WISE PEARL LTD v. THE COMMISSIONER OF INLAND REVENUE

CAMP 34/2024, [2025] HKCA 596

On Appeal from [2024] HKCFI 439

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 34 OF 2024

(ON AN INTENDED APPEAL FROM HCIA NO. 5/2023)

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BETWEEN

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J U D G M E N T

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The Court:

A. Introduction

1.  By Summons filed on 21 February 2024, the Appellant (“Taxpayer”) applied for the following orders from this Court:

(1) First, leave to appeal the Inland Revenue Board of Review’s (“Board”) decision handed down on 21 June 2023 (“Decision”), which dismissed the Taxpayer’s appeal against the Additional Profits Tax assessments for the years of assessment 2000/01 to 2008/09, 2011/12 and 2012/2013 and the Profit Tax assessments for the years of assessment 2009/10 and 2010/11 (the “Assessments”), and for the Decision to be set aside and the Assessments to “be annulled or reduced or otherwise remitted to the Board with the Court’s directions thereon”.

(2) Second, for the decision of Cheng J (“Judge”) handed down on 8 February 2024 (“Judgment”) [1] which dismissed the Taxpayer’s application for leave to appeal the Decision to be set aside.

2.  Having failed to obtain leave to appeal from the Judge, the Taxpayer renewed its application for leave to appeal to this Court. Having read the materials in the appeal bundle as well as the parties’ written statements lodged pursuant to sections 69(5)(a) and (b) of the Inland Revenue Ordinance (Cap.112) (“IRO”), we consider it appropriate to determine the application on the basis of written materials only without a hearing pursuant to section 69(5)(c)(i) IRO.

A1. Factual Background

3.  This is the undisputed background of the case, as adopted by the Judge in the Decision.

“B1. WPL[2]

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 Taxpayer lodged notices of objection to the Assessments by the assessor, but the Assessments were confirmed by the Commissioner by a determination dated 6 July 2020. The Taxpayer then appealed to the Board.

A2. The Board’s Decision

5.  Before the Board, the Taxpayer raised the following grounds of appeal against the Assessments[3]:

“(1) In relation to its offshore profits claim, WPL contends that:-

(a) WPL’s profits attributable to the manufacturing activities of BXL should be apportioned on a 50:50 basis in accordance with DIPN 21[4] (“Ground 1”);

(b) Further or alternatively, WPL had a legitimate expectation that it was entitled to a 50:50 apportionment of profits as set out in DIPN 21 (“Ground 2”).

(2) in relation to its IBA and CBA claims, WPL challenges the Commissioner’s ruling that (i) there is no evidence to establish that WPL is entitled to the relevant interest as to 30 June 20101 [sic], (ii) the calculation of the IBA and CBA should be based on the Real Estate Certificate; and (iii) the CBA in the year of assessment of 2012/2013 should be granted in respect of the premises used by YBL as well (“Ground 3”).”

6.  By the Decision dated on 21 June 2023, the Board by a majority dismissed all the arguments advanced by the Taxpayer in relation to offshore profits claim. In respect of the IBA and CBA claims, the Board unanimously dismissed all grounds of appeal.

A3. Application before the Judge

7.  By summons dated 21 July 2023, the Taxpayer applied for leave to appeal against the Board’s Decision to the Court of First Instance under section 69(1) IRO which only permits an application on a ground involving a question of law. The Taxpayer put forward four proposed grounds of appeal. In refusing to grant leave to appeal, the Judge decided against the Taxpayer in all four grounds of appeal on the basis that none of them involved a question of law. The Judge’s reasons and observations were set out at the following paragraphs.

“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…

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…

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 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. 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.

…

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.

…

28. There is also a complaint 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…

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.…

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.[5] 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.

…

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. The Real Estate Certificate showed that the Taxpayer had the right to use the Buildings. However, it was dated 27th 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.”

A4. Appeal to this Court

8.  By summons dated 21 February 2024, the Taxpayer renewed its application for leave to appeal against the Board’s Decision. The Taxpayer advanced substantially the same four grounds of appeal in its Statement in support of the present application, save that it has added to Ground 1 a sentence for clarification, which is highlighted in italics later in this Judgment in the section “Analysis”.

