IBM Malaysia Sdn Bhd, which was in the business of distributing software, intended to execute a software distribution agreement with IBM Ireland Product Distribution Ltd for the right to distribute IBM Ireland's software programmes in Malaysia.

Before doing so, IBM Malaysia applied for an advance ruling from the director general of inland revenue (DGIR) on 12 April 2016. The question was whether the payment made by IBM Malaysia to IBM Ireland under the software distribution agreement would be considered royalty under Section 2 of the Income Tax Act 1967 and thus subject to withholding tax under Section 109 of the act.

On 7 June 2016 the DGIR ruled that the distribution fee to be paid by IBM Malaysia to IBM Ireland was royalty and would be subject to withholding tax.

IBM Malaysia filed an application for judicial review for an order of certiorari to quash the advance ruling.(1)

One of the issues raised by the DGIR for consideration by the court was whether the advance ruling was a decision amenable to judicial review.

The DGIR submitted that the advance ruling was merely its position or opinion and was not a decision. As such, the DGIR argued that the advance ruling was not susceptible to judicial review.


The high court rejected the DGIR's argument and held that the DGIR had no basis for its submission.

In support of its decision, the high court referred to the explanatory note to the clause introducing advance rulings into the act and the Income Tax (Advance Ruling) Rules 2008 and relied on the fact that both had explicitly stated that the advance ruling is final and binding on both parties.

The explanatory note reads as follows:

Clause 26 also seeks to introduce a new Section 138B into Act 53. With this proposed amendment, a person may request for a ruling from the Director General of Inland Revenue on the application of any provision of Act 53 to a particular type of arrangement. Subject to certain qualifications, the ruling issued under this section is binding on the person and the Director General.

According to Paragraph 16 of the rules, an "advance ruling issued to any person for the purpose of any arrangement shall be final".

The high court further held that the DGIR's decision in the advance ruling clearly had consequences for IBM Malaysia, as it subjected the distribution fee to withholding tax and gave rise to an issue of law regarding whether payments made under a software distribution agreement are within the meaning of 'royalty' under the act and the Malaysia-Netherlands Double Taxation Agreement (DTA).

Since the application for judicial review had been properly made, the court went on to determine whether the payment under the software distribution agreement should be considered royalty.

According to established case law, the definition in the DTA prevailed over the definition in the Income Tax Act. Based on this prior jurisprudence, the high court applied the definition of 'royalty' under Article 13(6) of the DTA, supplemented by the Organisation for Economic Cooperation and Development commentary on Article 12, and held that pursuant to the definition of 'royalty' under the DTA, the distribution fee was not royalty.

This was because the payment made by IBM Malaysia was not for the right to reproduce software programmes, but rather to purchase products for distribution and resale with a mark-up in Malaysia.

The high court allowed IBM Malaysia's application for judicial review and quashed the DGIR's advance ruling as being ultra vires, illegal and unlawful.

For further information on this topic please contact Goh Ka Im or Foong Pui Chi at Shearn Delamore & Co by telephone (+60 320 272 727) or email (kgoh@shearndelamore.com or foongpuichi@shearndelamore.com). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.


(1) IBM Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2018] 9 MLJ 281.

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