NAM TAI TRADING CO LTD v. COMMISSIONER OF INLAND REVENUE

HCAL 80/2004 

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO.80 OF 2004

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J U D G M E N T

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1.  In these proceedings, the applicant (“NTEE”) applies to judicial review two decisions of the respondent (“CIR”) in connection with the additional profits tax assessment against NTEE for the year of assessment of 1997/1998.  They are:

(1)	The decision dated 11 May 2004 to holdover part of the tax payable under the Notice of Additional Profits Tax Assessment for 1997/1998 on condition that NTEE purchased a Tax Reserve Certificate (“TRC”) in the amount of HK$4,420,000 on or before 25 May 2004 pending the outcome of NTEE’s objection to the said assessment; and
(2)	The decision dated 28 May 2004 to charge a surcharge of 5% on the said sum of HK$4,420,000 consequent upon NTEE’s failure to purchase the TRC.

Background

(1) The Nam Tai group of companies

2.  NTEE is a company incorporated on 1 November 1983 under the laws of Hong Kong.  It is a company within the Nam Tai group of companies (“the Group”) that comprises the following companies:

(1)	Nam Tai Electronics Inc. (“NTEI”);
(2)	NTEE;
(3)	Nam Tai Electronics (Canada) Ltd (“NT Canada”);
(4)	Nam Tai Electronic (Shenzhen) Co Ltd (“NTSZ”);
(5)	Zastron Plastic & Metal Products (Shenzhen) Ltd (“Zastron”); and
(6)	Shenzhen Namtek Co Ltd (“Namtek”).

3.  NTEI is a BVI company.  NTEE and NT Canada, a Canadian company, are its wholly owned subsidiaries. 

4.  NTSZ, Zastron and Namtek are all PRC companies.  NTSZ and Zastron are wholly owned subsidiaries of NTEE.  NTEE holds 75% of Namtek directly and 25% indirectly through NTSZ.

5.  The Group deals mainly in the manufacture and trading of electronic products. 

(2) The operations of the Group

6.  On the operations of the Group, it is NTEE’s case that:

(1)	The Group had from about 1986 moved its manufacturing activities to the Mainland. By 1992, most of its operations had moved from Hong Kong to Shenzhen.
(2)	NTEI and NT Canada are responsible for providing management and administrative services to companies in the Group.
(3)	NTSZ is the manufacturing arm for the Group.
(4)	NTEE is responsible for selling products manufactured by the Group.  More than 99% of its purchases were supplied by NTSZ.
(5)	By 1996, most of the Group operations were performed by NTSZ and NT Canada. NTEE’s only operations in Hong Kong were sales co-ordination and consumer relations.

(3) Provision of management services and payment of management fees

7.  It is NTEE’s case that NTEI provided management services to NTSZ, Zastron and Namtek, the three PRC subsidiaries.  The management services were rendered by NT Canada.

8.  On the payment of management fees, NTEE’s case is that:

(1)	NTEI had paid management fees to NT Canada for the services rendered.
(2)	For management reasons, it was decided that NTEI would not charge the PRC subsidiaries directly for the provision of management services and expenses.  Instead, the accounting of the management fees charged by NTEI on the three PRC Subsidiaries was put through NTEE.
(3)	The management fees paid by NTEE to NTEI were recovered through the intra-group pricing policy.
(4)	Specifically for NTSZ, the management fees NTEE paid to NTEI on its behalf were recovered by including a margin on the purchases.

9.  At the same time, apart from paying its own employees, NTEE had been paying the employees of NT Canada for the provision of corporate services to NTEE and other companies within the Group, notably NTSZ and the other two PRC subsidiaries.

10.  In respect of the Group’s pricing policy, NTEE’s case is that it is decided according to the market.  Each year, after the Group’s budget is prepared, the budgeted profits will be shared among the subsidiaries, according to their functions and contributions.  In the case of NTEE, it had been allocated a gross profit margin of approximately 7% each year so as to cover its budgeted expenses and the management fees charged by NTEI, leaving a small operation profit.   

(4) The1996 and 1997 service agreements between NTEI and NTEE

11.  For the years in question, namely 1996 and 1997, NTEE had entered into two services agreements with NTEI for the provision of services by NTEI to NTEE.  Both agreements provide for the payment of a fee by NTEE to NTEI in consideration of services rendered by NTEI to NTEE.  Schedule I to both agreements set out the services to be provided.

