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Applicability Of Ad Valorem Duty To Contracts For Supply Of Material Or Equipment







In Petronas Carigali Sdn Bhd (PCSB) v Pemungut Duti Setem [2023] 6 AMR 427, the High Court ruled in favour of the taxpayer where the stamp duty assessment issued by the Collector of Stamp Duties (Collector) was set aside. The taxpayer was successfully by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar and associate, Yap Wen Hui.  

 

This alert summarises the arguments advanced by both parties and the findings of the High Court in respect of the non-applicability of ad valorem duty in this matter.

 

Brief Facts


Under an agreement, the taxpayer agreed to engage the contractor for the provision of supply, delivery and commissioning of gas compressor bundle assembly and casing. Subsequently, the Collector raised an assessment on the said agreement for the amount of RM53,849 under item 22(1)(a) of the First Schedule to the Stamp Act 1949 (the Act) (Assessment) despite the taxpayer’s objection.


Aggrieved by the Assessment, the taxpayer filed an appeal for a declaration that the Assessment issued by the Collector was erroneous, null and void.


Issue At The High Court

 

The sole issue for determination at the High Court was whether the stamp duty required to be paid by the taxpayer pursuant to the instrument of “Provision of Supply, Delivery and Commissioning of Gas Compressor Bundle Assembly and Casing for B11 Compressor Change-Out Project for Petronas Carigali Sdn Bhd” (Agreement) should be assessed under item 4 or item 22(1)(a) of the First Schedule to the Act.


Legal Position

 

The First Schedule to the Act provides for the instruments chargeable with stamp duty and the respective stamp duties.

 

Item 4 of the First Schedule to the Act attracts nominal stamp duty at RM 10 and reads as follows:

 

“AGREEMENT OR MEMORANDUM OF AGREEMENT made under hand only, and not otherwise specially charged with any duty, whether the same is only evidence of a contract or obligatory on the parties from its being a written instrument will be charged with nominal stamp duty amounting to RM10.00.”

 

Whilst, item 22(1)(a) of the First Schedule to the Act attracts ad valorem rate stamp duty based on the prescribed rate and reads as follows:


“BOND, COVENANT, LOAN, SERVICES, EQUIPMENT LEASE AGREEMENT OR INSTRUMENT of any kind whatsoever:

 

(1)  (a)   Being the only or principal or primary security for any annuity (except upon the original (except upon the original creation thereof by way of sale or security, and except a superannuation annuity), for the term of life or any other indefinite period

 

for every RM100 and also for any fractional part of RM100 of the annuity or sum periodically payable

 

 

 

 

 

 

 

 

 

 

 

 

RM1.00

 

 

(b)  for any sum or sums of money at stated periods, not being interest for any sum secured by a duly stamped instrument, nor rent reserved by a lease or tack.

 

The same ad valorem duty as a charge or mortgage for such total amount.

The Taxpayer’s Contentions

 

The taxpayer based its contentions on the following grounds:

 

  • The Collector erred in determining the service price in the Agreement as the price of the Agreement.

  • The Collector misinterpreted item 4.

  • The Collector failed to provide reasons for subjecting the Agreement to stamp duty under item 22(1)(a).

  • The nature of the Agreement was subject to stamp duty amounting to RM10 pursuant to item 4.


The Collector’s Contentions


On the other hand, the Collector contended that the Agreement should be subject to item 22(1)(a) based on the following grounds: 

 

  1. The price for the Agreement was determined in full and was final according to the clauses in the agreement.

  2. Item 4 applies only for an instrument for a service agreement where the price for the agreement is not determined.

  3. As the full consideration price for the Agreement had been determined in full, the Agreement did not fall under the category of “Agreement or Memorandum of Agreement made under hand only, and not otherwise specially charged with any duty” under item 4.

 

The High Court’s Decision


In allowing the taxpayer’s application, the High Court first examined item 22(1)(a) and held that for an instrument to fall within the ambit of item 22(1)(a), the following requirements should be satisfied:

 

  1. The instrument is for bond, covenant, loan, services, equipment lease agreement or instrument of any kind whatsoever.

  2. The said instrument should be the principal or primary security/agreement for any annuity, not being interest for any sum secured by a duly stamped instrument.

  3. The said instrument is for a definite and certain period so that the total amount to be ultimately payable can be ascertained.

 

In essence, the keywords under item 22(1)(a) are that the instrument should be the principal security/agreement; and that it is the primary security/agreement for any annuity.

 

The High Court observed that the provisions in the Act must be read or be given the meaning on the basis of what is clearly stated. The Court of Appeal in Pemungut Duti Setem v BASF Services (Malaysia) Sdn Bhd [2009] 5 MLJ 348 in this regard held that in construing the Act, one must look at the instruments and not at the transactions. Hence, the High Court took the view that the instrument that one must look at in the instant matter was the Agreement.  

 

Upon perusing the Agreement, the High Court held that the Collector erred in subjecting the Agreement under item 22(1)(a). Instead, the Agreement should be assessed under item 4 for the following reasons:  


  1. The Agreement was not a service agreement It was held that the Agreement was a contract with the sole purpose of supplying material or equipment, i.e., supply of gas compressor bundle assembly and casing. It was not a contract for services and there was no absolute contract value for the Agreement. The existence of a provision for services to be rendered does not ipso facto make the agreement a service agreement.

  2. The Price of the Agreement was not conclusive The High Court held that the Collector erred in treating the optional service fee stated in the Agreement as the price of the Agreement on the following basis:

    1. The unit rate stated for the respective optional incidental services in the Agreement was for indicative purposes.

    2. The list of optional incidental services did not represent or reflect the contract value as the duration or frequency of services was uncertain and unable to be determined.

    3. There was nothing in the Agreement suggesting that the price of the Agreement quote was full and final.

    4. The price schedule provided the base scope and provisional scope of the work carried out. The scope of work of the Agreement was uncertain due to the nature of the business.

    5. The price of the Agreement could not be said to be conclusive when the price included the estimated total conditional cost. Therefore, the price quoted under the provisional scope in the Agreement was clearly marked as an estimation.

 

In view of the above, the High Court held that there was no basis in law for the Collector to assess the Agreement with ad valorem duty under item 22(1)(a). Further, it was observed that the Agreement related to the supply, delivery and commissioning of a gas compressor and as such, should be assessed under item 4.


Commentary

 

In essence, the High Court’s decision serves as guidance for taxpayers and the Collector regarding the classification of agreements based on the specific characteristics of instruments. For instance, it addresses the issue of determining the value of the agreement for stamp duty purposes, emphasising that the price stated in the agreement may not always represent the definitive contract value, particularly in cases where the scope of work or the provision of optional services is uncertain. Overall, the ruling has underscored the significance of careful scrutiny of contractual terms and clear legal interpretation in determining the appropriate rate of stamp duty.


8 February 2024

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