High Court dismisses appeal by firm whose claim for $1.3m in refunds was denied by Iras

Source: Straits Times
Article Date: 09 Apr 2024
Author: Selina Lum

The Inland Revenue of Authority disallowed the claims in 2020 on the basis that there was no conclusive evidence of a supply of the goods, and that these were not genuine business transactions. It is the first time a case on the rejection of input tax has been brought before the court.

A wholesale trade company whose claim of more than $1.3 million in input tax refunds from the Inland Revenue of Authority (Iras) was denied has failed in its appeal to the High Court.

The company, THM International Import & Export, purportedly bought $19.7 million worth of micro SD cards and flash drives from a local supplier and then exported the goods to two customers in Malaysia.

The company claimed more than $1.3 million in input tax refunds for these supplies, which allegedly took place between April 1, 2016 and Aug 31, 2016.

Under the Goods and Services Tax Act, input tax is incurred on the supply of goods or services that are used for business purposes.

On Aug 3, 2020, Iras disallowed the claims on the basis that there was no conclusive evidence of a supply of the goods, and that these were not genuine business transactions.

The company appealed to the GST Board of Review – a three-member board comprising people not connected to Iras – but its appeal was dismissed.

It then appealed further to the High Court – the first time a case on the rejection of input tax has been brought before the court.

In his written judgment on April 5, Justice Aedit Abdullah dismissed the appeal for the single reason that the company had done nothing but challenge the board’s factual finding that there had been no supply of goods.

Justice Abdullah said it was clear that the court’s role in such appeals was a limited one, as the court generally does not have the jurisdiction to hear appeals on findings of fact made by the board.

Under the Act, the right of appeal to the court is only in respect of “any question of law or of mixed law and fact”.

In the appeal hearing before the board, THM provided documents to show that the Osperia-branded goods were received from its supplier, a company identified as K, then sold to its customers.

Oral testimony was also provided by the directors of THM and K.

The purported business arrangement was that THM’s customers would make inquiries on the goods through an intermediary known as Jacky.

THM would then contact K to obtain a quoted price, and in turn, provide a marked-up quotation to the customers.

The customers would make full payment to THM via cash deposit or bank transfer before K delivered the goods to THM.

THM would then pay K and arrange for the goods to be delivered to the customers.

THM argued that as long as a supply of goods was made in the course of its business, and such goods were exported, it was entitled to the refund of input tax.

The company also argued that Iras’ failure to prosecute THM or K for making false claims suggested that the taxman did not have sufficient evidence that the supplies did not take place.

But Iras argued that the company bore the burden of proof to show that K actually supplied the goods to it, and that THM actually supplied these goods to its customers.

Therefore, Iras said, it was not required to prove that the transactions were fraudulent to justify its dismissal of the tax claim.

The taxman laid out a plethora of evidence to cast doubt on the genuineness of the transactions.

Iras conducted an audit on THM’s business in July 2016, after it was alerted to a sudden spike in the value of the company’s input tax claims within a single quarter.

The Osperia-branded goods were allegedly made by a local company identified as O, then sold to a company identified as S, which then sold the goods to K.

Iras showed that O did not manufacture the goods, and that neither O nor S had traded in the goods during the relevant period.

The authority was also unable to find any online product review that mentioned Osperia goods, nor could it find Osperia products on popular marketplace websites.

Iras also argued that the account given by K’s director was “highly dubious”.

The director claimed he had been told by a friend – whom he could no longer identify – that he would be guaranteed a ready supplier of products and a ready buyer in Malaysia, as long as he sold the products to the customers through another local company.

Iras added that red flags were raised on the part of the customers, both of which were sole proprietorships whose business addresses were the home addresses of their owners.

In its written grounds of decision issued in 2023, the board agreed that serious doubt had been cast on the veracity of the transactions.

The board highlighted the surge in both the volume of transactions and value of the tax claims, the inability to trace the goods to the purported manufacturer or the upstream supplier, and the inexplicable reason why Osperia products were not known in the market.

The board also found the commercial arrangements “truly bizarre and incredulous”.

“Should the appellant’s account be believed, (its director) was offered a deal which was too good to be true, namely, a risk-free arrangement where he would earn a marked-up profit as a middleman without doing any more than to serve as a mailbox for the claiming of input tax,” said the board.

“It beggars belief why (the director of K) did not cut out the middleman and deal directly with Jacky and the customers himself, since he was privy to the upstream and downstream aspects of the sale.”