12.  Under clause (2) of the 1996 service agreement, the fee payable is the aggregate of 2.9%, 6.5% and 25.9% of the respective total turnovers of NTSZ, Zastron and Namtek, subject to the specified minimum payments.  The fee is to be computed by reference to the respective monthly management accounts of the three PRC subsidiaries. 

13.  In the case of the 1997 service agreement, clause (2) provides that the fee is the aggregate of 3.2% and 6.5% of the respective total turnovers of NTEE and Zastron, subject to the specified minimum payments.  It further provides that the fee is computed by reference to the respective monthly management accounts of NTSZ and Zastron. 

(5) The service agreements between NTEE and the PRC subsidiaries

14.  For 1996 and 1997, NTEE had entered into service agreements with NTSZ, Zastron and Namtek, the terms of which are very similar.  The agreements provide for the engagement of NTEE by each of the three PRC subsidiaries to perform the services set out in Schedule I to the agreements.  In consideration of the services rendered, each of the PRC subsidiaries shall pay a fee to NTEE.  In the case of NTSZ, the amount of fee for both 1996 and 1997 is 7.4% of its total turnover, subject to a minimum payment.

15.  Except for the 1997 service agreement with Namtek, all the agreements contain the following clause relating to the method of payment of the fees, namely:

“The fee payable to [NTEE] … shall be realised by the purchase price for the finished goods purchased by [NTEE] from [the PRC subsidiaries] being reduced by the amount of the fee due under this Agreement.  Such purchase price shall be mutually agreed upon by both parties from time to time.  Such payment method may be changed if mutually agreed by both parties.”

In the case of NTSZ, this is contained in clause (7) of both the 1996 and 1997 service agreements.

(6) Payment of management fees by NTEE to NTEI

16.  It was recorded in the 1996 and 1997 management accounts of NTEE that NTEE had paid to NTEI:

(1)	In 1996, a sum of HK$36,742,830, comprising HK$32,313,540 management fees and HK$4,429,290 legal and professional fees; and
(2)	In 1997, a sum of HK$34,790,641 as management fees.

These payments were deducted from the gross profits of NTEE for the two years of assessment.

17.  It was also recorded in the audited accounts of NTEE for 1996 and 1997 that: (1) In 1996, management fees in the amount of HK$17,654,943 were received from subsidiaries; and (2) In 1997, management fees in the amount of HK$5,039,809 were received from subsidiaries.  The subsidiaries involved are Zastron and Namtek.

Events leading to the application for judicial review

18.  In December 2002, the Inland Revenue Department (“IRD”) began a tax audit of NTEE’s returns and accounts for 1996/97 to 2001/02.  NTEE was notified of the tax audit by letter dated 12 December 2002.  The decision to conduct a tax audit was preceded by a screening process in which the tax file of NTEE was examined.  In the course of the examination, IRD found that a significant part of NTEE’s profits was reduced by the payment of management fees to NTEI thereby also substantially reduced the profits tax liability of NTEE.    

19.  A number of meetings were held and correspondences were exchanged between NTEE and its tax representative, Messrs. Grant Thornton (“GT”) and the IRD.  Eventually on 28 February 2003, having regard to the information and documents provided by NTEE up to the time, CIR issued a Notice of Additional Assessment and Demand for Tax to NTEE for the 1996/1997 Year of Assessment.  Under the Notice, CIR disallowed deductions in NTEE’s computation of profits tax relating to, inter alia, the fees of HK$36,742,830 paid to NTEI.  The additional tax assessed was HK$10,878,750.

20.  On 10 March 2003, NTEE through GT lodged an objection against the 1996/1997 Notice of Additional Assessment, and also requested for a complete unconditional holdover of the tax in dispute pending the outcome of the objection.  On 28 March 2003, CIR issued a notice to NTEE, informing that tax of HK$5,000,000 would be held over on condition that TRC of the same amount be purchased, with the balance of the tax in dispute to be held over unconditionally.