9.  On 6 March 2024, the Respondent filed its Statement as to why leave to appeal should not be granted.

B. Deliberation

B1. The applicable principles

10.  An appeal against a Decision of the Board may be made only on a ground involving a question of law: section 69(1) IRO. As per section 69(3)(e) IRO, no leave to appeal will be granted unless the Court is satisfied that a question of law is involved and that the proposed appeal either has a reasonable prospect of success or there is some other reason in the interest of justice why the proposed appeal should be heard.

11.  What constitutes a proper question of law for the purposes of section 69 IRO is explained in China Mobile Hong Kong Co Ltd v Commissioner for Inland Revenue [2018] 2 HKLRD 146 by Chow J (as he then was) at [30]:

“30. As to what would constitute a proper question of law for the purpose of Section 69, I am content to adopt the following principles as formulated by Mr Fung:-

(1) The right of appeal under section 69 is not unqualified and absolute. Any proposed question of law must be proper and satisfy a “qualitative” aspect (see Honorcan Ltd v Inland Revenue Board of Review at [49]-[50]; KWP Quarry Co Ltd v Inland Revenue Board of Review unrep HCAL102/2016, 10 October 2017, at paragraphs 13(1)-(2), per Andrew Chan J).

(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 (see CIR v Inland Revenue Borard of Review (Aspiration) [1989] 2 HKLR 40, 50G-J, 56E and 58E per Barnett J; KWP Quarry Co Ltd at [13(4)].

(3) It is not a proper question of law by turning the ultimate conclusion of the Board into a form of question (see Right Margin Ltd at [12]-[13]).

(4) It is also not a proper question of law if the framed question fails to identify precisely the point of law involved or any specific legal error or question (see Right Margin Ltd at [32], [33] and [36]).

(5) Whether or not a proposed question is a proper question of law depends on the circumstances of the case (see KWP Quarry Co Ltd at [17]-[18]).”

12.  In Commissioner of Inland Revenue v Right Margin Ltd [2017] 5 HKLRD 398 at [10], G Lam J (as he then was) warned against questions of law being put forward as questions of facts in disguise:

“10. It is well-established that attacks on findings of fact only raise questions of law in very limited circumstances, such as where it is said there is no evidence at all to support the finding. 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: Aust-Key Co Ltd v Commissioner of Inland Revenue [2001] 2 HKLRD 275, 281H; Runa Begum v Tower Hamlets London Borough Council [2003] 2 AC 430, §99. In this context, the cautionary notes sounded by Evans LJ in Georgiou v Customs and Excise Commissioners [1996] STC 463, 476 are well worth bearing in mind:

‘It is right, in my judgment, to strike two cautionary notes at this stage. There is a well-recognised need for caution in permitting challenges to findings of fact on the ground that they raise this kind of question of law. That is well seen in arbitration cases and in many others. 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. As this case demonstrates, it is all too easy for the appeals procedure to the High Court to be misused in this way. Secondly, the nature of the factual inquiry 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. The question is not, has the party upon whom rests the burden of proof established on the balance of probabilities the facts upon which he relies, but, was there evidence before the tribunal which was sufficient to support the finding which it made? In other words, was the finding one which the tribunal was entitled to make? Clearly, if there was no evidence, or the evidence was to the contrary effect, the tribunal was not so entitled.’” (emphasis added)

13.  We wish to reiterate there are very limited circumstances in which a party can challenge findings of fact as purported errors of law: Kwong Mile Services Ltd v Commissioner of Inland Revenue (2004) 7 HKCFAR 275 at [31], [34] – [37].

“Basis of intervention in an appeal on law only

31. Appeals from the Board of Review to the courts lie only on questions of law. But intervention in an appeal on law only is not confined to instances in which it is apparent on the face of the record that the determination appealed against resulted from a specifically identifiable error of law. Just because there is no appeal on facts, it does not mean that the appellate court is precluded from detecting and correcting errors of law buried beneath conclusions ostensibly of fact. Sometimes, as Lord Radcliffe put it in Edwards v. Bairstow at p.36, “the true and only reasonable conclusion contradicts” the determination appealed against. If so, the appellate court will assume that the determination resulted from an error of law. And that opens the way for the appellate court to intervene on the ground of an error of law.

