Recent Tax & Customs Cases

S. Saravana Kumar

Head of Tax, SST & Customs

sara@rdslawpartners.com

19.11.2020

www.rdslawpartners.com

Judicial Review & Stay Orders In Tax & Customs Cases

• Case study 1:

TN v Ketua Pengarah Hasil Dalam Negeri

• Case study 2:

MPIL v Ketua Pengarah Hasil Dalam Negeri

• Case study 3:

MBM v Ketua Pengarah Hasil Dalam Negeri

TN v Ketua Pengarah Hasil Dalam Negeri

• Taxpayer’s reinvestment allowance claim was rejected andassessments were raised in the billions of ringgit.

• IRB claimed that taxpayer is a service provider and not amanufacturing company.

• Taxpayer claimed otherwise and referred to a Federal Court ruling in anon-tax case which held that the taxpayer is a manufacturer.

• Paragraph 7 of Schedule 7A of the ITA did not exclude generation ofelectricity as a manufacturing activity.

• The Income Tax (Prescription of Activity Excluded from the Definitionof “Manufacturing”) Rules 2012 also did not exclude generation ofelectricity as a manufacturing activity.

• IRB relied on its own interpretation in claiming that generation ofelectricity is not a manufacturing activity.

• Leave to commence Judicial Review was granted.

• Interim stay order was also granted against the payment of thedisputed taxes.

MPIL v Ketua Pengarah Hasil Dalam Negeri

• For years, taxpayer has filed its tax returns for its earnings in theforms of dividends and interest from its holding of RedeemableConvertible Unsecured Loan Stocks as derived from "offshore non-trading activities" under S. 9 of LBATA 1990.

• Following a tax audit for YAs 2008 to 2018, IRB was of the view thatthe taxpayer's earning from the said securities investment did not fallwithin the definition under "offshore non-trading activity“. IRBclaimed the said securities were held by the taxpayer not by itself butonly on behalf of another company.

• S. 2(1) of LBATA: "offshore non-trading activity" to mean "an activityrelating to the holding of investments in securities, stock, shares,loans, deposits and immovable properties by an offshore company onits own behalf.“

• IRB issued income tax assessments for about RM182 million inclusiveof penalty and required the taxpayer to pay.

• Taxpayer applied for Judicial Review and a stay order.

• Attorney General and the IRB objected to the Leave application forJudicial Review.

• High Court upon hearing the parties granted the Leave applicationand also the stay order.

• High Court observed that the taxpayer’s arguments are:

a) It is a "Labuan Company" under S. 2(1) of the LBATA and thus, a"Labuan entity" under S. 9 of the LBATA and carried on "Labuannon-trading activity“.

b) The taxpayer has held the said securities investment on its ownbehalf and therefore within the definition under "offshore non-trading activity" and thus, exempted from income tax.

c) the IRB was in fact alleging evasion or avoidance of tax on thepart of the taxpayer without resorting to and complying withto S.140 of the ITA 1967.

d) the IRB has made clear jurisdictional errors or failed to performits statutory duty in relation thereto in deciding and issuing thesaid notices of additional assessment.

• High Court also ordered a stay order for the following reasons:

a) The status quo ought to be preserved having regards to the hugesum required to be paid by the taxpayer by the said notices ofadditional tax assessment and the adverse effects on the taxpayerand related parties.

b) A stay will not prejudice the IRB having regards the delay inconducting the tax audit by the IRB upon the taxpayer, at least inrespect of the earlier years of assessment.

Q: Does the proposed Section 103B of the ITA 1967 put anend to stay orders?

MBM v Ketua Pengarah Kastam

• Taxpayer imported passenger cars into Malaysia and was granted fullexemption from import duty by the Minister of Finance (i.e.pelepasan sepenuhnya).

• Customs claimed that hybrid cars are not included in the import dutyexemption.

• Taxpayer applied for Judicial Review.

• Customs objected on the basis that the appeal must be head beforethe Customs Appeal Tribunal.

• Taxpayer argued that the issue at hand is a question of law thatjustifies judicial review route.

• High Court agreed that there were exceptional circumstances andgranted leave to taxpayer to commence judicial review.

• High Court also granted interim Stay Order.

Q: Why is a Stay Order necessary?

RPGT v Income Tax

JF v Ketua Pengarah Hasil Dalam Negeri

• Taxpayer owned shares in a company that owned investment land.Those were RPC shares.

• Taxpayer sold the RPC shares to a third party after a few years ofowning them and duly filed RPGT return, which was cleared.

• After a few years, IRB decided to investigate the taxpayer andsubjected the gains to income tax.

• Taxpayer applied for Judicial Review and was granted leave and stayorder.

• Issue before the High Court is whether the gains from the RPC sharedisposal are subject to income tax or RPGT.

• Matter is pending decision.

Does Car Park Qualify For ITA & IBA?

