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Lam Soon Trademark Ltd v The Commissioner Of Inland Revenue

Judgment Cited authorities 2 Cited in Precedent Map Related
Vincent
Judgment Date02 September 2005
Year2005
Citation[2005] 4 HKLRD 652
Judgement NumberCACV279/2004
Subject MatterCivil Appeal
CourtCourt of Appeal (Hong Kong)
CACV279/2004 LAM SOON TRADEMARK LTD v. THE COMMISSIONER OF INLAND REVENUE

CACV 279/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 279 OF 2004

(ON APPEAL FROM HCIA NO. 2 OF 2004)

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BETWEEN

LAM SOON TRADEMARK LIMITED Appellant
and
THE COMMISSIONER OF INLAND REVENUE Respondent

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Before : Hon Stock JA, Le Pichon JA and Yuen JA in Court

Date of Hearing : 15 June 2005

Date of Judgment : 2 September 2005

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JUDGMENT

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Hon Stock JA:

Introduction

1. The issue in this appeal is one of construction of sections 14, 15(1)(b) and 60 of the Inland Revenue Ordinance Cap. 112. It comes before us on appeal from the decision of Tang J (as he then was) dated 6 August 2004 before whom a Case was stated by the appellant against the Board of Review’s confirmation of the respondent’s additional tax assessments for the years of assessment 1990/1991 to 1993/1994 inclusive. Those additional assessments were in respect of royalty income derived by the appellant from licensing the use of trademarks to its related companies.

2. For the purposes of this appeal, we can conveniently take the essential facts from the introductory paragraphs of the judgment below:

“ 2. The appellant is part of the well-known Lam Soon Group of Companies. It was incorporated in December 1987 in the Cook Islands with an issued and paid up capital of US$2. Between December 1987 and October 1990, the appellant was a subsidiary of Lam Soon Hong Kong Limited (“LSHK”). In October 1990, it became a subsidiary of Lam Soon Food Industries (BVI) Limited (“LSF-BVI”). LSF-BVI was in turn wholly-owned by Lam Soon Food Industries Limited (“LSFI”). LSFI became a listed company in Hong Kong in July 1991. LSFI was incorporated in Bermuda and in turn was a subsidiary of LSHK. LSHK was incorporated on 13 May 1961 and is also listed in Hong Kong. Some of its brand names, such as “Knife” and “Axe” are well-known in Hong Kong.
3. As the Board has held and it is uncontroversial ‘At all relevant times, the principal activities of the Appellant were the acquisition of trademarks and the granting of licences to use the trademarks in return for royalty income.’”

3. We are in this appeal concerned with only one aspect of the learned judge’s judgment, namely, that which related to the power of the Commissioner to make a reassessment under section 14(1) of the Ordinance when a final assessment had already been made by invocation of the provisions of section 15(1) of the Ordinance.

The statutory provisions

4. Section 15(1)(b) provides as follows:

“ (1) For the purposes of this Ordinance, the sums described in the following paragraphs shall be deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong -
(a) ….
(b) sums, not otherwise chargeable to tax under this Part, received by or accrued to a person for the use of or right to use in Hong Kong any patent, design, trademark, copyright material, secret process or formula or other property of a similar nature, or for imparting or undertaking to impart knowledge directly or indirectly connected with the use in Hong Kong of any such patent, design, trademark, copyright material, secret process or formula or other property;
… .”

5. Section 21A of the Ordinance, as it stood at the years of assessment with which we are concerned – it has since been amended – then read as follows:

“The assessable profits of a person arising in or derived from Hong Kong in respect of a sum deemed by section 15(1)(a) or (b) to be a receipt arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong shall, for the purposes of this Ordinance and notwithstanding any other provisions of this Part, be taken to be 10 per cent of such sum.”

