DAIRYFARM ESTABLISHMENT AND ANOTHER v. THE COMMISSIONER OF INLAND REVENUE

HCAL 234/2018

[2018] HKCFI 2245

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST NO 234 OF 2018

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J U D G M E N T

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INTRODUCTION

1.  A taxpayer who wishes to exercise his statutory right to object to a tax assessment issued by the Commissioner faces some hard options:-

(1) He is required by law to pay the full amount of the tax demanded notwithstanding any objection or appeal, unless the Commissioner exercises his discretion to permit the tax to be held over pending the determination of his objection and appeal.  Although he is entitled to be refunded the tax paid should he ultimately succeed in his objection or appeal, the refund will not be accompanied by any interest.

(2) If the Commissioner allows the tax to be held over conditionally upon the purchase a tax reserve certificate as security for the payment of the tax, the taxpayer’s position is practically the same.  Upon a successful objection or appeal, the taxpayer is entitled to be repaid the principal value of the certificate plus interest, but the interest rate is, and has since 4 January 2010 been, set at 0.0433% per annum.

(3) On the other hand, if the Commissioner allows the tax to be held over unconditionally, the taxpayer will not have to pay the tax upfront, but should he ultimately fail in his objection or appeal, he will have to pay, in addition to the tax as assessed, interest thereon at the District Court Judgment Rate, which has stood at 8% per annum since 1 April 2009.

2.  The taxpayer’s predicament is compounded if he receives multiple assessments, on alternative bases, in respect of the same profits, which it is not in dispute the Commissioner may lawfully issue in appropriate circumstances.

3.  In this case, the taxpayers received two sets of mutually exclusive, alternative, assessments on the same profits, and were prepared to provide security, by the purchase of a tax reserve certificate, to cover the higher of the two assessments (being the maximum amount of the tax for which they may ultimately be found liable), but did not wish to also provide security for, or accept an unconditional hold over of, the tax demanded under the lower assessment in view of the considerations mentioned above.  In order to avoid what they considered to be an “unreasonable, oppressive, unfair and prejudicial” position in which they found themselves in, the taxpayers put forward various proposals to the Commissioner in respect of the tax demanded under the lower assessment, which proposals were all rejected by the Commissioner.  The principal question which arises for determination in this application for judicial review is whether the Commissioner made any error of law in rejecting those proposals.

4.  In what follows, unless the context indicates otherwise, references to Sections shall be to the Inland Revenue Ordinance, Cap 112 (“the Ordinance”).

BASIC FACTS

(i)  Background

5.  The 1^st Applicant, Diaryfarm Establishment (“DFE”), and the 2^nd Applicant, The Diary Farm Company Limited (“DFCL”), are members of the Diary Farm Group.

6.  DFE is incorporated in Liechtenstein on 30 October 1991, and is the owner of a number of trade marks registered in Hong Kong under the Trade Marks Ordinance (Cap 559).

7.  DFCL is a private company incorporated in Hong Kong on 4 August 1896, and carries on business in Hong Kong including supermarkets, health and beauty stores under and by reference to the trade marks registered in the name of DFE, and furniture and convenience stores.

8.  By a Licence Agreement dated 28 September 2012, DFE as licensor granted to DFCL as licensee a non-exclusive licence to use various trade marks as set out therein (“the Trade Marks”) for a term of 3 years commencing on 1 January 2012, renewable automatically for additional terms of 3 years in the absence of any breach by DFCL or unless terminated in accordance with the provisions of the Licence Agreement, in consideration of the payment of royalties by DFCL to DFE at a percentage of the gross sales turnover of the relevant business of DFCL.

9.  Pursuant to the Licence Agreement, DFCL paid to DFE the following royalties (“the Royalties”):-

Year ending	Amount (HK$)
31.12.2012	202,158,870
31.12.2013	225,529,310
31.12.2014	246,445,353
31.12.2015	253,514,448
31.12.2016	260,964,845

(ii)  The tax assessments for 2012/13, 2013/14 and 2014/15

10.  DFE, in relation to the chargeability of the Royalties received by it to profits tax under the Ordinance, took the position that:-

(1) it did not carry on any trade, profession or business in Hong Kong and therefore was not chargeable to profits tax under Section 14 directly;

(2) since the Royalties were sums received by or accrued to it for the use of or right to use in Hong Kong the Trade Marks not otherwise chargeable to profits tax, the receipts were deemed by Section 15(1)(b) to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong;

(3) under Section 20B(2), DFE, being a non-resident person, was chargeable to tax in respect of the Royalties “in the name of any person in Hong Kong who paid or credited those sums [ie DFCL] to that or any other non-resident person [ie DFE]”;

(4) under Section 21A(1), the assessable profits of DFE should be taken to be only 30% of the Royalties received by it (for reasons which it is not necessary to go into in this judgment); and

(5) such assessable profits (at 30% the Royalties) should be taxed at the rate of 3% under the “Agreement Between the Government of the Hong Kong Special Administrative Regions of the People’s Republic of China and the Government of the Principality of Liechtenstein for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital” (“the Double Taxation Agreement”), which came into force on 8 July 2011 and was applicable as from the year of assessment 2012/13.

11.  On the other hand, DFCL, in its tax returns for the years of assessment 2012/13, 2013/14 and 2014/15, claimed the Royalties as deductions when computing its assessable profits.

12.  The Commissioner:-

(1) took the view that DFE carried on business in Hong Kong during the years of assessment in question, and the transaction between DFE and DFCL was artificial and entered into for the sole or dominant purpose of enabling DFCL to obtain a tax benefit;

(2) questioned whether DFE had validly acquired the relevant trade marks and whether DFCL incurred the Royalties as expenses in the production of its chargeable profits; and

(3) considered that the reduced tax rate of 3% under the Double Taxation Agreement did not apply to tax avoidance transactions.

