Malaysia – Flextronics Shah Alam Sdn Bhd V Ketua Pengarah Hasil Dalam Negeri [2018] 7 CLJ 487, High Court Of Malaya In Shah Alam ― The Existence Of A Domestic Remedy Does Not Act

Introduction

 

The longstanding position of the Inland Revenue Board of Malaysia (“IRB”) in regard to judicial review applications to challenge tax assessments raised by them is that the appeal procedure under section 99 of the Income Tax Act 1967 (“ITA”) is sufficient to address taxpayers’ complaints. Accordingly, the IRB have always argued that since a domestic remedy is available, aggrieved taxpayers should not be given leave to apply for judicial review, much less be heard on the merits.

 

This issue was considered by the High Court in the recent case of Flextronics Shah Alam Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri1.

 

Facts

 

The IRB had first conducted a tax audit on the taxpayer in late 2013 for the Years of Assessment (“Y/As”) 2007 to 2012. In the course of the audit, the IRB disallowed certain commission payments made by the taxpayer to its related company in Y/As 2008 and 2009. However, just before the completion of the audit and issuance of tax assessments, the IRB for the first time made transfer pricing adjustments to certain transactions of the taxpayer, purportedly pursuant to sections 140 and 140A of the ITA.

 

In December 2017, the IRB raised Notices of Additional Assessments against the taxpayer for Y/As 2007-2012 for a substantial sum in additional taxes and penalties (“disputed NOAAs”). The taxpayer proceeded to lodge an appeal to the Special Commissioners of Income Tax (“SCIT”).

 

Judicial Review application

 

In addition to lodging an appeal to the SCIT, the taxpayer initiated judicial review proceedings to challenge the disputed NOAAs on the following basis:

 

• The IRB has no power in law to make transfer pricing adjustments under section 140 of the ITA and further failed to give sufficient particulars in regard to any alleged tax avoidance. Accordingly, the IRB misused the general anti-avoidance provision for an extraneous and unlawful purpose;

• The IRB unlawfully relied upon its own Transfer Pricing Guidelines 2003 or 2012 (“TPGs”) to make transfer pricing adjustments despite the same having no force of law;

• The IRB acted in contravention of the High Court Order in the case of The Boston Consulting Group Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri2, where it was held, in substance, that the IRB did not have the power to make transfer pricing adjustments under section 140 ITA or the TPGs;

• The IRB was time barred from raising assessments for Y/As 2007-2010. The IRB disregarded the statutory limitation period of five years provided under section 91(1) of the ITA which was applicable at the time the NOAAs were raised, and further illegally attempted to read the statutory limitation period of seven years under section 91(5) retrospectively; and

• the IRB acted beyond its powers in making transfer pricing adjustments on what was essentially third party pricing.

   

Decision of the Court

 

The High Court allowed the taxpayer’s leave application. The Court held that the taxpayer had locus standi and the “low” threshold for leave was met, that is, that the taxpayer’s case was not frivolous or vexatious.

 

The High Court also held that the availability or non-availability of an alternative remedy is “not to be considered at leave stage when the threshold test is low and where the court acts upon the affidavit of the applicant alone”.

 

Granting the taxpayer’s application for leave, the learned High Court Judge Vazeer Alam Mydin Meera J (as his Lordship then was) held that:

 

“As to the issue of the exhaustion of the alternative statutory remedy of appeal to the Special Commissioners of Income Tax, I find that the non-existence of domestic remedy is not a pre- requisite under O. 53 of the Rules of Court 2012. It is pertinent to note that nowhere in O. 53 is it stated that the existence of a domestic remedy will bar an application for judicial review, neither is it a requirement established in case law. In this regard, I am of the opinion that the existence of the statutory appeal mechanism under s. 99 of the ITA does not by itself bar an application for leave for judicial review under O. 53 of the Rules of Court 2012.

 

… Thus, I accept the learned applicant's counsel's submission that …, the availability or non- availability of an alternative remedy is irrelevant at the leave stage and should be raised at the merits stage. The existence or non-existence of a sufficient alternative remedy is something that should be canvassed at the substantive stage and is therefore a premature objection to be raised now at the leave stage.” (emphasis added)

 

The High Court further considered the taxpayer’s argument that certain remedies sought could not in law be handed down by the SCIT, such as any orders for set-off or refunds or to stay enforcement, and accordingly it was not a clear cut case that an alternative remedy was in fact available.

 

The High Court also proceeded to grant an interim stay pending disposal of the judicial review, as the amount of the tax and penalties in dispute were large and which the taxpayer had contended would cause severe cash flow problems to the taxpayer.

 

Conclusion

 

This is an important case confirming the position that the existence of a domestic remedy does not act as a bar to an application for leave for judicial review and the IRB cannot merely refer to the existence of a separate appeal procedure under the ITA to oppose such an application. It further confirms that provided that the leave threshold is met, any issues of availability of domestic remedy is to be heard at the merits stage of the judicial review application. 

1 [2018] 7 CLJ 487.
2 Originating Summons No. 24-82-12/2013.