WISE PEARL LTD v. THE COMMISSIONER OF INLAND REVENUE

HCIA 5/2023

[2024] HKCFI 439

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 5 OF 2023

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D E C I S I O N

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A. INTRODUCTION

1.  By a summons of 21^st July 2023 (“the Summons”), the Applicant (“the Taxpayer”)  applies for leave to appeal under s.69 of the Inland Revenue Ordinance (Cap.112)  (“the IRO”)  against the decision of 21^st June 2023 (“the Decision”)  of the Board of Review (“the Board”).

2.  The Decision relates to the Taxpayer’s Additional Profits Tax assessments for the years of assessment 2000/01 to 2008/09, 2011/12 and 2012/13, and Profits Tax Assessments for the years of assessment 2009/10 and 2010/11.  The main issues in dispute between the parties are (1)  whether the Board erred in rejecting the Taxpayer’s case that its profits should be apportioned on the grounds that at least some part of the profits arose outside Hong Kong, and (2)  whether the Board erred in concluding that the Taxpayer did not have a “relevant interest” in certain factory and dormitory facilities in Shenzhen (“the Buildings”)  within the meaning of s.40 IRO in the year of assessment 2010/11, so that the Taxpayer was not entitled to a claim for annual building allowance in that year.

B.  THE BACKGROUND

3.  I gratefully adopt the following summary of the undisputed background from the Decision.

B1.  WPL

6.  WPL was incorporated in Hong Kong on 9 May 1991. According to its audited financial statements, its principal activities at the material time were manufacture of sports and leisure bags and military textile products.

7.  At the material time, the directors of WPL were Mr DLUGASH Brian (“Mr Dlugash”)  and Ms HO Kwok- ching (“Ms Ho”).

B2.  YBF

8.  On 7 July 1991, WPL and 寶安縣石岩鎮官田英寶製品廠 (“YBF”)  entered into a processing agreement. The agreement contained, inter alia, the following terms:-

(1)  YBF was responsible for providing factory premises, utilities and workers for producing WPL's goods, which would be delivered back to Hong Kong or other countries;

(2)  WPL was responsible for providing the necessary production equipment and raw materials without consideration.  WPL retained its title to the production equipment;

(3)  WPL should pay to the YBF monthly processing fees which would be computed on the basis as stated in the agreement;

(4)  WPL should provide technical training to the workers;

(5)  The agreement was effective for a period of 3 years ending on 8 July 1994.  Subject to the approval of the relevant authority, the agreement could be terminated or extended by mutual agreement.

B3.  BXL

9.  On 22 February 1994, Baoxing Backpack (An-Xi)  Co Ltd.  (“BXL”)  was incorporated in the Mainland as a wholly foreign-owned enterprise.

10.  The registered capital of BXL was US$500,000 and its investor was Pearlcorp Industrial Limited (“PIL”), a company incorporated in Hong Kong.  At the material times, the directors of PIL were Mr Dlugash, Ms Ho, Mr Or Ming-sing (“Mr Or”)  and Ms U Rebecca Wai- ping.

11.  The memorandum of BXL contained, inter alia, the following provisions:-

(1)  BXL’s business was design, development, manufacture and sale of products of cases and bags which were all for export during the first few years of business and would be reviewed afterwards;

(2)  The highest decision-making body of BXL was its board of [directors] which would be composed of 4 directors;

(3)  BXL should follow the financial accounting regulations laid down for foreign owned enterprises in keeping its books and records and preparing financial statements.

(4)  BXL was responsible for its own profits or losses and had to pay various taxes according to the regulations.

12.  It is stated in BXL’s business licence that the scope of business of BXL was manufacturing and processing of bags, tents, sleeping bags, wallets, handbags, cosmetic bags, protective cases and other sewn products, bullet-proof vests and other military sewn products for 100% export sale.

B4.  Profit Tax Returns filed by WPL

13.  WPL filed its Profits Tax returns for the years of assessment 2000/01 to 2012/13 together with audited financial statements.

(1)  In its Profits Tax returns for the years of assessment 2000/01 to 2012/13 filed together with audited financial statements, WPL claimed that 50% of its profits were attributable to the manufacturing activities undertaken by YBF and BXL in the Mainland and should not be assessed to Profits Tax.

