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2022 MarsdenLR 1475
HIGH COURT MALAYA KUALA LUMPUR
ABTP MARKETING SDN BHD – Appellant
Versus
KETUA PENGARAH HASIL DALAM NEGERI – Respondent
[Civil Appeal No: WA-14-53-12/2020]
Expenses must be 'wholly and exclusively' incurred in income production to qualify for tax deductions, with penalties not applying in cases of differing interpretations of tax provisions.
Headnote:(A) Income Tax Act 1967 – Sections 33(1) and 34(7) – Deductions – The Special Commissioners of Income Tax disallowed various deductions claimed by ABTP Marketing Sdn Bhd including OEM surcharges, repair, maintenance costs, and commissions. ABTP’s claims for Research and Development were partially accepted. The court outlines the principles for deduction eligibility, emphasizing that expenses must be ‘wholly and exclusively’ incurred in the production of income. (Paras 15, 30, 37, 72)
(B)
Penalties – The court ruled that penalties imposed lacked merit as there was no evidence of incorrect reporting by ABTP and differing interpretations of tax provisions do not constitute tax evasion. (Paras 68, 71)
Facts of the case:
ABTP incurred various costs associated with the production of AB-3P pipes and sought deductions, which the SCIT allowed partially.
Findings of Court:
The court found most deductions were consistent with the Income Tax Act provisions.
Issues
: The main issues pertained to the deductibility of surcharges, R&D expenditures, and penalties imposed on ABTP.
Ratio Decidendi:
The court clarified interpretations of allowable deductions under the Income Tax Act, rejecting excessive penalties as no wrongdoing was proven.
Result:
ABTP's appeal allowed; Revenue's appeal dismissed.
JUDGMENT
[1] On 21 May 2018, the Special Commissioners of Income Tax (the "SCIT") partially allowed the Appellant, ABTP Marketing Sdn Bhd's ("ABTP") appeal against notices of additional assessment for the years 2010, 2011 and 2012. Both ABTP and the Respondent ("Revenue") are appealing against that decision, which forms the subject matter of this instant appeal.
Salient Facts
[2] ABTP is in the business of trading anti-bacteria triple layer polymer water pipes.
[3] ABTP was appointed to be the exclusive marketing channel for anti-bacterial triple layer polymer water pipes ("AB-3P pipes") for another company, ME-Plas (M) Sdn Bhd ("ME-Plas").
[4] The authorization letter signed by ME-Plas and ABTP ("Authorisation Letter") stated that:
i. ABTP shall achieve a minimum of 2,000 ton of AB- 3P pipes purchase orders per year.
ii. If ABTP fails to make a minimum order of 2,000 ton per year /1,000 tone per every 6 months, ABTP will be charged by ME-Plas a factory OEM surcharge on the differences ("OEM surcharge");
[5] In 2010, ABTP had incurred an amount of RM544,150.99 and RM255,845.79 via 2 debit notes of times for the OEM surcharge, since it failed to make the minimum order under the Authorisation Letter.
[6] ABTP then claimed deduction for the Research and Development ("R&D") expenditure of RM226,651.55 for Year of Assessments ("YA") 2011 and 2012 under s 34(7) of the Income Tax Act 1967 (" ITA "). The R&D activities incurred were undertaken by ME-Plas to generate revenue for ABTP.
[7] ABTP had incurred expenditure in acquiring 2 units of PVC mixing machine for mixing the raw materials to produce AB-3P compounds.
[8] The PVC mixing machine was placed at the factory of ME-Plas and operated by ME-Plas for ABTP's business to process the raw materials into AB-3P compounds. In other words, the PVC mixing machines were operated by ME-Plas' staff for the production of income for ABTP.
[9] ABTP does not have staff to operate the PVC mixing machine.
[10] ABTP has claimed tax deduction for Repair and Maintenance costs of RM100,000 which it incurred in YA 2012.
[11] ABTP paid commission to a third party for the purchase of raw materials which were provided to ME-Plas. The commission paid was interest imposed for the credit facilities of third parties which were utilised by ABTP to purchase raw materials.
The Issues
[12] The consolidated issues and the SCIT's decision which are being appealed herein are as follows:
(a) 1st Issue: whether the OEM surcharge of RM799,996.78 for the YA 2010 should be allowed for deductions pursuant to s 33(1) of the ITA ;
SCIT's decision: Deduction for surcharge is not allowed because it is a penalty imposed on ABTP's failure to achieve the minimum order.
(b) 2nd Issue: whether the R&D expenditure of RM97,434.95 for YA 2010 and RM129,219.60 for YA 2011 should be allowed for deductions pursuant to s 33(1) of ITA . SCIT's decision: Deduction for R&D is allowed.
(c) 3rd Issue: whether the upkeep or repair and maintenance of the loading/unloading and mixing areas of RM100,000 for YA 2012 should be allowed for deductions pursuant to s 33(1) of ITA .
SCIT's decision: Deduction for upkeep or repair and maintenance is not allowed.
(d) 4th Issue: whether the commission and interest of RM660,904.84 for YA 2012, RM151,435.37 for YA 2011 and RM25,849.75 for YA 2010 should be allowed for deductions pursuant to s 33(1) of ITA . These items include commission paid for purchase of raw materials, interest incurred on money borrowed, banker's acceptance commission, director's remuneration, labour charges, and sales commission.
SCITs decision: Deduction for commission paid for purchase of raw materials and bankers commission is not allowed.
Deduction for interest of 5% on loans to ABPT, director's remuneration, and labour charges are allowed.
(e) 5th Issue: whether the capital allowances and hire purchase interest of RM353.521 for YAs 2010, 2011 and 2012 should be allowed for deductions pursuant to para 10 and 15 of Schedule 3 and s 33(1)
