Banque Nationale De Paris Hong Kong Branch v. Commissioner of Inland Revenue

HCIA000003/1983

IN THE HIGH COURT OF JUSTICE

BETWEEN

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Coram: Hon. Liu J.

Dates of Hearing: 20th, 21st and 22nd of June, 1984.

Date of Delivery of Judgment: 3rd July, 1984.

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JUDGMENT

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1. This is an appeal by way of Case Stated upon the application of Banque Nationale de Paris (hereinafter referred to as "the Bank") under section 69 of the Inland Revenue Ordinance.

2. In March 1982, the Commissioner of Inland Revenue made a determination adverse to the Bank on its objection to the profits tax payable for the two years of assessment 1978/1979 and 1979/1980. The kernel of the Stated Case may be put, as did Mr. Pinson, thus: "Whether certain interests payable by a branch bank in Hong Kong to the head office in France can be deducted in computing the profits of the Hong Kong branch for the purpose of Hong Kong profits tax".

3. The Bank is a multi-international bank operating, at the material time, 10 branches in Hong Kong. For these two years of assessment in question, profits made in Hong Kong and admittedly belonged to the Bank were not repatriated but retained and "used by the Hong Kong branch in its day-to-day business". The Bank was entitled to call for the repatriation of these amounts at any time. For these "retained profits", the bank charged its Hong Kong branch interests. The Commissioner in his said determination refused to deduct such interests from the assessable profits for the two years of assessment now under consideration. The Board of Review supported the determination of the Commissioner. Hence, the instant appeal.

4. The question asked in the Case Stated for the opinion of this court is:

"Whether or not the Board was correct in law in determining that the sums described in the Bank's Hong Kong branch accounts for the years ending 31st December 1978 and 1979 as 'interests on retained profits' should not be deductible in arriving at its assessable profits for Profits Tax purposes for the years of assessment 1978/1979 and 1979/1980 respectively".

5. It was virtually common ground that the assessments were made by the assessor under rule 3(2) of the Inland Revenue Rules and that the past practice of the Bank and its Hong Kong branch as well as that of the Inland Revenue in respect to interests so or similarly charged had no legal nexus with the question now before the court, which is primarily a matter of construction.

6. For ease of reference, I set out the relevant parts of section 14, section 2, section 16(1) and its paragraph (a), section 20A and section 85 of the Inland Revenue Ordinance as well as rule 3(2) of the Inland Revenue Rules:

"14.         Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in the Colony in respect of his assessable profits arising in or derived from the Colony for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part."

7. "Assessable profits", "body of persons" and "person" are defined in section 2 as follows:

" 'assessable profits' means the profits in respect of which a person is chargeable to tax for the basis period for any year of assessment, calculated in accordance with the provisions of Part IV."

" 'body of persons' means any body politic, corporate or collegiate and any company, fraternity, fellowship and society of persons whether corporate or not corporate."

" 'person' includes a corporation, partnership, trustee, whether incorporated or unincorporated, or body of persons."

"16.(1)     In ascertaining the profits in respect of which a person is chargeable to tax under this Part for any year of assessment there shall be deducted all outgoings and expenses to the extent to which they are incurred during the basis period for that year of assessment by such person in the production of profits in respect of which he is chargeable to tax under this Part for any period, including -

"20A.(1)     A non-resident person shall be chargeable to tax either directly or in the name of his agent in respect of all his profits arising in or derived from the Colony from any trade, profession or business carried on in the Colony whether such agent has the receipt of the profits or not, and the tax so charged whether directly or in the name of the agent shall be recoverable by all means provided in this Ordinance out of the assets of the non-resident person. or from the agent."

"85.(1)     The Board of Inland Revenue may from time to time make rules generally for carrying out the provisions of this Ordinance and for the ascertainment and determination of any class of income or profits."

8. Lastly, rule 3(2) of the Inland Revenue Rules reads:

"Where any accounts prepared by a bank for its own purposes disclose, in the opinion of the Assessor, the true profits of the Hong Kong branch, the assessable profits shall be computed on the basis of such accounts."

