Kementerian Kewangan Malaysia v Ha Pack Industry Sdn Bhd (P-01(A)-422-06/2024)

KETUA PENGARAH KASTAM JABATAN KASTAM DIRAJA MALAYSIA ... APPELLANTS AND HA PACK INDUSTRY SDN BHD (NO. SYARIKAT: 917997-V) ... RESPONDENT Heard together IN THE COURT OF APPEAL OF MALAYSIA APPELLATE JURISDICTION CIVIL APPEAL NO. P-01(A)-423-06/2024 BETWEEN HA PACK INDUSTRY SDN BHD (NO. SYARIKAT: 917997-V) ... APPELLANT

KETUA PENGARAH KASTAM JABATAN KASTAM DIRAJA MALAYSIA ... RESPONDENTS [In the High Court of Malaya at Penang Judicial Review Application No.: PA-25-64-08/2023 Between Ha Pack Industry Sdn Bhd (No. Syarikat: 917997-V) ... Applicant and

Kementerian Kewangan Malaysia

Ketua Pengarah Kastam, Jabatan Kastam Diraja Malaysia ... Respondents] CORAM: LIM CHONG FONG, JCA AZHAHARI KAMAL BIN RAMLI, JCA AHMAD KAMAL BIN MD. SHAHID, JCA JUDGMENT OF THE COURT

There are two (2) Appeals fixed for hearing before us, which we heard on the same day. Firstly, Appeal P-01(A)-422-06/2024 (Appeal 422) filed by Kementerian Kewangan Malaysia (the $ 1^{\mathrm{st}} $ Respondent) and Ketua Pengarah Kastam, Jabatan Kastam Diraja Malaysia (the $ 2^{\mathrm{nd}} $ Respondent) (collectively referred to as the Respondents). Secondly, is the Appeal by Ha Pack Industry Sdn Bhd (the Applicant) via Appeal P-01(A)-423-06/2024 (Appeal 423).

Both parties are dissatisfied with the decision of the High Court in a Judicial Review (JR) Application filed by the Applicant who is aggrieved with the decision of the $ 1^{\mathrm{st}} $ Respondent dated 22 May 2023, which conclusively rejected the Applicant's appeal against the $ 2^{\mathrm{nd}} $ Respondent's decision refusing remission of the remaining 50% of the Bills of Demand amounting to RM903,757.22, which the Applicant had previously paid.

Having heard the appeals, scrutinising the Records of Appeal and submissions by both parties, we decided to allow the Respondents' appeal in Appeal 422 and to dismiss the Applicant's appeal in Appeal 423. This grounds of judgment (GOJ) contain the full reasons for our decision.

The Applicant is a licensed manufacturing warehouse (LMW) operator pursuant to Sections 65 and 65A of the Customs Act 1967 (the Act).

The dispute centred around 675 drop shipment deliveries of raw materials from the Applicant's warehouse to two (2) other LMW companies, namely Syarikat Sin Kwang Plastic Industries Sdn Bhd (Sin Kwang) and Wentel Corporation Sdn Bhd (Wentel), between June and August 2017 (the said deliveries).

These transactions involved a local trading company, Stephen Gould Malaysia Sdn Bhd, (Stephen Gould) which ordered goods from the Applicant for direct delivery to Sin Kwang and Wentel.

The following process and manner of deliveries were undertaken: - a) Sin Kwang and Wentel would order raw materials/components for the requirements of their manufacturing activities from Stephen Gould; b) Stephen Gould would thereafter order the raw materials from the Applicant; c) Upon completion of the same and upon request of Stephen Gould, the Applicant would deliver the raw materials directly to Sin Kwang and Wentel respectively; d) The Applicant would subsequently issue an invoice requesting the payment from Stephen Gould; and e) Stephen Gould would then issue an invoice requesting for payment from Sin Kwang and Wentel, respectively.

The Applicant contends that the drop shipment transactions as above are permitted and should be considered as the Applicant's export quota in accordance with the guidelines published by the Royal Malaysian Customs Department.

Important to these proceedings is that vide a Mutual Non-Disclosure Agreement dated 1 $ ^{st} $ March 2016 executed between the Applicant and Stephen Gould, the Applicant was prohibited from disclosing its identity to the customers of Stephen Gould, including, but not limited to Sin Kwang and Wentel.

The Applicant contends that it had then declared the said deliveries using Customs Form 9 when LMW General Form should have been used and requested Sin Kwang and Wentel to endorse 'Delivery Order' and Stephen Gould to acknowledge receipt of the deliveries, in which LMW Lampiran 1 should have been used.

Pursuant to an audit conducted on the Applicant, the $ 2 ^{n d} $ Respondent took the position that the said deliveries were all local sales, and accordingly issued Bills of Demand, both dated 19 July 2019, demanding payment of goods and services tax (GST) amounting to RM102,312.14 as well as the payment of import duties amounting to RM1,705,202.31 (the Bills of Demand).

The Applicant had filed an appeal to the $ 2 ^{n d} $ Respondent, dissatisfied with the issuance of the Bills of Demand.

