SINOLINK SHANGHAI INVESTMENTS LTD v. COMMISSIONER OF INLAND REVENUE

HCIA 1/2024

[2025] HKCFI 544

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 1 OF 2024

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BETWEEN

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DECISION

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1.   Introduction

1.1  By its summons dated 29 January 2024 (“Summons”), the Applicant (“SSI”) applies pursuant to section 69 of the Inland Revenue Ordinance Cap 112 (“IRO”) for leave to appeal against the decision of the Board of Review (“Board”) dated 29 December 2023 (“Decision”). By the Decision, the Board dismissed SSI’s appeal against the determination dated 30 September 2020 (“Determination”), by which the Respondent (“CIR”) rejected SSI’s objections to the profits tax assessments for 2006/07 to 2009/10 and 2012/13 (“Relevant Years of Assessment”)[1].

1.2  Before the Board, SSI was represented by a different team of counsel. In the present leave application, SSI is represented by Mr Barlow SC and CIR, as was the case before the Board, by Mr Eugene Fung SC leading Mr Julian Lam. In addition to the skeleton submissions lodged for the present hearing, the statements filed by SSI (“AS”)[2] and CIR (“RS”)[3] pursuant to section 69(3) of the IRO are also signed by counsel. I mention SSI’s change of representation because, as will be seen below, there is a difference between Mr Barlow and Mr Fung as to how SSI had in fact run its appeal before the Board.

1.3  The Summons identifies the following questions of law (“Questions”):

“ Upon the true construction of the Part 4 of the IRO and in particular sections 14 and 15(1)(f) and by reason of the facts agreed by the parties and found by the Board, did the Board misconstrue the terms and requirements of each of those 2 sections by one or more of the following errors of law:

(a) Failing to adopt and apply the 3 pre-conditions of section 14 of the IRO to chargeability (as explained in Hang Seng Bank Ltd v CIR [1991] AC 306 at 318E-F) to the Board's findings of fact, which require the conclusion that the Applicant's contingent future entitlement under the Investment Agreement to the payments concerned could only ever derive from the Applicant's sole business, namely its joint-venture participation in the property development Project in Shanghai, PRC which it was funding [(“Question (a)”)];

(b) Failing to adopt and apply Part 4's “core principles that profits are not taxable until they are realized and that profits must not be anticipated” (Nice Cheer Investment Ltd v CIR (2013) 16 HKCFAR 813 at [40]) [(“Question (b)”)];

(c) Misconstruing and misapplying each of the 2 pre-conditions to the application of section 15(1)(f)'s deeming provision (neither of which, on the facts found, was met) namely, that the sums concerned be [(“Question (c)”)]:

(i) “sums received by or accrued to a corporation... by way of interest “by failing to adopt and apply the principle of law that interest is not “accrued“ (as distinct from “accruing”) unless and until the creditor has a present enforceable right to payment of the interest; and

(ii) “interest derived from Hong Kong”.” (emphasis added)

2.   Background

2.1  The basic facts have been set out at Decision Section B (§§2-20) and Section C (§§21-32). Section B sets out the agreed facts contained in the parties’ List of Agreed Facts dated 2 March 2022 (“Agreed Facts”). Section C sets out what the Board regarded as other uncontroversial and undisputable facts (“Indisputable Facts”). As underlined above, the Questions proceed on the basis of “the facts agreed by the parties and found by the Board”. Given the arguments advanced by the parties, it seems to me that it is important to bear in mind the distinction between the Agreed Facts and the Indisputable Facts. As will be seen below, the Indisputable Facts comprise (almost) exclusively of the Board’s recitation of what it considered to be the relevant terms of various agreements and representations made by Sinolink Worldwide Holdings Limited ("SWH") in (as defined below) the Circular and the Board Letter.

(i) The Agreed Facts

2.2  SSI is and was at all material times a wholly-owned subsidiary of SWH, a Hong Kong-listed company. In the profits tax returns, SSI has described its principal activity as investment holding.

2.3  On 14 November 2005, SWH and Rockefeller Group International Inc (“Rockefellar Group”) executed a confidential Memorandum of Understanding (“MOU”). The MOU sets out the basic terms and conditions of a contemplated investment by SWH in respect of the Waitanyuan project in Shanghai (“Project”).

2.4  On 30 November 2005, an Investment Agreement ("Investment Agreement") in relation to the Project was entered into amongst SSI, SWH, Rockefeller Group, Rock-Shanghai, Inc (a wholly-owned subsidiary of Rockefeller Group) ("RSI"), and Rockefeller Group Asia Pacific, Inc ("RGAP"). The recitals of the Investment Agreement provides, inter alia, that a Sino-Foreign Joint Venture (“CJV”) would be established to develop the Project. The CJV would be held by a Barbadian holding company (“SRL”), which would in turn be held by RGAP. SSI and RSI would become the shareholders in RGAP.

2.5  On 2 December 2005, RGAP, Rockefeller Group and SSI entered into an Option Agreement, granting Rockefeller Group an option to purchase in the form of Series C Shares (defined therein) a stated percentage, not to exceed 50%, of the outstanding share capital of RGAP ("Option Agreement").

2.6  On 22 December 2005, in accordance with the requirements of the Rules Governing the Listing of Securities on the Stock Exchange, SWH issued a circular on a major transaction disclosing the details of the Investment Agreement and the Project ("Circular") and enclosed a letter from the Board ("Board Letter")[4].

2.7  On 2 January 2006, SSI and the CJV entered into a project management agreement in Shanghai (“Project Management Agreement”).

2.8  SSI’s profit and loss accounts for the Relevant Years of Assessment show that, in each year, it had income described as "Shareholders' Loan Interest Income" or "Interest Income" (this income was described by the parties in the appeal as the “Sums”). In its profits tax returns, SSI claimed that, notwithstanding their descriptions, the Sums should be treated in substance as a return on investment in the Mainland and not interest income in nature (“Caveat”).

2.9  The Inland Revenue Department issued profits tax assessments to SSI for the Relevant Years of Assessment, which assessments were affirmed in the Determination, on the basis that the Sums were interest income arising in or derived from Hong Kong for the purpose of section 15(1)(f) of the IRO.

(ii) The Indisputable Facts

2.10  As stated earlier, Decision Section C sets out what the Board considered to be (1) the relevant terms of the Investment Agreement and the Project Management Agreement and (2) the relevant representations in the Circular and the Board Letter. The cited materials are then referred to in the subsequent sections of the Decision. It is unnecessary to set out here in full the materials cited by the Board. The following summary will suffice.

2.11  In terms of the Investment Agreement, the Board referred to, inter alia, Recital (C), Clause 3.1.1 and Schedule 2.1:

(1) Recital (C) provides that RSI and SSI intend for the CJV to develop the Project and to that end, they have agreed that SSI will subscribe for shares in RGAP and provide certain shareholder loans to RGAP[5];

(2) Clause 3.1.1 provides that SSI shall, as and when required by RGAP, provide RGAP with funds pursuant to 1 or more shareholder loans (“Shareholder Loans”) with an aggregate face amount no greater than the “Investment Amount” (ie US$169 million). The Shareholder Loans shall bear simple interest at the rate of 20% per annum payable on the Series B Funding Amount (irrespective of what amount has actually been advanced to RGAP) and in arrears in accordance with Schedule 2.1[6];

(3) Schedule 2.1[7] stipulates that RGAP shall distribute all of its distributable cash at the end of each fiscal year to make repayments of interest and dividends to its shareholders. It contains an order of priority of distribution. The top priority is that RGAP "shall pay any accrued and unpaid interest on the Shareholder Loan" to SSI.