…

34. Lord Radcliffe, having noted various ways of putting it, ultimately preferred to put it in terms of the determination appealed against being contradicted by the true and only reasonable conclusion. And I respectfully share that preference. But I of course acknowledge, as he did, that there are other ways of saying the same thing. To impugn a determination by saying that a contrary conclusion is the true and only reasonable one is in substance the same as saying that there was no evidence upon which the impugned determination could be reached. An observation to this effect appears in Viscount Simonds’s speech in Griffiths v. J.P. Harrison (Watford) Ltd [1963] AC 1 at pp.10-11. It is of course well-established that whether there is evidence upon which to find a fact is a question of law. The essence of the exercise was, if I may say so, neatly captured by Nourse J (as he then was) in Cooper v. C&J Clark Ltd [1982] STC 335. Building on the reference in Lord Simon of Glaisdale’s speech in Ransom v. Higgs [1974] 1 WLR 1594 at p.1619 C-D to ‘a ‘no-man’s land’ of fact and degree’, Nourse J said (at p.341d) that the appellate court ‘can only interfere where the degree of fact is so inclined towards one frontier or the other as to lead it to believe that there is only one conclusion to which [the fact-finding tribunal] could reasonably have come.’

35. Yet another way of putting it is to be found in the judgment of the English Court of Appeal in Coker v. Lord Chancellor [2002] IRLR 80 delivered by Lord Phillips of Worth Matravers MR. At p.82 the Master of the Rolls said that an error of law can “consist in a finding of fact which is perverse’.

36. Delivering the judgment of the Court of Appeal in CIR v. Magna Industrial Co Ltd [1997] HKLRD 173, Litton VP (later Mr Justice Litton PJ) said at p.181D that “[t]he words ‘profits arising in or derived from Hong Kong’ in s.14 have a wide meaning and can accommodate a variety of situations in which it could not be said to be wrong to arrive at a conclusion one way or the other”. Mr Kotewall is anxious that we bear that in mind. And I certainly do. Mr Griffiths, on the other hand, is anxious that we also bear in mind – as I certainly also do – what Lord Griffiths said in Lee Ting-sang v. Chung Chi-keung [1990] 1 HKLR 764, an employees’ compensation appeal from Hong Kong to the Privy Council. Delivering their Lordships’ advice, Lord Griffiths said (at p.769F) that “an appellate court must not abdicate its responsibility and it is worth bearing in mind the words with which Lord Radcliffe concluded his speech in Edwards v. Bairstow at pages 38 and 39.” There Lord Radcliffe, dealing with the duty of appellate courts in appeals on law only, said:

‘Their duty is no more than to examine those facts with a decent respect for the tribunal appealed from and if they think that the only reasonable conclusion on the facts is inconsistent with the determination come to, to say so without more ado.’

37. In an appeal on law only the appellate court must bear in mind what scope the circumstances provide for reasonable minds to differ as to the conclusion to be drawn from the primary facts found. If the fact-finding tribunal’s conclusion is a reasonable one, the appellate court cannot disturb that conclusion even if its own preference is for a contrary conclusion. But if the appellate court regards the contrary conclusion as the true and only reasonable one, the appellate court is duty-bound to substitute the contrary conclusion for the one reached by the fact-finding tribunal. The correct approach for the appellate court is composed essentially of the foregoing three propositions. These propositions complement each other, although the understandable tendency is for those attacking the fact-finding tribunal’s conclusion to stress the third one while those defending that conclusion stress the first two.”

B2. Ground 1

14.  Ground 1 states:

“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. And for the avoidance of doubt the specific findings of fact of the majority of the Board that did not take any or all of points (1) – (4) above into account in concluding that the profits of the Appellant were sourced entirely in Hong Kong by reason of all the Appellant’s profit-making operations taking place in Hong Kong were perverse, unreasonable, and/or not grounded in the evidence.”

