Limitation of Licenced Manufacturing Warehouse Conditions

The High Court in Pan International Electronics (M) Sdn Bhd v Menteri Kewangan Malaysia and Ketua Pengarah Kastam, Jabatan Di Raja Malaysia (PA-25-65-08/2023) quashed the decision of Ministry of Finance (“MoF“) in rejecting the appeal of Pan International Electronics (M) Sdn Bhd (“Taxpayer”) for the remission of import duty and sales tax as it is tainted with illegality and irrationality as the conditions under the licensed manufacturing warehouse (“LMW”) cannot be imposed on the ASEAN Trade in Goods Agreement (“ATIGA”) order.

The salient facts of Pan International Electronics (supra) are as follows:

a) The Taxpayer is a licensed LMW under Sections 65 and 65A of the Customs Act 1957.

b) Pursuant to the ATIGA, the Taxpayer had been importing decoders at 0% import duty and 0% sales tax.

c) However, the Royal Malaysian Customs Department (“RMCD”) issued a bill of demand against the Taxpayer for the import duty of RM8,432,282.51 and sales tax of RM841,342 because the Taxpayer had exceeded the local sales quota by 7.21%. This disqualified the decoders from the ATIGA rate of 0%.

d) The Taxpayer appealed to the MoF by way of a letter dated 27.3.2023 but such appeal was rejected by the MoF on 22.5.2023.

e) Dissatisfied, the Taxpayer filed a judicial review application to challenge the decision (the rejection).

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The High Court held that, amongst others:

a) The RMCD only has the power under Sections 65 and 65A of the Customs Act 1957 to impose conditions on LMW license.

b) The condition of decoders’ local sales quota of 20% is only limited to LMW license.

c) The ATIGA rate under the ATIGA order in an order made by the MoF pursuant to the exercise of his powers under Section 11(1) of the Customs Act 1957.

d) Under Article 41 of the ATIFGA, each member state undertakes not to adopt or maintain any quantitative restriction on the importation of any goods of the other member states or on the exportation of any goods destined for the territory of the other member states.

e) A company is entitled to the ATIGA rate so long the goods imported are classified as such and are imported from the ASEAN countries, regardless of whether the company is clothed with LMW status.

f) RMCD does not have any power to alter the ATIGA rate under the ATIGA order, only the MoF has the power to impose conditions in the ATIGA order under Section 11(1) of the Customs Act 1957.

g) There are no conditions imposed by the MoF in the ATIGA order that in order for the decoders to be entitled for import duty at the ATIGA rate of 0%, the Taxpayer must not exceed 20% local sales quota.

h) LMW status has nothing to do with the goods that are classified under the ATIGA order.

i) Hence, the RMCD’s imposition of the LMW conditions into the ATIGA order is illegal and irrational as the RMCD does not have any jurisdiction to fix the customs duty to be levied on any goods imported into or exported from Malaysia under Section 11(1) of the Customs Act 1957.

j) The MoF has failed to exercise his discretion to remit the customs duty ‘just and equitably’ as envisaged under Section 14A of the Customs Act 1957 as the MoF had rejected the Taxpayer’s remission application based on the same ground of breach of the LMW condition.

k) The MoF had allowed the LMW condition to be imposed on the ATIGA order, albeit no express condition was passed by the MoF under the ATIGA order or the Customs Act 1957.

Comments

This case, perhaps, is the first case that addressed the limitation of the conditions under the LMW license and the exercise of the MoF’s power under Section 14A of the Customs Act 1957. It is not uncommon for the tax authorities and/or authorities in Malaysia to conflate the conditions under different licenses (or approvals). This case serves as a reminder to taxpayers to always be vigilant and check whether the condition of one license can be imposed into another.

About the Author

Desmond Liew Zhi Hong is a Partner at Halim Hong & Quek, a member firm of Andersen Global specialising in Tax.

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