However, in the meantime, pending the Appeal, the Applicant had made payments by instalments totalling RM903,757.22, being 50% of the total sum demanded.

Vide letter from the $ 2^{\mathrm{nd}} $ Respondent dated 12 December 2019, the Applicant's appeal on the Bills of Demand was rejected on the following three (3) grounds: a. That it did not fulfil the conditions of "drop shipment" terminology and drop shipment sale involving LWM completed goods pursuant to Butiran 3.7 and Butiran 11, Perintah Tetap Kastam Bil. 27 dated 2 June 2017 (PTK Bil.27); b. That the delivery orders were purportedly acknowledged receipt by Stephen Gould instead of Sin Kwang and Wentel; and c. That the movement of the goods was declared using Customs Form 9, purportedly showing that they were local sales.

The Applicant's further appeal to the $ ^{1st} $ Respondent had only resulted in an unpaid remission of 50% of the total sum via a decision reflected in a letter from the $ ^{1st} $ Respondent dated 22 May 2023. However, the Applicant's application/appeal for the remission of the remaining 50% already paid under the Bills of Demand, amounting to RM903,757.22, was rejected with finality without providing any new and/or further reasons.

The above-said decision led to the filing of a JR by the Applicant in the High Court.

The specific reliefs or Orders sought by the Applicant are, briefly, as follows: a. A declaration that the Bills of Demand by the $ 2 ^{n d} $ Respondent are of no effect, null and void, and absolutely not binding on the Applicant. b. A declaration that all transactions which are the main subject under the Bills of Demand in respect of the said deliveries of goods by the Applicant to Sin Kwang and Wentel be considered: i. as the Applicant's export quota, and ii. not to be subject to any GST and/or import duty. c. An Order of Certiorari to quash the decision by the $ ^{1 s t} $ Respondent in their letter dated 22 May 2023, which conclusively rejected the application/appeal by the Applicant for the remission of the remaining 50% of the Bills of Demand amounting to RM903,757.22 previously paid by the Applicant. d. A declaration that the Applicant is entitled to remission and refund of the remaining 50% or import duty and GST amounting to RM903,757.22 previously paid by the Applicant. e. An order that the matter of the remission or both GST and import duty in the Bills of Demand be now referred back by this Honourable Court to be reconsidered/reassessed by the Respondents according to the spirit and intent of this order and to take appropriate steps to give full effect to this order. Findings of the learned High Court Judge

After hearing the substance of the JR, the learned High Court Judge (HCJ) partially allowed the Applicant's application, among others, on the following grounds: a. The decision to impose import duties and GST due to the alleged non-fulfilment of the definition of drop shipment under Butiran 3.7 of PTK Bil. 27 was irrational and without basis. b. The mere fact that the delivery orders were acknowledged by Stephen Gould does not negate the actual fact that the said deliveries were made to Sin Kwang and Wentel. c. The mere usage of the wrong form, i.e., Form 9, as opposed to LMW Form, would not justify the imposition of import duty. The only recourse for the wrong usage of forms would be for the Respondents to issue a compound to the Applicant pursuant to the Act. d. The $ 1^{\mathrm{st}} $ Respondent's decision to disallow the 50% remission to serve as a lesson to the Applicant is erroneous in law. e. The $ 1^{\mathrm{st}} $ Respondent, in imposing the import duty as a punishment/to serve a lesson to the Applicant, had exercised its powers unreasonably and acted ultra vires, as such imposition of import duty was not expressly provided for under the Act. f. The goods were indeed delivered to Sin Kwang and Wentel, and the Respondents themselves conceded that there were no elements of deviation in the entire transaction. g. The Respondents do not have the power to impose duties on the said deliveries on account of a breach of the LMW licence. h. Therefore, the decision of the Respondents to impose tax or the non-remission was irrational and went against the spirit and intent of the law.

As a conclusion, the learned HCJ issued a certiorari order to quash the $ ^{1st} $ Respondent's decision vide their letter dated 22 May 2023 rejecting the remission as requested. However, the learned HCJ declined to declare the Bills of Demand null and void or to order a full refund directly. Instead, the matter was remitted to the Respondents for reconsideration and reassessment in accordance with the spirit and intent of the law.

Dissatisfied, both parties now file their respective appeal to the Court of Appeal against the said decision via these two (2) appeals, as mentioned earlier. a. The Respondents, via Appeal 422, appeal against the whole decision of the High Court; and b. The Applicant, via Appeal 423, appeals against part of the decision which dismissed the Applicant's declaratory reliefs sought in the JR. i.e., a declaration that the Bills of Demand are null and void and that the Applicant is entitled to a full remission and refund.