13.  Accordingly, for the years of assessment 2012/13, 2013/14 and 2014/15, the Commissioner:-

(1) assessed DFE for profits tax in respect of the full amount of the Royalties under Section 14 directly – the total amount of tax involved was HK$197,982,793 (“the Section 14 Assessments”);

(2) assessed DFE for profits tax in respect of the full amount of the Royalties in the name of DFCL at the rate of 16.5% under Section 21A - the total amount of tax involved was HK$111,192,032 (“the Section 21A Assessments”); and

(3) denied DFCL deduction of the Royalties when computing its assessable profits under Sections 16, 61 and 61A - the total amount of tax involved was HK$111,232,033 (“the Section 61A Assessments”).

It is common ground that the Section 14 Assessments and Section 21A Assessments are alternative assessments.

14.  DFE and DFCL’s objections to (i) the Section 14 Assessments and (ii) the Section 21A/Section 61A Assessments were dismissed by a Deputy Commissioner and an Acting Assistant Commissioner respectively on 21 February 2017 (“the Determinations”).  In the Determination dismissing the objection to the Section 14 Assessments, the Acting Assistant Commissioner stated, inter alia, as follows:-

“After the finalisation of the Profits Tax Assessments for the years of assessment 2012/13 to 2014/15 raised on DFE direct, as now determined, instruction will be given to the Assessor to annul the alternative assessments raised in the name of DFCL”.

As I understand it, the Commissioner’s primary position is that DFE should be taxed under the Section 14 Assessments, with the Section 21A Assessments being his fallback position.

15.  DFE and DFCL’s appeals against the Determinations to the Board of Review (“the Current Appeals”) will, I understand, be heard together commencing on 4 March 2019.

16.  For the purpose of the present application for judicial review, it is not necessary for the court to determine the merits of the respective contentions of DFE/DFCL and the Commissioner, and whether DFE/DFCL should be charged for profits tax under the Section 14 Assessments or Section 21A Assessments or neither of them.  It is clear, however, that on any view of the matter DFE/DFCL will ultimately not be liable to pay tax under both the Section 14 Assessments and Section 21A Assessments.

(iii)    The purchase of tax reserve certificates for the Section 14 Assessments and Section 21A Assessments

17.  By notices dated 22 August 2016, the Commissioner ordered the tax payable under the Section 14 Assessments to be held over conditionally upon the purchase of tax reserve certificates in the amounts set out below, pending the determination of the objections to, and any appeals from, those assessments:-

Year of Assessment	Amount (HK$)
2012/13	49,652,419
2013/14	71,987,403
2014/15	76,342,971

DFE duly purchased tax reserved certificates for the above amounts on 2 September 2016.

18.  By notices dated 22 August 2016, 22 October 2014 and 29 February 2016 respectively, the Commissioner ordered the tax payable under the Section 21A Assessments to be held over conditionally upon the purchase of tax reserve certificates in the amounts set out below, pending the determination of the objections to, and any appeals from, those assessments:-

Year of Assessment	Amount (HK$)
2012/13	27,281,447
2013/14	30,436,457
2014/15	33,250,123

DFCL duly purchased tax reserve certificates for the above amounts on 2 September 2016, 5 November 2014 and 21 March 2016 respectively.

19.  In view of the fact that (i) DFE/DFCL would not, ultimately, be liable to pay tax on both the Section 14 Assessments and Section 21A Assessments, and (ii) the maximum amounts of tax payable would be those under the Section 14 Assessments, on 27 June 2017, DFE/DFCL requested the Commissioner to repay the excessive payments for the aforesaid tax reserve certificates.  The request was rejected by the Commissioner on 4 July 2017.

(iv)  The new tax assessments for 2015/16 and 2016/17

20.  By notices dated 10 November 2017, the Commissioner issued three further sets of profits tax assessments for each of the years of assessment 2015/16 and 2016/17 (collectively, the “New Assessments”), as follows:-

(1) DFE was assessed for the full amount of the Royalties under Section 14 directly – the total amount of tax involved was HK$146,560,395 (“the New Section 14 Assessments”);

(2) DFE was assessed in the name of DFCL for the full amount of the Royalties at the rate of 16.5% under Section 21A - the total amount of tax involved was HK$69,414,704 (“the New Section 21A Assessments”); and

(3) DFCL was denied deduction of the Royalties when computing its assessable profits under Sections 16, 61 and 61A - the total amount of tax involved was HK$84,889,082 (“the New Section 61A Assessments”).

21.  The tax charged under the New Assessments was due on 22 December 2017 (for the year of assessment 2015/16), and on 27 December 2017 (in respect of the first instalment for the year of assessment 2016/17).

22.  Through PricewaterhouseCoopers Limited (“PwC”), DFE and DFCL lodged objections to the New Assessments on 28 November 2017.

(v)  The Proposals

23.  By a letter dated 11 December 2017, Clifford Chance on behalf of DFE and DFCL wrote to the Commissioner putting forward the following proposals (“the Proposals”) regarding the New Assessments:-

“Without prejudice to other grounds of objection put forward in PwC’s letters, one of the grounds of objection is that you have assessed DFE profits tax twice under the Assessments (pursuant to section 14 of the Inland Revenue Ordinance (the ‘IRO’)) and Additional Assessments (pursuant to section 21A of the IRO) in respect of the same royalty income, amounting to double taxation of the same trading or business profits.

In a Determination dated 21 February 2017 in relation to earlier assessments issued to DFE for years of assessment 2012/13, 2013/14 and 2014/15 (under the appeals no. BR 38/16 and BR 39/16), the Assistant Commissioner has accepted that the additional assessments raised on DFCL for DFE in respect of those assessment years should be annulled: ‘Part of the profits of DFE for the Period has also been assessed to Profits Tax under section 21A(l)(a) of the Ordinance in the name of DFCL and both DFCL and DFE have objected to the assessments…After the finalisation of the Profits Tax Assessments for the years of assessment 2012/13 to 2014/15 raised on DFE direct, as now determined, instruction will be given to the Assessor to annul the alternative assessments raised in the name of DFCL.’

