Ayam Aa Farm Sdn Bhd (dalam Likuidasi) v 1. ) Ketua Pengarah Jabatan Kastam Diraja Malaysia (AA-24NCvC-148-04/2023)

1.

TRIBUNAL RAYUAN KASTAM …RESPONDENTS GROUNDS OF JUDGMENT Introduction [1]. This appeal challenges the decision by the Customs Appeal Tribunal (2nd Respondent) on Goods and Services Tax (“GST”). Ayam AA Farm Sdn Bhd (Appellant), a GST-registered company known for breeding and selling chicken broilers, initially adhered to GST regulations. But in a sudden turn of events post-March 2015, the company ceased its GST payments, effectively dodging its tax obligations. The crux of their argument is that its dealings with Contract Farmers fall outside the scope of GST, asserting that these transactions are either non-taxable or exempt. Background facts [2]. On 23 December, 2016, the 1st Respondent issued a Bill of Demand (“BOD”) amounting to RM3,116,641.74 for GST covering the period from April 1, 2015, to July 31, 2016, against the Appellant. The BOD was issued following an audit that revealed discrepancies in GST declarations by the Appellant, particularly involving the non-recording of sales of day-old chicks (“DOC”), chicken feed, and medicines to contract farmers as taxable supplies. [3]. The Appellant, a GST-registered company engaged in the breeding and sale of chicken broilers. The crux of the matter lies in whether the written agreement between the Appellant and its contract farmers constitutes a taxable supply relationship under the Goods and Services Tax Act 2014 (GST Act). According to the agreement, the Appellant appoints farmers (Contract Farmers) to rear Day-Old Chicks (“DOC”) using the feeds and medicines provided by the Appellant, and in return, these farmers would supply the matured broilers back to the Appellant. Item Particular s

Matured broilers 4.30 per kg on live weight x numbers of broilers returned to the Appellant Less: supplies provided by the Appellant to Contract Farmers

2.

DOC 60 per DOC x number of

Chicken Feed (starter)

