Commercial transactions involving various companies often involve complex business arrangements in order to facilitate the objectives of the companies. The doctrine of “substance over form” ensures that the true nature of a transaction or event is accurately represented, rather than its formal structure. In the words of the High Court in Ketua Pengarah Hasil Dalam Negeri v Servier Malaysia Sdn Bhd (2012) MSTC 30-038, “… it would be necessary for income tax purposes, to look at a business as a whole set of operation directed towards producing income”.
An illustration of the doctrine of “substance over form” can be seen in a recent case where the Court of Appeal dismissed the appeal by the Director General of Customs against the High Court’s decision in Ketua Pengarah Kastam v PE Sdn Bhd to set aside a GST bill of demand issued against the taxpayer.
Our Tax, SST & Customs partner, S. Saravana Kumar successfully represented the taxpayer at the Court of Appeal and the High Court.
Background Facts
Pursuant to the GST group registration provision in Section 27 of the Goods and Services Tax Act 2014 (GST Act), the taxpayer was the nominated company for all GST filing and communications with the Customs for its group of companies. Both PCE and PCM were registered member entities of the taxpayer’s GST group.
The taxpayer via PCE, supplied ethylene to overseas customers and made the necessary declarations in the K2 Form. The name of the exporter in the K2 Form was PCM. Following the sale of ethylene, tax invoices were issued to ISM (a local company) who then undertook the onward supply of ethylene to overseas customers. Each tax invoice for each supply clearly stated that the product was delivered to a location outside of Malaysia.
The Customs took the view that the transactions for the supply of ethylene in dispute should be levied standard tax rate of 6% GST on the basis that the transactions took place in Malaysia i.e. the transactions were between PCE and ISM. The Customs further argued that the ownership of the ethylene had moved from PCE to ISM as soon as the tax invoices were issued to ISM. On the contrary, the taxpayer insisted that the transactions were subject to zero rate pursuant to Section 17(1)(b) of the GST Act.
On 11.12.2020, the Customs issued a bill of demand amounting to RM 14,798,520.45 including penalty which was set off against the remaining outstanding GST refund for the taxpayer’s GST group. The sum constituting penalty of RM 3,214,468.20 was later remitted by the Customs, leaving the outstanding GST payable in the sum of RM 11,584,052.25.
Aggrieved, the taxpayer filed a judicial review application for an order to set aside the bill of demand.
The High Court’s Decision
The High Court allowed the taxpayer’s judicial review application on the following grounds:
(i) The imposition of GST was made on the supply of goods rather than ownership of goods. Even if the ownership of ethylene had moved from PCE to ISM, the end-user is not ISM but the overseas customers.
(ii) Section 17(1)(b) of the GST Act provided that a zero-rated supply was any supply of goods if the goods were exported. Had Parliament intended that the imposition of GST was to be based on the ownership of goods, it would have provided this clearly in the GST Act.
(iii) The K2 Form was sufficient proof that the ethylene in question had been exported out of Malaysia and cleared by the Customs officers.
(iv) Even if the K2 Form was declared in the name of PCM, there was an agency agreement between PCE and PCM that PCM remained responsible for managing the ethylene supply contract between PCE and ISM.
(v) Over and above the agency contract, PCE and PCM were part of the Taxpayer’s GST group. In this context, the two companies should have been treated as part of the same group within the meaning of Section 27(6) of the GST Act. As such, the K2 Form declared by PCM was akin to the same being declared by the taxpayer or PCE. For all intent and purposes, the taxpayer was the exporter of ethylene as declared in the K2 Form.
Accordingly, the High Court granted an order of certiorari to set aside the bill of demand.
Appeal To The Court of Appeal
The Customs’ Arguments
On appeal, the following arguments were put forth by the Customs:
(i) Based on the tax invoices submitted, the supply of ethylene was made by PCE to ISM. Accordingly, a 6% GST shall be charged and levied on the supply of ethylene to ISM.
(ii) There was insufficient proof that the ethylene was exported overseas. The tax invoices issued by PCE were actually for services rendered and not for the supply of goods. The supply of ethylene to overseas was actually done by ISM.
(iii) In respect of the K2 Form, the export of ethylene by PCM overseas was pursuant to an agency agreement between PCE and PCM. In other words, PCM was merely providing a service to deliver ethylene to overseas following an agreement between PCE and PCM.
(iv) The business carried out by PCE was the sale of ethylene, whereas the business carried out by PCM was managing the ethylene supply contract between PCE and ISM. By virtue of Section 27 of the GST Act, it is only for tax collection purposes, the sale and export of ethylene overseas would be treated as being carried out by the Taxpayer as the representative member. However, this does not mean that the supply of ethylene in dispute could be subject to zero rate as PCM at the material time was only managing the ethylene supply contract between PCE and ISM.
The Taxpayer’s Arguments
On the contrary, the Taxpayer submitted that:
(i) So long as the goods were exported, they were zero rated in accordance with Section 17(1)(b) of the GST Act. The Customs may raise a bill of demand only in the event such goods were later conclusively determined to not have been exported. To this end, the only document which conclusively showed that a product is exported out of the country was the K2 Form, which in this case the taxpayer had provided. The tax invoices also clearly established that the location of delivery was out of Malaysia.
(ii) There is a presumption of law that goods are deemed to be exported if the goods have been:
a. Cleared by proper customs officers at the last customs station on their route out of Malaysia; or
b. Loaded onto a vessel about to depart from a port in Malaysia.
Such a presumption of law cannot be easily rebutted by the Customs making issues with the name used in declaring the K2 Forms. The Customs bear evidential proof to show that the goods were subsequently found in Malaysia.
(iii) The Customs have preferred a reading of the documentation which would show non-export (supply in Malaysia) over evidence which established export. The Customs have further disregarded the documentary evidence such as the bill of lading and K2 Form which proved that the ethylene was in fact exported.
(iv) There was written confirmation from ISM that the ethylene supplied to ISM were never consumed in Malaysia. They were all accordingly exported to a place outside Malaysia and this was duly supported by documentary evidence such as the K2 Form and bill of lading.
(v) Section 27 of the GST Act is also clear on the treatment of group GST whereby supply within the group was to be disregarded and any supply by the member company was deemed to be made by the representative company. There was no issue with PCM declaring the K2 Form instead of PCE as they were in the same group.
The Court of Appeal’s Decision
The Court of Appeal unanimously held that the High Court was correct to grant the order of certiorari to set aside the GST bill of demand as the ethylene supplied by PCE to ISM was for export and was indeed exported overseas. Accordingly, the ethylene supplied was a zero-rated supply pursuant to Section 17(1)(b) of the GST Act.
Conclusion
The decisions of the High Court and the Court of Appeal are a clear illustration that all documents must be looked at in totality and not in isolation. Even though the Customs, looking at the tax invoices alone, argued that the supply of ethylene was made by PCE to ISM, the tax invoices also showed that the ethylene was to be delivered out of Malaysia. The K2 Form also clearly showed that the ethylene was exported overseas. Further, there was written confirmation that the ethylene was never consumed in Malaysia and was all accordingly exported overseas.
Applying the doctrine of “substance over form”, it would therefore be clear that the ethylene was in effect exported by the taxpayer. In other words, the High Court and the Court of Appeal have correctly quashed the bill of demand issued by the Customs. The decisions are also in line with Director General of Inland Revenue v Highlands Malaya Plantation Ltd [1988] 2 MLJ 99 where our Supreme Court emphasised the need to look at the real character of the subject matter rather than the mere label itself.
17 July 2024