15.  The Taxpayer contends at para 32 of its Statement that the Judge was “inaccurate” to conclude in [19] of the Judgment that Ground 1 amounts to an attempt to reweigh selected pieces of the evidence that was before the Board. The Taxpayer further contends in the same para that there were evidential factors that were material to the ascertainment of the locality of the profits of the Taxpayer that the Board did not take into account, which it ought to have, and irrelevant factors that it did take into account, when it ought not to have done so. It follows that the findings of fact of the majority of the Board “were perverse and so subject to curial review as though they were errors of law”: para 33 of the Taxpayer’s Statement.

16.  We have given serious consideration to the submissions made by the Taxpayer. Assuming for the sake of argument that the issue of the perversity of certain facts found by the majority of the Board was indeed raised and properly identified in the Taxpayer’s notice of appeal to the Judge, as contended in para 36 of the Statement, Ground 1 is still in essence an appeal against the Board’s findings of facts, however dressed up it may be.

17.  From paras 37 onwards of the Statement, the Taxpayer contends that it was not a “mere merchandise trader” and at para 38, “to characterise it as such would be to disregard the extensive pre-sales operations it conducted. It should have been apparent to the Board on the evidence before it that the profits of WPL arose at least in part from the manufacturing operations it carried on in conjunction with BXL in the Mainland.”

18.  These are criticisms directed at the Board’s findings of fact as to the locality of the Taxpayer’s profits. Ground 1 is evidently an attempt to appeal against the Board’s said findings.

19.  At para 40 of the Statement, the Taxpayer submits that it is critical that the majority of the Board misunderstood the true nature of the documents marked ‘Purchase Orders’ that the Taxpayer issued to BXL. This was an error of law in mistaking form for substance and, to the extent that it was a finding of fact, it was perverse and not grounded in the evidence. The true nature of the ‘Purchase Orders’, as correctly identified by the minority of the Board viz Mr Douglas Clark, was that they were ‘orders’ for the ‘purchase’ of manufacturing/processing services and so amounted to processing fees ie the CMT Fee. This should have been obvious because the CMT Fee in each of the so-called “Purchase Orders” was computed on the basis of the time spent by BXL in sewing ie processing each product and was intended to cover BXL’s processing costs and nothing more. At paras 235 and 236 of Mr Clark’s dissenting decision, he concluded:

“235. It is clear from this that materials were imported for processing, and processed and then exported. That is, the products were produced under a processing contract and were not purchased from BXL.

236. I find as a fact that the products were produced under a processing contract where the raw materials were provided to BXL were processed by BXL which then received a processing fee.”

20.  Essentially, what the Taxpayer seeks to contend is that Mr Clark’s analysis of the evidence is correct and should have been accepted by the Judge as the correct analysis of the evidence. But with respect this is not a question of law.

21.  To conclude, we cannot identify any findings of fact which are so perverse as suggested by the Taxpayer as to constitute a question of law. There is thus no proper basis for the purpose of an appeal under section 69(1) IRO.

B3. Ground 2

22.  Ground 2 states:

“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.”

23.  The Taxpayer states in para 57 of its Statement that Ground 2 involves a question of law because it turns on the true construction of section 14 IRO and the application of the authorities cited in paras 24-28 of its Statement.

24.  The authorities referred to in the Taxpayer’s Statement ie CIR v Hang Seng Bank Ltd [1991] 1 AC 306 etc are elementary. We do not see any mis-interpretation or mis-application of those authorities by the Board or by the Judge as contended.

25.  As the Judge pointed out and we agree, the Board was clearly alive to the possibility of apportionment between on-shore profits (taxable) and off-shore profits (not taxable) and have applied the relevant authorities in coming to this conclusion: see para 26 of the Judgment. As the Board found that the relevant profits were in fact wholly sourced and taxable in Hong Kong, it follows that apportionment was not necessary. There were no issues of law involved, let alone mistakes of law.