Chicken Feed (grower) 50 per 50kg 86.50 per 50kg 4. Miscellaneous costs (catching fee, medicine) as per claim Item 1 minus (Items 2 to 4) = Final Entitlement of the Contract Farmers [4]. The Contract Farmers’ entitlements are as per the above table. They are computed from monthly invoices issued by the Appellant to the Contract Farmers for services rendered. The Contract Farmers are paid based on the number of broilers returned, adjusted for the supplies provided by the Appellant. [5]. Dissatisfied with the audit results and the BOD amounting to RM3,116,641.74 for GST covering the period from April 1, 2015, to July 31, 2016, the Appellant filed an appeal through “Borang A” on August 21, 2019, to the 2nd Respondent. [6]. On March 17, 2023, the 2nd Respondent upheld the Bill of Demand. The Appellant submits that the 2nd Respondent erred in its decision by misinterpreting the relationship between the Appellant and the Contract Farmers as that of supplier and purchaser, rather than principal and sub-contractor. The Appellant asserts that they maintain ownership of the DOC and are the ultimate beneficiaries of the broilers, claiming that the Contract Farmers do not hold ownership. [7]. The Appellant relied on the ‘Guide on Manufacturing for Goods and Services Tax’ (as at 6 January 2016), under the title of Farming In/Out (Sub-Contract Work) arguing that even though the Guide on Manufacturing for Goods and Services Tax is more towards the manufacturing industry, it is still applicable to the agricultural industry/field as the manner of work is the same, i.e. sub-contracting out to third party. The Appellant submits that this manner of transaction does not transfer the ownership of the goods therefore the Appellant need not account for GST output tax on the raw materials provided to the contract farmers. It would exempt them from GST on supplies to Contract Farmers. [8]. To support the Appellant’s interpretation of the contracts they rely on the case of Rainy Sky SA v. Kookmin Bank [2012] 1 All ER 1137, to state that the agreement stipulates a service relationship rather than an outright sale of DOCs. The Appellant emphasizes that the 2nd Respondent should have considered the underlying intentions of the parties, as outlined in the principle from the case Rainy Sky SA’s case (supra), where Lord Clarke SCJ said: “Where, as in the present case, a term of a contract was open to two possible interpretations, it was appropriate for the court to adopt the interpretation which was most consistent with the business common sense in resolving the question of what a reasonable person ie a person who had all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract ---- would have understood the parties to have meant. If the language was capable of more than one construction, it was not necessary to conclude that a particular construction would produce an absurd or irrational result before having regard to the commercial purpose of the agreement……” [9]. The Appellant also references Arnold v. Britton and Others [2016] 1 All ER 1 and a case from our local jurisdiction SPM Membrane Switch Sdn Bhd v. Kerajaan Negeri Selangor [2016] 1 MLJ 464 to support the argument that the Tribunal should consider the commercial purpose and the parties' intentions rather than just the literal terms. Her Ladyship Zainun Ali FCJ states: “[78] Thus the nub of this appeal is, when one has to choose between two competing interpretations, the one which makes more commercial sense should be preferred if the natural meaning of the words is unclear. It is noteworthy that the same approach was taken by Lord Hodge (in the majority decision of Arnold v Britton), where His Lordship accepted the unitary process of construction in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 para 21 that: “… if there are two possible constructions, the Court is entitled to prefer the construction which is consistent with business common sense and to reject the other.”” [10]. Further, the Appellant highlights several errors made by the 2nd Respondent, including the failure to adopt a purposive interpretation of the contract terms that would reflect the true business nature and intentions of the parties. The Appellant also submitted that 2nd Respondent overlooked the actual operational dynamics and the accepted norm in this sort of business between the Appellant and the Contract Farmers. Additionally, the Appellant argues that the supplies provided were not a taxable "supply" under the GST Act, since they were ultimately for the Appellant's benefit and control remained with the Appellant. [11]. In conclusion, the Appellant seeks to have the appeal allowed and the GST sums paid to be refunded, contending that the 2nd Respondent’s decision was based on a misinterpretation of the contractual relationship and the applicable GST guidelines. Issues [12]. The legal argument before the tribunal and this court hinges on the interpretation of the written agreement and whether it unequivocally establishes a taxable supply relationship between Appellant and the Contract Farmer. Further, the dispute, questions the existence of any business custom that would exempt the Appellant from GST liability. Central to the case is Section 9(1) of the GST Act 2014, which defines the scope of the GST, and whether the Appellant is obligated to declare all sales for GST levy. The issues for determination from the submission of the parties are: a) Issue 1: Whether the relationship between the Appellant and the Contract Farmers is that of a principal and sub-contractor or a supplier and purchaser? b) Issue 2: Whether the Contract Farmers have control and ownership of the DOC? If the Appellant retains ownership and control what is the role of the Contract Farmers a sub-contractor? c) Issue 3: How should the contracts between the Appellant and the Contract Farmers be interpreted, especially regarding terms such as "purchase" and "supply back”? Should the interpretation consider the underlying intentions and commercial logic behind the contracts? d) Issue 4: Whether the transactions between the Appellant and the Contract Farmers constitute taxable supplies under the Goods and Services Tax Act 2014. Should the supplies provided by the Appellant to the Contract Farmers be exempt from GST based on the referenced guidelines? e) Issue 5: Whether the "Guide on Manufacturing for Goods and Services Tax" or the "Guidelines on Agriculture, Fisheries, and Livestock Industries" is the correct guideline to apply in this context. f) Issue 6: Whether the Appellant is entitled to a refund of the GST amounting to RM3,116,641.74 paid to the Royal Malaysian Customs based on the interpretation of the GST Act and the contracts