9. The Board of Review held, inter alia, that "Banque Nationale de Paris is one juridical person. The Hong Kong branches have no separate existence." Mr. Pinson, counsel for the appellant, shared the view that the Bank was but one juridical person with its branches serving merely as agencies. Indeed, the opinion of the Judicial Committee as given by Sir Montague E. Smith in Henry Prince and Others v. Oriental Bank Corporation⁽¹⁾ exemplified this concensus:

"But the difficulty of the plaintiffs, case is that these banks are not separate and distinct banks, but branches of one and the same banking corporation or establishment. They are, indeed, separate agencies, but agencies of one principal, that principal being the corporation of the Oriental Bank .... Supposing the Murrumburrah branch had sent money from their till to the branch at Sydney, whose money would it have been? Surely, the money of the Oriental Bank. It would have gone from the till at Murrumburrah to the till at Sydney, but would remain, notwithstanding the transfer, the bank's own money."

10. The maim-stay of the Commissioner's case, as accepted in principle by the appellant, was that a person could make no payment, including a payment of interest to himself, but as an adjunct to his other legal submissions, Mr. Pinson seemed also to lean on the fact that no actual payment was involved in the instant appeal.

11. It was held in C.I.R. v. Lo & Lo ⁽²⁾ that "an expense incurred" under section 16 would include an obligation to pay, “that is to say an accrued liability which is undischarged". Thus, flow of funds was not a pre-requisite for a deductible outgoing or expense within that section. Just as a payment requires a payer and a payee, an obligation would need an obligor and an obligee. For the purpose of this Case Stated, therefore, there would appear to be no significance in the absence of actual fund movements. In essence, the question that lies at the heart of this appeal can only be whether the Hong Kong branch could have a separate existence for the purpose of profits tax computation.

12. As agencies of one principal and being part of one juridical person, branch banks may be looked upon quite independently for specific purposes, such as in the legal situs of the deposit (See the Henry Prince case), the primary localized obligation to pay cheques at a particular branch where the account is kept (See Woodland v. Fear⁽³⁾ and Richardson v. Richardson⁽⁴⁾) and the computation of time for a notice of dishonour (See Clode v. Bayley⁽⁵⁾).

13. This court was invited to extend this practical territorial approach to the area of the Hong Kong profits tax. It was submitted that section 14, properly construed in conjunction with rule 3 of the Inland Revenue Rules, would bring the interests charged on the Hong Kong branch within the meaning of "interest" in section 16(1)(a) or generally within the meaning of an "expense" or "outgoing" in section 16(1) itself. As these retained profits had truly been used to produce taxable income, it was pressed upon me that the interests charged on such retained profits must be, in reality, an expense incurred in its production in Hong Kong and that there was no conceivable justification for refusing to acknowledge that situation in practical terms. It was further contended on behalf of the Bank that if these provisions were not sufficiently explicit to treat the Hong Kong branch as distinct for profits tax purposes, this court should not hesitate to "do some violence to" the language of the charging section 14 so as "to achieve the obvious intention (of the Legislature) and produce a reasonable result". Capital was sought to be made of C.I.R. v. Luke.⁽⁶⁾ But in the speech of Lord Reid at page 646,a clear limitation to the application of this principle was reasserted. Speaking of difficulties caused by the ordinary meaning of the words there under consideration, the learned law Lord had this to say:

"How, then, are we to resolve the difficulty? To apply the words literally is to defeat the obvious intention of the legislation and to produce a wholly unreasonable result. To achieve the obvious intention and produce a reasonable result, we must do some violence to the words. This is not a new problem, though our standard of drafting is such that it rarely emerges. The general principle is well settled. It is only when the words are absolutely incapable of a construction which will accord with the apparent intention of the provision and will avoid a wholly unseasonable result that the words. of the enactment must prevail."