B4. Ground 3

26.  Ground 3 states:

“Whether the Majority erred in 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 WPL for the Relevant Period in a manner consistent with DIPN 21, as it then appeared.” (emphasis added)

27.  The Taxpayer’s Statement further elaborates on Ground 3 as follows:

“63. The learned Judge apparently concluded that this Ground is “academic” or “hypothetical”.^[6] In so doing, however, she has misunderstood WPL’s case. Ground 3 was stated not to be necessary for WPL to succeed in its appeal if leave were granted on Ground 1 and/or Ground 2. As leave was not granted on either of those Grounds, it should have been incumbent on the CFI below to consider Ground 3 on its own terms as a self-standing ground of appeal…

64. Ground 3 involves a question of law because it turns on the proper construction of s.68(8)(a) [IRO] and the content of the decision-making power that the Legislature has vested in the Board. As the Board is a statutory semi-judicial body with original jurisdiction to dispose of tax appeals under the IRO, it should be presumed – to the extent there were nothing to the contrary in the IRO – that it is vested with sufficient case management powers to enforce procedural fairness.” (emphasis added)

28.  For ease of reference, section 68(8)(a) IRO is reproduced below:

“68. Hearing and disposal of appeals to the Board of Review:

…

(8)(a) After hearing the appeal, the Board shall confirm, reduce, increase or annul the assessment appealed against or may remit the case to the Commissioner with the opinion of the Board thereon.” (emphasis added)

29.  Mr Mariani for the Taxpayer first asserts as Ground 3 that the majority of the Board had erred in holding that it did not have jurisdiction to require the Commissioner to comply with the terms of the 50:50 Apportionment regime in DIPN21. But as the Judge rightly observed, the Board’s findings were that the Taxpayer’s profits were sourced in Hong Kong. Hence, the issue of apportionment simply did not arise, whether in accordance with the Commissioner’s concessions under DIPN 21 or otherwise. It follows that whether the Board had the jurisdiction under section 68(8)(a) to dispose of the Taxpayer’s appeal by remitting the case back to the Commissioner with an opinion that the Commissioner should abide by DIPN 21 is a purely hypothetical question.

30.  Further, we do not see how Ground 3 turns on the proper construction of section 68(8)(a) IRO at all. That sub-section simply deals with the Board’s powers after hearing the appeal, which are fairly easy to understand: the Board can confirm, reduce, increase or annul the assessment appealed against or may remit the case to the Commissioner with its own opinion. In the present case, the Board had confirmed the Assessments appealed against and did not see fit to remit the case back to the Commissioner. That is clearly permissible under section 68(8)(a).

31.  In this regard, at para 67 of the Taxpayer’s Statement, Mr Mariani submits that by reason of the disjunctive “or” in section 68(8)(a), remission to the Commissioner with the Board’s opinion is an alternative to confirming, reducing, increasing, or annulling the assessment(s) in question. It must follow that those words impute some decision-making power other than confirming or remaking the disputed assessment(s); otherwise, they would be otiose.

32.  We are prepared to accept that remission to the Commissioner with the Board's opinion is an alternative to confirming etc the Assessments in question. But since the Board has already confirmed the Assessments, rightly so in our view, it was unnecessary to exercise its alternative power of remitting the case back to the Commissioner with the Board's opinion.

33.  Lastly, Mr Mariani asserts that the Judge had misunderstood the Taxpayer’s case. We do not agree.

34.  As noted by the Judge, the Taxpayer did unequivocally acknowledge at para 36 of its Statement dated 21 July 2023 that this proposed Ground 3 was not strictly necessary for the Taxpayer to succeed in its substantive appeal, which was comprised in Grounds 1 and 2. That being the case, the Judge was clearly right to hold that 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).

B5. Ground 4

35.  Ground 4 states:

“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 followed, 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.”

36.  The Taxpayer contends that there is a question of law in Ground 4 and, in the Taxpayer’s Statement, Mr Mariani gives his reasons as follows:

“78. Ground 4 is concerned with the IBA capital allowances regime and whether WPL was entitled to claim an annual IBA deduction under s.18F for the year of assessment 2010/11. Section 34 requires that a person have a “relevant interest” in an industrial building to claim annual IBAs. The term “relevant interest” is defined in s. 40 as the same interest in the building that the person that incurred the capital expenditure on its construction had. Thus, Ground 4 turns on the proper construction of the words “relevant interest” in s. 40 and so involves a question of law.

