The Dispute Emerges
In the world of maritime logistics, a prominent shipping company found itself in troubled waters, facing tax assessments for the Years of Assessment (YAs) 2014 to 2016. The issue? The tax authorities challenged whether the company’s transactions with its associated entity, Eagle High (L) Limited (EHLL), adhered to the arm’s length principle under Section 140A of the Income Tax Act 1967 (ITA).
At the heart of the dispute were fees for charter hire and crew management services. The tax authorities alleged that the company’s markup rates, pegged at 35%, were not at arm’s length and that its transfer pricing methodology was flawed. The company, however, argued that the Director General of Inland Revenue (DGIR) had acted arbitrarily.
The Storm Brews
“This assessment is baseless,” the taxpayer’s counsel argued passionately. “The DGIR failed to specify which provisions were relied upon during the audit. Furthermore, EHLL is governed by the Labuan Business Activity Tax Act 1990 (LBATA), where the arm’s length principle was not applicable before 2020.”
The DGIR countered with equal vigor. “Section 140A must be read alongside the Transfer Pricing Rules 2012 and our Transfer Pricing Guidelines. These provide clear guidance on how controlled transactions should comply with the arm’s length principle. The taxpayer’s benchmarking analysis did not meet the required standards.”
The High Court Decision
As the case unfolded, it became clear that the matter revolved around three key questions:
- Whether the taxpayer’s transactions complied with the arm’s length principle.
- Whether the DGIR had a basis to reject the taxpayer’s benchmarking analysis.
- Whether the taxpayer had under-declared income related to the charter hire and crew management fees.
The High Court, after weighing the arguments, dismissed the taxpayer’s judicial review application. “These issues involve mixed questions of fact and law. Such disputes must be resolved by the Special Commissioners of Income Tax (SCIT), the appropriate forum for adjudicating matters related to tax assessments,” the judge concluded.
The court awarded costs of RM3,000 to the DGIR, leaving the taxpayer with the option to appeal the decision within 30 days.
The Lesson Learned
This case highlights a critical aspect of tax compliance: transfer pricing disputes require precise documentation and robust methodologies to withstand scrutiny. Taxpayers engaging in cross-border transactions must ensure that their transfer pricing policies align with regulatory expectations and are supported by comprehensive benchmarking analyses.
It also underscores the importance of addressing disputes in the correct forum. Issues involving mixed questions of fact and law, particularly in transfer pricing, are best resolved by the SCIT. Judicial reviews, while powerful, are not the appropriate avenue for contesting the merits of tax assessments.
For businesses, this case serves as a reminder to maintain meticulous records, adhere to established guidelines, and seek expert advice to navigate the complexities of transfer pricing compliance.
Aturan 53, Kaedah-Kaedah Mahkamah 2012 dan Seksyen 99 dan 140A Akta Cukai Pendapatan 1967
