COMMISSIONER OF INLAND REVENUE v. LI & FUNG (TRADING) LTD

HCMP 541/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 541 OF 2011

(ON AN INTENDED APPEAL FROM HCIA NO. 3 OF 2010)

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REASONS FOR JUDGMENT

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Hon Tang Ag CJHC:

1.  This appeal concerns the vexed question of source of income, on which liability to pay profits tax may depend. The amount of profits tax involved is about $110,000,000. The Board of Review’s decision was given on 12 June 2009, following which both the Commissioner and the Taxpayer asked the Board to state a case.

2.  On 19 March 2010, a case was stated.  We are only concerned with the first of the two questions stated, the second having been hived off.  The relevant question related to the Board’s conclusion that all of the taxpayer’s disputed profits were sourced outside Hong Kong.  The hearing of the appeal has been fixed to commence before Reyes J on 6 April with 4 days reserved.

3.  By summons stated 15 July 2010, the Commissioner applied, under section 69(4) of the Inland Revenue Ordinance, Cap. 112, to have

“1. the case stated remitted to the Board;

2. by way of amendment or edition to the case stated the Board do:

(1) set out the evidence in Part I of the Schedule;

(2) pose the additional questions set out in Part II of the Schedules;”

4.  On 11 February 2011, by summons of that date, the Commissioner asked for leave to amend the summons of 15 July 2010.  The amendment asked that the Board:

“3. make findings of primary facts relating to the issues raised by the additional questions set out in the Part II of the Schedule.”

5.  Part II of the Schedule raised four questions.  Questions 3 and 4 related to the hived off question and we were not concerned with them.  The 1^st and 2^nd questions related to source of income.  The summons of 11 February 2011 sought to amend in part – the first of these two questions.

6.  At the hearing on 17 February 2011, Reyes J gave leave to amend the summons but he struck out the 1^st and 2^nd questions. There is no appeal from that decision.  The learned judge also suggested that the parties should try to come up with a list of agreed facts, so that it would not be necessary to ask the Board to make additional findings.

7.  By 15 March 2011, the parties have agreed a total of 12 facts.  However, some facts which the Commissioner wished to be agreed were not agreed.  As a result, the Commissioner restored the summons for hearing before Reyes J on 28 March 2011. 

8.  On 28 March 2011, Reyes J dismissed the amended summary.  According to the transcript, the learned judge said:

“COURT: Fine. I think it is far too late for me to remit anything back to the Board. It was incumbent on the Commissioner to get her act together at a much earlier stage if there were going to be any facts to be – or any questions of fact to be remitted to the Board to make further findings.

It seems to me that this is very last minute, and I simply cannot allow it at this stage, and therefore the application is dismissed.”

9.  Reyes J also refused leave to appeal.

10.  Mr Eugene Fung, for the Commissioner, applied for leave to appeal.  The taxpayer was represented by Mr David Goldberg, QC, Mr. Stewart K. M. Wong and Ms. Queenie Lau.

11.  Mr Fung’s primary submission was that the Commissioner was not guilty of undue delay, and the learned judge ought not to have refused the Commissioner’s application on that basis.

12.  We were told that the summons of 15 July 2010 was fixed for hearing on 17 February 2011, because counsel for the taxpayer (not Mr Fung) was unavailable earlier, apart from on some dates in September 2010 on which the court was not available.  In other words, the summons was fixed for hearing as late as February 2011 in order to accommodate the Commissioner’s counsel.  Had the summons been heard earlier then the question of delay would not have loomed so large.

13.  By February 2011, if the matter had to be remitted to the Board, it would have meant an adjournment of the hearing of the appeal, probably, for a substantial time. 

14.  So, with respect, I am not convinced that the dismissal of the summons on the delay ground is a decision which this Court is entitled to overturn.

