YUE YUEN MARKETING CO LTD AND OTHERS v. COMMISSIONER OF INLAND REVENUE

HCAL 49/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST

NO. 49 OF 2009

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J U D G M E N T

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I.   INTRODUCTION

1.  The Applicants seek judicial review of profits tax assessments raised by the Commissioner against them in relation to financial years 1997/98, 1998/99, 1999/2000, 2000/2001, 2001/2002 and 2002/2003.

2.  The assessment for 1997/98 was raised in 2004, just before the expiry of the 6 year limitation for making assessments in Inland Revenue Ordinance (Cap. 112) (IRO) s. 60.  Thereafter, between 2005 and 2009, assessments for financial years 1998/99 to 2002/2003 were routinely made just before the expiry of the 6 year limitation for each financial year.  In every case, the Applicants objected within the 1 month period stipulated in IRO s. 64 (1).  The Commissioner has yet to determine any of the objections by the Applicants.

3.  The Applicants regularly applied for holdovers of the profits tax assessed, pending the Commissioner’s determination of their objections.  But at all times the Commissioner only agreed to holdovers on condition that the Applicants purchased Tax Reserve Certificates (TRCs).  The Commissioner has required the Applicants to buy TRCs to a total value of about $432 million.  To date, the Applicants have purchased TRCs to the value of about $315 million.  That amounts to about 30% of the tax demanded for the financial years which are the subject of this judicial review.

4.  It is the Applicants’ case that all their manufacturing activities (the source of their profits) have taken place outside Hong Kong.  Consequently, they should not have been chargeable to Hong Kong profits tax under IRO s. 14.  The Applicants complain that, because the Commissioner has failed to make any determination on their objections, they are unable to appeal against any of the assessments to the Board of Review.  They contend that they have been forced by the Commissioner’s inaction on their objections to proceed by judicial review.

5.  In their Notice for Judicial Review, the Applicants say that the various assessments raised against them are unlawful on 2 grounds:-

(1) The Commissioner abused her powers by making the assessments because, the Applicants’ profits having a non-Hong Kong source, were not susceptible to profits tax at all.

(2) The Commissioner has failed to deal with the Applicants’ objections to the assessments “within a reasonable time” contrary to the Commissioner’s duty under IRO s. 64(2).

6.  The Applicants ask that the assessments (including the requirement that the Applicants buy TRCs as security for the holdover of any payment due in connection with the assessments) be quashed.

II.  BACKGROUND

7.  The Applicants belong to the Yue Yuen Group.  The Group makes athletic and casual outdoor footwear for international brand name companies.  The Group’s business is sometimes described as that of OEM and ODM (Original Equipment Manufacturers or Original Design Manufacturers).  The Group started as a shoe manufacturing business in Taiwan in 1969.

8.  The Applicants are wholly-owned BVI subsidiaries of Yue Yuen Industrial (Holdings) Limited (YYIHL), a Bermuda company which has been publicly listed in Hong Kong since 1992.  The first 3 Applicants are held by YYIHL through Pou Hing Indutrial Co. Ltd. (a BVI company) (Pou Hing).  The remaining 5 Applicants are held by YYIHL through a chain of companies.  In particular, Pou Hing holds 100% of Yue Yuen Industrial Limited (a Hong Kong company) (YYIL); YYIL holds 100% of Pou Yuen Industrial (Holdings) Limited (a Hong Kong company) (PYIHL); and PYIHL holds 100% of the 4^th to 8^th Applicants.

9.  Before 1992 YYIL manufactured athletic shoes in the Mainland.  In 1992, when YYIHL was listed, the 1^st and 3^rd Applicants took over YYIL’s manufacturing business.  Since 1992, YYIL has been engaged in investment holding and property investment.  On 21 August 1992 the Revenue wrote to YYIL to confirm that it had no assessable profits for its financial year ended 30 September 1991 in relation to its manufacturing activities in the Mainland.  On 24 February 1993, the Revenue wrote to YYIL stating that it would not require YYIL to submit annual profits tax returns “until it commences/recommences to carry on a trade or business in Hong Kong, or to earn profits subject to Hong Kong profits tax”.

