Legal Herald. The much-anticipated goods and services tax ( GST ) replaced Malaysia s sales and. Special Issue on Taxation

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1 Special Issue on Taxation Legal Herald MAY Insights into the GST Appeal Process 8. Discerning the Judicial Trend in Recent Tax Avoidance Cases 18. Interest Against the Revenue: An Analysis of Pelangi s Case 22. Of Plants and Car Parks: An Analysis of Tropiland s Case All articles by Datuk D P Naban and S Saravana Kumar in this issue Insights into the GST Appeal Process* LEE HISHAMMUDDIN ALLEN & GLEDHILL. ALL RIGHTS RESERVED DISCLAIMER: The views and opinions attributable to the authors or editors of this publication are not to be imputed to the firm, Lee Hishammuddin Allen & Gledhill. The contents are intended for general information only, and should not be construed as legal advice or legal opinion. The firm bears no responsibility for any loss that might occur from reliance on information contained in this publication. It is sent to you as a client of or a person with whom Lee Hishammuddin Allen & Gledhill has professional dealings. Please do not reproduce, transmit or distribute the contents therein in any form, or by any means, without prior permission from the firm. KDN PP 12853/07/2012 (030901) The much-anticipated goods and services tax ( GST ) replaced Malaysia s sales and service tax in April this year. Under the new regime, all goods and services supplied in the country (unless they are zero-rated, exempt supply or out of scope) are subject to GST at the rate of 6% at every stage of the supply chain. Although GST is conceptually a simple consumption tax, confusion and uncertainty arising from the existing legislation (especially the wide zero-rated and exempt supply list) have made it a fairly complex tax in Malaysia. 1 This is coupled with technical issues that will arise due to differing standpoints adopted by the Royal Malaysian Customs Department ( Customs Department ) and GST practitioners. The Goods and Services Tax Act ( the GST Act ) also contains a comprehensive penalty regime which, from its drafting and intent, may be read to be punitive in nature. During its roadshows nationwide, the Customs Department appeared to have assured businesses and GST practitioners that it would adopt an educational approach, at least in the first year of GST implementation, and, as such, the penalty * This article was first published in the July 2015 issue of Tax Guardian, a publication of the Chartered Tax Institute of Malaysia 1 Boo Su-Lyn, Putrajaya s complex GST system paving way for confusion, say tax experts, < themalaymailonline.com/malaysia/article/putrajayas-complex-gst-system-paving-way-for-confusion-say-taxexperts> 2 [Act 762]. All section references herein shall be to this Act, unless otherwise stated. Printed by One2Print Sdn Bhd Suite , Wisma Mah Sing, 163, Jalan Sungei Besi, Kuala Lumpur, Malaysia

2 provisions under the GST Act would be applied sparingly. This assurance is not legally binding and, in any event, the Customs Department is not estopped from applying the full strength of the law if it wishes to impose a penalty. 3 This article will cover two major avenues of appeal available to taxpayers: the GST Appeal Tribunal and the judicial review application. GST Appeal Tribunal If a taxpayer is aggrieved by a Customs decision in respect of GST matters, the ordinary route envisaged by Parliament is for him to appeal to the GST Appeal Tribunal ( the Tribunal ). The establishment of the Tribunal is provided under s 125 of the GST Act. The Tribunal has the jurisdiction to determine appeals in respect of GST matters except on the matters specified in the Fourth Schedule. 4 Parliament has not provided a reason for making this exception and neither does the GST Act provide any alternative appeal remedy to taxpayers who may be aggrieved by a decision of the Customs Department (including the Director-General of Customs). It is unfortunate that the GST Act is silent on this. The author submits that Parliament should have either provided an appeal process for such matters, or at least acknowledged that such matters could be appealed by way of judicial review application. It is the author s opinion that taxpayers who are aggrieved by decisions in respect of matters specified in the Fourth Schedule may seek legal recourse by way of judicial review application, which is discussed below. The salient features of the Tribunal are: Membership The membership of the Tribunal is rather wide and appointment is determined by the Minister of Finance. 5 The chairman and deputy chairman of the Tribunal will be appointed from among the officers attached to the Judicial and Legal Service. 6 The minister is required to appoint no fewer than five members whom in his opinion have wide knowledge or extensive experience in any field of activities relating to GST, customs or taxation. 7 As at the time of writing, the author is unaware of any appointment being made by the Minister to the Tribunal. Tribunal members shall hold office for a term not exceeding three years and are eligible for reappointment up to three consecutive terms. 8 The Minister shall also determine the remuneration and other terms and conditions of the members of the Tribunal, including the chairman. 9 In the following circumstances, the appointment of a member of the Tribunal under s 128(1)(b) of the GST Act may be revoked by the Minister: 10 (a) his conduct, whether in connection with his duties as a member of the Tribunal or otherwise, has been such as to bring discredit to the Tribunal; (b) he has become incapable of properly carrying out his duties as a member of the Tribunal; (c) there has been proved against him, or he has been convicted of, a charge or charges in respect of: (i) (ii) an offence involving fraud, dishonesty or moral turpitude; an offence under any law relating to corruption; (iii) an offence under this Act, the Customs Act 1967 or the Excise Act 1976; or (iv) any other offence punishable with imprisonment for more than two years; 3 Teruntum Theatre Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2006] CLJ 123 (CA) 4 Supra n 2, s 127(1) 5 Ibid, s Section 128(1)(a) 7 Section 128(1)(b) 8 Section 128(2) 9 Section 128(3) 10 Section Legal Herald. MAY 2016

3 (d) he is adjudicated a bankrupt; (e) he has been found or declared to be of unsound mind or has otherwise become incapable of managing his affairs; or (f) he absents himself from three consecutive sittings of the Tribunal without leave of the chairman. A member appointed by the Minister may also resign from his office by giving a three-month notice. 11 Section 133 of the GST Act provides for the appointment of a secretary and an assistant secretary to the Tribunal to ensure the functions of the Tribunal are discharged accordingly. 12 The officials will report to the chairman of the Tribunal. 13 Like any other tribunal, no action or suit could be instituted or maintained in any court against the members of the Tribunal. 14 Hearing of appeals Any taxpayer aggrieved by the decision of the Director- General of Customs in respect of a GST matter, except for the matters specified in the Fourth Schedule, may appeal to the Tribunal within 30 days 15 from the date when the disputed decision was made known to the taxpayer. The appeal is to be made using the prescribed form 16 together with the prescribed fee. 17 The taxpayer is required to provide his particulars and state the grounds of appeal, along with the remedy sought, in the notice of appeal. If a taxpayer has missed the 30-day deadline, he may make an application in writing 18 to the Tribunal for an extension, 19 which will be granted if it is satisfied that it is reasonable in all circumstances to do so. The Tribunal is required to grant the Customs Department the right to be heard before making its decision. 20 An appeal is heard by a panel of three members 21 and each appeal is presided by the chairman or the deputy chairman. 22 The taxpayer may conduct his case himself or be represented by any person whom he may appoint for that purpose, including a tax agent 23 or an advocate or solicitor. 24 Meanwhile, the Director-General of Customs may be represented by an authorised officer. 25 Although it is stated that any proceedings before the Tribunal shall be conducted without regard to formality and technicality, the Tribunal may have the authority to exercise the following: 26 (a) procure and receive evidence on oath or affirmation, whether written or oral, and examine any person as a witness, as the Tribunal thinks necessary to procure, receive or examine; (b) require the production before it of books, papers, documents, records and things; (c) administer the oath, affirmation or statutory declaration, as the case may require; 11 Section Section 133(1) 13 Section 133(2) 14 Section Section Form B: see Goods and Services Tax (Review and Appeal) Regulations 2014 ( the Regulations ), reg 3(1) 17 RM200. See reg 3(2). 18 Using Form C 19 reg 5(1) of the Regulations 20 reg 5(3) of the Regulations 21 Supra n 2, s 135(1) 22 Section 135(2) 23 Section Section 141(a) 25 Section 141(b) 26 Section 142(1) Legal Herald. MAY