The Respondents, as the appellants in Appeal 422, submitted, among others: a. The Applicant as LMW holder, eligible to enjoy facilities, but the end products are subject to an export quota of 80% and local sale of 20% and below. b. The quota conditions have been set in the license, thus, the Applicant is well aware of the conditions. c. The operation, raw materials, export sales, and local sales are controlled via documentation which are subject to audit. d. The audit trail discovered that the local sales were in excess of the quota without the Malaysian Investment Development Authority (MIDA) approval or exemption under ASEAN Trade in Goods Agreement (ATIGA) as they are limited to the percentage of total local sales allowed under section 65A of the Act. e. The Bills of Demand issued by the $ 2 ^{n d} $ Respondent are legally valid because the Applicant company was found to have clearly manipulated the local sale in the guise of an export quota by adopting a business model unknown to the $ 2 ^{n d} $ Respondent. f. The Applicant has also been found trying to mislead the authorities by manipulating the Forms used for local sales, and this situation has been detected by the $ 2^{n d} $ Respondent. g. As an experienced LMW company, there cannot be an excuse for wrongful use of Forms, since this is crucial to the determination of quota. h. Therefore, the imposition of tax by the $ 2^{\mathrm{n d}} $ Respondent was found to be orderly and in accordance with procedures and legislation. i. Despite that, 50% remission has been approved. Further remission should not be allowed because, in addition to the various reasons given, it can serve as a lesson to the Appellant.

The Applicant, as the appellant in Appeal 423, submitted, among others: a. Without such a declaration granted, and just by quashing the decision of the $ 1^{\mathrm{st}} $ Respondent not granting full remission on import duty and GST and remitting the matter back to the $ 1^{\mathrm{st}} $ Respondent to consider and reassess, the matter poses a risk that the $ 1^{\mathrm{st}} $ Respondent may again refuse to grant a full remission of GST and import duties to the Applicant, when the Applicant was found to be not liable to pay GST and import duties. b. Without any declaration, the $ 1^{\mathrm{st}} $ Respondent may take this opportunity to grant the Applicant either 50% or 70% remission, although it was found that the Applicant is not liable to pay at all, and as a result thereof, the Applicant would be required to file a $ 2^{\mathrm{nd}} $ JR to quash the $ 1^{\mathrm{st}} $ Respondent's decision. This will lead to a vicious cycle that has no end. It defeats the purpose of the Applicant filing the JR in the very first place, which was not only to quash the $ 1^{\mathrm{st}} $ Respondent's decision, but also to determine its liability to pay GST and import duties.

We will first deal with Appeal 422 filed by the Respondents. Delivery Orders

The Applicant is a local company with the status of LMW under Section 65A of the Act. With this status, any importation of raw materials/components/equipment/machines to manufacture the end products will be exempted from import duty and sales tax. (See: LMW License: Encl. 4 Page 92)

The license was subjected to certain conditions imposed by the Respondents, i.e., 80% of the end products must be for export purposes and 20% can be distributed locally. The Applicant may apply to the Respondents for the tax exemption for the 20% local distribution. If the sale exceeded the 20% local sales quota, the Applicant is liable to pay tax.

Alternatively, for any local sales that exceeded 20%, the Applicant is entitled to another tax relief by applying to MIDA for an increased quota.

The Applicant has another option of applying to the $ 2^{n d} $ Respondent for the exceeded 20% local sale quota for ATIGA duty import rate. (See: Affidavit Respondents: Encl. 4 Page 56) (See: ATIGA's approval subject to LMW's license: Encl. 4 Pages 148-149)

It is to be noted that the Applicant is an LMW licensee. LMW licensees are subjected to various provisions, and the provisions concerned are vastly based on documentation. The only means of control for LMW is based on documentation produced to the $ 1^{\mathrm{st}} $ Respondent during the audit trail. Therefore, compliance with documentation is central to the regulation of LMW.

The relevant provisions concerning LMW are as follows: - a) Section 65A of the Act reads as follows: - "Manufacture and other operations in relation to goods in licensed warehouse

(1) The Director General may, on payment of such fees as may be fixed by him in each case, grant a licence to any person and when granted withdraw, suspend or cancel any such licence, to carry on any manufacturing process and other operation in respect of the goods liable to customs duties and any other goods.

A licence under subsection (1) shall be deemed to include a licence for warehousing goods as provided under section 65.

Any such licence shall be for such period and subject to such conditions as the Director General may specify in the licence.

(a) No goods which have undergone any manufacturing process in the licensed manufacturing warehouse may be released for home consumption or export without the prior approval of the Director General.

If such goods are released from the warehouse for home consumption the customs duty thereon shall be calculated on the basis as if such goods had been imported: Provided that the Minister may in any particular case exempt any person from the payment of the whole or part of such duty which may be payable by such person on any such goods and in granting such exemption the Minister may impose such conditions as he may deem fit". (Emphasis added) b) PTK Bil. 27, where the relevant provisions are as follows:

3.TERMINOLOGI-3.7.Drop shipment Drop shipment melibatkan penghantaran terus dagangan dari pemegang lesen kepada syarikat di Kawasan Utama Kastam (KUK) yang merupakan pelanggan kepada pengedar yang berada di luar Malaysia. Transaksi drop shipment ini dianggap sebagai jualan tempatan untuk maksud kiraan kuota.5SYARAT-SYARAT GPB (Gudang Pengilangan Berlesen)5.1.Kemudahan GPB hanya diberi kepada pengilang yang mengeksport tidak kurang dari 80% daripada jumlah nilai jualan barangan siap bagi tempoh 12 bulan (dalam tempoh perlesenan). Keperluan ini boleh diberi kelonggaran dari masa ke semasa bergantung kepada kelulusan pihak Lembaga Pembangunan Pelaburan Malaysia (MIDA).6.7Syarat-syarat Lesen6.7.1.Syarat-syarat Lesen Gudang Mengilang di bawah seksyen 65A Akta Kastam 1967 adalah seperti di Lampiran C.10DASAR PERCUKAIAN KE ATAS JUALAN TEMPATAN10.1.Penjualan barangan siap GPB ke pasaran tempatan perlu dibayar duti import mengikut Perintah Duti Kastam 2017. Walau bagaimanapun, pemegang lesen boleh memohon untuk membayar duti import pada kadar bersamaan ATIGA mengikut Perintah Duti Kastam (Barang-Barang Berasal Dari Negeri-Negeri ASEAN) (Tatanama Tariff Berharmonis ASEAN dan Perjanjian Perdagangan Barangan ASEAN) 2012 (ATIGA). Pemegang lesen perlu mematuhi syarat tempasal sekurang-kurangnya 40% nilai kandungan bahan mentah tempatan dan dari Negara ASEAN.10DASAR PERCUKAIAN KE ATAS JUALAN TEMPATAN10.6.4.Kelulusan ini membenarkan jualan barang siap ke pasaran tempatan dengan membayar duti import bersamaan kadar duti ATIGA adalah TERHAD kepada peraturan kuota jualan tempatan yang telah ditetapkan di dalam Lesen GPB (Lampiran C).Kelulusan ini akan TERBATAL sekiranya berlaku pelanggaran syarat dan duti import hendaklah dipungut semula mengikut kadar semasa.11PENJUALAN SECARA DROP SHIPMENT YANG MELIBATKAN BARANG SIAP GPB11.1Aktiviti penjualan secara drop shipment adalah dibenarkan...11.2Pengikraran barang hendaklah menggunakan Borang Kastam No.9 oleh pengimport/pembeli di Malaysia...11.2.2Nyatakan nama syarikat pengimport/pembeli sebenar di ruang dalam Borang Kastam No.9. 15PERGERAKAN BARANG-BARANG ESKPORT15.3Barangan siap GPB yang dijual/pindah kepada GPB lain sebagai bahan mentah/komponen adalah dianggap sebagai 'eksport' bagi tujuan pengiraan kuota export. Pergerakan barang-barang tersebut hendaklah menggunakan GPB No.1 seperti di Lampiran Q. (Emphasis added)

Since the LMW licensee is controlled via documentation, the usage of various forms is mentioned clearly in the PTK Bil. 27. Thus, an audit is conducted to ensure checks and balances commensurate with the need for adherence, and it shall be based solely on the documentation.

The need to follow specific documents to control the movement of goods has been clearly stated in paragraph 8 of PTK Bil. 27.

Given the above, we find that the striking features of PTK Bil. 27, which the Applicant as LMW licensee had to comply with, are as follows: - a) Export sales must be at least 80%; b) For LMW to LMW to be considered as an export sale, it must be shown via Form GPB-1; c) Local sale must be 20% or below; d) Local sale exceeding 20%, approval from MIDA or ATIGA is required; e) Local sale must be shown via Borang Kastam 9; f) Local sale must be delivered to the local company with a delivery order showing acceptance.

Coming back to the facts in the present case, having perused the evidence produced before us, we find that the Applicant failed to comply with PTK Bil. 27.

Based on the documentation produced by the Applicant, we find that there was no proof that deliveries were made to Sin Kwang and Wentel. Delivery orders shown deliveries were made to Stephen Gould, and Stephen Gould then sent the goods to Sin Kwang and Wentel, which were later endorsed by them.

These were proven via documents, and it cannot be refuted by the presumed fact that the actual deliveries were a direct delivery from the Applicant to Sin Kwang and Wentel. No documents were produced to support this presumed modus operandi.

Insofar as the whole transactions were involved, we find that the Applicant produced no single evidence to show that the deliveries were accepted via this channel from the Applicant directly to Sin Kwang and Wentel.

We are of the considered view that since there are no documents to show delivery from LMW (Ha Pack) (Applicant) to another LMW (Sin Kwang and Wentel) directly, these movements cannot be considered as an export sale.

We are also of the opinion that the learned HCJ has erred in deciding that the Applicant's deliveries were considered export in nature, which does not extract any tax, whilst the actual deliveries, based on documents, were made to Stephen Gould, a local trading company, and thus will be considered as a local sale, which is subjected to tax.

We are of the view that the issuance of the Bills of Demand is justified since the Applicant has failed to produce any documents to show there is a direct delivery from LMW to LMW as proof of an export sale. Usage of the Wrong form

The learned HCJ was also wrong when His Lordship decided that the Respondents appeared to be more preoccupied with form rather than substance.

We take note that in the case of LMW, or even in other cases involving tax, be it personal tax, business tax, import and export tax, the control mechanism is only by way of documentation. To adopt the opinion that 'form is not important but rather the substance' would negate the whole idea of having an audit trail, as the audit would only look at the documentation.