10.  PYIHL carries on manufacturing and sales operations in the Mainland and Taiwan through the 4^th to 8^th Applicants.

11.  It is the Applicants’ case that their business is managed from Taiwan and is largely operated outside Hong Kong.  I say “largely” because the Group maintains a Hong Kong office for the purpose of administrative support, including compliance with the Hong Kong Stock Exchange’s requirements for maintaining YYIHL’s listing here.  The administrative support is provided by Friendsole Limited, a Hong Kong company, owned 100% by YYIHL through Pou Hing.  Friendsole pays profits tax on income derived from the provision in Hong Kong of such services.

12.  Otherwise, the Applicants stress that the Group’s research and development centres are located either in Taiwan or the Mainland, that the Group’s sales orders are negotiated by representatives in Taiwan or elsewhere outside Hong Kong; that major functions (such as customer relationship, planning, costing, purchasing, quality control, shipping and invoicing) are “mostly performed by [the Group’s] respective offices and production plants either in Taiwan or in [the Group’s] Overseas Factories [in Vietnam, Indonesia and the Mainland]”; and that manufacture of the Group’s products takes place in Taiwan or the Group’s Overseas Factories.  The Applicants further note that YYIHL’s executive directors all live in Taiwan and “rarely have reason to visit Hong Kong”.

13.  By letter dated 14 January 2004 the Revenue informed YYIHL that the tax affairs of certain companies within the Group would be subject to a tax audit for the 6 financial years running from 1997/98 to 2002/2003.  The audit has been ongoing until now, with the Revenue seeking significant amounts of documents and information from the Applicants.

14.  The assessments raised by the Commissioner against the Applicants each contain a Note.  The assessments are “protective assessments” in the sense that they were made to forestall the application of the 6 year limitation in the IRO.  The Note states:-

“Assistant Commissioner’s Note:-

1.  It is my view that the profits booked in [name of relevant Applicant] in substance arose from businesses transacted in Hong Kong on its behalf by Friendsole Limited (‘Friendsole’) and are assessable on [name of relevant Applicant] under Section 14 of the Inland Revenue Ordinance.  The profits are estimated under section 59(1) proviso and section 59(3) of the Inland Revenue Ordinance in the absence of a tax return, which is now enclosed for your completion.

2.  It is also my view that the businesses transacted by Friendsole on [name of relevant Applicant]’s behalf were arrangement entered into for the sole or dominant purpose of enabling [name of relevant Applicant] to obtain a tax benefit challengeable under section 61A of the Inland Revenue Ordinance.”

15.  In some assessments, the second sentence of the first paragraph of the Note has been omitted.  But otherwise, save for the name of the Applicant addressed, the Note appears in identical form in the assessments.

III. DISCUSSION

A.  Should the assessments be quashed as an abuse of power?

16.  In a judicial review by a taxpayer, the Court does not normally consider the substantive merits of the taxpayer’s case.  It is not usual for the Court to determine in a judicial review whether a taxpayer is liable to pay tax, because the IRO sets out mechanisms for determining the rights and wrongs of the taxpayer’s substantive case.

17.  Under the IRO, it is for the Commissioner initially and then the Board of Review to determine the facts and matters relevant to a taxpayer’s objections to an assessment. On the basis of such a determination, the Commissioner or the Board of Review may confirm or dismiss the taxpayer’s objections in whole or in part.  If the taxpayer is still dissatisfied, it may appeal to the Court under the IRO, not by way of a judicial review, but by way of case stated on questions of law posed by the Board of Review.

18.  In the rare case when the Court is faced with a judicial review of a tax matter, the Court’s approach must be circumspect in light of the alternative procedures in the IRO.  The Court must be careful not to adjudicate upon matters which should more properly be decided through the procedure mandated by the IRO.  The Court should confine itself to adjudicating on established administrative law grounds, such as a collateral review of the process adopted in bringing about a particular outcome.

19.  An example of the Court’s circumspection in revenue-related judicial reviews may be found in the Privy Council’s decision (on appeal from New Zealand) in O’Neil v.  Commissioner of Inland Revenue [2001] 1 WLR 1212.  There Lord Hoffmann stated (at para. 18):-