(2)  In its Profits Tax returns for the years of assessment 2010/11 to 2012/13, WPL claimed industrial building allowance (“IBA”)  relating to the factory buildings named 深圳市石岩鎮官田橫坑工業區英寶廠 (the “Buildings”). The construction of the Buildings was completed during the year of assessment 2010/11, and the total construction cost was said to be $40,048,294.

(3)  In its Profits Tax returns for the year of assessment 2012/13, WPL claimed commercial building allowance (“CBA”)  relating to the leasehold improvement of the Buildings, which was said to cost $990,150.

B5.  Tax Audit

14.  In July 2009, the Assessor commenced a tax audit on the Profits Tax returns filed by WPL.

15.  In relation to its offshore profits claim that 50% of the profits were attributable to the manufacturing activities undertaken by either YBF or BXL in the Mainland, WPL explained to the Assessor its mode of operation and provided copies of transaction documents in respect of two selected sales, one in the year ended 30 June 2007 and the other in the year ended 31 December 2012. The gist of WPL’s responses can be briefly summarized as follows:-

(1)  All products sold by WPL were made by either YBF or BXL.  Ms Ho would decide to use which one of them to manufacture the products so as to optimize the production schedule.

(2)  With regard to YBF, WPL reimbursed all the costs incurred by it.  WPL would also pay CMT charges (i.e. “cut, make and trim” charges)  to YBF.  The CMT charges paid to YBF was higher than the prices charged by unrelated factories for CMT production since YBF paid salaries to those Mainland staff working at the factory site of BXL and supporting WPL’s business.

(3)  With regard to BXL, WPL instructed BXL to manufacture the products required by issuing the purchase orders routinely used by it.  Payments were made to it by reference to a “transfer price”, which was based on “standard sewing minutes” and a fixed rate per minute.  The rate was periodically adjusted so that it would just cover the costs incurred by BXL.  Raw materials would be purchased in the name of the Taxpayer and would generally be delivered to BXL directly. BXL was responsible for the import of raw materials, production and expert.

(4)  Samples of WPL’s products were generally made at the development centre at YBF.  WPL’s costing clerk at YBF and the customer service staff, including Mainland and Hong Kong staff, stationed in the Mainland would prepare costs sheets and price suggestions for Ms Ho’s approval.  The customer service staff would then offer the approved price to the customers.

(5)  Finished products were generally shipped from factories direct to the customers through ports located in the Mainland, and occasionally transshipped through Hong Kong.  Customers would settle their accounts by telegraphic transfer directly to WPL’s bank account in Hong Kong.

16.   In relation to its claim for industrial building allowance (“IBA”), WPL asserted that:-

(1)  The original factory building used by YBF ( the “Original Factory”)  was owned by Historic Handover Group Limited (“HHGL”), the majority shareholder of WPL.

(2)  Due to redevelopment, YBF had to be re-located. The Original Factory was proposed to be exchanged for two partially constructed buildings located at 官田橫坑工業園.

(3)  To effect the transaction, the Mainland authority required HHGL to transfer to WPL the ownership of the Original Factory, which was then exchanged for the new site later developed into the Buildings.

(4)  The Buildings were first used for new sewing production lines in August 2008.  In September 2009, YBF moved the office and some of the production facilities to the Buildings.  The remaining production facilities were moved into the Buildings when WPL obtained the real estate certificate of the Buildings dated 27 April 2011 (the “Real Estate Certificate”).

(5)  The Real Estate Certificate shows that WPL had the right to use the Buildings and the registered prices of different parts of the Buildings are as follows:-

	RMB
Factory 1	6,201,344
Factory 2	8,009,329
Dormitory 3	3,728,666
Dormitory 4	4,194,789
Warehouse	323,291
	22,457,419

(6)  In the year of assessment of 2012/2013, WPL disclosed its interest in a wholly-owned subsidiary incorporated in the Mainland, Ying Bao Sewn Products (Shenzhen)  Co Ltd (英寶縫紉製品（深圳）有限公司)  (“YBL”), which started to engage in the business of manufacturing bags in 2012.

17.   After receiving further documents and submissions from WPL, in relation to the offshore profits claim, the Assessor accepted that 50% of WPL’ s profits from the sale of goods  manufactured by YBF should be excluded.  However, the Assessor maintained the view that all of WPL’s profits arising from the sale of goods manufactured by BXL should be chargeable to Profits Tax.

