THE COMMISSIONER OF INLAND REVENUE v. SHELCORE HONG KONG LTD

DCTC 5209/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO. 5209 OF 2009

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DECISION

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1.  By a writ issued herein, the Commissioner of Inland Revenue (“CIR”) seeks to recover from the Defendant profit tax for the year of assessment 2002/2003 in the sum of HK$2,403,051.00. The action was issued under section 75 of the Inland Revenue Ordinance (“section 75”). The section reads as follows –

(1) Tax due and payable under this Ordinance shall be recoverable as a civil debt due to the Government.

(2) Whenever any person makes default in payment of tax the Commissioner may recover the same by action in the District Court notwithstanding that the amount is in excess of the sum mentioned in section 33 of the District Court Ordinance (Cap 336).

(3)...

(4) In proceedings under this section for the recovery of tax the court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal, but nothing in this subsection shall be construed so as to derogate from the powers conferred by the proviso to section 51 (4B) (a) to give judgment for a less sum in the case of proceedings for the penalty specified therein.

(5)...

2.  The Defendant filed a Defence on 7 December 2009.  CIR issued a summons under Order 18 rule 19 seeking to strike out the Defence on the ground that it disclosed no reasonable defence, and to have final judgment.   In particular, CIR claims that the defence is nothing more than an allegation that the tax is excessive or incorrect.  Such a defence should not be entertained by the District Court because of section 75(4) and the Defence should be struck out.

3.  It is the case of the Defendant that CIR knew that the alleged profits relate to off-shore businesses of off-shore companies and not the Defendant.  The relevant Notices of Assessment were ultra vires and this action was commenced mala fide.  This ground of defence, as Miss Lam, counsel for the Defendant put it, the “incorrect assessment defence”.

4.  In the alternative, the Defendant claims that in so far as section 75 of the Inland Revenue Ordinance purports to curtail or remove judicial authority and/or the duty of this Court to exercise its judicial power judicially to hear any defence that the assessment is incorrect or excessive, it is contrary to Article 35 of the Basic Law, or alternatively, against the Bill of Rights Ordinance, Articles 10 and 22, and section 75 should be disregarded or set aside.  Miss Lam called this the “constitutionality defence”.

5.  To consider this argument, I must first understand what is the constitutionality defence pleaded.  Paragraph 7 of the Defence states –

Alternatively, if or to the extent that section 75 of the Inland Revenue Ordinance purports to curtail or remove judicial authority and/or duty of this Honourable Court to exercise its judicial powers judicially, then it is contrary to Article 35 of the Basic Law and therefore void, since it purportedly limits or removes the Defendant’s right of access to the Courts for the timely protection of its lawful rights and interests and to judicial remedies against the executive authorities of the Hong Kong SAR Government (such as the Plaintiff).

6.  Paragraph 8 of the Defence further states –

Further and alternatively, if or to the extent that section 75 of the Inland Revenue Ordinance purports to curtail or remove judicial authority and/or duty of this Honourable Court to exercise its judicial powers judicially, then it violates the Bill of Rights Ordinance (Cap. 383), namely :-

(a)   Article 10 thereof, since it purportedly curtails or removes the Defendant’s entitlement to have its rights and obligations in this suit determined by a competent, independent, and impartial tribunal in a fair and public hearing – which requires that this Court be permitted to exercise judicial (and not merely administrative) authority; and/or

(b)   Article 22 thereof, since it purports to discriminate between the Plaintiff (who is part of the executive authorities of the Hong Kong SAR Government) and Hong Kong citizens;

-and therefore is to be disregarded or set aside.

7.  In opposition to the application, the Defendant has filed an affidavit of Chan Chung Yau Brian on 15 January 2010.  Miss Lam concedes that I should not consider any evidence for an application for striking out under Order 18 rule 19(a).  The said affidavit has been put in for the alternative argument that if the defence is struck out, the matters should be adjourned sine die pending the outcome of the challenge to the constitutionality of section 75 and/or the determination of the substantive issues surrounding the Defendant’s tax liability.

8.  Mr. Wong, counsel for CIR has set out in his written submission a wealth of case law that the incorrect assessment defence is nothing more than a plea that the assessment of CIR is incorrect or excessive.  I do not intend to repeat these often referred judgments. 

