The DGIR must provide substantiated evidence for disregarding tax assessments; failure to do so undermines its claims.

Introduction

[1] This is an appeal (encl 1) by Ketua Pengarah Hasil Dalam Negeri, the Appellant (DGIR) against the Deciding Order of the learned Special Commissioners of Income Tax (SCIT) dated 15 May 2020 which allowed the Respondent's (Company's) appeal and set aside the Notice of Additional Assessment for the Year of Assessment (YA) 2010 and Notices of Assessment for YA 2011 and 2012 all dated 29 December 2014 respectively (collectively, Impugned Assessment) which have been issued by the DGIR pursuant to the adjustment made under s 140A of the Income Tax Act 1967 ( ITA ) .

[2] The particulars of tax in the Notice of Additional Assessment for YA 2010 and Notices of Assessment for YA 2011 and YA 2012 all dated 29 December 2014 are as follows:

[3] After the hearing, I dismissed the DGIR's appeal in encl 1 The grounds for my decision appear below.

Background Facts

[4] The facts of the case can be found in the grounds of the decision of the SCIT and reproduced below with suitable modifications:

"(a) In 2003, the Company borrowed USD 36,842,335.00 from Watson Labuan in order to acquire a substantial number of shares in Watson Malaysia;

(b) In 2012, the Company borrowed another USD 1,276,000.00 from Watson Labuan to finance the acquisition of shares;

(c) The amount of money borrowed from Watson Labuan is to be paid interest by the Company at the rate of 3% plus the London Interbank Offered Rate (LIBOR) on a yearly basis and the principal amount borrowed is to be paid on demand by Watson Labuan;

(d) In 29 July 2013, the DGIR requested information from the Company relating to cross border transactions for transfer pricing risk assessment purposes by completing Form MNE for YA 2010 and 2011;

(e) On 10 November 2014 the DGIR informed the Company that:

(i) The interest paid by the Company for money borrowed in YA 2010 to 2012 will be adjusted under s 140A of the ITA and rr 8(1)(b) and 8(2) of the Income Tax (Transfer Pricing) Rules 2012 (TP Rules) ; and

(ii) The interest paid by the Company for money borrowed is not allowed as a deduction because the money borrowed is not at arm's length transactions.

(f) On 29 December 2014, the DGIR gave reasons for the issuance of the additional assessments and the imposition of s 140A of the ITA as follows:

(i) The transaction is with an associated enterprise;

(ii) The non-repayment of the principal sum is contrary to art 9 of the Model Tax Convention on Income and on Capital;

(iii) The transaction is not based on terms that would have been agreed between independent parties; and

(iv) The whole transaction is ignored by the DGIR under s 140A of the ITA .

(g) Therefore, the Company filed notices of appeal against the DGIR's decision on 22 January 2015."

(h) On 15 May 2020, the SCIT handed its decision and allowed the Company's appeal. The DGIR then filed a Notice of Appeal dated 5 June 2020 against the SCIT's decision, thereby resulting in the present appeal.

The Law

[5] It is trite law that a decision of SCIT can be set aside if the decision is tainted with the error or misconception of law or the decision is not supported by the evidence before the SCIT.

[6] This principle of law has been succinctly explained in the case of Lower Perak Co-Operative Housing Society Bhd v. Ketua Pengarah Hasil Dalam Negeri , [1994] 2 MLJ 713, in the following manner:

"First of all, it would be pertinent to say that in consideration of this appeal we have kept in the forefront of our minds the much-quoted principles enunciated by Lord Radcliffe in Edwards v. Bairstow and Harrison, regarding the duty of the court when hearing appeals from commissio