CLEAN WATER LTD v. COMMISSIONER OF INLAND REVENUE

HCIA 2/2023

[2023] HKCFI 744

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 2 OF 2023

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BETWEEN

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DECISION

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Introduction

1.  This is the Applicant’s application by summons of 13 February 2023 for leave to appeal against the Decision of the Inland Revenue Board of Review (“Board”) of 13 January 2023 in D27/22 (the “Decision”) dismissing the Applicant’s appeal against the determination of the Acting Deputy Commissioner of Inland Revenue dated 5 July 2022 (the “Determination”) confirming the profits tax assessments for years of assessment 2012/2013 to 2015/2016 (the “Assessment Years”, and “Assessments”).

The core facts

2.  The Applicant was a private company incorporated in Hong Kong in 2008.

3.  In each of the Applicant’s Reports and Financial Statements for the Assessment Years, the Applicant’s principal activity is described as “provision for evaporator design, marketing development and consulting services in China during the period.”

4.  The Applicant claimed that for each of the Assessment Years, its income was derived outside Hong Kong and hence not chargable to profit tax.

5.  The assessor has made repeated requests to the Applicant for information or documents to make good its claims. Some ultimately were provided. One batch (comprising 10 items[1]) was provided on 8 July 2022, only after the issuance of the Determination. The other batch (comprising 9 items, 4 of which amongst the 1^st batch)[2] was provided on 4 August 2022 when the Applicant lodged its appeal against the Assessments.

6.  During the appeal before the Board, the Applicant called no witness. But in that very morning, the Applicant made application to adduce another bundle of documents[3] (“B2 Documents”, the “B2 Application”). Having considered inter alia the lateness of the application, absence of any oral evidence from the Applicant with which the B2 Documents could be evaluated, depravation of any chance for the Commissioner of Inland Revenue (“CIR”) to cross-examine, and the prejudice to the CIR, the Board refused the application.

7.  The Board then assessed the evidence before it. Applying the legal principles discussed[4], the Board concluded that:

“the [Applicant] has failed to discharge its burden that the profits in question were wholly derived outside Hong Kong. It is our conclusion that the [Applicant] has failed to discharge, under section 68(4) of the Ordinance, its onus of proving that the Profits Tax assessments for the years of assessment 2012/13 to 2015/16 were excessive or incorrect.”

Appeal on point of law only

8.  Under s 69(1) of the Inland Revenue Ordinance (Cap 112), an appeal against the Decision may be made only on a ground involving only a question of law.

9.  The proposed ground should be a proper question of law which a reasonable prospect of success – see Cheung Hung Kit v CIR [2021] HKCFI 233 at §§3-6, and China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146 at §30.

10.  The Applicant proposes to rely on 4 grounds of appeal, as follows.

Proposed Ground 1

11.  The proposed Ground 1 reads as follows[5]:

“When determining the source of profits in tax assessment, what is the correct standard of proof? Specifically, whether the taxpayer has to satisfy the Board to be certain of (1) what the taxpayer done to earn the profits in question and (2) where he has done so?”

12.  In the Decision:

(a) the Board correctly reminds itself of the guiding principle on profits tax assessment as explained by Lord Jauncey in CIR v HK-TVB International Ltd [1992] 2 AC 397 at 407C-D, that “one looks to see what the taxpayer has done to earn the profit in question and where he has done it”;

(b) the Board notes ING Baring Securities (Hong Kong) Ltd v CIR (2007) 10 HKCFAR 417 in relation to the source of profits, that inter alia the relevant operations do not comprise the whole of the taxpayer’s operations but only those which produce the profit in question;

(c) on the question of burden of proof, the Board at §43 correctly reminds itself of the observations of A To J in CIR v Common Empire Limited (No.2) [2007] 3 HKLRD 75 at §32, that:

“Thus, the law is very well settled. Section 68(4) of the Inland Revenue Ordinance imposes on the taxpayer the legal or persuasive burden of proving that the assessment appealed against is excessive or incorrect. The Commissioner has no burden of proving that the assessment is correct. Hence, the Board is not bound to make any finding of fact one way or the other. If the taxpayer fails to adduce any evidence to discharge his burden, or if his evidence is disbelieved, the appeal shall be resolved on burden of proof by dismissing the appeal and upholding the assessment.”