6. Section 60(1) of the Ordinance provides that:

“ Where it appears to an assessor that for any year of assessment any person chargeable with tax has not been assessed or has been assessed at less than the proper amount, the assessor may, within the year of assessment or within 6 years after the expiration thereof, assess such person at the amount or additional amount at which according to his judgment such person ought to have been assessed, and the provisions of this Ordinance as to notice of assessment, appeal and other proceedings shall apply to such assessment or additional assessment and to the tax charged thereunder:
Provided that-
(a) (Repealed 2 of 1971 s. 39)
(b) where the non-assessment or under-assessment of any person for any year of assessment is due to fraud or wilful evasion, such assessment or additional assessment may be made at any time within 10 years after the expiration of that year of assessment.”

7. Section 14 stipulates that:

“ (1) Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part.
(2) In the case of-
(a) a corporation; and
(b) a corporation ("relevant corporation") to which a share of the assessable profits of a partnership is apportioned under section 22A and is charged in the partnership name under section 22,
profits tax shall be charged on the assessable profits of that corporation, or on that share of the assessable profits of that relevant corporation, as the case may be, at the rate specified in Schedule 8.”

The assessments and the objection

8. The appellant company was established in the Cook Islands to hold trademarks, and its business was the licensing for use in Hong Kong of intellectual property owned by the appellant. The income with which we are concerned is the royalty income that was derived from that licensing. By invocation of the provisions of sections 15(1)(b) and 21A, a series of assessments were raised in the name of Hong Kong resident companies on the appellant’s behalf (see section 20B). No objection was taken to any of those assessments and accordingly, under section 70 of the Ordinance, they became “final and conclusive.” Subsequently, however, the assessor concluded that the appellant had been carrying on business in Hong Kong and should be the subject of an additional assessment under sections 14 and 60 of the Ordinance and, accordingly, in March 1997 raised additional profits tax assessments.

9. The appellant objected against those additional assessments, but the Commissioner confirmed them and there was an appeal to the Board of Review against the determination to confirm. When the matter came before the Board, it heard testimony and concluded that the appellant had in fact carried on a business in Hong Kong; and that the royalty receipts in respect of the years of assessment constituted profits arising in or derived from Hong Kong. That aspect of the determination, canvassed again before Tang J, is not part of this appeal. It is the legality of the re-assessment that is the subject of this appeal.

10. The question in the Case stated was put thus:

“ 51. Whether upon the evidence before the Board and in all the circumstances of the case the Board erred in law by holding that the royalties having already been charged to Profits Tax under section 15(1)(b) of the Ordinance could further be charged with Profits Tax under section 14 of the Ordinance:”.

The judge at first instance held that the additional assessment was lawfully raised.

The argument

11. The appellant’s argument, broadly put, is that:

1) The amounts charged to profits tax by application of the deeming provision of section 15(1)(b) on receipt of sums paid for the use of intellectual property in Hong Kong is calculated in accordance with the provisions of section 21A; which, according to its terms at the relevant time, was at the rate of 10% of the sums thus deemed to be a receipt arising or derived from Hong Kong from a trade, profession or business carried on in Hong Kong.
2) The assessments became, in the absence of objection, final and conclusive (section 70).
3) Section 60 only permits an additional assessment where either the taxpayer has not previously been assessed or where the taxpayer “has been assessed at less than the proper amount”.
4) Inasmuch as the taxpayer in this case had been previously assessed, section 60 could not be invoked.
5) There had been no assessment at less than the proper amount, for that amount was the full amount assessable under the provisions which the assessor chose to invoke in making his original assessments. The statute conferred no power upon the assessor to cancel or withdraw the original assessments, nor any power to issue substitute assessments. Upon the original assessments, the taxpayer stood assessed upon the basis that the royalty receipts were not otherwise chargeable to tax; that is to say, on the footing that the royalty receipts were not in fact profits arising in or derived from Hong Kong.

Analysis

12. I do not agree with this argument. It seems to me that the effect of section 60 is clear, in that the question to be asked by the Commissioner is whether or not the taxpayer...

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