18.   In relation to the Buildings, the Assessor considered that no IBA should be granted for the year of assessment 2010/2011 and that the IBA granted for the years of assessment 2011/2012 and 2012/2013 should be computed by reference to the registered price set out in the Real Estate Certificate.  In essence, the Assessor doubted that WPL has incurred capital expenditure on the construction of the Buildings, but accepted that it owed the relevant interest in the Building as evidenced by the Real Estate Certificate.  The Assessor also considered that a portion of the commercial building allowance (“CBA”)  should be allowed.

19.   The Assessor was prepared to revise the Subject Assessments on the said bases.

4.  The Board, by a majority,[1] rejected the Taxpayer’s claim to apportion that part of its profits attributable to the manufacturing activities of BXL on a 50:50 basis.  The dissenting member of the Board considered that the Commissioner should have applied the partial offshore concession in DIPN[2] 21 when assessing the Taxpayer’s profits, at least up to the financial year 2009/10, and then applied the DIPN 21 issued in 1998 (and subsequent years)  for the years 2010/11 to 2012/13.

5.  The Board unanimously rejected the Taxpayer’s claim to an annual Industrial Building Allowance (“IBA”)  for the year 2010/11.

6.  The Taxpayer seeks leave to appeal on four proposed grounds. Proposed Grounds 1 to 3 relate to its offshore profits claim, and Proposed Ground 4 relates to its annual IBA claim for 2010/11.

C.  THE APPLICABLE PRINCIPLES

7.  An appeal against a decision of the Board of Review may be made only on a ground involving a question of law: s.69(1)  IRO.

8.  An intending appellant must first obtain leave to appeal: s.69(2)  IRO. Under s.69(3)(e), no leave will be granted unless the court is satisfied that:

8.1  a question of law is involved in the proposed appeal, and

8.2  the proposed appeal has a reasonable prospect of success, or that there is some other reason in the interests of justice why the proposed appeal should be heard.

9.  For this purpose, a proposed appeal has a reasonable prospect of success if it is “reasonably arguable”; it is not necessary to show that the proposed appeal will “probably” succeed; it is not a high threshold.  See China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146 at [16], [21].

10.  The ways in which a decision of the Board may be challenged are limited, as explained in CIR v Inland Revenue Board of Review [1989] 2 HKLR 40 at 56F-H, 57F-H (Barnett J).

10.1  The decision may be challenged for misdirection in law.

10.2  An inference or the final conclusion of the Board may be attacked on the basis that the primary facts do not admit of an inference drawn from them, or that the primary facts or inferences, or a combination of them, do not admit of the final conclusion.  Where the facts can reasonably admit of the Board’s conclusion, however, its decision should not be disturbed.

10.3  A finding of primary fact may be challenged on the basis that there was no evidence in support of the finding.  Alternatively, it may be contended that the Board should have made findings of other relevant facts.

11.  The second and third of these relate to challenges to findings of fact.  As further explained in Kwong Mile Services Ltd v Commissioner of Inland Revenue (2004)  7 HKCFAR 275 at [31] to [34] (Bokhary PJ), findings of fact can be challenged as errors of law only where:

11.1  the decision was based on a finding of fact or inference from the facts which is perverse or irrational;

11.2  there was no evidence to support the finding;

11.3  the decision was made by reference to irrelevant factors or without regard to relevant factors such that the conclusion is contrary to the true and only reasonable one.

12.  Attacks on findings of fact only raise questions of law in very limited circumstances.  It should be borne in mind that:

12.1  the extent to which a particular piece of evidence should be accepted or rejected, and the weight to be given to it, are matters for the Board and not the court;

12.2  it is all too easy for a so-called question of law to become no more than a disguised attack on findings of fact which must be accepted by the courts, and all too easy for the appeals procedure to the court to be misused in this way;

12.3  the nature of the factual enquiry which an appellate court can and does undertake in a proper case is essentially different from the decision-making process which is undertaken by the tribunal of fact.

See Commissioner of Inland Revenue v Right Margin Ltd [2017] 5 HKLRD 398 at [10] (G Lam J, as he then was).

13.  The principles as to what would constitute a proper question of law for the purpose of s.69 IRO were set out in China Mobile Hong Kong Co Ltd v Commissioner of Inland Revenue [2018] 2 HKLRD 146 at [30] and may be summarised as follows.

