PETRONAS PENAPISAN (TERENGGANU) SDN BHD Ketua Pengarah Hasil Dalam Negeri

WA-25-150-04/2021 Kand. 55 19/07/2022 08:15:51 Pihak-pihak: Bagi Pihak Pemohon : Nur Amira Ahmad Azhar & Yap Wen Hui Tetuan Rosli Dahlan Saravana Partnership Bagi Pihak Responden : Ashrina Ramzan Ali & Kwan Huey Shin Lembaga Hasil Dalam Negeri DALAM MAHKAMAH TINGGI MALAYA DI KUALA LUMPUR (BAHAGIAN RAYUAN DAN KUASA-KUASA KHAS) PERMOHONAN SEMAKAN KEHAKIMAN NO: WA-25-150-04/2021 Dalam perkara suatu Keputusan Responden seperti yang dinyatakan melalui notis-notis taksiran tambahan bagi tahun-tahun taksiran 2014, 2016, 2017, 2018 dan notis taksiran bagi tahun taksiran 2015 yang kesemuanya bertarikh 23.4.2021; Dan Dalam perkara suatu permohonan untuk antara lain, suatu Perintah Certiorari; Dan Dalam perkara Aturan 53 Kaedah-Kaedah Mahkamah 2012. 1 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal ANTARA PETRONAS PENAPISAN (TERENGGANU) SDN BHD PEMOHON DAN KETUA PENGARAH HASIL DALAM NEGERI RESPONDEN JUDGMENT [1] The applicant is a wholly-owned subsidiary of Petroliam Nasional Berhad (“PETRONAS”). The applicant's core business is refining crude oil into petroleum products. [2] On 16.4.2021, the applicant received an audit findings letter from the putative respondent, requesting the applicant to submit a response within 7 days. In the letter, the respondent invoked s 140A of the Income Tax Act 1967 (“ITA”) and 72 of the Petroleum (Income Tax) Act 1967 (“PITA”). [3] In the said letter, the putative respondent made the following assertions: (a) The benchmarking analysis conducted by the applicant is not reflective of the applicant’s functions, risks and assets (“FAR”). 2 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal (b) There was a link in the decrease in the profit margin level of the applicant with the profit margin level of PETCO Trading Labuan Corporation Limited (“PTLCL”). PTLCL is the sole trading arm of PETRONAS oil and gas business to undertake trading, logistical and operational matters. (c) PTLCL is the main reason for the applicant’s restructuring exercise. It says: Walaupun bayaran pampasan tidak semestinya berlaku di antara kedua-dua entiti tersebut, tetapi apabila melibatkan implikasi kepada pengagihan keuntungan yang ketara di mana pengurangan margin keuntungan di PP(T)SB dan peningkatan margin keuntungan yang mendadak ketara di PTLCL yang berperanan sebagai low risk distributor and marketer, maka pihak LHDNM berpendapat, PP(T)SB wajar menerima bayaran pampasan dalam mematuhi prinsip harga selengan bagi penstrukturan semula perniagaannya. According to the putative respondent, from the audit exercise, the putative respondent found that there was no restructuring compensation made between the applicant and PTLCL after the restructuring exercise, which started on 1.7.2014. 3 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal The putative respondent did not find it reasonable that the restructuring exercise involving potential and expected profits would finally encompass losses to the applicant's business operation. (d) The Profit Split Method (“PSM”) is more appropriate than the Transactional Net Margin Method (“TNMM”). It says: Oleh yang demikian, LHDNM berpendirian berdasarkan kepada hasil kajian terhadap FAR dan penemuan-penemuan audit yang dijalankan, margin di PTLCL perlu diselaraskan kembali berdasarkan kepada analisa FAR dan menggunakan Profit Split Method (PSM) sebagai kaedah Harga Pindahan. Keuntungan jualan di PTLCL akan diselaraskan semula berdasarkan PSM dan akan diagihkan kepada syarikat-syarikat yang layak berdasarkan kajian FAR yang dilakukan. (e) The applicant owns some intangible assets (“IA”). (f) The Export Duty Savings (“EDS”) rebate distorts the arm’s length principle. (g) The tolling fee charged is US$0.02 per barrel. 