The Hon Fok J upheld the appeal by the Commissioner of Inland Revenue (“the Commissioner”) to the Court of First Instance in the case of Commissioner of Inland Revenue v CG Lighting Limited (HCIA8/2009).
I suspect that Mr Yu, SC, leading counsel for the Commissioner, was as surprised as anyone to have succeeded at the Court of First Instance, particularly as The Hon Fok J did not find for the Commissioner on its principal submission, i.e. that because the taxpayer had acquired products from its subsidiary by way of a purchase and sale agreement, as opposed to a process manufacturing agreement, the Board of Review should have focused only on the sale of goods in determining the geographical location of the Taxpayer’s profit-producing transactions. Instead, The Hon Fok J agreed with Mr Yu’s subsidiary submission that the Taxpayer’s involvement with the manufacturing process, conducted by the Taxpayer’s subsidiary (CGES), was antecedent or incidental to the source of the Taxpayer’s profits. The Hon Fok J stated:
“Once it is accepted that the manufacturer of the lighting fixtures was CGES and not the Taxpayer and that CGES was not the agent of the Taxpayer in the manufacturing process, I do not see that it is possible to avoid the conclusion that the activities of the Taxpayer in relation to the manufacturing process itself are simply antecedent or incidental to the profit-producing transactions here.”
And later:
“Instead, the transactions which produced the profits for the Taxpayer were the sales of the finished products to its customers. Those sales were effected in Hong Kong and so the profits deriving from the sales are chargeable under s.14.”
He concluded:
“I am satisfied that, even though there was not a sale of the finished products by CGES to the Taxpayer, the fact remains that the Taxpayer did not manufacture the finished goods and only had them transferred to it pursuant to the sub-contracting arrangements between it and CGES. On analysis, I conclude that the profit-producing transactions of the Taxpayer consisted of the acquisition of the finished goods from CGES, for which the Taxpayer paid a processing fee under the Processing/Subcontracting Agreement in respect of the manufacture of the goods by CGES, and the on-selling of the same to its customers.”
I sincerely hope that this case will be appealed to the Court of Appeal, although I suspect it is destined to proceed ultimately to the Court of Final Appeal. The grounds for the appeal are likely to be comprehensive, and will, I hope, address such issues as:
- the manner in which the Board of Review’s decision has been interpreted;
- the application of previous decisions to this case, in particular the identification of those activities that were responsible for generating the profits of the taxpayer;
- the conclusion that the Taxpayer’s involvement in the manufacturing process was antecedent or incidental;
- the characterisation of the Taxpayer as a trader, notwithstanding the contrary presentation in audited accounts, and
- the failure to consider the legal aspects of whether CGES acted as an agent for the Taxpayer etc.
It will be interesting to follow this case through the appeal procedure, and I also hope the decision by the Court of Appeal in the case of CIR v Datatronic [2009]4 HKLRD 756 will be reviewed. Until this case has reached its final conclusion, it is unlikely that those cases with similar facts, and which are currently under objection or appeal, will be decided.