13.1  Any proposed question of law must be proper and satisfy a “qualitative” aspect.

13.2  A question of law may superficially appear to be a question of law, but if it is general and vague and does not identify the issues to be argued, it is inadequate.

13.3  Turning the ultimate conclusion of the Board into question form is not a proper question of law.

13.4  A question is not a proper question of law if it fails to identify precisely the point of law involved or any specific legal error or question.

13.5  Whether or not a proposed question is a proper question of law depends on the circumstances of the case.

14.  It follows from the above that an appeal under s.69(1)  IRO should not be approached as though it were a rehearing of the case before the Board.  For example, it is not appropriate to present an appeal on the basis of “facts” which are contrary to the findings which the Board made. If it is said that there is a legally permissible challenge to the facts found by the Board, then the error of law alleged should be clearly identified, for example, that there was no evidence to support a particular finding.  It is not appropriate to frame questions of law on the premise of facts which were not found, or indeed which are contrary to the facts which were found, or the undisputed evidence. 

D.  THE PROPOSED GROUNDS OF APPEAL

D1.  Proposed Ground 1

15.  The Taxpayer’s first proposed ground of appeal is as follows.

“Whether the majority of the Board erred in mis-applying the principles ascertaining the locality of profits established in CIR v Hang Seng Bank [1991] 1 AC 306 and ING Baring Securities (Hong Kong)  Ltd v CIR (2007)  10 HKCFAR 417 by finding that the [Taxpayer’s] profits arose in or derived from Hong Kong within the meaning of s.14 notwithstanding that: (1)  the [Taxpayer] purchased and retained legal title to the raw material inputs throughout the manufacturing process; (2)  manufacturing took place entirely on the Mainland through BXL under the direction of the [Taxpayer]; (3)  the so-called “Purchase Orders” issued by the [Taxpayer] to BXL were, in substance and reality, invoices for a processing fee and did not constitute a sale and purchase of the Products between BXL and the [Taxpayer]; and (4)  the [Taxpayer] effected sales of Products to customers at least in part in the Mainland, and not in Hong Kong, such that there was no basis for the majority of the Board to conclude that profits arising from those transactions were entirely Hong Kong source.”

16.  I do not accept this as a proper question of law.  The question is an attempt to challenge the Board’s findings of fact.

17.  Before the Board, the Taxpayer’s argument[3] was that the Taxpayer was in fact a manufacturer, not a trader.  It argued that it was the manufacturer of its products, and that it was not the case that there was any acquisition of products from BXL.  It was said that BXL was only the Taxpayer’s agent in carrying out cutting and sewing services.  The Taxpayer sought to argue that it was the manufacturer so that it could say that the manufacturing operations conducted by BXL in the mainland were the Taxpayer’s profit-producing activities.  However, the Board’s findings were that the Taxpayer was in fact a trader, and that its profit-producing activities were the sale of the finished products to its buyers; the manufacturing activities on the mainland were merely antecedent or incidental to such activities: Decision paragraphs 106 to 109.

18.  There was plainly evidence to support these findings.  In paragraph 92 of the Decision, the Board referred to a number of pieces of evidence, including the evidence of Ms Ho (the Taxpayer’s director)  that (inter alia)  the purchase orders placed by the Taxpayer with BXL represented real trading between the two companies on a principal-to-principal basis, and that BXL had its own employees and made its own profits, which profits were separate from those of the Taxpayer arising from the sale of products.  Furthermore, in paragraph 96 of the Decision, the Board referred to contemporaneous documents, such as BXL’s audited statements and the sample transaction documentation, which were consistent with Ms Ho’s admissions.