4 (d) seek and receive such other evidence and make such other inquiries as it thinks fit; (e) summon the parties to the proceedings or any other person to attend before it to give evidence or to produce any document, record or other thing in his possession or otherwise to assist the Tribunal in its deliberations; (f) receive expert evidence; and (g) generally direct and do all such things as may be necessary or expedient for the expeditious determination of the claims. The author welcomes the insertion of s 150 of the GST Act, which states that no proceedings, award or other document of the Tribunal shall be set aside or quashed for want of form. The Tribunal is also empowered to award costs against the taxpayer and the Director-General of Customs in the circumstances prescribed under s 151 of the GST Act. The Tribunal is required to pronounce its decision without delay and, where practicable, within 60 days from the first day the hearing before the Tribunal commences. 27 The Tribunal has the power to affirm, vary or set aside the Director-General of Customs decision 28 and is required to give reasons for its decision. 29 Further appeal A party aggrieved by the decision of the Tribunal has the right to appeal to the High Court on a question of law or of mixed fact and law. 30 It must be noted that ordinarily in an appeal, no new or further evidence could be adduced on appeal. Further, the Tribunal members would be the judges of fact and upon examining all the evidence admitted to them, the Tribunal would form an opinion and draw conclusions from those facts. Although any error of law committed by the Tribunal could be set aside on appeal, it must be appreciated that an appellate court is usually reluctant to disturb the finding of facts unless it could be established that the facts found by the Tribunal are not supported by evidence or another reasonable Tribunal in the same circumstances would not have found the same. The final court in respect of GST appeals originating from the Tribunal would be the Court of Appeal. A party dissatisfied with the decision of the High Court may lodge an appeal to the Court of Appeal within 30 days upon the pronouncement of the said decision. As GST appeals do not originate from the High Court, it is the author s view that it may not satisfy s 96(a) of the Courts of Judicature Act 1964 [Act 91] and thus, an appeal from the Court of Appeal to the Federal Court in respect of a GST matter determined by the Tribunal will not be possible. 31 Negotiation It is encouraging to observe that the mere fact that an appeal had been lodged before the Tribunal does not bar taxpayers and the Director-General of Customs from engaging in discussions and negotiations with the view of resolving the dispute amicably out of court. In fact, s 140(1) of the GST Act expressly provides that in appropriate circumstances, the Tribunal may assist parties to the proceedings in negotiating an agreed settlement in relation to the appeal. Where the parties reach an agreed settlement, the Tribunal shall approve and record the settlement and the settlement shall take effect as if it were a decision of the Tribunal. 32 However, in circumstances where it appears to the Tribunal that it would not be appropriate for it to assist the parties to negotiate an agreed settlement in relation to the appeal, or the parties are unable to reach an agreed settlement in relation to the appeal, the Tribunal shall proceed to determine the appeal Section 144(1) 28 Section 144(2) 29 Section 144(3) 30 Section Terengganu Forest Products Sdn Bhd v Cosco Container Lines Co Ltd & Anor and other applications [2011] 1 MLJ 25 (FC) 32 Section 140(3) 33 Section 140(4) 4 Legal Herald. MAY 2016

5 Judicial review The Federal Court has recognised that judicial review provides a means by which judicial control of administrative actions is exercised. 34 The Malaysian Civil Procedure 2013, among others, succinctly explains that judicial review refers to the process of supervisory jurisdiction exercised by the High Court over decisions of persons who carry out quasi-judicial functions or who are charged with the performance of public acts and duties. In respect of GST matters, the author foresees judicial review applications taking place when a taxpayer intends to bypass the Tribunal or is aggrieved by a matter which falls under the Fourth Schedule of the GST Act. A decision susceptible to judicial review is not only open to challenge on the ground of procedural impropriety, but also on the grounds of illegality, irrationality and proportionality. 35 Unlike the Tribunal where no leave is required to lodge an appeal, in order to commence judicial review proceedings, the taxpayer must first obtain leave from the High Court. As held by the Federal Court, 36 the sole question at the leave stage in a judicial review application is whether the application is frivolous. If leave is granted, the taxpayer may then commence his judicial review application and, if successful, the taxpayer may pray for the High Court to exercise its jurisdiction to grant various remedies including an order of certiorari to quash the impugned decision, grant declaratory relief and award damages including interest. As explained earlier, the Tribunal is precluded from hearing matters specified in the Fourth Schedule and the GST Act does not provide any appeal remedy in respect of such matters. It is worth noting that the following matters are specified in the Fourth Schedule: (a) any matter which is inherent of a statutory restriction under the GST Act; (b) any direction to treat persons as a single taxable person under s 23 of the Act; (c) any refusal of voluntary registration under s 24 of the Act; (d) any refusal of group registration under s 27 of the Act; (e) any matter relating to reassignment of the taxable period under s 40(4) of the Act; (f) offsetting tax against refund under s 45 of the Act; (g) any seizure and selling of any goods for recovery of any amount under s 47(2) of the Act; (h) any refusal of payment by instalment under s 51 of the Act; (i) (j) any decision to reduce or disallow any refund under s 57(2) of the Act; any refusal to refund an amount paid by any person under s 57(5) of the Act; (k) any refusal to remit any penalty or surcharge under s 62(2) of the Act; (l) any refusal to approve any application for any scheme under Part VIII of the Act; (m) any advance ruling made under s 77 of the Act; (n) the exercising of powers under Part X of the Act; 34 Ahmad Jefri bin Mohd Md Johari v Pengarah Kebudayaan & Kesenian Johor & Ors [2010] 3 MLJ 145 (FC) 35 R Rama Chandran v The Industrial Court of Malaysia & Anor [1997] 1 CLJ 147 (FC) 36 Mohd Nordin Johan v The Attorney-General, Malaysia [1983] 1 CLJ 130 (FC) Legal Herald. MAY

6 (o) the compounding of offences under s 121 of the Act; (p) any matter relating to approval of reward by the Director-General of Customs under s 171 of the Act; and (q) any matter relating to special refund under ss 190, 191 and 192 of the Act. In such circumstances, a taxpayer aggrieved by the decision of the Customs Department in respect of any one or more of the matters specified in the Fourth Schedule may seek legal recourse by applying for judicial review. In Goh Eng Hwa, 37 the taxpayer was issued a travel restriction notice under s 104 of the Income Tax Act 1967 [Act 53] by the Director-General of Inland Revenue. Such notice was not appealable to the Special Commissioners of Income Tax as it was not an assessment; neither was there a remedy provided under the Income Tax Act The taxpayer sought a declaratory relief from the High Court, inter alia, to declare that he did not owe any outstanding tax and thus, the travel restriction notice was not sustainable. He commenced proceedings by way of an originating summons, and not by way of judicial review. The taxpayer s case was dismissed on the premise that his approach in commencing the action by way of an originating summons was an abuse of process. There are two points to note from Goh Eng Hwa: (a) If a taxpayer intends to challenge a public authority like the Director-General of Inland Revenue, the appropriate legal recourse is to apply for judicial review; and (b) In instances where the domestic remedy provided under the governing legislation has no jurisdiction to hear a decision made by a public authority under the same legislation and the said governing legislation does not provide for an alternative legal remedy or is silent, then a taxpayer aggrieved by such a decision may seek legal recourse by way of judicial review. In this regard, the author is of the opinion that a taxpayer aggrieved by the decision of the Customs Department in respect of matters precluded from being heard by the Tribunal may seek legal recourse by way of judicial review. Meanwhile, in exceptional circumstances, matters which are appealable to the Tribunal could be pursued at the High Court by way of judicial review. The exceptional circumstances are clear lack of jurisdiction, failure to perform a statutory duty and breach of natural justice. The existence of the Tribunal does not prevent taxpayers from commencing judicial review proceedings in exceptional circumstances as held by a number of decisions such as Sungai Gelugor 38 and Metacorp Development. 39 It is notable that the decision of the High Court in Metacorp was unanimously affirmed by the Court of Appeal and the Director-General of Inland Revenue s leave application was dismissed unanimously by the Federal Court. In Sungai Gelugor, the Federal Court examined the alternative remedy argument in detail after studying various local and English authorities on this point. It concluded that where genuine grounds for judicial review are alleged, it is the refusal rather than the grant of relief that is the exceptional course. It further stated that: 40 The reason for this is that whilst in theory the courts there frequently recite the incantation that alternative remedies must be exhausted before recourse may be had to judicial review, in practice, the courts are often much kinder to the applicant with a good case on the merits, who is faced with this hurdle to clear and will most probably entertain his application as an exception. 37 Goh Eng Hwa v Ketua Pengarah Lembaga Hasil Dalam Negeri & Anor [2008] 8 CLJ 777 (HC) 38 Majlis Perbandaran Pulau Pinang v Syarikat Bekerjasama Serbaguna Sungai Gelugor dengan Tanggungan [1999] 3 MLJ 1 (FC) 39 Metacorp Development v Ketua Pengarah Hasil Dalam Negeri [2011] 5 MLJ 447 (HC) 40 Supra n 38 at p 37I-38A, per Edgar Joseph Jr FCJ 6 Legal Herald. MAY 2016

