Ketua Pengarah Hasil Dalam Negeri v SUDHAKARAN A/L KESAWAN (WA-14-8-04/2023)

From 2009 to 2015, Sudhakaran a/l Kesawan (“the Respondent”) was on secondment with Maybank Papua New Guinea. The Inland Revenue issued a Notice of Assessment dated 10.1.2017 for tax due in respect of his income received for Years of Assessment 2009 to 2015 whilst on secondment.

On appeal to the Special Commissioners for Income Tax (“SCIT”), these notices were set aside. The Inland Revenue (“the Appellant”) now appeals against the decision of the SCIT.

The relevant preceding events prior to the issuance of the Notice of Assessment 2017 are set out in the table below: No. Date Events

1.

16.06.1981 The Respondent commenced employment with

2007 The Respondent was appointed the Assistant Branch Manager of the MBB Klang Branch. His role was to develop and enhance the business goals of the branch.

3.

13.1.2009 The Taxpayer received a letter from MBB approving his appointment as Head, Operations of Papua New Guinea (“MPNG”) with effect from 13.01.2009.

4.

19.1.2009 Respondent commenced employment as Head, Operations of MPNG.

5.

18.5.2016 MBB disposed of its investment in MPNG by way of a Share Sale Agreement between MBB, Kina Ventures Limited and Kina Securities Limited. MPNG then became known as Kina Bank Ltd. It was also agreed that that MBB would second several employees (including the Respondent) to Kina Bank Ltd in order to facilitate the transition, for a period of up to 12 months.

7.

19.4.2016 A notice was issued by Kina Bank Ltd (previously MPNG) to the Respondent to release him from his secondment with effect from 30.4.2016. The Respondent opted for early retirement due to medical reasons with effect from 03.06.2016.

8.

18.5.2016 MBB filed Form CP22A (Notification of Cessation of Employment.

9.

10.1.2017 The Appellant issued a Notice of Assessment to the Respondent. [4] The Notice of Assessment 2017 was in respect of income received pursuant to s. 13(2)(c) of the Income Tax Act, 1967 from 2009 to 2015 as follows:- Year of Assessment (“Y/A”) Tax due and payable (RM) 2009 8,613.00 2010 47,262.07 2011 45,676.80 2012 39,283.60 2013 49,060.44 2014 68,208.81 2015 63,632.70 [5] On 14.9.2017, the Respondent filed Notices of Appeal (Form Q) against the impugned assessments to the SCIT. [6] On 7.4.2023, the SCIT allowed the appeal of the Respondent and set aside the Notice of Assessment. Decision of SCIT [7] The basis of the decision of the SCIT in a nutshell, is summarised as follows:

In order to tax the income received whilst the Respondent was on secondment in MPNG, the Appellant must establish that his duties in MPNG (and subsequently, Kina Bank Ltd) were incidental to the exercise of his previous employment in MBB, Klang. Once this is proved, his income received from his overseas assignment would be deemed received from Malaysia, pursuant to s. 13(2)(c) of the Income Tax Act 1967;

(ii) As there is no definition of incidental duties, reference was made to the Inland Revenue Board Malaysia Public Ruling No. 1/2011 (Taxation of Malaysian Employees Seconded Overseas) (“Public Ruling No. 1/2011”) which sets out 7 factors to be considered; and

(iii) Having considered evidence adduced in respect of all factors in the Public Ruling No. 1/2011, the duties of the Respondent in MPNG was not incidental to his duties in MBB. The Appellant’s contention [8] The Appellant contends that firstly, Public Ruling No. 1/2011 is not binding on this court. Secondly, the SCIT’s decision that the Respondent’s employment with MPNG was not incidental and attributable to his employment with MBB, was against the following weight of evidence:

The Letter of Appointment dated 13.1.2009 as Head of Operations Papua New Guinea, was issued by MBB Malaysia. The terms and conditions of the Respondent’s employment remain unchanged as stipulated in the Letter of Appointment. In addition, the terms of the Secondment Agreement between MPNG and MBB clearly states that the ultimate employment relationship was with MBB;

