CHIA TAI CONTI-HONG KONG LTD. v. COMMISSIONER OF INLAND REVENUE

HCAL105/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO.105 OF 2004

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J U D G M E N T

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1. On the day of hearing the application, I have dismissed the same with costs to the respondent.  The followings are my reasons for doing so.

Background

2. The plaintiff is 100% owned by its holdings company.  It buys raw materials from suppliers and sells the same to Sino Bermuda at a marked up price of 0.75%.  Sino Bermuda is also 100% owned by the parent Holdings company.

3. Sino Bermuda then sells the raw materials to Mainland manufacturing companies including CTC-SZ, a Shen Zhen company at a profit.  All these companies are within the CTC Group.

4. The aforesaid arrangement was a replacement of a Hong Kong company within the group called Sino Agritrade which reported its profits in Hong Kong when its business activities were conducted outside Hong Kong.

5. In February 2000 an assessor of IRD one Ms Lam Wai Hing was assigned to conduct a tax audit of the applicant and CTC International Holdings Ltd.  During the course of the tax audit through 2001, the assessor noted that over the period from 1988 to 1999, the assessable profits of the applicant together with the assessable profits of other companies within the group fell substantially from about $29 million to $2.7 million.

6. The assessor formed the view that the commencement of business by Sino Bermuda was a key to this substantial reduction in assessable profits.  The assessor noted that the applicant recorded substantial inter-company sales to Sino Bermuda.  The balance of the applicant’s current account with Sino Bermuda was then reduced by transferring a substantial sum to the current account of another company within the group, i.e. CTC International Holdings Ltd.

7. Further information was required in respect of these transactions.  On 27 March 2002, additional assessments were issued to the applicant and Holdings for additional tax assessed for the year 1995/96.  Otherwise the six years time limit for raising additional assessment would expire.

8. Additional assessments were issued to the following companies :

(1)	Sino Bermuda;
(2)	the applicant as agent for Sino Bermuda; and
(3)	Holdings as agent for Sino Bermuda;

all pursuant to section 20(2) of the Inland Revenue Ordinance.

9. They were protective assessments in order to preserve the Commissioner’s position whilst further information would have to be obtained to finalise the investigation.

10. The applicant’s accountants objected to all assessments and asked for unconditional holdover.  At that time the information was incomplete and the Commissioner therefore agreed to hold over the tax unconditionally.

11. In the same month of 2002, the assessor asked for further information.  Subsequently up to August 2002, the accountants provided further information and documents.

12. On 28 March 2003, original and additional assessments were issued to the following five companies, namely :

(1)	the applicant;
(2)	Holdings;
(3)	Sino Bermuda;
(4)	the applicant as agent for Sino Bermuda; and
(5)	Holdings as agent for Sino Bermuda in the alternative for 1996/97.

These were protective assessments, as the tax was assessed on the gross profit of Sino Bermuda shown in its audited financial statements as the equivalent of HK$70,000,000 in RMB.  The tax assessed was $11,550,000.

13. The accountants objected on the ground that the profits assessed were excessive since either the respective companies did not carry on business in Hong Kong or they were not assessed in accordance with the profits reported by the company.  They asked for a complete and unconditional holdover.

14. The assessor considered the request in light of Department Interpretation and Practice Notes (“DIPN”) No.6 and because she was of the view that the objection should not be allowed forthwith, she recommended to her Senior Assessor that the holdover should not be complete and unconditional.  Accordingly, the Commissioner ordered that the tax of $4,000,000 would be held over on condition that a TRC was bought and the balance sum of $7,550,000 was held over unconditionally and issued a notice dated 15 May 2003 to the applicant to that effect.  As the assessments were in the alternative, the Commissioner granted a complete and unconditional hold over in respect of the other four notices of additional assessment.

15. The applicant purchased the TRC on 16 May 2003 as directed by the Commissioner.

16. Earlier on 26 March 2003, the assessor asked Holdings for more information concerning Sino Bermuda.  The accountants provided the information six months later, in September 2003.

17. Again by 25 March 2004, original and additional assessments were issued again to the aforesaid five companies for 1997/98.  Again, these were protective assessments and were based on the profits of Sino Bermuda in the equivalent of HK$75 million in RMB.  The tax assessed was $11,137,501.

18. On 15 April 2004, the accountants objected to the assessment on the ground that the profits assessed were excessive since either respective companies did not carry on business in Hong Kong or they were not assessed in accordance with the profits reported by the company.  They also asked for a complete and unconditional holdover.

19. The assessor considered the request in light of DIPN No.6 and because she was of the view that the objection should not be allowed forthwith, she recommended to her senior assessor that the holdover should not be complete and unconditional.  Accordingly, the Commissioner ordered that tax of $10.7 million should be held over on condition that a TRC for that amount was bought and the balance of $437,501 was held over unconditionally.  A notice dated 30 April 2004 was issued to that effect to the applicant.

