The Court of Appeal recently issued its Grounds of Judgment for its decision in Pemungut Duti Setem v Ann Joo Integrated Steel Sdn Bhd.  The Grounds of Judgment can be accessed here. This case relates to the calculation of stamp duty applicable on a letter of offer for various credit facilities.

Brief Facts

By way of a Letter of Offer dated 27.12.2018 (“Letter of Offer”) issued by a bank to the taxpayer, the bank agreed to offer various credit facilities (“Facilities”) to the taxpayer, up to the limit of RM 105 million.

The taxpayer took the position that the Letter of Offer was to be stamped under item 22(1)(b) of Schedule 1 of the Stamp Act 1949 (“Act”) and that the Stamp Duty (Remission) (No. 2) Order 2012 (“Remission Order”) was applicable.

The Collector of Stamp Duties (“Collector”) took the position that the Letter of Offer was to be stamped under item 22(1)(a) of Schedule 1 of the Act and assessed stamp duty at RM 525,000. The Collector also disagreed with the taxpayer that the Remission Order was applicable.

For context:

• item 22(1)(a) provides that loan agreements or instruments for a definite and certain period are to be stamped at the same ad valorem duty as a charge or a mortgage (which is typically at the rate 0.5%) whereas item 22(1)(b) provides that loan agreements or instruments for a term of life or any other indefinite periodare to be stamped at the rate of 1%; and

• the Remission Order provides that “the amount of stamp duty that is chargeable” under item 22(1)(b) upon a loan agreement or instrument “without security for any sum or sums of money repayable on demand or in a single bullet repayable” which is in excess of 0.1% is remitted.

The taxpayer filed a notice of objection against the Collector’s assessment, which was rejected by the Collector.

The taxpayer appealed to the High Court. The High Court allowed the taxpayer’s appeal and set aside the Collector’s assessment. In allowing the appeal, the High Court held as follows:

• The Letter of Offer falls within the scope of item 22(1)(b) of Schedule 1 of the Act as there is no definite or certain period of time prescribed under the Letter of Offer and the Letter of Offer provided that the Facilities were subject to the bank’s right to recall or cancel the Facilities (or any part thereof) whereupon the whole indebtedness would be repayable on demand.

• The Remission Order applies to loan agreements or instruments which have no security and are either repayable on demand or in a single bullet repayment. The taxpayer fulfilled all the requirements stipulated under the Remission Order as the Facilities were without security and repayable on demand.

• As such, the Letter of Offer ought to be stamped at the rate of 0.1%.

The High Court ordered that the sum of RM 420,000 be refunded to the taxpayer together with interest at the rate of 8% calculated from the date the taxpayer paid the RM 525,000 assessed by the Collector until the date the RM 420,000 is refunded to the taxpayer.

Dissatisfied with the High Court’s decision, the Collector appealed to the Court of Appeal.

Court of Appeal’s Decision

The Court of Appeal unanimously allowed the Collector’s appeal in part and ordered as follows:

1. The stamp duty chargeable on the Letter of Offer is RM 1,050,000 (before applying the Remission Order).
2. The High Court’s order granting interest at the rate of 8% on the sum of RM 420,000 is set aside.
3. The remaining orders of the High Court are upheld and maintained, particularly the order for a refund of RM 420,000.

The grounds for the Court of Appeal's decision are described below.

Item 22(1)(a) vs Item 22(1)(b)

The Letter of Offer was chargeable to stamp duty under item 22(1)(b). The Letter of Offer does not set out a definite and certain period for repayment of the facilities. Instead, it provided as follows:

The offer of the credit facilities amount is open until such time the bank exercises its right to recall or cancel the entire credit facility (or any part thereof). The total amount to be ultimately payable could only be ascertained upon the bank exercising its right to recall or cancel the Facilities.  

Although there is a limit of RM 105 million, this amount is not necessarily the loan amount. It is up to the taxpayer to decide how much and when to take up the available credit amount.

The terms of the Facilities have no characteristic of a “definite and certain period” and a “total amount to be ultimately payable can be ascertained”, as required in item 22(1)(a).

As the Facilities in the Letter of Offer were not for a fixed term loan and there was no fixed term repayment period, they fall within the meaning of a loan “for the term of life or any other indefinite period”. Hence, the Letter of Offer satisfies the requirements of item 22(1)(b).