PP v Ketua Pengarah Hasil Dalam Negeri

• Appeal before the SCIT where the issues revolve around capitalexpenditure incurred for the construction of a multi-storey car parkwhich was part of its new hospital building qualified for investmenttax allowance (ITA) and industrial building allowance (IBA).

• No facts in dispute as the IRB’s witness also confirmed during thehearing that the multi-storey car park is an industrial building. Capitalexpenditure incurred for all the other parts of the hospital buildinghas been allowed for ITA and IBA save for the multi-storey car park.

• IRB’s only basis in disallowing the ITA and IBA claims is based on para.66 of Schedule 3 of the ITA 1967.

• According to IRB, the total area attributable to the car park made up36.07% of the total built-up area of the new building, i.e. more than10%.

• Taxpayer argued that based on the Exemption Order, it only needs tosatisfy the following:

(a) the new building is of an approved standard which has beenlicensed by the Ministry of Health and registered with theMalaysian Healthcare Travel Council

(b) the claim does not include capital expenditure incurred for theconstruction of living accommodation

(c) the project undertaken is for the expansion, modernization orrefurbishment of an existing private healthcare facility business.

• If it was intended for car parks to be disqualified from the ITA claimprovided under the Exemption Order 2012, it would have beenspecifically spelt out like how it was done for living accommodation,but this was not done.

• Moreover, in Paragraph 65(3) of Schedule 3 of the ITA 1967, it wasprovided that:“(3) Subject to paragraph 67B, a building used as a dwelling house(not being for accommodation of the kind mentioned insubparagraph (2)) or a retail shop, showroom or office is not andshall not be treated as an industrial building.”

• Thus, it is clear that Parliament had intended for specific items to bedisallowed under Schedule 3 of the ITA 1967 but car parks was nevermentioned as one of the items.

• Had the intention of Parliament to exclude car parks, this could beeasily spelt out in para. 65(3) of Schedule 3 of the ITA 1967 but thiswas not done.

• In that regard, the IRB has not basis under the Exemption Order 2012or the ITA 1967 to artificially segregate and isolate the multi-storeycar parks from the taxpayer’s ITA claim.

• Taxpayer’s appeal was allowed by SCIT.

• IRB has appealed to the High Court.

Withholding Tax: Software Distribution Payments Are Not

Royalty

HS v Ketua Pengarah Hasil Dalam Negeri

• Taxpayer is involved in the sales of computer hardware and relatedproducts, and provision of information technology consultingservices. Taxpayer entered into reseller agreements with its non-resident vendor for the right to resell and distribute the vendor’ssoftware to customers in Malaysia. The taxpayer is required to makepayments to the vendor for each copy of the software sold.

• Pursuant to the agreements, it was clearly stated that as a resellerand distributor, the taxpayer has no right to use, copy, develop,modify, prepare derivative works or sublicense the vendor’s software.Neither did the taxpayer obtain any proprietary right, title or know-how from the vendor.

• The issues before the SCIT were:

• Whether the payments of made by the taxpayer to its vendor in YAs2011 to 2013 were royalty under Article 12 of the Malaysia-Singapore Double Taxation Agreement (DTA)?

• In the event of conflict, whether the definition of royalty underArticle 12 of the DTA prevails over the definition of royalty underSection 2(1) of the ITA?

•

• The issues before the SCIT were:

• Whether the payments of made by the taxpayer to its vendor in YAs2011 to 2013 were royalty under Article 12 of the Malaysia-Singapore Double Taxation Agreement (DTA)?

• In the event of conflict, whether the definition of royalty underArticle 12 of the DTA prevails over the definition of royalty underSection 2(1) of the ITA?

•

• SCIT agreed with the arguments advanced by the taxpayer’s counseland unanimously held that the payments made to the non-residentvendor should not be subject to withholding tax as they do notamount to royalty under Article 12 of the DTA.

• This recent decision reinforces the well-established principles that theprovisions of the DTA prevails over the ITA and that reference is to bemade to the OECD Commentary in constructing the provisions in theDTA which Malaysia is a signatory to.

• It is also important to appreciate that not all payments made to non-residents are royalty payments and are thus, subject to withholdingtax under the ITA. Taxpayers will need to understand the nature of thevarious payments made to non-residents in the course of theirbusinesses before deducting any withholding tax from the invoices.

• In instances where taxpayers find the DGIR’s interpretation of royaltyto be inconsistent with any Double Taxation Agreements and theOECD Commentary, then they ought to seek further legal advice togain more insight and clarity.

Sales Tax Refund - De Minimis Principle

G(M) v Ketua Pengarah Kastam

• On 12.10.2020, the Court of Appeal unanimously allowed thetaxpayer’s appeal against the High Court’s decision in dismissing thetaxpayer’s judicial review application. The taxpayer challenged thedecision of the Director General of Customs (DGC) decision inrejecting the taxpayer’s application for sales tax refund underSections 190 and 191 of the GST Act 2014.

• No further appeal by the DGC.