4 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal (h) The restructuring of the applicant from the full-fledged manufacturing entity did not comply with the tenets of the arm’s length principle. [4] S 140A(3) of the ITA provides that where the Director General of the Income Tax (“DGIT”) has reason to believe that any property or services referred to in subsection (2) is acquired at a price less than or greater than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm’s length, the DGIT may in the determination of the income of the person, substitute the price in respect of the transaction to reflect an arm’s length price for the transaction. [5] S 72(1) of PITA provides that where the DGIT has reason to believe that any transaction has the direct or indirect effect of evading or avoiding any duty or liability which is imposed or would otherwise have been imposed on any person, he may disregard or vary the transaction and make such adjustments as he thinks fit with a view to counter-acting the whole or any part of any such direct or indirect effect of the transaction. [6] In response to the putative respondent’s letter, the applicant submitted a reply dated 22.4.2021. In the letter, the applicant states as follows: (a) The putative respondent did not provide any reasons for applying the PSM in favour of the TNMM method. 5 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal (b) The putative respondent also failed to state the source of information and unduly focused on the Years of Assessment (YAs), where the applicant was undergoing business restructuring. (c) The applicant denied that it owned any IA and was perplexed by the unfounded assumption made by the putative respondent. (d) The idea behind the applicant’s restructuring exercise was to sustain the operational capacities of the applicant. The exercise aims to concentrate on the applicant’s core competency to enhance its overall operational effectiveness. (e) The putative respondent arbitrarily imposed a 70:30 split on the profit between PTLCL and the applicant without any basis. (f) The putative respondent had erroneously and unreasonably invoked s 140A of the ITA. (g) There was an unexplained error on the part of the putative respondent when it asserted that the tolling fee was US$0.02 per barrel when it was clearly stated as US$1.62 to US$2.25 per barrel. (h) The applicant is aggrieved by an unjustified dilution of the FAR profile of PTLPL. 6 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal (i) The putative respondent has paid scant regard to the ITA by placing undue reliance upon Chapter IX titled “Transfer Pricing Aspects of Business Restructurings” as contained within the OECD (Organisation for Economic Co-operation and Development) Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administration 2017 (“OECD Guidelines”). [7] Unfortunately, the putative respondent did not heed to the applicant’s explanation. The putative respondent then raised the impugned Form JA for YAs 2014, 2016, 2017 and Form J for YA 2015 against the applicant. [8] In the audit exercise, the putative respondent discovered that, and this finding is disputed by the applicant, the transactions between the applicant and PTLCL are controlled transactions and not independent. In short, according to the putative respondent, the transaction was not at arm’s length. [9] The learned Senior Revenue Counsel (“SRC”) contended that the finding was in line with s 140A of the ITA and the Inland Revenue Transfer Pricing Guidelines [TPGL] 2012. S 140A was introduced in 2009, requiring taxpayers to determine and apply the arm’s length price on controlled transactions between associated companies. [10] On the other hand, the applicant argued that there was a complete failure on the part of the putative respondent to apply s 140A of the ITA and s 72 of the PITA correctly. 7 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal The Judicial Review [11] Aggrieved, the applicant commenced this proceedings for leave for judicial review, inter alia, for an order of certiorari to quash the said additional assessments and notice of assessment, all dated 23.4.2021. [12] The application for leave is supported by the affidavit of Rihanna Haryanti binti Mohd Ramli (“AIS-2”), which is in Encl 2. [13] Rihanna is the Head of Group Tax of PETRONAS. [14] In compliance with O 53 r 3(3) of the Rules of Court 2012, copies of the cause papers were lodged in the Attorney General’s Chambers on 12.5.2021. The AGC did not send any representative when the case was first called for CM on 19.5.2021. [15] I can only assume that the Attorney General has no objection to this application for leave. [16] However, at the same CM, the learned SRC appeared for the putative respondent and registered her objection to the application for leave. 