19.  For the Taxpayer now to raise points (1), (2), (3)  and (4)  under Proposed Ground 1 is an attempt to ask the Board to re-weigh selected pieces of the evidence and arrive at different findings of fact, which is not a proper question of law.  Moreover:

19.1  point (3)  is not even an item of evidence, but merely the Taxpayer’s submissions as to the evidence, which submissions the Board rejected and which are inconsistent with the Board’s finding of fact that there were sales and purchases of products between the Taxpayer and BXL.  With respect, it is inappropriate to frame a question of law on the premise of a “fact” which is not a fact found by the Board, and in fact contrary to the facts found by the Board.  This is particularly so when no challenge to those facts has been properly raised (for example, to say that there was no evidence to support the making of such findings of fact).  Mr Mariani submitted that Proposed Ground 1 implicitly challenges the Board’s finding as a perverse one.  It was pointed out that such a challenge was not raised on the face of Proposed Ground 1.  Mr Mariani indicated that he was prepared to make an amendment, but ultimately no application to amend was made. In the circumstances, I do not consider that any issue of perversity has been properly raised or identified.  As Mr Lincoln Cheung, counsel for the Commissioner, submitted, the grounds for the allegation of perversity have not been identified (given that there was evidence to justify the Board’s findings that the Taxpayer was in fact trading with BXL), so that no error of law has been identified.  What the Taxpayer seeks to do is to persuade the court to arrive at a different view of the evidence from the Board; this does not amount to a complaint that the Board was perverse in its conclusion;

19.2  point (4)  is also contrary to the facts found by the Board.  The majority of the Board found (Decision paragraph 109)  that there was no dispute that the Taxpayer’s sale of products were transactions which took place in Hong Kong.  The relevant evidence was set out in that paragraph.  The remaining member of the Board did not dissent on this point. In the circumstances, no basis has been identified for the re-opening of this finding of fact as an error of law.  To be fair, the Taxpayer does not expressly seek to re-open this finding of fact – but that precisely illustrates the problem about Proposed Ground 1: it frames a question of law premised on points which are contrary to the Board’s findings of fact, but which are simply asserted as if they were correct, ignoring the Board’s findings of fact to the contrary, and without seeking to challenge those findings on a basis which is properly identified and which is allowed as a matter of principle.  Yet it is apparent from the Taxpayer’s skeleton[4] that what is intended on appeal is to advance arguments to challenge the Board’s finding of fact that the Taxpayer’s sales were effected in Hong Kong, by reference to selected items of the evidence. This would not be a proper question of law, and it should not be allowed to be raised via a back door by being implicitly subsumed in Proposed Ground 1.

20.  The Taxpayer submitted that the Board was perverse to have found that it was a trader.

20.1  Again, this is not raised on the face of Proposed Ground 1. The grounds for the allegation of perversity have not been identified, so that no error of law has been identified.  As is apparent from the skeleton,[5] what the Taxpayer seeks to do is to persuade the court to arrive at a different view of the evidence from the Board, based on a selection of the evidence and a re-weighing of such evidence; this does not amount to a complaint that the Board was perverse in its conclusion.

20.2  In any event, as already referred to above, it is not a proper question of law to say that the Board reached a perverse conclusion in the light of certain alleged “facts”, when those alleged facts were contrary to the facts found by the Board.

21.  The Taxpayer submitted[6] that the Board misapplied the authorities, when in fact the correct position under ING Baring Securities (Hong Kong)  Ltd v CIR (2007)  10 HKCFAR 417 is (it is said)  that a person A may carry on its trade or business through the operations of another person B notwithstanding that B is not the agent of A in law, and the locality of the profits of the business will be where B carries out its operations on behalf of A.[7]  It is said that accordingly, the Board’s finding that BXL was not the Taxpayer’s agent was irrelevant.

22.  However, the Board’s view as to the source of the Taxpayer’s profits did not turn on whether BXL was the Taxpayer’s agent: see Decision paragraph 106.  No question of law therefore arises on this point.

23.  As Mr Cheung pointed out, the crux of the issue is what the profit-producing activities of the Taxpayer were.  If such activities did not include what the “agent” did, then whether or not the “agent” was in fact the taxpayer’s agent is irrelevant.

D2.  Proposed Ground 2

24.  The Taxpayer’s second proposed ground of appeal is as follows.

“Whether the majority of the Board erred by in effect concluding that the question of the locality of the [Taxpayer’s] profits was binary – that is, either they were wholly taxable in Hong Kong or wholly exempt from tax – when: (1)  the decision of the Privy Council in Hang Seng Bank stipulated that the apportionment of profits between jurisdictions (albeit not necessarily on a 50:50 basis)  is required in appropriate cases – that is, where profits arise in multiple localities; and (2)  persuasive authority in common law jurisdictions with a territorial tax code suggested that the proper basis of apportionment should be the degree of value-addition in each jurisdiction.”