20. On 10 May 2004 the accountants asked the Commissioner to reconsider.  Upon reconsideration and in particular, certain deductions were allowed and as a result the tax were reduced to $10.2 million.  On 11 May 2004, a second holdover notice was issued requiring the applicant to buy a TRC in the sum of $10.2 million.

21. On 13 May 2004 the accountants raised the query about the exchange rate used for conversion from RMB to Hong Kong dollar.  Upon review the assessor noticed a mistake in the conversion and a third holdover notice was issued with further reduction in the tax.  The applicant was required a TRC in the sum of $8.9 million.

22. This notice is now the subject of this judicial review.

23. It should also be noted that earlier on 5 May 2004, the first assessor asked the accountant of Holdings for information and that information was only provided nearly 10 months later in mid to late January 2005.  The IRD is now preparing a draft statement of facts in respect of the various objections for consideration by the Commissioner.

THE GROUNDS OF THIS APPLICATION

24. The applicant put forward Grounds A to I for the application and I shall analyse them in detail hereinbelow.

Ground A — The objection is meritorious and the demand to purchase TRC is unreasonable

25. The applicant submitted that the objections raised were genuine disputes and they were meritorious.  However, the determination of the objection is a matter for the Commissioner and on appeal, the Broad Review.  It is not the function of the court in a judicial review to deal with the objection itself, and this contention was acknowledged by the applicant.  The decision under review is the Commissioner’s assessment of the chances of success of the objection.  The court in judicial review has only a limited supervisory role to play and it would be “… a wrongful usurpation of power by the judiciary to substitute its view …” of the chances of success, see Tran Van Tien & Ors. v. Director of Immigration & Anor [1997] HKLRD 183 at p.189F-191F.   The applicant’s contentions were considered by the assessors.  Having taken them into account and after reviewing the extensive documents provided in 21 boxes, the respondent’s decision is that it is not immediately apparent that the objection should be allowed forthwith.  The assessors considered there was evidence to the contrary.

26. I cannot see any unreasonableness in the context of Wednesbury unreasonableness.  It would be a wrongful usurpation of the power of the Commissioner for the court to substitute its own view.

Ground B — The CTC-HK did not receive the profits in question

27. The applicant further submitted that it did not receive the profits.  However, the respondent did not accept that claim and has made an assessment under section 61A.  It is a reasoned decision based on available evidence.

Is the decision unreasonable?

28. The applicant submitted that the profits generated by Sino Bermuda are made offshore and paid into its bank account.  However, by operation of section 61A(2)(a), that is irrelevant, the effect of which is to assess those profits as if the sales and purchases between the applicant and Sino Bermuda had not been entered into or carried out.  Prior to 31 December 1994, Sino Agritrade purchased raw materials for resale to the Mainland companies.  The arrangement between the applicant and Sino Bermuda replaced Sino Agritrade in respect of procuring raw materials.  However, when it was operating and before the arrangement between the applicant and Sino Bermuda, Sino Agritrade paid tax in Hong Kong.  This is an indication that the purpose of the arrangement is to avoid that tax.  I cannot see any unreasonableness in that decision.

Ground C — The policy set out in DIPN No.6 is unreasonable

29. The short answer to this ground is that no leave has ever been given in the original application and this is a new ground.  It is therefore not for this court to determine whether the policy is a reasonable one or not in this judicial review.

Ground D — Undue delay re investigation and audit

30. I accept the respondent’s submission that there has not been any delay on the part of the respondent.  The applicant’s primary submission is that there has been delay because the Field Audit commenced in May 2000.  However, passage of time itself does not indicate delay for delay to be a ground for judicial review must amount to an abuse of power : see Preston v. IRC [1985] 1 AC 835 at 864D-G.

31. It is accepted by both sides that this is a complex case involving a large number of documents in terms of 21 boxes.  After information and documents have been provided, further investigation and requests for information would be required.  The IRD is now at the stage that a statement of facts is being prepared for the Commissioner’s consideration.  I cannot see any undue delay in the investigation and audit on the part of the respondent.

Ground E — Delay by the Commissioner to issue determination

32. There was the further complaint that there was delay in respect of the Commissioner’s determination of objections.  In fact as at the date of the decision now under review, the applicant itself required a total of more than 20 months in order to respond to requests for documents and information.  Since then the applicant required further 10 months to respond to the last request for information.

33. In any event the time taken for an investigation is irrelevant to the time taken for determination of an objection for the reason that the time for determination of an objection only begins to run once the objection has been made.  Prior to the issue of a notice of assessment or additional assessment, the taxpayer had no liability to tax.  Time can only run after the issue of the notice of assessment and the making of the objection time.  This is recognised by section 64(2) which provides that on receipt of an objection the Commissioner shall consider the objection within a reasonable time.

