CANRAY INTERNATIONAL LTD AND OTHERS v. COMMISSIONER OF INLAND REVENUE

HCAL 18/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO 18 OF 2011

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BETWEEN

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J U D G M E NT

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Introduction

1.  On 31 March 2011, the four applicants in these proceedings, Canray International Limited (“A1”), Cashmaster Profits Limited (“A2”), Liang Shing Industries (HK) Limited (“A3”) and Lucky Port Trading Limited (“A4”) (collectively “the Applicants”) sought leave to apply for judicial review against the Commissioner for Inland Revenue (“the Commissioner”) in respect of the conduct of the Inland Revenue Department (“the IRD”) relating to profits tax assessments issued against the Applicants in respect of the 2001/02 through 2004/05 years of assessment.  On 7 April 2011, Andrew Cheung J (as Cheung CJHC then was) granted the leave sought, and on 13 April 2011, the Applicants issued their Originating Summons in these proceedings.

2.  The Applicants are all wholly owned subsidiaries of Symphony Holdings Limited (“Symphony”), a Bermudan company whose shares are listed on the Hong Kong Stock Exchange.  The group of companies of which Symphony is the ultimate holding company is involved in the manufacture and sale of footwear.  A1 and A2 are BVI companies, acquired by the Symphony group in 1997 and 2000 respectively, neither of which is registered in Hong Kong under the Companies Ordinance (Cap 32) or the Business Registration Ordinance (Cap 310). A3 and A4 are Hong Kong companies.

3.  For present purposes, it is to be noted that the manufacture of the footwear products in which the Symphony group deals are carried on primarily at two factories on the Mainland, known as the Xingtaiy and Jingmei factories respectively.  Goods produced by the Xingtaiy factory were sold to A1, which on-sold them under back-to-back contracts to A3, which in turn on-sold the goods to customers in the United States and Europe. In the case of goods produced by the Jingmei factory, a similar chain of transactions was entered into, with A2 and A4 standing in the place of A1 and A3 respectively.

4.  According to the Applicants, A1 and A2’s business consists of ordering goods to be manufactured at the respective factories, and arranging for such goods to be sold to the end customers, and the activities undertaken by A1 and A2 in furtherance of this business (such as research, product development, marketing, production planning and the negotiation and conclusion of sales orders) are carried out not in Hong Kong, but on the Mainland and in Taiwan.  So far as A3 and A4 are concerned, it is said that their business is the provision of administrative support services. The Applicants say that for political, trade and administrative reasons, it was decided to channel sales to the Symphony Group’s customers in the United States and Europe through A3 and A4, in the manner described in the preceding paragraph.  This description of the businesses by the Applicants (and the consequences in taxation terms contended for by them) is, however, not accepted by the Commissioner.

5.  In February 2008, the IRD decided to institute a tax audit in respect of the affairs of the Symphony group.  In March 2008, information was sought in respect of the group’s turnover, cost of sales and before tax profits for the financial year ended 31 December 2001, with a breakdown of such items being requested.

6.  On 28 March 2008, shortly before the expiry of the six year period after which it would no longer be possible to make any assessment to profits tax in respect of the 2001/02 year of assessment, profits tax assessments were issued against the Applicants, as follows:-

(1)  An estimated assessment was raised against A1 (relying on section 14, the proviso to section 59(1), sections 59(3) and 61A of the Inland Revenue Ordinance (Cap 112) (“the Ordinance”)), in the amount of HK$9,280,000;

(2)  An estimated assessment was raised against A2 (relying on the same statutory provisions), in the amount of HK$4,800,000;

(3)  An assessment was raised against A3 (under sections 16, 61 and/or 61A of the Ordinance) in the amount of HK$10,614,228;

(4)  An estimated assessment was raised against A3 (under sections 20(1), 20(2), the proviso to section 59(1) and section 59(3) of the Ordinance) in the amount of HK$9,280,000;

(5)  An additional assessment was raised against A4 (under sections 16, 61 and/or 61A of the Ordinance) in the amount of HK$4,800,000; and

(6)  An estimated assessment was raised against A4 (under sections 20(1), 20(2), the proviso to section 59(1) and section 59(3) of the Ordinance) in the amount of HK$4,800,000.

