Claim for export allowance for flower exporter company
In Classic Japan Sdn Bhd (2020) (High Court), the taxpayer company was trying to claim for tax incentive for the export of its flowers to overseas. The taxpayer did not farm the flower but they buy it from the contract growers in Cameron highland. The taxpayer would collect the flowers and re-package them. Thereafter they will export it overseas to sell. The issue is whether the taxpayer is entitled to claim for export allowance under the Income Tax (Allowance for Increased Exports) Rules 1999 (the “Allowance”). The allowance require the taxpayer to engage in agriculture. The question becomes does repackaging of the flowers consider engage in agriculture? The High Court had held as follows:
(i) The science of agriculture has grown by leaps and bounds and should not be shackled by such an ancient concept that farms could not be housed in multi storage buildings, on vertical farms instead of open land.
(ii) s17A of the Interpretation Act states that the tax incentive rules should be read liberally in favour of the taxpayer.
(iii) In Kilmarnock, the coal which was repackaged into containers qualify for industrial building allowance. In our case, the fresh flowers which have to undergo the process to become cut flowers should also fall under the definition of engage in agriculture.
Court of Appeal - Classic Japan Sdn Bhd Overruled High Court's decision
The decision in Classic Japan Sdn Bhd (2020) had been overruled in the Court of Appeal in KPHDN v Classic Japan Sdn Bhd (2022). The COA Judges had held as follow:
(i) The language of Rule 3 and 4 of the 1999 Rules were unambiguous. Rule 3 states that the taxpayer company must be engaged in agriculture.
(ii) the wording engage in agriculture must mean that there is an involvement in the planting or growing of the fresh flowers, as such, the activity of buying the said flowers from the contract flower growers wasn't an activity within the phrase engage in agriculture.
(iii) the SCIT had found that the taxpayer wasn't engaged in agriculture under Rule 3 of the 1999 Rules.
Industrial Building Allowance
(i) There was a finding in the Court of Appeal that the taxpayer company’s factory was an industrial building which entitled the taxpayer company to claim from industrial building allowance. The taxpayer building factory was used to house the machinery to process the flowers bought from the flower growers.
Conclusion
The flower grower company cannot claim for tax allowance, as it has not engaged in the production of agriculture physically. In the author's humble opinion (Dylan), the argument that export and production of agriculture produce should be forwarded at the Special Commissioner of Income Tax. It is not normal for producer of agriculture to also focus in export. The tax rules to allow export allowance is to encourage export, not to encourage production of income. There should be better arguments forwarded by the counsels. It is with high hope this case can be revisited when new taxpayer company willing to argue again with the Court of Law.
Credit to:
This article is co-written by Mr. Dylan Chong, and Ms. Lim Jia Kei.
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