HCAL 61/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 61 OF 2009

____________

____________

____________

______________

J U D G M E N T

______________

I.       INTRODUCTION

1.  Kam Kiu complains that profits tax assessments were wrongly raised against it for the year 2002-2003.  The Commissioner raised 3 alternative protective assessments: one for $4.8 million on additional assessable profits of $30 million; a second for $4.8 million on assessable profits of $30 million; and a third for $4.8 million on the basis of an estimated assessment of $30 million. 

2.  The assessments were raised on account of the trading activities of Kam Kiu Aluminium Products Sdn Bhd (KMY).  KMY is a Malaysian company within the Group of which Kam Kiu is a member. Insofar as the additional assessment on Kam Kiu is concerned, the same was raised under Inland Revenue Ordinance (Cap.112) (IRO) ss.61 and 61A.  The Commissioner suspects that Kam Kiu’s profits have been artificially siphoned off to KMY as a result of transactions entered into for the sole or dominant purpose of obtaining a tax benefit.

3.  The assessments are “protective” in the sense that, if they had not been made before 31 March 2009, they would have been time-barred.

4.  It is Kam Kiu’s contention that all KMY’s profits were earned from overseas activities (largely carried out in the Mainland).  KMY (Kam Kiu stresses) never sold goods to Hong Kong customers.  Accordingly, Kam Kiu contends that KMY’s profits cannot be attributed to it and charged to profits tax.

5.  Kam Kiu’s objections to the assessments are still being considered by the Commissioner. 

6.  In the meantime, in the exercise of her discretion under IRO s.71(2), the Commissioner allowed the second and third assessments mentioned above to be held over unconditionally pending determination of Kam Kiu’s objections.  In relation to the additional assessment, the Commissioner ordered that $655,944 be held over unconditionally and $4,144,056 be held over on condition that Kam Kiu purchase an equal amount of Tax Reserve Certificates (TRCs) by 19 May 2009.  The amount of $4,144,056 was based on KMY’s profit for the year 31 December 2001 to 30 December 2002 (that is, $25,900,355 times the tax charge of 16%).

7.  It is against the decision of the Commissioner requiring purchase of TRCs that Kam Kiu seeks judicial review.

II.      DISCUSSION

8.  First, the Court’s role on a judicial review such as this is severely constrained.  I am not entitled to look into the substantive merits of Kam Kiu’s tax objection. 

9.  My function is limited to seeing whether the Commissioner’s decision to hold over tax conditional upon the purchase of TRCs is “so outrageous in its defiance of logic that no sensible person who had applied his mind to the question ... should have arrived at it” (Chu J in Nam Tai Co. Ltd. v. CIR [2006] 2 HKLRD 459 (at §57)).  See also Yam J in Re Chia Tai Conti-Hong Kong Ltd. [2006] 2 HKLRD 449 (at §§25-9)).

10.  Mr. Ho Chi Ming (appearing for Kam Kiu) argues that KMY’s activities, having wholly or largely taken place overseas, plainly cannot be assessable to Hong Kong profits tax.  In such case, Mr. Ho submits that the Commissioner should not even have been assessing additional tax, much less imposing any condition for holding over payment.

11.  However, the Commissioner points to a number of factors indicating that the true nature of KMY’s profits is far from self-evident.  According to the Commissioner, there may be more to this matter than meets the eye.  Some of the factors relied upon by the Commissioner are as follows:-

(1)     KMY was incorporated on 13 December 2001.  This was shortly after Kam Kiu was incorporated in Hong Kong on 14 November 2001.

(2)     KMY has made profits of $323,398,724 between 2002 and 2008. But it has never paid profits tax anywhere, whether in Hong Kong, Malaysia, the Mainland or elsewhere.

(3)     KMY had a representative office in the Mainland during the relevant time.  But that office’s registration certificate suggests that its permitted scope of business in the Mainland was limited to communication and handling of enquiries. There is no evidence of KMY being allowed to engage in trading activities (such as the selling of goods or the issuing of invoices) in the Mainland.