“Their Lordships respectfully agree with Richardson J that apart from what was in substance an allegation of bad faith in the commissioner’s motive for making the assessments, all the other points taken in the judicial review proceedings and on appeal were directed to showing that the assessments were erroneous in law or based upon an incorrect appreciation of the facts.  These are matters which it was open to the appellants to raise in the statutory objection and on further appeal to the courts.  The application for judicial review appears to have been made at the time because it was wrongly considered by the Taxation Review Authority that the objection procedure was not apt to deal with the administrative law challenges.  They were accordingly not argued before the Taxation Review Authority.  Before the application for judicial review was heard by the High Court, it had been established that the Taxation Review Authority was properly able to deal with challenges to assessments brought upon administrative law grounds: ... In view of the course which these proceedings have taken, their Lordships will briefly deal with all of these points in the order in which they were taken by Mr. Judd on behalf of the appellants.  But they must not be taken as accepting that relief by way of judicial review should be granted where the challenges can be addressed in the statutory objection procedure.  Such exceptional circumstances may arise most typically where there is abuse of power: Harley Development Inc. v. Comr of Inland Revenue [1996] 1 WLR 727, 736.  But they have also been held to arise where the error of law claimed is fatal to the exercise of statutory power and where it would be wasteful to require recourse to the objection procedure: Golden Bay Cement Co Ltd v. Comr of Inland Revenue [1996] 2 NZLR 665, 671.”

20.  Mr. Barrie Barlow SC (appearing for the Applicants) submits that the assessments were “arbitrary” and therefore constituted an unlawful abuse of power by the Commissioner.  He contends that, as a result, I should quash the assessments outright.

21.  According to Mr. Barlow, the assessments were “arbitrary” because they raised tax on the whole of the Applicants’ profits without any apparent attempt to distinguish any part as arising from activities carried out in Hong Kong, as opposed to manufacturing operations carried out elsewhere.  The Commissioner (Mr. Barlow suggests) obviously did not address her mind to the question of attributing specific profits to particular business activities carried out in Hong Kong as she was required to do under IRO s. 14.

22.  Mr. Barlow further draws my attention to the Affirmation of Shum Yuet Lin filed on the Commissioner’s behalf.  Mr. Shum was the Senior Assessor who initially handled the audit of the Yue Yuen Group for the Revenue.  Mr. Shum states:-

“17.   From past correspondence in the Profits Tax files of Friendsole, YYIl and PYIHL, I also noticed the following:-

....

(ii) From the service agreements with [the 6^th Applicant] and [the 1^st Applicant] submitted by Friendsole, I noticed that the services said to be rendered by Friendsole bore the trappings of trading by [the 6^th Applicant] and [the 1^st Applicant] in Hong Kong and included: handling I/E [import/ export] and logistic arrangements; operating bank accounts; handling L/C and customs declarations; keeping books and records; settling invoices; and other unspecified services that were required by the two companies from time to time.  While the principal activities of [the 6^th Applicant] and [the 1^st Applicant] were stated in YYIHL’s annual report to be ‘sale and marketing of footwear in the PRC’, it appeared to me that at least some of their businesses were transacted through Friendsole in Hong Kong and their profits should be liable to Hong Kong tax.

B.  YYIL and PYIHL

(iii) YYIL and PYIHL, at all relevant times, declared in their respective Profits Tax Returns that they were investment holding companies.  Their interests encompassed, inter alia, the Applicants which claimed to carry on manufacturing and trading activities in the PRC but not Hong Kong.  None of the Applicants have previously filed tax returns with the IRD.  As per the financial statements of YYIL and PYIHL for the 2002/03 Year of Assessment, significant dividend incomes were reported by YYIL and PYIHL....

(iv)   It appeared to me that YYIL and PYIHL were not simply investment holding companies.  They had actually entered into typical processing agreements with various PRC entities whereby processing factories were set up in the PRC to manufacture the athletic footwear.

(v) On the basis of the above, it appeared to me that the Group might have put the bulk of its profits into the Applicants and other BVI companies within the Group....

18.    To find out the amount of Profits Tax at stake, I did an assessment by comparing the profits of YYIHL’s three Hong Kong subsidiaries based on their tax returns to the IRD with the consolidated profits of the Group....

19.    In view of the factors set out above, I came to the view that:-

(i)  the profits derived by the Applicants; and

(ii) the purported division of the manufacturing and trading activities from YYIL and PYIHL to the Applicants and other BVI companies;

were the crux of the whole matter.  As such I considered that there were sufficient grounds to proceed with the next stage, namely, a tax audit.”

23.  Mr. Shum appears to be suggesting (Mr. Barlow observes) that the Applicants entered into transactions with YYIL and PYIHL for the sole or dominant purpose of conferring tax benefits on YYIL and PYIHL.  This is at odds with the Assistant Commissioner’s Note in the various assessments raised against the Applicants.  That Note instead suggests that the Applicants may have entered into transactions with Friendsole for the sole or dominant purpose of securing tax benefits to themselves.

