Asia Master Ltd v. The Commissioner of Inland Revenue
Read the full judgment text of HCAL 114/2005 on BabelCite. This High Court CFI judgment was delivered on 30 November 2006.
1. In these proceedings, the applicant seeks to challenge by way of judicial review two decisions of the Commissioner of Inland Revenue (“the Commissioner”) in connection with its profits tax liability for the years of assessment 1994/95 to 2000/01. The decisions that were set out in the Form 86A are as follows:
Cited by 1 case · Cites 6 cases
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HCAL114/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO.114 OF 2005 ----------------------- BETWEEN
----------------------- Before : Hon Chu J in Court Date of Hearing : 24, 25 and 28 April 2006 Date of Judgment : 30 November 2006 ----------------------- J U D G M E N T ----------------------- 1.In these proceedings, the applicant seeks to challenge by way of judicial review two decisions of the Commissioner of Inland Revenue (“the Commissioner”) in connection with its profits tax liability for the years of assessment 1994/95 to 2000/01. The decisions that were set out in the Form 86A are as follows:
I. The facts (1) The Asia Master group of companies 2.The applicant (“AML”) is a company incorporated on 13 June 1991 under the laws of Hong Kong. It is a company within the Asia Master group of companies (“the Group”). The Group is and was a manufacturer and exporter of ceramic articles. Its customers were mainly overseas and in the USA. 3.There are a number of companies within the Group. The ultimate parent company is Asia Master Group Limited (“AMGL”). It is an investment holding company incorporated on 28 April 1994 under the laws of Hong Kong. 4.AML is wholly owned by AMGL. It trades in ceramic articles. Apart from AML, the Group has other trading companies in Hong Kong. 5.Within the Group are three Mainland factories that manufacture ceramic goods. They are all located in Panyu. The one that is most relevant to this application is Asia Master (Panyu) Ceramic Industrial Ltd (“AM-PY”). It is the Group’s main manufacturing arm. AML used to hold 50% interest in AM-PY, which was increased to 65%, 72% and 83% in January 1995, October 1995 and May 1999 respectively. The remaining interest is held by a Mainland entity. The other two Mainland factories are Union Ring Ind. Ltd (“UR-PY”) and Perfect System (Panyu) Ceramic Material Ltd (“PS-PY”). AML has 50% and 67% interest in them respectively, with the remaining interest also held by Mainland entities. UR-PY had ceased operation since 1 February 2000. For ease of reference, I shall refer to the Mainland entities that have interest in the three factories as the Chinese partner(s). 6.The Group also has trading companies in the USA. For the purpose of this application, it is only necessary to refer to one of them, Inspirado Design Corp. (“IDC”). The Group has a 90% interest in it. 7.In 1994, a company called A-Grade International Group Ltd (“AGIGL”) was incorporated in the British Virgin Islands. It is wholly owned by AMGL. It is AML’s case that AGIGL is an intra-group re-invoicing company and that it was formed with a view to reducing the Group’s overall exposure to tax and commercial risks. This is not accepted by the Commissioner. 8.At all material times, the shareholders and directors of AMGL were Mr Chan Kwok Wing (“Mr Chan”) and Ms Chiu Chih Jou. They are husband and wife. They are also the directors of AML. (2) Investigations by the Inland Revenue Department 9.AML had filed profits tax returns for the years ending 31 December 1994 to 2001 and had been assessed to profits tax for those years. In all these tax returns, AML did not declare it had transacted business with any closely connected non-resident person. In particular, there was no disclosure of AGIGL in any of these returns or in the applicant’s audited financial statements for these years. 10.In December 1998, the Inland Revenue Department (“IRD”) commenced investigations into the tax position of AML and its related group of companies. 11.After Mr Chan’s first interview with the IRD on 10 August 1999, during which he was asked about the shareholders’ loan recorded in the Balance Sheet of AMGL, Mr Chan by letter dated 26 August 1999 made reference to AGIGL for the first time, explaining that the $62 odd million shareholder loan was from AGIGL. The letter also said that AGIGL had been in charge of the operation and running of all the factories of AMGL in the Mainland. 12.By letter dated 21 September 1999, Mr Chan provided to the IRD a copy of an agreement dated 2 November 1995 made between AML and AGIGL. Under the agreement, which took effect retrospectively from 1 January 1994, AGIGL undertook full responsibility for the operation of AM-PY and UR-PY and agreed to pay all costs incurred during manufacturing (except the purchase costs of factory installation and factory equipment) and government and municipal taxes and duties. AGIGL also agreed to be responsible for the guaranteed profits payable under the agreement made between AML and the Mainland entities that hold interests in the Mainland factories. It was also provided in the agreement that AGIGL should not sell the products manufactured by AM-PY and UR-PY to any party other than AML or unless with AML’s written consent. 13.On 24 February 2000, the applicant appointed Messrs Rowland Chow, Chan & Co (“RCC”), a firm of solicitors, as its tax representative. (3) The findings of the IRD 14.On 8 May 2001, as requested by the IRD, RCC provided three sample transactions for three different periods. Upon analysis, the IRD came to the following findings:
