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HCAL 18/2011
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
CONSTITUTIONAL AND ADMINISTRATIVE LAW LIST
NO 18 OF 2011
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BETWEEN
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CANRAY INTERNATIONAL LIMITED |
1st Applicant |
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CASHMASTER PROFITS LIMITED |
2nd Applicant |
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LIANG SHING INDUSTRIES (HK) LIMITED |
3rd Applicant |
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LUCKY PORT TRADING LIMITED |
4th Applicant |
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and
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COMMISSIONER OF INLAND REVENUE |
Respondent |
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Before: Hon Barma J in Court
Dates of Hearing: 1 and 2 February 2012
Date of Judgment: 18 May 2012
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J U D G M E NT
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Introduction
1. On 31 March 2011, the four applicants in these proceedings, Canray International Limited (“A1”), Cashmaster Profits Limited (“A2”), Liang Shing Industries (HK) Limited (“A3”) and Lucky Port Trading Limited (“A4”) (collectively “the Applicants”) sought leave to apply for judicial review against the Commissioner for Inland Revenue (“the Commissioner”) in respect of the conduct of the Inland Revenue Department (“the IRD”) relating to profits tax assessments issued against the Applicants in respect of the 2001/02 through 2004/05 years of assessment. On 7 April 2011, Andrew Cheung J (as Cheung CJHC then was) granted the leave sought, and on 13 April 2011, the Applicants issued their Originating Summons in these proceedings.
2. The Applicants are all wholly owned subsidiaries of Symphony Holdings Limited (“Symphony”), a Bermudan company whose shares are listed on the Hong Kong Stock Exchange. The group of companies of which Symphony is the ultimate holding company is involved in the manufacture and sale of footwear. A1 and A2 are BVI companies, acquired by the Symphony group in 1997 and 2000 respectively, neither of which is registered in Hong Kong under the Companies Ordinance (Cap 32) or the Business Registration Ordinance (Cap 310). A3 and A4 are Hong Kong companies.
3. For present purposes, it is to be noted that the manufacture of the footwear products in which the Symphony group deals are carried on primarily at two factories on the Mainland, known as the Xingtaiy and Jingmei factories respectively. Goods produced by the Xingtaiy factory were sold to A1, which on-sold them under back-to-back contracts to A3, which in turn on-sold the goods to customers in the United States and Europe. In the case of goods produced by the Jingmei factory, a similar chain of transactions was entered into, with A2 and A4 standing in the place of A1 and A3 respectively.
4. According to the Applicants, A1 and A2’s business consists of ordering goods to be manufactured at the respective factories, and arranging for such goods to be sold to the end customers, and the activities undertaken by A1 and A2 in furtherance of this business (such as research, product development, marketing, production planning and the negotiation and conclusion of sales orders) are carried out not in Hong Kong, but on the Mainland and in Taiwan. So far as A3 and A4 are concerned, it is said that their business is the provision of administrative support services. The Applicants say that for political, trade and administrative reasons, it was decided to channel sales to the Symphony Group’s customers in the United States and Europe through A3 and A4, in the manner described in the preceding paragraph. This description of the businesses by the Applicants (and the consequences in taxation terms contended for by them) is, however, not accepted by the Commissioner.
5. In February 2008, the IRD decided to institute a tax audit in respect of the affairs of the Symphony group. In March 2008, information was sought in respect of the group’s turnover, cost of sales and before tax profits for the financial year ended 31 December 2001, with a breakdown of such items being requested.
6. On 28 March 2008, shortly before the expiry of the six year period after which it would no longer be possible to make any assessment to profits tax in respect of the 2001/02 year of assessment, profits tax assessments were issued against the Applicants, as follows:-
(1) An estimated assessment was raised against A1 (relying on section 14, the proviso to section 59(1), sections 59(3) and 61A of the Inland Revenue Ordinance (Cap 112) (“the Ordinance”)), in the amount of HK$9,280,000;
(2) An estimated assessment was raised against A2 (relying on the same statutory provisions), in the amount of HK$4,800,000;
(3) An assessment was raised against A3 (under sections 16, 61 and/or 61A of the Ordinance) in the amount of HK$10,614,228;
(4) An estimated assessment was raised against A3 (under sections 20(1), 20(2), the proviso to section 59(1) and section 59(3) of the Ordinance) in the amount of HK$9,280,000;
(5) An additional assessment was raised against A4 (under sections 16, 61 and/or 61A of the Ordinance) in the amount of HK$4,800,000; and
(6) An estimated assessment was raised against A4 (under sections 20(1), 20(2), the proviso to section 59(1) and section 59(3) of the Ordinance) in the amount of HK$4,800,000.