7.  By these assessments:-

(1)  A1 and A2 were assessed to profits tax on the basis that they were carrying on a business in Hong Kong (the assessments mentioned in paragraphs 6(1) and (2) above) – I shall refer to such assessments as the direct assessments on A1 and A2;

(2)  A3 and A4 were assessed to profits tax on the basis that they were carrying on a business in Hong Kong (and their transactions with A1 and A2 respectively were to be disregarded as artificial, or alternatively were a tax avoidance device) (the assessments mentioned in paragraphs 6(3) and (5) above) – I shall refer to these assessments as the direct assessments on A3 and A4; and

(3)  A3 and A4 were assessed to profits tax under section 20 of the Ordinance on the basis that the business done between them and A1 and A2 respectively was so arranged that such business produced to A3 and A4 less than the ordinary profits that might be expected to arise in or derive from Hong Kong, so that A1 and A2’s businesses were deemed to be carried on in Hong Kong, and their profits were assessed and chargeable with tax in the names of A3 and A4 respectively, as if A3 and A4 were respectively agents for A1 and A2 (the assessments mentioned in paragraphs 6(4) and (6) above) – I shall refer to these assessments as the agency assessments on A3 and A4.

8.  Each of the Applicants lodged a notice of objection in relation to the tax returns issued against them and sought a holdover of the tax payable pending the determination of their objections.  In the event, unconditional holdovers were granted in respect of the whole of the tax payable under the direct assessments on A1 and A2, and the agency assessments on A3 and A4.  Partial holdovers were granted in respect of the direct assessments on A3 and A4, with HK$3,200,000 being held over in respect of the direct assessment on A3 and HK$2,500,000 being held over in respect of the direct assessment on A4.  As to the balance of the tax payable by A3 and A4 in respect of the direct assessments on them, this was eventually held over on condition that A3 and A4 purchase tax reserve certificates in the amounts of the tax that would otherwise have been payable.  The tax reserve certificates were eventually purchased on 27 May 2008.

9.  Thereafter, the IRD continued to seek information from the Applicants in connection with the tax audit.  Although the Applicants were told that their objections would be attended to promptly, the objections had not been determined by the time of the application for judicial review.

10.  In subsequent years, a similar pattern of events took place.  In March 2009, January 2010 and January 2011, the IRD issued assessments against the Applicants in respect of the 2002/03, 2003/04 and 2004/05 years of assessment respectively.  On each occasion, direct assessments were issued against A1 and A2, direct assessments were also issued against A3 and A4, and agency assessments were issued against A3 and A4, in each case on broadly (but not exactly) similar bases to those issued in March 2008. Objections were lodged by the Applicants against each of these assessments, and holdovers were granted in respect of the amounts of tax payable under the assessments on a similar basis to those granted in 2008, so that the direct assessments against A1 and A2 and the agency assessments against A3 and A4 were held over unconditionally in full, while the direct assessments against A3 and A4 were held over unconditionally in part, with the balance being held over conditionally, on condition that tax reserve certificates were purchased to cover the amount of tax not held over unconditionally.  Although the objections to these assessments were lodged by the Applicants timeously, up to the date of this application, no determination had been issued in respect of any of the objections.

11.  By the time that this application was made, the objections against the 2001/02 assessments made in March 2008 had been unresolved for some three years, while those against the 2002/03, 2003/04 and 2004/05 assessments had been left unresolved for two years, slightly over a year, and about 2 months respectively.

The application for judicial review

12.  By this application, the Applicants sought the following relief:-

(1)  Orders of certiorari to quash each of the assessments made;

(2)  Orders of mandamus to compel the Commissioner to issue determinations in respect of the objections which had been lodged by the Applicants against the assessments; and

(3)  Orders of certiorari to quash the conditional holdovers.

13.  In the statement of grounds in support of the application for leave to seek judicial review, the Applicants set out a brief history of the Symphony group and of the Applicants, and described their business activities with a view to showing that A1 and A2’s business activities did not take place in Hong Kong, and suggesting that each of the back to back contracts entered into were genuine commercial transactions.  So far as the relief sought is concerned, the grounds for these were broadly stated to be as follows:-

(1)  In respect of the orders of certiorari to quash the assessments, it was contended that each of the assessments was ultra vires and a nullity because:-

(a) The businesses of A1 and A2 were carried on outside Hong Kong, so that they could not be liable to Hong Kong profits tax, and there was therefore no tax liability to be avoided on their part (paragraph 75(a) of the Applicant’s statement of grounds of application).

(b) The transactions relied upon by the IRD in the assessments based on section 61A of the Ordinance were the incorporation of A1 in 1997 and the incorporation of A2 in 2000, each of which took place more than six years prior to the issue of the assessments, so that the assessments were raised more than six years after the transactions in question, and therefore after the period within which such assessments had to be raised (paragraph 75(b) and of the statement of grounds).

(c) As for the agency assessments, the relevant businesses were similarly so arranged in 1997 and 2000 (in the case of A1/A3 and A2/A4 respectively), and such assessments were therefore also made after the six year period within which they should have been made (paragraph 75(c) of the statement of grounds).