79. The term “interest” is not defined in the IBA code; however, when read in its context it plainly designates an interest, whether legal or equitable, in rem in the building itself (hence, the words “in that building or structure” as distinct from a right to use or access the building or structure).

…

81. It was not disputed that the Factories[7] were industrial buildings for the purposes of the IBA code. The Board, however, concluded that WPL acquired an interest in the Factories from the date of issue of the Mainland Real Estate Certificate (the "REC"), namely 27 April 2011 (i.e., from the year of assessment 2011/12), and not before. In so doing, it held that WPL did not have a “relevant interest” in the Factories in the year of assessment 2010/11 and was therefore ineligible to claim annual IBAs for that period.

82. Both the Commissioner and the Board accepted that the value of the Factories stated in the REC reflected expenditure incurred in their construction and was therefore capital expenditure eligible to be written down as annual IBAs. On that basis, the Board allowed WPL an annual IBA deduction for the year of assessment 2011/12.

83. Ground 4 is not about the quantum of construction expenditure. WPL’s position on Ground 4 is that allowing annual IBAs for the year of assessment 2011/12 but disallowing them for 2010/11 (irrespective of quantum) was logically unsound and internally contradictory. The Board’s failure to give adequate reasons for this inconsistency or for its conclusion that the REC created an interest in the Factories is, in and of itself, an error of law and therefore sufficient basis for a ground of appeal (Welltus Ltd v Fornton Knitting Co Ltd [2013] 5 HKC 106 (CA) at §§19-25).

84. That is because any expenditure on the construction of the Factories must have been incurred prior to the issuance of the REC; otherwise, the REC could not have contained a meaningful valuation of the Factories. It was not disputed that the construction of the Factories was completed in the year of assessment 2010/11, at which time the evidence showed that the bulk of capital expenditure on construction had already been incurred.” (emphasis added)

37.  Sections 18F(1), 34(2)(a) and 40 of the IRO state as follows.

“18F. Adjustment of assessable profits

(1) The amount of assessable profits for any year of assessment of a person chargeable to tax under this Part shall be …decreased by the allowances[8] made to that person under Part 6 for that year of assessment to the extent to which the relevant assets are used in the production of the assessable profits.

…

34. Initial and annual allowances, industrial buildings and structures

(2)(a) Where any person is, at the end of the basis period for any year of assessment, entitled to an interest in a building or structure which is an industrial building or structure and where that interest is the relevant interest in relation to the capital expenditure incurred on the construction of that building or structure, an allowance for depreciation by wear and tear, to be known as an “annual allowance”, of an amount equal to, subject to paragraphs (b), (ba) and (bb), one-twenty-fifth of that expenditure, is to be made to him for that year of assessment.

…

40. Interpretation

relevant interest (有關權益) means, in relation to any expenditure incurred on the construction of a building or structure the interest in that building or structure to which the person who incurred the expenditure was entitled when he incurred it…” (emphasis added)

38.  As can be seen from the above, in order to claim an annual IBA for an industrial building in any year of assessment, a taxpayer needs to be entitled to “the relevant interest” in the building at the end of the basis period of the year of assessment: section 34(2)(a) IRO.

39.  Section 40 IRO defines “relevant interest” to mean, in relation to any expenditure incurred on the construction of a building, the interest in that building to which the person who incurred the expenditure was entitled when he incurred it. In other words, the taxpayer’s interest in the building should be the same as the interest of the person who incurred the expenditure on the construction of that building, at the time when he incurred it.

40.  As submitted by Mr Cheung for CIR, the essence of the Taxpayer’s argument is that it had already incurred construction expenditure on the Buildings prior to the issuance of the Real Estate Certificate (“REC”) dated 27 April 2011. Hence, when the Board allowed the Taxpayer’s claim for annual IBA for the year of assessment 2011/12, the Board should also have made a finding that the Taxpayer had the relevant interest in the Buildings for the year of assessment 2010/11 and should have allowed the Taxpayer’s claim for annual IBA for the year of assessment 2010/11. In effect, the Taxpayer is asking the court to re-weigh the factual evidence and to reach a different finding of facts from the Board, as pointed out by the Judge at para 41 of the Judgment.