24.  Mr. Barlow argues that in any event, on either hypothesis (whether that posited in the Note or that advanced by Mr. Shum), there is a fundamental difficulty.  This difficulty is that neither hypothesis identifies what tax liability the Applicants or YYIL and PYIHL would have been subject to, but for the “transactions” allegedly made.

25.  Mr. Barlow elaborates: If there was no original liability to tax on the part of the Applicants, Friendsole, YYIL or PYIHL in relation to the Group’s manufacturing profits, because none of those entities engaged in manufacturing in Hong Kong during the relevant financial years, how could there be a “tax benefit” in the sense defined in IRO s. 61A?  Section 61A strikes down a transaction which artificially produces a “tax benefit,” namely, “the avoidance or postponement of the liability to pay tax or the reduction in the amount thereof”.  But this all presupposes an initial liability to pay tax on the part of someone.  If there is no such initial liability, how could there be a “tax benefit” from the avoidance or postponement of a non-existent liability?

26.  The Note and Mr. Shum’s statement (Mr. Barlow complains) assume an initial liability on the part of the Applicants or YYIL and PYIHL for the whole or part of the Yue Yuen’s Group’s manufacturing profits.  But this assumption is made in the absence of supporting evidence or cogent explanation.  The underlying assumption behind the assessments is (Mr. Barlow concludes) unsustainable.

27.  Mr. Barlow goes so far as to suggest bad faith on the Commissioner’s part.  He says that, by delaying her determination on the Applicants’ objections to the Revenue’s assessments (thereby barring the Applicants from recourse to the Board of Review) and by “extracting” the purchase of several hundred million dollars’ worth of TRCs from the Applicants, the Commissioner has shown bad faith.

28.  I am not persuaded that this is a case where the Court should exercise its discretion to quash the Commissioner’s assessments.

29.  From the Note in the assessments, it appears to be the Commissioner’s case that, at least for the purposes of making protective assessments, the whole of the Applicants’ manufacturing profits either have a Hong Kong source or (but for certain unspecified transactions among Friendsole and the Applicants) would be subject to Hong Kong profits tax.

30.  On the evidence currently before me, it is tempting to agree with Mr. Barlow that the Commissioner’s case (as to the whole of the Applicants’ manufacturing profits having a Hong Kong source) cannot be right.  I am also attracted by Mr. Barlow’ submission that the Note and Mr. Shum’s statement are not just contradictory, but also (on the materials to which my attention has been drawn) untenable as a basis for applying IRO s. 61A.

31.  Nonetheless, I am conscious (as Mr. Peter Ng SC (appearing for the Commissioner) points out) that the evidence before me is only a fraction of the material which the Commissioner has assembled in connection with its audit of the Applicants’ business affairs.  That part of the materials which is not before me may paint a different picture of the merits of the Applicants’ objections to the Commissioner’s assessments.

32.  At the hearing of this judicial review, I suggested to Mr. Ng that it was at least incumbent on the Commissioner to sketch out or indicate to the Court how precisely she was alleging that the Applicants were subject to profits tax in the first place.  I thought that something more than the bare assertions found in the Note to the assessments was necessary.

33.  But, on further reflection, it seems to me that there are dangers to such an approach by the Court.  An obvious danger is that one trespasses into the territory which the IRO has reserved to other bodies.  A greater danger is that one decides the substantive merits of a tax objection without having all relevant facts and matters placed before one.  I do not think that the approach of requiring the Commissioner to adduce some sort of threshold “arguable case” in this judicial review would be the correct one.

34.  In Re Preston [1985] 1 AC 835 (HL), Lord Templeman criticised Woolf J from going beyond the proper scope of a judicial review by pressing the Inland Revenue to explain in some detail why it was invoking anti-avoidance provisions in Income and Corporation Taxes Act 1970 s. 460 against a taxpayer.  Lord Templeman said (at 868H-869D):-