(d) The sales contracts between A1 and A3, and between A2 and A4, were all genuine sale contracts, so that section 61 can have no application (paragraph 75(d) of the statement of grounds).

(e) The assessments involved double or multiple taxation of the same profits, which was not allowed under the Ordinance (paragraph 75(e) of the statement of grounds).

(f) The assessments had to be reasonably quantified assessments of the Applicants assessable profits, which these assessments were not (paragraph 75(f) of the statement of grounds).

(2) In respect of the orders of mandamus, it was contended that the failure to issue determinations in respect of the objections lodged for periods of up to over three years was a breach of the Commissioner’s obligation to issue determinations within a reasonable time after the objections were lodged, as required by section 64(2) of the Ordinance (paragraph 80(b) of the statement of grounds).

(3) In respect of the orders of certiorari sought in respect of the conditional holdovers, it was contended that as the assessments were ultra vires and unlawful, the holdovers were similarly unlawful (paragraph 80(c) of the statement of grounds).

14.  The evidence in support of the affirmation consisted of an affirmation of Ms Lau Shuk Yi, who confirmed that the matters stated in the application were true and correct, and exhibited some documentation in support.  However, Ms Lau made it clear that while a very substantial amount of documentation had been supplied to the IRD in connection with the tax audit, most of that documentation was not exhibited, as it was considered that the summary of the way in which the Symphony group’s business was structured, which was contained in correspondence between their tax advisers and the IRD, was sufficient and accurate.

15.  The Commissioner filed evidence in opposition to the application from two assessors in his department who had been involved in the tax audit and the raising of the assessments under challenge.  This evidence made it clear that the Commissioner did not accept the description of the businesses of the Applicants as set out in the statement of grounds.  It also made it clear that the assessments were not intended to result in double (or multiple) recovery of tax on the same underlying income, and that the various assessments were intended to be alternative bases on which that income could be taxed.  The evidence also sought to deal with the complaints of delay, by explaining the course of the tax audit and stressing the complexity of the Applicants’ affairs as a justification for the time that had been taken so far.

16.  The Commissioner’s evidence was responded to by an affirmation of Symphony’s Managing Director.  This evidence largely responded to the Commissioner’s justification for the delay that had taken place, suggesting that the reasons proffered were not valid, and provided no excuse for the delay.

Issue of determinations by the Commissioner

17.  Thereafter, on 9 December 2011, some eight months after these proceedings commenced, the Commissioner issued determinations in respect of the various objections.  By the determinations:-

(1) The direct assessments on A1 and A2 were (for the most part) slightly reduced, but otherwise confirmed on the grounds that the Commissioner was of the view that A1 carried on business in Hong Kong in the relevant years.  However, section 61A was no longer relied upon as a basis for assessment against A1 or A2.

(2) The direct assessments on A3 and A4 were similarly slightly reduced in most cases, and otherwise confirmed on the grounds that:-

(a) A1 and A2 respectively played no part in the sales transactions which produced the profits on the sales involving the Applicants and that A3 and A4 alone carried on the relevant business.  As for the sales contracts with A1 and A2 respectively, these were “artificial” and therefore were to be disregarded pursuant to section 61.

(b) alternatively, the interposition of A1 and A2 between the factories and A3 and A4 respectively was a tax avoidance transaction, in that it was entered into for the sole or dominant purpose of reducing the Hong Kong profits tax that would otherwise have to be paid by A3 and A4, so that A3 and A4 should be assessed so as to counteract the tax benefit by disallowing all expenses said to have been incurred by A1 and A2.

(3) The agency assessments on A3 and A4 were also slightly reduced in most cases, and otherwise confirmed on the basis that A1 and A2 had not performed any role in the manufacturing and trading of the products, but had been interposed to siphon off a significant portion of A3 and A4’s profits, so that section 20 of the Ordinance could be invoked to treat A3 and A4 as the agents of A1 and A2, and be assessed in respect of A1 and A2’s profits.

The parties’ submissions at the hearing

18.  At the hearing, the Applicants were represented by Mr Barlow SC, while the Commissioner was represented by Mr Wong SC and Mr Lui.

19.  In the light of the issuance of the determinations in December 2011, the parties were agreed that the question of mandamus no longer arose.  However, Mr Barlow submitted that the assessments should nonetheless be quashed, as should the conditional holdover decisions.