25.  I do not accept this as a proper question of law.  It does not arise from the Decision.  It is unarguable.

26.  Nowhere did the Board express a view that the Taxpayer’s profits could only either be wholly taxable in Hong Kong or wholly exempt from tax; or, in other words, that apportionment was not possible.  On the contrary, as Mr Cheung pointed out in the Commissioner’s Statement opposing the grant of leave, the Board (at Decision paragraph 46)  referred specifically to Lord Bridge’s judgment in Hang Seng Bank, which highlighted the possibility of the need for apportionment according to the locality of a taxpayer’s profits.  Furthermore, at paragraphs 25 to 29, the Board noted that (1)  the Taxpayer’s original case was that the profits attributable to the manufacturing activities of BXL should be apportioned on a 50:50 basis; (2)  it was only in the Taxpayer’s opening that it was suggested for the first time that the Board should make a de novo apportionment; (3)  the request to take this new argument was refused under s.66(3)  IRO as the matter had not been raised in the notice of appeal, and to raise it then would cause the Commissioner prejudice; (4)  nevertheless, the Board did not rule out the possibility of remitting the issue of apportionment to the Commissioner if it saw fit to do so.  The Board was clearly alive to the possibility of apportionment.

27.  Mr Mariani’s response[8] was that in fact, the complaint was not that the Board was not aware that there could be apportionment, but rather, that the Board did not carry out an apportionment, which “in effect” amounted to a holding that the locality of the Taxpayer’s profits could only either be wholly taxable in Hong Kong or wholly exempt from tax.  With respect, this simply does not follow.  The Board’s findings were that the Taxpayer’s profits were sourced in Hong Kong; therefore, no issue of apportionment arose (whether in accordance with the Commissioner’s concessions under DIPN 21 or otherwise).  It is turning the matter on its head to say that since the Board did not conduct an apportionment, therefore, the Board must have impermissibly held that the Taxpayer’s profits could only either be wholly taxable in Hong Kong or wholly exempt from tax.

28.  There is also a complaint[9] that the Board unfairly disallowed the Taxpayer’s application to run an alternative case of apportionment (alternative to its original case that there should be 50:50 apportionment). The complaint is not raised in the Proposed Ground 2 and therefore does not give rise to any question of law.  In any event, the Board’s reasons for refusing to give leave to the Taxpayer to run a new case on apportionment were set out in paragraphs 26 to 29 of the Decision, and no error of law in this reasoning has been identified.  The Taxpayer complains that it raised its new case late only because the Commissioner ambushed it by his written submissions, a week before the hearing before the Board, which stated that as DIPN 21 did not have the force of law, it was therefore irrelevant to the appeal.[10]  With respect, this submission can hardly have been a surprising one.  The DIPNs all state on their face that they contain the Inland Revenue Department’s own interpretation and practices, and remind taxpayers that their rights of objection and appeal are not affected by the application of the notes.  It is also well established that it is incumbent on a taxpayer who wishes to raise a case of apportionment to formulate the basis for apportionment, and to establish the basis (in fact and in law)  for it (see eg. D24/06 (2006-07)  21 IRBRD 461 at [39], [65]), so that the Taxpayer should have raised all alternative cases of apportionment which it might have wished to rely on.

29.  Mr Mariani submitted that leave should be given for the Proposed Ground 2 as not only is it arguable, but also because it would be in the interests of justice to hear the appeal.  However, s.69(3)(e)  IRO provides that leave must not be granted unless the court is satisfied both that a question of law is involved, and that either the proposed appeal has a reasonable prospect of success or that there is some other reason in the interests of justice why the proposed appeal should be heard.  In other words, if no question of law arises, it is insufficient to say that the appeal is arguable or that it is in the interests of justice to hear the appeal.  For completeness however, I will briefly deal with Mr Mariani’s submission that it would be in the interests of justice to hear the appeal on the Proposed Ground 2.  He submitted that he was not aware of any binding authority as to the application of apportionment, and that he was aware of other taxpayers being in a similar position to the Taxpayer in having relied on DIPN 21.  However, even if it were the case that there is a “lacuna” in the law and that there are other taxpayers in the same position as the Taxpayer, this could not be a sufficient reason to give leave for Proposed Ground 2, which proceeds on a mischaracterisation of the Decision, to be argued on appeal.