21.  By a letter dated 7 April 2003 from GT, NTEE requested for a complete unconditional holdover of the entire tax in dispute. Thereafter, there were various discussions and correspondence between the representatives of GT and CIR on the issue of unconditional holdover and also the provision of outstanding information and documents requested by CIR.

22.  On 19 September 2003, after re-consideration, CIR issued a notice to NTEE granting a complete and unconditional holdover in respect of the entire amount of tax in dispute for the 1996/1997 Year of Assessment.

23.  By letter dated 7 November 2003, CIR requested NTEE for information and documents in respect of the 1997/1998 to 2001/2002 Years of Assessment.  Between December 2003 and March 2004, NTEE through GT provided the information and documents requested.  

24.  On 31 March 2004, having regard to the materials available, CIR issued a Notice of Additional Assessment and Demand for Tax to NTEE for the 1997/1998 Year of Assessment.  Under the Notice, CIR disallowed the deduction in NTEE’s computation of profits tax for the HK$34,790,641 management fees paid to NTEI.  The additional tax assessed was HK$5,166,411 (which is net of the 10% tax rebate from the government for the year in question).

25.  On 23 April 2004, NTEE through GT lodged an objection against the 1997/1998 Notice of Additional Assessment, requesting at the same time for a complete unconditional holdover of the tax in dispute pending the outcome of the objection.

26.  By a letter dated 10 May 2004 to GT (“the May Letter”), CIR set out her views on the issue of the deductibility of management fees paid by NTEE to NTEI and on NTEE’s objection to the additional assessment.  The letter also informed GT that the request for unconditional holdover of the tax in dispute could not be acceded to and notice of conditional holdover would be issued to NTEE separately.

27.  On 11 May 2004, CIR issued a notice to NTEE that tax of HK$4,420,000 would be held over on condition that TRC in the same amount be purchased by 25 May 2004, with the balance of the additional tax assessed in the sum of HK$748,411 be held over unconditionally.  

28.  By a letter dated 19 May 2004 and marked “without prejudice”, GT sought to review the issues relating to the deductibility of the management fees and requested CIR to grant a unconditional holdover in respect of the entire tax in dispute.  CIR gave her “without prejudice” reply on 24 May 2004. 

29.  On 28 May 2004, CIR issued a notice to NTEE for the charge of a 5% surcharge on the amount of HK$4,420,000, consequent upon NTEE's failure to buy the TRC by 25 May 2004.

30.  By a letter dated 12 June 2004, NTEE’s solicitors herein wrote to CIR seeking confirmation whether the May Letter had stated all the reasons for refusing the request for a complete unconditional holdover.

31.  CIR replied by letter dated 21 June 2004 (“the June Letter”).  The letter referred to paragraph 8 of IRD’s Departmental Interpretation and Practice Note No. 6 (“DIPN 6”).  In particular, it pointed out that as a rule of practice, if the facts known at the date of objection do not weigh definitely in favour of the taxpayer, then in the generality of cases, a stand-over will be ordered conditional upon the purchase of TRC in the amount of the tax being stood over.  It explained that NTEE’s case fell within this category and there should not be a departure from the existing policy.

32.  On the same day, NTEE commenced these proceedings.  Leave to apply for judicial review was granted on 3 July 2004.  The Notice of Motion was filed on 6 July 2004.

The grounds for judicial review

33.  A variety of grounds are argued on by NTEE in this judicial review application.  In summary, they are:

(1)	It is irrational and procedurally unfair for the CIR not to have regard to the principle of “like cases should be treated alike” and to treat the 1996/1997 and 1997/1998 Years of Assessment differently.  It is said that the situation of the two years of assessment, being broadly similar, CIR should give a consistent treatment and grant unconditional holdover of the entire tax in dispute for both years.
(2)	CIR had acted arbitrarily and failed to give adequate reasons for granting unconditional holdover only in respect of $748,411 but not in respect of the balance of $4,420,000.  As such, CIR is said to have acted irrationally and unreasonably and had abused her power under section 71(2) of the Inland Revenue Ordinance.
(3)	CIR had committed errors of law and fact in:
	(a)	asking whether there was cost sharing among the Group companies,
	(b)	asking whether there had been recoupment or recovery of management fees by NTEE from the PRC subsidiaries,
	(c)	failing to consider the service agreements between NTEI and NTEE, and the mode of payment of management fees under the service agreements between NTEE and the PRC subsidiaries,
	(d)	failing to note that a consistent 7.4% profit margin was recorded for NTEE in both the 1996/1997 and 1997/1998 Years of Assessment,
	(e)	concluding that there is no evidence of a recoupment of management fees by profit margin.
(4)	CIR’s failure to accord consistent treatment to NTEE and, in turn, the refusal to grant a complete unconditional holdover was in the circumstances unfair and amounted to an abuse of power.
(5)	CIR had failed to have regard to NTEE” s legitimate expectation that it would be granted a complete unconditional holdover for the 1997/1998 Year of Assessment.
(6)	It was disproportionate to refuse a complete unconditional holdover for the 1997/1998 Year of Assessment given that unconditional holdover was granted for the 1996/1997 Year of Assessment and that the additional assessments for both years were protective.

