Section 140 and 140A Income Tax Act 1967 Part 2

In the previous post accessible here, I touched upon the relationship between Section 140 and Section 140A of the Income Tax Act 1967 (“ITA“) and how the lines may be blurred due to the newly enacted Section 140(3a) and (3b). Briefly, Section 140 of the ITA is the anti-tax avoidance provision where the Director-General of Inland Revenue (“DGIR“) is given authority to ignore a certain tax transaction if there is no commercial sense in the arrangement other than to avoid tax. However, the cousin Section 140A is the transfer pricing provision where the DGIR is authorised to make an adjustment to a transaction if it considers that the transaction was not conducted at arm’s length.

The difference in the powers is imperative as it delineates the powers of the DGIR and illegal or without jurisdiction invocation of the said sections will be susceptible to intervention by a court of law.

The High Court had recently made a few landmark decisions on this which provide useful guidance on the jurisdiction of the two sections and the applicability of the same. 

In Ensco Gerudi (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2021] MLJU 1229 (“Ensco Gerudi 2021“), the DGIR invoked Section 140A to make the adjustment between Ensco Gerudi (M) Sdn Bhd and Ensco Labuan Limited (“ELL“). The DGIR dismissed the taxpayer’s use of the transactional net margin method (“TNMM Method”) as the transfer pricing methodology and insisted on the application of the transactional profit split method (“Profit Split Method”) instead.

It is apposite to note that in a previous decision of Ensco Gerudi (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (Application for Judicial Review No.: 25-101- 05/2013) (“Ensco Gerudi 2013“), the DGIR invoked Section 140 on the exact same transactions which were the subject matter of dispute in the case of Ensco Gerudi 2021. The only difference is that the DGIR in this instant case was invoking Section 140A instead of Section 140. Ensco Gerudi 2013 was a matter that went up to the Court of Appeal where the Court of Appeal held that the DGIR did not have any jurisdiction to invoke Section 140 of the ITA on the taxpayer’s transaction with ELL. 

Aggrieved, Ensco Gerudi initiated judicial review against the DGIR for, amongst others, a declaration that the DGIR’s invocation of Section 140A was illegal and void. Counsel for Ensco Gerudi canvassed the following arguments: 

(a) The DGIR acted in excess of its jurisdiction when it failed to act in accordance with previously decided cases by the High Court and the Court of Appeal in Ensco Gerudi 2013; 

(b) The DGIR had unlawfully invoked Section 140A of the ITA when it is clear that the taxpayer and ELL are not ‘associated persons’ with one another within the definition of the ITA (for the relevant years of assessment); and

(c) The DGIR had breached its duty to provide reasons when it issued the notices of assessment without providing any clear reasons and/or justifications as to how the taxpayer and ELL are associated persons or that the transfer pricing methodology was incorrect. They are aggrieved by the DGIR’s failure to perform even the most perfunctory transfer pricing analysis in coming to its incongruous decision. 

The DGIR refuted the points below:

(a) The taxpayer ought to ventilate the matter via appeal to the Special Commissioners of Income Tax; 

(b) The ITA provisions relied upon by the DGIR are different in Ensco Gerudi 2021 and Ensco Gerudi 2013; and 

(c) The reliefs sought in the two cases are different.

Both leave and judicial review applications were allowed. In arriving at the decision, the Learned High Court held as follows:

  1. The taxpayer and ELL are not associated persons as they do not possess or are entitled to acquire the greater part of the share capital or voting power because to be able to have control under Section 139 ITA, the taxpayer has to be at least 51% owned. The only justification that the DGIR had provided in relation to this issue is that the transactions are carried out between the parties within the same group but that is not a requirement under s 140A ITA.;
  2. The Respondent had exceeded its jurisdiction and acted unlawfully when it fails to give due consideration to the earlier decisions of the Superior Courts of Malaysia.
  3. Not only the taxpayer but the Court are deprived of knowing the DGIR’s version of what the transfer pricing report ought to be.
  4. An appeal to the SCIT is not a blanket approach and does not shut out an aggrieved taxpayer from coming to Court seeking for the remedy of judicial review on the premise that there exists an internal appeal process.

In another case of S v KPHDN, the taxpayer had entered into several intragroup services with the taxpayer’s related companies. It was the DGIR’s contention that several of these services provided were duplicative and hence certain services ought to be disallowed deductions. The DGIR invoked Section 140A by alleging that the “duplicative services” were not at arm’s length hence no deductions should be claimed.

Counsel for the taxpayer argued that the DGIR had inappropriately invoked section 140A of the ITA which does not allow the DGIR to disallow the expenses. Only section 140 of the ITA allows the DGIR to make such adjustments. If the DGIR was of the view that a certain transaction was entered to reduce the incidence of tax, the DGIR ought to invoke Section 140 of the ITA and not Section 140A. Section 140A only allows the DGIR to make an adjustment that would be reflective of an arm’s length transaction but not to disregard it completely.  

The DGIR on the other hand argued that the matter includes a dispute of facts that ought to be ventilated with the SCIT and this instant judicial review application is an abuse of the court process. Consequently, contemporaneous documents and examination would be required in order to determine if the services rendered were duplicative or otherwise.

Upon hearing the parties’ submissions, the learned high court had allowed the taxpayer’s application for leave. The matter is now pending for the substantive stage.


Section 140 and 140A has their distinctive difference and operates independently. With the presumption that the Parliament does not legislate laws in vain, Section 140 and Section 140A are not to be used interchangeably. Section 140A of the ITA only allows the DGIR to make an adjustment that would be reflective of arm’s length transaction but not to disregard the same whereas Section 140 gives the DGIR broader powers but not without its restrictions under as held in Port Dickson Power and as stated in Section 140(9).


Author: Sophia Choy

I am lawyer-turn-consultant writing about the latest tax changes in Malaysia. Pretty much the most dynamic scene in any law in Malaysia. Talk to me about tax at

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