8 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal The Putative Respondent’s Objections [17] The bases of the putative respondent’s objection to the application for leave can be summarised as follows. [18] First, a domestic remedy is available under s 99 of the ITA. If the applicant is aggrieved with the additional assessments and assessment, it could always appeal to the Special Commissioner of Income Tax (“SCIT”). In Ta Wu Realty Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri & Anor [2009] 1 MLJ 555 CA, the Court of Appeal referred to the judgment of the Supreme Court in Government of Malaysia & Anor v Jagdis Singh [1987] 2 MLJ 185 SC held that the courts still have the discretion to act by way of judicial review, but where there is an appeal procedure, certiorari should not normally issue save in exceptional circumstances. [19] The learned SRC then submitted that in the instant case, the applicant has failed to show any exceptional circumstances to justify the grant of leave. [20] Secondly, the learned SRC contended that this application for leave is premature and an abuse of the process of the Court. According to the learned SRC, having filed this judicial review application, the applicant filed an appeal to the SCIT by way of Form Qs dated 21.5.2021. The appeal was filed pursuant to s 99 of the ITA. 9 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal [21] My attention was drawn to the judgment of the High Court in Keysight Technologies Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri Malaysia [2018] MLJU 66. In that case, the High Court refused to grant leave for the applicant to commence judicial review against the respondent inter alia on the ground that the applicant has filed an appeal to the SCIT under s 99 of the ITA. The learned Judge further held that maintaining the aforesaid application was an abuse of the court process. [22] Finally, the learned SRC submitted that the issues raised that culminated in the issuance of the additional assessments and assessment involved the determination of facts, which is best reserved to be ventilated before the SCIT. According to the learned SRC, the transfer pricing issue, as in this case, is very technical in nature. [23] It is the putative respondent’s case that the determination on whether s 140A of ITA is applicable depends on the finding of facts that would be more appropriately deliberated before the SCIT, where witnesses from both parties can testify; see Zakaria bin Abdullah & Ors v Lembaga Perlesenan Tenaga Atom & Ors [2013] 5 MLJ 2016 CA. [24] For the aforesaid reasons, the learned SRC urged this Court to refuse leave for judicial review. 10 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal Analysis [25] Let me begin at the beginning. At the leave stage for judicial review, an applicant would only need to show an arguable case and that the matter is not frivolous. The threshold is low. At this stage, it is for the applicant to prove that there is a basis for the judicial review. As long as there is some substance before the courts for further arguments, leave should be granted for the matter to be further litigated, deliberated and determined at the substantive stage; see Tan Sri Musa bin Hj Aman & Ors v Tun Datuk Seri Hj Panglima Hj Juhar Hj Mahiruddin & Ors [2021] 3 MLJ 329 CA. [26] In view of the said proposition, which I must say is trite, the merits of the application itself should not be the subject matter of scrutiny. To paraphrase in less elegant language, this Court should not go into the merits of the case at the leave stage. Its role is only to see if the application for leave is frivolous; Tang Kwor Ham v Pengurusan Danaharta Nasional Bhd [2005] 1 LNS 179 CA. [27] In the circumstances of the case, whether the putative respondent had erroneously invoked s 140A of the ITA or otherwise is an issue that is to be determined at the substantive stage. The same goes as to whether “Transfer Pricing Aspects of Business Restructurings” as contained within the OECD Guidelines should be read harmoniously or independently of s 140A of the ITA. 11 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal [28] I am not prepared at this stage to determine whether the putative respondent has any basis to interfere with the applicant’s tax affairs which is contrary to the fundamentals of transfer pricing or otherwise. [29] Now, is it necessary for the applicant to exhaust the domestic remedy under s 99 of the ITA before proceeding with this application for leave? To begin with, in my considered view, s 99 is not mandatory. It only provides that an aggrieved person may appeal to the SCIT against the assessment. [30] In Flextronics Shah Alam Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2018] 7 CLJ 487 Vazeer Alam J (now JCA) made the following observation: As to the issue of the exhaustion of the alternative statutory remedy of appeal to the SCIT, 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. 