34.  NTEE seeks declarations that the decisions challenged are null and void, orders of certiorari to quash the decisions and an order of mandamus that an unconditional holdover be granted in respect of the $4,420,000 tax in dispute.  Alternatively, NTEE seeks a mandamus that its request for a complete unconditional holdover of the tax in dispute for the 1997/1998 Year of Assessment be remitted to CIR for re-consideration.

The Inland Revenue Ordinance (“IRO”)

35.  Sections 16, 17, 60, 61A and 71 of the IRO are relevant to the present application. 

36.  Sections 16 and 17 deal with deductions for the purpose of computing profits tax.  Under section 16(1), in ascertaining the profits in respect of which a person is chargeable to tax for any year of assessment, “there shall be deducted all outgoings and expenses to the extent to which they are incurred … by such person in the production of profits in respect of which he is chargeable to tax”.   Section 17(1)(b) provides that no deduction shall be allowed in respect of “any disbursements or expenses not being money expended for the purpose of producing” the chargeable profits.

37.  Section 60 concerns additional assessment of tax.  Under the sub-section (1), where it appears to an assessor that a person chargeable with tax has been assessed at less than the proper amount, the assessor may within six years after the expiration of the year of assessment, assess such person at the “additional amount at which according to his judgment such person ought to have been assessed”.

38.  Section 61A relates to transactions designed to avoid liability for tax.  Under sub-section (1), the section applies to transactions that have the effect of conferring a tax benefit on a person (i.e. the relevant person) and, having regard to the matters set out therein, “it would be concluded that the person, or one of the persons, who entered into or carried out the transaction, did so for the sole or dominant purpose of enabling the relevant person, either alone or in conjunction with other persons, to obtain a tax benefit”.  Sub-section (2) provides, inter alia, that the CIR may assess the liability to tax of the relevant person as if the transaction or any part thereof had not been entered into or carried out. 

39.  On payment and recovery of tax, section 71(2), which is directly relevant to this application, provides as follows:

“	71(2)	Tax shall be paid notwithstanding any notice of objection or appeal, unless the Commissioner orders that payment of tax or any part thereof be held over pending the result of such objection or appeal;
		Provided that where the Commissioner so orders he may do so conditionally upon the person who or on whose behalf the objection or appeal is made providing security for the payment of the amount of tax or any part thereof the payment of which is held over either –
		(a)	by purchasing a certificate issued under the Tax Reserve Certificates Ordinance (Cap. 289); or
		(b)	by furnishing a banker’s undertaking, as the Commissioner may require.”

The additional tax assessments and NTEE’s objections

40.  Before going into the grounds of challenge, it is important to understand NTEE and CIR’s respective positions on the additional tax assessments and the objections to it.  The two additional assessments were made because CIR takes the view that the management expenses NTEE paid to NTEI in respect of services provided to the PRC subsidiaries were not outgoings or expenses incurred by the taxpayer in the production of profits chargeable to tax within the meaning of section 16(1), and the deduction claimed by NTEE in respect of the management fees paid to NTEI should therefore be disallowed under section 17(1)(b) of IRO. 