The law is very clear. Paragraph 15 of PTK Bil. 27 clearly stated as follows: -

15.PERGERAKAN BARANG-BARANG EKSPORT15.1Pengeksportan barangan daripada kilang GPB hendaklah menggunakan Borang Kastam No.2 secara online submission. Sekiranya sistem SMK tidak berfungsi (offline) maka pengikraran bolehlah dibuat secara manual selaras dengan fallback method.15.3Barangan siap GPB yang dijual/pindah kepada GPB lain sebagai bahan mentah/komponen adalah dianggap sebagai ‘eksport’ bagi tujuan pengiraan kuota export. Pergerakan barang-barang tersebut hendaklah menggunakan GPB No.1 seperti di Lampiran Q.

And again, in paragraph 8 of PTK Bil. 27, it has clearly provided as follows: Bil.PergerakanDokumenPeruntukan Undang-undang1.GPB ke GPB(keluar dan masuk)Penyata GPB-1Per.30(5)Peraturan-peraturan 1977

In the instant case, we find that instead of using GPB-1, the Applicant, on his own accord, opted for Borang Kastam 9. There was no consultation whatsoever with the $ 2^{\mathrm{n d}} $ Respondent regarding the use of Borang Kastam 9.

It is to be noted that Borang Kastam 9 is obviously meant for local sale as stated in paragraph 8 of PTK Bil. 27: II.a. GPB menghantar bahan mentah/komponen untuk kerja subkontrak(farming out) kepada Syarikat Tempatan(KUK)Borang Kastam No.9 Delivery Order(DO)Per.29(1)(a)Peraturan-peraturan 1977Butiran 84 PDK(P)2013

Even assuming that the Applicant was right in his choice of Borang Kastam 9, we find that the Applicant has stated that the actual buyer is Stephen Gould and not Sin Kwang or Wentel. (See: Encl. 4 Page 112 for delivery to Sin Kwang and Encl. 4 Page 120 for delivery to Wentel).

The need to state the exact buyer can be found in paragraph 11.2.2 of PTK Bil. 27: "Nyatakan nama syarikat pengimport/pembeli sebenar di ruang 2 dalam Borang Kastam No. 9."

Thus, even if going through the format of Borang Kastam 9, the Applicant had also failed to adhere to the said requirement. Upon reviewing Borang Kastam 9, as completed by the Applicant, it is revealed that the actual buyer is Stephen, a local trading company. Thus, it must be a local sale.

Given the above, we are of the view that the learned HCJ had erred in his decision to accept the wrong form as a mere insignificant issue which does not attract tax. In so deciding, the learned HCJ has failed to take into account that: a) Section 65A(3)(b) of the Act clearly imposed a duty on goods released from LMW; and b) Proviso to section 65A(3)(b) of the Act is only applicable to give tax exemption, subject to the condition imposed.

Based on the explanation given above, we are of the view that the Applicant has breached the conditions imposed, thus liable to pay tax.

Similarly, once the Applicant exceeded the quota for the exemption of import duty for local sale as prescribed in the conditions of the licence, the $ 2^{\mathrm{nd}} $ Respondent is entitled to demand the import duty applicable as well as GST.

The learned HCJ erred when he failed to take into account that the usage of the local sale form, which is paramount to the LMW's license, will trigger a local sale quota, taking into consideration that the audit trail will only look at documents produced for inspection and control mechanisms.

Thus, we are of the considered view that the issuance of the Bills of Demand and rejection of 50% remission are well justified, rationally founded, and legally imposed by the Respondents.

The learned HCJ had decided that the decision to consider the said deliveries as local sale is irrational since the $ 2 ^{n d} $ Respondent has taken a stand that the said deliveries were not "drop shipment" within PTK Bil. 27, but at the same time considered the same as local sale.

This can be gleaned from the learned HCJ's GOJ in paragraph 34 when his lordship stated as follows: - [34] I have also noted that whilst the $ 2^{\mathrm{nd}} $ Respondent had stated that the said deliveries do not fall under the definition of Butiran 3.7 of Perintah Tetap Kastam Bil. 27, they concluded in their letter dated 19th July 2019 that the said deliveries are considered as local sales quota as opposed to export quota. In my view, there certainly seems to be merit that to say that the said deliveries do not fall under the definition of Butiran 3.7 of the Perintah Tetap Kastam Bil. 27, but at the same time take the position that the said deliveries are tantamount to local sales quota is irrational and without basis."

We find that the learned HCJ fell into error in his appreciation of the "drop shipment" concept as applied within the $ 2^{\mathrm{n d}} $ Respondent's regulatory framework.

The $ 2^{\mathrm{nd}} $ Respondent's regulatory framework has defined drop shipment in paragraph 3.7 of PTK Bil. 27 as follows: -

3.7 Drop shipment Drop shipment melibatkan penghantaran terus dagangan dari pemegang lesen kepada syarikat di Kawasan Utama Kastam (KUK) yang merupakan pelanggan kepada pengedar yang berada di luar Malaysia. Transaksi drop shipment ini dianggap sebagai jualan tempatan untuk maksud kiraan kuota.