In the premises, we are instructed to put forward the following proposals on behalf of DFE and DFCL:

Proposal 1

(1) the [New Section 21A Assessments] be annulled for the time being (without prejudice to them being reissued within six years of the end of each relevant year of assessment); or

(2) the due date for the payment of the 2015/16 and 2016/17 final tax in dispute (of HK$34,204,450 and HK$35,210,254) charged under the [New Section 21A Assessments] be postponed to two months after the final determination of the appeals no. BR 38/16 and BR 39/16, with further extension as may be agreed between the Commissioner on one part and DFE and DFCL on the other, if required.

Proposal 2

Both [(a)] the 2015/16 and 2016/17 final tax in dispute (of HK$74,637,957 and HK$71,922,438) charged under the [New Section 14 Assessments]; and (b) the 2015/16 and 2016/17 final tax in dispute (of HK$34,204,450 and HK$35,210,254) charged under the [New Section 21A Assessments] be held over on the condition that Tax Reserve Certificates (‘TRCs’) be purchased pursuant to section 71(2) of the IRO for the larger sums of HK$74,637,957 and HK$71,922,438 on the following conditions:

(1) Section 71(7)(c) of the IRO be applicable to:

(a) the [New Section 14 Assessments] issued against DFE in the event that the assessments subject to the appeal by DFE in BR 38/16 are upheld; or

(b) the [New Section 21A Assessments] issued against DFCL for DFE in the event that the assessments subject to the appeal by DFCL for DFE in BR 39/16 are upheld; and

(2) No interest will be imposed under Section 71(10) of the IRO on any tax liabilities which is found or assessed to be due and payable under the [New Section 14 Assessments] or the [New Section 21A Assessments]; and

(3) If neither set of assessments subject to the appeals in BR 38/16 or BR 39/16 are upheld, the full sums of the TRCs are to be repaid.

We submit that either of the above proposals is adequate in the circumstances for the following reasons:

(1) The Commissioner recognised and accepted in paragraph 3(11) of the Determination issued to DFE on 21 February 2017 that DFE, whether in its own name or in DFCL’s name, has been assessed tax in respect of the same royalty income twice.

(2) There is nothing in section 71 of the IRO, or the Tax Reserve Certificates Ordinance (Cap 289), or the Tax Reserve Certificates (Fourth Series) Rules (Cap 289A), which prohibits the use of one set of TRCs as security for two sums payable under two different assessments.

(3) There is adequate security by accepting the TRCs in the higher amounts equivalent to the sums due under the [New Section 14 Assessments] issued against DFE to cover the maximum tax liability of DFE in respect of the relevant years pending the disposal of the objections and/or the appeals of the [New Section 14 Assessments] issued against DFE and the [New Section 21A Assessments] issued against DFCL for DFE.”

24.  In summary, the 3 Proposals put forward by DFE/DFCL are as follows:-

(1) Proposal 1(1) – annulment of the New Section 21A Assessments for the time being (presumably pending the final determination of the Current Appeals, it being common ground, I understand, that the outcome of the Current Appeals should apply to and govern the validity of the New Assessments), without prejudice to them being reissued within 6 years of the end of each relevant year of assessment;

(2) Proposal 1(2) – postponing the due date for payment of tax under the New Section 21A Assessments to 2 months after the final determination of the Current Appeals; and

(3) Proposal 2 – for each year of assessment, purchasing one tax reserve certificate for the full amount of the New Section 14 Assessment as security for both the New Section 14 Assessment and New Section 21A Assessment.

(vi)  The Decisions under challenge

25.  By a letter dated 13 December 2017, the Commissioner rejected the Proposals put forward by Clifford Chance on behalf of DFE and DFCL (referred to in the Form 86 as “Decision 1”):-

“2. I would advise that the [New Section 14 Assessments] and the [New Section 21A Assessments] (as defined in your letter) for years of assessment 2015/16 and 2016/17 were issued to DFE and DFCL respectively on established authorities that the Revenue can make alternative assessments in appropriate circumstances …

3. I regret that your Proposal 1 and Proposal 2 are not acceptable on the following grounds:

Proposal 1

(a) The [New Section 21A Assessments] cannot be annulled since they were validly issued. The due date allotted for payment of the tax charged under the [New Section 21A Assessments] also cannot be amended.

Proposal 2

(b) If Tax Reserve Certificates (‘TRCs’) are purchased in respect of the [New Section 14 Assessments] under objection, the particulars of the tax in dispute will be clearly stated in the TRCs, including file number, charge number and amount. There is no provision in the Inland Revenue Ordinance (‘IRO’) for the Commissioner to accept the TRCs in payment of the tax payable under the [New Section 21A Assessments] upon the finalisation of the objection or appeal. If the tax charged under the [New Section 21A Assessments] had been held over unconditionally, section 71(10) of the IRO shall be applied.”

26.  In a reply letter dated 18 December 2017, Clifford Chance sought to persuade the Commissioner why the Proposals were open to him as a matter of law, and urged the Commissioner to reconsider the Proposals.  Since DFE and DFCL’s complaints in the present application are encapsulated in Clifford Chance’s letter of 18 December 2017, I shall quote in full from that letter:-

“With respect, we are not challenging the issue of alternative assessments by you as such. What we are seeking to achieve is to avoid our clients having to pay under both sets of Assessments now, either in payment thereof or to purchase separate TRCs as security therefor as a condition for hold over, when you have admitted that at least one set of the Assessments will have to be cancelled in due course, with no or minimal interest payable to our clients for the sum paid and returned. Of course, if our clients are right, both sets of Assessments will have to be annulled and the sums paid will have to be returned by you, again with no or minimal interest. This is absolutely unreasonable and oppressive.

The alternative of unconditional hold over of payment under one or both sets of Assessments will expose our clients to the risk of having to pay very high, and commercially unrealistic, interest rate under section 71(10) of the IRO, and it is again absolutely unreasonable and oppressive for our clients to have to take that alternative.

The only lawful, fair and reasonable solution to our clients, and the only lawful, fair and reasonable decision for you to make, is for you to agree to either Proposal 1 or 2, so that our clients need only to put up not more than the higher amount of the two Assessments in each year as security for a conditional hold over of both.

In relation to Proposal 1, the Commissioner certainly has the power to annul the [New Section 21A Assessments] under section 64(2) whether they are issued validly or not. Indeed you have admitted that for the previous years, you can annul the [Section 21A Assessments] charged on DFCL for DFE if the [Section 14 Assessments] on DFE directly are upheld, even though, on your own case, the former were validly issued. Alternatively, since it is for the Commissioner to set the due date for payment of the tax under the [New Section 21A Assessments] under section 71(1) of the IRO, he certainly has the power to extend the time under section 46(a) of the Interpretation and General Clauses Ordinance (Cap 1).

In relation to Proposal 2, section 71(2) proviso (a) only requires the conditional hold over of payment of the tax be secured by the purchase of a TRC. Under our Proposal, if one asks, is the tax payable under the [New Section 14 Assessments] issued against DFE secured? The answer is yes. Is it secured by the purchase of a TRC? The answer is yes. And if one asks, is the tax payable under the [New Section 21A Assessments] issued against DFCL for DFE secured? The answer is yes. Is it secured by the purchase of a TRC? The answer is yes. Because at least one of the two sets of Assessments will be annulled, a TRC in the higher amount purchased by DFE (since it is the taxpayer under both sets, even for the [New Section 21A Assessments], as it is the profits of DFE, and not DFCL, that is being taxed) will be sufficient security for both. We fail to see any problem with, or any prohibition in the IRO against, the Proposal.

There is nothing in the IRO or the Tax Reserve Certificates Ordinance (Cap 289) to say that one TRC cannot relate to more than one assessment or objection or appeal. You said that the particulars of the tax dispute will have to be stated in the TRCs, but there is no reason why particulars of both sets of Assessments in dispute cannot be stated in the TRCs to be purchased as security for both. Once it is so done, the Commissioner can use the TRCs to pay for whatever set of Assessments that are eventually upheld on appeal if at all under section 71(7)(c).

Your decision contained in the letter dated 13 December 2017 rejecting the Proposals are based on erroneous interpretation of the IRO, and is otherwise Wednesbury unreasonable. Both Proposals are open to you as a matter of law and you should have in the proper exercise of your discretion adopted one of them.

We therefore invite you to reconsider our Proposals and confirm your acceptance of one of them as a matter of urgency. If you again unreasonably and unlawfully and improperly reject the same, we have instructions to apply on behalf of our clients for leave to apply for judicial review of the decision to reject.

As we say above, the only lawful, fair and reasonable decision you can make is to agree to either Proposal 1 or 2. A decision by you requiring our clients to take one of the other possibilities (ie any combination of paying the tax directly, purchasing TRCs or unconditional hold over, for the two sets) is unreasonable, oppressive, unfair and unlawful. However, if you again unreasonably and unlawfully and improperly reject the Proposals, our clients will be in default if they do not pay the tax demanded under the [New Section 14 Assessments] and [New Section 21A Assessments], pending their application for leave to apply for judicial review, unless one of those other unlawful and unreasonable possibilities are adopted. In those circumstances, the least of all evils (and we reiterate that they are all evils) for our clients is for them to purchase separate TRCs as a condition for holding over the payment of tax under both sets of Assessments, and we ask you to make that decision in the circumstances, WITHOUT PREJUDICE to our clients’ case that such a decision is itself unreasonable, oppressive, unfair and unlawful and which they will also seek to challenge by way of an application for judicial review, and to ask inter alia that any TRCs purchased pursuant thereto be set aside and cancelled and the sums paid therefor be returned.”

27.  The Commissioner responded to Clifford Chance on 20 December 2017, as follows (referred to in the Form 86 as “Decision 2”):-

“Proposal 1(1)

2. DFE and DFCL have challenged the [New Section 14 Assessments] and the [New Section 21A Assessments] for the years of assessment 2015/16 and 2016/17 respectively by means of objections under section 64(1) of the Inland Revenue Ordinance (‘IRO’). Under section 64(2) of the IRO, the Commissioner of Inland Revenue (‘the Commissioner’) on receipt of a valid notice of objection shall consider it and in so doing may confirm, reduce, increase or annul the assessment within a reasonable time. It is for the Commissioner to determine the facts and matters relevant to a taxpayer’s objections to an assessment. On the basis of such a determination, the Commissioner may confirm or dismiss the taxpayer’s objections in whole or in part. At this stage, since the Commissioner has not yet made such determination, the [New Section 21A Assessments] raised on DFCL cannot be amended or annulled.

Proposal 1(2)

3. The Commissioner is empowered to fix the due date for payment of tax by virtue of section 62(1) of the IRO. It is the Department’s policy that the due dates once allocated will not be amended, while sufficient time will be allowed between the issue date of the demand note and the due date for tax payment for the taxpayer to plan and make financial arrangement for tax payment. In fact, section 71 of the IRO sets out the mechanisms regarding payment of tax in dispute. Under section 71(2) of the IRO, 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. Under section 71(6) of the IRO, taxpayers may apply for payment by instalments in case of financial difficulties. Surcharge will be imposed on the portion of tax postponed for payment.