15.The IRD also found that during the seven years of assessment in question, substantial profits had accrued to AGIGL in consequence of the supplies from AM-PY and the two other Mainland factories and resale to AML and other Hong Kong companies in the Group. The major part of the transactions involved AM-PY and AML. 16.The IRD takes the view that the profits of AML had been siphoned off to AGIGL. It considers that the interposition of AGIGL between AM-PY and AML since 1994/95 constitutes an artificial or fictitious transaction under section 61 of the IRO and that once the interposition is removed, the profits booked in AGIGL should have accrued to AML instead. (4) Discussions on settlement 17.On 8 May 2001 and 11 February 2002, AML through RCC made two settlement proposals to the IRD. The first offer involved allocating 50% of the aggregated profits of the Group to Hong Kong by reference to the costs incurred in Hong Kong. As for the second offer, it involved assessing tax on one-third of the profits booked in AGIGL’s accounts. IRD rejected both offers, taking the view that they lacked evidential and legal basis. 18.On 26 March 2001, 26 March 2002 and 28 February 2003, the IRD sent to AML estimated additional assessments for the years 1994/95 to 1996/97 under sections 61 and 61A of the IRO with a view to assessing profits siphoned to AGIGL. 19.On 25 June 2002, the applicant appointed Cheng & Cheng Limited (“CCL”) as its tax representative. In September and October 2002, CCL proposed to adopt a revised gross profit ratio to re-compute the assessable profits of the applicant and AGIGL. This was rejected by the IRD as it did not consider this was a case of transfer pricing. 20.On 11 December 2002, the IRD sent to CCL a computation comprising four tables showing the basis on which the IRD was prepared to re-compute the assessable profits of AML for the years of assessment 1994/95 to 2000/01. 21.On 17 December 2002, CCL wrote to the IRD contending, inter alia, that not all the profits accrued to AGIGL derived from activities in Hong Kong. A meeting was held between Mr Cheng of CCL and the assessors of IRD on 19 December 2002. During it, Mr Cheng made the point that most of the profits accrued to AGIGL were manufacturing profits of the Mainland factories and not the trading profits of AML. It was, however, made clear to him that the IRD did not accept the contention as there was no proper basis to differentiate between manufacturing and trading profits. It was also pointed out that after the interposition of AGIGL, the profits of AML had dropped substantially and that throughout AML did not disclose it had transactions with non-resident closely connected person. 22.On 23 December 2002, CCL sent to IRD a proposed computation in which the profits of AML were re-computed by using a revised gross profit ratio. However, this proposed computation did not form the basis of the subsequent discussions between CCL and IRD. 23.On 9 January 2003, Mr Cheng together with Mr Walter Chan of RCC met with the assessors of IRD. The IRD’s computation sent on 11 December 2002 and the appropriate amount of penalty to be imposed on AML were discussed at the meeting. As a result of documents supplied by CCL, proving payment to the Mainland entities of their guaranteed profits for the three Mainland factories, the IRD conceded to a deduction of the amount involved. 24.On 19 March 2003, the IRD sent to CCL a revised computation. The revisions took into account the deduction of the guaranteed profits to the Mainland entities and also the deduction of the salaries and allowances and directors’ remuneration as AML had decided to have the recipients assessed for salaries tax. The revisions also took note of points raised by CCL in its fax dated 20 January 2003. (5) The 21-3-2003 Agreement 25.On 21 March 2003, Mr Chan, accompanied by Mr Walter Chan of RCC and Mr Cheng of CCL, attended a settlement meeting with the assessors of the IRD. At the meeting, AML through Mr Chan agreed to the computations of (i) revised assessable / additional assessable profits for the years of assessment 1994/95 to 1996/97, and (ii) assessable profits of AML for the years of assessment 1997/98 to 2000/01. The computations were primarily based on the revised computation of 19 March 2003, except that the interest income from banks in Hong Kong had been excluded. 26.Also at this meeting, AML through Mr Chan offered to pay HK$15 million (equivalent to 82% of the tax undercharged) if the Commissioner was agreeable to compound the offences committed by AML for the seven years of assessment in question. He requested for the HK$15 million compound penalty to be paid by instalments. 