D3.  Proposed Ground 3

30.  The Taxpayer’s third proposed ground of appeal is as follows.

“Whether the majority of the Board erred by holding that it did not have jurisdiction to require the Commissioner to comply with the terms of the 50:50 Apportionment regime in DIPN 21 by remitting the matter back to him with its opinion thereon and, by extension, whether the Board erred by declining to remit the matter back to the Commissioner with its opinion that he should apply the 50:50 Apportionment regime to the [Taxpayer] for the Relevant Period in a manner consistent with DIPN 21, as it then appeared.”

31.  The Taxpayer acknowledges that this proposed ground is not necessary for it to succeed in its appeal.[11]  A question which is academic to the outcome of an appeal is not a proper question of law: Honorcan Ltd v Inland Revenue Board of Review [2010] 5 HKLRD 378 at [50] (Fok J, as he then was).  On this basis alone, the proposed ground of appeal does not give rise to any question of law.

32.  The proposed ground also does not arise given that, as already referred to above, the Board’s findings (to which no valid challenge has been raised)  were that the Taxpayer’s profits were sourced in Hong Kong; therefore, no issue of apportionment arose, whether in accordance with the Commissioner’s concessions under DIPN 21 or otherwise.  The question[12] of whether the Board had the jurisdiction under s.68(8)(a)  to dispose of the Taxpayer’s appeal by expressing an opinion that the Commissioner should abide by DIPN 21 and without the Board itself making any pronouncement on the correctness of the assessment is therefore a purely hypothetical one.

33.  Moreover, the proposed ground is unarguable.  Before the Board, the Taxpayer had argued that it had a legitimate expectation that it would continue to enjoy an offshore concession, and the Commissioner was precluded from acting against this expectation.  The Board had held that it did not have jurisdiction to determine a challenge based on legitimate expectation, which was tantamount to an exercise of the jurisdiction of the Court of First Instance to conduct a judicial review based on doctrines of administrative law.[13]  In his oral reply submissions, Mr Mariani submitted that he was not arguing that the Taxpayer had a legitimate expectation or that the Commissioner had abused his powers (having earlier acknowledged that the judicial review jurisdiction was for the Court of First Instance rather than the Board).  Rather, the argument was that the Commissioner’s concession as to 50:50 apportionment in DIPN 21 was a matter that the Board could take into account.  When pressed as to the basis for the argument that the Board should compel the Commissioner to give the concession to a taxpayer, given that neither legitimate expectation nor abuse of power was being relied upon, given the acceptance that the Board did not exercise a jurisdiction of judicial review, and given the acceptance that DIPN 21 did not have the force of law, Mr Mariani submitted that the DIPN concession had been set out in the Commissioner’s determination (under s.64(4)  IRO), which was “akin to pleadings”, and the Commissioner should be held to his pleadings just like in any other civil litigation.  However, an appeal to the Board is an appeal against an assessment, and not the Commissioner’s determination: see s.68(4)  IRO.  On hearing an appeal under s.68, the Board considers the matter de novo: Shui On Credit Co Ltd v Commissioner of Inland Revenue (2009)  12 HKCFAR 392 at [30].  With respect, I do not understand how the Board’s determination can be treated as “pleadings”, how such “pleadings” can be binding on the Commissioner, or the basis for the Board to hold the Commissioner to such “pleadings”, when the Board’s concern is with the correctness of an assessment – irrespective of the reasoning in the determination.

D4.  Proposed Ground 4

34.  The Taxpayer’s fourth proposed ground of appeal is as follows.

“Did the Board err in concluding that the [Taxpayer] did not have a “relevant interest” in the [Buildings] within the meaning of s.40 in the year of assessment 2010/11 notwithstanding that there was evidence before it that: (1)  the Taxpayer had acquired the buildings that were reconstructed as the [Buildings] pursuant to a documented land swap agreement; (2)  the [Taxpayer] had employed building contractors, corresponded with local authorities, and transacted business as the person responsible for the construction and maintenance of the Buildings prior to that year of assessment; and (3)  the Commissioner accepted that the [Taxpayer] was entitled to annual IBAs for the year of assessment 2011/12, and, it should have flowed, the interest that the [Taxpayer] had in the Buildings at that point in time must have been the same interest it had in the [Buildings] when it first incurred capital expenditure on their construction.”

