Taxpayer claims for deductions must be wholly and exclusively incurred for income production, and penalties for incorrect returns must be substantiated by valid claims.

Introduction

[1] This is an appeal against the decision of the High Court that dismissed the appeal of the Director General of Inland Revenue (the Revenue) and at the same time allowed the appeal of the taxpayer, ie ABTP Marketing Sdn Bhd (ABTP). Both appeals before the High Court were from the deciding order of the Special Commissioners of Income Tax (the SCIT) in respect of ABTP's appeal against additional assessment.

Background Facts

[2] The basic undisputed facts extracted from the judgment of the High Court and the grounds of decision of the SCIT are as follows.

[3] ABTP was appointed as the marketing channel for anti-bacterial triple-layer polymer water pipes for another company, namely ME-Plas (M) Sdn Bhd (ME- Plas). The issues before the SCIT and High Court centred on the claims for deductions by ABTP for the Years of Assessment (YA) 2010, 2011 and 2012.

[4] The complex business relationship between ABTP and ME-Plas worked this way. ABTP purchased two PVC mixing machines and placed them in ME-Plas's premises. ABTP purchased raw materials from a third party for the manufacture of the anti-bacterial compounds. It then supplied the said raw materials to ME-Plas which mixed the same into anti-bacterial triple polymer compounds for ABTP. ME-Plas charged ABTP for mixing the compounds through debit notes. ME-Plas then purchased the compounds from ABTP and manufactured the anti-bacterial polymer pipes (also known as "AB-3P pipes"). ABTP as the marketing channel company purchased the said pipes from ME- Plas.

[5] The arrangement between the parties contained the following stipulations as reflected in the Authorisation Letter signed by both parties.

(i) ABTP shall achieve a minimum of 2,000 tons of the AB-3P pipes purchase orders per year.

(ii) If ABTP fails to make a minimum order of 2000 tons per year/1000 tons per every 6 months, ABTP will be charged by ME-Plas, a factory original equipment manufacturer (OEM) surcharge on the difference (the OEM surcharge).

[6] Arising from the above arrangement, ABTP made a number of claims for deduction for YA 2010, YA 2011 and YA 2012. After an audit made in 2014, the Revenue raised additional assessment for the same years in respect of the said claims The Revenue also imposed a penalty under s 113(3) of the Income Tax Act . ABTP appealed to the SCIT. The appeal was partially allowed.

[7] The claims for deduction decided by the SCIT and the High Court involved the following issues:

(a) Whether the claim for deduction of the OEM surcharge via two debit notes of RM544,150.00 and RM255,845.79 can be allowed;

(b) Whether the Research and Development (R&D) expenditure of RM226,651.55 for the YA 2011 and 2012 is an allowable deduction under s 34(7) of the ITA ?

(c) Whether the upkeep or repair and maintenance in the sum of RM100,000.00 in the areas of ME-Plas's factory where the mixing machines owned by ABTP are placed is an allowable deduction;

(d) 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 are allowable deductions. These items include (i)commission paid for purchase of raw materials including bankers' acceptance commission, (ii) interest incurred on money borrowed, (iii) director's remuneration, (iv) labour charges and (v) sales commission;

(e) Whether the capital allowance and hire purchase interest for the machinery owned by ABTP that was placed in ME-Plas's factory in the sum of RM353,521.00 for YA 2010, 2011 and 2012 can be deducted;

(f) Whether penalty