KUMAGAI GUMI CO. LTD. AND ANOTHER v. CONSTRUCTION INDUSTRY TRAINING AUTHORITY

DCMP421/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 421 of 2001

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DECISION

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1. This is an appeal by the plaintiffs against the decision of levy assessment made by the defendant on 11th January 2001. It was begun by Originating Summons and pursuant to Section 30(4) of the Industrial Training (Construction Industry) Ordinance.

2. The plaintiffs were engaged by the Mass Transit Railway Corporation ("MTRC") to construct the Kowloon Station under contract 503C and subcontracted the electrical and mechanical works on contract 503C to Balfour Beatty Limited ("BBL").

3. Section 21 of the Ordinance empowers the defendant to impose a levy on the value of all construction works undertaken in Hong Kong and such levy is payable by every contractor who undertakes any such works.

4. The amounts in dispute can be divided into 4 categories, namely;

a. Preliminaries costs of HK$ 33,283,470

The plaintiffs alleged that this was paid to "BBL" by the plaintiffs in relation to the electricity supply system, the air-conditioning plant and the fire services installation( the non-leviable building services works);

b. Profit and attendance fee of HK$ 32,369,428

The plaintiffs alleged that this was received by the plaintiffs from their employer, MTRC, in respect of the non-leviable building services works carried out by "BBL";

c. The plaintiffs' overheads of HK $66,377,923

The plaintiffs alleged that this was incurred in supervising the non-leviable building services works carried out by "BBL".

d. Additional overheads of HK$ 54,272,439

The plaintiffs further argues that this additional sum of overheads which the plaintiffs incurred in supervising the non-leviable building services works should also be exempted from the levy by using a different formula.

5. The first issue the Court has to decide is whether or not the Court hearing this appeal is by way of re-hearing of the case. The practical effect of the decision only affects the amount under category 4 here for the plaintiffs argued this point for the first time at the appeal hearing.

6. Section 30(4) of the Ordinance enables any aggrieved party whose objection to the assessment being turned down by the committee of the Authority to take the matter up with the District Court by way of appeal, on hearing the appeal the District Court may confirm, cancel or reduce the levy or surcharge but the section is silent as to the form and procedure on such an appeal.

7. Unlike the High Court Rules which make specific provisions under Order 55, subject to certain exceptions, the appeal shall be by way of rehearing and must be brought by originating motion, the Rules of the District Court make no similar provisions.

8. In law, any person who is not satisfied with the assessment may, pursuant to Section 29 of the Ordinance, raise objection to the levy, and in so doing, the objector should produce all written statements and other documentary evidence in support of the objection, the matter would then be placed before a committee of the Authority for re-consideration, the committee may confirm, cancel or reduce the levy.

9. Surely the nature of the proceedings before the committee hearing the objection is an informal one, it allows only written representations from one side i.e. the objector, and in the circumstances the committee cannot be said to be acting judicially in discharging its statutory duty. Given its informality of the committee's hearing, in my view, the Court can and should re-hear the matter once again on appeal so that the parties concerned can fully argue their case before it and if necessary further or fresh evidence can be adduced to assist the Court to determine the issues.

ISSUES

10. It is not disputed that the plaintiffs had sub-contracted the following works to its sub-contractor "BBL", namely,

(a)- electricity supply system;

(b)- air-conditioning plant;

(c)- fire services installation;

(d)- plumbing and drainage.

Items (a), (b) & (c) belong to non-leviable building services works by virtue of Section 2(3) of the Ordinance, the issue is whether the "values" of these works as suggested by the plaintiffs should be excluded from the levy.

BURDEN OF PROOF

11. Section 31 of the Ordinance reads as follows:

(1)- An employer, contractor or authorized person concerned in any construction works shall---

(a)provide the Authority,..................within such time and in such form as the Authority ........... may specify, with such information relating to the construction works ( including any amount paid or payable in respect of the construction works or any work connected therewith ),...............as the Authority may require;

(b) on being so required by the Authority.........., produce or cause to be produced any documents or records in his possession relating to the construction works ( including any amount paid or payable in respect of the construction works ) for inspection by the Authority....... And permit the Authority to take copies or make extracts from them or to remove them for a reasonable period.

12. Section 29 (2) also allows any person dissatisfied with the assessment to raise an objection to the committee of the Authority and in doing so, the objector shall state precisely the grounds of objection and shall be accompanied by all written statements and other documentary evidence relied upon by the objector in support of the objection.

13. It is clear from the sections above that the onus is on the person against whom a levy is imposed to provide the Authority with sufficient information together with supporting documents so as to enable them to make the necessary assessment.

CATEGORY A- PRELIMINARIES OF HK$ 33,283,470

14. The plaintiffs claim that these costs were the costs of the project administration and site equipment required to enable "BBL" to go ahead with the works, such costs include the costs of providing a sub-contractor warranty, providing insurance for materials and goods manufactured off site, site supervision and management, liaison and co-ordination with the plaintiffs and all third parties, site accommodation, site transport and cleaning on completion of the sub-contract works etc. As a proportion of the costs related to the non-leviable works, the plaintiffs argued that this proportion should be excluded from the assessment of the levy. As it is impossible to identify precisely the exact proportion relating to the leviable as well as the non-leviable works because there is no specific correlation between the preliminaries items and the individual items of the contract works. The plaintiffs suggested that the proportion of the preliminaries relating to the non-leviable works should be ascertained by apportioning it between the different elements of the building services works pro rata to the value of these work.

15. The plaintiffs' argument is that by using the values of the 4 types of works carried out by "BBL", the percentage of, say the plumbing and drainage works, can be worked out to be 9.5% of the overall value. In other words, the percentage of the value of the non-leviable works would be 90.5%.

16. The defendant, on the other hand, took the view that only those parts of the preliminaries which were actually incurred in respect of the non-leviable items could be deducted from the levy assessment and as such, exemption should be granted only on the value of excluded items as presented in the contract.

17. In ascertaining the value of the construction works, the Ordinance has provided guidance under Section 23, the Authority should take into account the following:

(a)- in the case of construction works performed pursuant to a contract, the consideration, or such part of the consideration as is attributable to the construction works, payable to the contractor under the contract, which shall be evidence, but not the conclusive evidence, of the value of the construction works;

(b)- the cost or value of materials used in the construction works;

(c)- the cost or value of time, work and labour involved in the construction works;

(d)- the equipment used in the construction works;

(e)- such overhead costs as may be considered reasonable;

(f)- the reasonable profit to be expected on the open market in respect of the performance of such construction works;

(g)- .............................................................

18. Since levy is to be imposed on the value of the construction works, in my view, the ascertained value should reflect the true or actual value of the works in question as much as possible, otherwise, it would not do any justice to either party, the contractor or the Government. The purpose of the Section 23 is to enable the Authority to make the fairest assessment in the circumstances by considering a number of factors, not just the price of the contract which sometimes may be misleading. For example, the parent company of the main contractor may sub-contract certain works to its subsidiaries, the price would easily be subject to manipulation and the value of the works would then become unrealistic.

19. The plaintiffs worked out the amount of the preliminaries (HK$ 33,283,470) on a pro rata basis according to the proportion of non-leviable works to the overall value of the works. The result as the plaintiffs argued would be reasonably accurate in light of the difficulty, as they now face, in assigning an actual figure for individual items of the non-leviable works. I would incline to agree with the plaintiffs if the preliminaries of the non-leviable works were in fact all valued-related. But as the plaintiffs put it these preliminaries covered insurance, supervision and clearance of the site upon completion. These items, except insurance, are not value-related, supervision is indeed time-related whilst clearance is event-related. Some other items may well be related by a combination of these categories. In the premise, it would not be right to say that the plaintiffs' calculation would produce a reasonable and accurate amount for exemption when the preliminaries covered so many different types of works which were not just valued-related.

20. The Authority is undoubtedly under a statutory duty to assess the levy, but as the plaintiffs' suggested calculation had its own flaw, the defendant was entitled to reject it.

CATEGORY B- PROFIT AND ATTENDANCE FEES OF HK$ 32,369,428

21. The plaintiffs claim that as different from the other categories, the figures here are identifiable in the contract that the profit and attendance fees payable to the plaintiffs did relate to the non-leviable building services works. In the chart drawn up by the plaintiffs (Bundle P.71), there are 28 items in total. The first item is preliminaries, the certified value of which is $ 36,777,315, the plaintiffs worked out the net exempt value for the preliminaries by multiplying the figure with the percentage of non-leviable works i.e. 90.5%, and the resulting value becomes $ 33,283,470. The values of the plumbing and drainage are specifically excluded from the calculation of the net exempt value. The sub-total of the certified value is $ 605,808,215 and the net exempt value has become $544,643,685.

22. In calculating the amount to be excluded from the levy for item 27 and 28 (i.e. profit for additional foundation works and labours respectively), the plaintiffs here used the proportion of net exempt value ($544,643,685) to the certified value ($605,808,215), which is about 90%, to determine the amount.

23. The plaintiffs' argument here also fails because their method of calculation is embedded with the same problem by using the percentage based on value. For the same reason as stated above, the percentage based on value (i.e. 90.5%) cannot be used as a basis to determine the amount of preliminaries of which levy should be exempted. The same reasoning applies to the use of the proportion of net exempt value / certified value in calculating the amount of labours attributable to non-leviable building services works.

CATEGORIES (C) & (D) OVERHEADS OF $120,650,362 (SUPERVISION)

24. The plaintiffs claim that the overheads are the costs which the plaintiffs incurred in supervising BBL's works and a part of which related directly to the execution by BBL of the non-leviable works. As it is impossible to identify precisely what proportion of the overheads related to each of the different elements of the building services works, since there was no specific correlation between the overheads and the individual items of the contract works. Moreover, construction contracts are not priced in such a way as to separately identify overheads for different parts of the works. The plaintiffs therefore argue that the proportion of the overheads relating to the non-leviable works and which should be excluded from the levy should be assessed by apportioning the overheads between the different elements of the works pro rata to the value of those works.

25. Initially, when the plaintiffs presented their case to the committee of the Authority, they only asked the sum of $ 66,377,923 under this head to be exempted from levy assessment. On the appeal hearing, however, the plaintiffs added a further sum of $54,272,439 which they maintained it should also be excluded from levy assessment by using a new formula. The total sum for which they are now seeking exemption is therefore $ 120,650,362.

26. As for the sum of $66,377,923, the plaintiffs took two figures from the Final Payment Certificate Statement (Bundle P.77), item(1) of preliminaries ($379,175,734) and item (39) of additional and prolonged preliminaries ($198,651,668), and added them together to be the value of the plaintiffs' supervision of whole project ($ 577,827,402). The part related to the supervision of "BBL" works was calculated by multiplying overall costs of supervision with the percentage of "BBL" staff costs / costs of all staff which was 12.5%.Therefore, the total value to the plaintiffs of supervising the BBL works was $ 72,228,425, and the portion of this relating to the non-leviable works would be $66,377,923 9 (assuming 91.9% being the proportion of the value of non-leviable works to the total value of BBL works).

27. Again the same problem encountered by the plaintiffs in apportioning the costs of supervision, which is basically time-related, on the basis of proportional value of the non-levible works. The fallacy of this method is that it assumes that the amount of supervision is proportional to the value of a particular type of works, but this is not true in the present case.

28. In respect of the sum of $120,650,362, the plaintiffs used a rate of 20.88% instead of 12.5% on the sum of $577,827,402 to calculate the overheads for the non-leviable works (the net value of the non-leviable works expressed as a percentage of the net total value of Contract 503C would be 20.88%). For the same reason, this method of calculation also failed to reflect the true value of the non-leviable works in terms of supervision.

OTHER QUESTIONS

29. I like to deal with one other matter relating to the construction of Section 2(3) of the Ordinance concerning exempted works as parties have dispute over it. Section 2(2) defines " construction works" to include any kind of work involving or in connexion with, say, building works etc. Whilst Section 2(3) excluding certain kind of works from the definition of construction works, it does not contain the words " involving or in connexion with" as appear in Section 2(2). The defendant maintained that such words were deliberately omitted from the section, it must have been the intention of the legislature to deny exemption to those works " involving or in connexion with" the excluded works as mentioned in Section 2(3). I am not, however, convinced by this argument. Section 2(2) has defined the meaning of construction works, that is any kind of work involving or in connexion with the types of particular work as set out in the section, and Section 2(3) only tells us the types of work which are to be excluded. It does not re-define the meaning of construction works. If the contractor can prove the true or actual costs of any works involving or in connexion with the excluded works as set out in Section 2(3), they should be exempted.

CONCLUSION

30. The plaintiffs, being the main contractor, has the duty to supply the Authority with information or evidence as to the value of the exempted works for the purpose of assessment of levy. These values are the true or actual values of the exempted works. Most of the items of works, if not all, could and should in my view have records to show the value of the works. For instance, as for insurance, separate policies could be taken out individually for leviable works such as the plumbing and drainage and for non-leviable works like the electricity supply system etc., while for manpower, there should have records of the number of persons employed to do a particular item of work, their man-hour involved, the equipment they used and if vehicles involved, the logbooks and so forth.

31. All these may require the plaintiffs to set up a proper record system, it would certainly cause them to incur extra costs, but in view of the huge amount in dispute (close to 20 million), in my view, this is not an unreasonable course of action to be adopted by the plaintiffs; and in any event, it is not impossible to do so provided someone would apply their mind to it at the commencement of the project.

32. Now that the plaintiffs have failed to come up with evidence (and I emphasize evidence) which could reasonably reflect the true or actual value of the non-leviable works, it is not open to them to argue that the defendant should adopt the convenient and easy method of calculation as they suggested in order to be fair to them, but their method is fraught with problems as aforesaid. The plaintiffs' pro rata approach based on value was going off on a wrong basis because it included works which were in fact not value-related. As long as there is evidence tending to show the true or actual value of the exempted works, the defendant is duty-bound to assess, but there is none in the present case.

33. For the reasons given, I see no reason to interfere with the defendant's decision on the levy, and therefore, the plaintiffs' appeal is dismissed.

34. I shall make a costs order nisi that the costs of and occasioned by this appeal be to the defendant together with Certificate for Counsel, to be taxed if not agreed. Such costs order shall become absolute at the expiration of 14 days after the date of handing down this decision.