(ii) The Respondent’s salary was paid by MBB. The terms of remuneration were stated in the Letter of Appointment. It provided for his salary to be paid in Ringgit Malaysia and MBB continued to pay contribution to the Employee’s Provident Fund;

(iii) MPNG was wholly owned by the Maybank Group. MBB owned 100% shares in MPNG. Therefore, at all material times, MPNG was under the management and control of MBB. The running of MPNG must be taken as under the control and supervision of MBB for it to function as their foreign branch;

(iv) The secondment was a corporate arrangement to support MBB. The Respondent’s service with MPNG was not pursuant to a fresh independent contract. MBB remained as his employer and in control of his career development. [9] The Appellant contends that the above evidence taken cumulatively showed that the Respondent’s duties in MPNG was incidental to his employment with MBB. The Respondent’s position [10] The Respondent contends that the SCIT was correct to take into consideration Public Ruling No. 1/2011. The 7 factors and circumstances set out therein are to be considered collectively and cumulatively in determining whether the Respondent’s duties in MPNG were incidental to the exercise of his employment with MBB. [11] The unchallenged and uncontradicted evidence before the SCIT showed that only 3 of the 7 of the factors were answered in the affirmative. The rest were answered in the negative. The SCIT therefore came to a correct decision on the evidence. This court ought not to intervene in its finding of facts. Issue for determination [12] Both parties agree that the sole question of law for determination of this court is whether the income received by the Respondent from MPNG for Years of Assessment 2009 to 2015 is deemed to be derived from Malaysia under s. 13(2)(c) of the Income Tax Act 1967. Analysis and decision of this court Applicable test in determining an appeal from SCIT [13] I shall start with the key principles on the duty of the courts when hearing appeals from the SCIT. In Lower Perak Cooperative Housing Society Berhad v. Ketua Pengarah Hasil Dalam Negeri [1994] 2 MLJ 713 (SC) the Supreme Court held, When the case comes before the court it is the duty to examine the determination having regard to its knowledge of the relevant law. If the case contains anything ex facie which is bad in law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene. It has no option but to assume that there has been some misconception of the law and that this has been responsible for the determination. So, there, too there has been error in point of law. [14] The Court of Appeal in Kenny Heights Development Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri [2015] 4 MLJ 487 (CA) reiterated the SCIT’s specialisation and noted their special insight and appreciation of the facts of each case. Intervention is only justified when the SCIT has erred on a question of law resulting in a manifest error. The Court of Appeal held, [25] Courts must also bear in mind the SCIT's specialisation. Dealing with terms and practises of the business and the business community enables them to have a special insight, understanding and appreciation of the evidence and facts, to make the findings drawn from those evidence and facts. While a finding of fact often touches upon the law, the determining factor in the finding is their special insight and appreciation of the facts. Hence, unless it is demonstrated that SCIT had erred on a question of law, resulting in a manifest error in the deciding order, the court cannot intervene, as it would amount to interference contrary to the intent of legislation setting up and empowering the SCIT. [15] In summary, an appellate court can interfere with the decision of the SCIT where there has been:

a misconception of law;

(ii) a conclusion of law which cannot be supported by the primary facts; and

(iii) a conclusion of mixed fact and law that no reasonable Special Commissioners could have reached if they had correctly directed themselves. S.13 (2)(c) of the Income Tax Act 1967 [Act 53] [16] The operative provision which formed the basis of the impugned assessments is set out below: General provisions as to employment income

(1) Gross income of an employee in respect of gains or profits from an employment includes— ….

