28 October, 2017
Brief facts
Alcanet, which is not tax resident in Malaysia, provided certain services relating to the provision of a global network for voice, data and video communication (“Services”) to Alcatel.
Subsequent to a withholding tax audit conducted by the Director General of Inland Revenue (“Revenue”), the Revenue purported to subject payments made by Alcatel to Alcanet for the Services (“Payments”) to withholding tax and increased withholding tax under “Section 109 and/orSection 109B of the Income Tax Act 1967” (“ITA”) for years of assessment 2001 to 2005 vide a letter dated 14 April 2008 (“Revenue’s decision”).
Alcatel and Alcanet (collectively “Taxpayers”) disputed that the Payments were subject to withholding tax and filed an application for judicial review in the High Court on 23 May 2008 under the then Order 53 of the Rules of the High Court 1980 (“RHC”) to quash the Revenue’s decision (“Judicial Review Application”).
Relevant statutory provisions
The relevant statutory provisions are set out below:
Section 109 of the ITA:
“(1) Where any person … is liable to pay interest or royalty derived from Malaysia to any other person not known to him to be resident in Malaysia … he shall upon paying or crediting the interest … or royalty deduct therefrom tax at the rate applicable to such interest or royalty, and … shall within one month after paying or crediting the interest or royalty render an account and pay the amount of that tax to the Director General: …”
Section 109B of the ITA:
“(1) Where any person … is liable to make payments to a non-resident – …
(b) for technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; or …
which is deemed to be derived from Malaysia, he shall, upon paying or crediting the payments, deduct therefrom tax at the rate applicable to such payments, and … shall within one month after paying or crediting such payment, render an account and pay the amount of that tax to the Director General: …”
Section 143 of the ITA:
“(1) No assessment, notice or other document purporting to be made or issued for the purposes of this Act shall be quashed or deemed to be void or voidable for want of form, or be affected by any mistake, defect or omission therein, if it is in substance and effect in conformity with this Act or in accordance with the intent and meaning of this Act – …
(2) An assessment purporting to be made or issued for the purposes of this Act shall not be impeached or affected by reason of a mistake therein as to –
(a) the name of a person charged to tax;
(b) the description of any income; or
(c) the amount of chargeable income assessed or tax charged,
and a notice of assessment purporting to be so made or issued shall not be impeached or affected by any such mistake if it is served on the person in respect of whom the assessment was made or intended to be made (or served in accordance with subsection 67(5)) and contains in substance and effect the particulars contained in the assessment.”
Decision of the High Court[2]
The High Court then went on to rule that the Payments do not constitute “royalty” under section 109 read with section 2 of the ITA as the Revenue had failed to establish that the software was used to produce profits for Alcatel or that Alcatel was granted any rights to develop or exploit the software commercially.
Decision of the Court of Appeal[3]
The Revenue then lodged an appeal to the Court of Appeal against the decision of the High Court. The Court of Appeal affirmed the decision of the High Court and held that the Revenue had acted unreasonably, committed an error of law and exceeded their statutory powers by invoking both sections 109 and 109B of the ITA to subject the Payments to withholding tax because:
“…Section 109 and section 109B of the ITA are distinctly different and each section deals with different subject matter. … The appellant was indeed indecisive and could not make up his mind as to which particular section of the ITA apply in respect of payments for the ‘leased communication facilities’. So, he invoked both sections. The appellant’s affidavit-in-reply state that the payments were in the nature of royalty. Learned counsel for appellant before us also said the payments were royalty. But En. Norhisham who appeared for the appellant in the High Court said that the payments were partly for royalty and partly for services. So, both sections apply. This was a clear cut case in which the appellant had made a decision arbitrarily in exercise of this statutory power to the detriment of the 1st respondent.”
The Court of Appeal did not analyse as to whether the Payments were “royalty” under the provisions of the ITA.
Decision of the Federal Court
The Revenue then obtained leave to appeal to the Federal Court and the questions before the Federal Court were:
Question 1: Whether the letter of the Director General of Inland Revenue dated 14 April 2008 referring to both sections 109 and/or 109B of ITA is bad in law?
Question 2: If the answer is in the negative, are the payments for the services as referred in the Agreement exhibited as “PC-3” royalties under section 109 of the ITA?
More than nine months after the hearing of the Revenue’s appeal at the Federal Court, the Federal Court allowed the appeal and the grounds of the decision of the Federal Court are as follows:
The Revenue did not act unreasonably by invoking both sections 109 and 109B of the ITA to impose withholding tax
Although the Federal Court also recognised that sections 109 and 109B of the ITA deal with different types of payment, the Federal Court nevertheless held that the Revenue did not act unreasonably by invoking both Sections 109 and 109B of the ITA in their letter dated 14 April 2008 (“14.4.2008 Letter”) as the Taxpayers had already known about the issues of non-compliance of the withholding tax provisions through the earlier correspondences and meetings between the parties. Moreover, since the Taxpayers were represented by a reputable tax agent, the Federal Court held that the tax agent ought not to have been misled by something so obvious.