At page 648, the learned law Lord continued:

"If it is right that, in order to avoid imputing to Parliament an intention to produce an unreasonable result, we are entitled and indeed bound to discard the ordinary meaning of any provision and adopt some other possible meaning which will avoid that result, then what I am looking for in examining the obscure provision at the end of Section 161(1) is not its ordinary meaning (if it has one) but some possible meaning which will produce a reasonable result.

14. Before I turn to consider the object served by the relevant provisions of the Inland Revenue Ordinance, it would not be impertinent to examine more closely the practical commercial aspect. In economic terms, prejudice brought about by the parting of the Bank's funds to or the withholding of it by its branch was either profits the Bank might have made if it had had the use of the money or conversely loss the Bank suffered because of its deprivation of the use of it. The Bank charged the Hong Kong branch the usual inter-bank interest at a rate known universally as "LIBOR". The Bank was the beneficiary of all the Hong Kong profits. Money which any bank receives by way of interest will also go to swell its profits. Whether the Bank was to receive the whole yield from the use of its "retained profit" in Hong Kong or some interest plus naturally only the balance of it, the tangible benefit to the Bank would be the same. In reality, an artificial classification. of a bank's total investment return on any one sum seems to be uncalled for unless, of course, it is fostered by our tax legislation for some purpose.

15. Section 14 is the charging section. The function of section 14 is to specify the "person" who is to be liable to profits tax. Section 16 gives allowance for outgoings and expenses and other specified deductible items, including interest. Little assistance is offered by the definition of "assessable profits" which was described in C.I.R. v. Lo & Lo ⁽²⁾ as "a somewhat circular definition".

16. The Commissioner relied heavily on counsel's concession made in Anglo-Continental Guano Works v. Bell.⁽⁷⁾ The Anglo-Continental case was decided on an express provision for excluding all interests on advances employed as capital for profits tax deduction. In The Scottish North American Trust, Limited v. Farmer, ⁽⁸⁾ both Lord Salvesen in the First Division of the Court of Sessions at page 701 and Lord Atkinson in the House of Lords at pages 707 and 708 distinguished the case of Anglo-Continental Guano Works on this statutory provision. However, in the First Division of the Court of Sessions, Lord Johnson endorsed one of the underlying principles in counsel's concession made in the Anglo-Continental Guano Works case. At page 699, in his opinion Lord Johnson observed:

"It is the Anglo-Continental Guano Works v. Bell, 1st March, 1894, 70 L.T.R. 670. A foreign firm had a branch out in England, which was conducted on the footing of a separate business. The English House obtained short loans, or accommodation, for the conduct of its business, from the foreign firm and from foreign bankers. I think the case may be relieved of any question regarding the advances by the foreign firm. For I think the court regarded the foreign firm as really eadem persona with the English House."

Again, in Bank of Chettinad, Limited, Colombo v. C.I.T., Colombo, ⁽⁹⁾ in the judgment of the Board in the Privy Council as delivered by Lord Morton of Henryton, the same principle was reiterated, though the case itself is distinguishable on its own facts and the legislation involved:

"It has not been disputed that apart from these Rules, the deduction claimed is inadmissible, inasmuch as debits and credits as between a head office and the branches of a company are not expenses or receipts which come into account in computing the profits of the business of a branch."

17. The Bank has readily accepted that there was only one juridical person featuring in this case. From that starting point, I should now return to the specific arguments advanced on its behalf. Mr. Pinson urged that section 85 through rule 3(2) of the Inland Revenue Rules was aimed at guiding the application of the charging section 14 to the local branch. Logically, so it was submitted, with rule 3(2) attributing profits to a local branch, income and expenses, as the main components for computing such of its profits, must consequentially be referable to those of the same local branch; thus Rule 3 personifies the Hong Kong branch for profits tax computation. Counsel pressed the court to treat the Hong Kong branch, for profits tax purposes, as having the capacity to enter into transactions which had given rise to the interest payments as expenses. The overall scheme of the Inland Revenue Ordinance is, so counsel elaborated, to categorise each local branch of a foreign bank as a separate entity for computing profits tax, and the definition of "person", including a body of persons, is sufficiently wide to include a local bank branch. Mr. Pinson suggested that the clear intention of the Legislature to achieve this object was, if need be, good incentive for abusing the ordinary meaning of the word "person" chargeable to profits tax so as to let in the Hong Kong branch's claim of deduction under Section 16.

