Commissioner of Inland Revenue v. Hit Finance Ltd

FACV Nos 8 and 16 of 2007

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NOS 8 AND 16 OF 2007 (CIVIL)

(ON APPEAL FROM HCIA NO. 14 OF 2005)

(Heard together with FACV Nos 9 and 17 of 2007)

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Between :

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FACV Nos 9 and 17 of 2007

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NOS 9 AND 17 OF 2007 (CIVIL)

(ON APPEAL FROM HCIA NO. 15 OF 2005)

(Heard together with FACV Nos 8 and 16 of 2007)

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Between :

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J U D G M E N T

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Lord Hoffmann NPJ:

1.This is the judgment of the Court.

2.On 4 December 2007, the Court unanimously allowed the Commissioner’s appeal against HITL and confirmed the assessments on HITL.

3.The parties subsequently lodged written submissions seeking clarification of the Court’s order, the issue between them being whether, in the light of the Judgment, the proper assessments on HITL are those made by the Commissioner in the Determination or the assessments as increased by the Board of Review.  HITL contends for the former and the Commissioner for the latter.

4.The Commissioner’s contentions are correct.  The principle stated in the judgment requires the deduction of interest paid by HITL on a sum in excess of the US$587 million actually borrowed by the group to be disallowed.  That was the effect of the increased assessments made by the Board of Review. It does not depend on the ‘no real money’ argument which the Court rejected.

5.The subsequent borrowings by Strategic by selling loan notes are in our opinion irrelevant. They are new transactions.  If (as appears to be the case) Strategic lent the new money to another group company, that company would be entitled to deduct the interest it paid.  But there is no reason why HITL should thereby become entitled also to deduct interest on the same borrowings.

6.Accordingly, and in the light of uncontroversial submissions made by the parties regarding other aspects of the orders required to be made, we make the following orders, namely, that:

(1) The Commissioner’s appeal against HITL in FACV No 9 of 2007 be allowed and the assessments on HITL as increased by the Board of Review under section 68(8)(a) of the Inland Revenue Ordinance (Cap 112) be confirmed.

(2) The Commissioner’s appeal against Finance in FACV No 8 of 2007 be dismissed.

(3) The following profits tax assessments on Finance be annulled:

Year of assessment	Charge No
1994/95	1-5053025-95-7
1995/96	1-3148225-96-A
1996/97	1-1147626-97-7
1997/98	1-2896198-98-7
1999/00	1-1043202-00-3
2000/01	1-1082365-01-5

(4) The profits tax assessment on Finance for the year of assessment 1998/99 under charge no 1-1081904-99-0 be reduced to chargeable profits of HK$20,000,414 and with tax payable thereon of HK$3,200,066.

(5) The cross appeal by Finance against the Commissioner in FACV No 16 of 2007 be allowed.

(6) The cross appeal by HITL against the Commissioner in FACV No 17 of 2007 be dismissed.

(7) The Orders of the Court of Appeal dated 13 February 2007 and 22 June 2007 be set aside.

(8) Costs be dealt with by the Court on written submissions by the parties as to which the parties should seek procedural directions from the Registrar.

Mr David Goldberg, QC and Mr Stewart KM Wong (instructed by the Department of Justice) for the appellant (respondent on cross appeal)

Mr John Gardiner, QC, Mr Ambrose Ho, SC and Mr Kenny Lin (instructed by Messrs Woo, Kwan, Lee & Lo) for the respondent (appellant on cross appeal)