Proposal 2

4. In the notice of objection against the [New Section 14 Assessments], PricewaterhouseCoopers Limited (‘PwC’) on behalf of DFE requested that the final tax in dispute be held over on the condition that Tax Reserve Certificates (‘TRCs’) in the same respective amounts were to be purchased pending the outcome of the objection. Taking into consideration DFE’s request, conditional standover orders will be made shortly requiring the purchase of TRCs. Pursuant to the proviso to section 71(2) of the IRO, DFE should apply for the purchase of TRCs for the conditional standover orders (‘Conditional TRCs’). Upon payment by DFE, the Conditional TRCs with particulars sufficient to identify the related objections will be issued by the Commissioner pursuant to section 71(7) of the IRO and subject to section 71(8) of the IRO. Section 71(7)(e) of the IRO explicitly provides that no certificate so purchased shall be valid for any purpose except as specified in the preceding paragraphs of the subsection. Where the objection against the [New Section 14 Assessments] is withdrawn of determined against DFE (wholly or in part), DFE may tender the Conditional TRCs in payment of so much of the tax held-over as is found payable. No certificate purchased in pursuance of a conditional order shall be used for any other purpose. A certificate so purchased will be inscribed with an identifying mark to such effect.

5. In the notice of objection against the [New Section 21A Assessments], PwC on behalf of DFCL requested that the final tax in dispute be held over on the condition that the Conditional TRCs purchased by DFE in respect of the [New Section 14 Assessments] could be applied to settle any tax liabilities which was found or assessed to be due and payable under the [New Section 21A Assessments] and that no interest would be imposed under section 71(10) of the IRO. As mentioned in paragraph 4 above, the Conditional TRCs in pursuance of the conditional orders shall not be used for any other purpose. Therefore, where the objection against the [New Section 21A Assessments] is withdrawn or determined against DFCL (wholly or in part), the Conditional TRCs purchased by DFE in respect of the objection against the [New Section 14 Assessments] shall not be used in payment of so much of the tax held-over as is found payable. In the circumstances, unconditional standover orders will be made pending finalisation of the [New Section 21A Assessments]. However, interest will be imposed under section 71(10) of the IRO if any tax so held-over is finally found payable. Please note that the imposition of the interest under sections 71(10) and 71(11) of the IRO is mandatory and there is no provision in the IRO for waivers or remissions of the interest.

6. With respect, I cannot agree with you that there is nothing in the IRO or the Tax Reserve Certificate Ordinance (Cap 289) to say that one TRC cannot relate to more than one assessment or objection or appeal. According to section 71(7)(a) of the IRO, where the Commissioner exercises his powers under the proviso to 71(2) and a person is required to purchase a certificate under paragraph (a) of that proviso, a certificate in an amount equal to the tax or any part thereof the payment of which is held over shall be purchased. That means the total amount of TRCs purchased should be equal to the total amount of tax held over conditionally. You can also make reference to sections 71(7)(b) and (c) of the IRO on this issue.”

28.  In view of the Commissioner’s stance as set out in the aforesaid letter of 20 December 2017, Clifford Chance wrote a further letter of the same date to the Commissioner requesting, under protest, for the issue of conditional hold over orders in respect of the tax payable under the New Section 21A Assessments upon the purchase of separate tax reserve certificates for the tax demanded under those assessments.  Clifford Chance also made it clear that this was done without prejudice to DFE/DFCL’s case that “such a decision is itself unreasonable, oppressive, unfair and unlawful and which they will seek to challenge by way of an application for judicial review”.

29.  Eventually, by four separate notices all dated 22 December 2017, the Commissioner ordered the hold over of each of the New Section 14 Assessments and New Section 21A Assessments, on condition that a separate tax reserve certificate be purchased for the tax demanded under each assessment (referred to in the Form 86 as “Decision 3”).

(vii)   The purchase of tax reserve certificates for the New Assessments

30.  Pursuant to the aforesaid notices, on 5 January 2018, DFE/DFCL purchased the following tax reserve certificates as security for the payment of the tax demanded under the New Section 14 Assessments and New Section 21A Assessments:-

	Year of Assessment	Amount (HK$)
New Section 14 Assessment	2015/16	74,637,957
	2016/17	71,922,438
New Section 21A Assessment	2015/16	34,204,450
	2016/17	35,210,254

(viii)  The application for judicial review

31.  On 13 February 2018, DFE and DFCL made the present application for leave to apply for judicial review of Decisions 1, 2 and 3.  In the Form 86, the following grounds of judicial review were advanced:-

(1)  error of law;

(2)  Wednesbury unreasonableness; and

(3)  fettering of discretion (in rejecting Proposal 1(2) and in respect of Decisions 2 and 3).

32.  On 26 February 2018, the court granted DFE and DFCL leave to apply for judicial review upon consideration of papers alone.

THE STATUTORY SCHEME RELATING TO THE PAYMENT OF TAX PENDING OBJECTION AND APPEAL

33.  The statutory scheme relating to the payment of tax pending objection and appeal is contained in Section 71 (titled “Provisions regarding payment of tax”) under Part 12 (tiled “Payment and Recovery of Tax”) of the Ordinance.

34.  So far as relevant, Section 71 states as follows:-

“(1) Tax charged under the provisions of this Ordinance shall be paid in the manner directed in the notice of assessment on or before a date specified in such notice. Any tax not so paid shall be deemed to be in default…

(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…as the Commissioner may require.

(4) Where, upon the final determination of an objection or appeal under Part 11, or upon any order made by the Commissioner, any tax which has been held over under subsection (2) becomes payable or the tax charged is increased, the Commissioner shall give to the person objecting or appealing a notice in writing fixing a date on or before which any tax or balance of tax shall be paid. Any tax not so paid shall be deemed to be in default.

(5) Where any tax is in default, the Commissioner may in his discretion order that a sum or sums not exceeding 5% in all of the amount in default shall be added to the tax and recovered therewith.

(6) Notwithstanding anything contained in the previous subsections of this section the Commissioner may agree to accept payment of tax by instalments.