9.  Mr. Wong argues that by section 75(4) of the Inland Revenue Ordinance, I am not entitled to entertain such a defence.  Mr. Wong submits that there is no dispute that the Defendant has been assessed and has not paid the tax.  There is no issue of identity. The incorrect assessment defence is not a reasonable defence. 

10.  I agree with Mr. Wong, counsel for the CIR that the incorrect assessment defence is nothing more than a plea that the assessment of CIR is incorrect or excessive.  Indeed, Miss Lam concedes that the incorrect assessment defence of itself may be viewed as unarguable and should be struck out (subject to her alternate argument of stay).  The Defendant’s main argument is that section 75 is unconstitutional and should be disregarded.  Then the incorrect assessment defence could be argued.  Hence the application turns on whether there is a reasonable defence that section 75 is unconstitutional.  And the burden rests on CIR to show that there is no reasonable defence disclosed in the Defence, including that the constitutionality defence is not arguable.

11.  Article 35 of the Basic Law reads –

“Hong Kong residents shall have the right to confidential legal advice, access to the courts, choice of lawyers for timely protection of their lawful rights and interests or for representation in the courts, and to judicial remedies.

Hong Kong residents shall have the right to institute legal proceedings in the courts against the acts of the executive authorities and their personnel.”

12.  And Articles 10 and 22 of the Bill of Rights Ordinance reads –

“Article 10

All persons shall be equal before the courts and tribunals. In the determination of any criminal charge against him, or of his rights and obligations in a suit at law, everyone shall be entitled to a fair and public hearing by a competent, independent and impartial tribunal established by law. The press and the public may be excluded from all or part of a trial for reasons of morals, public order (ordre public) or national security in a democratic society, or when the interest of the private lives of the parties so requires, or to the extent strictly necessary in the opinion of the court in special circumstances where publicity would prejudice the interests of justice; but any judgment rendered in a criminal case or in a suit at law shall be made public except where the interest of juvenile persons otherwise requires or the proceedings concern matrimonial disputes or the guardianship of children.

Article 22

All persons are equal before the law and are entitled without any discrimination to the equal protection of the law. In this respect, the law shall prohibit any discrimination and guarantee to all persons equal and effective protection against discrimination on any ground such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status.”

13.  The argument of Mr. Wong against the constitutionality defence is two folded.  He submits that the reliance by the Defendant on BL35 and BOR10 is misconceived as they do not apply to tax matters.  Further and in the alternative, section 75 is not in breach of BL35 and BOR10.  (Mr. Wong also submits that section 75 is not in breach of BOR22 and Miss Lam does not advance any argument for breach of BOR22.) 

14.  Ribeiro PJ said in Lam Siu Po v. Commissioner of Police (2003) 6 HKCFAR 299, “BOR10 is materially in substantially similar terms to article 6(1) of the European Convention of Human Rights (“Article 6(1)”), in that a person is entitled to a fair and public hearing in the determination of his civil rights and obligations.  There are a wealth of judgment by the European Court of Human Rights and other international and other national tribunal on the interpretation of the European Convention of Human Rights.”  Ribeiro PJ further held that “it is often appropriate to refer to the jurisprudence of the European Court of Human Rights and to the decisions of other international and national tribunals regarding international and constitutional instruments having substantially similar provisions.”

15.  The relevant part of Article 6(1) reads –

“In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and an impartial tribunal established by law ….”

16.  Indeed, that has been the approach of this Court when interpreting the meaning of BOR10.  I have been referred to the judgment of HH Judge Cheung (as he then was) in CIR v. Lee Lai-ping DCCJ 1541 of 1992.  HH Judge Cheung also held that the expression “rights and obligations in a suit at law” in BOR10 bears the same meaning as the expression “civil rights and obligations” in Article 6(1). Having compared BOR10 with Article 6(1), HH Judge Cheung referred to a helpful passage in Halsbury’s Laws of England:-

“..the term ‘civil rights’ is a concept which is interpreted independently of the classification of rights within the relevant domestic law. The right must be one which is derived from private law as opposed to public law; thus it does not apply in respect of administrative matters such as proceedings of a fiscal nature.”

17.  And having analysed a number of decision by the European Commission of Human Rights, HH Judge Cheung concluded that the assessment of tax by CIR is an administrative act made pursuant to the provision of the Inland Revenue Ordinance.  BOR10 would not apply. 