20.  So far as the assessments were concerned, Mr Barlow submitted (in his written submissions filed prior to the commencement of the hearing) that it was open to the court to quash the assessments where they were ultra vires, in the sense that there was no power to issue them under the Ordinance, or where they were Wednesbury unreasonable, or where they were issued in abuse of power.  He suggested that there were a number of authorities which made it clear that a purported assessment could be quashed in judicial review proceedings: see e.g. IRC v National Federation of Self Employed and Small Businesses [1982] AC 617 (per Lord Wilberforce at 632 C-E); CIR v Canterbury Frozen Meat Co Ltd [1994] 2 NZLR 681 (per Richardson J at 688‑691); Harley Development Inc v CIR [1996] 1 WLR 727 (per Lord Jauncey at 735C-736C, O’Neil v CIR [2001] 1 WLR 1219 (per Lord Hoffman at 1219H‑1220A) and Ngai Lik Electronics v CIR (2009) 12 HKCFAR 296 (per Ribeiro PJ at paras 113-115 and 119-121).

21.  Mr Barlow went on to submit in his written submission that in the present case, the assessments were indeed ultra vires, because:-

(1) The Ordinance does not permit the assessment of profits tax on profits of a trade or business which is not carried on in Hong Kong, and the profits in issue in the assessments were all profits that were not sourced in Hong Kong (this is the ground set out in paragraph 75(a) of the statement of grounds).  Mr Barlow submitted that the determinations in respect of A3 and A4 demonstrated that the direct assessments on A1 and A2 were ultra vires the Ordinance because they made it clear that neither A1 nor A2 carried on any trade or business in Hong Kong.

(2) The Ordinance does not permit double or multiple taxation of the same trading or business profits (this is the ground set out in paragraph 75(e) of the statement of grounds).

(3) The determinations in respect of the agency assessments against A3 and A4 (confirming such assessments in whole or in part) showed that the direct assessments against these two Applicants were ultra viresthe Ordinance, because the transactions were (on the Commissioner’s own case) undertaken by them not in their own right, but as agents for A1 and A2 respectively.

(4) One or other of the two bases of determination in respect of the direct assessments against A3 and A4 must be invalid, because if section 61 was available to enable the sale contracts between A1 and A3 or A2 and A4 to be disregarded, there could be no assessment under section 61A, as there would have been no tax benefit obtained by virtue of such contracts.

(5) As the direct assessments on A3 and A4 were upheld on the basis of the application of section 61, it followed that the Commissioner could not be satisfied that there was a tax benefit obtained (since none would have been) and there was therefore no power to raise an assessment on the basis of section 61A.

(6) The agency assessments against A3 and A4 were ultra vires because if A1 and A2’s businesses were not carried on in Hong Kong, the profits from those businesses are not assessable to tax at all.

(7) It was not open to the Commissioner to assess tax on the basis of gross profits.

22.  In the course of his oral submissions, in elaborating his argument described in paragraph 21(2) above, Mr Barlow also submitted that it was not open to the Commissioner to issue assessments (or determinations) against different taxpayers in respect of the same profits, and that the multiplicity of assessments in this case demonstrated that the Commissioner was acting unreasonably, capriciously and improperly both in raising the assessments in the first place, and in substantially maintaining them under the determinations.

23.  As to the holdover decisions, Mr Barlow submitted that if the assessments were quashed, the conditional holdovers necessarily should be quashed also.  He also submitted in his oral submissions that even if the assessments were allowed to stand, the court should make an order of mandamus to require unconditional holdovers to be granted.

24.  Mr Wong, however, submitted that the scope for seeking to judicially review an assessment was much more limited than Mr Barlow suggested.  He submitted that:-

(1) Merely because an assessment might be wrong, it did not follow that it was ultra vires.

(2) Even if a wrong assessment could be said to be ultra vires, it did not follow that the court ought to deal with arguments as to the merits of an assessment in judicial review proceedings. Rather, the appropriate course would be to require the challenge to the assessment (or the determination confirming it) to be made through the appeals procedure provided for in the Ordinance – by way of appeal of the determination to the Inland Revenue Board of Review, and thereafter by way further appeal to the courts by way of case stated on a question of law.

25.  Mr Wong went on to submit that:-

(1) Mr Barlow’s arguments summarised in paragraphs 21(1), (3), (5) and (6) were arguments as to the substantive merits of the assessments, and should therefore not be entertained in judicial review proceedings, but left for determination in accordance with the appeals procedure provided for in the Ordinance.

(2) As to the argument mentioned in paragraph 21(7) above, this too merely went to the question of what expenses should have been deducted from the gross profits – a complaint as to the correctness of the assessment, which could and should be resolved by the statutory appeals procedure under the Ordinance.