13.  The Board has clearly identified the burden of proof correctly.

14.  In so far as the standard of proof is concerned, there is no dispute that it is the civil one of balance of probabilities.

15.  The Applicant seeks to argue that the Board has got the standard of proof wrongly, and that it has applied a “wrong and higher standard of proof”.

16.  In the Decision, the Board has never said that it applied any higher standard of proof.

17.  In its attempt to substantiate the proposed Ground 1, the Applicant points to §§72, 74 and 78 of the Decision.

18.  In context, what happens is that after reciting the relevant legal principles:

(a) the Board proceeds to consider the parties’ submissions (§§47 to 60);

(b) the Board then at §61 identifies the 2 question explained by Lord Jauncey in CIR v HK-TVB International Ltd (the “What Question” and the “Where Question”);

(c) the Board at §§62 to 71 considered the evidence as to what the Applicant has done to earn the profit. At §62, the Board notes that neither party has called any witness;

(d) then, having considered and discussed the evidence, the Board concludes at §72 in respect of the What Question that:

“On the face of the documents, we were not certain what services were exactly provided by the [Applicant] to earn the amount of HK$14,429,750.00 during the material period”;

(e) Then, in respect of the Where Question, the Board observes that:

“74. Since we are not certain on what exactly the [Applicant] did to earn the income, it follows that we are not certain that the services were totally provided or rendered in the Mainland.

…

78. In the absence of explanation provided by the [Applicant] to remove the doubts arising from the suggestion, we could not be certain on the place in which the [Applicant] provided the services to earn the incomes or profits in question.”

19.  Words like “certain” and “doubts” are ordinary English words. Their mere use does not suggest the application by the Board of any higher standard like the criminal standard of beyond reasonable doubt.

20.  I have considered the structure of the Decision, and the Board’s consideration and analysis of the evidence before it as discussed therein. I agree with the CIR’s Statement that reading the Decision as a whole, what the Board clearly means is simply that there is insufficient evidence for it to make any positive finding as contended for by the Applicant.

21.  The applicable standard of proof is well established and is not in contention. The proposed Ground 1 is in effect a disguised attempt to attack the consideration and analysis of the evidence by the Board, and the finding and conclusion it has reached as a result, which in my view are beyond challenge applying the usual test – see Cheng Hung Kit v CIR [2021] HKCFI 233 at §5.

22.  In my view, the proposed Ground 1 is not reasonably arguable and has no prospect of success.

Proposed Ground 2

23.  The proposed Ground 2 reads as follows[6]:

“In applying the broad guiding principle in [HK-TVB], whether the uncertainty in the exact services rendered by the taxpayer necessarily preclude the Board from assessing the location of any or any of the services rendered and in turn the source of profits in question?”

24.  At §14(1) of the its Statement, the Applicant claims that:

“Having been able to find that it was ‘more probable that the Applicant’s business was more marketing development of evaporator’ (see §79 of the Decision), the Board erred in holding that it could not answer [the What Question] on existing materials. ”

25.  The Applicant has failed to quote what the Board has stated at §79 of the Decision in its full context.

26.  §79 is under the heading of “Whether the [Applicant] had any business activities in Hong Kong?” The Board first of all makes reference to the principal activities reported in the Applicant’s audited accounts (which I have cited above). In that light, the Board proceeds to consider “the [Applicant’s] submission that such service fees were earned by Ms Wang (for the [Applicant]) solely. The services provided were limited only to as an interpreter …”[7] It is in that context and in respect of those submissions that the Board observes at §79 that:

“If ‘interpretation’ was the main business, the [Applicant] should add in ‘interpretation services’ as one of its principal activities in its audit reports issued in the subsequent years once it found that its services provided were limited to ‘interpretation’ and its claimed income of several million a year was from ‘interpretation’. In the absence of express wording of ‘interpretation’ as its principal activity or one of principal activities in its audited financial statements, we feel it more probable that the [Applicant’s] business was more ‘marketing development of evaporator’ than ‘interpretation’.” (Emphasis added.)

27.  What the Board is observing there is that as between “marketing development of evaporator” and “interpretation”, the Board feels it more probable that the Applicant’s business was more the former than the latter.

28.  At §14(1) of the its Statement, not only has the Applicant failed to set out the full context, its has also only quoted the underlined part of §79 of the Decision, but sees fit to leave out the words (which I have reproduced in bold) of “than interpretation”.

29.  In any event, I am of the view that CIR’s submissions[8] are clearly correct, that the Board is there only discussing in general what the Applicant’s principal business was, which is different from the What Question, which is directed at the specific transactions or operations that gave rise to the profits in question.

30.  Upon the Applicant’s failure to prove and answer the What Question, the Where Question simply cannot be answered.

31.  The proposed Ground 2 is not reasonably arguable, and has no prospect of success.

Proposed Ground 3

32.  The proposed Ground 3 reads as follows[9]:

“In assessing the veracity of documentary evidence, whether the Board should have regard to the taxpayer’s assertion in argument which (1) does not amount to evidence, and (2) is not supported by or consistent with the said documentary evidence?”

33.  The proposed Ground 3 is a most unusual and curious ground for the Applicant to make. It is in effect saying that the Board has erred in considering the submissions and arguments advanced by the Applicant’s own representative on its own behalf during the appeal.

34.  The Applicant relies on CIR v Crown Brilliance Ltd [2016] 3 HKC 140 at §19.

35.  But Crown Brilliance was an appeal by the CIR, the complaint being the Board’s acceptance of the submissions and representations made by the taxpayer’s representative during the hearing, which was not evidence. That case does not assist the Applicant at all.

36.  Further and in any event, the Board has[10], with reference to Crown Brilliance, reminded itself of the status of any representation by the taxpayer’s representatives that is not supported by evidence. As has been pointed out by the CIR[11], the Board has qualified the assertions (that the profits were earned by interpretation service) as being “claimed” or “purported”[12].

37.  The proposed Ground 3 is not reasonably arguable, and has no prospect of success.

Proposed Ground 4

38.  The proposed Ground 4 reads as follows[13]:

“Where an appeal before the Board concerns more than one year of assessment, what is the proper approach of the Board when determining the source(s) of profit? In particular, whether the Board is required to consider the source(s) of profits of each individual year of assessment separately?”

39.  This ground is not reasonably arguable and has no prospect of success:

(a) In terms of the approach to be adopted, the Board has reminded itself, with reference to ING Baring:

(i) that the Court should consider, not of the operations which produced the profits in question, but more narrowly of the operations of the taxpayer which produced them;

(ii) the relevant operations do not comprise the whole of the taxpayer’s operations but only those which produced the profit in question;

(iii) the focus is on establishing the geographical location of the taxpayer’s profit-producing transactions themselves as distinct from activities antecedent or incidental to those transactions;

(b) The Applicant has not put forward any authority in support of its stance that the approach should be “the source of profits for each individual year of assessment separately”[14], as opposed to the approach as explained by the Court of Final Appeal in ING Baring;

(c) In any event, when before the Board, the Applicant did not suggest that there had been any change in the operation of its business during the Assessment Years[15];

(d) The Applicant seeks to argue that the Board should have considered some of the B2 Documents. However, the Applicant is not seeking to argue that the Board’s decision refusing the B2 Application was erroneous. No specific ground of appeal has been put forward in that regard;

(e) In any event, I accept the CIR’s submissions[16] that the Board’s decision in rejecting the B2 Application was an exercise of the Board’s discretion under s 68(7) of the Inland Revenue Ordinance, of case management in nature, and will only be interfered with if the Board had exercised its discretion “wrongly, not in accordance with the recognised principles” – CIR v Perfekta Enterprises Ltd [2018] HKCA 301 at §8.5;

(f) Rather than wrong or not in accordance with any recognised principles, the Board’s decision rejecting the B2 Application is in my view entirely justified;

(g) The balance of the proposed Ground 4 is concerned with the Board’s assessment of the evidence, which discloses no arguable question of law.

Disposition

40.  For the above reasons, I dismiss the Applicant’s application for leave to appeal.

41.  I make a costs order nisi that the Applicant is to pay the costs of the CIR, to be taxed if not agreed.