with the Contract Farmers. Issue 1, 2 and 3: The contract between the Appellant and its Contract Farmers [13]. The Appellant argues that the 2nd Respondent erred in interpreting the agreement between the Appellant and the Contract Farmers. The Appellant submits the agreements detail that the Contract Farmers are to rear DOC, using chicken feeds and medicines provided by the Appellant. The broiler chicks when matured are then delivered back to the Appellant, where the Contract Farmers are compensated based on the number of broilers returned, adjusted for costs of supplies (chicken feeds and medicines) provided. [14]. The Appellant submits that the Contract Farmers function as subcontractors rather than independent contractors, having no control over the DOC and being required to rear them using supplies provided by the Appellant. The contract farmers are only permitted to sell back the matured broilers to the Appellant, who benefits from the rearing services. There are no invoices issued by the Contract Farmers for the DOC and feeds, which reinforcing the Appellant’s position that the farmers merely rear the DOC for the Appellant's benefit. [15]. The Appellant contends that, if the Contract Farmers were indeed customers, the Appellant would have invoiced them for the DOC, feeds, and other items accordingly. The 2nd Respondent found that the services provided by the Contract Farmers and the supplies by the Appellant were subject to GST under Section 9 and Section 4 of the GST Act. However, the Appellant asserts that, as per Section 2 of the GST Act, they remain the owner of the DOC and broilers, as they retain control and the power of disposition over these goods. [16]. The Appellant contends that the agreement stipulates a service relationship rather than an outright sale of DOCs. The Appellant emphasizes that the 2nd Respondent should have considered the underlying intentions of the parties, as outlined in the principle from the case Rainy Sky SA (supra). [17]. In summary, the Appellant maintains that the agreement should be seen as a service contract, not a sale, and thus not subject to GST. Court’s finding [18]. Upon review of the submissions presented by both parties and the agreements in question, it is clear that the heart of the dispute lies in the determination of the nature of the transactions between the Appellant and its Contract Farmers. The primary rule in the interpretation of documents is that the intention of the parties must be determined from the written instrument itself; see Goh Gok Hoon v Abdul Hamid & Anor [1966] 1 LNS 52. [19]. This court is in agreement with the Respondents that the transactions between the Appellant and the Contract Farmers constitute a supply-and-purchase relationship, thus making them subject to GST. This is evident from the written agreements itself, which describe a process where the Appellant supplies DOC, chicken feed, and medicines to the Contract Farmers, who, in turn, raise the chicks and supply the mature broilers back to the Appellant at specified prices. Reviewing one such agreements, the audit findings clearly indicates that the Appellant purchased chicken feed from the supplier at RM80.50 and then resold it to the Contract Farmer named Gong Eng Siong at a higher price of RM86.50. This price difference of RM6.50 indicates that the Appellant made a profit on the sale of chicken feed to the Contract Farmer, thereby making them liable to pay GST. [20]. The agreement between the Appellant with the Contract Farmers, as mentioned above also constitute a supply-and-purchase relationship. The following provision of the Farmers Contract, describes the process: “2.1 The company shall supply to the contract farmer and the contract farmer shall purchase the DOC based on the quantity and price as specified in the section 1 of the Second Schedule hereto” “4.1 The company shall supply to the contract farmer and the contract farmer shall purchase the feeds from the company based on the quantity and price that is specified under section II of the Second Schedule hereto.” “ 5.1 The contract farmer shall supply the Broilers and the Company shall purchase the Broilers at the ex-farm price as specified in section III of the Second Schedule hereto” [21]. In Ting Jack Tak, Ling Kuong Ing & Nairn Land Sdn Bhd [2020] 1 LNS 1984, the High Court stated: “[39] ……, it is clear that in construing a contract, the intention of the contracting parties must be given effect and this can be gathered from the words used in the contract itself. The court must give effect to the plain meaning of the words used.” (underline is emphasised) [22]. The 2nd Respondent also relies for support from the Federal Court case Morello Sdn Bhd v. Jacques (International) Sdn Bhd [1995] 2 CLJ 23: [1995] 1 MLJ 577, where it states that contracts should be interpreted based on the actual words used by the parties, rather than speculating on what the parties might have intended to say. His Lordship Edgar Joseph Jr FCJ, in a majority decision of the Federal Court states: “In our view, the only clause of direct relevance to the issue at hand is clause 3 which expressly provides for an initial payment of the sum of RM116,700 by way of "deposit to be paid on signing of the contract". For the purposes of construction of contracts, the intention of the parties is the meaning of the words they have used. In Schuler (L.) AGv . Wickman Machine Tool Sales Ltd. [1974] AC 235, Lord Simon of Glaisdale approved the following passage in Norton on Deeds (2nd Ed. p.50): ...the question to be answered always is, 'What is the meaning of what the parties have said?" not 'What did the parties mean to say?"...it being a presumption juris et de jure that the parties intended to say that which they have said. (underline is emphasised) [23]. The Respondents also referred to Ab Aziz Al-Safi Bin Ismail & Anor v Noraini Binti Abdullah [2016] 6 CLJ 793; [2016] 2 MLJ 609, where the Court of Appeal emphasized that all related agreements must be read together to discern the true intentions of the parties. “[33) With respect to the learned High Court Judge, while the terms in this letter may appear to be in conflict with the Perjanjian Persefahaman, the court has clearly overlooked the other agreement which is to be found in the Deklarasi of 7 September 2009. As was pointed out earlier, the relationship between the parties is to be found in the MOU, Perjanjian Persefahaman and later, the Deklarasi. All these agreements were free/y entered into by the respondent; her signature is affixed to each of these agreements. These agreements must also be read together to discern the intention of the parties and the terms as agreed between them... .