In other words, the Federal Court was of the view that the 14.4.2008 Letter did not give rise to any uncertainty as both sections 109 and 109B are withholding tax provisions under the ITA and, as such, the invocation of both these sections did not bar the Revenue from claiming withholding tax in this case.
The Taxpayers should have filed an appeal to the Special Commissioners of Income Tax (“SCIT”) back in 2008
The Federal Court took the position that the imposition of withholding tax amounts to an “assessment”. Thus, since the 14.4.2008 Letter was a “notice of assessment”, the Taxpayers should have appealed to the SCIT under section 99 of the ITA[4].
On the facts, since the Taxpayers had failed to avail themselves of such appellate remedy under the ITA, the Federal Court added that:
“…as there was no appeal to the Special Commissioners, this Court has no option but to accept certain facts and conclusions as not reversible (fait accompli). We cannot alter the view that the payments made by the first respondent are royalty payments and not be heard to complain, bearing in mind that they have failed to avail themselves, to echo Gill FJ, ‘of that remedy as laid down by the law’ before coming to the courts.”
The Revenue’s mistake as to the “description of any income” did not render the “assessment” void
Further, the Federal Court also referred to section 143 of the ITA and held that a defect in procedure could not displace the underlying tax liability imposed by statute:
“A perusal of appendix 1, which was attached to the letter of 14.04.2008 shows that sections 109 and 109B were referred to for payments of Leased Communication and Facilities.
… It could be observed that the error committed by the Appellant lies in the description of incomewhich was subject to withholding tax. …
Applying section 143(2)(b) of the Act, the assessment contained in the letter dated 14.04.2008 shall not be impeached or affected merely by reason of a mistake therein as to ‘the description of any income’.
…
Applying section 143(1) of the Act, even if the Appellant was uncertain as to the exact applicable provision, it does not render the assessment void for want of form. To put it in a nutshell, the allegation of procedural impropriety ought not to be permitted to vitiate the Appellant’s statutory duty to assess and collect the correct amount of tax.”
No general duty on decision makers to give reasons for their decisions
Having referred to the statement of law that in the absence of reasons being given by an administrative body the courts are at liberty to conclude that it has no good reason in making its decision, the Federal Court nevertheless held that such statement of law must be applied cautiously and went on to state that:
“The correct application of the law concerning the duty of administrative authorities to give reasons for decisions has been explained by the Privy Council in Dr Stefan v The General Medical Council (1999) 1 WLR 1293. It must be emphasized that the law does not impose a general duty upon decision makers to give reasoned decisions. The trend of the law is towards giving reasons, but on a case by case basis. Among the determining factors when reasons ought to be given by administrative decision makes lie in the nature and character of the decision making and when the giving of reasons will be required as a matter of fairness and openness.”
The Judicial Review Application was incompetent
The final point that was raised by the Federal Court was that the Judicial Review Application was incompetent as it was made out of time. Under Order 53 Rule 3(6) of the RHC, an application for judicial review shall be made promptly or within 40 days from the date when the grounds for the application first arose or when the decision was first communicated to the applicant[5].
Referring to the chronology of events in this case, the Federal Court pointed out that prior to the 14.4.2008 Letter, the Revenue had already issued a letter to Alcatel on 28 March 2008 stating the amount of withholding tax that Alcatel is liable to pay (“28.3.2008 Letter”). Hence, the actual decision of the Revenue was already contained in the 28.3.2008 Letter and accordingly the Judicial Review Application should have been filed against the same and not the 14.4.2008 Letter, which was merely issued by the Revenue for clarification purposes and in response to the tax agent’s query.
Based on the above, the Federal Court answered Question 1 in the negative and, since no appeal was filed to the SCIT, the Federal Court did not answer Question 2 on the issue of royalty.
Conclusion
The Federal Court has once again placed great emphasis on the importance of utilising the appellate procedure available under the ITA and having the merits of the case heard by the SCIT even when the Revenue did not raise any objections against the Judicial Review Application. It would appear that the courts will be reluctant to hear tax cases by way of judicial review unless there are extenuating circumstances.
[1] [2017] 1 MLJ 563
[2] [2011] 4 CLJ 142
[3] [2015] 6 MLJ 77
[4] Section 109H was inserted into the ITA with effect from 1 January 2013 to allow the payer referred to in sections 109, 109B or 109F to appeal to the SCIT against the imposition of withholding tax by the Revenue on the basis that the same is not liable to be paid under the ITA.
[5] The RHC have been replaced by the Rules of Court 2012 and currently Order 53 Rule 3(6) of the Rules of Court 2012 provides that the application for judicial review shall be made promptly or within three months from the date when the grounds for the application first arose or when the decision was first communicated to the applicant.
For further information, please contact:
Goh Ka Im, Partner, Shearn Delamore & Co
kgoh@shearndelamore.com