27.Towards the end of the meeting, Mr Chan as AML’s director signed an agreement (“the 21-3-2003 Agreement”) signifying his agreement to the computations of the revised assessable/ additional assessable profits in settlement of the objections against the previous assessments for the years of assessment 1994/95 to 1996/97 and the assessable profits of AML for the years of assessment 1997/98 to 2000/01 as set out therein. The agreement also recorded the proposal to pay $15 million as compound penalty. (6) Revised/ additional profits tax assessments and penalty 28.On 27 May 2003, the IRD issued to AML notices of revised profits tax assessment for the years of assessment 1994/95 to 1996/97 under section 64(3) of IRO. On the same day, the IRD also issued to AML notices of additional profits tax for the years of assessment 1997/98 to 2000/01. The revised assessments and additional assessments were made in accordance with the computations contained in the settlement agreement. AML did not lodge any objections to these notices. By letters dated 3 April and 25 June 2003, CCL applied on behalf of AML to pay the tax due under the revised and additional assessments by instalments. 29.In the meantime, the Commissioner approved the compound penalty and the request to pay by equal instalments of $1.5 million each. Between June and September 2003, AML paid four instalments totalling $6 million. Thereafter, CCL had by letters dated 8 October 2003 and 5 March 2004 requested on AML’s behalf to vary the instalment amount and the payment plan. In total, AML has paid $9,948,000 by way of penalty. AML has also paid $3,220,000 as profits tax. (7) EY’s letter dated 16 April 2004 30.On 27 April 2004, the Field Audit and Investigation Unit of the IRD received notice from AML of its appointment of Ernst & Young Tax Services Limited (“EY”) as its new tax representative in the place of CCL. Prior to this, AML had written to the Profits Tax Unit of the IRD on 16 February 2004 about the appointment of new tax representative. 31.By letter dated 16 April 2004 to the IRD, EY made the following points that were relevant to the profits tax position of AML for the years of assessment in issue in this application:
32.By letter dated 20 August 2004, EY made the following clarifications in respect of the 16 April 2004:
33.In this letter, EY also requested for payment of the tax due under the assessments and of the balance of the compound penalty be withheld pending the resolution of the section 64 objection and the section 70A application. (8) IRD’s two letters dated 10 September 2004 34.By two letters both dated 10 September 2004 addressed to AML, the IRD replied to EY’s letter of 20 August 2004 and the requests made in the 16 April 2004 letter. In the first reply dealing with the section 64 objection, the IRD stated that it was not a valid objection since it was not received within one month of the date of assessment, and that the IRD was not satisfied that AML had been prevented form lodging an objection in time owing to absence from Hong Kong, sickness or other reasonable cause (i.e. the grounds provided in the proviso to section 64). The IRD further pointed out that the assessments in question had become final and conclusive in terms of section 70 of the IRO. 35.In the second reply dealing with the section 70A application, the IRD stated that in respect of the year of assessment 1997/98, the application was invalid as it was not received within six years after the end of the year of assessment or within six months after the date on which the notice of assessment was served. As for the years of assessment 1998/99 to 2000/01, the IRD refused the application, taking the view that there was no overcharge of tax by reason of an error or omission in the return or statement submitted for the years of assessment or any mathematical error or omission in the calculation of the amount of the assessable profits or in the amount of the tax charged. (9) EY’s letter dated 7 October 2004 36.Then on 7 October 2004, EY wrote again to the Commissioner lodging objections against the refusal to correct the assessments for the years of assessment 1997/98 to 2000/01. EY further reiterated that AGIGL was entitled to object to the assessments under section 64 of the IRO. 37.In respect of the objection to the refusal to correct under section 70A of the IRO, it was taken forward by the Appeals Section of IRD. On 17 June 2005, the IRD sent to AML’s representatives the draft statement of facts for putting before the Commissioner. AML initially requested for extensions of time, but later indicated it would defer its response until after the determination of the present application. 38.Nevertheless, the Deputy Commissioner issued a determination against AML on 1 March 2006. Consequently, AML had on 31 March 2006 lodged an appeal to the Inland Revenue Board of Review against the determination pursuant to section 66 of the IRO. The hearing before the Board of Review was pending at the hearing of the present application. This aspect of the dispute between AML and the Commissioner is relevant to the Commissioner’s procedural objections to this application, which are dealt with in the latter part of this Judgment. (10) EY’s and GCKM’s letters dated 22 March 2005 39.On 22 March 2005, EY wrote again to the Commissioner, enclosing a letter from Messrs George C K Mok & Co. (“GCKM”), AML’s solicitors in these proceedings. Both EY and GCKM referred in their letters to an opinion of an English Queen’s Counsel. It was said that the counsel had advised there was reasonable excuse justifying a late objection under section 64. 40.In GCKM’s letter, it was also argued that the assessments amounted to a nullity because Mr Chan agreed to the settlement under a mistake that the liability to tax was established. GCKM further asked the Commissioner to exercise her discretion to allow the objection so as to alleviate the need to litigate the dispute by way of judicial review. (11) IRD’ letter dated 31 May 2005 41.The IRD replied on 31 May 2005. It pointed out that the late objection under section 64 had been rejected by the IRD’s letter dated 10 September 2004 and that the section 70A application had also been rejected by the other IRD’s letter dated 10 September 2004. The letter also stated that the objection against the refusal of the section 70A application would be dealt with in accordance with the procedures laid down in the IRO. This letter forms the first of the two decisions challenged by AML in this application. (12) EY’s letter dated 12 August 2005 42.By letter dated 12 August 2005, EY wrote again to the Commissioner requesting reconsideration and cancellation of the assessments for the years of assessment from 1994/95 to 2000/01 on the basis that they were a nullity. It reiterated that the profits assessed did not belong to AML and were profits earned offshore by AGIGL or by other companies to which the profits should have been attributed. (13) IRD’s reply dated 19 August 2005 43.The IRD replied on 19 August 2005. The letter stated that the assessments were properly made and that the tax position had already been explained to AML in its previous correspondence and the IRD had nothing further to add. This forms the second of the two decisions challenged in this application. II. The application for judicial review 44.On 29 August 2005, AML filed the application for leave to apply for judicial review. Leave was granted on 9 September 2005. The Notice of Motion was filed on 21 September 2005. 45.AML seeks the following relief in this application:
46.In the Form 86A, AML put forward three grounds in support of the application. They are:
47.In the Form 86A, there were suggestions that Mr Chan agreed to the settlement at the 21 March 2003 meeting under very unpleasant circumstances, including duress and/or threats of imprisonment. The assessors of the IRD who attended the meeting denied the allegations. Miss Eu SC who appeared for AML had however not pursued the point in her submissions. III. IRD’s procedural objections 48.Before going into the grounds relied upon by the applicant, it is necessary to deal with the three procedural objections raised by the Commissioner. They are:
(1) Undue delay 49.Section 21K (6) of the High Court Ordinance, cap.4 provides:
50.Order 53 rule 4 of Rules of the High Court also provides:
51.The thrust of the Commissioner’s objection is that the two decisions challenged in this application are not fresh decisions, but are merely replies to letters from EY and GCKM, in which they sought to re-open the decisions that the Commissioner had already made and communicated to AML by the two letters of 10 September 2004. The judicial review application was however only brought in August 2005, nearly a year later. The Commissioner therefore argues that there has been undue delay and that the delay is detrimental to good administration. 52.In response, AML argues that the Commissioner should not be allowed to rely on procedural objections at this late stage of the application since the Commissioner did not apply to set aside the leave granted. It is also said that although time limits should be observed, the overriding consideration is to do justice. It is further said that there can be no prejudice to the Commissioner and that it would be in accordance with good administration to grant the relief sought as it would enable the Commissioner to properly carry out her statutory duty. 53.In my view, the Commissioner is correct in her analysis of the facts and the effects of the letters exchanged between EY and the IRD. AML through EY made objection to and application for correction of the assessments in question under sections 64 and 70A of the IRO by EY’s letter dated 16 April 2004 as clarified by EY’s letter dated 20 August 2004. The Commissioner’s decisions on the objection and application were communicated to AML by IRD’s two letters of 10 September 2004. The IRD’s letters dated 31 May and 19 August 2005 are merely replies to the letters from EY dated 22 March and 12 August 2005 respectively. In these two letters, the IRD do not convey any fresh decisions. Instead, they pointed out to AML that decisions had already been made as per the letters of 10 September 2004. 54.As held by Keene J in R v. Commissioner for Local Administration, ex p Field [2000] COD 58, Lexis transcript of judgment p.5, an applicant cannot overcome the time limit in section 21K and Order 53 rule 4(1) “by writing fresh letter to the decision maker and thereby obtain a reply which one then seeks to characterise as a fresh decision. That would render that provision in the Rules wholly ineffective.” 55.The decisions that AML is challenging in this judicial review are those of 10 September 2004. Indeed, it did not appear to have escaped the attention of AML’s legal advisers that the Commissioner had already made substantive decisions on AML’s objection and application. In GCKM’s letter dated 22 March 2005, it was said that “we have now obtained the advice of a leading Queen’s Counsel and tax expert in England who has asked us to invite your personal attention to this matter before our client applies to the High Court for judicial review of your decision ..”. There is however no explanation from AML as to why it had waited for nearly a year before bringing the present proceedings. 56.In my view, there is clearly undue delay on the part of AML. The criticism that the Commissioner had not moved to set aside the leave to apply for judicial review cannot assist AML. The Commissioner does not have to do so when her position is simply that because of undue delay, the relief sought should not be granted. 57.As to detriment to good administration, that depends on the circumstances of each case: see Lo Siu Lan v. Hong Kong Housing Authority (unreported) CACV 378/2004, 16.12.2004, para.37. 58.In the present context, it is important to appreciate the Commissioner’s duty to collect revenue and to do so timely. This judicial review was brought more than two years after the revised/ additional assessments were made in May 2003 and which were issued in accordance with an agreement reached in March 2003. The challenge to the 21-3-2003 Agreement and the assessments was made nearly a year later. After the Commissioner decided on the challenge, AML again waited for nearly a year before making the judicial review application. 59.On the other hand, it is to be noted that AML was throughout advised by solicitors and accountants. It had ample opportunity to consider on its tax position and advance its case to the IRD. It was after rounds of meetings and correspondence that agreement was reached on the assessments to be made. Even after EY was appointed, there were meeting and discussions between its representatives and the assessors of the IRD before the Commissioner’s made the substantive decisions in September 2004. Considering all these circumstances, the unavoidable conclusion is that not only has there been undue delay, but the delay also is detrimental to good administration. I agree with the Commissioner that in light of the undue delay, the court should not grant any relief to AML. There is no room for AML to complain that this would be unfair or unjust. (2) Failure to exhaust alternative remedy 60.The Commissioner also argues that the court should refuse relief to AML because there is a pending appeal to the Board of Review against the determination of the section 70A application, which AML should have pursued. As noted above, after several requests for extension of time to respond to the statement of facts prepared by the IRD, AML requested to defer the response to after the determination of this judicial review. The IRD did not agree and the Deputy Commissioner proceeded with the determination. Consequently, AML has appealed to the Board of Review. 61.The subject matter of the appeal before the Board of Review is the same as in this application. It is trite that judicial review being an exceptional and discretionary remedy, the court may refuse relief if the applicant has failed to exhaust the alternative remedy that is available: Hong Kong Civil Procedure 2006 vol.1 para.53/14/22, see also R v. IRC, ex p Preston [1985] AC 835, 852D-H. 62.In the Form 86A, AML made the point that as the issues before the Court and the Board of Review are the same and since the Court has jurisdiction to review the assessments, it would be fair and just for the court to judicially review the decisions of the Commissioner instead of waiting for the appeal before the Board of Review. This submission, however, ignores the fact that this judicial review was brought some ten months after AML lodged its objection to the decision on its section 70A application. 63.Miss Eu SC seeks to draw assistance form the case of R v. Wiltshire County Council ex p Nettlecombe Ltd 96 LGR 386. The issue in the case was whether statutory regime of making an application to the High Court created a jurisdictional bar to judicial review. The judge decided to approach it on the basis of the exercise of discretion. This was held to be a plain error of law and that the court should have granted the relief sought. The case does not assist AML. Here, AML had already invoked the section 70A and the statutory appeal procedures when it commenced the present judicial review application. The critical question is what are the justifications for invoking the court’s supervisory and collateral jurisdiction. AML has not demonstrated any special circumstance justifying this judicial review when there is available an alternative remedy. 