18.  Miss Lam refers to the dissenting judgment of the European Court of Human Rights in Ferrazzini v. Italy (2002) 34 E.H.R.R. 45.  Judge Lorenzen, when giving the dissenting opinion, said

“It is not open to doubt that the obligation to pay taxes directly and substantially affects the pecuniary interests of citizens and that in a democratic society taxation (its base, payment and collection as opposed to litigation under budgetary law) is based on the application of legal rules and not on the authorities’ discretion.  Accordingly, in my view Article 6 should apply to such disputes unless there are special circumstances justifying the conclusion that the obligation to pay taxes should not be considered “civil” under Article 6(1) of the Convention.”

19.  I believe the answer has been given in the judgment of the Court by the majority –

“In the tax field, developments which might have occurred in democratic societies do not, however, affect the fundamental nature of the obligation on individuals or companies to pay tax.  In comparison with the position when the Convention was adopted, those developments have not entailed a further intervention by the State into the “civil” sphere of the individual’s life.  The Court considers that tax matters still form part of the hard core of public-authority prerogatives, with the public nature of the relationship between the taxpayer and the tax authority remaining predominant.”

20.  I agree with the learned opinion of the majority.  And I would also refer to another judgment of the European Court of Human Rights in Ketko and Mroz v. Ukraine, 3 April 2006, ECtHR when the majority view is re-confirmed.

21.   It should not be misunderstood that there is no control over the administrative act of the government.  HH Judge Cheung said in Lee Lai Ping’s case that the European Court has interpreted Article 6(1) as requiring the administrative act to be subject to control by a judicial body that has full jurisdiction to deal with the merits of matters and in conformity with the article.   HH Judge Cheung quoted from the judgment of the European Court in Albert and Le Compte v. Belgium

“nonetheless, in such circumstances the Convention calls at least for one of the two following systems: either the jurisdictional organs themselves comply with the requirements of Article 6(1) or they do not so comply but are subject to subsequent control by a judicial body that has full jurisdiction and does provide the guarantees of Article 6(1).”

22.  HH Judge Cheung has analysed the appeal system under section 64, 66, 67, 68 and 69 of the Inland Revenue Ordinance and concluded that “the assessment of profit tax does not involve any determination of private right, but is rather a matter arising out of an administrative act.  This administrative act is subject to a review on its merits by the Board of Review, which satisfied the requirement of BOR10.” I would add that there would be further appeal to the High Court and Court of Appeal which would be sufficient control by a judicial body with full jurisdiction, in compliance with the ruling as set out in Albert and Le Compte’s case. 

23.  I agree with the judgment of HH Judge Cheung that BOR10 does not apply to tax matters and section 75(3) & (4) are not inconsistent with BOR10. 

24.  Is BL35 going to give a different conclusion?  It is stated in Ho Ho Wah v. Incorporated Owners of Hoi Fu Court [2010] 1 HKLRD 278 that BL35 serves similar purposes as BOR10.  The protection of the right of citizen offered by BL35 and BOR 10 is the same.  Hence, by the same argument, BL35 does not apply to tax matters.

25.  Miss Lam also relies heavily on the judgment of HH Judge M. Ng in CIR v. Nam Tai Trading Co. Ltd. DCTC 4250 of 2008 when Her Honour struck out a similar defence of unconstitutionality raised by the taxpayer (“Nam Tai Striking Out Judgement”), but later granted leave to appeal (“Nam Tai Leave Judgement”).  But in coming to the decision in Nam Tai Striking Out Judgment, HH Judge M. Ng has not ruled upon if BL35 and/or BOR10 apply to tax matters.  The ruling is not helpful to the argument if BL35 and/or BOR10 apply to tax matters.  And HH Judge M. Ng also concluded in the Nam TaiStriking Out Judgement that a similar approach should be adopted for BL35 and BOR10.  (I shall come back to the Nam Tai Leave Judgment on the alternate argument of Mr. Wong.)

26.  Miss Lam also relies on the judgment of A Cheung J in Re Lee Yee Shing Jack and Yeung Yuk Ching HCAL40/2008 when leave was granted for the applicants to argue that section 69 of the Inland Revenue Ordinance which provides that any appeal from the Board of Review shall be by way of case stated on points of law is non-constitutional and against BL35.  But Miss Lam has not elaborated on why section 69 is non-constitutional.  A. Cheung J has not gone into the merit of the argument in his judgment, as only issue on whether leave should be granted was argued before His Lordship.  I presume Miss Lam only seeks to argue that if there is an unsettled point of law, CIR cannot say that the constitutionality defence is unarguable and I should not strike out the Defence.