41.  In coming to this view, CIR has regard to the fact that the services provided by NTEI through NT Canada were solely for the benefit of the PRC subsidiaries and did not benefit NTEE and there was no costs sharing agreement among the Group companies.  In this regard, NTEE has maintained that under the service agreements it made with NTEI, it had a binding contractual obligation to pay management fees to NTEI.  In GT’s letter dated 19 May 2004, it was also said that the services provided to NTSZ were primarily for generating taxable sales to NTEE.  However, the letter also accepted that “NTEE was nothing more than a passing through entity that exists solely for accounting purposes”           

42.  CIR’s decision to make additional assessments was also predicated upon her view that there was no recouping by NTEE from the PRC subsidiaries of the management fees paid to NTEI.  This is because CIR considers that the management fees paid to NTEI is commercially unrealistic in that it was not paid on a user-pay basis, given that NTEE alone was paying for all the group companies.  Therefore, to the extent the management fees paid to NTEI were not reimbursed, they were not incurred in the production of chargeable profits. 

43.  NTEE’s primary position on this is that it matters not whether and how NTEE could recoup the management fees or a portion of from other Group companies.  Alternatively, NTEE’s case is that the management fee costs was recovered by including a margin on its purchase costs paid to the PRC subsidiaries.  Reliance was also placed on the service agreements made between NTEE and the PRC subsidiaries.  In other words, NTEE’s case is that there was indirect recouping of the management fees paid to NTEI.  Thus, it is both relevant and important to ascertain whether there is evidence of indirect recouping of management fees in the manner claimed by NTEE.

44.  For NTEE, it is said that there is no evidence that the provision in the service agreements between NTEE and the PRC subsidiaries dealing with payment of management fees was not genuine and not implemented.  Further, NTEE had maintained a consistent pattern of profit margin between 1996 and 2002.    It repeatedly stressed that the 7% gross margin allocated to NTEE under the intra-group pricing policy, was sufficient to enable NTEE to cover its own operating expenses and the management fees paid to NTEI, leaving a small operating profit.  In GT’s letter dated 19 May 2004, in reaffirming that NTEE was a paper company that exists solely for accounting purpose, it was said that, but for the recovery of NTEI’s management fees, there was no justification for allocating 7% gross profit margin to NTEE annually. 

45.  CIR, on the other hand, says there is no evidence of the management fees being recovered in the manner contended.  It is said there is no evidence of the profit margin reflecting an element of recovery.  The IRD had conducted an analysis on the accounts of NTEE of the relevant years.  The analysis on the gross profit ratio reveals a consistent declining trend.  CIR’s stance is that either the management fees paid to NTEI was recovered either directly or indirectly.  If it was indirectly as claimed by NTEE, then the fees should have come off from the purchase costs paid to the PRC subsidiary in question. This would have resulted in an increase in the profit margin of NTEE.

46.  Evidently, whether there had been recouping of management fees from the PRC subsidiaries is critical to the differences between NTEE and CIR on the issue of the deductibility of the management fees paid to NTEI for the two Years of Assessment.

47.  In this connection, it is paramount to note that the resolution of the dispute over the deductibility of the management fees paid to NTEI is not a matter for this court in these proceedings.  The CIR had made additional profits tax assessments based on its view on the issue.  NTEE had given notices of objections together with reasons for them.  The dispute is to be resolved by the procedures established under the IRO.

CIR’s decisions to holdover the tax in dispute

(1) The situations in 1996/1997 and 1997/1998

48.  I turn now to the CIR’s decisions to holdover the additional tax assessed to be payable for 1996/1997 and for 1997/1998.  A fundamental contention underlying the present judicial review is NTEE’s argument that the situations for the two Years of Assessment are the same and that CIR had behaved inconsistently and treated the respective requests to holdover the tax assessed to be payable for the two Years of Assessment differently. The question that must therefore be answered is whether the contention is right?

49.  For the year of 1996/1997, the CIR’s initial refusal to grant an unconditional holdover of the tax in dispute, NTEE through GT had provided further documents and information.  They showed that NTEE had received management fee payments from NTSZ, Zastron and Namtek totalling HK$17,654,943.  This represents a direct recouping of a substantial portion of the management fees NTEE paid to NTEI in that year.  The documents provided also verified payment of management fees by NTEI to NT Canada. 