Remission Order

To qualify for remission under the Remission Order, 4 conditions have to be fulfilled, namely:

1. stamp duty is chargeable under item 22(1)(b);
2. it must be a loan agreement or loan instrument;
3. the entire loan sum or credit facility is not secured with any security; and
4. the sum(s) of money owing is repayable on demand or in a single bullet repayment.

There is no dispute that the first 3 conditions are satisfied.

On the last condition, the phrase “any sum or sums of money repayable on demand or in single bullet repayment” has to be understood as follows:

• The phrase “any sum or sums of money” refers to the outstanding loan amount and the word “repayable” simply means to pay back (to the bank). There are 2 situations in which the outstanding loan amount could be repaid to the bank, which are:
  • when the bank demands for the outstanding loan amount to be repaid (i.e. repayable on demand); and
  • the outstanding loan amount is repayable in a lump sum payment (i.e. repayable in a single bullet payment).

• In the second situation, the bank does not need to demand the repayment as the manner of repayment would have been spelled out as a term of repayment in the agreement or instrument.

• The Collector’s argument that the taxpayer is not entitled to the remission as there is no provision in the Letter of Offer which provides that the taxpayer does not need to pay the loan unless and until it is demanded by the bank is not reasonable. All loans from financial institutions are required to be repaired whether by staggered payment or flexi-payment. No financial institution would offer a loan without any repayment term or provide that repayment is only required when demanded. To suggest that the taxpayer must prove that it does not have to repay the bank unless there is a demand by the bank is against any financial or commercial sense. The Collector’s interpretation could not be what the Minister had in mind when making the Remission Order.

• As such, “repayable on demand” has to refer to the circumstances where the terms of the loan instrument provides that the lender has a contractual right to demand for the full outstanding sum to be repaid immediately even when there is no express term that the borrower has to pay the outstanding sum (or part thereof).

The last condition of the Remission Order has therefore been fulfilled and the taxpayer is entitled to enjoy the benefit of the same.

Amount to be refunded  

The taxpayer paid the sum of RM 525,000 (i.e. RM 105 million x 0.5%) which was assessed by the Collector.

The taxpayer argued that the amount of stamp duty ought to be RM 105,000 (i.e. RM 105 million x 0.1%) and sought for a refund of RM 420,000 (i.e. RM 525,000 – RM 105,000).

Both the Collector’s and the taxpayer’s calculations are incorrect.

The Collector’s calculation is incorrect because the Collector used item 22(1)(a) instead of item 22(1)(b).

The taxpayer’s calculation is incorrect because the Remission Order uses the phrase “amount of stamp duty that is chargeable” and not “amount chargeable for duty”. The former means the stamp duty payable whereas the latter means the amount that is to be used for the calculation of the stamp duty payable.

It is incorrect to take 0.1% as the applicable rate under the Remission Order. The “0.1%” in the Remission Order is in reference to the stamp duty which has to be paid in accordance with item 22(1)(b). By virtue of the Remission Order, any amount of stamp duty payable in excess of 0.1% is remitted.  The correct calculation of the stamp duty payable after the remission is as follows:

• Amount chargeable for duty: RM 105 million
• Stamp duty chargeable under item 22(1)(b): RM 105 million x 1% = RM 1,050,000
• The stamp duty payable (after remission): RM 1,050,000 – RM 1,048,950 (i.e. amount of stamp duty in excess of 0.1%) = RM 1,050

The correct amount to be refunded to the taxpayer should be RM 523,950 (i.e. RM 525,000 – RM 1,050). The High Court incorrectly ordered the sum of RM 420,000 to be refunded. However, since there is no cross-appeal filed by the taxpayer on this error, the Court will not disturb the order granted by the High Court in relation to the amount to be refunded.

Interest

The High Court erred in granting interest at the rate of 8%. This was a stamp duty appeal under section 39(1) of the Act. It is not a suit brought for the recovery of any debt or damages in which a court could give interest at such rate it thinks fit pursuant to section 11 of the Civil Law Act 1956 (“CLA”). The High Court order in granting interest on the sum of RM 420,000 ought to be set aside.