(4)     KMY’s sales contracts, invoice and receipts bear Kam Kiu’s Hong Kong address as a correspondence address.

(5)     In bank account opening forms, KMY declared that Hong Kong was the place where its major business was carried out.

(6)     All KMY sale proceeds were deposited into Hong Kong bank accounts.

(7)     KMY’s sales documentation (including order confirmations, sale invoices, shipping advices and certificates of origin) bear a Malaysian address as well as Kam Kiu’s Hong address (including telephone and fax numbers).

(8)     KMY’s key personnel are also Kam Kiu employees.  Some of their salaries in relation to their employment with KMY were paid in Hong Kong through bank transfers from KMY’s Hong Kong bank account.

(9)     Kam Kiu employees are authorised signatories of KMY’s bank accounts.

(10)   KMY engaged Kam Kiu to provide bookkeeping, account-recording, bank handling and other trade-related services in Hong Kong.

(11)   Despite KMY’s substantial net profits of over $323 million between 2002 and 2008, Kam Kiu incurred net losses of $719,194 over the same period.  This (the Commissioner believes) may be indicative of the artificiality of interposing KMY in various sale transactions.

12.  This is not the place for any detailed investigation of the laws relating to profits tax and its avoidance or the application of such laws to the facts.  Some of the factors just listed may be more compelling than others for the purpose of determining the source or nature of KMY’s profits.  Kam Kiu may or may not have a good answer to some or all of the points raised by the Commissioner.  But obviously fully to assess the validity of Kam Kiu’s answers would require a trial.  That would be outside the province of this Court in a judicial review. 

13.  Considering everything in the round, I am unable to say that this is self-evidently a case where profits tax is not assessable.

14.  Second, Mr. Ho submits that it was an “abuse of power” for the Commissioner to require purchase of TRCs.  Mr. Ho suggests that there is an “abuse” because Kam Kiu would have to borrow money from a bank to finance the purchase of the requisite TRCs. The interest earned on the TRCs would be less than the interest on the putative loan.  If Kam Kiu succeeds in its objection, then Kam Kiu would be out of pocket by the difference between the interest paid to the bank and the interest earned on the TRCs.

15.  IRO s.71(2) provides that, notwithstanding an objection or appeal against an assessment, “tax shall be paid”.  The Commissioner, however, retains a discretion under the sub-section to order that tax be held over unconditionally or conditionally.

16.  Where a person objects to an assessment and wishes the Commissioner to exercise the discretion to direct an unconditional hold-over of tax, then it is:-

“for the applicant to demonstrate why the requirement of s.71(2), namely, that the tax shall be paid notwithstanding any notice of objection, should not be fully applied” (Hartmann J in Interasia Bag Manufacturers Ltd. v. CIR [2004] 3 HKLRD 881 (at §99).

17.  In Interasia, as here, the applicant for judicial review was throughout advised by professional accountants (here, Deloittes).  Hartmann J noted (at §99) that “the Commissioner surely could work on the basis that the accountants would know what to put forward and what not to put forward” if it was desired to obtain an unconditional hold-over.  The Commissioner was under no duty (Hartmann J held) to make enquiries of the applicant in order to ascertain its true financial position.

18.  If Kam Kiu wished to put forward a case for exercising the discretion to hold over unconditionally in its favour, it was incumbent on it (and its advisers) to put forward such a case for the Commissioner’s consideration.  The fact is that, prior to issuing its Notice of Application for Judicial Review, Kam Kiu never did so.

19.  It is accordingly hard to see how (in the absence of any specific application backed with appropriate evidence from Kam Kiu) the Commissioner can be faulted from deciding as she did on the question of hold over.  Normally, the lawfulness of a public authority’s decision is not to be judged by reference to information not placed before the authority at the time of an impugned decision.

20.  Mr. Ho suggests that it would be unfair for the Court now to exclude the evidence said to justify an unconditional hold over of tax.  In essence, Mr. Ho invites me to assess the validity of the claim for an unconditional hold over myself.

21.  I decline to do so.

22.  To begin with, there is no injustice.  The burden was on Kam Kiu and its tax advisers to adduce such evidence at an early stage.  They did not do so.

23.  Further, it is for the Commissioner to consider in what way the discretion to hold over should be exercised.  It is not for this Court to do so.  The Court is in a poor position to assess the merits of Kam Kiu’s claim of cashflow difficulties.  If Kam Kiu now wishes to pursue the matter of financial hardship farther with the Commissioner, it may presumably do so and a proper decision may be taken on the basis of relevant material provided to the Commissioner and whatever additional enquiries she may wish to make.

24.  In any event, I do not see anything unreasonable in the Commissioner’s conclusion.  Let me look at the question in broad terms.

25.  There is evidence that on 30 June 2009 Kam Kiu had a cash balance of over $11 million in its bank account.  Kam Kiu says that it has pledged deposits with its bank in the amount of $43,954,214 which it cannot use.  It appears from Kam Kiu’s unaudited balance sheet statement, however, that the $11 million plus cash holding is separate from the pledged deposits.  Further, it is not known how much (if any) interest such cash balance is earning. 

26.  It is far from apparent to me on those premises that Kam Kiu is hard-pressed to comply with the Commissioner’s condition for hold over.  Again Kam Kiu may have some explanation, but this Court cannot assess the validity of such explanation in a judicial review.  On the face of it, there is nothing to object in the Commissioner’s decision.

27.  In coming to a decision on hold over, the Commissioner was guided by reference to Departmental Interpretation and Practice Note No.6 (DIPN 6).  Although the complaint does not appear in Kam Kiu’s Notice for Judicial Review, it is suggested by Mr. Ho that this reliance on DIPN 6 was wrong or unreasonable.

28.  Under DIPN 6, where it is shown to the Commissioner’s satisfaction that the purchase of TRCs would cause financial hardship to a taxpayer, the Commissioner may accept a bank undertaking in lieu of TRCs. 

29.  Following the commencement of the judicial review, the Commissioner has indicated that she is prepared to accept a bank undertaking in lieu of TRCs.  But that offer was rejected by Kam Kiu, apparently because (among other things) there would be a bank charge of 1.5% per annum on such an undertaking.

30.  Whether or not the degree of hardship to Kam Kiu (including any hardship arising from a 1.5% charge) justifies the hold over of tax must be a decision for the Commissioner.  There was no such decision at the time of the Judicial Review Notice, because Kam Kiu did not raise any such matter before then.  In those circumstances, it is not for this Court to treat the Commissioner’s willingness to accept a bank undertaking, an offer presumably made by her in an effort to settle these review proceedings amicably, as some sort of “decision” which should now be subject to judicial review.  Leave was neither sought nor granted for that purpose.

31.  Finally, Mr. Ho suggested that I should consider the “balance of convenience” in relation to this application. 

32.  Convenience, however, is not the test for the Commissioner ordering (or not ordering) an unconditional hold over.  As Hartmann J pithily observed in Interasia (at §100), “s.71(2) places a responsibility on the Commissioner to collect tax not to forgive it”.  It is not a question of balancing out whether it would be more or less convenient for a taxpayer who has lodged an objection to pay tax now or later.  See Yam J in Chia Tai at §§35 and 37 to like effect.

33.  Here the Commissioner considered that Kam Kiu’s objections to tax were not wholly unmeritorious.  She thought that they had a chance of success.  In those circumstances, in line with DIPN 6 and absent evidence of any financial hardship from Kam Kiu, a conditional hold over was granted.  I find nothing to complain of in that reasoning.

III.     CONCLUSION

34.  Kam Kiu’s application for judicial review is dismissed.