THE COMMISSIONER OF INLAND REVENUE v. GENEHARBOR (HONG KONG) TECHNOLOGIES LTD

DCTC74/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

TAX CLAIM NO 74 OF 2015

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DECISION

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BACKGROUND

1. In this action, the Commissioner of Inland Revenue (“the Commissioner”) sues the defendant (“the Taxpayer”) for the sum of HK$11,138,929.03 (together with interest and costs) being tax due and payable, but unpaid, by the Taxpayer, under s 75 of the Inland Revenue Ordinance, Cap 112 (“the Ordinance”).

2. The writ herein was served on the Taxpayer on 29 January 2015.  In its Defence filed on 8 June 2015, the Taxpayer mainly contended that:-

(1) The tax representative for the Taxpayer, Messrs Deloitte Touche Tohmastsu (“Deloitte”) had lodged an objection pursuant to s 64(1) of the Ordinance against the assessments on the ground the profits assessed were excessive and incorrect (“the Objection Plea”): [See §3 of the Defence];

(2) The Taxpayer requested that the tax assessed for the years of assessment 2007/08 and 2008/09 be held-over unconditionally.  The Assistant Commissioner issued two notices on 22 April 2014 ordering that the tax for the amount of HK$314,774 under Charge No 1-1183741-08-A (“Charge 1”) and HK$9,387,655 under Charge No 1-1175978-09-2 (“Charge 2”) be held over with conditions that an equal amount of Tax Reserve Certificate be purchased not later than 6 May 2014 (“the Notices”).  By the operation of s 71(2) of the Ordinance, since the profit taxes were held over, the due dates of Charge 1 and Charge 2 as pleaded in the statement of claim were not applicable as no profit tax shall be due when they were held over irrespective whether the Taxpayer has satisfied the conditions or not (“No Profit Tax Due Plea”): [See §4-7 of the Defence].

3. By a summons dated 13 July 2015, the Commissioner applied for an Order for judgment to be entered against the Taxpayer pursuant to Order 14 of the Rules of the District Court, Cap 336H (“RDC”).  The Commissioner filed the affirmation of Chow Wai Wing on 13 July 2015 in support of its application (“Chow’s affirmation”), an acting assessor of the Inland Revenue Department (“IRD”).

4. Messrs Tang & So represented the Taxpayer in these proceedings and have been so since 6 March 2015.  The Taxpayer filed the affirmation of Wang June, who is a director of the Taxpayer, in opposition of the summons on 3 August 2015 (“Wang’s affirmation”).  In Wang’s affirmation, the Taxpayer basically raised 2 purported defence which I will adopt the abbreviations used by Ms Minnie Wong, Government Counsel for the Commissioner, namely, (i) the Objection Plea and; (ii) the No Profit Tax Due Plea.

DISCUSSION

(i) The Objection Plea

The Law

5. The relevant provisions of the Ordinance are sections 71(2) and 75(4):-

“71(2) Tax shall be paid notwithstanding any notice of objection or appeal, unless the Commissioner orders that payment of tax or any part thereof be held over pending the result of such objection or appeal…”

“75(4) In proceedings under this section for the recovery of tax the court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal…”

6. I agree with Ms Wong that s 75(4) is drafted in very plain and clear terms.  I further agree with her that no matter how a defence is dressed up, if its substance is to say the tax is incorrect, it cannot be entertained. 

7. In my judgment, the Objection Plea falls squarely within the straightforward s 75(4).  In my view, a plain reading of the section itself can dispose of this defence outright.  However, for the sake of completeness, the following passages from the authorities have been referred to me by Ms Wong of which I would respectfully adopt:-

(a) In CIR v Au Yuk Shuet (1966) 1 HKTC 489 at 493, Judge Pickering said:-

“The object of section 75 is to provide a convenient means of collecting, through the District Court, overdue taxes but its intention is not to permit a taxpayer who has failed to take advantage of the provisions for appeal contained in Part XI of the Ordinance to have issues of law and fact determined in the District Court. Indeed to hold that the District Court has a concurrent jurisdiction in regard to issues of liability would lead to absurdity for if that were the case a taxpayer whose appeal has been dismissed by the Commissioner, the Board of Review, the Supreme Court and the Privy Council could, upon being sued by the Commissioner for tax previously in dispute, raise the same issues all over again in the District Court.”

