1. BPS Ltd v.

Ketua Pengarah Hasil Dalam Negeri (1997) MSTC 2847

Introduction
The case is between BPS Ltd., the appellant and Ketua Pengarah Hasil Dalam Negeri, the
respondent. The case was held on 6 March 1997. The taxpayer which is BPS Ltd was a company
incorporated in the United Kingdom, and their duty was the care and supervision of vessels
during lay-up in Sabah. BPS Ltd hired ships and certain equipment from a shipping company
which was a non-resident in Malaysia to carry out its business. The payments were paid by the
taxpayer to the shipping company. However, the taxpayer did not deduct tax from the payment of
demise hire of the ships and hire of equipment as required under Section 109B of the Income Tax
Act 1967.
In the Section 109B (1) states that where any person (referred to as the payer) is liable to
make payments to a non-resident
(a) for services rendered by the non-resident person or his employee in connection with the
use of property or rights belonging to, or the installation or operation of any plant,
machinery or other apparatus purchased from, such non-resident;
(b) for technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; or
(c) for rent or other payments made under any agreement or arrangement for the use of any
moveable property.
Therefore, the Revenue wrote to BPS Ltd agent stating that the payments were subject to
deduction under the provisions of Section 109 and Section 109B of the Income Tax Act 1967.
Consequently, the taxpayer paid the tax deductions on the payment of the demise hire of
ships and hire equipment in full but however, the Revenue denied the taxpayer deductions on
the payments from the taxpayers gross income under Section 39(1)(j) of the Act.
In Section 39(1)(j) of the Income Tax Act 1967, it states that any payments from which
tax is deductible under Section 109B or 109F if tax has not been deducted there from and
paid to the Director General in accordance with subsection (1) of that section :
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Provide that(i)

this paragraph shall not apply if the payer has paid the amount referred to in

subsection
(2) of that section; and
(ii)
where such tax is deducted or such amount is paid after the due date for the furnishing
of
a return for a year of assessment that relates to such payment, the tax or amount so paid
shall not prejudice the imposition of penalty under subsection 113(2) if a deduction on
such payment is made in such return or is claimed in the information given to the
Director General in arriving at the adjusted income of the payer.
Therefore, it is already stated that when any person who makes the payment of rental
to a non-resident, it is compulsory for that person to deduct tax at the rate applicable and
remit the amount to the Respondent within a month after the payment have been made.

Facts of case

The Appellant is a company incorporated in the United Kingdom. Its principal activity
include care and supervision of vessels during lay-up in Brunei Bay, Sabah. The business was
begun by the Appellant on 1 January 1979 and subsequently ended its business operations on 1
July 1986. On the same day, the Appellant ceased carrying on the business, the activities were
taken over by BPS Sdn. Bhd.
For the purpose of providing accommodation for their staff, repairing facilities, fuel,
water storage and communication facilities, the Appellant chartered base ship(s) in Brunei Bay
which is located in Sabah. The working staffs on the base ship(s) conducted thorough inspection
and maintenance on laid-up vessels when they were on their visit to the ships.
The Appellant hired from BPS Ltd ship(s), which were used as base ships(s) and certain
equipment, for the reason of carrying out the business. Also, the Appellant made payments to
BPS Ltd, a non-resident in Malaysia, for the demised hire of ships and hire of equipment.
It was stated that on 17 February 1993, the Respondent wrote to the Appellants tax
agent, M/s Ernst & Young, mentioning that the demise hire of ships and hire of equipment for the
years of assessment between 1980 to 1987 inclusive were subject to deduction of tax under the
provisions of Section 109 (for the period before 21 October 1983) and Section 109B (for the
period after 21 October 1983) of the Act. The deductions for the demise hire of the ships and hire
of equipment claimed by the Appellant and initially allowed by the Respondent for the relevant
years of assessment would be disallowed and added back as there were no such deductions made
or paid under those sections.

