BFH v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Andrew Ang J
• Judgment Date: 22 August 2013
• Neutral Citation: [2013] SGHC 161
• Court: High Court (Singapore)
• Docket Number: Income Tax Appeal No 3 of 2013
• Year: 2013
• Published date: 26 August 2013
• Hearing Date: 22 May 2013,23 May 2013
• Plaintiff Counsel: Sunit Chhabra and Tang Siau Yan (Allen & Gledhill LLP)
• Defendant Counsel: Quek Hui Ling, Joyce Chee, Jimmy Goh and Pang Mei Yu (Inland Revenue Authority of Singapore (Law Division))
• Subject Matter: Revenue Law,Income Taxation
• Citation: [2013] SGHC 161

Andrew Ang J: Introduction

This appeal concerns the tax treatment of a $100m 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 $100m 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 $100m expenditure is: of a revenue nature and deductible in the ascertainment of income under s 14(1) of the Act; or capital in nature and disallowed deduction by s 15(1)(c) of the Act.

Background

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”).

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”).

In 2001, the Appellant paid approximately $100m 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 $100m 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

The IDA grants the telcos Facility-based Operator Licences (“FBO Licences”) 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 specified part of the radio frequency spectrum”: see reg 2 of the Telecommunications (Radio-communication) Regulations (R 5, Cap 323, 2000 Rev Ed). The IDA only grants spectrum rights to FBO Licensees.

Regulation 7 of the Telecommunications (Radio-communication) Regulations stipulates, non-exhaustively, the procedure for allocating spectrum rights. In short, spectrum rights can be allocated by any combination of the following methods: auction; tender; or allocation for a pre-determined fee or negotiated fee. Before 2001, the IDA (or TAS, as the case may be) allocated spectrum rights for a pre-determined fee. This fee was calculated on a cost-plus recovery basis and was payable annually. Only the 900 and 1800 MHz frequencies (“900 MHz and 1800 MHz Spectrum Rights” or “2G Spectrum Rights”) were allocated then.

The Appellant was assigned an FBO Licence in 1994 (“the 2G FBO Licence”). The 2G FBO Licence, originally granted by TAS, was to be valid for 25 years, from 1 April 1992. Under the terms of that licence, the Appellant was to pay an annual licence fee computed at 1% of the annual audited gross turnover, subject to a minimum of $100,000.

The onset of the new millennium and the emergence of new 3G technology heralded a sea change in IDA’s policies. The IDA decided to regulate the operation of 3G services in a different manner in three respects. First, the IDA decided against allocating 3G Spectrum Rights for a pre-determined fee, choosing instead to allocate them by auction. Second, 3G Spectrum Rights were to be bundled together with the grant of a 3G FBO Licence. Third, operators would be charged an upfront fee without annual charges for the 3G Spectrum Rights and 3G FBO Licences.

The policy reasons for the shift towards an auction-based, lump sum payment system were discussed in parliamentary debates. In the Singapore Parliamentary Debates, Official Reports (8 March 2001) vol 73 (“the 8 March 2001 Parliamentary Debates”) at col 409, the then Minister for Communications and Information Technology, Mr Yeo Cheow Tong (“the Minister”), explained that the auction process was the most efficient mechanism for a few reasons, including the fact that “3G technology [was] still unproven, no 3G system [was] operational yet, and therefore the true potential [was] not known to regulators”. At col 408, the Minister clarified that the rationale for requiring an upfront lump sum payment without any royalty component was that operators would be “incentivised to roll out their systems as quickly as possible and to also roll out as many services as possible, in order to recoup their upfront investments as quickly as possible”.