(b) In Ng Chun Kwan v CIR [1976] HKLR 94 at 98, Briggs CJ said that:-

“Section 75 of the Ordinance is quite another matter. It deals with the recovery of the tax and not with assessments at all. The wording of subsection (4) of the section wraps up all the objections which can be made to the assessment. This is not to say that there is no defence to a claim for tax brought by the Commissioner. There may be question as to the identity of the taxpayer for example. As I see it section 75 of the Ordinance confers a limited, in fact a very limited, jurisdiction o the District Court rather than limits the jurisdiction of the courts as a whole.” [emphasis added]

(c) In CIR v Choy Sau Kam (1983) 2 HKTC 10 at 15, Barker JA described the position as an “ouster” of the District Court’s jurisdiction by virtue of s 75(4) to entertain a plea that the tax is incorrect.

(d) In Lau Chi Sing (DCCJ 12121 of 2000, 26 April 2001, unreported), Judge Lam said at §8:-

“Further, section 71(2) of the Ordinance makes it clear that tax shall be payable notwithstanding that there is any pending objection to the assessment or appeal against the same. In the proceedings before the District Court, the court is only required to be satisfied that an assessment has been made against the defendant and he has not paid. If a defendant wishes to raise other matters, the proper avenue is to follow the objection procedures laid down in the Ordinance.”

8. I further agree with Ms Wong’s submission that the Court of Appeal in CIR v Lai Yin Ha formerly trading as China Skin Specialist Clinic (1988) 2 HKTC 374 laid down the correct approach for the District Court when faced with a defence as in the present case, which in effect argues that the assessment is incorrect.  Faud VP said at p 380:-

“Section 75(4) of the Ordinance is perfectly clear and all the material averments in the Defence, as well as the basis for the Taxpayer’s submissions to the Court, are caught within the steely embrace of the prohibition: ‘… the court shall not entertain any plea that the tax is excessive, incorrect, subject to objection or under appeal…’ Nothing that the Taxpayer has said today (she appears before us in person) takes the matter outside that express statutory proscription.

If authority were needed on the effect of s 75(4) and that in such circumstances the proper course is to strike out the defence, it is to be found in two of the decisions cited to the judge, both of which bound him: Ng Chun Kwan v Commissioner of Inland Revenue, [1976] HKLR 94; 1 HKTC 633 (Full Court, 16 January 1976) which was followed in Commissioner of Inland Revenue v Choy Sau Kam [sic] and Another, 2 HKTC 10 (Court of Appeal, 9 November 1983).

Both those authorities point out that matters of the kind raised by the Taxpayer here can only be ventilated by the objection and appeal procedures for which the Ordinance makes provision. These are to be found in ss 64, 66, 67, 68, 69 and 69A.

With every respect to the learned judge, his approach, both at the hearing proper and at the review, was wholly misconceived. In view of the content of the Defence and what is enacted by s 75(4) of the Ordinance, the judge’s discretion could only properly have been exercised by striking out the Defence as not disclosing ‘an adequate defence’ under rule 38A(1)(b)(ii) of the District Court Civil Procedure (General) Rules. He should then have gone on to enter judgment against the Taxpayer under rule 27(1)(b) of the same Rules because she had failed ‘to disclose any reasonable ground of defence’. There was, in the circumstances, no need for the production of the certificate provided for in s 75(3) of the Ordinance because that subsection is only relevant when, as a matter of evidence, it is necessary to prove that the tax is due and its amount”.

9. Ms Wong submits and I accept that the approach laid down in CIR v Lai Yin Ha formerly trading as China Skin Specialist Clinic (1988) 2 HKTC 374 should be adopted with references to the current RDC.

10. In my judgment, the proper avenue for the Taxpayer to pursue its case in order to argue whether it has truly received the profits of the transaction involved is by way of objection to the Revenue, and then appeal can be made to the Board of Review, thereafter by way of case stated to the Court of First Instance.  The Taxpayer’s position is that it has raised ‘a valid objection’ (See §7 of Wang’s affirmation), thus, it falls squarely within the ambit of s 75 of the Ordinance.  In my view, this does not raise an issue since s 71(2) of the Ordinance in unequivocal terms provides that “Tax shall be paid notwithstanding any notice of objection or appeal”. There is, in my view, no ambiguity in such clear wordings.

11. I therefore find that the Objection Plea raised by the Taxpayer cannot be substantiated as a matter of law and is not a valid defence to this action.

