BFH v Comptroller of Income Tax

• Judgment Date: 22 August 2013
• Date: 22 August 2013
• Docket Number: Income Tax Appeal No 3 of 2013
• Court: High Court (Singapore)

BFH

Plaintiff

and

Comptroller of Income Tax

Defendant

[2013] SGHC 161

Andrew Ang J

Income Tax Appeal No 3 of 2013

High Court

Revenue Law—Income taxation—Deduction—Appellant paying one-time lump sum payment of $100 m for 3G facilities-based operator licence and right to use electromagnetic spectrum at 2100 Mhz—Whether expenditure was deductible in ascertainment of income—Whether expenditure was capital or revenue in nature—Whether purpose of expenditure was strengthening of appellant's core business structure—Whether lack of competitive advantage gained by appellant relevant—Whether different tax treatment from earlier expenditure justified

The appellant (‘the Appellant’) was in the business of, inter alia,operating and providing mobile telecommunications systems and services in Singapore. In 2001, the Appellant paid approximately $100 m (‘the Relevant Expenditure’) to the Info-communications Development Authority of Singapore (‘IDA’) (which licenses the operation of telecommunications systems and services and oversees the use of electromagnetic spectrum rights) for a 20-year grant of both a 3G facilities-based operator licence (‘3G FBO Licence’) and a right to use the electromagnetic spectrum at a frequency of 2100 Megahertz (‘3G Spectrum Rights’).

Before 2001, FBO Licences and Spectrum Rights were allocated for a pre-determined fee payable annually. They were also allocated separately. The IDA changed its policies in 2001 with regard to 3G: firstly, the IDA allocated 3G Spectrum Rights by auction. Secondly, 3G Spectrum Rights were bundled together with the grant of a 3G FBO Licence. Thirdly, operators would be charged an upfront fee without annual charges for the 3G Spectrum Rights and 3G FBO Licences.

The Respondent, the Comptroller of Income Tax, did not allow the upfront fee of $100 m (‘Relevant Expenditure’) to be deducted in the ascertainment of the Appellant's income on the ground that the Relevant Expenditure constituted capital expenditure (not deductible by virtue of s 15 (1) (c) of the Income Tax Act (Cap 134, 2008 Rev Ed)). The Appellant disagreed, arguing that the Relevant Expenditure was revenue in nature, and appealed to the Income Tax Board of Review (‘the ITBR’), which dismissed the appeal. The Appellant's appeal against the decision of the ITBR came before me.

Held, dismissing the appeal:

(1) In differentiating between capital and revenue expenditure, the fundamental inquiry was as to the purpose of the expenditure, although the court had, often as a matter of practical necessity, to look to specific guidelines and factors for assistance. In that regard, purpose should be distinguished from intention: an enquiry into purpose called for a teleological explanation and focused on the ultimate end, while an inquiry as to intention did not necessarily have such a focus: at [30] and [32] .

(2) Even though the payment structure of the Relevant Expenditure was decided by the Government, the fact that it constituted a lump sum one-time payment of $100 m instead of recurrent annual payments was indicative but not determinative of its capital nature: at [35] and [36] .

(3) The consequence or result of the Relevant Expenditure was the strengthening or enhancement of the Appellant's existing telecommunication systems which constituted its profit-making business structure. The Relevant Expenditure provided the Appellant with additional spectrum capacity to accommodate more customers and new services. The Relevant Expenditure also enabled the Appellant to develop a 3G telecommunications network and to offer 3G services, which meant new and innovative services and greater speeds for the Appellant's customers: at [39] , [42] and [44] .

(4) Thus, the Relevant Expenditure was incurred with the purpose of strengthening the Appellant's core business structure and providing avenues for growth of its business. It was not incurred to overcome any obstacle to the Appellant's existing business such that it could be considered revenue in nature: at [45] and [52] .

(5) It was irrelevant that owing to similar expenditure by its competitors, the Appellant obtained no competitive advantage from the Relevant Expenditure; the focus of the capital-revenue distinction was the effect of the expenditure on the taxpayer and not the relative effects of similar expenditures on different taxpayers: at [46] .

(6) Difference in tax treatment between 2G-related expenditure and the Relevant Expenditure was warranted because rights gained under the respective payments were in actuality dissimilar: at [55] , [58] and [59] .

(7) Tax treatment of similar expenditure in comparable foreign jurisdictions supported the Respondent's treatment of the Relevant Expenditure as being capital in nature. In other common law jurisdictions with similar tax laws, statutory intervention was needed to make it clear that expenditure relating to 3G licences was deductible either as a revenue expense or as depreciation allowances. Under the existing statutory scheme in Singapore, the Relevant Expenditure was not permitted either as a revenue expense or depreciation allowance: at [60] to [65] .