7 The above clearly establishes that if taxpayers choose not to exercise the statutory appeal remedy, namely the Tribunal, the courts jurisdiction to hear such applications is not excluded. In fact, as a matter of practice, the courts are often inclined to grant judicial review to applications that have merit. This approach is also consistent with the position observed in R v Chief Immigration Officer Gatwick Airport, ex parte Kharrazi, 41 where it was stated that on countless occasions that the availability of appeal does not debar the court from quashing an order by certiorari and that everything depends upon the facts of the case. This observation was unanimously endorsed in Sungai Gelugor. The judicial pronouncements cited above illustrate that it is the refusal to grant judicial review which is an exception rather than the granting of judicial review in cases where there is an alternative remedy. The author submits that if an appeal is necessitated on the premise that the Director-General of Customs had abused his authority by applying the law erroneously and acted beyond the powers conferred to him, then judicial review appears to be a better legal remedy to the taxpayers. This is because unlike the Tribunal, the High Court has the jurisdiction to stay the enforcement of the decision. Further, the authority of the Director-General of Customs is not absolute and is open to judicial review. Conclusion It is essential that taxpayers and GST practitioners are aware of their legal rights and the legal recourses available to them. Once they have determined the suitable legal recourse that they wish to pursue, that is, appeal before the Tribunal or judicial review application, then they must ensure that they comply with the necessary procedural requirements. Meanwhile, the Customs Department as the public authority entrusted with the implementation of the GST Act must ensure that it exercises its powers and discretion equitably and judiciously. Decisions should neither be made arbitrarily nor influenced by a publicly declared target. 43 The author respectfully concludes this article by highlighting the reminder issued in Jasanusa; 44 that is, the courts need to balance the government s need to realise taxes with that of the taxpayer to be protected against arbitrary or incorrect assessments. The courts are ever vigilant against taxpayers who may use procedures like applying for a stay of execution to defer or postpone payment of just dues or to abscond by migration or to dissipate the assets to defeat the judgment. The courts should also bear in mind the possibility of arbitrary or incorrect assessments, brought about by fallible officers who have to fulfil the collection of a certain publicly declared targeted amount of taxes and whose assessments, as a result, may be influenced by the target to be achieved rather than the correctness of the assessment. LH-AG In Kim Thye Co, 42 despite the existence of the Special Commissioners of Income Tax, the Director-General of Inland Revenue accepted as a matter of law that he is not immune from the process of judicial review and made no procedural objection to the taxpayer s application in that case. 41 [1980] 3 All ER Kim Thye Co v Ketua Pengarah Jabatan Hasil Dalam Negeri, Kuala Lumpur [1991] 3 CLJ 2507 (HC) 43 Sabah Customs aims to collect RM1.2 billion under GST, < 44 Government of Malaysia v Jasanusa Sdn Bhd [1995] 2 CLJ 701 (FC) Legal Herald. MAY

8 Discerning the Judicial Trend in Recent Tax Avoidance Cases* The topic of tax avoidance is no stranger to controversy, having sparked lots of interest in both private and public discourse. With the advent of the Organisation for Economic Co-operation and Development (OECD) and G20 s Base Erosion and Profit Shifting Action Plan (i.e. the BEPS Action Plan), this topic is even more prevalent than before. According to the OECD, national laws have not always kept pace with global developments, the fluid movement of capital and the rise of digital economy. Apparently, this leaves gaps and mismatches that can be exploited by businesses, thus undermining the fairness and integrity of tax systems. The OECD s stand on this matter somewhat mirrors that adopted by the Inland Revenue Board of Malaysia in public discourse, or at least in the four court cases discussed below. With this backdrop, this article will examine the judicial mood in recent tax avoidance cases in Malaysia, namely, Sabah Berjaya, Port Dickson Power, Ibraco-Peremba and Ensco Gerudi. Tax mitigation explained Section 140(1) of the Income Tax Act 1967 ( ITA ) confers on the Director General of Inland Revenue ( DGIR ) the authority to disregard or vary transactions if he has reason to believe that the said transaction alters the incidence of tax, relieves any person from any tax liability, evades or avoids any duty or liability imposed or hinders or prevents the operation of the ITA. In such circumstances, the DGIR may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the transaction and make such adjustments as he thinks fit with a view to counter-acting the whole or any part of any such direct or indirect effect of the transaction. Section 140(1), which is modelled after the then Australian general anti-avoidance provision, is not peculiar to Malaysia alone; it has parallels in other jurisdictions where it has received judicial consideration (see Sabah Berjaya Sdn Bhd v Ketua Pengarah Jabatan Hasil Dalam Negeri, cited next page). In this area of the law, there is a clear distinction between tax evasion, tax avoidance and tax mitigation. Tax evasion in most jurisdictions including Malaysia is illegal and gives rise to substantial civil and criminal sanctions. In Malaysia, by virtue of s 140(1), the DGIR is entitled to disregard or vary any transaction that is created merely for the purposes of tax avoidance. The Australian position is similar to Malaysia. If the dominant purpose of a transaction has no commercial purpose, then that transaction will be disregarded or varied as being for the purpose of tax avoidance by tax authority there. Therefore, the objective of the exercise must be to achieve a commercial purpose and not to enjoy tax efficiency without any other commercial purpose for the transaction. However, if tax savings arise by the manner in which the commercial transaction is implemented or structured, that is regarded in law as tax mitigation. If the incidence of tax is altered or a party is relieved of its liability to pay tax as a consequence of a transaction that has commercial justification or the transaction is a bona fide transaction, the DGIR is not entitled to disregard or vary that transaction. This is generally known as tax mitigation if a benefit is obtained by reason of a transaction that has commercial justification or is bona fide and yet, it reduces a party s liability to tax. * This article was first published in Tax Guardian (January 2016), the official journal of the Malaysian Institute of Taxation 8 Legal Herald. MAY 2016

9 The four cases: Facts and principles (i) Sabah Berjaya Sdn Bhd v Ketua Pengarah Jabatan Hasil Dalam Negeri 1 The taxpayer was one of several wholly-owned subsidiaries of the Sabah Foundation, an approved institution. Gifts of money made to the foundation were tax deductible in the hands of the donor. Between 1979 and 1985, the then Chief Minister of Sabah was chairman of both the foundation and the taxpayer. During that period, there was a letter from the state ministry of finance to the subsidiaries of the foundation. It required all surplus funds in the subsidiaries to be donated to the foundation. Accordingly, the taxpayer resolved that the whole of its profit shall be donated to the foundation, a practice that continued for eight years. Later, the DGIR invoked s 140(1) and disallowed the sums donated by the taxpayer to the foundation. Among others, the DGIR argued that the making of the donations amounted to a tax avoidance scheme. The Court of Appeal rightly analysed the distinction between tax evasion, tax avoidance and tax mitigation. This is the first decision of a local superior court to have dwelt on this topic. The court adopted with approval the following opinion of the Privy Council in Commissioner of Inland Revenue v Challenge Corporation Ltd, 2 where s 99 of the Income Tax Act 1976 of New Zealand is in pari materia with our s 140. Evasion occurs when the commissioner is not informed of all the facts relevant to an assessment of tax. Innocent evasion may lead, to a reassessment. Fraudulent evasion may lead to a criminal prosecution as well as reassessment. In the present case Challenge fulfilled their duty to inform the commissioner of all the relevant facts. The material distinction in the present case is between tax mitigation and tax avoidance. A taxpayer has always been free to mitigate his liability to tax. In the oft-quoted words of Lord Tomlin in IRC v Duke of Westminster [1936] AC 1 at p 19: Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Act is less than it otherwise would be. In that case however the distinction between tax mitigation and tax avoidance was neither considered nor implied. Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income or entitle him to reduction in his tax liability. Section 99 does not apply to tax mitigation because the taxpayer's tax advantage is not derived from an arrangement but from the reduction of income which he accepts or the expenditure which he incurs. Thus when a taxpayer executes a covenant and makes a payment under the covenant he reduces his income. If the covenant exceeds six years and satisfies certain other conditions the reduction in income reduces the assessable income of the taxpayer. The tax advantage results from the payment under the covenant. When a taxpayer makes a settlement, he deprives himself of the capital which is a source of income and thereby reduces his income. If the settlement is irrevocable and satisfies certain other conditions the reduction in income reduces the assessable income of the taxpayer. The tax advantage results from the reduction of income. Where a taxpayer pays a premium on a qualifying insurance policy, he incurs expenditure. The tax statute entitled the taxpayer to reduction of tax liability. The tax advantage results from the expenditure on the premium. A taxpayer may incur expense on 1 [1999] 3 CLJ 587 (CA) 2 [1986] STC 548 (PC) Legal Herald. MAY