64.I am of the view that on this ground as well, the court should refuse the relief sought. (3) Failure to challenge the substantive decisions 65.The Commissioner’s third objection is a short point. Irrespective of the outcome of this application. The substantive decisions of 10 September 2004 remain extant. The IRD’s letters of 31 May and 19 August 2004 do not affect the substantive decisions on AML’s sections 64 and 70A objection and application. Accordingly, the present judicial review is academic and futile. I agree with the submission. It is also relevant to note that AML would be faced with tremendous, and in my view insurmountable, difficulties of overcoming the problem of serious delay if it were to challenge the substantive decisions. For this reason, the relief sought should also be refused as a matter of discretion. 66.In the premises, I am of the view that this judicial review should fail on these objections alone. (IV) The merits of the judicial review application 67.For the sake of completeness, I turn now to deal with the merits of the judicial review. (1) The 1st ground: Assessments ultra vires and/or illegal? 68.Under the first ground, the issue is whether the tax assessments and demands made pursuant to the 21-3-2003 Agreement are ultra vires and/or illegal. 69.It is the Commissioner’s case that the 21-3-2003 Agreement was entered into by invoking the power under sections 61 and 61A of the IRO. The crux of AML’s argument is that notwithstanding this, the Commissioner had acted outside the power under the two sections in treating AGIGL’s profits as those of AML. This is because AGIGL’s profits is entirely offshore and the profits are not wholly attributable to AML. 70.Sections 61 and 61A of the IRO provide as follows:
71.The effect of section 61 was considered by the Court of Appeal in Cheung Wah Keung v. Commissioner of Inland Revenue [2002] 3 HKLRD 773, 793C-794A. In that case, the taxpayer had interposed a service company in between himself and a motorcar dealer that he worked for. The arrangement was that the taxpayer’s expenses were disguised as director’s benefits of the service company and claimed as deductible, as a result of which the taxpayer’s salaries tax liability was reduced. The Court of Appeal upheld the finding that the transaction was artificial within the meaning of section 61 and should be disregarded. It was further held that the effect of disregarding the artificial transaction is to raise the assessments against the person whose tax was thereby reduced. Accordingly, the payments made by the motorcar dealer to the service company were treated as if they had been received by the taxpayer as its employee. 72.In the present case, the IRD considers that the interposition of AGIGL between AML and AM-PY since 1994 to be an artificial or fictitious transaction within the meaning of section 61. Consequently, the IRD disregarded the interposition of AGIGL and treated the sales of ceramic goods over the years as direct sales and purchases between AM-PY and AML. On this basis, the IRD treated the profits booked in AGIGL’s accounts as the profits accrued to AML. 73.One of the main planks in AML’s argument against the IRD’s treatment of the profits in AGIGL’s account is that section 61 provides that when the artificial or artificial transaction is regarded, “the person concerned shall be assessable accordingly”. It is AML’s case that the Commissioner should therefore look at all the parties involved in the transaction, namely, AM-PY and the other Mainland factories and companies in the Group, and should not look simply at AML. It is further argued by AML that on this approach, the Commissioner should have concluded that the profits booked in AGIGL did not derive from the trading profits of AML, but from the manufacturing profits of AM-PY, and are offshore. 74.In support of the argument that the Commissioner is obliged to take into account all the parties involved in the transaction, Miss Eu SC relies on a passage in Lord Diplock’s judgment in Seramco v. Income Tax Commissioner [1977] AC 287, 301E-F, an appeal from Jamaica to the Privy Council, which said: “The persons concerned means all parties to the transaction; those whose liability to tax it would have increased as well as those whose liability to tax it would have reduced.” 75.As pointed out by Mr Ho SC for the Commissioner, the Jamican anti-avoidance provision that was considered in Seramco was differently worded. While section 61 refers to “person concerned shall be assessable accordingly”, section 10(1) of the Jamaican Income Tax Law 1954 refers to “persons concerned shall be assessable accordingly”. Section 2 of the IRO defines “person” as including “a corporation, partnership, trustee, whether incorporated or unincorporated, or body of persons”. 76.More importantly, although Seramco had been cited to the Court of Appeal in Cheung Wah Keung, Woo JA (at para.60) in holding that where a transaction is found by the assessor to contravene section 61, he may disregard it and the person concerned shall be assessable accordingly, made the point that:
77.Further, by any view of the words “the person concerned shall be assessable accordingly” in section 61, they must be construed to limit to “the person concerned” that is present within the jurisdiction of the IRD. It would have been legitimate for the IRD to look at the tax position of or to raise assessment on AM-PY, who is a party outside Hong Kong. The complaint that the Commissioner in exercising the power under section 61, had failed to have regard to the other parties involved, noticeably AM-PY, is not made out. 78.As for the effect of section 61A, it was held in Commissioner of Inland Revenue v. Tai Hing Cotton Mill (Development) Ltd (unreported) HCIA 8/2004, 9.9.2005 that the section involves three considerations:
79.As can be seen from the clear wordings of section 61A(2), where section 61(A)(1) applies, the Assistant Commissioner is given very wide power. He can assess the liability to tax of the relevant person as if the transaction or any part thereof had not been entered into or carried out, or in such other manner as he considers appropriate to counteract the tax benefit that would otherwise be obtained. The Assistant Commissioner does not have to consider the tax position of other parties involved in the transaction or to consider pricing adjustments or apportionment of profits or tax liability. 80.In the context of the present case, the transaction impugned is the interposition of AGIGL between AML and AM-PY. The Commissioner also considers that AGIGL was interposed to bring about and did cause a substantial reduction in the profits, hence tax liability, of AML. On this basis, section 61A(2) empowers the Assistant Commissioner to assess AML’s liability to tax as if there was no involvement or interposition of AGIGL in the sales. Hence, it is open to the Assistant Commissioner to raise assessment on AML on the basis of direct sales between AML and AM-PY and to treat the entire profits of AGIGL as those of AML. The Assistant Commissioner is further entitled to counteract the tax benefit obtained by AML, being the reduction in the amount of AML’s tax liability, in such other manner as he considers appropriate. 81.It follows from the above analysis of the effects of sections 61 and 61A that the Commissioner has proper legal basis to treat the whole of AGIGL’s profits as those of AML. 82.It is also the applicant’s case that the prices invoiced by the Mainland factories were controlled and fixed by AML. In the course of her submission, Miss Eu SC argues that the prices invoiced by AM-PY were depressed resulting in losses to AM-PY and consequentially profits to AGIGL. She further suggests that the controlled pricing is also part of the artificial or fictitious transaction for the purpose of section 61 as well as being part of the impugned transaction for the purpose of section 61A. On this basis, it is said that the Commissioner is obliged to take into account the position of AM-PY and should not have assessed on the basis of direct sales between AML and AM-PY. I do not accept the submission. 83.Firstly, this aspect of controlled price and AML’s notices on the pricing were never revealed to the IRD. They were only mentioned in MR Chan’s second affirmation filed shortly before the hearing of the judicial review. It is a new piece of evidence as far as the judicial review application is concerned. Secondly, the evidence before the court does not support the submission. The evidence is unclear as to what was the prevailing market price and there is no evidential basis for the suggestion that the prices invoiced by AM-PY were below market price. I also do not understand AML to be arguing that the prices invoiced by AM-PY were lower than its production costs. The mere fact that AM-PY made a loss does not automatically lead to the conclusion that the prices invoiced by AM-PY were below market price. Further as pointed out in the second affidavit of Sit Wai Ting Victor filed on behalf of the Commissioner, the documentation provided by AML shows that the pricing policy was not strictly adhered to by AM-PY. As to AML’s complaint that the IRD’s comment that AML and AM-PY appeared to be dealing at arm’s length is not justified, there is simply no evidence put before the IRD or the court to show the contrary. 84.On the question of the source of AGIGL’s profits, AML also submits that the Commissioner should have attributed at least some of the profits to other entities, notably AM-PY. Two matters were relied upon in arguing that the Commissioner acted ultra vires in treating the entire profits of AGIGL as those of AML. The first is that part of AGIGL’s profits had been assessed to income tax in the Mainland. The second is that on the basis of a report by Deloitte Touche Tohmatsu (“Deloitte’s report”), the Commissioner should have conducted pricing adjustments. 85.On the first matter, it is said that as part of the profits of AGIGL originated from AM-PY and since AM-PY had been assessed to tax in the Mainland, the assessments in issue amount to double taxation. For the reasons given in Mr Victor Sit’s second affidavit, the Commissioner does not accept that there are double taxation. I do not consider it is necessary to deal into this. It is sufficient to say that even if there were double taxation, it is not relevant. This is because there is at present no comprehensive double taxation agreement (“CDTA”) between Hong Kong and the Mainland. The limited arrangement in existence for the avoidance of taxation on income has no application since AGIGL is not a Mainland enterprise. Moreover, the question of assessment to Mainland tax only arose after the 21-3-2003 Agreement. Mainland tax liability was not a matter raised with the IRD before EY was appointed as AML’s tax representative. 