Gross income in respect of gains or profits from an employment— ….

for any period during which the employee performs outside Malaysia duties incidental to the exercise of the employment in Malaysia; … shall be deemed to be derived from Malaysia. (emphasis added) [17] Thus, in the context of the present case, the gross income received from MPNG shall be deemed to be income derived from Malaysia and hence attract tax, if the duties performed by the Respondent in MPNG are proven to be incidental to his employment in MBB. [18] The SCIT in its grounds of decision noted that the phrase ‘incidental to the exercise of the employment in Malaysia’ is not defined. I agree. Public Ruling No. 1/2011-Tax of Malaysian Employees Seconded Overseas [19] The SCIT then referred to Public Ruling No. 1/2011 as its basis to determine the issue. This Ruling explains the tax treatment of employment income derived by employees from Malaysia on secondment overseas. [20] The said Public Ruling is issued pursuant to s. 138A(3) of Act 53 which reads as follows:- Public ruling

(1) The Director General may at any time make a public ruling on the application of any provision of this Act in relation to any person or class of persons, or any type of arrangement.

The Director General may withdraw, either wholly or partly, any public ruling made under this section.

Notwithstanding any other provision of this Act, where a public ruling in subsection (1) applies to any person in relation to an arrangement and the person applies the provision in the manner stated in the ruling, the Director General shall apply the provision in relation to the person and the arrangement in accordance with the ruling. [21] I am of the view that the binding effect of a public ruling issued under s. 138A (3) of the Act on the Appellant cannot be disputed. The evidence before the SCIT showed the Appellant’s own witness to have applied Public Ruling No. 1/2011. Factors to be considered in determining if overseas employment is incidental to employment in Malaysia [22] Public Ruling No. 1/2011 lists down 7 factors and circumstances to be considered in determining whether the duties of employees on overseas secondment are incidental to the exercise of the employment in Malaysia. They are as follows:

Whether the employee exercised his employment in Malaysia prior to being sent overseas;

(ii) Whether the duties overseas are connected with or are part and parcel of the employee’s regular duties in Malaysia;

(iii) Whether the duties overseas are to further the purpose of the employer in Malaysia;

(iv) Whether the duties overseas are to be temporary in nature;

Whether the direction and control of the employee lies with the employer in Malaysia;

(vi) Whether the company in Malaysia bore the cost of the employee’s remuneration during the overseas secondment; and