10 export business or incur capital or other expenditure which by statute entitles the taxpayer to a reduction of his tax liability. The tax advantages result from the expenditure for which Parliament grants specific tax relief. When a member of a specified group of companies sustains a loss, Section 191 allows the loss to reduce the assessable income of other members of the group. The tax advantage results from the loss sustained by one member of the group and suffered by the whole group. Section 99 does not apply to tax mitigation where the taxpayer obtains a tax advantage by reducing his income or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability. Section 99 does apply to tax avoidance. Income tax is avoided and a tax advantage is derived from an arrangement when the taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction. The taxpayer engaged in tax avoidance does not reduce his income or suffer a loss or incur expenditure but nevertheless obtains a reduction in his liability to tax as if he had. Applying the above principles, the Court of Appeal in Sabah Berjaya unanimously held that the taxpayer did not pretend to donate its entire profit to the Foundation. On the evidence, there was an actual donation thus the question of tax evasion did not arise. As in Challenge Corporation, there was a payment that reduced the foundation s income in circumstances in which s 44(6) of the ITA clearly afforded a reduction in tax liability. According to the Court of Appeal, the taxpayer did not engage in tax avoidance as it did not do anything that did not reduce its income or suffer a loss yet resulting in it obtaining a reduction in its liability to tax as if it had. It is so clearly laid down in the Sabah Berjaya case that arranging one s affairs to enjoy a tax benefit that is permissible under the ITA does not amount to tax avoidance. Arising from this point, the next question is whether this principle remains good law. The cases discussed below may hold the answer to this question. (ii) Port Dickson Power Bhd v Ketua Pengarah Hasil Dalam Negeri 3 Port Dickson Power has the distinction of being the first reported case in Malaysia where judicial review was granted to quash an assessment raised under s 140(1) of the ITA. The taxpayer applied for an order of certiorari to quash the additional assessments raised by the DGIR. The taxpayer, an independent power producer licensed by the government to exclusively supply electricity to Tenaga Nasional, was to finance, construct and operate a power plant. The taxpayer raised funds for the project by way of equity, shareholders borrowings by way of loan stock and third party borrowings. In respect of the loan stock, the taxpayer had an obligation to pay interest at the rate of 12% per annum to the subscribers of the loan stock and retained the right to redeem the loan stocks. Interest was incurred by the taxpayer in servicing the loan stock. The interest expenditure was deducted under s 33(1) of ITA as expenses wholly and exclusively incurred in the production of its income. The DGIR invoked s 140(1) and disallowed the interest on the loan stock paid by the taxpayer to its loan stock holders, being of the view that the taxpayer should not have obtained funding by way of loan stock from its shareholders. Instead, it should have requested the shareholders to increase their equity contribution. The DGIR contended that the issuance of loan stock and the consequent interest expenditure were a scheme by the taxpayer to alter their tax incident. 3 (2012) MSTC Legal Herald. MAY 2016

11 The thrust of the taxpayer s case was concerned with the issue surrounding the proper, or rather, the improper, invocation of s 140(1). First, the notice of additional assessment was defective as it did not specify or particularise which limb under that subsection that the IRB had resorted to. Second, the DGIR had not shown any ground for believing that it was necessary to invoke the tax avoidance provision. The High Court held that the ability of the DGIR to ascertain his grounds for entertaining the necessary belief would greatly assist him in identifying under which particular paragraph in s 140(1) that the taxpayer had committed the impugned act of understating their income. It was added that the DGIR had misconceived or otherwise misconstrued the agreement that had become the basis upon which the taxpayer was required to pay the interest of 12% for the loan stocks. There was no suggestion that the agreement was a sham designed to facilitate the taxpayer in avoiding paying tax. The High Court cited in support the decision of Westmoreland Investment Ltd v Macniven (Inspectors of Taxes) 4 which observed: Money raised by borrowing belongs to the borrower; it is as much his money as any other money of his. Expenditure is incurred by the taxpayer whatever the source of his finance with which he intends to meet it. In other words, just because the taxpayer had to borrow in order to pay for the interest that accrued did not mean that the payment of the interest was not genuine. The High Court commented that in the present case, the financiers were local public listed companies of good repute and there was nothing in the affidavits of the DGIR to suggest otherwise. If the whole financial structure that was put in place that had provided for the apparent obligation on the taxpayer to service the 12% interest was indeed a sham, then the burden or the onus ostensibly rests with the DGIR to prove that it was indeed a sham. According to the High Court, the decision in Customs and Excise Commissioners v Faith Construction Ltd 5 would be authority for this proposition: If the payments are to be disregarded the Crown would, I think, have to show that they were a sham. Hence, in the absence of any such proof put forth by the DGIR to the effect that the interest payments were not what the taxpayer had made them out to be, the High Court, as was held in the Faith Construction case, held that one is not entitled to disregard their legal effect and treat them as something else. In concluding, the High Court held in clear language that a taxpayer is entitled to mitigate his incidence of tax as long as he does not, in so doing, evade or avoid having to pay the necessary tax. The High Court also held the DGIR had failed in its statutory duty to give particulars, concurrently with the notice of additional assessments that were alleged to be due. Relying on the decisions of the then Supreme Court in Director-General of Inland Revenue v Hup Cheong Timber (Labis) Sdn Bhd 6 and Director-General of Inland Revenue v Rakyat Berjaya Sdn Bhd, 7 it was ruled that such failure to comply with the mandatory provisions as contained under s 140(5) of the ITA would render the decision of the DGIR null and void and of no effect. The Court of Appeal, however, allowed the DGIR s appeal without providing any oral or written grounds in support of its decision. Reference is made to Petronas Penapisan (Terengganu) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri, 8 where it was held that in the absence of written grounds, the decision of the Court of Appeal does not 4 [2001] 1 All ER 865 (HL) 5 [1989] 2 All ER 938 (CA) 6 [1985] CLJ (Rep) 107 (SC) 7 [1984]1 MLJ 248 (SC) 8 (2014) MSTC Legal Herald. MAY

12 form a binding precedent. In light of the Court of Appeal s reversal of the High Court s decision, a legal quandary arises as to the status of the following principles that were rightly and firmly held by the High Court: (a) The DGIR has a duty to identify under which particular paragraph under s 140(1) that the taxpayer had committed the impugned act of understating their income; and (b) He must have reasons to believe that the taxpayer had committed an act resulting in tax avoidance. The burden of proof to establish that the transaction was a sham rests with the DGIR. In the absence of any such proof, the DGIR is not entitled to disregard their legal effect and treat them as something else. The only way to test the veracity of these principles is to wait for another taxpayer to raise them on another occasion before our courts. Be that as it may, the High Court s decision that the DGIR has a statutory duty to give particulars, concurrently with the notice of additional assessments alleged to be due as contained under s 140(5) of the ITA, remains unaffected. This aspect of the decision was in reliance of another two older apex court decisions, namely, Hup Cheong Timber and Rakyat Berjaya. (iii) Syarikat Ibraco-Peremba Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 9 The taxpayer was a property developer, and profits derived were regarded as business income and subject to income tax under the ITA. The taxpayer identified a few plots of land in Kuching as being suitable for long-term investment and on which it intended to build shophouses and a shopping complex with the objective of leasing out some of the shophouses. However, such an undertaking would result in the gains arising therefrom being subject to income tax. Accordingly, the taxpayer sought advice from Arthur Andersen HRM (Tax Services) Sdn Bhd ( AA ), upon which the developer formed a subsidiary that transacted with the taxpayer to develop the project. The subsidiary was formed as an investment holding company and was made to undertake the project. Upon completion of the project, the taxpayer undertook a restructuring activity and sold some shares of the subsidiary to a related company. Eventually, the subsidiary and the related company were all wound up. The DGIR argued that the taxpayer was a property development company that acquired and developed land through the subsidiary, which it then sold for profits. The profits arising therefrom were therefore business income and subject to income tax. According to the DGIR, the taxpayer sought advice from AA to minimise its tax incident, where a letter from the latter read as follows: We understand that the principal activity of Ibraco- Peremba Sdn Bhd (hereinafter the Company ) is developing properties for resale. It intends to build shophouses and a complex for renting out for a period of time before it sells the shophouses and complex in its entirety or in units. The company has applied for approval to build the shophouses and complex. The Company also plans to build shophouses on another lot of land with the objective of leasing out the shophouses for a period of time prior to sale. Against this background we have been requested to suggest an effective method of developing the properties to minimise the tax impact to the Company "Under this scenario, we have considered a structure which, if implemented, could result in the sales proceeds being treated as capital gains and hence, be subject to RPGT. That is, the lands will be 9 (2014) MSTC Legal Herald. MAY 2016

