Malaysia vs Ensco Gerudi Malaysia SDN. BHD., July 2021, Juridical Review, High Court, Case No. WA-25-233-08-2020

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Ensco Gerudi provided offshore drilling services to the petroleum industry in Malaysia, including leasing drilling rigs, to oil and gas operators in
Malaysia.

In order to provide these services, the Ensco entered into a Master Charter Agreement dated 21.9.2006 (amended on 17.8.2011) (“Master Charter Agreement”) with Ensco Labuan Limited (“ELL”), a third-party contractor, to lease drilling rigs from ELL. Ensco then rents out the drilling rigs to its own customers.

As part of the Master Charter Agreement, Ensco agreed to pay ELL a percentage of the applicable day rate that Ensco earns from its drilling contracts with its customers for the drilling rigs.

By way of a letter dated 12.10.2018, the tax authorities initiated its audit for FY 2015 to 2017.

The tax authorities issued its first audit findings letter on 23.10.2019 where it took the position that the pricing of the leasing transactions between the Applicant and ELL are not at arm’s length pursuant to s 140A of the Income Tax Act 1967 (“ITA”). The tax authorities proposed that the profit earned by ELL should remain with the Ensco by reducing the cost of the leasing asset by 20% or equivalent to the margin obtained by ELL.

Ensco disputed the tax assessment and brought the case to court for an appeals review.

Decision of the High Court

The High Court granted orders in terms of Ensco’s application allowing an appeal.

Excerpts

“It has been said that additional assessment is rooted in fairness and that there is a duty on the part of the Respondent [tax authorities] being an important public authority to give its reasons more so, when the issues pertaining to transfer pricing are complex matters and can never be straightforward. As the Applicant [Ensco] has submitted and this Court agrees, that at the very least, the most basic Transfer Pricing Report by the Respondent will be able to shed some light on the Applicant on this issue because without some basis, how would the Applicant be able to adequately defend itself before the Special Commissioners of Income Tax. The Applicant’s [Ensco] basis and justifications for the pricing of the leasing transactions is definitely in stark contrast to the Respondent’s failure to provide its own Transfer Pricing Report to the Applicant.

In the present matter, exceptional circumstances of the case have been established at the leave stage which is a starting point in judicial review cases. Illegality, unlawful treatment, error of law and failure to adhere to legal principles established by the Courts tantamount to an excess of jurisdiction and all of which this Court finds have been demonstrated by the Applicant.

 

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