(3) As to the argument described in paragraphs 21(2) and (4) and paragraph 22 above, while not accepting that the various assessments raised were necessarily mutually inconsistent, it was open to the Commissioner to raise, in an appropriate case, alternative assessments on more than one taxpayers in respect of the same profits, or on a single taxpayer on alternative bases, whether such bases were factually consistent or not, so long as there was no double recovery of tax.  In the present case, each of the assessments was alternative, and it was not the purpose of the assessments (or the intention of the Commissioner) to recover tax twice in respect of the same profits.

(4) Further, it was not open to Mr Barlow to make the arguments mentioned in paragraphs 21(3) to (7) and 22 above, as they were not raised in the Applicants’ statement of grounds.

(5) It appeared that the grounds raised in paragraphs 75(b), (c), (d) and (f) of the statement of grounds were no longer pursued.

Whether or not judicial review is appropriate – the legal principles

26.  The first issue for consideration, I think, is as to the scope for judicial review in relation to assessments such as these. As to this, I am satisfied that Mr Wong is correct to say that the court should generally be circumspect about whether or not it should deal with challenges to assessments by way of judicial review, and should generally decline to do so where the complaint is one that can be dealt with by way of the statutory appeals procedure.  Proceedings by way of judicial review will be appropriate only in rare cases, for example, where there has been some abuse of power, or perhaps where the exercise of the power (say by making an assessment) is so obviously flawed that the matter can readily be dealt with in judicial review proceedings.

27.  This appears from the decision of the Privy Council in Harley Development Inc. v CIR (supra), an appeal from Hong Kong in which it was argued that an error of law on the part of an assessor, in forming the opinion that a taxpayer was chargeable to tax, rendered his decision a nullity which was challengeable by way of judicial review proceedings.  In rejecting this submission, Lord Jauncey said (at page 732B-D) that:-

“Mr Gardiner argued that neither the commissioner nor the board of review had power to consider an assessment which had been made ultra vires.  Such an assessment could only be challenged by way of judicial review.  This argument fails for two reasons.  In the first place the right of objection in section 64(1) is, validity of notice apart, unqualified and does not purport to restrict in any way the circumstances in which a taxpayer may be aggrieved by an assessment. Furthermore the use of the words “confirm, reduce, increase or annul” appear to cover every situation in which an assessment might be challenged.  If the commissioner thinks it is for the correct amount he confirms, if for too much he reduces, if for not enough he increases and if he considers that, for some reason or other which necessarily includes questions of vires it should not have been made at all, he annuls.  The objection and appeals procedure is accordingly perfectly competent to deal with the type of challenge to the decisions to assess which Mr Gardiner mounts.”

28.  Later in the judgment, in the passage on which Mr Barlow relied, Lord Jauncey referred to the views expressed by Lord Scarman in R v IRC ex parte Preston [1985] AC 835 at 852, where Lord Scarman said:-

“… a remedy by judicial review is not to be made available where an alternative remedy exists. This is a proposition of great importance. Judicial review is a collateral challenge: it is not an appeal. Where Parliament has provided by statute appeal procedures, as in the taxing statutes, it will only be very rarely that the courts will allow the collateral process of judicial review to be used to attack an appealable decision.”

Lord Jauncey went on to refer to Fox LJ’s judgment in IRC v Aken [1990] 1 WLR 1374 at 1380, where Fox LJ said:-

“… the statutory machinery is exclusive machinery for an appeal from a notice of assessment. There is normally no other. However, I do not say that there are no cases in which, exceptionally, a challenge by way of judicial review or otherwise to a decision of the revenue would possible. There may be cases where, for example, there has been some abuse of power or unfairness, which would justify the intervention of the court … But that is exceptional. …”

Lord Jauncey then concluded by saying:-

“There are other dicta of high authority to the same effect. Their Lordships consider that, where a statute lays down a comprehensive system of appeals procedure against administrative decisions, it will only be in exceptional circumstances, typically an abuse of power, that the courts will entertain an application for judicial review of a decision which has not been appealed.”