13 transferred to a 100% realty company of Ibraco. Real property gains tax is payable on the market surplus of the lands. Stamp duty exemption should be available under s 15A of the Stamp Act. As the developed properties will be held for rental for a relatively long period, say five years, there is a valid argument that the gain (or loss) of the investment properties is on capital account and subject to real property gains tax. Pursuant to AA s advice, the taxpayer organised various transactions including the restructuring activity. The DGIR contended that the setting up of the subsidiary was merely a vehicle to defray the intention of the taxpayer as the former was fully controlled by the taxpayer and was without any expertise or funds to develop the project. There was no commercial or business reason to set up the subsidiary, except for the purpose of the scheme to avoid such disposal from being taxed under income tax. The subsidiary and the related company which acquired the former s shares were formed for the same purpose of tax avoidance. This is because after they had completed their tasks, both had been voluntarily wound up by their shareholders. The taxpayer, on the other hand, argued that the disposal of shares in the subsidiary was a realisation of investment and not an adventure in the nature of trade or trading. Even if there is a liability to tax, it should be on the gain arising from the disposal of shares in a real property company. The taxpayer challenged the DGIR s approach of examining the entire business transaction in totality and questioning the commercial motive of each transaction. The Court of Appeal remarked that in light of s 140(1) (c) of the ITA, it was for the taxpayer to demonstrate that the transaction or arrangement by which the income was produced was so preordained by compliance with the requirements of law or accepted business practices to limit risk exposure, and that the tax savings were purely incidental. Other than this, all that remains solely at the taxpayer s discretion was tax mitigation, which, as explained in Challenge Corporation, was not subject to tax avoidance because the taxpayer s tax advantage was not derived from an arrangement but from the reduction of income which he accepts by reducing his income, or the higher expenditure which he incurs, or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability. In this case, the Court of Appeal held that it was quite clear that the advice of AA was obtained for the primary purpose of ordering the transactions in a manner to minimise tax. There was tax avoidance when the transactions entered into by the taxpayer through shell companies revealed the factual situation that the tax position was altered. Further, there was finding of facts that the taxpayer had in fact implemented a scheme following the advice of the tax consultant in perpetuating one original intention of selling of the project as it intended to do from the start. The principle enunciated in W T Ramsay Ltd v Inland Revenue Commissioners 10 is that where a tax avoidance scheme comprised a number of specific transactions to avoid tax, the genuineness or otherwise of each individual step or transaction need not be looked at from each individual step or transaction but is to be looked at as a whole. This decision reiterates that a taxpayer must be able to demonstrate that the transaction or the arrangement undertaken by them was consequent to the requirements of law or accepted business practices and that the tax savings were purely incidental. Failure to do so may result in them not being able to challenge the invocation of tax avoidance provision against them. However, it is comforting to note that the Court of Appeal had endorsed the principle of tax mitigation as discussed in Challenge Corporation. Hence, this decision, like the one in Port Dickson Power, recognises the concept of tax mitigation in Malaysia as long as a taxpayer is able to justify the commercial reason behind the transaction. 10 [1981] 1 All ER 865 (HL) Legal Herald. MAY

14 CHAMPIONING TAXPAYERS We represent taxpayers. Be it tax litigation, advisory or structuring, we focus on clarity, certainty and solutions. Make us your confidante today. OUR SUB-SPECIALISATION INCLUDES: INCOME TAX GOODS & SERVICES TAX Tax Litigation & Dispute Resolution Proceedings Tax Advisory & Planning Tax Audit & Investigation Transfer Pricing & Thin Capitalisation INTERNATIONAL TAX (Including Cross-border Transaction Tax & Withholding Tax) GST Litigation GST Legal Advisory GST Audit & Investigation Anti-Profiteering CUSTOMS DUTY, EXCISE DUTY, SAFEGUARD DUTY & ANTI-DUMPING DUTY TRADE FACILITATION & INCENTIVES REAL PROPERTY GAINS TAX PETROLEUM INCOME TAX STAMP DUTY

15 OUR TAX PARTNERS Datuk D. P. Naban SENIOR PARTNER A tenacious, mature, composed and technically-sound legal strategist. A Senior Partner of the firm, Datuk Naban is a highly-acclaimed Band 1 tax lawyer (Chambers Asia). He has appeared in some of Malaysia s most significant recent tax disputes, where clients describe him as outstanding and recommend him for his superb advocacy skills. A client remarked to the Legal 500 that Despite many years at the Bar, he (Naban) still exudes a fresh and tireless enthusiasm for the law, which translates to immaculate service. dpn@lh-ag.com Tel : S. Saravana Kumar PARTNER Committed, sound in knowledge, amiable and always well prepared. Saravana has appeared in benchmark litigations with a sizeable volume of wins in tax disputes. Praised for his ability to think outside the box and innovative approach in interpreting the law, Chambers Asia Pacific acknowledged Saravana for being dynamic, efficient and helpful. Saravana is an Adjunct Professor with Universiti Tenaga Nasional (UNITEN) and chairs the Taxation Section of LAWASIA. sks@lh-ag.com Tel : Datuk Aznam Mansor PARTNER Focuses on private clients practice including tax and estate planning for high net worth individuals. A founding partner of the firm, Datuk Aznam draws strength from his past experience as a banking litigator and current role as a corporate figure. His portfolio includes developing tax-efficient compensation and retirement schemes and advising on the establishment of tax-exempt organisations. am@lh-ag.com SM Shanmugam Tel : PARTNER A corporate and commercial litigator, with experience in defending taxpayers in civil tax recovery proceedings. SM Shanmugam has defended taxpayers in tax recovery proceedings commenced by the Inland Revenue Board under Section 103 and Section 106 of the Income Tax Act He is well versed with court processes such as stay of proceedings, stay of execution of judgment and appears regularly before the High Court and the appellate courts. ssm@lh-ag.com Tel :

16 (iv) Ensco Gerudi (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 11 The taxpayer had been providing offshore drilling services to the petroleum industry in Malaysia for 18 years. Its customers included national and international oil and gas companies. The taxpayer, however, does not own any drilling rigs. It would enter into a leasing agreement on a bareboat charter basis with a rig owner within the Ensco Group. Later, one of the rig owners decided to incorporate a Labuan company to facilitate easier business dealing for the taxpayer. The formation of the Labuan company was approved by the Labuan Financial Services Authority ( Labuan FSA ), which was allowed to undertake leasing business with the taxpayer. Bank Negara Malaysia had also given the necessary approval. Pursuant to these approvals, the taxpayer entered into an agreement with the Labuan company. Unlike the previous transactions of the taxpayer, where the payments to lease the drilling rigs attracted withholding tax, the payments made to the Labuan company did not attract any. The DGIR investigated the taxpayer and invoked s 140(1) (c) to disregard the transaction between the taxpayer and the Labuan company. The DGIR, among others, alleged that: (a) (b) (c) (d) the Labuan company had no economic or commercial substance; the economic and absolute rights over the assets had not been transferred to the Labuan company; the Labuan company was under the control of the Ensco Group; and the Labuan company only transacted with the taxpayer and the purpose of transaction was more to benefit from the tax incentives provided. The taxpayer argued that the invocation of s 140(1) (c) on the basis of tax avoidance was irrational and unreasonable. The DGIR by doing so had committed an error law. The High Court, in ruling in favour of the taxpayer, pronounced that the DGIR s requirements such as the Labuan company must own its own assets to be leased and that it must enter into leasing business with several entities were neither required by the LFSA nor by the relevant Labuan legislation regulating leasing business. The DGIR s unilateral imposition of these requirements was entirely ultra vires. The principle enunciated in Sabah Berjaya was applied and there was no evidence to show that the lease payments were returned to the taxpayer in any form whatsoever to surreptitiously evade or avoid tax liability. The taxpayer was entitled to claim tax deduction on the lease payments notwithstanding whether it leased it from the Labuan company or the rig owners. There was nothing artificial about the payments and there was no circularity of payments. In fact, the High Court added that the transactions were within the meaning and scope of the arrangements contemplated by the Government. Interestingly, the High Court relied on the majority decision of the New Zealand Supreme Court in Ben Navis Foresty Ventures Ltd v Commissioner of Inland Revenue 12 in ruling that the ultimate question was whether the impugned arrangement viewed in a commercially and economically realistic way makes use of the specific provision in a manner which was consistent with Parliament s intention. If the answer was in the affirmative, then the mere usage of provision does not tantamount to a tax avoidance arrangement. The High Court firmly held that taxpayers have the freedom to structure transactions to their best tax advantage. It is notable that the High Court observed that there was no evidence to show that the lease payments were returned to the taxpayer in any form whatsoever to surreptitiously evade or avoid tax. There was no artificiality about the payments and no circularity 11 Unreported. The authors have been informed that the Court of Appeal affirmed the decision of the High Court and that the DGIR has applied for leave to the Federal Court to appeal further. 12 [2009] 2 NZLR 289 (NZSC) 16 Legal Herald. MAY 2016