35.  This ground of appeal concerns the Taxpayer’s claim for an annual IBA for the year of assessment 2010/11 in relation to the Buildings.

36.  In order for a taxpayer to claim an annual IBA in relation to an industrial building in any one year of assessment, he needs to be entitled to “the relevant interest” in the building at the end of the basis period of the year of assessment: s.34(2)  IRO.  By virtue of the definition of “relevant interest” in s.40 IRO, what is required in order to make the claim is that the taxpayer’s interest in the building be the same as that of the person who incurred the expenditure on the construction of the building at the time when he incurred it.

37.  The Board held that the Taxpayer failed to discharge its burden to show that it had the relevant interest in the Buildings in the year of assessment 2010/11.[14]  The Real Estate Certificate showed that the Taxpayer had the right to use the Buildings.  However, it was dated 27^th April 2011, and therefore could not support the Taxpayer’s claim to being entitled to the relevant interest in the earlier year of assessment 2010/11.

38.  As the Board explained in Decision paragraph 158, the question as to when the Taxpayer became entitled to the Buildings is a matter of PRC law, as the Buildings are located in the mainland. This was not disputed by the Taxpayer before the Board.

39.  The Board considered that no weight could be placed on the PRC legal opinion adduced by the Taxpayer in support of its claim that it was entitled to an interest in the Buildings at an earlier time.  There is no challenge to this.  Instead, the Taxpayer says that there was other evidence to show that the Taxpayer had the relevant interest in the Buildings from around 2007, in that:

39.1  the Taxpayer had acquired the Buildings pursuant to a land swap agreement with certain mainland companies in 2007 (“the Swap Agreement”);

39.2  the Taxpayer instructed building contractors to carry out works and correspondence with local authorities in the capacity of the person responsible for construction;

39.3  the Taxpayer was allowed to claim an annual IBA for the year of assessment 2011/12 based on the value of the Buildings stated in the Real Estate Certificate, and the bulk of this expenditure would have been incurred in 2010/11, so it was inconsistent not to have allowed a claim in 2010/11.

40.  The Taxpayer argues that the Board failed to take into account this evidence, and that it should have made a finding that the Taxpayer had the relevant interest in the Buildings from around 2007.

41.  I do not agree that any question of law arises out of this proposed ground of appeal, which in effect seeks to re-weigh the evidence and persuade the court to come to a different finding of fact from the Board.

41.1  As to the first of the Taxpayer’s points above, the legal significance of the Swap Agreement must be a matter of PRC law.  However, the Taxpayer did not adduce any evidence about this.

41.2  As to the second point above, it is unclear what evidence is said to have been overlooked in relation to the Taxpayer’s instruction of contractors and correspondence with local authorities.[15]  Insofar as construction costs relating to the claim for initial IBA for 2010/11 are concerned, the Board considered the evidence advanced by the Taxpayer and came to the view that the Taxpayer failed to discharge its burden to show the actual expenditure incurred by it on the construction costs of the Buildings (Decision paragraphs 163 to 183)  and it is not said that the Board erred in this assessment.

41.3  As to the third point above, whether or not expenditure was incurred in 2010/11, what was lacking before the Board was evidence as to the nature of the Taxpayer’s interest in the Buildings in that year of assessment, so that the Taxpayer failed to establish that it had the “relevant interest” in the Buildings for the purpose of the claim for annual IBA.  Even if the Real Estate Certificate denoted an existing interest for the year of assessment 2011/12,[16] it does not follow that the Taxpayer must have had the same interest in 2010/11.  There was simply a lack of evidence as to the position under PRC law on this point.  Indeed, the Taxpayer’s legal opinion was equivocal as to whether lawful construction of a building might create an interest therein and whether the creation of such an interest might or might not coincide with the date of issue of a real estate certificate: see extract of the opinion cited in Decision paragraph 161(2).

E.   DISPOSITION

42.  I therefore dismiss the Summons.

43.  I further make a costs order nisi that the Taxpayer is to pay the costs of and occasioned by the Summons to the Commissioner.  The Commissioner has already submitted his statement of costs.  The Taxpayer is to lodge and serve its list of objections, if any, within seven days, in bullet point form limited to two pages; the Commissioner has leave to lodge and serve his reply, if any, within five days thereafter, limited to two pages.  The assessment will be made on the papers.