(vii) Whether the risks and benefits from the performance of the employee’s overseas duties reflect the commercial reality. Consideration of the SCIT on the 7 factors [23] I shall now deal with the SCIT’s findings in relation to the 7 factors in Public Ruling No. 1/2011, and at the same time, deal with the respective contentions of the parties in this appeal. Factor 1- Exercise of the employment in Malaysia [24] SCIT’s finding in the affirmative for factor 1 is not disputed by the Respondent as he was with MBB prior to being seconded to MPNG. Factor 2-Nature of overseas employment [25] In relation to factor 2, the SCIT found that the Respondent’s duties in MPNG bore no relation to MBB and were solely for MPNG. [26] This finding is supported by evidence of the CEO of MPNG who testified that the Respondent’s responsibilities as Head of Operations for MPNG were solely focused upon MPNG. His testimony was supported with details pertaining to the job scope and duties of the Respondent. He further added that whilst the Respondent was on the MPNG assignment, he did no work for MBB. His work for MPNG was exclusively for MPNG. In other words, his duties in MPNG bore no relation to his duties with MBB neither was it to further the purpose of MBB. [27] I find that premised on the evidence, the SCIT was justified in concluding that the Respondent’s work in MPNG was not connected to nor part and parcel of his work in MBB. [28] However, the Appellant argues that his MPNG duties alone is not determinative of the issue whether it is incidental to his employment with MBB. Due consideration must be given to the Letter of Appointment dated 13.1.2009 issued by MBB, approving his secondment to MPNG. [29] It is not surprising for MBB to issue the letter as the Respondent was sent on secondment by his then current employer. It is not a deciding factor. I am of the view that nothing turns on the party that issued the Letter of Appointment. Factor 3-Purpose of overseas duties [30] The SCIT found that the primary duties performed in MPNG were not to further any purpose of MBB. The Respondent’s roles and responsibilities in MPNG which were explained by him in his evidence, was accepted by the SCIT. Premised on the evidence adduced, SCIT then concluded that the Respondent’s duties in MPNG were solely for the purpose of MPNG. [31] In my view, SCIT as the decider of facts based on the evidence before it, was justified in its conclusion. Factor 4-Temporary nature of overseas duties [32] The Respondent does not dispute the correctness of SCIT’s findings that the Respondent’s duties in MPNG were temporary, as he was on secondment. However, I must add that the temporariness of the MPNG assignment is not the sole deciding factor. It must be considered with other factors stipulated in Public Ruling No.1/2011. Factor 5-Place from where the duties are directed and controlled [33] SCIT found that based on the evidence of the Respondent and the CEO of MPNG, that the Respondent reported to the CEO of MPNG only whilst he was on secondment. The CEO added that the Respondent was subject only to the control and direction of MPNG. MBB had no supervision, direction and control of the Respondent. The evidence in this respect was not challenged nor contradicted. [34] In relation to this issue, the Appellant contends that the SCIT ought to have considered that MPNG was a subsidiary of MBB. That being the case, it must have been under MBB’s supervision and control. [35] I find the assumption made to be erroneous and ignores the legal reality that even in a group of companies, each company is a separate legal entity. (See: Tan Sri Dato’ Tajuddin Ramli v Rego Multi-Trades Sdn Bhd. [2018] 7 CLJ 197 (CoA)) [36] It was in evidence that MPNG had its own board and management and was under the supervisory jurisdiction and purview of the Central Bank of Papua New Guinea, whilst MBB came under the supervisory jurisdiction and purview of Bank Negara. It cannot be disputed that both of these governing authorities are clearly separate and different authorities. [37] I find the SCIT was correct to accept the Respondent’s submission that both MBB and MPNG are 2 separate legal entities regulated by different laws. In so doing, it then concluded that MBB has no control over MPNG. [38] I find no reason to find the SCIT had erred in its conclusion. Factor 6-Payment for services performed [39] The Appellant contends that the SCIT failed to consider the fact that the Respondent’s salary was paid by MBB. [40] I find this contention to be factually incorrect. [41] The SCIT found as a fact on the documentary evidence that the Respondent was paid by MPNG and not MBB. The SCIT noted that although the Respondent’s payroll was managed in Malaysia and Papua New Guinea, it was done so upon his request. The Respondent’s overseas allowance was paid by MPNG but his salaries and allowance (except overseas allowance) were paid by MBB, as this was an arrangement made to facilitate payment of his commitments in Malaysia as his family remained in Malaysia at the material time. [42] SCIT also accepted the evidence that the Respondent’s remuneration paid from MBB’s payroll was reimbursed by MPNG. There was documentary evidence to show the reimbursements by MPNG to MBB for disbursements made to the Respondent. Premised on the evidence, SCIT found that MBB was