27.  But section 69 only deals with the procedure of appeal.  Assuming for a moment that section 69 may be non-constitutional, it does not follow that section 75 is non-constitutional.  The fact that the appeal system under the Inland Revenue Ordinance is supervised by the High Court, a court of full jurisdiction, by way of case stated (as provided in the Ordinance) or by way of judicial review would be sufficient to comply with the ruling as set out in Albert and Le Compte’s case. 

28.  Hence the judgment of A. Cheung J is not helpful to the Defendant. 

29.  In conclusion, I found that BOR10 and BL35 do not apply to tax matters.

30.  And for the part of the defence based on BOR22, Mr. Wong submits that there is no discrimination.  Paragraph 8 (b) of the Defence claims that section 75 violates BOR22 since “it purports to discriminate between the CIR (who is part of the executive authorities of the Hong Kong SAR Government) and Hong Kong citizens. But the Defence is not clear in what way the CIR and the Defendant are treated differently under section 75.

31.  Discrimination means that a person is being treated less favourably than another person in a relevantly similar or analogous situation.  Mr. Wong refers to a passage in Ghaidan v. Godin-Mendoza [2004] 2 AC 557 - “like cases should be treated alike, and unlike cases should not be treated alike”.  The passage was cited with approval by Li CJ in Secretary for Justice v. Yau Yuk Lung (2007) 10 HKCFAR 335.

32.  At the hearing, Miss Lam has not advanced further argument on BOR22.  It is sufficient for me to refer again to a paragraph in the judgment of HH Judge Cheung in Lee Lai Ping’s case –

“Between the Commissioner and the taxpayer, the Commissioner relies on the statutory provisions of ss 75(3) and (4) to preclude the taxpayer from challenging the correctness of the assessment in these proceedings. I do not consider this constitutes any inequality between the litigants. What is more important in my view is that there is no suggestion that ss 75 (3) and (4) have been applied to the taxpayer differently or more unfavourably than to any other taxpayer in a similar situation. I rule that the equality provision of article 22 has not been breached.”

33.  By the above analysis, the constitutionality defence must fail, and the incorrect assessment defence must fail too.

34.  Miss Lam argues that this is a highly complex and as yet unsettled area of law.  She seeks to demonstrate that this is not a plain and obvious case where the Defence is bound to fail.  As such the Defence should not be struck out.  But it is obvious from the above analysis that the issue has been well considered by the Court of Appeal and this Court in earlier decisions.  I see no reason why I should not exercise my discretion to strike out the Defence.

35.  That would be sufficient to dispose of the summons.  In case I am wrong and that BOR10 or BL35 apply to tax matters, it is the alternative argument of Mr. Wong that there is no violation of any rights thereunder at all.

36.  Mr. Wong submits that a taxpayer has all the rights refer to in BL35 and BOR10.  He may object to a tax assessment under section 64 to CIR.  If the result is not favourable, he may appeal to the Board of Review under section 66, and then appeal by way of case stated to the Court of First Instance under section 69 or to the Court of Appeal under section 69A.  Section 75(4) does not curtail or remove the right of a taxpayer.  The section specifies the forum at which the tax dispute is to be argued.  As I have analysed above, the same has been approved by HH Judge Cheung in Lee Lai Ping’s case.

37.  Mr. Wong refers me to judgment of Briggs CJ in Ng Chun-kwan v. CIR [1976] HKLR 94, and the judgment of Barker JA in CIR v. Choy Sau Kam (1983) 2 HKTC 10, which I do not intend to repeat.  It is clear that there is authority to state that the Ordinance differentiates between assessment and tax recovery.  Objection to the assessment is dealt with by the Board of Review and the High Court, while objection to the tax are dealt with by the District Court. The right of any taxpayer to object to the assessment is clearly protected. While BL35 and BOR10 ensure that every citizen has the right to appear before a Court, it is not an absolute right but may be subject to limitations.  Such limitations are valid if they pursue a legitimate aim, are proportionate to that aim and are not such as to impair the very essence of the right (per Ribeiro PJ in Ng Yat Chi v. Max Share Ltd (2005) 8 HKCFAR 1 at 31).  I agree with Mr. Wong’s submission that such differentiation of duty between tribunal is justified.