(ii) The No Profit Tax Due Plea

The Law

12. The relevant provisions of the Ordinance are sections 71(2), 71(3) and 71(7)(a)[A/1]:-

“71(2) Tax shall be paid notwithstanding any notice of objection or appeal, unless the Commissioner orders that payment of tax or any part thereof be held over pending the result of such objection or appeal;

Provided that where the Commissioner so orders he may do so conditionally upon the person who or on whose behalf the objection or appeal is made providing security for the payment of the amount of tax or any part thereof the payment of which is held over either-

(a) by purchasing a certificate issued under the Tax Reserve Certificates Ordinance (Cap 289); or

(b) by furnishing a banker’s undertaking,

as the Commissioner may require.”

71(3)  Where the Commissioner is of opinion either that the tax or any part thereof held over under subsection (2) is likely to become irrecoverable, or that the person objecting or appealing is unreasonably delaying the prosecution of his objection or appeal, he may cancel any order made under that subsection and make such fresh order as the case may appear to him to require.

71(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 of 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..”

13. The Taxpayer denies that it is indebted to the plaintiff the sum of HK$11,138,929.03 as the Notices of Profits Tax Assessment Demanding Final Tax for 2007/2008 and 2008/2009 issued on 11 March 2014 have been overridden by the two hold-over orders by the Notices: [see §3 of Wang’s Affirmation].  The Taxpayer contends that, by the operation of s 71(2) of the Ordinance, since the profit taxes were held over by the Notices, the due dates as pleaded in the statement of claim were not applicable irrespective whether the Taxpayer has satisfied the conditions in the Notices or not: [See §6-7 of Wang’s Affirmation].

14. The Taxpayer further contends that the tax has been held over pending the result of the Taxpayer’s objection filed on 29 May 2014 as the Revenue did not issue any fresh order to pay tax pursuant to s 71(3) of the Ordinance: [See §6-7 of Wang’s Affirmation].

15. On the plain reading of the statutory provisions, I agree with Ms Wong that s 71(2) clearly provides that the hold-over orders by the Commissioner may be made on the condition that the person who or on whose behalf the objection or appeal is made purchase a Tax Reserve Certificate (“TRC”).  By the Notices, the hold-over orders were made on the condition that the Taxpayer purchased an equal amount of TRC of $314,774 and $9,387,655 for the Charge 1 and Charge 2 respectively no later than on 6 May 2014.

16. Clause 1 of the “Payment Instructions” in the overleaf of the TRC clearly provides that “this certificate must be purchased on or before the date of purchase specified herein, ie 6 May 2014, otherwise the condition for holdover of the tax covered by this TRC will lapse and the tax will become payable immediately.”:  [§5 of the affirmation of Chow Wai Wing and §5 of the second affirmation of Chow Wai Wing].

17. s 71(7)(a) of the Ordinance further states that the TRC shall be purchased within 14 days from the date of the hold-over order or the due date for payment of tax specified in the notice of the assessment, whichever is later, failing which the provisions of s 71(2) shall apply as they would if there had been no hold-over order. [emphasis added]

18. Moreover, §10 of the Departmental Interpretation and Practice Notes No 6 (Revised) has expressly stated that failure to purchase TRC within the prescribed time will have the effect of nullifying the order, thereby rendering the underlying tax payable in full on the relevant due date(s): [§8 of Second Affirmation of Chow Wai Wing].

19. Since the Taxpayer has failed to comply with the condition of the hold-over orders by purchasing the TRC by 6 May 2014, the two hold-over orders were nullified pursuant to s 71(7)(a) of the Ordnance.  It rendered the underlying tax to be payable in full on the relevant due dates, ie 22 April 2014.  Therefore, the dues dates in Charge 1 and Charge 2 as stated in the Commissioner’s statement of claim are still valid.

20. It has further been submitted by Ms Wong that, since the hold-over orders have already been nullified pursuant to s 71(7)(a), it is not necessary for the Revenue to ‘cancel’ the hold-over orders and issue a fresh order pursuant to s 71(3) in such circumstances.  It is not a case where the Commissioner opines that, after issuing a hold-over order, the tax or any part thereof is likely became irrecoverable or the person objecting is unreasonably delaying the prosecution of the objection.  It is submitted on behalf of the Commissioner that s 71(3) is irrelevant and not applicable to the present case.

21. I agree.

22. Therefore, in my judgment, the Taxpayer’s No Profit Tax Due Plea is also untenable in this case.

The Taxpayer’s case

23. It has been submitted by Ms Tsang on behalf of the Taxpayer that:-

(a) The Commissioner should have issued fresh orders demanding payment of tax to the Taxpayer after 6 May 2014 due to the principle of legal certainty; and

(b) Alternatively, it was not fair for the Commissioner to take 22 April 2014 as the due date for the payment of tax because of the conflicting messages they sent to the Taxpayer.

