The High Court in Malaysia has recently held that an agreement for the installation of a gas compressor is to be stamped at the nominal rate of RM10 ($2), and not at an ad valorem rate.
The taxpayer, an established multinational oil and gas company, was successfully represented by Rosli Dahlan Saravana Partnership’s tax, SST & customs partner, S Saravana Kumar, and an associate at the firm, Yap Wen Hui.
Facts of the case
An agreement between the taxpayer and a contractor for the supply, delivery, and commissioning of the gas compressor (the ‘Agreement’) was executed. The taxpayer then submitted the Agreement for stamp duty adjudication to the Collector of Stamp Duties (the ‘Collector’).
The Collector subsequently raised a stamp duty assessment by subjecting the Agreement to an ad valorem rate under Item 22(1)(a) of the First Schedule of the Stamp Act 1949 (SA). The taxpayer filed a notice of objection pursuant to Section 38A(1) of the SA and took the stance that the Agreement should be subject to the nominal rate of RM10.
The Collector disregarded the taxpayer’s notice of objection and maintained its position without giving any reasons. The taxpayer subsequently filed an appeal to the High Court under Section 39(1) of the SA.
The central issue
The issue is whether the Agreement is subject to stamp duty under Item 4 at a nominal rate of RM10 or Item 22(1)(a) at an ad valorem rate.
For an instrument to fall within the ambit of Item 22(1)(a), the requirements stated below must be satisfied:
It can be a bond, a covenant, a loan, services, an equipment lease agreement, or an instrument of any kind;
It should be the principal or primary security agreement for any annuity, not being interest for any sum secured by a duly stamped instrument; and
It is for a definite period for the total amount to be ultimately payable and ascertained.
The Collector’s contention
The Collector contended that the Agreement should be subject to ad valorem duty under Item 22(1)(a) for the following reasons:
The Agreement was not solely for supplying material or equipment but also includes services rendered by the contractor;
Item 4 applies only to service agreements, including those where the price for the agreement is not determined; and
There is no statutory duty to provide reasons for its decision.
The taxpayer’s contention
The taxpayer maintained the position that Item 22(1)(a) was not applicable for the following reasons:
The Agreement for the supply and commissioning of the gas compressor failed to satisfy the requirements stipulated under Item 22(1)(a). It was argued that the Agreement did not constitute security and that none of the clauses demonstrated an agreed annuity between the parties.
There was no absolute contract value for the Agreement. As clearly stated in the Agreement, the unit rate stated for the optional incidental services was only for indicative purposes.
The Agreement should be subject to a nominal rate under Item 4 as it did not fall under other items in the First Schedule of the SA.
The absence of a statutory duty to give reasons does not exempt the Collector from giving a reason for raising the disputed assessment.
Commentary
The High Court held that Item 4 should be given effect as there was no legal basis for the Collector to subject the Agreement to Item 22(1)(a). The Agreement should be subject to nominal stamp duty for the following reasons:
The Collector had failed to advance evidence to demonstrate that the Agreement was an “annuity” or a “security” under Item 22(1)(a);
No reasons had been given by the Collector in the stamp duty assessment to subject the Agreement to stamp duty under Item 22(1)(a); and
The price stated in the scope of the optional incidental work stated in the Agreement was not final and conclusive, as it was merely an estimation.
The Collector was required to pay interest at a rate of 8% from the time the stamp duty was paid until the date of refund.
The High Court’s decision is a welcome one given the novelty of service agreements being ruled as an instrument falling under Item 4 since the introduction of Item 22. This decision also brings substantial stamp duty savings to oil and gas companies as hundreds of written contracts of this nature are executed in a year.
While the Collector has the power to collect stamp duty from taxpayers, the Collector is not empowered to raise stamp duty assessments without providing reasons. It serves as a good reminder to the Collector that discretion cannot be exercised arbitrarily without observing the parameters of the SA. Any conduct resulting from an arbitrary decision including a stamp duty assessment is subject to judicial scrutiny.