29.  Further, in two recent Hong Kong decisions (Yue Yuen Marketing Co Ltd v CIR (HCAL 49/2009, 17 March 2010) and Kong Tai Shoes Manufacturing Co Ltd v CIR [2011] 6 HKC 227), Reyes J adopted just this approach to attempts to quash assessments in judicial review proceedings, holding that the court should be very circumspect in doing so, so as not to circumvent the statutory appeal procedures.  In both those cases, Reyes J held that despite substantial delay on the Commissioner’s part in issuing determinations on objections to assessments which had been raised against the taxpayer, the proper course to follow was not to deal with the challenge to the merits of the assessment by quashing them, but to grant an order of mandamus requiring the determinations to be issued within a reasonable period, so that the statutory appeals procedure could then be invoked.  In doing so, Reyes J pointed out that the statutory appeals procedure enabled the tribunal hearing the appeal from a determination to receive evidence, both oral and documentary, before coming to a conclusion as to the merits of an appeal.  By contrast, in judicial review proceedings, the evidence before the court was likely to be more limited, and would be on affidavit, on which there would generally not be any cross‑examination.  Thus, if the court were to embark on an investigation of the actual merits of the assessment, it might well be doing so on the basis of far less information than would be available to the Board of Review in an appeal under the Ordinance.  This, too, seems to me to be a sound reason for the courts to exercise caution when invited to deal with an allegedly incorrect assessment by way of judicial review proceedings.

30.  I do not think that the authorities cited by Mr Barlow suggest otherwise.  In both IRC v National Federation of Self Employed and Small Businesses and O’Neil v CIR, it was emphasised that a collateral attack by way of judicial review would be rare, and likely to arise in exceptional cases involving abuse of power or some failure in statutory duty.

31.  In CIR v Canterbury Frozen Meat Co Ltd, it was made clear that there is a distinction to be drawn between challenging the correctness of an assessment and challenging the process followed in making it.  In that case, the complaint was that the purported assessment was not an assessment at all, since it was expressed to be only tentative and subject to review.  The New Zealand Court of Appeal accepted that such a tentative assessment was not an assessment within the meaning of the relevant legislation, and thus could be challenged in judicial review proceedings (which would not have been the case had the assessment been an assessment within the meaning of the legislation, as the legislation required all challenges to assessments to be made through the statutory appeals process, and thus excluded the possibility of judicial review of assessments in the true sense).

32.  Nor do I think that the observations ofRibeiro PJ in Ngai Lik, or those of Lord Walker NPJ in Shui On Credit Co Ltd v CIR (2009) 12 HKCFAR 392, where they stated, in the context of assessments made pursuant to the powers conferred by section 61A, which require the Assistant Commissioner to form a view that there is a transaction, designed to produce a tax benefit, and having the dominant purpose of doing so, and thereupon to raise an assessment designed to counteract the tax benefit, that such view and the consequent assessment must be reached in accordance with the constraints imposed by public law, assist the Applicants here.  Both of those cases arose out of appeals under the statutory procedure, and not judicial review proceedings, and the statements made were not made in the context of a consideration of whether or not the assessments concerned should be quashed by way of judicial review, rather than dealt with under the statutory procedure.  The references to being subject to the usual public law constraints were, I think, simply intended to indicate that a failure to act in accordance with such constraints would form a ground for an appeal under the statutory procedure.

Whether the assessments should be quashed on the basis that they were wrong in various respects

33.  Applying this approach to the present case, I am satisfied that Mr Wong is correct to submit that the complaints made by Mr Barlow and summarised in paragraphs 21(1), (3), (5), (6) and (7) are complaints as to the substantive merits of the assessments, which can and should (now that the determinations have been issued) be dealt with by the statutory appeals procedure laid down in the Ordinance.  I do not think that it much matters, for present purposes, whether these complaints can also be characterised as giving rise to a question of vires, as Mr Barlow accepted that questions of vires could be raised in an appeal to the Board of Review.

34.  What is important is that in this case (as in the Yue Yuen and Kong Tai cases), a conclusion on these complaints must (indeed, can only) be reached on a consideration of the evidence, and the evidence before the court consists of far less material than is in fact available, and which could be deployed in an appeal to the board of review.  I do not think that it is, in these circumstances, possible to say that the view taken by the assessor (or by the Commissioner in the determinations) is untenable or that it would be appropriate to attempt to resolve the merits of the assessments in a summary way in these proceedings, by reference only to the limited evidence that has been placed before the court.

35.  Mr Barlow pointed out that at the time that these proceedings were commenced, there were no determinations, and hence the statutory appeal procedure could not have been invoked.  However, I do not think that this is an answer to this point.  The failure to issue the determinations for what appears on the face of it to be an inordinately long time could have been appropriately addressed by seeking the orders of mandamus alone.  Now that the determinations have been issued, that relief is no longer necessary.  It does not, however, follow, that the additional remedy of certiorari to quash the assessments should have been applied for, still less granted, if it would not otherwise be appropriate to do so.

36.  The delay in issuing the determinations appears to me to be a matter that bears on the question of the appropriate costs order to be made at the end of the day, in that it may have been justified for the proceedings to have been commenced for the purpose of obtaining orders of mandamus. As to this, however, Mr Wong has indicated that he would wish, in that context, to make submissions to the effect that the delay was not in fact inordinate having regard to the circumstances of this case.  I therefore express no concluded view as to that aspect of the matter at this stage.