17 of payments. The transactions were within the meaning and scope of the arrangements contemplated by the Government in actively offering incentives, which in this case was to promote Labuan as an international trade and financial centre. The approach taken in Encso Gerudi is no different from that in Ibraco-Peremba, whereby if the taxpayer is able to demonstrate that the arrangements have a genuine commercial basis and, where applicable, such arrangements are not inconsistent with the legislation promulgated by Parliament, then the DGIR has no room to invoke s 140(1). (c) (d) The DGIR must have reasons to believe that taxpayer had committed an act resulting in tax avoidance. He cannot rely on suspicion alone. The burden of proof to establish that the transaction was a sham rests with the DGIR; and The DGIR has a statutory duty both to identify the particular paragraph under s 140(1) under which the taxpayer had committed the impugned act of tax avoidance and give particulars of adjustment concurrently with the notice of additional assessments under s 140(5). Conclusion The authors are of the view that the principles enunciated in Sabah Berjaya remain good law despite the passage of time. Accordingly, the scene for tax avoidance law in Malaysia could be summed up as follows: (a) (b) Where a taxpayer is accorded a tax benefit by virtue of the law and he arranges his affairs to enjoy that benefit which is permissible under the ITA, then such initiative does not amount to tax avoidance. In this context, a taxpayer has the freedom to structure transactions to his best tax advantage; A taxpayer must be able to demonstrate that the transaction or the arrangement undertaken was consequent to the requirements of law or accepted business practices and that the tax savings were purely incidental. There should be a genuine commercial reason behind the transaction or arrangement; The four cases discussed above clearly illustrate how our courts have, to a large extent, managed to balance the rights and interest of both taxpayers and the government. As much as it is salutary to remember that every taxpayer, be it an individual or a company, must ensure that tax due is duly settled every year (see Kerajaan Malaysia v Beyond Gateway Sdn Bhd 13 ), our courts have also held that it is well settled that every exercise of statutory power cannot be done so arbitrarily. The Court of Appeal in Mudek Sdn Bhd v Kerajaan Malaysia 14 endorsed the proposition that every exercise of statutory power must not only be in conformity with the express words of the statute, but above all must also comply with certain implied legal requirements. Tax avoidance is no stranger to tax controversy and will remain so, as long as tax legislation continues to flourish in our midst. LH-AG 13 [2003] 2 CLJ 527 (HC) 14 [2013] 1 LNS 281 (CA) Legal Herald. MAY

18 Interest Against the Revenue: An Analysis of Pelangi s case In the recent landmark decision of Ketua Pengarah Hasil Dalam Negeri v Pelangi Sdn Bhd, 1 the Court of Appeal unanimously affirmed the decision of the High Court, which, among others, ordered the Inland Revenue Board ( IRB ) to refund tax unlawfully collected and retained, with interest accruing at 4% per annum from the date of the IRB s decision to retain the tax. Facts of the case Pelangi revolved around a taxpayer whose principal activities were property development and investment holding. Among others, it owned 19 parcels of land in Johor Bahru, which were its stock in trade. In 2008, all 19 parcels were compulsorily acquired by the state authority for which the taxpayer was paid compensation. The taxpayer did not subject the gains from the compensation to income tax following the decision of the Court of Appeal in Ketua Pengarah Hasil Dalam Negeri v Penang Realty Sdn Bhd. 2 The IRB disagreed with the taxpayer s stance and adjusted its tax liability for the year of assessment 2008 by subjecting the gains arising from the compensation to income tax. The taxpayer s tax payable was also increased by RM2,360, and the IRB proceeded to retain the same from the tax refund due to the taxpayer. A notice of reduced assessment amounting to RM12,202, was issued when, in actual fact, the IRB should have issued one amounting to RM14,563, This prompted the taxpayer to challenge the decision of the IRB in the High Court by way of judicial review. Upon obtaining the requisite leave from the High Court, the taxpayer sought, among others, an order quashing the decision of the IRB and the tax retained to be refunded with interest. The High Court, following Penang Realty and the recent Court of Appeal decision of Ketua Pengarah Hasil Dalam Negeri v Metacorp Development Sdn Bhd 3 held that the gains arising from the compensation for compulsory acquisition of land were not subject to income tax. It held that the element of compulsion vitiated the intention to trade and thus, the gains could not be treated as taxpayer s income from an ordinary course of business. The High Court also held that the taxpayer was entitled to interest accruing from the date of the IRB s decision to subject the said gains to income tax. Section 11 of the Civil Law Act 1956 The crux of the matter in Pelangi was whether the High Court may award interest as compensation to make good the unlawful deprivation of use of the taxpayer s money. The legal position is that the High Court has the discretion to award interest, be it pre-judgment or post-judgment interest. Section 11 of the Civil Law Act 1956 [Act 67] ( the CLA ) reads: In any proceedings tried in any Court for the recovery of any debt or damages, the Court may, if it thinks fit, order that there shall be included in the sum for which judgment is given interest at such rate as it thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment 1 The authors successfully represented Pelangi before the Court of Appeal (No W-01(1M) /2011) and the High Court (No R ). The Court of Appeal s decision was delivered on 29 March [2006] 2 CLJ (No W ). Subsequently, the Federal Court dismissed the IRB s leave application to challenge the decision of the Court of Appeal. The authors represented Metacorp Development Sdn Bhd at the High Court, Court of Appeal and Federal Court 18 Legal Herald. MAY 2016

19 Interest as compensation On several occasions, the Federal Court has observed that an award of interest serves as compensation. Interest is a remedy available to the aggrieved party when the use of his money has been unlawfully deprived by the other party. In Lim Eng Kay v Jaafar bin Mohamed Said, 4 it was held that:...the court had always had discretion to award interest as a compensation for a party who has been deprived of the use of its money to which it is legally entitled Interest is not awarded as a compensation on account of inflation, but awarded because an injured plaintiff has been deprived of the use of money to which he is entitled. Our courts have also commented that interest is a sum of money representing the return for the use or the compensation for the retention by one person of a sum of money belonging to or owed to another. In essence, it is regarded as representing a profit which the other person might have made if he had the use of the money or conversely the loss which he had suffered because he had not that use. In other words, interest is a compensation for the deprivation of the use of money which he is lawfully entitled to. Pelangi s position In Pelangi s situation, the IRB had subjected the gains arising from the compulsory land acquisition to income tax despite the decisions of the superior courts ruling that such gains are not taxable. Consequently, the IRB retained the taxpayer s tax refund, which the taxpayer argued was its rightful money at all material times. The taxpayer further argued that the IRB subjected the said gains to income tax despite the decisions in Penang Realty and Metacorp Development being brought to its attention. Therefore, the IRB s action was inappropriate as it continued to ignore the decision of the superior courts. The taxpayer contended the IRB had clearly acted ultra vires and arbitrarily as it had kept the taxpayer out of the money amounting to RM2,360,723.82, which ought to have been refunded to the taxpayer. Therefore, since the IRB had had the use of the money, it ought to compensate the taxpayer accordingly. The taxpayer relied on Woolwich Equitable Building Society v Inland Revenue Commissioners 5 (which is discussed on the following page) and the following instructive passages from Mangalore Chemicals & Fertilisers Ltd v Deputy Commissioner of Commercial Taxes: 6 It must be emphasized that these amounts which we are directing to be refunded, were collected by the excise authorities without the authority of law and were illegal levies. The Central Government had use of these amounts during this period of three years and correspondingly the petitioner concerned was kept out of the use of these amounts during the said period. It is therefore just and proper that the respondents should pay interest at twelve per cent per annum (which is the proper rate looking to the conditions in the money market) from the dates of the collection of the said amount directed to be refunded till the date of actual repayment. 4 [1982] 2 MLJ 156 (FC) at p [1993] AC (4) KarLJ 760 Legal Herald. MAY

