News Flash
Hong Kong Tax
The IRD lost in the Aviation Fuel
Supply case as a matter of
procedural fairness
January 2015
Issue 1
In brief
The Court of Final Appeal (CFA) handed down its judgment in Aviation Fuel Supply Co v CIR on 15
December 2014. The substantive issue before the CFA, as raised by the Commissioner of Inland Revenue
(CIR), was whether balancing charges should be imposed on the taxpayer in respect of certain assets
transferred by the taxpayer. The issue of balancing charge was only raised by the CIR when the case
proceeded to the Court of Appeal (COA) and the statutory six-year limitation period for the assessment
in dispute had already expired. The CFA dismissed the CIR’s appeal and held that the assessment under
appeal cannot be revised at this stage by imposing a balancing charge on the taxpayer as the CIR is too
late in bringing up the issue in the litigation process.
It is interesting to note that the CFA dismissed the CIR’s appeal not on the basis that there was no merits
of the CIR’s argument on the balancing charge issue but because the CIR did not raise the issue as an
alternative argument earlier enough during the proceeding. The CFA commented that there may be
merits in the CIR’s argument on the balancing charge issue technically, but held that allowing the CIR to
raise the balancing charge issue at such late stage would be unfair to the taxpayer. As in doing that, the
taxpayer would be required to carry out extensive further fact finding and investigation of the relevant
transactions that took place more than six years ago.
Given the conclusion above, it is not necessary for the CFA to decide whether the COA was right in
saying that no balancing charge was payable on the basis that the assets were transferred by way of
succession. However, the CFA did express its views on this issue as invited by the CIR as obiter dictum.
A key lesson to learn in this case is that it is crucial to include all possible alternative arguments at the
early stage of a proceeding such that if one argument fails, the other fallback arguments (if any) can still
be relied upon. Taxpayers should therefore be mindful of including all possible arguments in the case
stated for a Board of Review hearing or in the submission to the court for a direct appeal to the court.
The obiter dictum of the CFA also sheds some light on what is meant by “passed by way of succession” in
the context of applying the balancing charge/allowance provisions for profits tax purpose with respect to
transfer of plant and machinery.
In detail
A brief recap of the case
Below is a brief recap of
relevant facts of the case and
the judgments of the lower
courts. For a detailed
discussion of the full facts of the
case and the judgments of the
Court of First Instance (CFI)
and the COA, please refer to our
Hong Kong Tax News Flash,
January 2013, Issue 21.
The relevant facts
The case involved a
sophisticated commercial
arrangement whereby the
taxpayer’s group entered into
various agreements with the
Airport Authority in Hong Kong
(the Authority) in 1995 to
develop and operate the
aviation fuel supply system at
the Hong Kong airport (the
Facility) on a "Build-OperateTransfer" model. The diagram
in the Appendix shows the
relationships of the parties
involved in the arrangement.
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News Flash — Hong Kong Tax
As a result of an early termination of
the various agreements between the
taxpayer and the Authority in 2003
whereby the taxpayer’s business
together with the Facility (which
consisted of plant and machinery,
prescribed fixed assets and industrial
buildings) were transferred from the
taxpayer to the Authority, a lump sum
of around US$449 million was
received by the taxpayer.
The CIR sought to tax the lump sum as
trading receipt received by the
taxpayer in year of assessment
2003/04. The taxpayer lodged an
appeal against the CIR’s assessment
directly to the CFI, arguing that the
sum should be regarded as a
compensation for the surrender of its
business and a payment made by the
Authority to acquire its business and
therefore, should be capital in nature
and not subject to profits tax.
The judgments of the lower courts
The CFI held in favour of the taxpayer
that the sum was not a receipt derived
from the taxpayer's business but a
payment made to acquire the
taxpayer's business and resulted in a
change of ownership of the Facility. As
such, it should be regarded as capital
in nature and not taxable. The CIR
then lodged an appeal against the
CFI’s judgment to the COA.
A few weeks before the hearing in the
COA in 2012, the CIR raised a point
that had not been raised before the
CFI, namely if the decision of the CFI
was upheld, the original assessment
should be revised to impose balancing
charges (and also claw back of the
deduction previously claimed on the
capital expenditure on the prescribed
fixed assets) on the taxpayer upon
transfer of the Facility as depreciation
allowances were previously granted to
the taxpayer.
The taxpayer submitted that the CIR
should not at that stage be allowed to
put forward this claim as it was an
entirely new assessment basis. The
COA did not agree that the CIR was
attempting to make a new assessment
on a different and wider basis than the
original assessment and exercised its
discretion to allow the CIR to raise the
balancing charge issue. However, the
COA dismissed the CIR’s balancing
charge claim and held that no
balancing charge should be made on
the taxpayer as the Facility was passed
from the taxpayer to the Authority by
way of succession upon cessation of
the taxpayer’s business2. The COA also
held in favour of the taxpayer that the
2
lump sum received by the taxpayer
was a capital receipt and not taxable.
the sale proceeds to each
individual asset concerned. This
would require the taxpayer to
investigate transactions that took
place more than six years ago (e.g.
the taxpayer would need to find
out the value the assets back in
2003 when the assets were
transferred). In the CFA’s opinion,
it would be unfair to the taxpayer
to require it to investigate these
matters after the limitation period
for a fresh assessment had
expired, in particular that the CIR
could have originally made an
alternative assessment claiming a
balancing charge.
The judgment of the CFA
The balancing charge issue
In appealing to the CFA, the CIR no
longer sought to argue that the lump
sum was trading receipt subject to
profits tax but only focused on the
COA’s judgment in respect of the
balancing charge issue.
Although the CIR sought to appeal
against the COA’s judgment on the
merits that the Facility was passed to
the Authority by sale rather than by
succession, the CFA considered that
the chief question was indeed whether
the CIR should have been allowed to
raise the balancing charge issue at the
last minute before the hearing in the
COA.
The CFA dismissed the CIR’s appeal
and held that the COA should not have
entertained the CIR’s application on
the balancing charge issue as doing so
is unfair to the taxpayer. Below is the
analysis of the CFA on this issue:



The COA has all the authority to
make any assessment that the CIR
is empowered under the Inland
Revenue Ordinance (IRO) and
hence is allowed to exercise a
discretion to increase the original
assessment under appeal on a
different basis (i.e. by imposing a
balancing charge) as that is all
part of the original assessment,
however, the COA needed to
consider whether it would be fair
to do so before exercising such
discretion.
By the time the COA was invited
to make the assessment (it was
2012), the statutory six-year
limitation period for making an
additional assessment (the
assessment in dispute is for year
of assessment 2003/2004) under
section 60(1) of the IRO had
already expired. Although the
COA’s assessment is not an
additional assessment within the
meaning of section 60(1), the
effect of making such assessment
is to deprive the taxpayer of the
protection of the limitation period
against what may be in substance
an entirely new claim.
Imposing a correct amount of
balancing charge on the taxpayer
would require: (1) apportioning
part of the lump sum received by
the taxpayer as the sale proceeds
of the Facility and (2) allocating
Whether the assets were transferred
by sale?
Given the CFA decided that the CIR
should not be allowed to raise the
balancing charge issue, it was not
necessary for it to decide whether the
COA was right in deciding that no
balancing charge was payable on the
basis that the plant and machinery
were transferred by way of succession
instead of by sale. However, as invited
by the CIR, the CFA expressed the
following views on this issue as obiter
dictum:

There was clearly a sale of the
plant and machinery. Although
the Authority succeeded to the
taxpayer’s business, the plant and
machinery were not passed to the
Authority by way of succession as
the Authority did not get them
for nothing. In addition, the plant
and machinery were not
transferred by operation of law
upon termination of the lease.
The termination of the lease was
similar to a sale of the taxpayer’s
residual interest as a surrender
would have been.

As between the Authority, the
taxpayer and the CIR, the plant
and machinery had been treated
as owned by the taxpayer and
depreciation allowances claimed
by the taxpayer had been
allowed. As such, the CIR would
have been entitled to impose a
balancing charge on the taxpayer
upon transfer of the plant and
machinery.

The COA made a mistake in
seemingly holding that its
opinion (i.e. no balancing charge
in the case of succession) also
applied to prescribed fixed assets
and industrial buildings as
section 39D(3)2 only applies to
PwC
News Flash — Hong Kong Tax
plant and machinery and there is
no equivalent provision in the
IRO for prescribed fixed assets
and industrial buildings.
The takeaway
One key lesson to learn in this case is
that it is crucial to include all possible
alternative arguments at the early
stage of a proceeding such that if one
argument fails, the other fallback
arguments (if any) can still be relied
upon. In this case, the CIR would
succeed in claiming a balancing charge
from the taxpayer should he include
the balancing charge argument early
enough (i.e. at the hearing of the CFI
in this case3). Taxpayers should
therefore be mindful of including all
3
possible arguments in the case stated
for a Board of Review hearing or in the
submission to the court in case of a
direct appeal to the court.
The obiter dictum of the CFA also
sheds some light on what is meant by
“passed by way of succession” in the
context of applying the balancing
charge/allowance provisions in the
IRO to transfer of plant and
machinery. The term “succession” is
not defined in the IRO. Apparently,
the term implies “a process in which
the assets are taken up by someone
without consideration” and one of the
limited circumstances in which this
can happen as cited by the CFA is
when someone receives the assets by a
distribution in specie.
Endnotes
1.
Hong Kong Tax News Flash,
January 2013, Issue 2 can be accessed
via this link:
http://www.pwchk.com/home/eng/h
ktax_news_jan2013_2.html
2.
Section 39D(3) of the IRO provides
that a balancing charge or balancing
allowance should not be applicable in
the case where the plant and
machinery are passed by way of
succession upon cessation of a trade
or business.
3.
This case is a direct appeal to the CFI,
passing the Board of Review.
PwC
News Flash — Hong Kong Tax
Appendix: Commercial arrangement between the taxpayer’s group and the Hong
Kong Airport Authority
4
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News Flash — Hong Kong Tax
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact a member of PwC’s Hong Kong
Corporate Tax Team:
Reynold Hung
+852 2289 3604
reynold.hung@hk.pwc.com
Oscar Lau
+852 2289 5603
oscar.lau@hk.pwc.com
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