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2023 MarsdenLR 2482
HIGH COURT MALAYA KUALA LUMPUR
KETUA PENGARAH HASIL DALAM NEGERI – Appellant
Versus
SANDAKAN EDIBLE OILS SDN BHD – Respondent
[Civil Appeal No: WA-14-2-02/2021]
The Revenue cannot adjust taxpayer profits to the median point under transfer pricing if profits fall within the interquartile range, per OECD Guidelines.
Headnote:Section 140A of the Income Tax Act 1967 (ITA) provides the framework for determining transfer pricing adjustments by requiring the application of arm's length pricing standards. The special commissioners evaluated evidence from both parties, resulting in a finding that the Revenue's adjustment to the taxpayer’s profits to the median point was unfounded as the taxpayer's profits were already within the interquartile range. The court reaffirmed the SCIT's findings, which explicitly noted there was no legal basis for the Revenue's actions. Key issues analyzed include adherence to OECD Guidelines for transfer pricing. The ruling concluded that the appeal was dismissed and previous assessments set aside due to lack of substantiated claims by the Revenue.
| Table of Content |
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| 1. adjustment to taxpayer profits must be substantiated by compliance with established pricing guidelines. (Para 1 , 3 , 4 , 8) |
| 2. taxpayer's right to appeal against unjust assessments must be preserved under tax law. (Para 2 , 18 , 20 , 22) |
| 3. exchange of information and documentation is essential in tax audits. (Para 9 , 10 , 11) |
| 4. revenue must show evidence of transfer pricing practices to justify profit adjustments. (Para 30 , 35 , 39) |
| 5. penalties require evidence of intent to misreport or understate income. (Para 72 , 80 , 81) |
Introduction
[1] This is an appeal (Enclosure 1) by the Appellant, the Director General of Inland Revenue (Revenue) against the decision of the Special Commissioners of Income Tax (SCIT) delivered on 4 February 2021 setting aside the notice of additional assessment (Form JA) dated 1 August 2017 for the year of assessment (YA) 2010 against the Respondent (Taxpayer) pursuant to an adjustment made by the Revenue under s 140A of the Income Tax Act 1967 ( ITA ) which deals specifically with transfer pricing.
[2] The particulars of tax in the Notice of Additional Assessment dated 1 August 2017 for YA 2010 are as follows:
(Reference: Rekod Rayuan Tambahan (Bahagian A, Jilid 2) at pages 300 and 303)
[3] Central to the issue under appeal is whether the adjustment of the Taxpayer's profit to the median point by the Revenue in determining the arm's length price is in accordance with s 140A of the ITA and the Income Tax (Transfer Pricing) Rules 2012 [P.U (A) 132/2012] (the Rules).
[4] After the hearing, I dismissed the Revenue's appeal (Enclosure 1). The grounds for my decision appear below.
Background Facts
[5] The narration of the background facts herein is adopted with and/or without modification from the Statement of Facts of both parties and the grounds of judgment of the SCIT.
[6] The Respondent (Taxpayer) is a company incorporated in Malaysia with an office address at KM 8, Jalan Batu Sapi, 90009 Sandakan, Sabah.
[7] The Taxpayer's principal activity is, amongst others, to carry out the refining and sale of edible oils and related products, and the packaging and sale of cooking oil.
[8] On 13 March 2014, the Taxpayer through its tax consultants Messrs Ernst & Young Tax Consultants Sdn Bhd (EY) submitted its Transfer Pricing Documentation for the fiscal years ended 31 December 2010 to 31 December2012 (the 2012 TP Report) to the Revenue.
[9] Subsequently, on 11 December 2014, the Taxpayer through EY submitted an addendum to the TP Report to the Revenue to cover 31 December 2013.
[10] Pursuant to a letter dated 12 December 2015, the Revenue commenced an audit against the Taxpayer on 16 March 2015.
[11] Since 16 December 2015, the Taxpayer and Revenue exchanged various correspondences through which the Taxpayer had provided various documents, information and explanations to the Revenue. Amongst others, the Taxpayer through EY provided various supporting documents and explanations through EY's letters dated 16 February 2015, 17 April 2015 and 24 April 2015.
[12] Vide its letter dated 30 November 2016, the Revenue requested that the Taxpayer prepare a benchmarking analysis for the years under audit i.e. for the YAs 2010 to 2013 by making a comparison with refinery companies operating in Malaysia.
[13] Vide a letter by EY dated 10 March 2017, the Taxpayer through EY submitted the benchmarking analysis as requested by the Revenue. Amongst others, the Taxpayer suggested four (4) comparable companies for the purpose of the benchmarking analysis.
[14] Vide its audit findings letter dated 17 May 2017, amongst others, the Revenue proposed a list of nine (9) comparable companies for the purpose of the benchmarking analysis.
[15] Vide a letter by EY dated 30 June 2017, the Taxpayer through EY replied to the Revenue's letter dated 17 May 2017. Amongst others, the Taxpayer rejected three (3) of the proposed comparable companies by the Revenue, including Intercontinental Specialty Fats Sdn Bhd (Intercon