Whether the assessments should be quashed because of the multiplicity of assessments

37.  That leaves the points summarised in paragraphs 21(2) and (4) and 22 above.  In essence, these raise an argument that it is not open to the Commissioner to issue multiple assessments against different taxpayers in respect of the same set of profits.  Insofar as it is suggested that this is not authorised by the Ordinance, I would accept (as I think Mr Wong did) that this is a legitimate basis for seeking to challenge the assessments by judicial review proceedings, since it does not seek simply to challenge the correctness of the assessments on the evidence, but is a challenge that can be answered by reference to the proper construction of the Ordinance.

38.  As to this, Mr Wong accepted that there could be no double (or multiple) taxation of the same profits.  He submitted, however, that this was not the case here.  As the assessors had stated in their affirmation evidence, the intention was not to seek to tax the same profits more than once.  Rather, the intention was to put forward different bases on which the profits might be taxed as alternatives, in circumstances in which the assessors had to proceed on what was limited information available to them.

39.  Mr Wong submitted that there was nothing in the Ordinance that prevented the issue of multiple alternative assessments, whether the alternatives were founded on a consistent factual basis, or on inconsistent alternative bases.  He submitted that this was established by a number of Australian authorities: e.g. Deputy Commissioner of Taxation of the Commonwealth of Australia v Richard Walter Pty Ltd (1995) 183 CLR 168; Trustee of the Balmain Trust v Federal Commissioner of Taxation (1998) 38 ATR 637; and Briglia v Federal Commissioner of Taxation (2000) 44 ATR 166.

40.  In the Richard Walter case, Brennan J dealt with the question of whether or not assessments could be made against two taxpayers in respect of the same income at pages 200-202 of the judgment, in the following terms:-

“Richard Walter submits that two persons cannot be severally liable each in its own right to have included in its individual assessment the same income for the same year. This is the submission which the unsuccessful taxpayer made in Richardson v Federal Commissioner of Taxation [(1932) 48 CLR 192 at 205]. It cannot be accepted now. The function of the Commissioner in making an assessment is to take a view of the facts, so far as a view can reasonably be taken from the information in his possession, and to apply the general provisions of the Act so as to arrive at the taxpayer’s taxable income and to define the tax liability accordingly …

It must be remembered that the Commissioner’s function is administrative, not judicial. The power to assess is, as s 167 shows, not limited to cases where the Commissioner has enough information on which to make a positive finding of fact. The Commissioner is not required to determine on the balance of probabilities that one person rather than another is the person subject to the tax liability in respect of the particular income. Where the facts known to the Commissioner are such that he is unable to determine which of two or more persons is liable to tax on the same item of income in the same year, he may adopt the view in the case of any or all of those persons that there is a substantial possibility that the item of income is assessable income of that person. If that view is adopted in respect of two or more of those persons, he may validly assess each of them to tax. The making of an assessment on that view of the facts, provided it is not for the purpose of double recovery of the tax imposed by the relevant Taxing Act, is in my opinion a bona fide attempt to exercise the power to assess so that the assessment either is valid or is validated by s 175. And the notice of assessment attracts the protection of s 177(1).

It is immaterial to the validity of an exercise of the power to assess one taxpayer to tax that the Commissioner believes it possible that another taxpayer is liable to tax in respect of the particular income. If uncertainty as to the taxpayer liable were to sterilise the Commissioner’s power to make an assessment or if the power could be exercised only when the Commissioner is satisfied on the balance of probabilities that one taxpayer rather than another is liable, the uncertainties which are the inevitable companion of complex commercial transactions would substantially erode the Commissioner’s ability to recover tax and would, contrary to the intent of section 177(1), open the way to litigating liability to tax outside the objection, review and appeal procedures.

The fact that a tax liability remains outstanding against two taxpayers pending the ascertainment of the taxpayer truly liable is no bar to the exercise of the power to assess both to tax in respect of the same income …

The raising of concurrent assessments of two or more taxpayers to tax in respect of the same item of income has not hitherto been regarded as beyond the powers of the Commissioner … And the courts, if not the Commissioner, can diminish the difficulty of concurrent assessments by ensuring that there is no double recovery of tax.”

41.  Similar view were expressed by Mason CJ at page188, Dawson J at pages 216-217, Toohey J at pages 228-229 and McHugh J at pages 237-238.