2.12  In terms of the Project Management Agreement, the Board highlighted (1) Recital 2 provides that CJV is the entity which develops the Project and (2) Recital 3 provides that CJV wishes to appoint SSI as the Project Manager[8].

2.13  In terms of the Circular and the Board Letter, the Board noted, inter alia, the following representations made therein:

(1) SWH’s investment was being made by way of (a) subscription for shares in RGAP and (b) the provision of related shareholder loans to RGAP up to an amount equal to the Investment Amount;

(2) The Investment Agreement required the parties to procure that directors appointed by them adopt a distribution policy for RGAP in respect of distributable cash of RGAP. Distributable cash meant the surplus of RGAP available under the laws of the British Virgin Islands for distribution to the shareholders after repayment of the outstanding shareholder loans;

(3) As consideration for its Series B Shares, SSI paid an amount equal to the par value of 490 Series B Shares (US$1 per Series B Share, being a total of US$490 or approximately HK$3,798). In addition, SSI agreed to make available for RGAP's benefit, as and when required, shareholder loans of up to US$169 million (approximately HK$1,310 million). The monies advanced by way of these shareholder loans would be used by RGAP to fund payments under the Land Grant Contract and the Relocation Contract;

(4) The Shareholder Loans advanced by SSI would entitle it to simple interest at a rate of 20% per annum on the total Investment Amount commencing on the Closing Date (“Shareholder Loan Accrued Interest”), payable in arrears on a date determined by the board of RGAP as soon as practicable after the end of each Fiscal Year. However, to the extent that RGAP did not have distributable cash available to make such payments, Shareholder Loan Accrued Interest would accrue on a cumulative basis and would be payable in future years when distributable cash was available;

(5) A rate of 20% interest payable on shareholder loans made available to RGAP by SSI up to the Investment Amount was considered by the parties to be a fair commercial return to SWH on its investment, taking into account the risks involved including the particular pre-construction, construction, development and other risks of the Project.

3.   The issues before the Board

3.1  The hearing before the Board took place on 7-9, 12-13 and 30 June 2023.

3.2  At Decision §35, the Board recited the provisions of the IRO which were relevant to SSI’s appeal.

3.3  Section 14(1) provides:

“ Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part.”

3.4  Section 15(1)(f) provides:

“ For the purposes of this Ordinance, the sums described in the following paragraphs shall be deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong …(f) sums received by or accrued to a corporation carrying on a trade, profession or business in Hong Kong by way of interest derived from Hong Kong.”

3.5  At Decision §34, it is recorded that, on 20 June 2023, SSI and CIR agreed on a List of Agreed Issues which set out 4 issues for the Board’s determination (“Agreed Issues”):

(1) Issue (1): Was SSI a person carrying on a trade, profession or business in Hong Kong in the basis period for each of the Years of Assessment under appeal?

(2) Issue (2): Were the Sums accrued to SSI by way of interest under section 15(1)(f) of the IRO?

(3) Issue (3): Was the geographical source of the Sums Hong Kong for the purpose of section 15(1)(f) of the IRO?

(4) Issue (4): Was the geographical source of the Sums Hong Kong for the purpose of section 14 of the IRO?

3.6  At Decision §33, the Board summarized SSI’s arguments as elaborated in, inter alia, SSI’s written closing submissions dated 27 June 2023 as follows.

3.7  First, for each of the Relevant Years of Assessment, SSI was not a person carrying on a trade, profession or business in Hong Kong:

(1) SSI at all material times invested in and participated in the Project in Shanghai PRC through its investment in RGAP pursuant to the Investment Agreement. For each of the Relevant Years of Assessment, the Sums were amounts credited in the accounts of SSI for the relevant basis period pursuant to Clause 3.1.1 and Schedule 2.1 of the Investment Agreement;

(2) Therefore, sections 14 and 15(l)(f) of the IRO were not applicable to any profits or receipts of SSI during each of the Relevant Years of Assessment.

3.8  Further or alternatively, and without prejudice to the above ground, the Sums did not arise in, and were not derived from, Hong Kong such that sections 14 and 15(l)(f) of the IRO did not apply:

(1) RGAP was at all material times incorporated in the BVI, having its share register maintained in the BVI. At all material times, RGAP did not carry on any business in Hong Kong. Any profits and distributable cash which it might or would have, out of which the Sums would be or would have been payable, would derive, or would have been derived from the profits which might or would be made by the CJV from the Project in Shanghai PRC;

(2) The Sums were amounts credited in the accounts of SSI for the relevant basis period pursuant to Clause 3.1.1 and Schedule 2.1 of the Investment Agreement. On a proper interpretation of the Investment Agreement as a whole, and in the light of all the relevant facts and circumstances, including (a) the fact that the Investment Agreement was concluded and signed outside Hong Kong, (b) the MOU and (c) the Option Agreement, the Sums were not and would not have been interest income for a loan (being compensation for the use of SSI's money for a period of time). Rather, the Sums were and would have been a return to SSI for its investment in the Project in Shanghai PRC, such-return being distributed upstream through the CVI, SRL and, in tum, RGAP;

(3) Notwithstanding the nomenclature used in the Investment Agreement, the Sums were not interest income derived by SSI from the making of a loan to RGAP:

(a) The Shareholder Loans did not involve a simple transaction whereby SSI provided money to RGAP for a period of time in return to be compensated simply and purely by a sum for the use of the Shareholder Loans for the said period;

(b) Rather, the transaction concerned a provision of money by SSI as an investor solely for the purpose of paying the capital expenditure of the Project in Shanghai PRC, with no provision or right to the repayment of the money provided save in liquidation;

(c) SSI earned or would have earned the Sum by providing the capital funding for the Project, with the agreed return (being the Sums) deriving only from the profits (if any) from the Project in Shanghai.

(4) For these reasons, the source of the Sum, as a practical hard matter of fact, was outside Hong Kong.

3.9  As may be seen from the above, the nub of SSI’s challenges before the Board were (1) the Investment Amount was not a loan, (2) the Sums were not interest income derived by SSI but were a return on Investment, (3) there was no certainty that the Sums would in fact be paid and (4) the Sums were credited in SSI’s accounts as an accounting treatment simply to reflect the terms of the Investment. I have not been provided with the closing submissions lodged before the Board, but it seems to me pertinent to note that, in relation to the last point, SSI’s submissions were apparently worded carefully, deliberately avoiding any reference to a position that the Sums had accrued.

3.10  By the Decision, the Board determined each of the Agreed Issues against SSI. I shall refer to the relevant findings made by the Board below when I consider SSI’s grounds for seeking leave to appeal.