38.  Mr. Wong also relies on the case of Bryan v. United Kingdom (1995)21 EHRR 342 (“the Bryan Principle”) to argue that a system whereby the determination of rights in a specialized area of law (such as revenue law) is entrusted to a specialize, independent quasi-judicial tribunal such as the Board of Review with further appeals on questions of law to the court of law is in full compliance with BOR10.  I agree that revenue law is a specialized area of law.  The Board of Review is a quasi-judicial tribunal established by law, and by law is independent from CIR.

39.  In fact, the combined effect of BOR10 and Bryan Principle has the same result when I found BOR10 does not apply but there is a qualification that the administrative act is subject to control by judicial body of full jurisdiction. I repeat my analysis at paragraph 21 and 22 that the Board of Review is subject to control by judicial body of full jurisdiction.

40.  Ribeiro PJ also held in Lam Siu Po v. Commissioner of Police FACV 9/2008 that the Bryan principle is applicable to BOR10 and that “a court of full jurisdiction” does not necessarily have to conduct afresh any fact-finding exercise underlying the impugned decision.  And as I analysed above, BOR10 and BL35 are protection for similar rights and I do not see any reason why the Bryan principle does not apply to an argument on BL35. 

41.  And I would just quote from the Nam Tai Striking Out Judgment of HH Judge M. Ng that “it was held in Tse Wai Chun Paulv. Solicitors Disciplinary Tibunal & anor[2002] 4 HKC 1 that there is no violation of the BL or the BOR if the adjudicating tribunal’s decision is subject to subsequent control by a court that has full jurisdiction and itself complies with the requirements.  In other words, the right of appeal to a court of full jurisdiction does not purge a breach of the BL or the BOR, but prevents the breach from occurring in the first place.”  That explains why section 75 is not in breach of BOR or BL.

42.  I note that Miss Lam has no specific complaint to why the system of appeal is against the Basic Law or the Bill of Rights Ordinance.  She seems to rely on the Nam Tai Leave Judgment when Her Honour granted leave for the defendant to appeal against her decision.  Miss Lam has set out at length those parts of the judgment by Her Honour when she granted leave.

43.  To begin with, I do not have the advantage of having Sir John Swaine SC (who appeared before HH Judge M Ng) to argue the constitutionality defence before me.  The Defendant, if they wish to advance the same argument, should make the point in details in the hearing.  I cannot rely on the bit and piece of Sir John Swaine’s argument recorded in HH Judge M. Ng’s judgment to speculate the argument advanced.  And it remains the position that the similar defence in Nam Tai’s case has been struck out by HH Judge M. Ng.  I have the benefit of reading the Nam Tai Striking Out Judgment of HH Judge M. Ng and I agree with her reasoning.  In fact, Her Honour has after a detail analysis concluded that section 75 is not in violation of BOR10 and/or BL35, the constitutionality defence is not a reasonable defence.

44.  In particular, on the argument by Sir John Swaine that the Board of Review is not a specialized tribunal, I have dealt with the point hereinbefore. And on the argument whether the Bryan Principle also applies to BL35, I have also consider the point. They do not raise reasonable defence.

45.  In giving leave to appeal, the judgment and reasoning of Her Honour Judge Ng is only relevant to the consideration if leave of appeal should be granted.  There is no suggestion that Her Honour thinks that she has erred in her judgment of striking.  In saying that there is an arguable ground of appeal, that must be read in the context of the matters raised in Nam Tai’s case, and the submission of the defendant. 

46.  On these analyses, I agree with Mr. Wong that there is no breach of BOR10 and BL35, if they apply to tax matters.  I am not convinced that I should stay the proceedings.  I am confirmed by counsel that the appeal by Nam Tai has been abandoned.  And the ruling in A. Cheung J.’s case would only affect the way how the Defendant may proceed with the appeal against the decision of the Board of Review.  

47.  I therefore order that the Defence be struck out and I grant judgment in favour of the Plaintiff for the sum of HK$2,403,051.00 with interest thereon at judgment rate from 8 December 2009 until payment. 

48.  I also grant an order nisi that the Plaintiff do have costs of the application and of the action (including all costs reserved if any) to be taxed if not agreed with certificate for counsel.