41.  Mr Cheung submits in CIR’s Statement that, in the Decision at paras 156 - 162, the Board, after referring to the evidence relied upon by the Taxpayer in para 157 ie the Swap Agreement dated 17 August 2007, the Application Form of Initial Registration of Property dated 13 December 2010, as well as the opinion evidence of Ms Gong (on PRC law), unanimously held that the Taxpayer had failed to discharge its burden to show that it had the “relevant interest” in the Buildings in the year of assessment 2010/11. In particular, the Board had rejected, for reasons given in para 161, the PRC legal opinion evidence of Ms Gong as lacking in substance and no weight could be given to it.

42.  In this regard, it is pertinent to note that under section 68(4) IRO, the onus of proving that the assessment appealed against is excessive or incorrect shall be on the appellant i.e. the Taxpayer in this case. Since it was accepted by the Taxpayer’s representative before the Board that the question as to when the Taxpayer became entitled to the Buildings was a matter of PRC law, the rejection of Ms Gong’s PRC legal opinion evidence meant the Taxpayer had failed to discharge its burden under section 68(4) IRO.

43.  We find it difficult to see how Ground 4 turns on the “proper construction” of the words “relevant interest” in section 40 and thus involves a question of law. This is because (i) the term “relevant interest” is clearly defined under section 40 IRO, (ii) it is accepted by Mr Mariani in para 79 of the Taxpayer’s Statement that the term “interest” designates an interest in rem (legal or equitable) but excludes a right to use or access the Buildings, and (iii) the Board’s findings of fact that the Taxpayer did not have the “relevant interest” in the Buildings in the year of assessment 2010/11, as opposed to subsequent years. It is a complete non sequitur for the Taxpayer to contend at para 86 of the Taxpayer’s Statement that since the Board had allowed the annual IBA claim for the year of assessment 2011/12, the upholding of the annual IBA claim for the earlier year 2010/11 would be a necessary corollary finding. In this Court’s view, that simply does not follow: it all depends on the evidence available to the Board.

44.  As also noted by the Judge at para 37 of the Judgment, the REC only showed that the Taxpayer had the right to use the Buildings. Thus, on Mr Mariani’s concession that the “relevant interest” does not include a right to use the Buildings, the REC could not support the Taxpayer’s claim to being entitled to the “relevant interest” in the earlier year of assessment 2010/11. But even without Mr Mariani’s concession, whatever evidential value the REC could provide to the Taxpayer in this regard and whatever interest it denoted that the Taxpayer might have in the Buildings, it was dated 27 April 2011, the REC could not support the Taxpayer’s claim for annual IBA in the earlier year of assessment 2010/11.

45.  Lastly, Welltus Ltd v Fornton Knitting Co Ltd does not assist the Taxpayer. Mr Cheung does not dispute that adequate reasons must be given by the Board for its Decision. However, in this Court’s view, there were in fact adequate reasons given by the Board in support of its Decision: see Section G of the Decision.

46.  In our view, this ground of appeal does not involve any proper question of law and must be rejected.

Disposition and costs order nisi

47.  For the above reasons, the Appellant/Taxpayer’s application for leave to appeal is dismissed.

48.  As this application is wholly without merits, pursuant to section 69(5)(f)(ii) of IRO (alternatively RHC O 59 r 2A(8)), we further order that no party may request under section 69(5)(e) of IRO (alternatively RHC O 59 r 2A(7)) that the present determination be reconsidered at an oral hearing inter partes.

49.  Costs should follow the event. The Respondent shall have its costs, to be summarily assessed if not agreed and paid by the Appellant/Taxpayer forthwith, certificate for counsel. The Respondent is directed to file and serve a statement of costs within 7 days from the date of this Order. The Appellant/Taxpayer is directed to file and serve a statement of opposition within 7 days thereafter.