20 Duty collected in disregard of the exemption was held to be an unauthorised collection of duty and that interest is return or compensation for the use or retention of another s money ; since the Revenue had retained and enjoyed the benefit of such money petitioners were held to be entitled to interest; interest at the rate of 12 per cent per annum was directed to be paid from the date of collection till the date of repayment Meanwhile, according to the IRB, there was no written law that requires it to pay interest to the taxpayer. The IRB further contended that the taxpayer was not entitled to a refund as under s 111(3)(b) of the Income Tax Act 1967 [Act 53] ( ITA ), the Board cannot be compelled to refund the tax until the assessment is finally determined. The IRB further contended that it had never made tax refunds with interest, thus, admitting that the government has for years had free use of taxpayer s monies including those extracted from taxpayers unlawfully. Woolwich s case: Restitution and unjust enrichment The IRB s contentions did not persuade the High Court and the Court of Appeal, where the learned judges correctly observed that its reliance of s 111(3)(b) of the ITA was misplaced as the said provision specifically deals with an overpayment. Pelangi is not a case of overpayment as there was no basis in law for the payment made by the taxpayer in the first place. The courts agreed with the taxpayer s submission that the IRB s action was inappropriate in light of the decisions of the superior court that gains arising from compulsory acquisition of land are not subject to income tax. The courts in Pelangi considered the cases highlighted above and relied on the landmark ruling of the House of Lords in Woolwich Equitable Building Society, which upheld on appeal that a taxpayer was entitled to interest on the sums repaid to it by the Revenue, running from the dates when those sums were paid to the Revenue by the taxpayer. As the High Court s decision in Pelangi is premised on Woolwich Equitable Building Society, it is worth considering the illuminating comments of the law Lords. In this regard, the following extracts from Lord Goff s judgment in Woolwich Equitable Building Society, which expands the scope of law of restitution to tax matters, are instructive:... Stated in this stark form, the Revenue s position appears to me, as a matter of common justice, to be unsustainable; and the injustice is rendered worse by the fact that it involves, as Nolan J pointed out, the Revenue having the benefit of a massive interestfree loan as the fruit of its unlawful action. I turn then from the particular to the general. Take any tax or duty paid by the citizen pursuant to an unlawful demand. Common justice seems to require that tax to be repaid, unless special circumstances or some principle of policy require otherwise; prima facie, the taxpayer should be entitled to repayment as of right. The first is that the retention by the state of taxes unlawfully exacted is particularly obnoxious, because it is one of the most fundamental principles of our law enshrined in a famous constitutional document, the Bill of Rights that taxes should not be levied without the authority of Parliament; and full effect can only be given to that principle if the return of taxes exacted under an unlawful demand can be enforced as a matter of right. The second is that, when the Revenue makes a demand for tax, that demand is implicitly backed by the coercive powers of the state and may well entail (as in the present case) unpleasant economic and social consequences if 20 Legal Herald. MAY 2016

21 the taxpayer does not pay. In any event, it seems strange to penalise the good citizen, whose natural instinct is to trust the Revenue and pay taxes when they are demanded of him... I would therefore hold that money paid by a citizen to a public authority in the form of taxes or other levies paid pursuant to an ultra vires demand by the authority is prima facie recoverable by the citizen as of right. As at present advised, I incline to the opinion that this principle should extend to embrace cases in which the tax or other levy has been wrongly exacted by the public authority not because the demand was ultra vires but for other reasons, for example because the authority has misconstrued a relevant statute or regulation Similarly, Lord Browne-Wilkinson in Woolwich Equitable Building Society also found in favour of the taxpayer and relied on the concept of unjust enrichment. His Lordship had the occasion to state that the concept of unjust enrichment suggests that the taxpayer should have a remedy. According to his Lordship, the Revenue had demanded and received payment of the sum by way of tax alleged to be due under regulations that were subsequently held to be ultra vires. If the Revenue s position that it was under no legal obligation to repay the wrongly extracted tax and in consequence, was not liable to pay interest on the same was accepted, then the Revenue is enriched by the interest on money to which it had no right during that period. This was aptly described as the paradigm of a case of unjust enrichment. Lord Slynn in the same case observed that it is unacceptable in principle that the common law should have no remedy for a taxpayer who has paid large sums or any sum of money to the Revenue when those sums have been demanded pursuant to an invalid regulation and retained free of interest pending a decision of the courts. As such, the High Court and the Court of Appeal s unprecedented approach in Pelangi is applauded. This is because in the circumstances of the case, it was only fair, reasonable and appropriate that the High Court exercised its discretion under s 11 of the CLA to award interest from the date when the tax was unlawfully exacted on the taxpayer. Conclusion Pelangi s case illustrates that the High Court has jurisdiction to award interest in tax cases and that the ITA and the CLA do not in any manner restrict this. The IRB s decision to subject the gains from the compensation to income tax, despite the decisions of the superior courts being brought to its attention, was inappropriate. As held by the High Court, the IRB s actions had kept the taxpayer out of the money amounting to RM2,360,723.82, which ought to have been refunded. Since the IRB has had use of the money, which at all material times rightfully belonged to the taxpayer, the authors applaud the decision of the High Court holding that the IRB ought to compensate the taxpayer accordingly. The case also embodies the principle that public interest demands that the IRB exercises its statutory power reasonably and with due consideration. After all, as our courts have held, matters of this nature involve, inter alia, balancing the needs of the government to realise taxes and that of the taxpayer to be protected against arbitrary or incorrect assessments. Hopefully, following this decision, the authorities and their officers will exercise their statutory obligations responsibly and pay greater respect to the decisions of our courts. LH-AG Legal Herald. MAY

22 Of Plants and Car Parks: An Analysis of Tropiland s Case* In a recent landmark ruling, 1 the Court of Appeal unanimously affirmed the decision of the High Court that a purpose-built multi-storey car park constitutes a plant within the meaning of Schedule 3 of the Income Tax Act 1967 ( the Act ). Paragraph 2(1) of Schedule 3 of the Act provides that qualifying plant expenditure is capital expenditure incurred on the provision of capital expenditure incurred on the provision of plant or machinery used for the purposes of a business. The word plant is not defined in the Act. In determining whether a piece of equipment or a structure is a plant, courts in the Commonwealth examine the facts of each case, including the nature of the taxpayer s business and functionality of the equipment or structure in the taxpayer s business. Facts Tropiland involved a taxpayer whose principal activities consisted of property development, car park operation and letting out of premises. In 1984, the taxpayer contracted with the Penang Development Corporation ( the PDC ) under a 30-year privatisation scheme to build a multi-storey car park on a piece of land owned by the corporation. It was also the taxpayer s responsibility to ensure that the multi-storey car park shall be primarily used as a car park, the purpose and function of which shall be to service the users and occupiers of Kompleks Tun Abdul Razak. Under the terms of the lease agreement, the taxpayer was to build the multi-storey car park in accordance with the plans, elevations and specifications stipulated in the agreement and employ the services of named architects, civil and structural engineers, mechanical and electrical engineers and quantity surveyors as consultants. In constructing the multi-storey car park, the taxpayer incurred capital expenditure amounting to approximately RM10 million and claimed capital allowance on the premise that the car park was a plant for use in its business. Pursuant to an audit, the Inland Revenue Board ( IRB ) rejected the taxpayer s capital allowance claim, on the basis that the multi-storey car park was the taxpayer s business setting and hence, not a plant and did not qualify for capital allowance. Aggrieved by the IRB s decision, the taxpayer appealed to the Special Commissioners of Income Tax, who dismissed the appeal. Convinced that the car park ought to qualify for capital allowance, the taxpayer appealed to the High Court, which ruled in its favour. This prompted the IRB to mount an appeal to the Court of Appeal. What is a plant? As the law does not supply a definition of plant, we need to look at its ordinary meaning as guided by our superior courts and courts in the Commonwealth, which prescribe a set of guidelines for application to any particular set of circumstances. In Tropiland, both the High Court and the Court of Appeal had, at the outset, adopted the meaning of plant as described in Yarmouth v France, 2 the locus classicus on the meaning of plant and machinery, in which it was held: * This article was first published in the April 2013 issue of Tax Guardian, the official journal of the Malaysian Institute of Taxation 1 Ketua Pengarah Hasil Dalam Negeri v Tropiland Sdn Bhd ( Tropiland ). The authors successfully represented Tropiland with their solicitors before the Court of Appeal (Civil Appeal No P ). The court s decision was delivered on 13 August 2012 and is reported as (2013) MSTC (1887) 19 QBD 647 at p 658, per Lindley LJ 22 Legal Herald. MAY 2016