42.  Mr Barlow submitted that Richard Walter and the other Australian cases were not applicable in the Hong Kong context, as they turned on the provisions of section 177(1) of the Income Tax Assessment Act 1936, which provided that a notice of assessment was to be conclusive evidence of the due making of the assessment, and not open to dispute other than in the review and appeal procedure provided for under the Taxation Administration Act 1953.  However, I do not think that this is a relevant distinction.  The effect of section 177(1) would appear to be to exclude the possibility of any challenge to an assessment in Australia other than by way of the statutory procedure.  It thus excludes the possibility of a judicial review.  However, the material point that is to be derived from the Richard Walter decision is that given a system of taxation that calls for the issue of assessments on the basis of incomplete information (which is also the case in Hong Kong – see section 59(3) of the Ordinance), it follows that it is not required for the assessor to reach a firm view (or one on a balance of probabilities) before being able to issue an assessment.  As Mr Wong put it, given that the assessor may issue an estimated assessment on less than full information, it is open to him to issue an assessment on a single taxpayer on more than one basis, and such bases need not necessarily be consistent.  That being so, Mr Wong submitted that there was no logical reason why alternative assessments could not be issued against different taxpayers, whether on a factual basis that was consistent or otherwise, so long as there was no double recovery of tax.  At the end of the day, any of the taxpayers so assessed may, if aggrieved by the assessment made against them, object to the assessment, and upon a determination being issued, may appeal against the determination to the Board of Review.  In a case such as this one, this might mean that each of the Applicants would appeal against each of the assessments against them, and the IRD might then be at risk of having to pay costs to such of the Applicants as were successful in their appeals.  But it would not follow from this that there was no power to raise the assessments.  I agree with this submission.

43.  I therefore do not think that it was beyond the power of the assessor to issue the assessments that were issued to the various Applicants in this case, and this ground for challenge does not succeed either.

44.  Further, if it is open (as I think it is) to the assessor to raise alternative assessments against more than one taxpayer, I do not think that it can be inferred from the fact of such assessments alone that the assessor has acted capriciously, arbitrarily or otherwise improperly, so as to provide an alternative ground for judicial review.  The Applicants do not point to any other basis on which it could be suggested that the decisions are capricious, arbitrary or unreasonable, and I therefore reject Mr Barlow’s suggestion that the assessments should be quashed on that basis either.

Other points in relation to the assessments

45.  Having regard to my conclusions on Mr Barlow’s submissions, it is not necessary for me to formally decide whether or not he should be debarred from raising those arguments which Mr Wong suggested were not mentioned in the statement of grounds.

46.  As to the grounds mentioned in the statement of grounds, but not in Mr Barlow’s written submission, these can be dealt with briefly.

47.  Mr Barlow did not seriously press the points made in paragraphs 75(b) and (c) of the statement of grounds.  In my view he was right to take this course.  It seems to me to be quite clear that the relevant transactions are not those by which the corporate structure involving A1 and A2 were put in place, but the transactions between A1 and A3, and between A2 and A4, in the relevant basis periods for each year of assessment with which we are concerned.  If this were not the case, it would mean that having put the structure in place in (say) 1997, no tax assessments could be raised in respect of profits arising more than six years after that, even if the structure remained in place, and profits continued to be earned.  This cannot be right.

48.  Mr Barlow did not really address the points mentioned in paragraphs 75(d) or (f) of the statement of grounds either.  In any event, both of those would appear at best to be challenges to the substantive merits of the assessments, which are not, for the reasons I have given in paragraphs 26 to 35 above, a suitable basis for seeking judicial review of the assessments.

49.  It therefore follows that I do not consider that the assessments themselves should be quashed.

The position in relation to the conditional holdovers

50.  It follows from this that the conditional holdovers should not be quashed either.  Moreover, no independent basis for suggesting that the amounts conditionally held over against the purchase of tax reserve certificates were arrived at unreasonably or capriciously by the IRD. In these circumstances, it does not seem to me that any basis is made out for issuing an order of mandamus to require the Commissioner to unconditionally hold over this part of the tax assessments.

Disposition and questions of costs

51.  As I am satisfied that none of the relief sought should be granted, the Applicant’s application is dismissed.  However, in the light of the fact that the determinations were issued only after these proceedings were brought, and having regard to Mr Wong’s indication that he would wish to make submissions as to the reasonableness of the delay in the particular circumstances of this case, I shall not make a costs order nisi but will instead direct that the parties should endeavour to agree directions for fixing a hearing to deal with the question of costs, if they are unable to agree as to how the question of costs should be disposed of.  Should the parties be unable to agree on such directions, I would be prepared to give the necessary directions on receipt of written submissions from each party.