34. On that basis the objection was received on 15 April 2004 and the first holdover notice was issued on 30 April 2004.  Subsequently it was reviewed and re-issued on 14 May 2004.  There was no unreasonable period of delay at all.

Ground F — No need to require purchase of TRC and no loss to IRD

35. This is a new ground for the Form 86A did not complain that there was no need to require purchase of TRC.  The basis submitted is that there is no loss to the revenue.  However, this must be applicable to all cases but then the legislation must have appreciated that there may be no loss to the revenue and yet it provided in section 71 that the tax shall be paid pending determination of the objection.  It is only if the Commissioner excuses the taxpayer, either conditionally or unconditionally, that the tax need not be paid.  The Commissioner is not obliged to grant a holdover at all and it is a matter within his discretion.  I further accept the submission of counsel for the respondent that the principle to be applied is not similar to the principle applicable to injunction application and therefore the balance of convenience is not the guiding principle.

36. The applicant further asserts that to call for repayment of its account receivables will cause hardship and disruption to its business will be very considerable.  There was however no complaint of hardship made to the Commissioner.  The court therefore should not consider matters which were not put to the decision maker for his consideration and the court can only decide this case on the facts before the Commissioner at the time of his decision.  (See Interasia Bag Manufacturers Ltd v. CIR [2004] HKLRD 881 at para.71.)

37. The applicant requested the court to find that, on the balance of convenience, hardship to the applicant outweighs the possibility of loss to the revenue.  As decided hereinbefore, it is not appropriate for the court to consider the balance of convenience in judicial review.  That is a decision on the merits.

38. In any event the Commissioner does not accept there will be hardship on the applicant’s mere assertion.  The applicant’s accountant had once asked about the provision of a banker’s undertaking in lieu of purchase of TRC.  She was advised that a banker’s undertaking would only be considered if the applicant was in financial difficulties.  The applicant there and then did not pursue this matter any further.

39. The applicant asserted in this application that it is still actively trading and hence there will be no loss to the revenue.  However, during a meeting with assessors on 5 March 2004, the accountant for Holdings said that the applicant had ceased operation and was dormant.

Ground G — The decision of the Commissioner is not bona fide

40. The applicant submitted that the decision was made to apply pressure on the applicant to concede or to settle.  However, this is wholly unsupported by the evidence and it is categorically denied by the respondent.

Ground H — Inconsistency

41. The applicant submitted that the earlier assessments were all held over until the assessments for the year 1996/97 and 1997/98.  The last unconditional holdover was granted on 7 May 2002.

42. However it is quite clear that there is a change of circumstances.  The earlier decisions to hold over unconditionally were made because the assessments were protective.  In respect of 1996/97 and 1997/98, more information and documents were available such that a decision in accordance with DIPN No. 6 could be made.  The information and documents were supplied after 7 May 2002 and they were supplied in response to the requests of the assessor.

43. There was no complaint of inconsistency in respect of the notice of conditional holdover for 1996/97 and the applicant bought the TRC without a complaint regarding consistency or at all.

Ground I — IRD failed to explain why it demanded payment of TRC

44. I accept the respondent’s submission that a decision maker has a duty to give reasons only where :

(1)	the provisions of the relevant ordinance impose a statutory duty to give reasons;
(2)	such a duty can be implied from the provisions of the relevant ordinance; and
(3)	at common law where the requirements of fairness and justice demand that the decision maker should give reasons.

45. Here, the respondent has not established that the applicant’s failure to give reasons was unfair.  The Ordinance does not impose a duty on the Commissioner to give reasons in respect of a decision to hold over tax on condition that the taxpayer purchases a TRC.

46. Such a duty to give reasons does not arise by implication from the statute.

47. One could compare section 71 with a duty to give reasons imposed by section 64(4) in the event the Commissioner fails to agree with an objection to an assessment.   Fairness and justice does not require reasons to be given in respect of such a decision.

48. The applicant or its accountants must have known in any event the reason for the Commissioner’s decision or ought to have known the reason.  The requirement of the purchase of a TRC was because the assessor considered, applying DIPN No.6 that the objection should not be allowed forthwith.

49. During the meeting on 5 March 2004, the assessors made it clear that they would not consider an objection made on the grounds put forward by the applicant’s representatives should be allowed forthwith.

50. Moreover counsel for the respondent submitted that in Barina Corporation Ltd v. Deputy Commissioner of Taxation 16 ATR 336 at p.347, from the Federal Court of Australia, distinguishing Peter Thomas Mahon v. Air New Zealand Ltd & Others (1984) 3 WLR 884, it was held that there is no principle of law that requires a decision-maker to give a person advance notice of a view that the material presented by the person is insufficient to persuade him to exercise his discretion in the person’s favour.  The accountants had asked for an unconditional hold over and given the grounds of the objection.  The assessor was not obliged to give notice that she was not persuaded that the objection should be allowed forthwith.

CONCLUSION

51. For the aforesaid reasons, I had dismissed the application with costs to the respondent.