Under this provision, drop shipment involves a scenario where an overseas buyer instructs a Malaysian LMW manufacturer to deliver goods directly to a local customer (typically within the Kawasan Utama Kastam (KUK)). In such a case, the transaction is deemed a local sale for the LMW, even if the buyer is arranged through an overseas party.

However, we find that this business model does not fit the modus operandi adopted by the Applicant. The Applicant is not located overseas, and Sin Kwang and Wentel are not local companies located in Kawasan Utama Kastam (KUK). Both Sin Kwang and Wentel are LMW. Thus, it cannot be a local sale to the Applicant.

We find that the $ 2^{\mathrm{nd}} $ Respondent's regulatory framework has allowed drop shipment by LMW to be considered as an export sale in 4 situations, which are well explained in "Panduan Bahagian Perkastaman - Aktiviti Jual Beli Syarikat Berstatus Gudang Pengilangan Berlesen (GPB) Melibatkan Syarikat Pedagang". (Guideline)

The learned HCJ in paragraph 32 of his GOJ had referred to the $ 4^{th} $ situation stated in the Guideline to the situation that fit the Applicant's business model when he said as follows: - [32] Reference is also made to the guidelines provided by the customs department which provides that "drop shipment" involving deliveries of raw materials from one LMW to another LMW involving either local or foreign trading company is allowed and the sales quota for the LMW in that situation is categorised as export quota. An excerpt of the said guidelines is reproduced below: i. Pemegang lesen GPB adalah dibenarkan untuk menjalankan aktiviti jual beli dan memindahkan barang yang melibatkan syarikat pedagang di luar/dalam Malaysia. Dasar semasa menyatakan jualan barang siap GPB ke Kawasan Utama Kastam (KUK) adalah tertakluk kepada duti import, duti eksais dan cukai jualan sebagaimana peruntukan perundangan di bawah seksyen 65A(3)(b) Akta Kastam 1967, seksyen 28 Akta Eksais 1976 dan seksyen 57(b) Akta Cukai Jualan 2018. c. Delivery Order (DO) hendaklah dinyatakan seperti dalam borang K2 iaitu syarikat penghantar adalah di atas nama GPB care of (bagi pihak) pedagang (nama penuh pedagang dan alamat) manakala syarikat penerima adalah di atas nama GPB pelanggan di Kawasan Zon Bebas. d. Kuota jualan syarikat GPB dalam keadaan ini dikategorikan sebagai memenuhi kuota jualan eksport."

The $ 4^{\mathrm{th}} $ situation involved "Pedagang membeli barang daripada GPB dan mengarahkan GPB memindahkan barang berkenaan kepada pelanggan di Zon Bebas".

Free Zone is defined by section 2(1B) of the Act as any area in Malaysia which has been declared by the Minister to be a free commercial zone and a free industrial zone under the Free Zones Act 1990.

In the instant case, we find that there is no evidence that Sin Kwang and Wentel were located in Zon Bebas. There was no involvement of Borang K2 in the whole episode. Thus, we are of the view that the learned HCJ has erred in reference to the $ 4^{th} $ situation. This error leads to the wrongful conclusion that the usage of Borang K9 by the Applicant is justified and that the sale constitutes an export sale.

Further, we find that the learned HCJ has failed to take into consideration that the Applicant's modus operandi is more likely to fit the $ 3^{rd} $ situation, which involved "Pedagang membeli barang daripada GPB dan mengarahkan GPB (penjual) memindahkan barang berkenaan kepada pelanggan berstatus GPB (pelanggan)", which fulfils this $ 3^{rd} $ situation, will entitle the LMW to claim a sale of export quota.

To be able to claim an export quota under this type of drop shipment, the Applicant must comply with the five (5) conditions, which are clearly spelled out in the guidelines, where the usage of Borang GPB-1 is crucial in determining a sale from LMW to LMW. In fact, the same information must also be included in the delivery order. Failure to comply with all the conditions above will not entitle LMW to claim that its sale constitutes an export quota.

In the present facts, we find that the Applicant has ignored the usage of Borang GPB-1, but instead, the Applicant, in the disguise of an export sale, used Borang Kastam 9 meant for local sale. Clearly, the Applicant was adopting his own procedure instead of the established regulatory framework laid by the $ 2^{\mathrm{n d}} $ Respondent.

Given the above, we are of the view that the learned HCJ has clearly confused the whole scenario of the sale conducted by the Applicant in disguise of an export sale by adopting his own procedure instead of the established regulatory framework laid by the $ 2^{n d} $ Respondent.

All in all, we are of the view that the Applicant's business model does not fall under the legally defined "drop shipment" category, and the failure to comply with mandatory documentary procedures disqualifies the transactions from being treated as export sales. As such, the imposition of tax was lawful and appropriate. The decision to impose tax serves as a lesson to the Applicant.

The learned HCJ has decided that any non-compliance with the LMW license would only result in revocation of the license or imposition of a compound and that the imposition of tax by the Respondents was erroneous in law, especially since it appeared to be done "to teach the Applicant a lesson".

