Recently, the Court of Appeal unanimously allowed the taxpayer’s appeal in relation to a RM 28 million sales tax dispute. This case which is reported as Hong Leong Yamaha Motor Sdn Bhd v Ketua Pengarah Kastam Diraja Malaysia (2024) MSTC 30-704 is the first decision of the Court of Appeal in relation to a dispute under the Sales Tax Act 2018.
The taxpayer was successfully represented by the firm’s Tax, SST & Customs partner, S. Saravana Kumar together with associate, Yap Wen Hui.
Brief Facts
The taxpayer was a franchise holder of locally assembled motorcycles. After importing various components of the motorcycle, the taxpayer will have them assembled at the factory. In this respect, the taxpayer had obtained exemption certificates to claim sales tax exemption for the imported components in the manufacturing of the motorcycles below 250cc under the Sales Tax (Persons Exempted from Payment of Tax) Order 2018 (Exemption Order). However, the Director General of Customs (Customs) by way of bills of demand imposed additional sales tax at the rate of 10% on the vehicle components for the motorcycles imported by the taxpayer.
The Custom alleged that the taxpayer did not qualify for sales tax exemption on the imported components under item 1, Schedule C of the Exemption Order as the components used in the assembly of the motorcycles were non-taxable finished goods. The Customs took this stance despite condition (c), column 4, item 1 in Schedule C of the Exemption Order, which reads as follows, did not require the finished goods to be taxable goods:
“that the goods shall be used solely in the manufacturing of finished goods of the person mentioned in column (2)”
The taxpayer being aggrieved by the Custom’s decision, filed for judicial review to set aside the bills of demand.
The High Court’s Decision
The High Court granted leave to the taxpayer to commence judicial review proceedings despite the objection from the counsel representing the Attorney General.
However, the High Court disallowed the taxpayer’s judicial review application at the substantive stage for the following reasons, amongst others:
The definition of “registered manufacturer” under Section 2 of the Sales Tax Act 2018 (STA) must be read together with Sections 12 and Section 13. According to Section 2, a “registered manufacturer” refers to one who manufactures “taxable goods” and is liable to be registered under Section 13. As such, the taxpayer is not a registered manufacturer under the STA.
Section 35(1)(b) of the STA permits the Minister to make an Exemption Order to exempt tax charged and levied on manufactured or imported taxable goods. As the manufacturer who manufactures non-taxable goods was not required to register under the STA, there was no sales tax payable by the manufacturer.
Pursuant to item 1, Schedule C of the Exemption Order, the Customs had a legal basis to impose other conditions as the DG deems fit by limiting the term “finished goods” to only taxable finished goods.
Dissatisfied with the High Court’s decision, the taxpayer filed an appeal to the Court of Appeal.
The Custom’s Position
The crux of the Custom’s position was, amongst others:
The taxpayer was not a registered manufacturer under Sections 2, 12 and 13 since the motorcycles below 250cc manufactured by the taxpayer are non-taxable goods. Thus, no exemption was to be given to the taxpayer under the Exemption Order.
The underlying purpose of item 1, Schedule C of the Exemption Order was to give effect to the single-stage sales tax which was imposed either at the stage of purchasing raw material or the stage of the sale of finished goods. Since the end products manufactured by the taxpayer are not taxable, the taxpayer should not be eligible to claim any sales tax exemption at the production stage.
The condition of “taxable finished goods” was imposed through the exemption certificates.
The Taxpayer’s Arguments
The crux of the taxpayer’s arguments is summarised as follows:
The High Court misinterpreted the definition of “registered manufacturer” under the STA. Section 12(2) provides that any manufacturer of taxable goods is liable to register. The definition of “manufacturer” under Section 2 states that “manufacturer” means “a person who engages in the manufacture of goods”. Meanwhile, the definition of “manufacture” under Section 3 provides that:
In this Act, “manufacture” means – (a) In relation to goods other than petroleum, the conversion by manual or mechanical means of organic or inorganic materials into a new product by changing the size, shape, composition, nature or quality of such materials and includes the assembly of parts into a piece of machinery or other products…”
Sales tax can be charged on all taxable goods imported into Malaysia under Section 8(1)(b) of the STA which stipulates
“A tax to be known as sales tax shall be charged and levied on all taxable goods …(b) Imported into Malaysia by any person”
In the present case, the taxpayer assembled the imported components for the motorcycles. Therefore, the mere fact that the taxpayer is producing non-taxable finished goods does not bar him from claiming sales tax exemption as the Exemption Order is applicable to the registered manufacturer.