50.  As for 1997/1998, the information available showed that Zastron and Namtek had paid management fees to NTEE in the respective sums of HK$2,793,631 and HK$2,246,178, totalling HK$5,039,809.  There is thus evidence of direct recouping of the management fees paid on behalf of these two PRC subsidiaries to NTEI.  In the case of NTSZ, it is not in dispute that it did not make any management fees payment to NTEE.  As noted above, NTEE’s case is that the recovery is by including a margin in its purchases from NTSZ.

51.  Thus viewed, on the question of recouping of management fees from the PRC subsidiaries, the situations in 1996/1997 and 1997/1998 are not the same.  Given the significance of the question to the dispute over the deductibility of the management fees paid to NTEI, the situations in the two Years of Assessment can in no way be said to be broadly similar.  They are fundamentally different.

52.  It is this fundamental difference that led the CIR to reach different conclusions on NTEE’s requests to grant unconditional holdover for the tax in dispute in the two Years of Assessment.

(2) The IRD’s policy under DIPN 6

53.  As explained by the CIR in the June letter, the IRD’s practice and policy in dealing with requests to holdover tax in dispute is contained in DIPN 6.  Under paragraph 8(ii), it is stated that upon the receipt of a valid objection to assessment and a request for holdover:

(a)	Where it is immediately apparent to an Assistant Commissioner or an authorized officer that the objection should be allowed forthwith, an unconditional stand-over will be granted.
(b)	Where it is the opinion of an Assistant Commissioner or an authorized officer that the objection has little chance of success, no stand-over will be granted.
(c)	Where it is the opinion of an Assistant Commissioner or an authorized officer that the objection has some merit but that the balance of probability, based on the facts known to exist at the date of objection, does not weigh definitely in favour of the taxpayer, a stand-over will be ordered conditional upon the purchase of TRC in the amount of the tax stood-over.

(3) The CIR’s reasons for the decisions 

54.  In respect of the request to holdover the tax in dispute for the 1996/1997 Year of Assessment, despite her initial refusal, the CIR did eventually grant an unconditional holdover of the entire amount, after receiving further information and documents.  The decision was essentially driven by the consideration that there was evidence of direct recouping of a substantial portion of the management fees paid to NTEI. 

55.  In the case of 1997/1998, the CIR granted a partial unconditional holdover.  The portion of tax that was unconditionally stood over represented the tax assessment on the amount of management fees received from Zastron and Namtek.  Mr Alan Shum, the Assessor who recommended the partial unconditional holdover, was of the opinion that, based on the facts available at the date of objection, except for the part that had been recouped from or reimbursed by Zastron and Namtek, the objection to the additional assessment based on the disallowance of the management fees paid to NTEI did not, on balance of probabilities, weigh definitely in favour of NTEE.  Accordingly, the CIR granted an unconditional holdover only for the tax covering the part of the management fees that had been recouped from Zastron and Namtek (i.e. HK$748,411).  As for the balance of the tax disputed (i.e. HK$4,420,000), the holdover was granted on the condition that TRC in the like amount should be purchased.

56.  As indicated in the June Letter, the CIR’s decisions on the requests to holdover the tax in dispute are based on the policy set out in DIPN 6.   An examination of the deliberations as explained by Mr Shum confirms that the decisions are the result of the application of the policy and the CIR’s assessment of the merits of the objections to the assessments for the two Year of Assessments.   As noted above, the availability of evidence of recouping of management fees paid is of critical importance to the assessment of the merits of the objections. 

57.  As Mr Cooney rightly points out, it is not my function to substitute my views for those of the Assessor or the Assistant Commissioner in assessing the chances of success of the objections.  The court only has a limited supervisory role to play in judicial review proceedings.  It should not interfere unless the view of the CIR, who clearly has knowledge and expertise in tax matters, is so outrageous in its defiance of logic that no sensible person who had applied his mind to the question to be decided should have arrived at it: Tong Po Wah v. Hong Kong Society of Accountants [1998] 3 HKC 82.  

Considerations of the grounds for judicial review

58.  I turn now to deal specifically with the grounds relied upon by NTEE in this application.  As the above analysis and discussions show, the basic contention underlying the present application, namely, the situations for the two Years of Assessment are the same or broadly similar, is untenable.  The challenge that the CIR did not have regard to the principle of “like cases should be treated alike” has no proper foundation.  There is also no foundation for the challenge that the CIR acted arbitrarily in granting a partial unconditional holdover for 1997/1998.  Similarly, the challenge that the CIR had failed to accord consistent treatment to NTEE such that the refusal to grant a complete unconditional holdover is unfair, is also without basis. 

