Income from non-resident companies categorized as special classes of income under Section 4A(iii) of the Income Tax Act is subject to withholding tax in Malaysia, overriding DTA exemptions in absence of a permanent establishment.

[1] Lembaga Hasil Dalam Negeri Malaysia, ie the appellant made a decision vide a letter dated 21 May 2007 stating that pursuant to s 109B of the Income Tax Act 1967 (the Act), the respondent was required to withhold tax on payment of charter fees made by it to non-resident companies, which had no permanent establishment in Malaysia. Being dissatisfied with that decision the respondent filed at the High Court of Malaya for a judicial review to have that decision quashed by certiorari. It was successful, and the appellant being dissatisfied filed an appeal at the Court of Appeal but failed. The appellant then filed a successful leave application before us on the following question:

"Whether the time charter payment made by a resident company in Malaysia to non-resident companies in Singapore is subject to withholding tax under subsection 109B(1) of Income Tax Act 1967 ("the Act") read together with subsection 4A(iii) and 24(8) of the Act and therefore, such non-resident companies are not entitled for relief under art IV of the Agreement For the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Malaysia-Singapore) ("DTA")."

Background Facts

[2]The respondent is a private company resident in Malaysia, with its main activity being the owning of vessels, hiring and managing vessels with third party charterers, eg Petroliam Nasional Berhad. In the year of 1998 up to 2004 (the said period), being the period of the matter of the application for certiorari granted by the High Court, the respondent entered into "Uniform Time Charter Party for Offshore Service Vessels" contracts (UTC) with non-resident companies particularly from Singapore. These non-resident companies hired out vessels, services and crews to the respondent, and in consideration payments were made to them under the said UTC contracts. In the belief that these non-resident companies were in receipt of business income and being only subjected to Singapore laws (and covered by the avoidance of double taxation treaties), the respondent made full payment without any deduction of withholding tax under s 109B of the Act. This section provides for the statutory deduction of tax from payments made to non-residents for services rendered (the provision will be; reproduced later when we discuss the question for our determination in depth).

[3] There are certain indisputable facts in this appeal, amongst them being the want of dispute as to the status of the non-resident companies, the non-resident companies being from countries that have entered into double taxation treaties with Malaysia and having no permanent establishments in Malaysia (with the majority being from Singapore, ie 17 out of 22 companies). Further, parties are on common ground that the payments received by the non-resident companies from the respondent were charter fees for the time charter of ships and crews, and received as income by the non-resident companies. The tax to be withheld by the respondent was not that of the respondent's but of the recipient non-resident companies. It is indisputable that the High Court and the Court of Appeal concluded that the income of the non-resident companies derived from the charter hire of vessels and crew contracts was business income.

[4] We now touch on the antecedents which led to this appeal. Being desirous of listing the respondent company with Bursa Malaysia, and to avoid hiccups and pitfalls later, the respondent's tec