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Business sale agreement is subject to nominal stamp duty

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S. Saravana Kumar and Nur Hanina Mohd Azham of Rosli Dahlan Saravana Partnership discuss a High Court ruling where a business sale agreement is subject to nominal stamp duty.

The Kuala Lumpur High Court allowed a taxpayer’s appeal in challenging the decision of the collector of stamp duties to subject a business sale agreement to ad valorem stamp duty. The taxpayer, represented by the authors, successfully argued that the agreement should be subjected to nominal stamp duty of RM10 ($2).

Facts

On February 6 2020, a business sale agreement was executed between MB Malaysia and the taxpayer. Under this agreement, the taxpayer agreed to acquire the business assets and liabilities of MB Malaysia. Among others, the assets and liabilities acquired were MB Malaysia’s fixed assets such as computer software, computer hardware, fittings, and equipment as well as liabilities under existing business contracts. The list of assets excluded from the transaction was set out in Schedule 2 of the agreement. Among others, the assets excluded in the transaction is the ‘goodwill of the Malaysian business’ of MB Malaysia.

The taxpayer submitted the agreement for stamp duty adjudication to the collector on March 5 2020. Subsequently, on March 15 2020, the collector ruled that the consideration paid by the taxpayer to MB Malaysia pursuant to the agreement is the consideration for the purchase of the goodwill of MB Malaysia and raised a stamp duty assessment based on ad valorem rate under item 32 of the First Schedule of the Stamp Act 1949 (the Act). However, the collector did not state which sub-clause of item 32 which the collector relied upon to determine the ad valorem rate.

The taxpayer disagreed with the collector’s stance to raise the assessment based on ad valorem rate. On April 11 2020, the taxpayer paid the stamp duty under protest and submitted the notice of objection against the assessment pursuant to section 38A(1) of the Act. However, on April 13 2020, the collector rejected the taxpayer’s notice of objection and provided no reasons for the rejection. Aggrieved by the assessment, the taxpayer filed an appeal to the High Court pursuant to section 39(1) of the Act.

Legal arguments

The taxpayer submitted that the stamp duty assessment issued by the collector should be set aside based on the following reasons:

  • The collector failed to specify the sub-clause of item 32 of First Schedule of the Act;

  • The collector failed to provide any reason as to why the agreement should be assessed under item 32;

  • The failure to provide reasons leads to the inference that there are no good reasons for the decisions made by the collector especially when the taxpayer in their notice of objection provided detailed grounds of objection;

  • India’s superior courts have recognised that failure of a public authority to give reasons for its decision is sufficient grounds in itself for a decision to be liable to be quashed;

  • The consideration paid by the taxpayer was for the list of assets stated in the agreement, which excluded the goodwill of MB Malaysia. Schedule 2 of the Agreement clearly stipulates that the goodwill of MB Malaysia’s business in Malaysia was excluded from the transaction; and

  • Section 21(1) of the Act was inapplicable as there was no interest in the property. There was no conveyance, assignment, transfer of sale of property under the Agreement that warrants the application of item 32 of the First Schedule of the Act.

Based on the above arguments, the taxpayer submitted that the agreement should be stamped at the nominal rate of RM10 pursuant to item 4 of the First Schedule of the Act.

Significance of the decision

Upon hearing both parties, the High Court allowed the taxpayer’s application that the agreement should be assessed for nominal stamp duty of RM10 under item 4 of the First Schedule of the Act.

The stamp duty assessment by the collector was ruled to be erroneous. Another significant ruling in this case was the High Court’s order that the collector pay interest at the rate of 8% to the taxpayer from the time the stamp duty was paid under protest.

The High Court’s decision serves as a reminder that an aggrieved taxpayer by a stamp duty assessment is not left without any recourse. Whilst the collector has the power to collect stamp duty from taxpayers, the collector should not exercise his authority arbitrarily. This decision reaffirms the position that a sale of business agreement is to be taxed at the nominal rate of RM10.

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