Issue
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Referring to the case of BPS Ltd V. Ketua Pengarah Hasil Dalam Negeri, the main issue
is whether the Revenue was correct in disallowing the taxpayer a deduction from its gross
income as a result of the taxpayer's failure to deduct tax upon payment of demise hire to a nonresident. This is because the Revenue wrote to the taxpayer's tax agent stating that the demise
hire of ships and hire of equipment were entitled to tax deduction under the provisions of Section
109 and Section 109B of the Income Tax Act 1967. Since there were no deductions made or paid
under those sections, the deductions for the demise hire of the ships and hire equipment claimed
by the taxpayer and initially allowed by the Revenue would be disallowed and added back.
Therefore, the taxpayer did pay their tax deductions on the payment of the demise hire of ships
and hire equipment in full. The Revenue then, denied the taxpayer deductions on the payments
for the demise charter hire of the ships and hire equipment from the taxpayer's gross income
under Section 39(1)(j) of the Act.

Decision and Discussion

The appellant who are paying the hire of the ships and equipment did not deduct tax as
required by Section 109B of the Act and thus the Respondent appeal the Section 39(1)(j) of
the Act by disallowing BPS Ltd deductions for the purpose of Section 33(1) of the Act. As
the Section 33(1) of Income Tax Act states that the adjusted income of a person from a
source for the basis period for a year of assessment shall be an amount ascertained by
deducting from the gross income of that person from that source for that period all outgoings
and expenses wholly and exclusively incurred during that period by that person in the
production of gross income from that source. In the case, the Appellant failed to deduct the
tax as required by the Act when making the payments, therefore the Appellant cannot be
allowed a deduction from its gross income by virtue of the Section 39(1)(j) of the Income
Tax Act. The Appellant debates that since BPS Ltd was not liable to be taxed in Malaysia
because the company was incorporated in United Kingdom, there is no obligation that the
Appellant to deduct the tax under Section 109B of the Act.
With the arguments by the Appellant, Section 109B of the act requires an obligation or
it is compulsory for BPS Ltd to deduct its tax at the rate given whether the recipient is
taxable in Malaysia or not in Malaysia. Therefore, even though the company was not liable to
Malaysian taxation, the Appellant still need to deduct their tax and remit the tax under section
109B of Income Tax Act. Later on in the case, it is found that the Appellant had breached the
Section 109B of the Act and the Respondent had correctly refused deductions under Section
39(1)(j) of the Act. The Special Commissioner need to consider the Appellants request as
since they had paid the tax to be deducted, the Respondent should exercise his responsibility
under Section 109B Proviso (ii) which stipulates that under special circumstances, allow
extension of time for tax deducted to be paid over.
Although the Appellant further debate on few reasons, there are no merits have no
consideration as the law is stated very clear. In the case, the Respondent had not deducted tax
at all and because BPS Ltd is not liable for Malaysian Tax, there is no obligation on the part
of the Appellant to deduct tax. But after few discussions between BPS Ltd and Ketua
Pengarah Hasil Dalam Negeri, the Appellant finally pay the tax that is to be deducted with
hope that the respondent would treat them late and reluctant payment as made with the
extension of time. Then the Appellant did not tell the Respondent of the payment of the
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demise hire at the time tax return was made but they only told the Respondent only after the
enquiries. With the result, the Respondent had the right to refuse the extension of the time.

Conclusion
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As the date of 27 November 1996, the decisions made by the Special Commissioner states
that the Appellant are compulsory to deduct the tax on the payments of the demise hire of ships
and hire of equipment as stated in Section 109B of Income Tax Act 1967. Also, there is an
indication that no deduction for statutory income is made from business that is allowed according
to Section 39(1)(j) of the Act. Therefore the appeal was rejected. According to a notice dated on
9 December 1996, it states that the Appellant was dissatisfied with the Special Commissioner
decisions and they require the Special Commissioner to state a case for the opinion of the High
Court. Although the Appellant ask for the opinion of the High Court, the decision made by the
Special commissioner was correct in law.