ABD Pte Ltd v Comptroller of Income Tax [2010] 3 SLR 609 (folld)

British Insulated and Helsby Cables Ltd v Atherton [1926] AC 205 (folld)

Commissioner of Taxation of the Commonwealth of Australia v Citylink Melbourne Ltd (2006) 228 CLR 1 (refd)

Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948 (folld)

Comptroller of Income Tax v ACC [2010] 2 SLR 1189 (folld)

Comptroller of Income Tax v IA [2006] 4 SLR (R) 161; [2006] 4 SLR 161 (folld)

Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 (folld)

Harrods (Buenos Aires) , Ltd v Taylor-Gooby (HM Inspector of Taxes) (1964) 41 TC 450 (distd)

Henriksen (Inspector of Taxes) v Grafton Hotel Ltd [1942] 2 KB 184 (folld)

Income Tax Case No 1726 (Gauteng Tax Court) (refd)

Income Tax Case No 1772 (Gauteng Tax Court) (refd)

Lawson (Inspector of Taxes) v Johnson Matthey plc [1992] 2 AC 324 (distd)

Mitchell (HM Inspector of Taxes) v BW Noble Ltd (1927) 11 TC 372 (distd)

Mohanlal Hargovind of Jubbulpore, Messrs v Commissioner of Income Tax, Central Provinces and Berar, Nagpur [1949] AC 521 (refd)

Morgan (Inspector of Taxes) v Tate & Lyle Ltd [1955] AC 21 (distd)

Mount Elizabeth (Pte) Ltd v Comptroller of Income Tax [1985-1986] SLR (R) 950; [1986] SLR 421 (folld)

Pinetree Resort Pte Ltd v Comptroller of Income Tax [2000] 3 SLR (R) 136; [2000] 4 SLR 1 (folld)

Regent Oil Co Ltd v Strick (Inspector of Taxes) [1966] AC 295 (folld)

Sun Newspapers Ltd v The Federal Commissioner of Taxation (1938) 61 CLR 337 (folld)

TLtd v Comptroller of Income Tax [2006] 2 SLR (R) 618; [2006] 2 SLR 618 (folld)

Vodafone Cellular Ltd v Shaw (Inspector of Taxes) [1997] STC 734 (distd)

Income Tax Act (Cap 134, 2008 Rev Ed) ss 14 (1) , 14 (1) (h) , 15, 15 (1) (c)

Telecommunications (Radio-communication) Regulations (Cap 323, Rg 5, 2002 Rev Ed) rr 2 and 7

Income Tax Assessment Act 1997 (Cth) ss 40.25, 40.30 (2) (f)

Income Tax (Deduction for Cost of Spectrum Assignment) Rules 2007 (M'sia) r 4

Income Tax (Trading and Other Income) Act 2005 (c 5) (UK) s 146 (a)

Sunit Chhabra and Tang Siau Yan (Allen & Gledhill LLP) for the appellant

Quek Hui Ling, Joyce Chee, Jimmy Goh and Pang Mei Yu (Inland Revenue Authority of Singapore (Law Division)) for the respondent.

Judgment reserved.

Andrew Ang J

Introduction

1 This appeal concerns the tax treatment of a $100 m lump sum payment by BFH (‘the Appellant’) for a 20-year licence to provide certain telecommunications services and the right to use a particular bandwidth of the electromagnetic spectrum. The Appellant's case stands or falls on a single issue, viz, whether the $100 m expenditure was capital or revenue in nature. With reference to the Income Tax Act (Cap 134, 2008 Rev Ed) (‘the Act’), the key issue is thus whether the $100 m expenditure is:

(a) of a revenue nature and deductible in the ascertainment of income under s 14 (1) of the Act; or

(b) capital in nature and disallowed deduction by s 15 (1) (c) of the Act.

Background

2 The Appellant is in the business of, inter alia,operating and providing mobile telecommunications systems and services in Singapore. Apart from the Appellant, there are two other such companies in Singapore (each commonly known and hereinafter referred to as a ‘telco’).

3 The telecommunications industry in Singapore is regulated by the Info-communications Development Authority of Singapore (‘IDA’), which licenses the operation of telecommunications systems and services and oversees the use of electromagnetic spectrum rights. Prior to 1 December 1999, this regulatory function was performed by the Telecommunications Authority of Singapore (‘TAS’).

4 In 2001, the Appellant paid approximately $100 m to IDA for a 20-year grant of both a 3G facilities-based operator licence (‘3G FBO Licence’) and a right to use the electromagnetic spectrum at a frequency of 2100 Megahertz (‘2100 MHz Spectrum Rights’ or ‘3G Spectrum Rights’). For ease of reference, this $100 m expenditure is hereinafter referred to as the ‘Relevant Expenditure’. In order to determine whether or not the Relevant Expenditure qualifies as a deductible revenue expense in the ascertainment of income for the purpose of income tax, it is necessary to understand the nature of and the circumstances leading to the Relevant Expenditure.

Evolution of the licensing regime

5 The IDA grants the telcos facility-based operator licences (‘FBOLicences’) to run their telecommunications systems and services. However, FBO Licences, in and of themselves, serve no purpose: the telcos also require the use of the electromagnetic spectrum to transmit wireless telecommunications. To that end, the IDA grants to the telcos spectrum rights, defined in the relevant subsidiary legislation as the ‘right to use any...