1. SEIWA PODOYO SDN BHD V KPHDN (COURT OF APPEAL
Brief Facts
The Taxpayer has been in the business of manufacturing, assembling, and trading plastic injection-moulded products since 1993. In 2008, the appellant decided to diversify its business into plastic casings for ink cartridges. Thus, in 2009, the Taxpayer purchased new machinery and equipment for that purpose and claimed reinvestment allowance ("RA") on the capital expenditure incurred. However, in 2015, the IRB disallowed the Taxpayer's RA claims in YA 2009 and raised an additional assessment for YA 2010 in 2015. The IRB's basis for raising the additional assessment is that, based on the IRB's public ruling, the taxpayer's expenditure does not fall within the meaning of 'diversifying' under Schedule 7A of the Income Tax Act 1967.
IRB's position:
a) The notice of assessment dated 25.6.2015 was issued for YA 2010 and not YA 2009. There was no assessment raised for YA 2009. As such, the notice of assessment was issued within timebar period of 5 years.
b) The IRB's act of disallowing RA for YA 2009 does not constitute an 'assessment' pursuant to Section 93 of the ITA.
c) The Taxpayer was negligent because it had made a declaration of compliance with public rulings in its Form C when it did not (according to the IRB). Public Rulings have the force of law.
d) The Taxpayer is only entitled to claim RA under the category of "diversifying" provided that the Taxpayer continues to produce its existing product, i.e., plastic components for the automotive sector. The Taxpayer in this case ceased production of its existing product and disposed of the machinery for the production of the existing product. Following from that, the Taxpayer did not "diversify" under Schedule 7A of the ITA.
Taxpayer's position:
a) A taxpayer's eligibility for RA must be determined for the YA in which the expenditure is made. Any adjustment by the IRB must be made to the year of assessment in which the RA was claimed. Therefore, the time-bar is calculated from the year where the RA was claimed, and not the year the assessment was issued. The assessment was time-barred pursuant to Section 91(1) of the ITA.
b) The IRB's act of disallowing RA claimed in YA 2009 is an assessment and attracts the application of Section 91(1) i.e., limitation period. The superior courts have held that "assessments" do not refer to the papers or notices issued by the IRB. An assessment is the official act or operation of the IRB to determine the taxes payable. In fact, past cases have shown that the IRB themselves have taken the position that an assessment is not confined to a notice.
c) Public Rulings issued by the IRB are merely the IRB's own interpretation of the statutes, have no force of law and are not binding on the taxpayers. In fact, Section 138A(3) allows taxpayers the choice of whether to apply public rulings or otherwise. If the taxpayers choose to apply the public rulings, the IRB is estopped from not complying with their own Public Rulings. Further, Public Rulings cannot in any way adversely modify or restrict tax incentives granted by Parliament through primary legislation to taxpayers. When there is doubt or ambiguity on whether a taxpayer is entitled to claim for tax incentive, the law is to be read liberally in the taxpayer's favour.
d) In adopting a purposive approach in interpreting the ITA and looking at the wordings used as well as giving the ordinary meaning to the word, it is clear that 'diversify' includes not only enlarging the number of products, but also changing the type of products produced. The IRB's contention that the Taxpayer must continue to maintain an existing product while creating an additional product is therefore erroneous. There is also no specific requirement in the ITA that a Taxpayer must maintain its existing product while diversifying into a new product to be eligible for RA.
e) The IRB must provide reasons when imposing a penalty. Further, penalties should not be imposed when the dispute arises as a result of a technical adjustment (i.e., a difference in interpretation of legislation between the Taxpayer and the IRB).
The High Court's Findings:
Upon evaluation of the relevant statutory provision and authorities, the High Court held that:
a) A public ruling cannot in any way adversely modify or restrict tax incentives granted by Parliament through primary legislation to taxpayers. When there is doubt or ambiguity on whether a taxpayer is entitled to claim a tax incentive, the law is to be read liberally in the taxpayer's favour.
b) The phrase "diversifying" must be understood in its plain and ordinary meaning, which is to "enlarge or vary its range of products or field of operation." In adopting a purposive approach in interpreting the ITA and considering the wordings used as well as giving the ordinary meaning to the word, it is clear that "diversify" includes not only enlarging the number of products, but also changing the type of product produced. The IRB's contention that the Taxpayer must continue to maintain an existing product while creating an additional product is therefore erroneous. The definition of "diversifying" cannot be restricted to only enlarging the number of products because to "diversify" means to "enlarge or vary its range of products", which is exactly what the Taxpayer has done.
c) The diversifying activity undertaken by the Appellant is an activity within its core business activity of plastic injection moulding. The two products are clearly related by virtue of having the same raw material and manufacturing process within the plastic injection moulded products industry.
d) Based on the Budget Speech 1991, RA is "given on reinvestments in related products." There is no requirement or limitation that the "related product" in question must be "additional or new" in relation to an "existing" product. RA will also be given for expansion, modernisation, and diversification activities undertaken by a manufacturing company to diversify their products. It is further clear that there is no indication whatsoever that the intention of Parliament in introducing RA is to encourage companies in Malaysia to only expand or enlarge their production and not to vary their production activities as submitted by the IRB. It is also apparent from the Budget Speech 1991 that that the government had decided to widen the scope of RA to not only encourage companies in Malaysia to expand or enlarge their production but also to diversify their products.
e) Each word in a statute must be given significance. As such, it cannot be said that "diversifying" has the same meaning with "expanding". It is clear that Parliament had intended to allow RA for both circumstances of expanding production and diversification products.
f) The SCIT had erred in dismissing the Taxpayer's appeal on the premise of the Appellant's non-compliance with the Public Ruling when the Public Ruling has no force of law.
g) The fact that the Appellant had carried forward the unutilised RA claimed in YA 2009 to YA 2010 does not mean that YA 2010 may be adjusted. Any adjustment must be made to the year of assessment in which the RA was claimed, and in the present matter, it was YA 2009.
h) Section 91(1) of the ITA allows the IRB to lift the time bar if there was fraud, negligence, or wilful default. However, the IRB had failed to allege nor prove fraud, negligence, or wilful default despite the burden being placed on the IRB to do so.
i) In any event, the SCIT should not have found that the Appellant was negligent as the issue of "negligence" was not contended or raised by the Revenue. It is trite law that the court is not entitled to decide on an issue not raised by the parties. Any decision based on issues not raised should be set aside on appeal. Further, the legislation does not give the SCIT suo moto jurisdiction to apply Section 91(3) of the ITA when the Revenue has not sought to apply it.
The Court of Appeal's Decision:
The Court of Appeal dismissed the IRB's appeal and unanimously ruled in favour of the Taxpayer.
The Court of Appeal further indicated that a written grounds of judgment will be provided. Pending further written grounds by the Court of Appeal, this decision will be one of the landmark tax cases for taxpayers as it addresses common issues often encountered when assessments are issued by the DGIR, such as time-barred assessment, reinvestment allowance, and penalties.
To view the full article, click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