Once these agreements are properly understood, it becomes apparent that the terms of the respondent’s appointment as manager no longer resides in the Perjanjian Persefahaman alone or even the earlier MOU, but in the Deklarasi as well. And, on a totality of evidence, both undisputed and admitted, what is patently clear is that the respondent failed to attend to the matters that were agreed under both agreements, the Perjanjian Persefahaman and the Deklarasi.” [24]. Having considered the above, this court has no difficulty in holding that the terms of the agreement between the Appellant and the Contract Farmers establishes the relationship of supply and purchase, not at all that of principle and subcontractor. [25]. The court observes that the arrangement does not merely show a subcontractor's role to the Contract Farmers but places them in a position where they buy supplies from the Appellant, raise the livestock, and sell the mature broilers back to the Appellant. This comprehensive involvement in the process, coupled with the assumption of risk (such as mortality and disease management) and the potential for profit, aligns more closely with that of an independent contractor engaged in a commercial transaction, rather than a subcontractor performing a service under the direct control and for the benefit of the Appellant. Also, the use of terms like "purchase" and "supply back" in the agreements, along with the absence of any terms explicitly defining the relationship as one of principal and subcontractor, further supports the argument that these transactions should be subject to GST. [26]. This court finds no part of the written agreement between the Appellant and the Contract Farmers which states that the Appellant is the perpetual owner of the chickens. This is clearly evidenced by the fact that the sale and purchase of DOC, feed, and medicines are entirely based on the written agreements between the Appellant and the Contract Farmers. Ideally, once the DOC is sold, ownership no longer remains with the Appellant. [27]. Further considering the contractual terms and the operational set up of these transactions, the court finds that the relationship established by the agreements does indeed form a supply-and- purchase arrangement. The essence of GST is to tax the supply of goods and services, and in this context, the transactions between the Appellant and its Contract Farmers fall squarely within this premise. The provision of DOC, feed, and medicines by the Appellant to the Contract Farmers, and the subsequent return of mature broilers, constitutes a chain of supply that is taxable under the GST Act. [28]. Insofar as the Appellant’s claim that the dealing is "conventions”. The Appellant did not provide any evidence during the audit to support the claim of "business conventions." This concept is also not mentioned in the written agreements between the Appellant and the Contract Farmers. Therefore, the court is bound to consider what is in the written agreements, which indicate only a seller-buyer relationship. Also, to be noted is that the Appellant pays the Contract Farmers for the broilers, not as a service fee, payment to the Contract Farmers is based on a set price that includes the higher cost of feed and medicines. The written agreements do not specify payments as solely for rearing services. [29]. Consequently, I hold the BOD of RM3,116,641.74 issued on 23.12.2016, for sales of food, medicines, and chicken-catching fees is proper and valid in accordance with section 9(1) of GST Act. It also followed by the failure of the Appellant to issue and record invoices for supplies made to the Contract Farmers which constitutes a breach under Section 34 of the GST Act 2014. Sections 9 and 34 is produced here below for ease of reference: “Imposition and Scope of Goods and Services Tax, etc Section 9 (1) A tax known as goods and services tax (GST) shall be charged and levied on— a). any supply of goods or services made in Malaysia including anything treated as a supply under this Act; and b) any importation of goods into Malaysia. Production of tax invoices by computer Section 34. For the purposes of any provision under this Act in relation to a tax invoice, a registered person shall be treated as having issued a tax invoice to another person notwithstanding that there is no delivery of any equivalent document in paper form to the person if the requisite particulars are recorded in a computer and are—

