Recently, the High Court in Pan International Electronics (M) Sdn Bhd v Menteri Kewangan Malaysia & Anor [2024] MLRHU 726 allowed the taxpayer’s judicial review application in challenging the decision of the Minister of Finance (Minister) and Director General of Customs (Customs) in imposing a 30% import duty and sales tax in relation to the sale of goods which enjoy a zero rate duty under the Customs Duties (Goods of ASEAN Countries Origin) (ASEAN Harmonised Tariff Nomenclature And ASEAN Trade In Goods Agreement) Order 2012 (ATIGA Order).
The dispute arose when the taxpayer sold 27.21% of the goods to the local market when it was alleged that the taxpayer was subject to a 20% local sales quota.
Background Facts
The taxpayer was a local company manufacturing decoders and was holding a licensed manufacturing warehouse (LMW) status under Sections 65 and 65A of the Customs Act 1967 (CA). The concept of LMW allows manufacturers to import raw materials for use in manufacturing process without any customs duty, subject to the conditions imposed by the Customs. In the present matter, the condition imposed was that at least 80% of the decoders must be exported. In other words, the local sales of the decoders were limited to 20%.
Other than that, the taxpayer was also entitled to zero rate duty for the decoders based on the ASEAN Trade in Goods Agreement (ATIGA) pursuant to paragraph 3(1) and the Second Schedule of the ATIGA Order. In order to qualify for zero rate, the goods must be classified under the Second Schedule of the ATIGA Order and must be imported from one of the ASEAN countries.
It was undisputed that the decoders were classified under the ATIGA Order and therefore, the decoders were subject to zero rate duty.
Notwithstanding this, the Customs issued a bill of demand imposing import duty of RM 8,432,282.51 and sales tax of RM 841,342.00 against the taxpayer on the basis that the taxpayer had exceeded the local sales quota by 7.21%. Subsequently, the taxpayer appealed to the Minister who then dismissed the taxpayer’s appeal. Both the Customs and the Minister opined that exceeding the local sales quota disqualified the decoders from enjoying zero rate duty.
Aggrieved by this decision, the taxpayer applied for judicial review to challenge the decision. The issue before the High Court was whether the taxpayer was entitled to a zero rate import duty pursuant to the ATIGA Order despite exceeding the local sales quota provided in the LMW license condition.
The Taxpayer’s Contentions
The crux of the taxpayer’s contention was as follows:
(i) The Customs has no power to alter the rate of duty for goods under the ATIGA Order as well as to impose any conditions for goods to be qualified under the ATIGA Order. The power lies within the Minister pursuant to Section 11(1) of the CA.
(ii) LMW and ATIGA were separate and distinct concepts. A company without a LMW license can still be entitled to a zero rate import duty as long as the goods are classified under the ATIGA Order. Similarly, a LMW company may import raw materials from countries outside ASEAN and still be entitled to an import duty exemption.
(iii) In the event there is a breach of condition of the LMW license, the Customs was only empowered to suspend or cancel the LMW license pursuant to Section 65A(1) of the CA.
(iv) The Minister had imposed the condition of the LMW license on the ATIGA Order. In doing so, the Minister failed to exercise his discretion in a just and equitable manner.
The Minister and Customs’ Contentions
Meanwhile, the Minister and Customs argued that:
(i) The Customs was empowered under Sections 65(2) and 65A(2) of the CA to specify and/or to decide the conditions in the taxpayer’s LMW license, namely the 20% local sales quota. This was also agreed by the Minister in rejecting the taxpayer’s appeal.
(ii) Since the taxpayer had agreed to be given the LMW license and to operate under the LMW status, the conditions imposed must be adhered to and strictly followed by the taxpayer.
The High Court’s Decision
In summary, the High Court allowed the taxpayer’s judicial review application and held as follows:
(i) The decoders were subject to zero rate under the ATIGA Order.
(ii) The Customs has no power to alter the rate of duty under the ATIGA Order even if there was a breach of the LMW condition. Only the Minister has the power to impose conditions in the ATIGA Order under Section 11(1) of the CA. However, there was no such condition imposed by the Minister in the ATIGA Order requiring the taxpayer to adhere to the 20% local sales quota in order for the decoders to qualify for the zero rate duty.
(iii) The LMW status has nothing to do with goods that are classified under the ATIGA Order. A company which does not possess a LMW license was not bound by the 20% local sales quota and could enjoy to the import duty levied at the ATIGA rate so long the goods are classified under the ATIGA Order. On the other hand, a company with LMW license may import raw materials which are not from the ASEAN countries and still be entitled to import duty exemption.
(iv) The purpose of the ATIGA is to promote free flow of goods within the ASEAN region, aimed at reducing tariff barriers among the ASEAN countries whereas the conditions of LMW is aimed at promoting local products. Thus, the Customs in issuing the bill of demand has acted against the ATIGA Order made by the Minister.
(v) In rejecting the taxpayer’s appeal for remission of import duty, the Minister had adopted the same grounds as the Customs. Accordingly, the Minister’s decision suffers from the same infirmities as the Customs’ decision in issuing the bill of demand. The Minister’s decision was irrational as he had taken into account irrelevant matters when he wrongly considered the purported breach of a LMW condition as part of the conditions for the ATIGA Order.
Conclusion
The High Court’s ruling is consistent with its ruling in DDG Glass Mfg Sdn Bhd v Menteri Kewangan & Anor [2020] 1 LNS 1369 where the High Court took into consideration the spirit and intent of the ATIGA which stood to eliminate trade barriers and the quantitative restrictions on the importation of goods within the ASEAN region.
By imposing or seeking to impose import duty on the decoders following the purported breach of the condition in the LMW license, the Customs and the Minister had clearly acted against the spirit of the ATIGA. This is more so when the LMW license and the ATIGA Order operate separately.
30 August 2024