The Director General of Inland Revenue acted within jurisdiction under section 140A of the Income Tax Act, and the High Court's intervention was unwarranted given the alternative remedy available.

[1] This is an appeal by the Director General of Inland Revenue ("DGIR") against the decision of the learned High Court Judge dated 3 May 2021 in allowing the Respondent's application to quash the decision of the DGIR.

[2] The decision of the DGIR is in respect of the notice of additional assessment dated 22 July 2020 and the audit findings dated 23 October 2019, 30 January 2020 and 22 June 2020 for the assessment for Year of Assessment ("YA") 2012 - 2017. These are based on the DGIR's decision to make adjustments on the Respondent's transaction with Ensco Labuan Limited under s 140A of the Income Tax Act 1967 (" ITA ").

[3] Having considered the Appeal Records and the submissions of all parties, we have allowed the DGIR's appeal and these are the grounds for our decision.

Salient Facts

[4] The respondent is a private limited company incorporated in Malaysia on 29 July 1994, and is primarily involved in the business of providing offshore drilling services, including leasing of drilling rigs to oil and gas operators in Malaysia.

[5] From the Transfer Pricing Document ("TP Document") of the Respondent, it shows that the Respondent is wholly owned by a United States based company, ENSCO Oceanics Company LLC. The legal structure of the Ensco Group of Companies includes both the Respondent and Ensco Labuan Limited ("ELL"). From para 5.1 of the TP Document, both the Respondent and ELL are affiliates within the Esco Group:

"5.1. Legal Structure

EGMSB is 49% owned by EOCL, a company incorporated in the USA. The ultimate holding company of the Group is Ensco Plc (EPLC), which undertakes its operation through numerous affiliate within the group.

The legal ownership structure of EGMSB during the period under review, mapping out the linkage with its related party companies (ie companies within the ENSCO Group) is shown below:

[6] In para 5.4 of the TP Document, the operations of Ensco Group of companies in Malaysia are conducted via the Respondent and other related companies:

"5.4. Business activities of EGMSB

The Ensco Group's operations in Malaysia are conducted via EGMSB, a Malaysia resident company.

The overview of EPLC's operational arrangement in each drilling operation as explained earlier, in relation to EGMSB and the drilling operations in Malaysia, is depicted in the diagram below:

[7] In order to provide the services to the oil and gas operators in Malaysia, the Respondent entered into a Master Charter Agreement dated 21 September 2006 (amended on 17 August 2011) ("Master Charter Agreement") with ELL, to lease drilling rigs from ELL. The Respondent then rents out the drilling rigs to its own customers.

[8] As part of the Master Charter Agreement, the Respondent agreed to pay ELL a percentage of the applicable day rate that the Respondent earns from its drilling contracts with its customers for the drilling rigs.

[9] By way of a letter dated 12 October 2018, the DGIR initiated its audit on the Respondent for the YA 2015 to 2017. The DGIR requested for further and specific information and documents from the Respondent during the course of the audit. The Respondent had duly complied with the DGIR's requests.

[10] The DGIR issued its first audit findings in a letter on 23 October 2019 where it took the position that the pricing of the leasing transactions between the Respondent and ELL is not at arm's length pursuant to s 140A of the ITA . The DGIR proposed that the profit earned by ELL should remain with the Respondent by reducing the cost of the leasing asset by 20% or equivalent to the margin obtained by ELL.

[11] The respondent responded via two (2) letters dated 22 November 2019 and 3 December 2019.

[12] Via a letter dated 30 January 2020, the DGIR issu