7. By these assessments:-
(1) A1 and A2 were assessed to profits tax on the basis that they were carrying on a business in Hong Kong (the assessments mentioned in paragraphs 6(1) and (2) above) – I shall refer to such assessments as the direct assessments on A1 and A2;
(2) A3 and A4 were assessed to profits tax on the basis that they were carrying on a business in Hong Kong (and their transactions with A1 and A2 respectively were to be disregarded as artificial, or alternatively were a tax avoidance device) (the assessments mentioned in paragraphs 6(3) and (5) above) – I shall refer to these assessments as the direct assessments on A3 and A4; and
(3) A3 and A4 were assessed to profits tax under section 20 of the Ordinance on the basis that the business done between them and A1 and A2 respectively was so arranged that such business produced to A3 and A4 less than the ordinary profits that might be expected to arise in or derive from Hong Kong, so that A1 and A2’s businesses were deemed to be carried on in Hong Kong, and their profits were assessed and chargeable with tax in the names of A3 and A4 respectively, as if A3 and A4 were respectively agents for A1 and A2 (the assessments mentioned in paragraphs 6(4) and (6) above) – I shall refer to these assessments as the agency assessments on A3 and A4.
8. Each of the Applicants lodged a notice of objection in relation to the tax returns issued against them and sought a holdover of the tax payable pending the determination of their objections. In the event, unconditional holdovers were granted in respect of the whole of the tax payable under the direct assessments on A1 and A2, and the agency assessments on A3 and A4. Partial holdovers were granted in respect of the direct assessments on A3 and A4, with HK$3,200,000 being held over in respect of the direct assessment on A3 and HK$2,500,000 being held over in respect of the direct assessment on A4. As to the balance of the tax payable by A3 and A4 in respect of the direct assessments on them, this was eventually held over on condition that A3 and A4 purchase tax reserve certificates in the amounts of the tax that would otherwise have been payable. The tax reserve certificates were eventually purchased on 27 May 2008.
9. Thereafter, the IRD continued to seek information from the Applicants in connection with the tax audit. Although the Applicants were told that their objections would be attended to promptly, the objections had not been determined by the time of the application for judicial review.
10. In subsequent years, a similar pattern of events took place. In March 2009, January 2010 and January 2011, the IRD issued assessments against the Applicants in respect of the 2002/03, 2003/04 and 2004/05 years of assessment respectively. On each occasion, direct assessments were issued against A1 and A2, direct assessments were also issued against A3 and A4, and agency assessments were issued against A3 and A4, in each case on broadly (but not exactly) similar bases to those issued in March 2008. Objections were lodged by the Applicants against each of these assessments, and holdovers were granted in respect of the amounts of tax payable under the assessments on a similar basis to those granted in 2008, so that the direct assessments against A1 and A2 and the agency assessments against A3 and A4 were held over unconditionally in full, while the direct assessments against A3 and A4 were held over unconditionally in part, with the balance being held over conditionally, on condition that tax reserve certificates were purchased to cover the amount of tax not held over unconditionally. Although the objections to these assessments were lodged by the Applicants timeously, up to the date of this application, no determination had been issued in respect of any of the objections.
11. By the time that this application was made, the objections against the 2001/02 assessments made in March 2008 had been unresolved for some three years, while those against the 2002/03, 2003/04 and 2004/05 assessments had been left unresolved for two years, slightly over a year, and about 2 months respectively.
The application for judicial review
12. By this application, the Applicants sought the following relief:-
(1) Orders of certiorari to quash each of the assessments made;
(2) Orders of mandamus to compel the Commissioner to issue determinations in respect of the objections which had been lodged by the Applicants against the assessments; and
(3) Orders of certiorari to quash the conditional holdovers.
13. In the statement of grounds in support of the application for leave to seek judicial review, the Applicants set out a brief history of the Symphony group...
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