• In February 2017, the taxpayer filed an application for a review of theDGC’s decision in rejecting the taxpayer’s sales tax refund application.Subsequently, in March 2017, the DGC rejected that taxpayer’s reviewapplication under Section 191(3) of the GST Act 2014 on the premisethat the sales tax refund application contained incorrect information.

•

• Aggrieved by the DGC’s decision, the taxpayer commenced judicialreview proceedings to challenge the said decision. In January 2018,the High Court dismissed the taxpayer’s judicial review and held thatthe DGC’s decision was not illegal, irrational or unreasonable ascertain information in the taxpayer’s sales tax refund application werefound to be inaccurate.

• Upon hearing the submission by both parties, the Court of Appealunanimously allowed the taxpayer’s appeal and set aside the HighCourt’s decision.

• Court of Appeal also directed the DGC to refund the total amountclaimed by the taxpayer less the value in relation to the inaccurateinformation in the sales tax refund application within 90 days.

• This decision is first of its kind in tax disputes where the judiciary hasexercised its jurisdiction in applying the principle of de minimis (i.e.the law cares not for small things).

• This decision strengthens the common law position that the principleof de minimis has to be applied generally in circumstances whichwarrants its application and that tax law is not excluded from thisprinciple. In reversing the High Court’s decision, the Court of Appealhas indirectly reinforced the position that the courts are not bound bythe harsh and strictness in the application of Section 191(3) of theGST Act 2014 if such interpretation will lead to injustice ormiscarriage of justice.

• It is trite that there is now a statutory recognition for courts to take apurposive approach in the interpretation of statutes (taxing statutesincluded). Sections 190 and 191 of the GST Act 2014 are transitionalprovisions specifically enacted to remedy situations of doubletaxation and to provide relief.

• The strict approach taken by the DGC towards Section 191(3) of theGST Act 2014 arguably defeats the purpose of the introduction of thesales tax refund provisions.

• This decision also serves as a reminder that all decisions andmeasures taken by public authorities must be fair, reasonable andproportionate to the objective a particular provision sought toachieve.

• The reach and extent of the court’s jurisdiction to review anadministrative action is not limited to narrow grounds such asprocedural impropriety, illegality, irrationality but may also includeproportionality. Therefore, decisions made by public authoritiesincluding tax authorities that are disproportionate are amenable tojudicial review.

GST- Exceptional Input Tax Credit Claim

JEP v Ketua Pengarah Kastam

• Recently, the High Court allowed the application for judicial review byJEP to quash the decision of the Director General of Customs (DGC).

• DGC had erroneously disallowed JEP’s claim for input tax credit on thebasis that JEP did not make any taxable supply whilst being aregistered person.

• JEP is in the business of constructing, commissioning, operating andmaintaining a Coal Fired Power Plant. In late 2014, JEP applied to beregistered under the GST Act 2014.

• In the late 2017, the JEP made an Exceptional Input Tax Credit Claimunder Regulation 46(1) of the GST Regulations 2014 amounting toRM45 million.

2

• The DG apportioned the claim and allowed only RM2,232.21 of theExceptional Input Tax Credit Claim.

• The remaining (i.e. the Disallowed ITC) was rejected by the DG. TheDisallowed ITC is the input tax paid by JEP for the construction of thePower Plant.

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• The reason for rejecting JEP’s claims were as follows:

(i) The Disallowed ITC is not eligible to be credited as JEP has not madeany taxable supply from the Power Plant when it was registeredunder the GST Act; and

(ii)The input tax incurred for the furniture and equipment for thecontinuance of the JEP’s business is approved with the followingcalculation:

Input tax x (Period in which a person becomes registered under the GSTAct ÷ Useful life items)

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• High Court allowed the taxpayer’s judicial review application andordered that the Disallowed ITC is paid with interest.

• Customs have appealed to the Court of Appeal.

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GST- Agricultural Land Is Exempted From GST

SF v Ketua Pengarah Kastam

• This recent decision dealt with a novel point of law in a GST case as towhether a supply of land used for agricultural purposes qualifies as anexempt supply under item 1(1) of the Exempt Supply Order. In makingits decision, the High Court expressed the view that it is essential toidentify the status of the land at the time of supply. In the presentmatter, the time of supply is at the time when the Land is transferredor disposed of.

• At the material time, the Land was being used for oil palm plantationsand was zoned as agricultural land. Accordingly, the Land is an exemptsupply.

• This decision further demonstrates that once a supply is already anexempt supply, the Minister and Director General are not allowed towilfully disregard the exemption and look to a taxpayer’s futureintention to impose tax on a subject that is already an exempt supply.Such an interpretation of item 1(1) of the Exempt Supply Order is notonly arbitrary, but it also raises a further question as to when thisintention should be determined.

• Additionally, this case also serves as a reminder that a publicauthority has no jurisdiction to commit an error of law or act in amanner that is procedurally improper or in breach of the principles ofnatural justice. Such an error or procedural impropriety would renderthe decision susceptible to judicial review.

• No further appeal to the Court of Appeal by the DGC.

Thank you

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