4.   The applicable principles

4.1  As I understand counsel, the following principles are largely not in dispute. The disagreements between counsel are on how these principles are to be applied in the present case:

(1) Section 69(1) of the IRO stipulates that an appellant may appeal against the Board’s decision “on a ground involving only a question of law”. It does not provide for an appeal by way of rehearing;

(2) Section 69(3) provides that leave to appeal “must not be granted” unless the court is satisfied: (i) that a question of law is involved in the proposed appeal and (ii) that the proposed appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the proposed appeal should be heard. The merit threshold is not a high one;

(3) It is incumbent on the intended appellant to identify and state a proper question of law for determination by the court. The requirement to identify a proper question of law is to assist the court in dealing with the application for leave to appeal and to assess, inter alia, whether the proposed appeal involves a proper question of law that ought to be heard, and whether the proposed appeal has a reasonable prospect of success: China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146 at §27;

(4) A question of law may superficially appear to be a question of law, but if it is general and vague and does not identify the issues to be argued, it is inadequate: China Mobile at §30(2);

(5) It is not a proper question of law by turning the ultimate conclusion of the Board into a form of question: China Mobile at §30(3);

(6) It is not a proper question of law if the framed question fails to identify precisely the point of law involved or any specific legal error or question: China Mobile at §30(4);

(7) A proper question of law should not allow the intended appellant to raise new arguments based on facts which were not raised before the Board. To permit this would be bordering on an abuse of process: KWP Quarry Co Ltd v Inland Revenue Board of Review [2021] HKCA 1627 at §§38-39;

(8) Where the applicant seeks to challenge a conclusion on the basis of the facts found by the Board, the conclusion would only involve an error of law if it could be shown that the conclusion for which the applicant contends is the only one open to the Board on the basis of the facts found. Merely to show that the applicant’s view of the matter is reasonably arguable would not suffice. KWP Quarry at §§53-55.

4.2  Mr Fung refers to Wise Pearl Limited v CIR [2024] HKCFI 439 for the following caution:

“ [12] Attacks on findings of fact only raise questions of law in very limited circumstances. It should be borne in mind that:

12.1 the extent to which a particular piece of evidence should be accepted or rejected, and the weight to be given to it, are matters for the Board and not the court;

12.2 it is all too easy for a so-called question of law to become no more than a disguised attack on findings of fact which must be accepted by the courts, and all too easy for the appeals procedure to the court to be misused in this way;

12.3 the nature of the factual enquiry which an appellate court can and does undertake in a proper case is essentially different from the decision-making process which is undertaken by the tribunal of fact.

…

[14] It follows from the above that an appeal under s.69(1) IRO should not be approached as though it were a rehearing of the case before the Board. For example, it is not appropriate to present an appeal on the basis of “facts” which are contrary to the findings which the Board made. If it is said that there is a legally permissible challenge to the facts found by the Board, then the error of law alleged should be clearly identified, for example, that there was no evidence to support a particular finding. It is not appropriate to frame questions of law on the premise of facts which were not found, or indeed which are contrary to the facts which were found, or the undisputed evidence.”

4.3  Mr Barlow emphasizes that the complaints here are concerned with inferential facts or conclusions found or made by the Board and relies heavily on Edwards v Bairstow [1956] AC 14. In addition to the observations of the Court of Appeal set in KWP Quarry set out above, in the very recent case of Foxconn (Far East) Ltd v CIR [2024] HKCA 1111[9], the Court of Appeal said as follows:

“ [20] Nevertheless, the proposed appeal must involve a “question of law” before leave to appeal may be granted. For this purpose, where the complaint is about an inferential fact or conclusion found or made by the Board, the test for determining whether there is a question of law involved (or whether the Board has made an error of law) can be found in the following often quoted passage in the judgment of Lord Radcliffe in Edwards (Inspector of Taxes) v Bairstow [1956] AC 14, at 36 –

‘ I do not think that inferences drawn from other facts are incapable of being themselves findings of fact, although there is value in the distinction between primary facts and inferences drawn from them. When the case comes before the court it is its duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that, this has been responsible for the determination. So there, too, there has been error in point of law. I do not think that it much matters whether this state of affairs is described as one in which there is no evidence to support the determination or as one in which the evidence is inconsistent with and contradictory of the determination, or as one in which the true and only reasonable conclusion contradicts the determination. Rightly understood, each phrase propounds the same test. For my part, I prefer the last of the three, since I think that it is rather misleading to speak of there being no evidence to support a conclusion when in cases such as these many of the facts are likely to be neutral in themselves, and only to take their colour from the combination of circumstances in which they are found to occur.’

[21] In Kwong Mile Services Ltd v CIR (2004) 7 HKCFAR 275, at §37, Bokhary PJ also explained the court’s proper approach to the question of whether a question of law is involved in relation to a complaint against an inferential fact found by the Board –

‘ In an appeal on law only the appellate court must bear in mind what scope the circumstances provide for reasonable minds to differ as to the conclusion to be drawn from the primary facts found. If the fact-finding tribunal’s conclusion is a reasonable one, the appellate court cannot disturb that conclusion even if its own preference is for a contrary conclusion. But if the appellate court regards the contrary conclusion as the true and only reasonable one, the appellate court is duty-bound to substitute the contrary conclusion for the one reached by the fact-finding tribunal. The correct approach for the appellate court is composed essentially of the foregoing three propositions. These propositions complement each other, although the understandable tendency is for those attacking the fact-finding tribunal’s conclusion to stress the third one while those defending that conclusion stress the first two.’

[22] In In short, an inference drawn from other facts found by the Board is still a finding or determination of fact. However, if the true and only reasonable conclusion on the facts found contradicts the inferential finding or determination, there would be error of law made by the Board which could justify leave to appeal being granted.” (emphasis added)

4.4  Further, Foxconn §23 states in clear terms that the leave requirement under section 69 of the IRO serves the function of a quick filtering process to weed out proposed appeals which do not meet the statutory conditions and is not intended to give parties effectively a full hearing of his proposed appeal.

4.5  In applying the above principles, there are, in my view, the following important aspects of the present case. First, the Board was of the view that the case before it did not turn on the credibility of the SSI’s factual witness[10]. Secondly, the Board was also of the view that the expert evidence filed by the parties should be disregarded. As recorded at Decision §47, the expert evidence was filed to address CIR’s argument that the accounting treatment of the Sums was determinative of its nature as interest. The Board had apparently accepted the parties’ then position that the accounting treatment was not relevant in considering the true nature of the Investment Amount and the Sums.

4.6  In the present case, the Board proceeded on the basis that Clause 11.1 of the Investment Agreement provides that the Investment Agreement shall form the entire agreement and understanding between the signing parties on the subject matter of the agreement and supersedes all previous oral or written agreement, contracts, understandings and communications of the parties in respect of the subject matter of the agreement[11]. Where, as here, the “findings” or conclusions of the Board were (arguably) premised (exclusively or predominantly) on their interpretation of the terms and effect of the Investment Agreement, it seems to me relevant to also note the principles summarized in, for example, Life Young Medical Group Limited (formerly known as Life Young Aesthetic Medical Limited) v Chiu Suet Man [2024] HKCFI 3728 on the proper characterization of such a finding or conclusion:

“ [44] In the context of contracts, it is well-established that the construction of written documents is a question of mixed law and fact. There are two parts to the construction exercise. Chitty explains at para 16-050:

‘ The construction of written instruments is a question of mixed law and fact. The expression “construction” as applied to a document includes two things, first, the meaning of the words; and, secondly, their legal effect, or the effect which is to be given to them. Construction becomes a question of law as soon as the true meaning of the words in which an instrument has been expressed and the surrounding circumstances, if any, have been ascertained as facts.’

…

[46] On this, I refer to the judgment of Lord Hoffmann in Carmichael v National Power plc [1999] 1 WLR 2042 at 2048D-2049A in which his lordship discussed “the troublesome distinction between questions of fact and questions of law”…:

‘ … the rule was adopted in trials by jury for purely pragmatic reasons. In mediaeval times juries were illiterate and most of the documents which came before a jury were deeds drafted by lawyers. In the 18th and 19th centuries the rule was maintained because it was essential to the development of English commercial law. There could have been no precedent and no certainty in the construction of standard commercial documents if questions of construction had been left in each case to a jury which gave no reasons for its decision. Thus the rule that the construction of documents is a question of law was well established when industrial tribunals were created and has been carried over into employment law.’

[47] It has been recognised that this rule may be regarded as anomalous but is too entrenched in our legal system to be changed. In Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724, Lord Diplock said, at 736E-F:

‘ A lawyer nurtured in a jurisdiction that did not owe its origin to the common law of England would not regard it as a question of law at all. …Nevertheless, despite the disappearance of juries, literate or illiterate, in civil cases in England, it is far too late to change the technical classification of the ascertainment of the meaning of a written contract between private parties as being “a question of law” for the purposes of judicial review of awards of arbitrators or decisions of administrative tribunals from which an appeal to a court of justice is restricted by statute to an appeal upon a question of law.’

…

[49] In Carmichael, Lord Hoffmann explained when the rule applies and whenit does not, at 2049B-C:

‘ It applies in cases in which the parties intend all the terms of their contract (apart from any implied by law) to be contained in a document or documents. On the other hand, it does not apply when the intention of the parties, objectively ascertained, has to be gathered partly from documents but also from oral exchanges and conduct. In the latter case, the terms of the contract are a question of fact. And of course the question of whether the parties intended a document or documents to be the exclusive record of the terms of their agreement is also a question of fact.’ (underline added)” (emphasis added)

5.   The Decision

5.1  As stated above, the Board determined each of the Agreed Issues against SSI.

5.2  In relation to Issue (1), the Board found that SSI carried on a business at the material times to participate in the transactions provided in the Investment Agreement, namely to subscribe for SSI’s shares in RGAP and to provide the Shareholder Loans, and that such a business was carried on in Hong Kong. The Board rejected SSI’s argument that its business was to develop the Project with RSI. In particular, the Board agreed with CIR that it should focus on the acts of SSI, and that whilst the Project was executed in Shanghai, it was done by the CJV and not SSI.

5.3  The Board’s analysis is set out at Decision Section J2. It seems to me that, on the issue of SSI’s business, the Board’s conclusion was exclusively premised on its interpretation of the terms and effect of the Investment Agreement (Decision §§58-68).

5.4  In relation to Issue (2), the Board concluded that the Sums were accrued to SSI by way of interest under section 15(1)(f) of the IRO. The Board’s analysis is set out at Decision Sections K2.1, K2.2 and K2.3:

(1) At Decision Section K2.1, the Board concluded that the “Investment Amount” referred to at Clause 3.1.1 of the Investment Agreement was not a capital investment but a loan. The Board’s analysis is premised on its interpretation of the terms and effect of the Investment Agreement (Decision §§77-93). For present purpose, it is pertinent to note that the Board appeared to have accepted at Decision §91, as part of the relevant factual matrix, the existence of the “Branding Requirement” and the “Shareholding Restriction” which, as I understand, are matters specifically relied on by Mr Barlow;

(2) At Decision Section K2.2, the Board concluded that the Sums were not return on investment but interest. The Board’s analysis is again premised on its interpretation of the terms of the Investment Agreement (Decision §§97-102);

(3) At Decision Section K2.3, the Board disagreed with SSI’s argument that the Sums arose from a pure contractual right to accrue, which conclusion was based on the analyses carried out at Decision Sections J2, K2.1 and K2.2 (ie Decision §§68-102).

5.5  In relation to Issue (3), the Board concluded that the geographical source of the Sums was Hong Kong for the purpose of section 15(1)(f) of the IRO. The Board’s analysis is set out at Decision Section L1. At Decision §110, by reference to Issue (1) and Issue (2), the Board repeated that the profit-producing activity that earned SSI the Sums was the advancement of the Shareholder Loans by SSI to RGAP and the remaining issue was whether the Sums were earned by SSI in Hong Kong. The Board found that the Sums were earned by SSI in Hong Kong. In the process, the Board dealt with the two arguments made by SSI set out at Decision §111, namely (1) SSI’s signing of the Investment Agreement was the act which generated the Sums, and as the Investment Agreement was signed outside Hong Kong, the Sums were derived outside Hong Kong and (2) the Sums were the anticipated profit from the offshore Project, produced by the acts of execution, management and development allegedly undertaken by or on behalf of SSI as one of the investors of the Project. The Board was of the view that SSI’s negotiation and signing of the Investment Agreement amounted to antecedent acts and found that (a) SSI did not carry out any activities, whether by itself or through any entity, on the development of the Project to earn the Sums; and (b) it was the CJV that developed the Project, and the activities of the CJV were carried out on its own behalf.

5.6  In relation to Issue (4), the Board concluded that, pursuant to section 15(1)(f) of the IRO, the geographical source of the Sums was in Hong Kong and hence they were chargeable pursuant to section 14 of the IRO.

5.7  As explained by Mr Barlow, the Questions contain areas of overlap since:

(1) sections 14 and 15(1)(f) incorporate the same statutory pre-conditions and so Question (a) overlaps with and involves parallel issues to Question (c)(ii);

(2) Question (b) and Question (c)(i) involve the same findings of primary fact (albeit different legal issues of statutory construction).

5.8  As to how the Questions relate to the Agreed Issues, Mr Barlow clarifies as follows:

(1) Question (a) relates to the Board’s conclusions in Issues (1) and (4);

(2) Questions (b) and (c)(i) relate to Issue (2);

(3) Question (c)(ii) relate to Issue (3).

6.   Question (a)

6.1  Mr Barlow says that Question (a) poses the question of law as to whether or not the Board’s findings of primary facts plus the applicable law and in particular the statutory language of section 14 of the IRO in law require the opposition conclusion to the Board’s ultimate conclusion, which was that the profits assessed were derived from SSI’s Hong Kong business of advancing the Sums to RGAP.

6.2  SSI’s arguments are set out at AS §§42-58. The applicable law relied upon is derived from: (1) CIR v Hang Seng Bank Ltd [1991] 1 AC 306, (2) ING Baring Securities (Hong Kong) Ltd v CIR (2007) 10 HKCFAR 417, (3) Lee Yee Shing v CIR (2008) 11 HKCFAR 6, (4) WT Ramsay v IRC [1982] AC 300, and (5) Shell Canada Ltd v The Queen [1999] 3 SCR 622.

6.3  On the ambit of section 14 of the IRO, it was held in Hang Seng Bank at 318 and 319:

“ Three conditions must be satisfied before a charge to tax can arise under section 14: (1) the taxpayer must carry on a trade, profession or business in Hong Kong; (2) the profits to be charged must be ‘from such trade, profession or business.’ which their Lordships construe to mean from the trade, profession or business carried on by the taxpayer in Hong Kong (3) the profits must be ‘profits arising in or derived from’ Hong Kong.”

6.4  At ING Baring, the Court of Final Appeal at §38 added:

“ In Kwong Mile Services Ltd v Commissioner of Inland Revenue (2004) 7 HKCFAR 275 at 283G, per Bokhary, P.J, applying the abovementioned authorities., this Court noted the absence of a universal test but emphasized “the need to grasp the reality of each case, focusing on effective causes without being distracted by antecedent or incidental matters.” The focus is therefore on establishing the geographical location of the taxpayer's profit-producing transactions themselves as distinct from activities antecedent or incidental to those transactions. Such antecedent activities will often be commercially essential to the operations and profitability of the taxpayer's business but they do not provide the legal test for ascertaining the geographical source of profits for the purposes of section 14.”

6.5  At Lee Yee Shing §§68-71, the Court of Final Appeal construed the section 14 phrase “carrying on a business” concluding from their review of the authorities that it “implies a [“continuous”] repetition of acts” constituting an "exercise of activity in an organised and coherent way ... directed to an end result" namely (albeit not invariably) "making a gain or profit”.

6.6  WT Ramsay at 323G-324B provides guidance to the analysis of commercial transactions:

“ Given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. This is the well-known principle of Inland Revenue Commissioners v Duke of Westminster [1936] A.C. 1. This is a cardinal principle but it must not be overstated or overextended. While obliging the court to accept documents or transactions, found to be genuine, as such, it does not compel the court to look at a document or a transaction in blinkers, isolated from any context to which it properly belongs. If it can be seen that a document or transaction was intended to have effect as part of a nexus or series of transactions or as an ingredient of a wider transaction intended as a whole, there is nothing in the doctrine to prevent it being so regarded: to do so is not to prefer form to substance, or substance to form. It is the task of the court to ascertain the legal nature of any transaction to which it is sought to attach a tax or a tax consequence and if that emerges from a series or combination of transactions, intended to operate as such, it is that series or combination which may be regarded. For this there is authority in the law relating to income tax and capital gains tax: see Chinn v Hochstrasser [1981] A.C. 533 and Inland Revenue Commissioners v Plummer [1980] A.C. 896.”

6.7  In a similar vein, Shell Canada states as follows:

“ [39] … this Court has never held that the economic realities of a situation can be used to recharacterize a taxpayer 's bona fide legal relationships. To the contrary, we have held that, absent a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer's legal relationships must be respected in tax cases. Recharacterization is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its actual legal effect: Continental Bank Leasing Corp. v Canada. [1998] 2 S.C.R. 298, at para. 21, per Bastrache J.

…

[45] The courts’ role is to interpret and apply the Act as it was adopted by Parliament. Obiter statements in earlier cases that might be said to support a broader and less certain interpretive principle have therefore been overtaken by our developing tax jurisprudence. Unless the Act provides otherwise, a taxpayer is entitled to be taxed based on what it actually did, not based on what it could have done and certainly not based on what a less sophisticated taxpayer might have done.”

6.8  In summary, Mr Barlow submits that as a matter of reality:

(1) SSI's only "business" was its participation, pursuant to the MOU and/or Investment Agreement in the Project in Shanghai, including its project management of the Project (the most significant responsibility/operation) and the financing of it;

(2) The financing responsibility was "incidental" to the commercial driver of the business, namely the redevelopment of the Shanghai property;

(3) The provision of that financing was not itself a "business";

(4) SSI was not in the business of moneylending;

(5) SSI’s redevelopment business was essentially carried on (like all property redevelopment businesses) at the location of the property, namely Shanghai.

6.9  In the above regard, SSI complains that the Board had erroneously failed to adopt the relevant principles set out in the above cases but instead:

(1) In defiance of reality adopted an unreal and wholly artificial construct, essentially comprising a one-off capital investment or loan by a non-moneylender and disregarded the dominant and defining aspects of SSI's only business;

(2) Instead of identifying SSI's only business and focusing upon the profit-producing transactions of that (Shanghai) business, the Board allowed itself to be "distracted' by the "incidental" matter that the Project financing (which is not itself a "business") took place in Hong Kong;

(3) The Board took an illogically contorted view of the "unique and tailormade arrangement"[12] in the Investment Agreement. The reality was that this "unique and tailormade arrangement" was an arrangement adopted in order to conform to the appearances required by the Shanghai Municipal Government;

(4) The Board thereby failed to recognize that, on the facts found, SSI's contingent future entitlements to be paid the Sums could never satisfy the 3 pre-conditions to chargeability of section 14 of the IRO.

(i) Analysis

6.10  Mr Fung raises a host of arguments directed at, for example, (1) the complaint that SSI is now running a new argument based on the Money Lenders Ordinance Cap 163 (“MLO”), (2) the formulation of Question (a) as being general and vague and having the effect of turning the ultimate conclusion of the Board into a form a question and (3) SSI has made impermissible challenges to the Board’s finding of fact and references to facts which were not found.

6.11  I consider Question (a) to be reasonably arguable and leave to appeal ought to be granted. Whilst it would be inappropriate for me to dwell on the merits in detail (China Mobile §21), it seems to me that I should at least deal with the issue briefly.

6.12  As Mr Barlow has explained, Question (a) is related to the Board’s conclusions in Issue (1) and (4).

6.13  As stated above, the Board found that SSI carried on a business at the material times to participate in the transactions provided in the Investment Agreement, namely to subscribe for SSI’s shares in RGAP and to provide the Shareholder Loans, and that such a business was carried on in Hong Kong. The foregoing conclusion was exclusively premised on the Board’s interpretation of the terms and effect of the Investment Agreement.

6.14  As I understand Mr Barlow, he seeks to draw a distinction between the Agreed Facts and the Indisputable Facts. Whilst the Agreed Facts chronicle the series of relevant agreements, the Indisputable Facts do nothing more than recite what the Board regarded to be the relevant terms. Where, as here, the Investment Agreement contains an entire agreement clause, it seems to me that, based on the principles summarized in Life Young, the Board’s conclusion on the effect of the Investment Agreement involves a question of law.

6.15  I have earlier mentioned that Decision §91 refers to the “Branding Requirement” and the “Shareholding Restriction”. As I understand the position, they are related to Mr Barlow’s submission that the “unique and tailormade arrangement” was an arrangement adopted in order to conform to the appearances required by the Shanghai Municipal Government. Indeed, clause 4.1 of the Investment Agreement (which is not cited in the Decision) provides as follows:

“ Each Party acknowledges the need to maintain the essential confidentiality of the Project as a result of the history of RGI’s involvement of the Project. Accordingly, each Party acknowledges and covenants that for purposes of all unrelated third parties, including Government Authorities of Shanghai and NHP, the Project must remain a “Rockefeller Group” project and that RGI shall appear as the “public face” for any aspect of the Project in respect of any communications to or with third parties (except that Sinolink may appear as RGI’s local developer partner).”