12 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal The above proposition, which I respectfully agree with, has support from ample decisions of high authority. In QSR Brands Bhd v. Suruhanjaya Sekuriti & Anor [2006] 3 MLJ 164 CA, the Court of Appeal, when dealing with a similar issue, held that the question of exhaustion of domestic remedy was not an issue at the leave stage. [31] On the issue of possible abuse of the process, I respectfully agree with learned counsel for the applicant that there is no general rule that by filing an appeal to the SCIT, a taxpayer would thereby lose the opportunity to file an application for judicial review under O 53 of the ROC. O 53 does not preclude the applicant from filing this judicial review. [32] In any event, the putative respondent did not seek leave from this Court to file an affidavit in reply. The assertion the applicant filed an appeal to the SCIT by way of Form Qs dated 21.5.2021 was an averment from the Bar. Although learned counsel for the applicant did not deny that an appeal was made to the SCIT, this, according to learned counsel, is limited to the issues of statutory time bar and the imposition of penalty. [33] With respect, I will not entertain any factual averments from the Bar. [34] A statement made from the Bar is akin to giving evidence on behalf of the client, but such a statement was not given on oath and should not be accepted; see Loo Sze Kin v Cheong Choy Teik [1977] 4 MLJ 537. 13 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal [35] In Keysight Technologies, a case relied on by the learned SRC, it was not in dispute that the applicant had filed an appeal under s 99 of the ITA against the notice of additional assessment (“NAA”) dated 13.6.2017. The appeal was strictly against the NAA. The case is therefore distinguished. [36] On the issue that the assessment and NAA are factual matters which are best reserved to be ventilated before the SCIT, I respectfully agree with learned counsel for the applicant that the interpretation of s 140A of the ITA, fundamental of transfer pricing, arms’ length price for the transaction and the application of PSM in favour of TNMM can be determined by way of affidavit evidence at the substantive stage. They are not rocket science which can only be determined by the SCIT to the exclusion of this Court. Findings [37] In Flextronics Shah Alam, the learned Judge made the following observation: I accept that the applicant, which is facing an imminent risk of having to pay the amount of the disputed NOAAs ie, RM62,954,252.40, is clearly not a busybody with trivial complaints. The applicant has passed the threshold test for leave as it is clearly affected by the decision of the respondent, who is a public authority. When the applicant has demonstrated a case on its merit and when the applicant's case is not frivolous or vexatious, leave should be given to 14 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal proceed to the substantive merits stage to challenge the legality of the respondent's alleged illegal conduct of charging the applicant approximately RM62.9 million in disputed taxes and penalties, which on the surface seems to be contrary to the High Court order in the BCG case and may have contravened statutory time bar. [38] In the instant case, the total amount reflected in Form JA for YAs 2014, 2016, 2017 and Form J for YA 2015 against the applicant is RM2,623,218,708. By any account, that is a huge amount. The applicant is definitely affected by the decision of the putative respondent, which is a public authority. The issues raised by the applicant are pertinent questions of law. They are not frivolous. [39] For the reasons aforesaid, it is my finding that the applicant has crossed this lower threshold as expected of it. [40] Leave is granted with costs in the cause. [41] I am also granting an interim stay pending the disposal of the substantive application. Tarikh: 18 Julai 2022 (WAN AHMAD FARID BIN WAN SALLEH) Hakim Mahkamah Tinggi Kuala Lumpur. 15 S/N ohudrFptFUmXag79X0iJWg **Note : Serial number will be used to verify the originality of this document via eFILING portal