Comments

What is interesting about this case (to the author at least) is how the Court of Appeal interpreted the Remission Order and calculated the amount of stamp duty payable after taking into account the remission.

In many cases, both taxpayers and the Collector adopt the same interpretation that the Remission Order provides for a reduced rate of 0.1%. A quick search on Google would show numerous articles and write-ups published online which adopt this interpretation. This is also the approach the Collector takes in practice.

However, as rightly pointed out by the Court of Appeal, the wording of the Remission Order does not allow for such an interpretation as it refers to the “amount of stamp duty that is chargeable”. Put bluntly, the effect of the Remission Order is that it gives taxpayers a 99.9% discount on the stamp duty payable.

The approach taken by the Court of Appeal in this case ought to also be applicable to the remission granted in respect of service agreements under the Stamp Duty (Remission) Order 2021 as the words used therein are similar to those used in the Remission Order in respect of loan agreements or instruments.

Another interesting point in this case is that despite the Court of Appeal’s finding that the correct amount to be refunded to the taxpayer is RM 523,950, the Court of Appeal did not vary the High Court’s order that the sum of RM 420,000 be refunded on the basis that the taxpayer did not cross-appeal against the High Court’s order for refund. Under section 69(4) of the Courts of Judicature Act 1964 (“CJA”), the Court of Appeal can “give any judgment, and make any order which ought to have been given or made, and make such further or other orders as the case requires”. By virtue of section 69(5) of the CJA, the powers of the Court of Appeal under section 69 “may be exercised notwithstanding that the notice of appeal relates only to part of the decision, and the powers may also be exercised in favour of all or any of the respondents or parties, although the respondents or parties have not appealed from or complained of the decision”. The Court of Appeal therefore had the power to order a refund of the correct amount notwithstanding the fact that the taxpayer did not file a cross-appeal. Perhaps the Court of Appeal did not see it fit to exercise this power in this particular case.

Yet another interesting point is the Court of Appeal’s decision to set aside the High Court’s order granting the taxpayer interest at the rate of 8%. This was on the basis that this is a stamp duty appeal and not a suit brought for the recovery of any debt or damages in which a court could award interest under section 11 of the CLA. The following points were not expressly dealt with by the Court of Appeal in its Grounds of Judgment:

• The Courts have previously held that the phrase “any debt or damages” and “tried” in section 11 of the CLA should be construed widely.

• In the case of Ritz Garden Hotel (Cameron Highlands) Sdn Bhd v Balakrishnan Kaliannan [2013] 7 CLJ 413, the Federal Court accepted that the phrase “any debt or damages” should be construed widely to cover any sum of money which is recoverable by one party to another.

• In the case of Mirra Sdn Bhd v The Ayer Molek Rubber Co Bhd [2008] 3 CLJ 273, the Court of Appeal held that the word “tried” in section 11 of the CLA should be given a broad interpretation to include any order made by the court, be it judicially made or done administratively.

• In the case of Pemungut Duti Setem v Lee Koy Eng [2022] 3 CLJ 252, the Court of Appeal held that as a consequence of the order of refund given by the Court in favour of the taxpayer who was successful in its stamp duty appeal, the excess amount to be refunded is a “debt” due from the Collector to the taxpayer within the meaning of section 11 of the CLA.

• Construing section 11 of the CLA widely, it is arguable that the section would apply in this case as, in the taxpayer’s appeal to the High Court, the taxpayer sought a refund of the excess amount paid to the Collector.

• In the case of Pelangi Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2012] 1 MLJ 825, the High Court held that where the Revenue has wrongly taxed a taxpayer and retained the taxpayer’s money (which rightfully belonged to the taxpayer), the Revenue ought to compensate the taxpayer accordingly as the Revenue would have had the use of the money.  The High Court awarded interest under section 11 of the CLA at the rate of 4%.

It is hoped that the courts could give more clarity on the application of section 11 of the CLA to tax appeals. A taxpayer who has paid taxes imposed and who is subsequently successful it its appeal against the assessment ought to be compensated for the loss of the use of the monies paid. Of course, the awarding of interest under section 11 of the CLA is always at the discretion of the courts.

Authors: Nicholas Mark Pereira & Sarah Aina