We find that under section 65A(3)(b) of the Act, import duty is automatically imposed on any goods released from an LMW unless specific conditions are met for exemption. Once those conditions are breached - such as by exceeding the 20% local sales quota - the statutory duty becomes payable, regardless of intent or purpose. Therefore, we view that there is ample power stipulated by the substantive law to give absolute power to the $ 2^{\mathrm{n d}} $ Respondent to impose tax upon failure to adhere to conditions.

Therefore, the allegation that if there is any breach of the conditions of the licence by the Applicant may only lead to compound or prosecution and revocation of the license as expressly outlined in the licence is untenable and devoid of merit.

The learned HCJ has also decided that the $ 1^{\mathrm{st}} $ Respondent's decision to refuse further 50% remission was exercised unreasonably when it was done to serve as a punishment/lesson to the Applicant. (See: Paragraph 52 of the GOJ)

We find that the $ 1^{\mathrm{st}} $ Respondent has provided more than just a reason as to why further remission of 50% is denied. Serving as punishment is only one (1) of the many reasons given, and the learned HCJ has failed to consider many other reasons given, which resulted in a wrong conclusion by His Lordship.

In paragraph 6.8 of the $ 1^{\mathrm{st}} $ Respondent Affidavit, the reasons are as follows: (See: Encl. 4 Page 77) "6.8 Permohonan Pemohon untuk mendapatkan remisi 50% ke atas baki bil tuntutan duti import dan cukai barang dan perkhidmatan tidak diluluskan berdasarkan justifikasi berikut: i) Bahagian Cukai, Kementerian Kewangan berpandangan keputusan penolakan ke atas permohonan Pemohon sebelum ini adalah wajar kerana Pemohon tidak mematuhi syarat dan peraturan GPB. Namun, pertimbangan kelulusan 50% diberi apabila semakan mendapati tiada unsur penyelewengan sepanjang transaksi berlaku. Kelulusan diberikan sebanyak 50% sahaja kerana Pemohon tidak mematuhi prosedur yang ditetapkan di bawah GPB; ii) Setiap syarikat mempunyai trend perniagaan tersendiri. Namun, sebagai syarikat berstatus GPB, Pemohon seharusnya lebih peka dan merujuk kepada JKDM terlebih dahulu mengenai business model syarikat sebelum mula beroperasi. Sekiranya syarikat enggan berbuat demikian dan ingin menjalankan model perniagaan dengan kaedah tersendiri sekaligus gagal mematuhi syarat-syarat GPB sedia ada, syarikat adalah digalakkan untuk menyerah kembali lesen GPB dan melaksanakan pengilangan di KUK. Syarikat boleh merujuk dengan JKDM untuk menikmati kemudahan-kemudahan yand disediakan kepada pengilang. iii) Sehubungan dengan itu, Kementerian Kewangan berpandangan permohonan rayuan meremitkan baki 50% ke atas bil tuntutan duti import dan cukai barang dan perkhidmatan berjumlah RM903,757.22 tidak boleh dipertimbangkan; dan iv) Keputusan ini adalah muktamad dan sebarang rayuan tidak diterima."

According to the above averment, the $ 1^{\mathrm{st}} $ Respondent has stated that the 50% remission was refused due toa) The Applicant has failed to adhere to the condition, procedure, and regulation pertaining to LMW; b) The Applicant, as a company, has opted for its own business model but failed to consult the $ 2^{n d} $ Respondent on a proper business model to be adopted as LMW; c) As LMW, the Applicant is controlled by rules. If the Applicant is unable to abide by the rules, the Applicant is advised to surrender the licence and conduct business outside LMW, where the Applicant can enjoy other facilities; d) Based on the reasons above, the remaining 50% remission was denied, and the decision is final.

We are of the view that if the learned HCJ had kept the above reasons at the forefront of his judicial analysis, then it is very likely that His Lordship might have come to a different conclusion.

The Applicant attempted to justify its usage of Form K9 and omission of Form GPB-1 by claiming it was bound by a Non-Disclosure Agreement (NDA) with Stephen Gould. According to the Applicant, this NDA restricted disclosure of the end purchasers (Sin Kwang and Wentel), allegedly preventing the Applicant from naming them as buyers on the customs forms and delivery documents.

We find that this explanation is not only unconvincing but also irrelevant in the context of LMW compliance. If the Applicant's business arrangement required deviation from standard LMW procedures, it had every opportunity to seek guidance or clarification from the $ 2^{n d} $ Respondent beforehand. However, we find that no such consultation was ever made.

Bottom line, we find that the business model adopted by the Applicant does not meet the LMW criteria, and the Applicant has never consulted the $ 2^{n d} $ Respondent in doing so.

Given the above, we are of the view that the existence of an NDA does not excuse the Applicant's failure to use proper forms or document its transactions in accordance with LMW regulations.

Therefore, we view that the decision to issue the Bills of Demands and deny further remission was lawful and rational, given that the Applicant chose to proceed with a model that knowingly conflicted with the licensing terms.

