to make?  Clearly, if there was no evidence, or the evidence was to the contrary effect, the tribunal was not so entitled.

H.3.5.  The Implicit Proposition

85.At this stage, I deal first with Mr Wong’s submissions in relation to the Implicit Proposition. 

86.The relevant parts of Mr Wong’s submissions are at Sections D2 to D5 of his written submissions.  I have summarised them above.  Those submissions are made on the assumption and basis, in the Company’s favour, that the What Question and the First Limb are considered established.

87.I have set out the law on profits tax charge.  Whilst there are broad guiding principles, the exercise of identifying the source of profits, that quest of identifying the effective cause, is a factual one, a hard practical matter of fact.  I highlight the Only Constant.  I highlight Lord Nolan’s observations in Orion Caribbean.  I highlight Transvaal Associated Hide and Skin Merchants, which illustrates vividly that even in the case of a sale and purchase contracts, and depending on the facts, it may “be unreasonable and artificial to attribute the origination of the profit wholly to the sales”, because the “sale only turns into cash” prior “unrealized profit” in the goods.

88.On the authorities, I accept Mr Wong’s submissions that the Implicit Proposition is not a proposition or principle of universal application[51]. The Board was mandated to find, with the statutory onus of proof in mind, the “effective cause”.  That might or might not be the effecting of the sales which gave rise to the Disputed Profits.  I accept Mr Wong’s submissions that even if the First Limb is accepted, the Second Limb does not necessarily follow, such that “[there] can therefore be no error of law for the Board in simply failing to accept and apply the so-called ‘unchallenged evidence’ ”[52].

89.Hence, even upon finding the What Question and the First Limb in favour of the Company (if the Board had so found), the Board remained entitled to consider the evidence so as to identify the “effective cause” and the geographic source of the Disputed Profits.

90.As mentioned above, the Board correctly stated the general law on profits tax change, noted ING Baring and Ribeiro PJ’s observations at §38 thereof.  The Board was aware of “the need to grasp the reality of each case, focusing on effective causes without being distracted by antecedent or incidental matters”.

91.The Board stated the Shortcomings of the Evidence which it noted.  The Board referred to the evidence and the Appendices of the Company’s Nutshell on DPs.  The Board then stated its findings on the Proposed Findings at §§226 to 241 of the Decision.  The Board pointed out that the scale of operations underlying the Disputed Profits was much more complex than those for the Commission Income (§230).  The Board stated in gist the inadequacies of the witnesses’ evidence (§§231, 232 and 236).  The Board considered the Sample Supply Contracts and the Four Sample Transactions, but felt that it was not able to extrapolate from the small and dated samples (§235).  The Board noted that there could be more than one causes (or in the words of Schreiner JA in Transvaal Associated Hide and Skin Merchants, “there may be a number of causae sine qua non”).  At §43 of his written submissions, Mr Wong submits that:

… The Board had to find the effective cause, and in order to do that, it would have to understand all possible “causes” and then perform an evaluation as to which one is the effective one.  Without knowing the Company’s situation, it would obviously not be in a position to know which causes existed, and which causes were therefore “effective”.  Where there is a reasonable basis, as in this case, for the Board to consider that it does not have the full picture, then it is fully entitled to dismiss the appeal, as it is not in a position to find what the true effective cause is.

At §54 of his submissions, Mr Wong further submits that:

… the refusal by the Board to find the Implicit Proposition is clearly something which it was entitled to do: such a Proposition is necessarily based on a qualitative assessment of all the acts of those involved in the sales transactions and the Board was clearly entitled to say that it could not do so because of the lack of a clear and full picture by reason of the lack of quality of the evidence of the Company which it specifically identified.

I accept those submissions of Mr Wong’s.

92.Before accepting those submissions made by Mr Wong:

(a)  I have considered again the Interposition Theory:

(i)  I have already observed that despite the 2 Agreed Paragraphs, there was room for the CIR to put it forward;

(ii)  I am of the view that the Board was entitled to have in mind that theory when seeking to identify the “effective cause”;

(iii)  In the end, and for completeness, the Board found that the underlying facts are “just too uncertain” that the Interposition Theory “could well be one cause or factor.  The question is whether it is in reality the effective cause rather than one cause”, but that it was “not prepared to positively so find”[53];

(iv)  I note in this regard Mr Goldberg’s submissions[54] to the effect that the CIR, not having sought leave to pose any question of law in relation to that finding, cannot raise the argument on appeal;

(v)  I do not accept those submissions.  As submitted by Mr Wong[55] which I accept, the CIR is not inviting this Court to make any positive finding in his favour in respect of the Interposition Theory.  What he is saying is that the Board, with that theory in mind as “one cause or factor”, felt that it was not in the position to find in favour of the Company the Implicit Proposition and the Proposed Findings;

(vi)  The position is in fact not dissimilar with the one explained by Tang JA at §47 of Yau Wah Yau, that:

Nor is this a case where the Commissioner has put forward an alternative case of a cash allowance.  It was the taxpayer’s case that the sums were refunds of rent paid.  Unless the taxpayer proved to the satisfaction of the Board that they were refunds of rent, they were taxable.  Contrary to Mr Barlow’s submission, the Commissioner does not have to prove that the taxpayer was contractually entitled to the “cash allowance”.  If the taxpayer had received a cash payment, it is taxable, unless, in this case, he has proved that it was refund of rent.