The Customs failed to consider the trite principle of interpreting taxing legislation laid down in Mangin v Inland Revenue Commissioner [1971] AC 739 was adopted by the Federal Court in Palm Oil Research and Development Board Malaysia & Anor v Premium Vegetable Oils Sdn Bhd [2004] 2 CLJ 299 which states that:
“…The correct approach to be adopted by a court when interpreting a taxing statute is to set out in the advice of the Privy Council delivered by Lord Donovan in Mangin v Inland Revenue Commissioner [1971] AC 739 First, the words are to be given ordinary meaning… Secondly, “… one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption so to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used…”
As decided by the Federal Court in Krishnadas A/L Achutan Nair & Ors v Maniyam A/L Samykano [1997] 1 MLJ 94 and the Supreme Court in Foo Loke Ying & Anor v Television Broadcasts Ltd & Ors [1985] CLJ (Rep) 122, Parliament does not act in vain by inserting the phrase “finished goods” if its intention was not to give sales tax exemption to non-taxable finished goods. If Parliament intended to narrow down “finished goods” as taxable finished goods, Parliament would have used express words to that effect, which was evidence from examples such as these:
Item 5, Schedule C “Semi-finished taxable goods or finished taxable goods subsequently returned after the completion of subcontract work”
Item 35, Schedule C “Locally manufactured taxable goods, excluding petroleum exported and subsequently re-imported for reprocessing”
Item 66, Schedule A “All taxable goods… “That the taxable goods are approved by the Director General”
Through the Sales Tax (Persons Exempted from Payment of Tax) (Amendment) Order 2022 (Amended Order), there was a recent amendment in condition (c) under Item 1, Schedule. Such amendments illustrate that the Parliament at the relevant time did not intend to limit the sales tax exemption to only finished taxable goods. Effective from 1.1.2023, the Parliament intended to limit the sales tax exemption under item 1, Schedule C to taxable goods” or “both taxable and exempted goods”.
Before 1.1.2023 | Effective from 1.1.2023 |
(c) That the goods shall be used solely in the manufacturing of finished goods of the person mentioned in column (2) |
(c) That the goods shall be used solely in the manufacturing of finished goods of
(i) Taxable goods; or (ii) Both taxable and exempted goods of the person mentioned in column (2) |
The Court of Appeal's Decision
Having considered both parties’ submissions, the Court of Appeal ruled in favour of the taxpayer for the following reasons:
The approach adopted by the High Court on the interpretation of Sections 2, 12 and 13 was incorrect to determine whether the phrase “finished goods” was limited to only finished goods.
By adopting literal interpretation, the words “finished goods” employed under item 1, Schedule C could mean both non-taxable finished goods and finished taxable goods. The words “finished goods” were clear, unambiguous and plain enough. There was no ground to warrant the application of the purposive approach as there is no ambiguity in the meaning. In ruling in favour of the taxpayer, the Court of Appeal held that:
“All imported goods (be it finished goods, raw materials, components or packaging materials) are liable to payment of import tax, sales tax and/or any other taxes as prescribed by the law (see s. 8 of the STA 2018) unless they have been exempted. In this instant case, the appellant paid the import tax and sought exemption to pay the sales tax. Therefore, the certification for exemption of sales tax was meant for the imported goods which were for the manufacture of finished goods. The certification for exemption of sales tax, therefore, would not necessarily lead to the conclusion that the finished goods must be finished taxable goods. …. If the Drafters intended the words “finished goods” to mean “finished taxable goods” in Item 1 of Schedule C, they could have done so like in other parts of the Schedules. The words “finished taxable goods” were used in Item 5 of Schedule C. The words “taxable goods” were used in Items 35 and 66 of Schedule A as illustration. It was held that “Parliament does nothing in vain, the Court must endeavour to give significance to every word of an enactment, and it is presumed that if a word or phrase appears in a statute, it was put there for a purpose and must not be disregarded”
The Customs were not entitled to impose additional conditions over the existing conditions under the Exemption Order. Any other condition imposed has to be other than the conditions already stated in column 4, item 1, Schedule C. In the event, there were changes to the wording of Schedule C, it has to be done by proper legislation such as through the Exemption (Amended) Order 2022.
The amendment to the Exemption Order bolsters the contention that the meaning of the original wording “finished goods” was not limited to only finished taxable goods, otherwise, there was no necessity to subsequently amend Schedule C in 2022.
Conclusion
The Court of Appeal’s ruling marks a significant precedent in the interpretation of the Sales Tax Act 2018, addressing core principles of taxation statutes and clarifying the scope of terms like "finished goods" under the Exemption Order.
7 March 2024