Malaysia: Section 140(1) Not Applicable To Transfer Pricing

The MM Sdn Bhd case has the distinction of being the first transfer-pricing dispute to be litigated in Malaysia. The Special Commissioners of Income Tax ("SCIT") held that transfer pricing adjustments performed under Section 140(1) of the Income Tax Act 1967 ("ITA") are invalid.

We successfully represented MM Sdn Bhd before the SCIT and the High Court.

Validity of transfer pricing adjustment

The Inland Revenue Board ("IRB") performed the transfer pricing audit relying on the Transfer Pricing Guidelines 2003 ("TPG"). Upon intense cross-examination, the IRB's witness admitted that:

(a) the TPG has no legal effect;

(b) the TPG is not an instrument prescribed by statute.; and

(c) transfer pricing legislation was only enacted by Parliament as Section 140A of the ITA, which came into effect on 1.1.2009.

Although the TPG was not provided for by law, the IRB enforced it to perform transfer pricing adjustment for the years 1998 to 2005. We successfully argued that the TPG was not an instrument of law. Article 96 of the Federal Constitution states that "No tax or rate shall be levied by or for the purposes of the Federation except by or under the authority of federal law". By enforcing the TPG, the IRB had acted ultra vires, illegally and without jurisdiction.

Section 140A(1) of the ITA

We submitted that Section 140A(1), which specifically provides for the application of transfer pricing principles, was enacted much later. Parliament had to enact Section 140A(1) as Section 140 does not address transfer pricing matters. Section 140 addresses tax avoidance and not transfer pricing. We persuaded the SCIT that Parliament does not act in vain. If Section 140 sufficiently addresses transfer pricing, then it begs the question why Parliament had to then enact Section 140A.

Our courts have refused to adopt a construction of a taxing statute which would impose liability when doubt exists. A subject is not to be taxed without clear words. In a taxing statute, one has to look merely at what is clearly said. There is no room for any intendment and no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.

Arbitrary invocation of Section 140

In exercising a quasi-judicial function or purely an administrative function as a public decision maker, committing an error of law is fatal to the exercise of such function. An error of law arises where the IRB asks "the wrong question or takes into account irrelevant considerations or omits to take into account relevant considerations... or if he misconstrues the terms of any relevant statute, or misapplies or mis-states a principle of the general law".

We raised the point that even if Section 140 were applicable, the IRB must demonstrate that it has reason to believe that it is right to invoke this provision. The IRB had arbitrarily invoked Section 140 as the IRB:

(a) failed to identify the relevant sub-paragraph of Section 140(1); and

(b) failed to provide the particulars of adjustment together with assessments as required under Section 140(5).

Arbitrary application of transfer pricing principles

The SCIT also ruled that the IRB had arbitrarily applied the transfer pricing principles:

(a) IRB disregarded the reduction of the taxpayer's export commission rate from 3.25% to 3% and import commission from 1.25% to 1%. No valid reason was provided other than that the "function performed, asset employed and risks assumed ("FAR")" by the taxpayer did not change. The taxpayer's 3 witnesses testified consistently that the commission rate of 3% and 1% received from the holding group was at arm's length. The witnesses also testified that the FAR had changed in the present case.

(b) IRB disallowed the deduction of management services fee incurred by the taxpayer for the various inconsistent reasons. First, the IRB alleged that the charges were not at arm's length. Then, the IRB said that the charges were subject to withholding tax and would be disallowed until the withholding tax was settled. Finally, nearly 4 years after commencing the audit, the charges were disallowed on the basis that they were never rendered to the taxpayer. The SCIT commented that the IRB led no evidence in support of its decision to disallow the said charges.

(c) IRB disregarded the taxpayer's 2 transfer pricing reports including the report prepared by an independent and reputable firm of tax consultants. Among the reasons provided by the IRB were that the pan-Asian comparables were not applicable and that the local comparables did not share similar functions with the taxpayer. IRB neither submitted a rebuttal transfer pricing report nor provided alternative comparables for the taxpayer to consider.


The rules governing transfer pricing are significant for both taxpayers and tax administrators. This determines the income expenses and taxable profits of associated enterprises in different tax jurisdictions. Businesses should strive to implement a high-integrity process in determining their pricing method. It is equally important for businesses to ensure the chosen methodology provides a commercially realistic mechanism in applying the "transfer pricing" rules. The taxpayer in MM Sdn Bhd was able to demonstrate these principles in developing and applying its transfer pricing policy. It is imperative that the IRB exercises its statutory powers fairly in transfer pricing audits. This case is an apt reminder that transfer pricing is not an exact science.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.