86.As to transfer pricing, it should also be noted at the outset that the Deloitte’s report was again not shown to the IRD until these proceedings. It was prepared after the 21-3-2003 Agreement and was only disclosed for the first time in the second affirmation of Mr Chan in April 2006. As pointed out by the Commissioner, the Deloitte’s report suffers from a major setback in that there was no analysis of the functions and risks of the relevant entities, which calls into doubt the basis for the transfer pricing adjustments. It has thus not been demonstrated that even if the Commissioner were to take into account this report, the decisions made on AML’s objection and application under sections 64 and 70A would have been different. 87.Before leaving the first ground, it is necessary to briefly mention the case of Al Fayed v. Advocate general for Scotland [2004] STC 1703. Miss Eu SC relies on this case and submits that even though the assessments were made in accordance with the 21-3-2003 Agreement, if the assessments were ultra vires or illegal, then the Commissioner could not have proceeded to demand for the tax. 88.I have in the preceding part of this Judgment concluded that there is proper legal basis under sections 61 and 61A to treat the whole of AGIGL’s profits as those of AML and to make assessment accordingly. On this basis, the case of Al Fayed and the arguments associated with it becomes irrelevant. At any rate, the situation in the present case is different from that in Al Fayed. The issue there is whether a taxpayer can enforce an agreement to regulate the tax position in future when the agreement is ultra vires the tax authority. Not only is the present case not dealing with a forward tax agreement, but also that the assessment and demand made by the Commissioner was pursuant to a statutory scheme, namely sections 64, 70A and 71. It is also the duty of the Commissioner, not as a matter of discretion, to exercise her power and to enforce the statutory scheme. 89.For the above reasons, the first ground fails. (2) The 2nd ground: Application of the time limit in sections 64 and 70A 90.Given my conclusion that the assessments are not ultra vires and/or illegal, the basis upon which the second ground is made is gone. It is plain from the facts that the section 64 objection was made out of time. Despite what had been put forward by EY and GCKM in their letters to the IRD, AML has not made out a case for the proviso in section 64(1) to apply: see Chow Kwong Fai v. CIR [2005] 4 HKLRD 687, 696E-G and Yee Aik Ee v. CIR (unreported) HCAL 49/2005, 3.1.2006, para.56. 91.Similarly, the section 70A application insofar as to relates to the year of assessment 1994/95 is also out of time. In any event, the burden is on AML to show that the assessment was excessive by reason of an error or omission in the tax return or statement submitted by him. Looking at the facts, the essence of AML’s case is not so much that there has been an error or omission, but rather it would appear that there had been a change in the approach or opinion or its professional advisers: see Extramoney Ltd v. CIR [1997] HKLRD 387, 396A-D. 92.In my view, the second ground also fails. (3) The 3rd ground: Wednesbury unreasonableness of the decisions to accept the late objection and application 93.Given the history of this case, it can hardly be said that the Commissioner acted Wednesbury unreasonably in refusing to accept the late objection and application. 94.The references to the cases of Mortgage Corporation Ltd v. Sandoes, The Times Law Report 27.23.1996, Marshall v. Gradon Construction Services Ltd [1997] 4 All ER 880 and R v. Inland Revenue Commissioner ex p Unilever [1996] STC 681 do not assist the case of AML. The first two cases deal with the exercise of discretion to extend time limit. The Commissioner, however, has no discretion under sections 64 and 70A of the IRO. As to Unilever, the facts are very different from those in this case. Here, there is no question of legitimate expectation arising as a result of the conduct of the IRD. 95.In my view, AML cannot be heard to complain of unfairness or injustice as a result of the Commissioner acting in accordance with the statutory time limits. It cannot be overlooked that AML had chosen in the first place not to disclose the existence of AGIGL, then with professional advice, proceeded to agree to the 21-3-2003 Agreement and not to lodge the sections 64 and 70A objection and application within the time limits prescribed under the IRO. The 3rd ground must be rejected. Conclusion 96.For the above reasons, the application for judicial review is dismissed. I also make an order nisi that the applicant pays the costs of the respondent of this application, including the costs reserved.
Miss Audrey Eu SC and Mr Richard Leung instructed by Messrs George YC Mok & Co for the applicant. Mr Ambrose Ho SC and Mr Eugene Fung instructed by Department of Justice for the respondent. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
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