ATIGA is an agreement signed between ASEAN countries to facilitate the free flow of goods within the ASEAN region, by providing a comprehensive framework aimed at reducing trade barriers among the ASEAN countries. In order to qualify for the ATIGA rate of duty (0%), the goods must be shown to originate from ASEAN countries.

The Applicant argued that even if the sales were considered local and exceeded the 20% quota, the transactions should still be eligible for 0% import duty under ATIGA.

However, we find that this argument is fundamentally flawed. While ATIGA allows for reduced or zero import duty on qualifying ASEAN-origin goods, this preferential treatment is subject to strict conditions, including compliance with LMW licensing terms.

In other words, the 0% ATIGA rate was limited to sales within the 20% local quota. Once that quota is breached without prior approval from MIDA or additional ATIGA clearance, the exemption automatically lapses, and import duty becomes payable at the prevailing rate. (See: Paragraph 10.6.4 of PTK Bil. 27)

Given the above, we are of the view that the Applicant, even relying on ATIGA, cannot avoid paying tax in view of the local sales quota exceeding the limit. Exercise of discretion

As to the issue of remission, the issue to be decided by the court is whether the $ 1^{\mathrm{st}} $ Respondent had exercised his discretion correctly.

The $ 1^{\mathrm{st}} $ Respondent has decided to allow first remission on 50% and refused to allow another 50% remission, and the grounds were well spelt out in paragraphs 75 and 76 above. (See: Encl. 4 Pages 76- 77)

We are of the view that so long as the $ 1^{\mathrm{st}} $ Respondent exercises the discretion without improper motive, the exercise of discretion must not be interfered with by the court unless he had misdirected himself in law or had taken into account irrelevant matters or had not taken into consideration relevant matters, or that his decision militates against the object of the statute.

Based on the evidence presented before the court, we are of the considered opinion that the decision of the $ 1^{\mathrm{st}} $ Respondent was justified and reasonable in the way that conclusions are based on: - a) Applicant who is an LMW holder, eligible to enjoy facilities, but the end product is subject to an export quota of 80% and local sale of 20%. b) The quota conditions have been set in the license; thus, the Applicant is well aware of the conditions. c) The operation, raw materials, export sales, and local sales are controlled via documentation which are subject to audit. d) The audit trail discovered that the local sales exceeded the quota without MIDA approval or exemption under ATIGA, as they are limited to the percentage of total local sales allowed under section 65A of the Act. e) The Bills of Demand issued by the $ 2 ^{n d} $ Respondent are legally valid because the Applicant company was found to have clearly manipulated the local sale in disguise of an export quota by adopting a business model unknown to the $ 2 ^{n d} $ Respondent. f) The Applicant has also been found trying to mislead the authorities by manipulating the forms used for local sales, and this situation has been detected by the $ 2^{n d} $ Respondent. g) As an experienced LMW company, there cannot be an excuse for the wrongful use of forms since this is crucial to the determination of quota. h) Therefore, the imposition of tax by the $ 2^{\mathrm{n d}} $ Respondent was found to be orderly and in accordance with procedures and legislation.

We are of the view that the refusal to allow a remission was entirely within the $ 1^{\mathrm{st}} $ Respondent's lawful discretion under Section 14A of the Act, which empowers the $ 1^{\mathrm{st}} $ Respondent to remit any part of customs duty if he deems it just and equitable, subject to conditions he may impose.

As such, we view that there is nothing illegal nor irrational as to the discretion exercised by the $ 1^{\mathrm{st}} $ Respondent in refusing the 50% remission applied by the Applicant.

Based on the reasons given above, we allow the Respondents' appeal.

This is the Applicant's appeal against part of the decision of the learned HCJ, which dismissed the Applicant's declaratory reliefs sought in the JR, i.e., a declaration that the Bills of Demand are null and void and the Applicant is entitled to a full remission and refund.

To avoid any repetition, based on our findings in Appeal 422, inter alia, that the issuance of the Bills of Demand and rejection of 50% remission are well justified, rationally founded, and legally imposed, thus, we find that this appeal has no merit.

Based on the reasons above, we find that the learned HCJ erred in partially allowing the Applicant's JR application.

We therefore unanimously set aside the decision of the High Court dated 24 May 2024. The Respondents' Appeal 422 is hereby allowed, and the Applicant's Appeal 423 is hereby dismissed.

We also order costs as follows: - Appeal 422 a) The Applicant to pay the Respondents costs of RM15,000.00 without allocator. Appeal 423 b) The Applicant to pay the Respondents costs of RM15,000.00 without allocator. Dated: 24 November 2025 Ahmad Kamal Bin Md Shahid Judge Court of Appeal Malaysia Counsel appearing: For the Applicant: (Respondent in Appeal 422 and Appellant in Appeal 423) Mr. Cheong Yew Sheng [Messrs B C Teh & Yeoh] For the Respondents: (Appellants in Appeal 422 and Respondents in Appeal 423) Ms. Aliza binti Jamaluddin (together with Mr. Amirul Hisyam Bin Azedi Noor) [Senior Federal Counsel, Pejabat Penasihat Undang-Undang Negeri Pulau Pinang]