merely a payment agent for MPNG. [43] The documentary evidence also showed that the Respondent’s tax during the period of secondment was computed and remitted by MPNG to the Papua New Guinea Inland Revenue Commission on a monthly basis based on the total employment income he received. [44] In relation to the income received, the SCIT noted that the fact that the Respondent received his salary in Ringgit Malaysia was not a relevant fact as the Public Ruling No. 1/2011 did not stipulate the currency received by the employee as a factor to be considered. [45] Having considered the totality of the evidence taken into account by SCIT, I find the contention of the Appellant to be against the weight of the evidence. There is no evidence to support the fact that remuneration was paid by MBB. To reiterate, the Appellant is factually in error here. [46] The Appellant also relied heavily on the fact that the EPF contributions were continued by MBB during his secondment. The Appellant contends that a statutory contribution by both an employee and an employer under the EPF Act on wages paid attracts the assumption and application of a contract of service between an employee and an employee. [47] This stance overlooks the fact that the Appellant’s own witness in cross-examination, conceded that the Respondent’s EPF contributions were borne by MPNG. Although paid by MBB, it was reimbursed by MPNG. [48] To conclude on the Factor 6, I am of the view that the evidence before the SCIT supports the finding made that the remuneration of the Respondent was by MPNG. Factor 7-Commercial Reality [49] With regard to Factor 7, SCIT found that the risks and benefits borne by MPNG for the services of the Respondent reflected the commercial reality of the situation. The fact that MPNG was a separate legal entity from MBB, and was subject to the laws of Papua New Guinea meant that it not only bore the risks of all decisions made but benefited therefrom. [50] On the other hand, the Appellant contends that the secondment was in fact a corporate arrangement to support the operations of MBB. MBB was ultimately the party in control of the Respondent. [51] On the issue of control, I have dealt with SCIT’s findings under Factor 5. As I have found the SCIT to be correct on the issue of control and supervision, the Appellant’s contention that the secondment was a corporate arrangement for the benefit of MBB, is without merit. [52] In relation to the issue of control, the Appellant contends that notwithstanding the Respondent’s secondment, MBB was his employer. Consequently, the Respondent’s income would be deemed to be derived from Malaysia. [53] The fact that MBB was the Respondent’s employer at all material times, cannot be denied. Even the SCIT held it to be so. However, I find it erroneous to then contend merely on that basis, that his income would be deemed derived from Malaysia. [54] I agree with the Respondent that secondment does not entail a change of employer, as upon completion of the temporary duties, the employee returns to the same employer to continue his employment. [55] In this regard, the SCIT correctly held that the issue of Respondent’s employer is not relevant as it cannot be disputed that MBB remained his employer even during his period of secondment. I find the SCIT’s position to be supported by Malaysian industrial law jurisprudence. (See: Comex Services Asia Pacific Region, Miri v Grame Ashley Power [1987] 2 ILR 34, Geoffrey Alan William v The University of Nottingham in Malaysia Sdn Bhd [2014] 3 ILR 99 and John Brian Cheeson v Baker Hughes (Malaysia) Sdn Bhd [2018] 1 ILR 357). [56] Having examined the authorities referred to, I do not find the SCIT to have erred in law. Conclusion [57] To recapitulate, the question whether the Respondent’s duties in MPNG were incidental to his previous employment with MBB requires a consideration of all the 7 factors in Public Ruling No. 1/2011. [58] The SCIT only answered 2 of the 7 factors in the affirmative. (Factor 1 and factor 4). Having examined its findings in the light of the evidence it considered, I find no reason to intervene. More importantly, all the 7 factors must be answered in the affirmative before the secondment can be said to be incidental to the Respondent’s employment in Malaysia. [59] In addition, there is no error in point of law committed by SCIT in arriving at its decision as to the application of s. 13(2)(c) in the light of the factual matrix of this case. [60] The SCIT also set aside the penalties imposed in the impugned assessments. The penalties arose from the failure of the Respondent to submit his income tax returns for Years of Assessment 2010 to 2015. In view of the SCIT’s findings that there was no chargeable income under s. 13(2)(c), the SCIT had correctly found the penalty imposed to be without basis. [61] In the circumstances and premised on the foregoing reasons, the appeal of the Appellant is dismissed. I also order that costs of RM 8,000.00 be paid to the Respondent. Dated : 19th January 2026. -sgd-Alice Loke Yee Ching Judge High Court Kuala Lumpur Counsel for Appellant: Pn. Siti Salina binti Hassan, Senior Revenue Counsel (Pn. Nurul Ashikin Ismail, Revenue Counsel with her) Lembaga Hasil Dalam Negeri Counsel for Respondent: En. Sudharsanan Thillainathan (Ms Tania Edward with him) Tetuan Adnan Sundra & Low (KL)