15.  Moreover, we do not believe Reyes J had not also in mind the merit of the application, or the lack of it. 

16.  As the joint judgment of Bokhary and Chan PJJ in Lee Yee Shing v The Commissioner of Inland Revenue (2008) 11 HKCFAR 6 said:

“8. … But neither party alone nor even both parties in unison can insist on the case being stated in a particular form or terms. … ”

17.  Also:

“… the applicant must, in my opinion, show that the desired findings are (a) material to some tenable argument, …” per Scott J in Consolidated Goldfields plc v Inland Revenue Commissioners [1990] 2 All ER 398 at 402.

18.  Mr Fung submitted that the Board was not obliged to make any of the propounded findings, but the Board should be given an opportunity to do so. 

19.  Mr Goldberg, QC, submitted that there is no merit in the application.  He has taken us to the questions which the Commissioner wished to be remitted to the Board.  I will take two of them as examples.  The first:

“The contents quoted in paras. 6 and 9 of the list of agreed facts of what Victor Fung said to the Harvard Business Review are facts.”

20.  Paras. 6 and 9 are reproduced below:

“6. In an interview reported in the Harvard Business Review dated 1 September 1998, Mr Victor Fung said:

‘The company is managed on a day-to-day basis by the product group managers. Along with the top management, they form what we call the policy committee, which consists of about 30 people. We meet once every five to six weeks. People fly in from around the region to discuss and agree on policies. Consider, for example, the topic of compliance, or ethical sourcing. Compliance is a very hot topic today - as well it should be. Because our inspectors are in and out of the factories all the time, we probably have a better window on the problem than most companies. If we find factories that don’t comply, we won’t work with them. However, because there is so much subcontracting, you can’t assume that everyone is doing the right thing. That is, you have to make sure that a supplier that was operating properly last month is still doing so this month. The committee of 30 not only shapes our policies but also translates them into operating procedures we think will be effective in the field. And then they become a vehicle for implementing what we’ve agreed on when they return to their divisions.’

……

9. In an interview reported in the Harvard Business Review dated 1 September 1998, Mr Victor Fung said:

‘Consider our Gymboree division, one of our largest. The division manager, Ada Liu, and her headquarters team have their own separate office space within the Li & Fung building in Hong Kong. When you walk through their door, every one of the 40 or so people you see is focused solely on meeting Gymboree’s needs. On every desk is a computer with direct software links to Gymboree. The staff is organized into specialized teams in such areas as technical support, merchandising, raw material purchasing, quality assurance, and shipping. And Ada has dedicated sourcing teams in our branch offices in China, the Philippines, and Indonesia because Gymboree buys in volume from all those countries. In maybe 5 of our 26 countries, she has her own team, people she hired herself. When she wants to sources from, say, India, the branch office helps her get the job done.’”

21.  What Mr Victor Fung was reported to have said in the Harvard Law Journal have been agreed as facts 6 and 9.  The Board is asked to find that what he said are facts.  But, given their contents, I find it difficult to believe that the Board would, in any event, have been in a position to do so. 

22.  Another question is Question No. 5.  That reads as follows:

“LFT provided some ‘leadership’ training (problem solving and achieving of the budget) to some staff of the overseas sourcing companies in Hong Kong.”

23.  However, the note to this question tells us that:

“(The taxpayer) agrees with this fact only if the word ‘occasional’ is added before the term ‘leadership training’. The CIR, however, does not consider the addition of the word justified by the evidence.”

24.  The difference between the parties is more apparent than real.

25.  To be fair, the other three questions are not so obviously hopeless. But it is not necessary to deal with them separately.

26.  Mr Fung has supplied us with the Commissioner’s skeleton submissions for the substantive appeal to be heard by Reyes J.  Mr Fung submitted that we should read:

“Paragraphs 37 to 45 to see how the Propounded Findings (which Reyes J refused to remit to the Board of Review for the purpose of making additional findings of primary fact) would be material to the CIR’s submission;”

27.  I have read these paragraphs.  I do not believe the addition of the other three propounded facts, even if the Board were willing to find them, would add in any meaningful way to the strength of the Commissioner’s case.

28.  That is why although we had very little time to consider the matter, I was able to come to the firm view that this is not a case where leave to appeal should be granted, and leave was dismissed with costs.

Hon A Cheung J:

29.  I agree.