(7) Where the Commissioner exercises his powers under the proviso to subsection (2) and a person is required to purchase a certificate under paragraph (a) of that proviso –

(a) a certificate in an amount equal to the tax or any part thereof the payment of which is held over shall be purchased within a period of 14 days from the date of the order of the Commissioner, or on or before the date for the payment of tax specified in the notice of the assessment, whichever is the later, failing which the provisions of subsection (2) shall apply as they would if there had been no order;

(b) the Commissioner shall, when he issues a certificate so purchased, note on it particulars sufficient to identify the objection or appeal to which it relates;

(c) upon the withdrawal or final determination of the objection or appeal a certificate or part of a certificate so purchased shall be accepted by the Commissioner in payment of so much of the tax held over as becomes or is found to become payable, and no interest shall be payable upon any certificate or part of a certificate so accepted;

(d) where, upon the final determination of the objection or appeal, and after all tax held over which becomes, or is found to be, payable has been paid in the manner specified in paragraph (c), any certificate or part of a certificate so purchased has not been accepted as payment by the Commissioner under paragraph (c), the Commissioner must repay to the holder of the certificate –

(i) the principal value represented by the certificate or part of the certificate; and

(ii) the interest on that value, calculated in accordance with the rules from the date of issue of the certificate to the date of the final determination of the objection or appeal; and

(e) no certificate so purchased shall be valid for any purpose except as specified in the proceeding paragraphs.

(10) Where the Commissioner makes an order under subsection (2) but does not exercise his powers under the proviso thereto, interest shall be payable on so much of the amount of the tax or any part thereof the payment of which is held over as becomes payable or is found to become payable upon the withdrawal or final determination of the objection or appeal, from the date for the payment of the tax specified in the notice of assessment or the date of the order, whichever is the later, to the date of withdrawal or final determination of the objection or appeal, at the rate specified in subsection (11).

(11) The rate of interest specified for the purposes of subsections (9)(e)(ii) and (10) shall be the rate determined by the Chief Justice by order under section 50(1)(b) of the District Court Ordinance (Cap. 336).”

35.  The effect of Section 71 is, in summary, as follows (for simplicity sake, it is assumed that the taxpayer’s objection or appeal either succeeds or fails wholly, but similar principles apply where the objection or appeal only succeeds partially):-

(1) Tax demanded under an assessment is payable on the due date specified in the assessment notwithstanding any objection or appeal, unless the Commissioner orders that the payment thereof be held over pending the outcome of the objection or appeal.

(2) If the Commissioner does not order any hold over and the taxpayer pays the tax as assessed on or before the due date –

(a) should the taxpayer ultimately succeed in his objection or appeal, he is entitled to be refunded the tax paid, but without any interest (Weson Investment Ltd v CIR [2007] 2 HKLRD 567);

(b) on the other hand, should he withdraw, or ultimately fail in, his objection or appeal, no further issue arises as the tax has already been paid.

(3) Where Commissioner decides to make a hold over order, he may do so unconditionally or conditionally.

(4) If the Commissioner makes an unconditional hold over order –

(a) should the taxpayer ultimately succeed in his objection or appeal, no payment will need to be made by him and no further issue arises as there is no tax liability;

(b) on the other hand, should he withdraw, or ultimately fail in, his objection or appeal, he has to pay the amount of tax that he is liable to pay plus interest on that amount from the original due date or the date of the order (whichever is the later) to the date of the withdrawal or final determination of the objection or appeal at the rate specified in Section 71(11), which has stood at 8% per annum since 1 April 2009.

(5) If the Commissioner makes a hold over order conditional upon the purchase of a tax reserve certificate –

(a) should the taxpayer ultimately succeed in his objection or appeal, he is entitled to be refunded the amount paid to purchase the tax reserve certificate with interest at the rate specified in Section 71(7)(ii), which has stood at 0.0433% per annum since 4 January 2010;

(b) on the other hand, should he withdraw, or ultimately fail in, his objection or appeal, the certificate shall be accepted by the Commissioner in payment of the tax that the taxpayer is liable to pay and no further payment is required to be made by him.

36.  It should immediately be apparent that there are huge disparities between:-

(1) the interest payable by the taxpayer (who withdraws, or ultimately fails in, his objection or appeal) to the Commissioner in the case of an unconditional hold over – 8% per annum;

(2) the interest payable by the Commissioner to the taxpayer (who ultimately succeeds in his objection or appeal) in the absence of any hold over – nil interest; and

(3) the interest payable by the Commissioner to the taxpayer (who ultimately succeeds in his objection or appeal) in the case of a hold over conditional upon the purchase of a tax reserve certificate – 0.0433% per annum.

Such disparities lie at the heart of the present application for judicial review.

THE COMMISSIONER ERRED IN LAW IN REJECTING THE PROPOSALS

37.  Before considering whether the Commissioner made any error of law in rejecting the Proposals, four preliminary observations may be made.  First, as submitted by Mr Mok, SC for the Commissioner, the Ordinance generally operates on the principle of “pay first, argue later”.  In Super Lion Enterprises Ltd v Commissioner of Rating and Valuation, HCAL 71/2005 (6 October 2006), Hartmann J (as he then was) stated, in respect of a similar provision in Section 29 of the Government Rent (Assessment and Collection) Ordinance, Cap 515, the following at paragraph 59:-

“At the outset, it must be recognised that the fundamental purpose of the Ordinance, viewed in the widest sense, is the assessment and collection of revenue in the form of rent. Even when a demand for rent is disputed, it is the general legislative intent that the rent in question must still flow without delay into the Government’s coffers. The legislative scheme, as with other revenue – collecting statutes, is one of ‘pay now, litigate later’. But that being said, the Ordinance recognises that there will no doubt be exceptions to the general rule and that provision should be made for the equitable disposal of those cases.”

38.  Second, the Commissioner enjoys a wide discretion in deciding whether, and if so on what basis, to make a hold over order.  For this purpose, the Commissioner has formulated a set of policy which has been said to contain sensible criteria to guide the exercise and implementation of the discretion (see Kinco Investment Holding Ltd v Commissioner of Inland Revenue, HCAL 91/2009 (20 September 2010), at paragraphs 20 and 22 per Poon J (as he then was)).

39.  Third, it is not in dispute that the Commissioner may, in appropriate circumstances, issue two (or more) mutually exclusive, alternative, profits tax assessments on different tax bases to a taxpayer for any particular year of assessment.  The rationale for this principle was explained by Barma J (as he then was) in Canray Investment Ltd v Commissioner of Inland Revenue [2012] 4 HKLRD 792, at paragraph 42:-

“However, the material point that is to be derived from the Richard Walter decision is that given a system of taxation that calls for the issue of assessments on the basis of incomplete information (which is also the case in Hong Kong – see section 59(3) of the Ordinance), it follows that it is not required for the assessor to reach a firm view (or one on a balance of probabilities) before being able to issue an assessment. As Mr Wong put it, given that the assessor may issue an estimated assessment on less than full information, it is open to him to issue an assessment on a single taxpayer on more than one basis, and such bases need not necessarily be consistent…I agree with this submission.”

40.  Fourth, notwithstanding the glaring disparities in the interest payable by the Commissioner and taxpayer under the different scenarios referred to in paragraph 36 above, such disparities are authorized by legislation and have to be accepted as lawful and binding (see Weson, supra, at paragraphs 70-71).

41.  These having been said, the unfairness of the situation faced by DFE/DFCL, who have been issued two mutually inconsistent, alternative, assessments in respect of the same profits (ie the Royalties paid by DFCL and received by DEF) and who are prepared to provide, and have in fact provided, full security by purchasing a tax reserve certificate covering the maximum amount of the tax which they may ultimately be found liable to pay in respect of the Royalties, is obvious.  The Commissioner would not, as I see it, suffer any financial prejudice in consequence of accepting the Proposals or any one of them.  On the other hand, DEF/DFCL would (i) suffer considerable financial hardship if they have to purchase separate tax reserve certificates for the New Section 21A Assessments (in addition to those for the New Section 14 Assessments), or (ii) be exposed to considerable financial risk if they have to accept an unconditional hold over of the tax demanded under the New Section 21A Assessments.

42.  In relation to Proposal 1(1), the Commissioner’s position, as stated in Decision 1, is that the New Section 21A Assessments “cannot be annulled since they were validly issued”.  It would seem that the Commissioner takes the view that, as a matter of law, he cannot annul an assessment once it has been validly issued.  This view is, I consider, legally incorrect.

(1) Under Section 64(2) of the Ordinance, on receipt of a valid notice of objection, the Commissioner shall consider the same and within a reasonable time “may confirm, reduce, increase or annul the assessment objected to …”.  This subsection gives the Commissioner a wide discretion to annul an assessment after receipt of a valid notice of assessment which, I consider, is not confined to the situation where the Commissioner has made a determination on an objection but may lawfully be utilized to mitigate the harshness of the statutory regime to which DFE and DFCL are subjected in the circumstances of the present case.  Whether, on the facts, the Commissioner ought to exercise his discretion under the subsection is a separate matter.

(2) If necessary, I consider that the Commissioner also has power under Section 46(c) of the Interpretation and General Clauses Ordinance, Cap 1 (“the IGCO”), to “withdraw” (which has the same effect as “annul”) the New Section 21A Assessments, there being no contrary intention appearing from the Ordinance that I can discern which would exclude the application of the general provision in Section 46(c) to the present situation.

(3) I am unable to accept the suggestion (which Mr Mok raises tentatively by saying that “it is highly doubtful …” in paragraph 42 of his Skeleton Submissions) that the Commissioner has no power to re-issue the New Section 21A Assessments after the final determination of the objection and appeal in respect of the New Section 14 Assessments because of Section 70, which provides (so far as relevant) as follows –

“… where the amount of such assessable income or profits or net assessable value has been determined on objection or appeal, the assessment as made or agreed to or determined on objection or appeal, as the case may be, shall be final and conclusive for all purposes of this Ordinance as regards the amount of such assessable income or profits or net assessable value:

Provided that nothing in this Part shall prevent an assessor from making an assessment or additional assessment for any year of assessment which does not involve re-opening any matter which has been determined on objection or appeal for the year.”

(4) If, for example, it should finally be determined that the New Section 14 Assessments were incorrectly issued to DFE, but it (in the name of DFCL) should instead be taxed under the (annulled) New Section 21A Assessments, I cannot see why re-issuing the New Section 21A Assessments would be “re-opening any matter which has been determined on objection or appeal”.

(5) In any event, there is, so far as I can see, nothing to stop the Commissioner from re-issuing the New Section 21A Assessments after the determination of the Current Appeals but before any determination of the objection to the New Section 14 Assessments.

43.  In relation to Proposal 1(2), the Commissioner’s position, as stated in Decision 1, is that the due date allotted for payment of tax under the New Section 21A Assessments “also cannot be amended”.  In other words, the Commissioner appears to take the view that he likewise has no power in law to amend the due date for payment once it has been specified in an assessment.  That this is the Commissioner’s view is confirmed by Mr Mok in paragraphs 45 to 48 of his Skeleton Submissions for the Commissioner.

(1) Again, I consider the Commissioner’s view of the law to be incorrect.  Such power can be found in Section 46(a) of the IGCO, the application of which is not, I consider, displaced by any contrary intention appearing from the Ordinance.

