Although judicial review is a preferred dispute resolution process among taxpayers, judicial review in tax cases are only allowed in limited circumstances where there are illegality, procedural impropriety and unreasonableness in the exercise of power by the Director General of Inland Revenue (DGIR). A taxpayer, represented by Wong & Partners, succeeded in its application to quash the DGIR’s Notices of Additional Assessment for additional taxes and penalties by arguing and outlining the illegality and unreasonableness in the DGIR’s decision reassess the taxpayer to tax despite previous binding decisions of the Courts..
We summarize below the key facts, arguments and findings of the High Court.
The taxpayer is in the business of providing offshore drilling services. The taxpayer entered into a Master Charter Agreement with a main contractor (“Contractor“) to lease drilling rigs, and sub-leased them to customers (“Leasing Transactions“).
Back in 2013, the DGIR invoked Section 140 of the Income Tax Act 1967 (ITA) on the Leasing Transactions, arguing that they formed an anti-avoidance scheme and issued tax assessments for additional taxes and penalties. The taxpayer filed a judicial review against the said DGIR assessment (“2013 Suit“), where the High Court found in favor of the taxpayer. The High Court held that the DGIR’s decision was illegal because there was no evidence that:
- the taxpayer and the Contractor had transacted on a non-arm’s length basis,
- the taxpayer was in control of the Contractor or vice versa, or
- the taxpayer was controlled by a same third person who also has control over the Contractor.
This was upheld by the Court of Appeal.
In 2019, the DGIR audited the taxpayer for subsequent years of assessment (YAs) that were not covered by the 2013 Suit. Notwithstanding that there were no significant changes to the circumstances of the taxpayer’s Leasing Transactions, the DGIR concluded that the pricing of the Leasing Transactions were not at arm’s length. The DGIR proceeded to make pricing adjustments to the Leasing Transactions pursuant to Section 140A of the ITA (“DGIR’s Decision“). Aggrieved, and on the advisement by Wong & Partners that the DGIR’s Decision is illegal and unreasonable, the taxpayer applied for judicial review against the DGIR’s Decision.
1. The application of the 2013 Suit
Counsel for the taxpayer argued that in order for the DGIR to invoke Section 140A, the DGIR must be satisfied, amongst others, that the transactions are between “associated persons”, i.e., transactions between persons one of whom has control over the other; or persons both of whom are controlled by some other person (see Section 140A(5) ITA). It was further submitted that “control” in Section 140A is similar to that in Section 140, which the Courts had already decided in the taxpayer’s favor in the 2013 Suit.
The DGIR in turn contended that the present matter differs from that in the 2013 Suit because the consequences of the ITA provisions relied upon are different.
Ultimately, the High Court agreed with the taxpayer that the DGIR had re-adjusted the taxpayer’s taxability under the guise of a “different” provision under Section 140A ITA. Significantly, in the 2013 Suit, it had been concluded that the Leasing Transactions did not meet the requirements of Section 140(6) ITA. The High Court noted that the requirements of Section 140A(5) ITA in this instance are essentially the same as that of Section 140(6) ITA.
2. Interpretation of “control” and “associated persons”
The DGIR also argued that it has the powers to adjust the pricing of the Leasing Transactions under Section 140A on the ground that the taxpayer and the Contractor are “associated persons”. The DGIR alleged that:
- the test of control in Section 140A(5)(c) ITA does not require majority shareholdings, and
- the taxpayer and the Contractor, being related companies, are associated persons.
The High Court accepted the taxpayer’s submissions that the shareholdings of the taxpayer and the Contractor demonstrated that they do not fall within the ambit of “control” and “associated persons”. The companies do not possess and are not entitled to acquire the greater part of the share capital or voting power in one another (as is required under Section 139 ITA).
This is consistent with the findings in the 2013 Suit. The ITA does not empower the DGIR to make pricing adjustments for transactions between companies indirectly related to each other.
3. The DGIR’s duty to give reasons for its decisions
The DGIR resisted the judicial review application by arguing that the difference in the transfer pricing methodology and the determination of the correct pricing is a question of fact that should be determined by the Special Commissioners of Income Tax (SCIT) and not be subject to judicial review.
In response, the taxpayer highlighted that the crux of its contention is not the correctness of the pricing, but that the DGIR acted unreasonably and breached its duty to provide reasons as to why and how the DGIR arrived at its adjustments. The DGIR failed to consider and justify its decision − neither a transfer pricing analysis nor an opposing transfer pricing report was furnished by the DGIR.
The High Court held that the DGIR, as a public decision-making body, has a duty to give reasons for its decisions. The taxpayer would be unable to adequately defend itself before the SCIT without the DGIR’s alleged basis for adjustment. Consequently, the DGIR’s Decision amounts to a breach of the principles of natural justice and procedural fairness that provides a justifiable ground for judicial review.
This recent High Court decision reinforces the principle that the tax authorities’ exercise of power is subject to legal limits and that an application for judicial review can be made where such power has been used illegally or unreasonably, notwithstanding the alternative statutory remedy of an appeal to the SCIT.
The Court’s findings on the DGIR’s failure to particularize the basis for its decisions serves as a reminder that it is the tax authority’s duty (not the Court’s) to discover a taxpayer’s wrongdoings. The tax authorities must state upfront the relevant facts it purports to prove, and the Court’s duty is only to make findings of law and facts to examine the correctness of the tax authority’s findings.