Initially, the reserve price of the auction was set at $150m. Notably, the Minister in Singapore Parliamentary Debates, Official Reports (22 February 2001) vol 72 at col 1421 stated: “The reserve price that we are establishing is only slightly higher than what we would be getting from a 2G licence”. Subsequently, however, the reserve price was reduced to $100m. In the 8 March 2001 Parliamentary Debates at col 408, the Minister explained that as the market value of 3G licences had dropped considerably and there was a greater uncertainty over the business case for 3G, the IDA had decided to lower the reserve price to bring it in line with international levels then.

There were four lots of 3G Spectrum Rights bundled with 3G FBO Licences up for auction in 2001. However, the auction did not proceed as planned because the IDA only received three offers. Instead, each of the three telcos was allocated one 2100 MHz Spectrum Right bundled with a 3G FBO Licence, valid for 20 years, at the reserve price of $100m.

Soon after the allocation of the 3G Spectrum Rights and 3G FBO Licence in 2001, the IDA held another auction for six additional lots of 2G Spectrum Rights which were to be granted on top of any existing lots previously allocated to the three telcos. The IDA decided to allocate those additional lots by auction. However, successful bidders for the additional 2G Spectrum Rights were still required to pay annual 2G FBO licence fees. On 1 October 2001, the six lots were allocated between the three telcos at the reserve price of $120,000 each.¹ Additionally, on 1 October 2002, the three telcos were re-granted certain 2G Spectrum Rights previously allocated to them before 2001. The three telcos were thereafter required to pay annual fees for those pre-existing 2G Spectrum Rights.

The 2G Spectrum Rights that were granted on 1 October 2001 and 1 October 2002 were due to expire on 31 December 2008. Thus, the IDA announced another auction exercise for 18 lots of 2G Spectrum Rights on 18 January 2008. Under the terms of this auction, each successful bidder that was an existing 3G FBO Licensee had to pay an annual licence fee (in addition to the upfront fees for the 3G FBO Licence already paid) if it wished to provide 3G services using the 900 MHz and 1800 MHz Spectrum Rights. These 18 lots were allocated between the three telcos at the reserve price of $300,000 each.²

Technological explication

As mentioned above, spectrum rights are rights to use certain specified bandwidths of the radio frequency spectrum. Accordingly, 2G Spectrum Rights and 3G Spectrum Rights simply refer to the rights to use different parts of the radio frequency spectrum. The 900 MHz and 1800 MHz frequencies have been set aside for 2G use and the 2100 MHz frequency for 3G use. As the assigned frequency is a neutral medium upon which radio waves of that frequency are transmitted, there is nothing intrinsically special or unique about the respective frequencies that have been assigned. This was affirmed by the IDA in its letter dated 23 September 2009 addressed to all three telcos (at para 3):³

The 2G Spectrum Right and 3G Spectrum Right relate to rights to use different bandwidth of the radio spectrum. Although different services may be provided on different bandwidths of the radio spectrum, the nature of the 2G Spectrum Right and 3G Spectrum Right is similar in that both constitute a grant of right to use specific allocated parts of radio frequency spectrum (as set out in the relevant Spectrum Rights) to operate telecommunication system(s) for the purposes of providing services in relation to that Spectrum Right and as permitted under the applicable Facilities-Based Operator licences. Payments made for use of 2G Spectrum Right and 3G Spectrum Right are also similar in that they are essentially payments for rights to use specified frequency bands of the radio spectrum. [emphasis added]

Thus, the differences between 2G and 3G systems do not stem from the frequencies that have been set aside for each. Rather, the terms “2G” and “3G” refer to differences in the infrastructure and technology of mobile communication systems which, in turn, affect the type of services provided. In an information memorandum dated 8 March 2001, the IDA clarified the differences between 1G, 2G and 3G services as follows:⁴ First generation (“1G”) mobile communication systems were introduced in the 1980s to offer simple wireless voice services based on analogue mobile technology. Second generation (“2G”) systems are based on digital mobile technology and are able to support improved voice quality, higher capacity for mobile devices, simple non-voice services such as short messaging services as well as global roaming capabilities. Third generation (“3G”) systems are expected to...