transmitted or made available to the person by electronic means; or

produced on any material other than paper and is delivered to the person” [30]. The net result of all the above is that the BOD of RM3,116,641.74 was set-off against the Appellant's tax refund claims. The Appellant after the audit, started charging GST to its contract farmers. Issue 4 & 5 whether Contract Farmers are exempt from GST based on the referenced guidelines Court finding [31]. This court is of the view that the Appellant engaged in poultry farming and trading in chicken feeds, which clearly falls under the agricultural sector. The "Guidelines on Agriculture, Fisheries, and Livestock Industries" specifically addresses GST issues related to agriculture, making it the most relevant guideline. This guideline was available and relevant to the Appellant’s business, providing clear instructions to be followed to ensure compliance with GST. The guideline provides detailed guidance tailored to the agricultural sector, including activities such as rearing livestock, selling feed, and managing agricultural products. Where else "Guide on Manufacturing," relied by the Appellant is intended for industrial manufacturing processes and does not cover the unique aspects of agricultural operation. [32]. I am constrained to hold the inappropriate reference by the Appellant appears to be a calculated move to circumvent GST obligations. Issue 6: Whether the Appellant is entitled to a refund of the GST amounting to RM3,116,641.74 [33]. The Appellant is not entitled to a refund of the GST paid. The 2nd Respondent’s decision to uphold the BOD is correct based on the application of the provisions of the GST Act and the contractual relationship with the Contract Farmers. Conclusion [34]. In summary I state as follows: a) The court finds the transactions between the Appellant and Contract Farmers constitute a supply-and-purchase relationship, subject to GST under the GST Act 2014. b) This court holds that the transactions are subject to GST, with the Contract Farmers acting in a capacity that aligns more with independent contractors than subcontractors. c) The "Guide on Manufacturing for Goods and Services Tax" has no legal effect and should not be applied. The "Guidelines on Agriculture, Fisheries, and Livestock Industries," is more applicable to the Appellant's business activities. d) The temporary transfer of possession and control of DOC to Contract Farmers involves a taxable supply of goods and services. e) In the upshot, I dismiss the appeal in favour of the Respondents, affirming the decision of 2nd Respondent and the Director General of Customs to uphold the Bill of Demand (BOD) issued to the Appellant. The Appellant is liable for the GST amounting to RM3,116,641.74, and no refund is warranted. f) Costs RM5,000.00 in favour of the Respondent. Date : 13 June 2024 Moses Susayan MOSES SUSAYAN Judicial Commissioner High Court in Malaya at Ipoh, Perak Counsel: For the Appellant : Cheng Theng Keat Advocates and Solicitors Messrs Cheng, Lee & Goh Jalan Jelutong, Pulau Pinang For the Respondent 1 : Muhamad Izwan bin Mohamed Nor Federal Counsel Legal Division Royal Malaysia Customs Department Putrajaya (Notice: This Grounds of Decision is subject to official editorial revision) Headnotes Contract ─ Interpretation ─ Whether the Contract Farmers’ agreement constitute a supply-and-purchase relationship and thereby the transactions are subject to GST Act 2014 ─ Whether the Contract Farmers acting in a capacity that aligns more with independent contractors than subcontractors would exempt them from GST ─Whether the use of "Guide on Manufacturing for Goods and Services Tax" has no legal effect and should not be applied ─ The "Guidelines on Agriculture, Fisheries, and Livestock Industries," is more applicable to the Appellant's business activities ─ Whether temporary transfer of possession and control of Day-Old-Chick to Contract Farmers involves a taxable supply of goods and services.