Your World of Legal Intelligence
 Hong Kong | 1-800-335-6202

Commissioner Of Inland Revenue v Tai Hing Cotton Mill (Development) Ltd

Judgment Cited authorities 7 Cited in Precedent Map Related
Vincent
Judgment Date22 December 2006
Year2006
Citation[2007] 2 HKLRD 380
Judgement NumberCACV343/2005
Subject MatterCivil Appeal
CourtCourt of Appeal (Hong Kong)
CACV000343/2005 COMMISSIONER OF INLAND REVENUE v. TAI HING COTTON MILL (DEVELOPMENT) LTD

cacv 343 /2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 343 of 2005

(on appeal from HCIA NO. 8 of 2004)

______________________

BETWEEN

　 COMMISSIONER OF INLAND REVENUE Appellant
　 and 　
　 TAI HING COTTON MILL (DEVELOPMENT) LIMITED Respondent

Before: Hon Rogers, Tang VPP and Le Pichon JA in Court

Date of Hearing: 7-9 November 2006

Date of Handing Down Judgment: 22 December 2006

______________________

J U D G M E N T

______________________

Hon Rogers VP:

1. This is an appeal from a judgment of Deputy High Court Judge Poon given on 9 September 2005. The matter before the judge was an appeal by way of case stated dated 9 December 2004 in respect of the decision of the Board of Review. At the conclusion of the hearing of this appeal judgment was reserved which we now give.

Background

2. The taxpayer, Tai Hing Cotton Mill (Development) Ltd, is a wholly-owned subsidiary of Tai Hing Cotton Mill Ltd which will be referred to in this judgment as the parent company. The parent company’s business lay in the production of cotton. It had a cotton mill on what has been referred to as Site I. It had quarters and other buildings on what have been referred to as Sites II and III. It no longer wished to retain all the land but wished to have a new mill on Site III and to have Site II redeveloped together with Site I, once that Site had been cleared. To this end the parent company and the taxpayer entered negotiations with Hang Lung Development Company Ltd (“Hang Lung”) as to how that would take place. As summarised in paragraphs 11-13 of the case stated there were three agreements which were entered on 18 December 1987. These were as follows:

a) The Site I and Site II agreement. This was a sale and purchase agreement between the taxpayer and the parent company for the purchase of Sites I and II. The consideration for the sale of the land was identified in clause 2 as being:

i) payment of $346,309,452.06 and interest thereon;

ii) an obligation on the part of the taxpayer to build or procure the building of a new industrial building on Site III with construction costs of approximately $193 million;

iii) a further sum of $400 million which was to be subject to the taxpayer realising net profits of that amount together with an additional sum equal to 50% of any such profits realised by the taxpayer from the development of the properties. This aspect was termed “the Balance Consideration”. The Balance Consideration was to be paid only after finalisation of the audited development accounts.

b) There was then an agreement for the sale and purchase of Site III to another subsidiary of the parent company. That agreement apparently reserved the right to redevelop the land and committed the parent company to the obligation to build or procure the building of a new industrial building to be built on the Site.

c) The third agreement made on that day was between the taxpayer, Hang Lung and a subsidiary of Hang Lung which had been formed for the purpose of the development of the three Sites namely Stanman Properties Ltd (“Stanman”). This agreement was a joint venture agreement. Under this agreement Hang Lung agreed in principle with the taxpayer to procure the redevelopment and construction on Sites I and II of commercial and residential complexes to be known as Tai Hing Gardens and for the construction on Site III of the replacement industrial building. The industrial building was to be provided at no cost to the taxpayer. Stanman was to be the developer and would finance the costs, expenses and charges in carrying out and completing the development of the three Sites. The sales proceeds to be derived from the development would be applied first to reimburse the taxpayer and Stanman of the costs of the development and the balance would be shared between those two parties.

3. Over the course of the next 10 years or so the development of the Sites proceeded. The taxpayer paid the parent company various sums at various times in accordance with the provisions of the Site I and Site II agreement. In short there was an initial sum of $196,309,452 which had been paid in the period leading up to 18 December 1987. The remaining $150 million which formed part of the consideration referred to in 2 a) (i) above was not paid until February 1991. Over a period between September 1994 and November 1995 various payments were made which totalled $400 million. Then in March 1996, 1997 and 1998 3 payments were made which totalled $337,775,000.