“When the commissioners received further information from the accounts of Gymboon Ltd. and from their investigations of the Rossminster group and ultimately from the appellant and his fellow shareholder, there was nothing in the 1978 agreement [whereby the Inland Revenue informed the taxpayer that it would not raise any further inquiries of his tax affairs if he withdrew certain claims for interest relief and capital loss] which made it unfair for the commissioners to enforce any liability to tax which Mr. Thomas [the inspector] did not know to exist in 1978.  Some significant information might have come to light in 1978 if Mr. Thomas had interviewed the appellant but Mr. Thomas desisted from making further inquiries from the appellant at the request of the appellant and on the basis of the information supplied by the appellant.  That information was woefully inadequate.  Full details of the disposal were requested.  Bare details alone were given.  When the application for judicial review came before Woolf J, it was plain from the facts and the evidence that the commissioners were invoking section 460 notwithstanding the 1978 agreement, because the commissioners were not in possession of the full facts in 1978.  Nevertheless the judge pressed the commissioners to give further evidence about the commissioners’ reasons for invoking section 460 and about their process of reasoning.  He then dismissed their further evidence as inadequate...  My Lords, it was not open to Woolf J to usurp the functions of the commissioners or to investigate further their reasons and reasoning for invoking section 460.  The sole question for the judge on judicial review was whether in the light of the 1978 agreement it was an abuse of power for the commissioners to invoke section 460.  In my opinion it was not.”

35.  Right or wrong, the Commissioner has through the Note indicated why the assessments have been made.  The sole question before me (to use Lord Templeman’s characterisation) is to decide whether there has been an abuse of power in the process by which the assessments have been raised.

36.  Mr. Barlow is in reality inviting me now to decide substantively whether the assessments levied on the Applicants are correct in light of facts and evidence before me tending to show that the Applicants have not engaged in any manufacturing activities in Hong Kong.  That evidence may be strong, possibly compelling.  But the determination of the question posed by Mr. Barlow does not involve a consideration of whether there has been an abuse in the procedure followed in making the assessments.  The consideration of Mr. Barlow’s question is instead second-guessing the Commissioner as to the merits of the assessments.  The consideration of the question would be usurping the Commissioner’s functions as well as those of the Board of Review.  It would be doing what I should not do, regardless of how tempting.

37.  I have not lost sight of Mr. Barlow’s point that the Applicants have not been able to go before the Board of Review because the Commissioner has not yet ruled on their objections.  On proper analysis, however, that point involves a different question, namely, whether there has been inordinate delay on the Commissioner’s part contrary to her statutory duty under IRO s. 64(2) and (if so) what relief (if any) should be granted by this Court.  In other words, the point goes towards the second ground of judicial review and I should deal with the point in the context of that second ground.  Logically, the issue of the Commissioner’s delay (or lack of it) has nothing to do with the supposed “arbitrariness” of the assessments.

38.  As for Mr. Barlow’s case on bad faith, I see no basis for the making of such an allegation against the Commissioner.

39.  The Applicants’ case of bad faith is nowhere spelled out in their Form 86A Notice.  If the Applicants were seriously mounting such a case, one would have expected it to have been clearly signalled and particularised in their application for leave.  The Court has repeatedly stressed that allegations of bad faith are not to be made lightly.  If such allegations are to be made, lawyers must be satisfied that there is a sufficient evidential basis for making the same.  Further, if such allegations are to be made, they should be particularised in the originating document setting out a party’s case.

40.  In any event, I decline to infer bad faith merely because there has been apparent delay on the Commissioner’s or that she has required the Applicants to purchase TRCs as a condition for holding over.  Delay may be due to a myriad of reasons, including the complexity of the audit being conducted into the Applicants’ affairs by the Revenue; incompetence, inexperience, inefficiency or overwork on the part of one or more of the assessors handling the audit; and a lack of manpower or other resources to conduct a speedy audit.  Some of the reasons may be excusable, others may not.  But delay by itself cannot be an adequate foundation for an allegation of bad faith.

41.  On the other hand, the quantum of the TRCs which the Applicants have had to purchase is an inevitable consequence of the Applicants’ sizeable manufacturing profits which the Commissioner perceives as potentially having a Hong Kong source.  I cannot infer from the fact that the amount of TRCs involved is great that there has been some type of “extortion” (much less bad faith) by the Commissioner.

42.  At the end of the day, Mr. Barlow’s allegation of bad faith hinges on the Court accepting his contention that the assessments are arbitrary and that the Revenue must know them to be so.  I have already explained why I do not think that it is appropriate for me to consider the correctness of the assessments in a judicial review.  I see nothing suggesting that the Revenue deliberately made assessments despite knowing them to be wrong.