18. Section 14 imposes tax liability. The crucial word in the vocabulary of the Inland Revenue Ordinance is "person" which can only refer to the one juridical person of the Bank. Plainly, the branch itself is not assessable to profits tax; nor indeed would it carry any tax liability. A branch as an agency and its group of employees were not, for those two years, and are still not themselves trading within this territory. Therefore, the local branch as an agency and its group of employees do not and did not, at the material time, make any profits nor incur any expenses or outgoings. Even if some independent status were to be pinned on the branch for profits tax purposes, there would be and could have been no available profits for computation and equally no expenses for deduction. The authorities craved in aid by the appellant reflect an indispensable recognition of territorial limitation to certain incidents in the practical relationship of a banker and its depositors. Even some of these inherent difficulties have been alleviated with the advancement of computer science. These decisions are unconcerned with strict legal liability, far less the levy of tax.

19. In my judgment, the branch as an agency and its group of employees in Hong Kong were never intended to have or enjoy any separate existence for profits tax purposes. Tax liability could not be imposed except by a clear and specific provision. Rule 3(2) is subsidiary legislation and merely provides, as Mr. Somerville was at pains to emphasize, an alternative and convenient means for assessing profits of a foreign bank derived from its trading within this territory. When such profits have been quantified, profits tax is chargeable on the bank under section 14. Rule 3 purports to create no new tax liability or claimable deduction. In my view, the language both in section 14 and rule 3 admits of no ambiguity. I do not feel constrained either by the commercial considerations I have earlier referred to or by any of these reasonably unobscure provisions to lend my support to the Bank's proposition that it was the apparent intention of the Legislature to take leave from the usual eadem persona principle in the computation of a foreign bank's gains so as to treat each of its local branches as enjoying a distinct existence for profits tax purposes.

20. Economic realities do not call for special treatment for credits and debits as between the Bank and its Hong Kong branch in the form of the interest payments involved here, and the ordinary meaning of these provisions would not produce "a wholly unreasonable result". Even if commercial considerations merited any special treatment for these debits and credits, there would be nothing in the language of these provisions compelling enough to give rise to an obvious legislative intention to depart from so basic a concept as that of "eadem persona" for a bank and its branches. After all, a departure such as this could have been easily achieved by an express and direct provision in the Ordinance. For all the reasons I have given, there is no room or justification for discarding the ordinary meaning of the word "person" in these provisions. The language in these provisions suffers from no obscurity, and it would not be legitimate for me to attempt to reconstruct the clear intent and purport of the Legislature.

21. Consequently, the Hong Kong branch could not make payment to the Bank by way of interest and, by the same parity of reasoning, could incur no legal obligation to pay such interest.

22. The answer to the question posed for the opinion of this court must, therefore, be in the affirmative. The Board was correct in its said determination in law. Subject to what counsel have to say, this appeal be dismissed accordingly with costs against the appellant.

(1) [1878] 3 A.C. 325 at p.331

(2) Privy Council Appeal 59 of 1982, judgment of the Judicial Committee was delivered on the 10th May 1984 by Lord Brightman, p.6.

(3) 7 E & B. 519

(4) [1927] p.226 at p.232

(5) 12 M & W 51

(6) (1963) 40 T.C. 630

(7) (1894) 3 T.C. 239

(8) (1910) 5 T.C. 693

(9) [1948] L.J.R. 1925 at p.1926

Representation:

Mr. Barry Pinson, Q.C. assisted by Mr. Robert G. Kotewall, instructed by M/S Johnson, Stokes & Master for the Appellant.

Mr. H. Somerville with Mr. B. Lai, Crown Counsel for the Respondent.