The determination by the Commissioner

4. In his determination the Commissioner approached the matter on the basis that the market value for Sites I and IIas at 18 December 1987 had been a total of $800 million. Taking that into account and based on the fact that the audited accounts of the taxpayer ended 31 March 1989 had shown the land cost at $746,309,452 he said:

“In reality, I consider that the payments which exceed the market value of the two sites were not payments for the land but appropriation of the profits to THCML [the parent company] which the [taxpayer] derived from the development of the Tai Hing Garden. Therefore such payments made to [the parent company] being in the nature of appropriation of profits were not deductible under section 16 of the IRO.”

5. The determination then turned to section 61A of the Inland Revenue Ordinance (“the Ordinance”). In that respect it concluded that the purchase of the land by the taxpayer from the parent company on the terms which had been set out in the Site I and Site II agreement was a transaction which fell within the scope of section 61A namely that the sole or dominant purpose had been that of enabling the taxpayer either alone or in conjunction with others to obtain a tax benefit. The determination set out the various subsections of section 61A(1) and in doing so the Commissioner referred to the consideration as being “commercially unrealistic and grossly excessive”, the claim to deduction of the cost paid by the taxpayer as being “excessive payments for the sites” and the “purported sale of the land by THCML at an exorbitant price”. I would simply add that as far as this case is concerned there appears to have been no further reference to the sale of the land being “purported” and no further argument or suggestion to that effect has been advanced.

The Board of Review decision

6. Crucially important in the decision of the Board was the finding of fact that the consideration under the Site I and Site II agreement was “not excessive and was realistic from a business or commercial point of view”. The Board was well aware that there was agreement between the parties that the market value of the Sites as at 18 December 1987 had been $800 million. There were reasons why the Board was prepared to reach the conclusion that the consideration payable under the Site I and Site II agreement was not excessive and was realistic from business and commercial point of view.

7. One of the reasons referred to by the Board was the fact that in respect of the bulk of the consideration payable under clause 2 of the Site I and Site II agreement, namely, the Balance Consideration, no interest was payable at least until 60 days after finalisation of the audited development accounts.

8. Consideration also has to be given as to the circumstances that existed both in Hong Kong and elsewhere in 1987. There had been a state of flux since the early 1980s when the future of Hong Kong was under consideration. Thereafter, no doubt, there had been an appreciation in the value of land but it is a well-known fact that in October 1987 there had been a somewhat eratic fluctuation in stock market prices in many countries which has been referred to commonly as “Black Monday”. Whatever price might have been obtained for the Sites on the open market did not necessarily reflect the value of the Sites in the eyes of the management of the parent company. Clearly, the parent company intended not only to continue business but to do so in entirely new premises. There is no indication that the parent company would have been a willing seller at the open market price.

9. In relation to section 16 of the Ordinance the Board observed that no reference to section 16 had been made in the written submissions on behalf of the Commissioner. The simple finding by the Board was that once it had been decided that the consideration under the Site I and Site II agreement was not excessive and was realistic from a business or commercial point of view, section 16 could not assist the Commissioner.

10. In relation to section 61A the Board was careful to consider what was the impugned transaction. On the basis that it was the Site I and Site II agreement, the Board considered that no profit arose therefrom and in the absence of profit there was no question of a tax benefit. The Board went on to refer to the fact that it was the Site I and Site II agreement which gave the taxpayer the interest in the land without which it could not have entered the joint venture agreement with Hang Lung and Stanman and that it was the joint venture agreement which enabled the taxpayer to earn the profit which is the subject of this case. The Board had considered the effect of the Site I and Site II agreement in the context in which it had occurred, namely, the context of the two other agreements which were entered into on 18 December 1987 together with the background of the parent and taxpayer and set out their findings in paragraph 61, 62 and 63 of the case stated. In paragraph 92 it was said that:

“The Board’s overall conclusion was that the sale or dominant purpose was not the obtaining of a tax benefit....

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT