2010 MarsdenLR 846

AZIAH ALI
ALCATEL-LUCENT MALAYSIA SDN BHD & ANOR – Appellant
Versus
KETUA PENGARAH HASIL DALAM NEGERI – Respondent

The court ruled that payments for services performed outside Malaysia are not subject to withholding tax as royalties under the Income Tax Act, emphasizing the requirement for clear reasoning in tax assessments.

Headnote:(A) Income Tax Act, 1967 - Sections 109 and 109B - Withholding tax audit - Payments made for services performed outside Malaysia challenged as being subject to withholding tax; respondent failed to provide adequate reasoning for tax assessment. (Paras 2 and 3)

(B) Judicial Review - Applicants sought to quash respondent's decision that payments were royalties subject to withholding tax. Court found the respondent failed to apply relevant legal principles and did not adequately consider the nature of the payments. (Paras 18 and 19)

(C) Unreasonableness of Decision - The court held the respondent's decision was unreasonable as it applied withholding tax incorrectly under both sections without clear justification, leading to a violation of procedural fairness. (Paras 8 and 20)

Facts of the case:
The applicants were subjected to withholding tax assessments from the respondent for payments made to a service provider related to telecommunication services, contending these payments were not royalties and thus not subject to tax.

Findings of Court:
The court found that the payments were for services and not royalties, quashing the respondent's decision as unreasonable.

Issues: The main issues involved the lack of clear reasoning for the withholding tax decision and whether the payments qualified as royalties under the ITA.

Ratio Decidendi: The court held that without clear justification from the respondent, requiring tax withheld was unreasonable and contrary to principles of natural justice.

Result: Application allowed with costs.