(2) On behalf of the Commissioner, Mr Mok argues that such contrary intention can be found from the fact that the legislature intends for the Ordinance to establish a certain and predictable statutory scheme, including carefully designed procedures for handling objection/appeal and withholding payment of tax pending determination, and express provisions giving the Commissioner power to extend time in some specified circumstances (eg Section 58(6) for filing tax returns).  However, it is a fact that the Ordinance provides for payment of tax to be deferred in circumstances where the Commissioner exercises his power to allow the tax to be held over (unconditionally or conditionally) pending objection or appeal.  The time required for final determination of an objection or appeal is inherently uncertain, and thus the time of eventual payment or collection of the tax, whether by actual payment in the case of an unconditional hold over or by acceptance of a tax reserve certificate in the case of a conditional hold over, is also inherently uncertain.  In such circumstances, I am unable to see why giving the Commissioner the power to postpone the due date for payment of tax is so inconsistent with, or contrary to, the statutory scheme for the assessment, objection and appeal, payment and recovery of tax under the Ordinance that the general power to “amend” (which would include the power to extend time) under Section 46(a) of the ICGO should be regarded as being excluded.

(3) Separately, Mr Mok also argues that the “date specified in such notice” referred to in Section 71(1) must be a fixed date and cannot be one to be calculated as suggested in Proposal 1(2), namely, “two months after the final determination of the [Current Appeals], with further extension as may be agreed between the Commissioner on one part and DFE and DFCL on the other, if required”.  The observation in (2) above is repeated.  It is also relevant to note that under Section 71(4), “[w]here, upon the final determination of an objection or appeal under Part 11, or upon any order made by the Commissioner, any tax which has been held over under subsection (2) becomes payable or the tax charged is increased, the Commissioner shall give to the person objecting or appealing a notice in writing fixing a date on or before which any tax or balance of tax shall be paid” [emphasis added].  In other words, in cases falling under that subsection, pending the determination of an objection or appeal, the due date for payment would be uncertain.  This suggests to me that there is nothing inherently inconsistent with the statutory scheme that at some point in time it is not possible to ascertain a fixed date for payment of tax under an assessment.

(4) The fact that the Commissioner states, in Decision 2, that “[i]t is the Department’s policy that the due dates once allocated will not be amended” [emphasis added] is inconsistent with the proposition that he has no power as a matter of law to postpone the due date for payment.  It is, I consider, an implicit recognition that he does have such power.

(5) In view of the inconsistent positions adopted by the Commissioner in Decision 1 and Decision 2 on this issue, the preferable course, it seems to me, would be to remit the matter to the Commissioner for fresh consideration instead of proceeding on the basis that the Commissioner correctly understood that he had the power to postpone the due date for payment and asking whether his exercise of discretion can be challenged on the Wednesbury unreasonableness ground, or on the ground of fettering of discretion.

44.  Lastly, in respect of Proposal 2, the Commissioner’s position, as stated in Decision 1, is that there is nothing in the Ordinance to permit him to accept tax reserve certificates purchased in respect of the New Section 14 Assessments “in payment of the tax payable under the [New Section 21A Assessments] upon the finalization of the objection or appeal”.  This view is, apparently, founded on Section 71(7)(e), and the fact that where a tax reserve certificate is purchased, the particulars of the tax in dispute, including the file number, charge number and amount, have to be clearly stated in the certificate, having regard to the “form” of tax reserve certificate as prescribed by the Tax Reserve Certificates (Fourth Series) Rules, Cap 289A, rule 5(2) and Schedule 1, Form 2 (see paragraphs 65 to 71 of Mr Mok’s Skeleton Submissions).

(1) The Commissioner’s argument seems to me to be based on an overly rigid way of reading the relevant statutory provisions and filling out the form.

(2) The tax reserved certificate is a standard form document.  It states as follows:

“(For Conditional Standover Order – Objection/Appeal Against the Notice of Assessment for the Year of Assessment / )

This Certificate is issued by the Commissioner of Inland Revenue in acknowledgement of the sum stated below, and entitles the applicant to repayment of the sum so stated together with any interest which might accrue, in accordance with the conditions set out in the Tax Reserve Certificates (Fourth Series) Rules.  This Certificate is issued pursuant to section 71(7) of the Inland Revenue Ordinance (Cap.112) and subject to section 71(8) of that Ordinance.”

Underneath those words are blanks to be filled in for “Name of Applicant”, “File No”, “Charge No”, “Amount” and “Date to be purchased by”.

(3) Section 71(7)(e) provides that no certificate required by the Commissioner to be purchased by a taxpayer under paragraph (a) of the proviso to subsection (2) as security for the payment of the amount of tax being held over shall be valid for any purpose except as specified in paragraphs (a) to (d) of subsection (7).  I fail to see why the “particulars” of two sets of assessments in dispute cannot be appropriately stated in the blanks in the tax reserve certificate to make it clear that the certificate stands, and is intended to stand, as security for both assessments so that Section 71(7)(e) would be complied with.

(4) I accept as correct Mr Wong, SC’s submission that where the Commissioner has issued two sets of assessments charging tax on the same profits but on an alternative, mutually exclusive, basis, a tax reserve certificate (in the higher amount of the two assessments) may be purchased and lawfully used as security for both assessments.

45.  Having concluded that the Commissioner erred in law in rejecting Proposals 1(1), 1(2) and 2, it is not necessary for me to consider the other grounds of judicial review (ie Wednesbury unreasonableness and fettering of discretion).  Neither would it be appropriate for me to do so because the Proposals have to be remitted to the Commissioner for fresh consideration in any event (this being also the relief sought in paragraph 4 of the Originating Summons).

DISPOSITION

46.  For the foregoing reasons, the application for judicial review is allowed, Decisions 1, 2 and 3 are quashed, and the Proposals are remitted to the Commissioner for fresh consideration in accordance with this judgment, with liberty to the parties to apply for further or consequential relief in relation to the tax reserve certificates purchased by DFE and DFCL in respect of the New Section 14 Assessments and New Section 21A Assessments in the event that the parties are unable to reach agreement on how they are to be dealt with.  The Applicant shall be entitled to the costs of this application, to be taxed if not agreed with certificate for 2 counsel.

47.  Lastly, it remains for me to thank counsel for their assistance rendered to the court.