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.

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