6.16  As I understand the argument before the Board, part of the factual matrix of the Investment Agreement was as follows[13]:

“ Due to the requirements of the Shanghai Huang Pu People's Government that (i) The Rockefeller Group was strictly not allowed to transfer shares in the CJV or SRL to any third party until the completion of the Project; and (ii) Rockefeller Group should be remain as "public face" of the Project, it was inevitably that Rockefeller Group and Sinolink Group should form a joint venture investment in the shareholding of 51% and 49% respectively with the Rockefeller Group as a larger shareholder in tum of capital. In order to protect the interest of Sinolink Group, i.e. Investment Amount of US$I69 million and subsequently increased to US$196 million, an Investment Agreement was therefore entered to protect the interest of Sinolink Shanghai in the investment…

When negotiating the Investment Agreement, [various] investment terms are considered. Unlike general return on provision of credit, as the advances to RGAP is considered as capital investment used in financing the Project which will be transformed to the assets of the Project, it was not necessary for Sinolink Shanghai to demand for a pledge of assets (i.e.unsecured) as Sinolink Shanghai should have ownership in the assets of the Project…

Sinolink Shanghai would only be paid until the completion of the Project where the properties under the Project are sold and/or rented out; fixed periodical repayment terms are not applicable…

Unlike general loan agreement, there is no default risk clause in the Investment Agreement which secures Sinolink Shanghai from the risk of default repayment of principal and/or interest. At all relevant time, Sinolink Shanghai has no intention to recall the investment from RGAP as the Investment Amount has always been treated as long term capital investment in the Project which could be returned through the distribution of profits and return on capital in proportion to the funding amount contributed to the Project.”

6.17  At Decision §91, the Board said as follows:

“ Even taking into account the "Branding Requirement" and the "Shareholding Restriction"… they do not necessarily mean that the "Investment Amount" must be a capital investment. The above are only background matters leading to SSI agreeing to the transactions as set out in the Investment Agreement. One ultimately needs to go back to the express terms of the Investment Agreement to ascertain the nature of the transactions which SSI and the other signing parties agreed to enter into with the Branding Requirement and the Shareholder Requirement in mind. As we have explained above, properly construed, SSI had agreed to provide the funds under Clause 3.1.1 of the Investment Agreement by way of loan(s). It follows that SSI had to bear the legal consequences, including tax consequences, arising from such a decision.”

6.18  In my view, having found as a fact that the Branding Requirement and the Shareholding Restriction were part of the relevant factual matrix, there is a reasonable argument as to the correctness of the Board’s conclusion on the effect of the Investment Agreement (which for present purpose does not involve a high threshold). In this regard, it seems to me that the arguments exist on 2 perhaps inter-related levels, namely whether the Board’s conclusion on the effect of the Investment Agreement was correct and, as submitted by Mr Barlow, whether the Board had disregarded the principle set out in Ramsay.

6.19  However, I agree with Mr Fung that the argument based on the MLO is a new one. In my view, leave to appeal should be granted to Question (a) as explained at AS §§42-58 but without reference to the arguments made in relation to the MLO.

7.   Question (b)

7.1  As stated earlier, Mr Barlow and Mr Fung disagree on how SSI in fact ran its appeal before the Board.  It is Mr Fung’s position that:

(1) Question (b) is formulated on the false premise that the profits in question were the unrealized or anticipated profits when it was common ground before the Board that the profits in question (ie the Sums) were earned and realized;

(2) Former leading counsel for SSI had confirmed on Day 1 that SSI would not take any Nice Cheer point to contend SSI’s profits were anticipated and not realized. The issue of whether the Sums were unrealized or anticipated profits was never litigated below;

(3) As such, the Board never sought to tax any unrealized or anticipated profits of SSI;

(4) The relevant issue between the parties was only whether the Sums were accrued by way of interest under section 15(1)(f) of the IRO.

7.2  I have been referred to the transcript of Day 1 of the hearing. SSI’s former leading counsel in his oral opening said on pages 46-47:

“ If the making of the contract is a profit-producing act, because to take my learned friend's approach at paragraph 51, they say the accrual is the -- now, I'm not taking a Nice Cheer point. Members may be aware of the Nice Cheer Agency CFA, where profits cannot be anticipated. Merely paper profit not actually made or derived by taxpayer is not chargeable just because it is quoted in the accounts. I am not taking that point. But where I do take the point is that if my learned friend's point here, it is merely by accruing, that is putting the sum into my account in 2006, means I've actually made the profits and payable, and nothing else thereafter matters, then you have to ask yourself, because I haven't handed over the full amount, so how can -- at least -- if at the end of 2006 I only have $158 million and not $169 million, but then the interest referable to that $11 million, how can that be referable to any provision of money in Hong Kong?”

7.3  Whilst it appears to be quite clear from the above that former leading counsel for SSI had on Day 1 (7 June 2023) stated that SSI would not take any Nice Cheer point, the Agreed Issues were only subsequently compiled on 20 June 2023 and SSI lodged its closing submissions thereafter on 27 June 2023.

7.4  I have not been provided with the parties’ closing submissions or the transcripts of other parts of the proceedings before the Board. I have already reproduced at §3.8 above the Board’s summary of SSI’s arguments at Decision §33 and set out my observations at §3.9 above. One of the arguments raised was that there was no certainty that the Sums would be paid. At Decision §116, the Board noted specifically that SSI had argued that the Sums were the anticipated profit derived from the Project.

7.5  I am therefore unable to conclude, on the material before me, that the Sum was not anticipated profit was a common ground before the Board and was not litigated below. In fact at RS §31(2), it is CIR’s position that the Board had rejected SSI’s submission that the Sums were anticipated profits.

7.6  According to the AS, Question (b) is directed at Decision §§100-102 and 117-118.

7.7  AS §59 puts forward 2 propositions.

7.8  First, Mr Barlow argues that at Decision §§100-102, the Board had concluded that the Sum was unrealized and unpaid profits. Decision §§100-102 are part of the Board’s treatment of Issue 2, namely whether the Sums were accrued to SSI by way of interest under section 15(1)(f) of the IRO. In particular, they are under Section K2.2 which deals with the issue whether the Sums were return on investment or interest.

7.9  Decision §§100-102 read as follows:

“ [100] The fact that the actual payment of the accrued interest may be deferred or that the actual payment of the interest is dependent on contingencies does not change the nature of the sum being an interest. As Megarry VC held in Chevron Petroleum (UK) Ltd v BP Petroleum Development Ltd [1981] STC 689:

‘ I cannot see why the contingency should deprive the so-called ‘interest' of the quality of being true interest. If X lends £100 to Y, the loan to carry interest at 10% per annum, why should a provision for repayment and interest to be waived in certain events, or for repayment with interest to be made only in certain events, prevent the interest from being true interest if in the event it becomes payable?”

[101] Therefore, SSI's argument that the accrued interest would only be paid by RGAP when it had distributable cash according to Schedule 2.1 of the Investment and in arrears would not render the Sums not true interest. The Board finds that it was SSI' s own commercial decision based on its assessment of risks which prompted it to have agreed that the actual payment of the accrued interest would only take place when RGAP becomes profitable. Indeed, the arrangement, including the interest rate of 20% per annum was considered by SWH to be a fair commercial return on its investment, taking into account the risks involved, including the risk of the Project, see the Circular page 10 at paragraph 4.

[102] SSI' s argument that the actual return which it could get would never be 20% save by coincidence does not take its case very far. Assuming that the Project was not profitable, the fact that the Sums eventually had to be written off or could not be fully paid by RGAP would not change the nature of the Sums from being interest: see §95 above. If the Project is profitable, SSI may be entitled to full repayment of the Sums under Clause 2 (a) (i) of Schedule 2.1 of the Investment Agreement, as well as further distribution under Clause 2 (1) (iii). But this will not change the nature of the Sums as being interest, as Megarry VC held in Chevron (supra) at 694g that "If in its nature a sum is 'interest of money', I think it retains that nature even if the parties to a contract provide for it to be wrapped up with some other sum and the whole paid in the form of a single indivisible sum" (Emphasis added).” (original emphasis)

7.10  I agree with Mr Fung that, contrary to Mr Barlow’s submissions, Decision §§100-102 do not show that the Board had concluded that the Sums were unrealized and unpaid profits. As pointed out by Mr Fung:

(1) At §§100-101, the Board was concerned with SSI’s argument that the Sums were not interest (rather than any argument that the Sums were unrealised or anticipated). These paragraphs specifically addressed the arguments (summarized at §101) that the “accrued interest would only be paid by RGAP when it had distributable cash according to Schedule 2.1 of the Investment [Agreement] and in arrears.” The Board concluded that even if actual payment of the accrued interest may be deferred or was dependent on contingencies, that would not change the nature of the sum being interest.

(2) At §102, the Board addressed the related argument that the Sums might in future have to be written off or could not be fully paid. However, the Board concluded that this also did not change their nature from being interest.

7.11  Secondly, AS §59 next contends that the Board at Decision §117 concluded that the Sums would be paid from “the anticipated profits from the Project” but nonetheless Secan permitted the Sums to be assessed (Decision §118).

7.12  Decision §§117-118 are part of the Board’s treatment of Issue 3, namely was the geographical source of the Sums Hong Kong for the purpose of section 15(1)(f) of the IRO. In particular, they deal with SSI’s arguments that the Sums were not derived in Hong Kong. The discussion starts at Decision §111:

“ [111] In an attempt to show that the Sums were not derived in Hong Kong, SSI put forward the following artificial arguments which conveniently omitted SSI's provision of the "Investment Amount"/Shareholder Loan to RGAP:

(1) SSI contends that its signing of the Investment Agreement was the act which generated the Sums. As the Investment Agreement was signed outside Hong Kong, the Sums were derived outside Hong Kong.

(2) Alternatively, it submits that the Sums are the anticipated profit from the offshore Project, produced by the acts of execution, management and development allegedly undertaken by or on behalf of SSI as one of the investors of the Project.

[112] The Board finds that both arguments are devoid of merits and must be rejected.

[113] First, SSI's negotiation and mere signing of the Investment Agreement could not have been the profit generating act. As we have analysed in Section J above, the Sums were accrued as a result of SSI making available for the use of RGAP the "Investment Amount"/Shareholder Loan since the date when the Investment Agreement was entered into. It is against practical reality for SSI to suggest that by merely appending its signature on the Investment Agreement, without mote, it would be entitled to the Sums. At the most, SSI's negotiation and signing of the Investment Agreement amount to antecedent acts.

[114] SSI cannot stretch the phrase "irrespective of what amount has actually been advanced to [RGAP]" in Clause 3.1.1 too far. The phrase in fact only says that interest would be accrued irrespective of how much (what amount) has actually been advanced by SSI, it does not say that interest would be accrued even if SSI did not make any advance at all. Indeed, as a matter of fact, as recorded in SSI's ledgers vis-a-vis RGAP, SSI had started to make advancement to RGAP since 2 December 2005, two days after the signing of the Investment Agreement.

…

[116] Second, by suggesting that the Sums are anticipated profit derived from the Project, SSI has conflated 2 matters:

(1) It has conflated its act of earning the Sums (which the Board is focusing on in ascertaining the source of the Sums) and the anticipated source of RGAP's payment of the Sums.

(2) It has conflated its act of earning the Sums and the act of other entities, including RGAP and the CJV, in the execution of the Project.

[117] With respect to the first conflation, one only needs to go back to Clause 3.1.1 and Schedule 2.1 of the Investment Agreement. To understand the parties' respective rights and obligations properly. As we have explained above, the Sums are interest accrued by reason of SSI making available the funds under Clause 3.1.1 for the use of RGAP. This is the profit-generating act, the act which resulted in the accrual of the Sums. As to the anticipated profit from the Project, it is the money or the source of payment which RGAP would resort to in settlement in arrears of the interest which has already accrued to SSL This is made clear by Clause 2 of Schedule 2, which expressly states that “On each Dividend Payment Date, [RGAP, not SSI] shall make interest payments and other distributions to Shareholders in the following order of priority”. Further, Clause 2(a)(i) provide that ''firstly, subject to paragraph 3, [RGAP] shall pay any accrued and unpaid interest on the Shareholder Loan to the Series B Shareholder".

[118] This is reinforced by the fact that SSI itself prepared its account on an accrual basis. The Sums were profits which arose in the Relevant Years of Assessment they were earned, irrespective of whether SSI had actually been paid by RGAP the Sums: see D14188 (1988) 3 IRBRD 206 at 217-218, 220-222; Commissioner of Inland Revenue v Secan Ltd (2000) 3 HKCFAR 411 at 419D-G, 421 I-J per Lord Millet NPJ.”

7.13  I agree with Mr Fung that Decision §§117-118 do not show that the Board had concluded that the Sums were unrealized or unpaid profits.

7.14  However, in relation to the issue of anticipated profit, the only submission made by Mr Fung is that in so far as SSI now seeks to take the Nice Cheer point (which was expressly abandoned by SSI’s former leading counsel before the Board) and argue that the Board failed to conclude that the Sums were not taxable because they were anticipated profits, this is not a proper question of law because of the Flywin principle and because it seeks to resile from a concession of fact.

7.15  The Nice Cheer point raised by Mr Barlow is as follows. The passages in Secan which the Board relied on at Decision §118 read as follows:

“ Both profits and losses therefore must be ascertained in accordance with the ordinary principles of commercial accounting as modified to conform with the Ordinance. Where the taxpayer's financial statements are correctly drawn in accordance with the ordinary principles of commercial accounting and in conformity with the Ordinance, no further modifications are required or permitted. Where the taxpayer may properly draw its financial statements on either of two alternative bases, the Commissioner is both entitled and bound to ascertain the assessable profits on whichever basis the taxpayer has chosen to adopt. He is bound to do so because he has no power to alter the basis on which the taxpayer has drawn its financial statements unless it is inconsistent with a provision of the Ordinance. But he is also entitled to do so, with the result that the taxpayer is effectively bound by its own choice, not because of any estoppel, but because it is the Commissioner's function to make the assessment and for the taxpayer to show that it is wrong. Capitalisation of interest is not mandatory, but it· is permitted in circumstances such as those as in the present case where it is in accordance with accepted principles of commercial accounting. The taxpayer elected to capitalise interest when preparing its financial statements, and accordingly its profits and losses must be assessed on the same basis unless this is prohibited by the Ordinance…

There can be no inconsistency between s.16 of the Ordinance, I which is concerned with debits, and the capitalisation of interest, which is concerned with credits. This is sufficient to dispose of the appeals, since there is no basis on which a taxpayer can challenge an assessment based on its own financial statements, so long as these are prepared in accordance with ordinary accounting principles, show a true and fair view of its affairs and are not inconsistent with a provision of the Ordinance.”