(b)  I have also considered the Board’s approach when considering the other 2 aspects of the Company’s appeal before the Board, which resulted in findings and conclusions in favour of the Company.  When those parts of the Decision and the related reasoning are juxtaposed with those concerning the Disputed Profits, it becomes even clearer that the Board did have in mind and apply the proper fact-finding approach. 

93.For the above reasons, I conclude that the Company’s criticisms that the Board had undertaken an impermissible “roving inquiry” for the “full picture” or into irrelevant matters are not justified, and are not made out.

94.The above also disposed of Alleged Errors (iii)[56] and (v). 

H.3.6.  The Board made no error in its assessment of the evidence

95.I now come back to the question as to whether the Board has made any error of law in its assessment of the evidence in relation to the First Limb.

96.For the reasons set out above, I accept Mr Wong’s submissions that even if the Board had erred in having refused to find positively the First Limb, the Company had still failed to show that in refusing to find in favour of the Company the Implicit Proposition and thus the Second Limb, the Board had made any error of law.  It is hence strictly speaking not necessary to consider the instant question.

97.For the following reasons, I am in any event not satisfied that the Board had made any:

(a)  I have reiterated how the Board stated and noted the Shortcomings of the Evidence, and how it referred to the evidence and the Appendices of the Company’s Nutshell on DPs.  I have set out and summarised the reasons which the Board gave;

(b)  In the penultimate section of Mr Goldberg’s written submissions (§§9.1 to 9.16), Mr Goldberg criticized the Board’s views on the Shortcomings of the Evidence, acceptance of CIR’s criticisms on the evidence (as set out in §62, which the Board at §63 regarded as valid), and the reasons given by the Board for not accepting the evidence (as set out in §§226 to 240 of the Decision). In his attempt to make good his criticisms, he went into some details of the witnesses’ evidence.  When making his oral reply, Mr Goldberg further handed up his written reply entitled “Appellant’s reply on CIR’s purported Limitations of the Appellant’s Evidence”.  They are made in reply to Mr Wong’s submissions on what he called the “limitations” in the Company’s evidence, and focus upon the Board’s criticisms of the Board’s views on the Shortcomings of the Evidence;

(c)  I have considered Mr Goldberg’s submissions, and in particular those highlighted above;

(d)  First off, I note Mr Goldberg’s submissions at §§9.1 and 9.2 of his written submissions, which preface his other criticisms in that section, that:

9.1  The Board has, for some reason or another, approached the evidence led for the Appellant with a degree of cynicism and a wrong belief (like that of the Board in ING), that it needed to know everything about the business of the Appellant – compare §§70.2, 70.3, 230 and 237 of the Decision … and contrast with ING at §53 … – and not just where the sales in question were effected.

9.2  No doubt at least partly because the Board felt that it needed a complete picture of the Appellant’s business and did not get it, the Board felt justified in criticising the evidence given by the witnesses.  Some of the Board’s criticisms are dealt with above but no matter where they are dealt with, none of them is justified. 

(e)  In respect of those opening submissions:

(i)  Similar to Mr Goldberg’s submissions[57] that the “Board did not like that agreement ”, I see no basis for the suggested “cynicism”;

(ii)  Mr Goldberg’s reliance upon ING Baring is noted, but is of limited value.  Whether the Board’s approach and assessment constitute any error of law is case and facts specific;

(iii)  I have dealt with Mr Goldberg’s criticism in respect of the Board’s view on absence of “full picture”.  I do not accept that it was a “wrong belief ” on its part;

(f)  Mr Goldberg relies heavily on the absence of cross-examination in relation to the witnesses’ relevant evidence;

(g)  I have discussed the law above.  Despite the absence of specific challenge, the Board was not put into a straitjacket to accept the evidence. The Board did in my view take a nuanced approach and considered the totality of the evidence.  It correctly applied All Best Wishes, which is in my view consistent with Markem and Griffiths.  I have explained why;

(h)  The Browne v Dunn rule should not be applied rigidly.  It is not an inflexible rule.  Its application is case and facts sensitive.  I have set out above how the facts in Markem and Griffiths bore upon its application;