43.  At the start of the judicial review, Mr. Barlow applied to cross-examine the deponents of the affirmation evidence filed on the Commissioner’s behalf in these proceedings.  He wished to do so in order to make out his case on bad faith.

44.  I refused the application.  I did this because it seemed to me that Mr. Barlow was putting the cart before the horse.  If a case of bad faith was being seriously mounted, then it was incumbent on the Applicants first to state so unambiguously in their Form 86A Notice and to give particulars explaining the basis for such allegation.  Here the suggestion of bad faith only surfaced in Mr. Barlow’s Opening Skeleton Argument dated 3 March 2010.

45.  In the absence of any particulars of bad faith in the Form 86A Notice, cross-examination by Mr. Barlow of the Commissioner’s deponents would be little more than a fishing exercise, an enquiry without well-defined boundaries determined by some clear statement in the Applicants’ Form 86A Notice.  I did not think that I would be assisted by such an undisciplined investigation.  Cross-examination is rarely ordered in judicial reviews.  It is for an applicant to make out a properly particularised case for cross-examination.  Leave to cross-examine will not be given to enable an applicant to flesh out what would otherwise be a speculative case.

46.  In summary, I do not think that the assessments should be quashed as an abuse of power.

B.  Has there been inordinate delay on the Commissioner’s part?

47.  IRO s. 64(2) requires the Commissioner to adjudicate upon a taxpayer’s objections to an assessment “with a reasonable time”.  Nina Wang v. Commissioner of Inland Revenue (1994) 4 HKTC 15 (PC on appeal from Hong Kong) provides guidance on how the Court approaches the question of “reasonable time”.

48.  In Nina Wang Lord Slynn (at 24) first observed that “[w]hat is a reasonable time ... must be considered as a question of fact in the light of all the circumstances”.  Lord Slynn then dealt with the consequences of any delay in the making of a determination by the Commissioner.  He said (at 28-9):-

“In the present case the legislature did intend that the Commissioner should make his determination within a reasonable time.  At the same time it is no less plain that the legislature imposed on the Inland Revenue authorities, including the Commissioner, the duty of assessing and collecting profits tax from ‘every person carrying on a trade, profession or business in Hong Kong’ (section 14).  If the Commissioner failed to act within a reasonable time he could be compelled to act by an order of mandamus.  It does not follow that his jurisdiction to make a determination disappears the moment a reasonable time has elapsed.  If the court establishes the time by which a reasonable time is to be taken as having expired, which will depend on all the circumstances, including factors affecting not only the taxpayer but also the Inland Revenue, it would be surprising if the result was that the Commissioner had jurisdiction to make the determination just before but not just after that time.  Their Lordships do not consider that that is the effect of a failure to comply with the obligation to act within a reasonable time in the present legislation.  Such a result would not only deprive the Government of revenue, it would also be unfair to other taxpayers who need to shoulder the burden of Government expenditure; the alternative result (that the Commissioner continues to have jurisdiction) does not necessarily involve any real prejudice for the taxpayer in question by reason of the delay.

Their Lordships accordingly consider that in the context of this legislation a failure to act within a reasonable time (had it occurred) would not have deprived the Commissioner of jurisdiction or made any determination by him null and void.”

49.  Delay by the Commissioner would therefore give rise to an entitlement on the taxpayer’s part to an order of mandamus, namely, an order that the Commissioner determine an objection to an assessment raised by the Revenue.  Inordinate delay would neither mean that the Commissioner’s assessments become nullities nor that the Commissioner loses the power to determine an objection.

50.  In oral submission, Mr. Barlow attempted to persuade me that the consequence of inordinate delay was that the assessments made against the Applicants should be quashed.  But this would run contrary to what the Privy Council has said in Nina Wang.  If I were to quash the assessments, it is possible (on the assumption that the Applicants’ objections are unfounded) that the Government would be deprived of revenue and other taxpayers would unfairly be shouldering a disproportionate burden of Government expenditure.

51.  There is a suggestion that the requirement that the Applicants purchase TRCs has caused prejudice.  This is because the Applicants (if their objections are well-founded) have been deprived of the use of the large sums tied up in the TRCs over a long period of time.  But even then, Mr. Barlow put his case thus:-

“The drain upon the Group’s cash-flow (in the middle of a harsh recession – which affects manufacturers of goods which might be characterised as ‘discretionary spending’ harder than other businesses) is now reaching a critical point.  If this unlawful and oppressive process is permitted to continue then, eventually the TRC outlays will be more than the Group can manage.”

52.  I understand this to mean that the Group (just like almost every other business in the present climate of financial crisis) is currently experiencing cashflow difficulty.  But it can still cope to an extent.  What is needed is a prompt decision on the Applicants’ objections, so that (if the Applicants are right) monies locked up in TRCs can be freed to relieve the Group’s present cashflow constraints.  To my mind, the Group’s tight cashflow is a factor supporting an order of mandamus requiring the speedy determination by the Commissioner, one way or the other, of the Applicants’ objections.  I do not think that tight cashflow considerations by themselves override the Privy Council’s reasoning in Nina Wang or compel the grant of an order of certiorari in place of mandamus.

53.  In his written submissions Mr. Barlow himself appeared to recognise that in the present case, in the absence of bad faith, mandamus (and not certiorari) was the appropriate remedy.  He observed:-

“3.4 However, by refusing to perform her/ his mandatory positive statutory duty under section 64(2) timeously to determine assessee’s objections, the CIR has been unlawfully blocking the Applicants’ access to the statutory appeals process for almost 6 years now.  Also, by doing this after having made ‘protective’ assessments on the last day of the Ordinance’s 6 year limitation period (see ss. 59 & 60 of the Ordinance), the CIR has illegitimately given herself/ himself a de facto limitation period of 12 years – or twice that actually provided by the Legislature.

3.5    Had that been the only issue, then an order of mandamus to compel the CIR to perform his statutory duties under section 64(2) would probably have been sufficient relief for the Applicants e.g. Regina v. Inland Revenue Commissioners ex parte National Federation of Self-Employed and Small Businesses [1982] AC 617 (HL) per Lord Wilberforce at 632C-E; Nina Wang v. CIR ... per Lord Slynn ...; O’Neil v. CIR [2001] 1 WLR 1219 (PC) per Lord Hoffmann at 1219-1220A...

3.6    However, that is not the only issue arising herein, because the Applicants contend that the CIR’s s. 64(2) misconduct was undertaken consequent upon the IRD’s issuance of the 48 ultra vires purported arbitrarily-estimated ‘protective’ assessments, presumably in order to debar the Applicants from recourse to their statutory rights, under Part XI of the Ordinance, to have those purported ‘assessments’ annulled, while at the same time unlawfully extracting, also by ultra vires means, over HK$432 million in TRCs – which, cumulatively, constitutes unlawfully acting mala fides.”

54.  I have considered Mr. Barlow’s arguments of arbitrariness and bad faith in the previous section of this Judgment.  In light of my rejection of Mr. Barlow’s suggestion of bad faith, it follows from Mr. Barlow’s written submissions that mandamus is the proper relief for inordinate delay by the Commissioner.

55.  Has there been inordinate delay then in all the circumstances of the present case?  As a matter of impression, there appears to have been so.

56.  For instance, the assessment for 1997/98 was made in 2004.  The Applicants objected a month later.  In 2010, some 6 years afterwards, the Commissioner has yet to make a determination.

57.  One might think that the argument of delay would have less force for later years of assessment, such as 2002/2003.  In the latter case, the assessment was made in 2009.  Objection was lodged and this judicial review was taken out shortly after that.  So that, for 2002/2003, only about a year has lapsed waiting for the Commissioner’s determination.

58.  But the parties (including the Revenue) have proceeded on the basis that there has been no significant change in the Applicants’ mode of operation between 1997/98 and 2002/2003.  Accordingly, if on analysis the Applicants had been making Hong Kong-sourced manufacturing profits in 1997/98, that same analysis of liability would be valid for subsequent years up to 2002/2003.  Once a basis for taxation has been worked out for 1997/98, the only outstanding issue in relation to 2002/2003 would be the quantum of Hong Kong-based profits.  One might have thought that the exercise of quantification would be a matter of no more than a few months, rather than something requiring a year or so.

59.  Mr. Ng submits that the fault for delay lies with the Applicants.  According to Mr. Ng, the Applicants were dilatory in their response to the Revenue’s requests for information and documents.  Mr. Ng says that even now documents remain outstanding.

60.  While the Applicants may not always have responded to the Revenue’s requests for information promptly, I cannot attribute all or even a substantial part of the near 6 years’ delay in connection with the 1997/98 financial year to the Applicants.