7.16  Mr Barlow points out the following clarifications made by Lord Millet in Nice Cheer:

“ [33] The Commissioner submitted that the amount of any profits or losses during the year of assessment must be ascertained by reference to the ordinary principles of commercial accounting unless these are contrary to an express statutory provision in the Ordinance, and relied on the decision of this Court in Commissioner of Inland Revenue v Secan Ltd for this purpose. That is a misreading of my judgment in that case… It should be noted that I said “in conformity with the Ordinance”, not “in conformity with an express provision of the Ordinance”.

[34] It is a fundamental principle of the constitution of Hong Kong, as of England, Australia, the United States and other democratic societies, that the subject is to be taxed by the legislature and not by the courts, and that it is the responsibility of the courts to determine the meaning of legislation. This is not a responsibility which can be delegated to accountants, however eminent. This does not mean that the generally accepted principles of commercial accounting are irrelevant, but their assistance is limited.

…

[40] In particular, the principles of commercial accounting must give way to the core principles that profits are not taxable until they are realised and that profits must not be anticipated…”

7.17  As pointed out above, I am unable to conclude on the present material that, despite what transpired on Day 1, that the Sum was not anticipated profit was a common ground before the Board and not litigated below.

7.18  I have not overlooked the fact, that in relation to the Flywin objection and the complaint that SSI seeks to resile from a concession of fact, Mr Fung relies on the arguments made in relation to Question (c). However, the contention made at AS §60 is that even if the section 15(1)(f) deeming provision applies, it does not permit unrealized or notional profits to be anticipated.

7.19  In my view, leave to appeal should be granted on Question (b). I accept Mr Barlow’s submission that there is a reasonable argument on the correctness of the Board’s conclusion at Decision §§117 and 118 that the Sums had been earned and were not anticipated profits (1) irrespective of whether SSI had actually been paid by RGAP the Sums and (2) despite the fact that the Sums would only be paid from the anticipated profits from the Project. As a consequence, there is further a reasonable argument on the correctness of Decision §118 where the Board had concluded that the Sums were not anticipated profits by reference to Secan, on the basis that SSI had prepared its account on an accrual basis and therefore the Sums were profits which arose in the Relevant Years of Assessment they were earned.

8.   Question (c)

8.1  SSI’s arguments on Question (c)(i) are set out at AS §§62-68.  In gist:

(1) The section 15(1)(f) deeming provision is restricted to sums received by or accrued to a corporation by way of interest.

(2) As a matter of law, an entitlement (or obligation) does not become “accrued” unless and until the person entitled (or obliged) has a present enforceable right to the benefit (or obligation) concerned.

(3) During the Relevant Years of Assessment, SSI did not have a present enforceable right to receive payment of the Sums from RGAP. Under the terms of the Investment Agreement, any attempt by SSI to demand the earlier payment of “interest” was a breach thereof.

8.2  Mr Fung contends the argument that the Sums were not accrued is a new one, which is inconsistent with the Board’s findings of fact and SSI’s concession that the Sums were accrued in the Relevant Years of Assessment. RS §34 points out that, prior to the present application, SSI’s position had always been that the Sums were treated as accrued as income in the Relevant Years of Assessment. For example:

(1) By the Circular, SWH stated publicly, inter alia, that “to the extent that RGAP does not have distributable cash available to make such payments, Shareholder Loan Accrued Interest [(ie the Sums)] will accrue on a cumulative basis and' will be payable in future years when distributable cash is available”;

(2) In its letter to the CIR dated 17 April 2013, SSI's tax representative (Deloitte) stated, inter alia, that the 20% per annum on US$169 million (ie the Sums) would "accrue on an accumulated basis and will be payable in future years when distributable cash is available”;

(3) In §§56(5) and 93 of his Witness Statement dated 14 March 2022 filed on behalf of SSI, Mr Francis Tang stated that the "interest on the Shareholder Loan began to accrue from the date of the Investment Agreement itself” and described the return to SSI for having made available the Shareholder Loan as "the 20% accruing annually";

(4) To withdraw from a concession of fact, SSI has the burden of showing that the previous foregone point should be raised. It will be harder to raise a point that has been expressly conceded. If taking the point would risk causing prejudice to the other party, in the sense that it might have been deprived of the opportunity of dealing with the case differently in the tribunal below, then it is unlikely that the resiling will be allowed. The greater the risk, the less likely it is that it will be allowed. There is a low threshold of risk for these purposes. The burden of establishing no risk is on the party who wishes to withdraw the concession, and the other party should have the benefit of any doubt in this area: Chan Chi Wai v Chan Sau Wah [2019] 3 HKLRD 330 at §29;

(5) The state of the evidence relevant to this point would certainly have been materially more favourable to CIR if the point had been taken before the Board. CIR would have been able to cross-examine SSI’s factual witness and expert on the discrepancies between the new contention (that the Sums were not accrued) and its consistent factual and expert evidence (that the Sums were accrued). It is plain that allowing SSI to resile from the admitted fact will cause irremediable prejudice to the CIR;

(6) For the same reasons, by reason of the principle in Flywin Co Ltd v Strong & Associates Ltd (2002) 5 HKCFAR 356 at §§37-38, it would be grossly unfair to CIR for SSI to seek to contend in the intended appeal that the Sums were not accrued in the Relevant Years of Assessment.

8.3  As pointed out at Encyclopaedia of Hong Kong Taxation, Volume 3 at [7068], it is not clear whether the word “accrued” in section 15(1(f) means anything significantly different from “earned” following the decision in Willingale v International Commercial Bank Ltd [1978] AC 834. That case established that a profit cannot be taxed until it is “earned” or “realized” even though the taxpayer keeps its accounts in a way that anticipates profits. Whether interest “accrues’ within the meaning of section 15(1)(f) depends on the facts of each case.

8.4  As I understand the arguments, Questions (c)(i) and (ii) are both concerned with, in substance, whether the Sums were interest or not. In my view, Mr Barlow’s argument premised on the fact that during the Relevant Years of Assessment, SSI did not have a present enforceable right to receive payment of the Sums from RGAP is but a dimension to the overall argument that the Sums were not interest. On the other hand, the matters referred to by Mr Fung only suggests that SSI had agreed that the Sums would be treated in the SSI’s accounts on an accrual basis (but with the Caveat set out at Decision §20).

8.5  I am not able to come to a concluded view on the present material whether the argument that the Sums were not accrued is a new one. It seems to me that there is a difference between SSI’s acceptance that its accounts were prepared on an accrual basis (which was subject to the Caveat) and SSI’s acceptance that the Sums had accrued. As noted at §3.9 above, SSI’s arguments were (apparently) carefully crafted to avoid any reference to accrual.

8.6  In my view, it is plain that SSI seeks to challenge the Board’s overall conclusion that the Sums were interest and/or anticipated profit which must have a bearing on the Board’s conclusion that section 15(1)(f) of the IRO was satisfied. Given that leave to appeal is granted to Question (a) (on a curtailed scope) and Question (b), it seems to be that I should also grant leave to appeal on Question (c).

9.   Conclusion

9.1  For the above reasons, leave to appeal is granted in respect of Questions, but Question (a) is limited to the extent set out at §6.19 above.

9.2  I make a costs order nisi that the costs of the present leave application be costs in the appeal. For avoidance of doubt, I grant a certificate for 2 counsel in respect of CIR’s costs.