24. On the principle of Legal Certainty, Ms Tsang submits:-

(a) The Commissioner issued the held-over orders only on 22 April 2014, the original due dates for the payment of tax.

(b) While section 71(7)(a) stipulates that the failure to purchase the TRC as required would lead a situation where “subsection (2) shall apply as they would if there had been no order”, it was impossible for the Taxpayer to discharge its liability according to the Demand Notes because of the expiry of the due dates as early as on the date when the Commissioner issued the held-over orders.  Due to the impossibility for the Taxpayer to comply with the direction set out in the Demand Notes, the Demand Notes must have ceased to have effect as of 22 April 2014.

(c) The hold-over orders lapsed on 7 May 2014.  The world “lapsed” was a choice of word by the Comissioner in their letter dated 26 November 2014.  According to the Oxford Shorter Dictionary, “lapsed” means “ceased”, “no longer valid”.  The hold-over orders granted on 22 April 2014 were no longer valid only starting from 7 May 2014.

(d) With the lapse of both the Demand Notes and the hold-Over orders, it was necessary for the Commissioner to make fresh orders pursuant to section 71(3) of the Ordinance, or section 46 of the Interpretation and General Clauses Ordinance, Cap 1 to make fresh orders and to inform the Taxpayer, based on the principle of legal certainty, a new date on which it is required to pay the tax assessed: Leung Kwok Hung & ors v HKSAR (2005) 8 HKCFAR 229.

25. Further, the Taxpayer relies on the principle of fairness:-

(a) According to the Commissioner’s policy in relation to the issuance of held-over orders (7/132-133), if the “objection (lodged by a Taxpayer in relation to the tax assessment) has little chance of success, no hold-over will be ordered and the tax will be payable on the due date(s) contained in the notice of assessment”.

(b) The Taxpayer applied for hold-over orders as early as on 10 April 2014 and only got a reply from the Commissioner on the original due date of 22 April 2014.

(c) The decision of the Commissioner was the granting of conditional hold-over orders.

(d) The decision to grant conditional hold-over orders by the Commissioner shows that the objection lodged by the Taxpayer “has some merits”.

(e) Without receiving a rejection by the Commissioner in relation to the hold-over applications before the original due date, there was a good basis for the Taxpayer to expect there to be a chance for the Commissioner to grant unconditional hold-over orders.

(f) The fact that the decision of the Commissioner was related to the Taxpayer only on 22 April 2014 but not earlier has deprived the Taxpayer the chance to better prepare for the way forward.

(g) It was the Commissioner’s stance that the hold-over orders “lapsed” on 7 May 2014.  The word “lapsed” was a choice of word by the Commissioner in his letter dated 26 November 2014.  According to the Oxford Shorter Dictionary, “lapsed” means “ceased”, “no longer valid”.  In other words, the hold-over orders granted on 22 April 2014 became invalid only from 7 May 2014 onwards.

(h) Without repeating the argument in connection with the principle of legal certainty, the Taxpayer says that it was not fair for the Commissioner to impose surcharge on the alleged outstanding tax retrospectively starting from 23 April 2014, when they had only on 20 June 2014, for the first time, informed the Taxpayer that the tax should be settled “immediately”.

(i) It should be noted that as of 14 November 2014, the Commissioner still invited the Taxpayer to follow up whether the tax payable will be held over.

(j) Added up together, it was unfair for the Commissioner, when it had sent conflicting messages to the Taxpayer at various stages, to still take 22 April 2014 as the due day for the tax payment.

26. In my judgment, given the Commissioner’s submissions on the legal principles as referred to above, of which I fully accept and endorse, none of the above submissions made on behalf of the Taxpayer contains any real substance and I have no difficulty to dismiss all of them.

CONCLUSION

27. In light of the aforesaid, I find that the Taxpayer has failed to raise any arguable defence against any of the Commissioner’s claims or to raise any triable issue.  In the premises, I am of the view that the Taxpayer has no defence to the Commissioner’s claim and I grant the relief sought by the Commissioner as set out in the summons pursuant to Order 14 of the RDC.

28. Costs will follow the event.  I make an order nisi that the Taxpayer do pay the Commissioner’s costs of the action, including the costs of this application, such costs to be paid on a party and party, to be taxed if not agreed.  The order nisi will become absolute in the absence of any application by the parties to vary the same within 14 days from the date of this Order.

29. Lastly, I would like to thank counsel on both sides for their helpful assistance.