61.  For instance, by a letter dated 7 November 2008 to the Applicants, the Revenue implicitly acknowledged that, of relevant categories of documents, only material relating to financial years 2000/2001 to 2007/2008 was outstanding.  Nothing therefore prevented the Commissioner in late 2008 from determining the Applicants’ objections at least in relation to 1997/98, 1998/99 and 1999/2000.

62.  Mr. Ng argues that the Revenue needed the documents for the later financial years as a “cross-check” on any analysis of the earlier financial years.  But this excuse for the Commissioner’s failure in 2008 to make a determination for the years 1997/98 to 1999/2000 is unconvincing, given that the Revenue had requested (and been provided with) documents covering financial years 1992/93 to 1996/97.  Why would not the information of the earlier financial years act as a sufficient “cross-check” on any analysis of 1997/98 to 1999/2000?  One can of course always call for documents by way of a “cross-check”.  But at some point the value of such exercise becomes minimal and one must get down to making a determination.

63.  In my view, in relation to the determination of the Applicants’ objections for the years 1997/98 to 2002/2003, more than a reasonable time has elapsed.  There has been inordinate delay by the Commissioner.  A determination in relation to 1997/98, 1998/99, 1999/2000 should have been done at the latest by sometime in 2008 (in light of the 7 November 2008 letter mentioned above).  Thereafter, determinations for the 2000/2001, 2001/2002 and 2002/2003 should have followed in quick succession, certainly by now.  I shall therefore order mandamus.

64.  In the middle of the hearing of this judicial review, having taken instructions from the Revenue, Mr. Ng stated that the Commissioner was in a position to determine the Applicants’ objections to the assessments for 1997/98 to 2002/2003 within 6 months.  But Mr. Ng stressed that this was subject to the Applicants confirming that all available relevant documents had been provided to the Revenue and the Applicants were not in a position to provide any of the documents said by the Revenue to be outstanding.

65.  It is implicit (if not express) from the Form 86A Notice here that the Applicants are not in a position to provide further relevant documents.  The Notice states:-

“20.   As at 10 March 2006, all requested information had been provided by the Yue Yuen Group through Deloitte Touche Tohmatsu (‘Deloittes’) to the IRD in respect of the 1997/1998, 1998/1999, and 1999/2000 years of assessment.  In addition, in 2004 and 2005, transactional documents were sent to the IRD by Deloittes which enable the IRD to understand the Yue Yuen Group’s operations and demonstrated that the negotiation and conclusion of manufacturing and trading transactions were clearly all done outside Hong Kong.  By a letter dated 7 November 2008, the IRD confirmed that no further information was being sought in relation to these years of assessment and the IRD was only seeking further information in relation to the years 2000/2001 to 2007/2008.  In the period since 12 February 2004, Deloittes on behalf of the Yue Yuen Group, have now provided the IRD with all the requested information and relevant documents for the periods up to and including the year of assessment 2002/2003.

21.    Accordingly, any outstanding information and comments would have no bearing on tax assessments or holdover decisions for the year of assessment 2002/2003 or any years of assessment prior thereto.”

66.  In light of that statement, I do not see much point in the further confirmation which (according to Mr. Ng) the Commissioner requires.  Accordingly, I take what Mr. Ng has said in open court to mean that the Commissioner can now make her determinations within 6 months at the latest.  I would hope, however, that the determinations can be done well before the lapse of 6 months.

67.  I shall make an Order that the Commissioner determine the Applicants’ objections to the assessments of 1997/98 to 2002/2003 as soon as possible and, in any event, at the latest within 6 months from the date of this Judgment.

IV. CONCLUSION

68.  There will be an Order of mandamus as set out in the previous paragraph of this Judgment.

69.  The applications to quash the relevant assessments and to quash the Commissioner’s holdover decisions are refused.

70.  The Applicants have substantially, but not completely, prevailed.  Much time was spent on their application to quash the assessments.  They made a suggestion of bad faith against the Commissioner in the course of the hearing which I have held to be unwarranted.  Although the Applicants have obtained an order of mandamus, they did not seek mandamus in their Form 86A Notice.  Instead, they pressed for certiorari as the appropriate form of relief.  In those circumstances, I do not think that it would be right to award the Applicants all of their costs.  There will be an order nisi that the Commissioner bear 75% of the Applicants’ costs of this judicial review, such costs to be taxed if not previously agreed.