(i)  In the present case, it remains relevant to bear in mind the statutory incidence of proof, that it was the Company (and the Company alone)  which had full and comprehensive knowledge and understanding of its operation, it was the Company (and the Company alone)  which decided what evidence it wanted to adduce in support of its appeal (not dissimilar to TUI’s legal team in Griffiths which decided on the tactics in response), and that, as Mr Wong pointed out at §58(5)  of his written submissions, CIR did not ask the Board to disbelieve the witnesses, that the Board had little criticism or disagreement with what it was they said they did, but just that their evidence had the limitations noted;

(j)  In respect of the last point, I note that according to Griffiths, the application of the Browne v Dunn rule is not confined to cases where a witness’ credibility is in issue.  I note on the other hand what Deputy Judge Reyes observed at §§44 and 45 of Kaifull, which I have set out above.  Given the flexible nature of the rule, it remains a point to take into account when considering the overall fairness of the case;  

(k)  I have stated that the Board did consider the Two Sample Supply Contracts and the Four Sample Transactions, and that it felt that it was not able to extrapolate from the small and dated samples.  I note Mr Goldberg’s submissions that the sample transactions were prepared in accordance with the directions given by the Board.  I was further informed by Mr Goldberg that the use of Sample Transactions are usual in tax proceedings.  But those factors do not vitiate the Board’s assessment on weight;

(l)  I reiterate Right Margin.  Weight is for the Tribunal;

(m)  Holistically, the appeal before the Board was in my view overall a fair one.  On the evidence adduced before the Board, I am of the view that it was entitled to hold the views as it did on the evidence.  The Board’s assessment of the evidence, oral and documentary, was overall fair and reasonable, and is definitely not an exercise which no reasonable tribunal would have taken.  It was far from being perverse.  Mr Goldberg’s criticisms, individually or collectively, do not make out any error of law on the Board’s part, in the sense as explained by Bokhary PJ in Kwong Mile or Lord Millett in Begum.

98.For the reasons set out above, Alleged Errors 2 and 3 are not made out. For those same reasons, Alleged Error (ii)  is also not made out.

I.  The Delay Feature

99.As I have recorded above, Mr Goldberg accepted that delay on its own would not entitled the Company to a relief.

100.For the reasons set out above, I am of the view that no error of law has been made out.  There is in the circumstances no need for this Court to consider the Delay Feature further, or the various cases Mr Goldberg has cited on the implications of delay (which include ING Baring at §121 (per Lord Millett), Mak Kang Hoi v Ho Yuk Wah (2007)  10 HKCFAR 552 at §§58 and 60 (per Mortimer NPJ), Esquire (Electronics)  Ltd v HSBC [2007] 3 HKLRD 439 at §6 (per Rogers VP), and CIR v Li & Fung (Trading)  Ltd [2012] 3 HKLRD 8 at §42 (per Tang VP)). 

101.However, before concluding, it remains for this Court to express my concern and disapproval over the delay involved.  I have mentioned the case of Li & Fung immediately above.  The appeal to the Court of First Instance was heard before Reyes J.  At §60 of his Decision[58], the learned Judge observed as follows:

I fully appreciate that Board members give up their valuable time in order to render voluntary public service for little or no remuneration.  But it seems to me that, by any standard, a delay of 3½ years in handing down a Decision must be unacceptable.  

102.I echo those observations.  The present appeal before the Board was a heavy one.  The amount of tax involved was very substantial.  The facts went back some years, and were not straightforward.  Legal representation was of the highest order.  The Board might have wanted to be detailed and careful in the preparation of the Decision.  All these are recognised.  The contribution by the Board towards public service is also immediately acknowledged.  But despite all these, a post-hearing delay of some 8 years 2 months[59] is by any standard entirely unacceptable.  The consequences, unfairness, and implications not just on the immediate parties but also on the overall repute of the system can be serious and dire.  Whilst this appeal is going to be dismissed, the dismissal is for the reasons set out above, and does not signify any approval by this Court of the delay involved.

J.  Overall disposition

103.For all the reasons set out above, I answer the Leave Question in the negative.  The Leave Question is not made out.  I dismiss the appeal.

K.  Costs

104.I make a costs order nisi, absolute within 14 days, that the Company shall bear the costs of and occasioned by this appeal (including for the avoidance of doubt any costs reserved, and the costs of the application for leave (which I ordered to be in the cause of the substantive appeal)), with certificate for 2 counsel where 2 were engaged, to be taxed if not agreed. 

Mr David Goldberg KC with Mr Eugene Fung SC leading Ms Kay Seto, instructed by Clifford Chance, for the Appellant

Mr Stewart Wong SC leading Ms Elizabeth Cheung, instructed by Department of Justice, for the Respondent