23 There is no definition of plant in the Act; but, in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business... (Emphasis added) Otherwise known as the apparatus test, the primary issue to be determined was whether the multi-storey car park was an apparatus for the purpose of the taxpayer s business. However, it is pertinent to note that an apparatus for the conduct of a business must be distinguished from the structure within which the business is carried out. The premise or structure in which a business is carried out cannot be considered a plant. This is described as the premises test. 3 The courts have also adopted the settings test in construing whether an item can be regarded as plant. 4 Essentially, what this means is that if the subject is a part of the setting in which the business is carried on (and which cannot be regarded as part of the apparatus used for carrying on the business), then it cannot qualify as plant. However, something which forms part of the setting of a trade may nevertheless be a plant if it is more a part of the apparatus than a part of the setting. 5 The functional test is another test formulated by the courts to ascertain if the subject matter performed a functional purpose in the trade. 6 Tropiland s position In determining whether the multi-storey car park qualified as plant, the issue was whether the taxpayer carried on its business with or in the purpose-built multi-storey car park. The IRB argued that it had a legitimate basis to reject the capital allowance claimed on the multi-storey car park on the basis that the land could still be used as a car park without a need for a building. The taxpayer contended that in considering whether an apparatus is a plant, this should be done in relation to trading activities as a whole and/or all its constituent parts and appurtenances had to be viewed as a whole. Both the High Court and the Court of Appeal agreed that the question of what is properly to be regarded as plant can only be answered in the context of the particular industry concerned and of the particular circumstances of the taxpayer s own trade. There is thus a need to take a holistic approach in every case. The need to refrain from viewing the taxpayer s business in a fragmented fashion was reinforced in W Nevill & Co Ltd v Federal Commissioner of Taxation, 7 in which the High Court of Australia held, per Latham CJ at p 301: 3 Wimpy International v Warland [1989] BTC 58 and Lingfield Park (1991) Ltd v Shore (HM Inspector of Taxes) [2004] CA 89 4 J Lyons & Co Ltd v Attorney General [1944] 1 Ch Jarrold v John Good & Sons Ltd [1963] 1 WLR Commissioners of Inland Revenue v Scottish Newcastle Breweries Ltd [1982] 2 All ER (1937) 56 CLR 290 Legal Herald. MAY

24 In my opinion, the answer to this contention is to be found in a recognition of the fact that it is necessary, for income tax purposes, to look at a business as a whole set of operations directed towards producing income. Although it may be true that the land could still be used as a car park without a need for a building, the IRB failed to take into account that it was not an option available to the taxpayer. As previously highlighted under the privatisation lease agreement, the taxpayer was required to build a multi-storey car park within the parameters and conditions set by the PDC. The High Court and the Court of Appeal in Tropiland recognised the need to consider the obligations of the taxpayer under the agreement, 8 which did not occur in vacuum. In essence, the IRB must look at the economic purpose of the agreement. More importantly, it is trite law that the IRB does not have the authority to dictate how a taxpayer should conduct its business the taxpayer is at his own liberty to conduct his business with all available means to make good profits. 9 Therefore, on the question of whether the taxpayer conducted its business with the multi-storey car park, the Court of Appeal held that, in light of the above, it was clear that the multi-storey car park was indeed the taxpayer s apparatus. On whether the taxpayer conducted its business in the multi-storey car park, the court endorsed the High Court finding that in view of the peculiarity of the facts and service industry of the taxpayer, there was a definite tilt towards the multi-storey car park being regarded as a tool of the taxpayer s trade rather than a mere setting. The car park was, therefore, held to not be the taxpayer s place of business. Large and permanent structures The High Court had noted that the operating of the car park was the taxpayer s business and, therefore, it essentially only performed one primary function, which was to provide the means from which the taxpayer derived its revenue. The judge further stated that one of Parliament s intentions in allowing capital allowance was for the improvement of infrastructure and ultimately contributing towards economic growth and activity. While agreeing with the decision of the High Court, the Court of Appeal considered and was further persuaded by a plethora of cases in which large and permanent structures were held to be a plant rather than a setting or a place of business. The examples include: (a) In Commissioner of Inland Revenue v Barclay Curle & Co Ltd, 10 the English House of Lords viewed a dry dock as a plant and not a mere setting or part of the premises, despite its large size, because it was the means by which the operation of the business was performed. 8 Newey v Revenue & Customs Commissioners [2010] SFTD Re Magna Alloys & Research Pty Ltd v Commissioner of Taxation of the Commonwealth of Australia [1980] FCA 150 and Ronpibon Tin NL & Tongkah Compound NL v Federal Commissioner of Taxation [1949] 78 CLR [1969] 1 All ER Legal Herald. MAY 2016

25 (b) Ornaments used purely in the creation of the right atmosphere for the interiors of a hotel were held to be apparatus and, therefore, a hotelier s plant in Inland Revenue Commissioners v Scottish & Newcastle Breweries Ltd. 11 (c) In Northern Ireland, from poultry houses 12 to stands at a racecourse, 13 the courts have taken the view that such assets constitute plant on the basis that they were necessary for the businesses to be carried out respectively and their function was one that was active and ongoing. (d) In Schofield (HM Inspector of Taxes) v R&H Hall Ltd, 14 the primary issue was whether a silo could be considered a plant. The Court of Appeal in Northern Ireland took into account the nature of the business and the function of the silos in the trade. The silos were held to be plant as they were specially built for the purposes of the business, without which the business could not have functioned. (e) In Wangaratta Woollen Mills Ltd v Commissioner of Taxation of the Commonwealth of Australia, 15 the High Court of Australia was of the view that a dyehouse was more than a convenient setting for the business operations as it played a part in the manufacturing process as a tool in the trade. Besides the above, a swimming pool, 16 cold stores 17 and mezzanine platforms in a warehouse 18 have also been held to be a plant. Moving forward in light of Tropiland Both the High Court and the Court of Appeal in Malaysia arrived at their respective decisions by giving weight to the nature of the taxpayer s business. The taxpayer was a car park operator bound by the terms of the lease agreement with the PDC which required the construction of a multistorey car park. Although on the surface of things, the multi-storey car park may appear to be the premises on which the business was carried out, the cases mentioned as well as the nature of the taxpayer s business seemed to have proved otherwise. The cases pointed out that large assets need not necessarily be a premise, but could instead qualify as plant. The multi-storey car park did not stop short of being a premise or a place of business on which the business was being conducted. Instead, it was the means by which the taxpayer s business was operated. The multi-storey car park was found to be part and parcel of the taxpayer s business, and served to fulfil the function of a plant. Nor was it merely a setting as it played an integral role in providing the means by which the business was operated. 11 [1982] 2 All ER 230 (HL) 12 O Srianain (Inspector of Taxes) v Lakeview Ltd 3 ITR O Grady (Inspector of Taxes) v Roscommon Race Committee 5 ITR TC [1969] 119 CLR 1 16 Cooke (Inspector of Taxes) v Beach Station Caravans Ltd [1974] 1 WLR Commissioner of Inland Revenue v Waitaki International Ltd [1990] 3 NZLR Hunt (Inspector of Taxes) v Henry Quick Ltd; King (Inspector of Taxes) v Bridisco Ltd [1992] STC 633 Legal Herald. MAY

26 The car park was also of utmost importance for the purposes of carrying out the taxpayer s car park business, as the exclusion of it would have spelled the closure of the taxpayer s business in its entirety. Further, it was a means from which the taxpayer had derived its revenue. The revenue, being the payments received from car park operation, was the sole and primary form of revenue for the taxpayer. All in not lost for the government and the IRB, however. As the High Court observed in Tropiland, offering such flexibility to the claiming of qualifying plant expenditure would encourage the construction of infrastructure, which would in turn improve economic activity and lead to increased revenue generated by businesses. This increase in revenue would ultimately see higher tax revenue collections by the IRB. LH-AG Conclusion The determination of whether an asset is a plant for the purposes of claiming qualifying plant expenditure under paragraph 2(1) of Schedule 3 of the Act received much clarity and elucidation from Tropiland. Large assets that may, at first glance, give the impression that it may be a premise would not be so if proven to be the means with which a business is operated or the tool used in the operation of a business. 26 Legal Herald. MAY 2016

27 About Lee Hishammuddin Allen & Gledhill The Firm has more than 100 lawyers in Kuala Lumpur, Penang and Johor Bahru. Our areas o f practice include t he f ollowing s pecialist practice groups, each led by an experienced partner: Arbitration Banking & Insolvency Construction Corporate & Commercial Disputes Employment Energy, Oil & Gas Financial Services Foreign Investment Insurance Intellectual Property & TMT Islamic Finance Mediation Mergers & Acquisitions Real Estate Regulatory & Compliance Shipping Tax, GST & Customs If we can be of service to you, please contact us at: Lee Hishammuddin Allen & Gledhill Level 16, Menara Tokio Marine Life 189, Jalan Tun Razak Kuala Lumpur, Malaysia Tel : Fax : , enquiry@lh-ag.com Consultants : Dato K C Vohrah : Dato Mohd Hishamudin Yunus Senior Partners : Dato Thomas M L Lee Datuk D P Naban Knowledge Partner : Koh Kek Hoe Published by the Knowledge Department Lee Hishammuddin Allen & Gledhill For further information about the Legal Herald, please contact knowledge@lh-ag.com or the person whom you normally consult. Opinion, comments and suggestions are welcome. Legal Herald. MAY

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