59.  Quite the contrary, it can be seen that the CIR had acted consistently in adopting the department’s policy on requests to holdover tax in dispute.  In dealing with the requests for unconditional holdover, the CIR’s deliberations and decisions are consistently premised upon her assessment on the merits of the objections to the disallowance of the management fees paid to NTEI.  The CIR had also consistently assessed the merits of the objections by reference to whether the management fees paid to NTEI had been recovered from the PRC subsidiaries.      

60.  NTEE has argued that the CIR had not given adequate reasons for her decision when granting a partial unconditional holdover.  It places great reliance on the fact that the May and June Letters did not explain the rationale for the unconditional holdover in respect of HK$748,411.  In my view, the two letters had adequately explained to NTEE, and its professional tax representative and legal adviser, that the decision was the result of the application of DIPN 6 and the CIR’s views on the merits of the objections.  It is evident from GT’s letter dated 19 May 2004 that it was aware that a critical difference between its and the CIR’s views on the deductibility of the management fees paid to NTEI is the recouping of the fees from the subsidiaries, and the availability of evidence to substantiate this.  I agree with Mr Cooney that fairness does not require the CIR to give further details of the decision.  It should also be noted that neither GT nor NTEE’s solicitors did not in their letters to the CIR sought explanations for the part that was unconditionally held over.    

61.  As to the challenge that the CIR had made errors of facts and law, it is in substance a criticism of the CIR’s views on the relevance and importance of the recouping of management fees from the PRC subsidiaries.  As already noted, the dispute over the additional assessments is not a matter for this court in these proceedings.  Suffice to say, the CIR’s views on the matter cannot be said to be wholly without legal basis.  In particular, I consider that the CIR is entitled to take the view that she was only concerned with the tax position of NTEE but not with what may be the position of the Group as a whole: see Inland Revenue Board of Review Decision No.111/03.

62.  It is clear from the correspondences exchanged that the CIR fully understood the positions taken by NTEE and GT and the objections to the assessments.  The CIR was also fully alert to the matters or facts that NTEE relied upon.  She had referred to the contractual obligations under the service agreements, but took the view that they are not determinative of the matter in dispute, a view shared by GT.  She had also dealt with the profit margin of NTEE but did not agree that it reflected an element of recovery of management fees. The suggestion that she had failed to have regard to the relevant facts is not justified.  

63.  NTEE refers to the disallowance by the Shenzhen tax authorities of half of the management fees from NTSZ to NTEE in 1996. It is said that NTEE had to waive the management fees, and that despite this, the gross profit margin for 1997 was not adjusted.  Mr Chua submits that the CIR errs in not having regard to this, which explains why there was no recoupment of all the management fees.  However, the disallowance was only by notice dated 6 April 2000, well after the 1997 accounts were prepared.  It could not have been within the consideration of the management when preparing the 1997/1998 accounts.  I am also unable to understand how this affords a reasonable explanation of NTEE not recouping the management fees from NTSZ in 1997/1998.      

64.  On the challenge of legitimate expectation, there can be no legitimate expectation arising from the CIR’s decision to grant a complete unconditional holdover for the 1996/1997 additional assessment.  The question of tax liability for one year is always to be treated as inherently a different issue from that of liability for another year: Caffour v. Commissioner of Taxation, Colombo [1961] AC 584 at 598.   At any rate, the CIR was only dealing with the chances of success of the objections when considering the requests for unconditional holdover.

65.   Finally on the challenge of proportionality, quite apart from the fact that this was not raised in the Form 86A, I do not accept that this has any application to the present case.   Among other matters, the additional assessment in question is not an estimated or protective assessment.  It is clear from the evidence that it was issued after mature deliberations and based upon clear calculations.  I also share the reservations against extending the doctrine of proportionality to cases like the present, which do not concern fundamental human rights. 

Conclusion

66. For the reasons stated above, the judicial review application is dismissed.  Applying the normal rule of costs follow event, I make an order nisi that the applicant pays the respondent the costs of these proceedings, to be taxed if not agreed.