Chandos Pte Ltd v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: L P Thean J
• Judgment Date: 07 May 1987
• Neutral Citation: [1987] SGHC 14
• Docket Number: District Court Appeal No 29 of 1985
• Date: 07 May 1987
• Year: 1987
• Published date: 19 September 2003
• Plaintiff Counsel: Andrew Ang (Lee & Lee)
• Citation: [1987] SGHC 14
• Defendant Counsel: Rosalind Tan
• Court: High Court (Singapore)
• Subject Matter: Income taxation,Interest on loan,Execution of loan agreement and handing over of cheque outside Singapore,Meaning of source of interest,Whether interest derived in Singapore,Revenue Law,ss 10 & 12(b)(c) Income Tax Act (Cap 141, 1970 Ed),Employment of funds in Singapore

Cur Adv Vult

The facts in this appeal are not in dispute and have been agreed upon. They are as follows. Chandos Pte Ltd (Chandos), the appellants, is a company incorporated in Singapore. At all material times, all its shares were beneficially owned by Hamthor Ltd a company incorporated in Hong Kong, and the directors of Chandos were Nadaisan Logaraj, Brian Shane McElney, Thomas John Gregory and Robert Seton Nickson Baly. Nadaison Logaraj was the director resident in Singapore and was only appointed to comply with s 122(1) of the Companies Act (Cap 185), now s 145(1) of the Companies Act (Cap 50), and all the other directors were resident in Hong Kong. All meetings of directors were held there. The objects for which Chandos was incorporated are, inter alia, to negotiate loans and procure capital for any company in any country and it derived its earnings from such transactions. Since its incorporation, only one such transaction had been undertaken by Chandos and that transaction was made with a company called Delacom Investments Pty Ltd (Delacom).

Delacom is a company incorporated in the State of New South Wales, Australia. It was not resident in Singapore, but it established a branch in Singapore and was registered here as a foreign company under the provisions of the Companies Act.

On 22 May 1976 Delacom purchased an interest in certain mineral rights in Australia. It was not stated in the statement of agreed facts from whom Delacom purchased the interest, but from the recital to the deed of assignment dated 22 May 1976 made between Delacom and a company called Tealby Pty Ltd it appears that Delacom purchased it from a company called Nazly Pura Jaya Pte Ltd (Nazly Pura). This is also evident from the cheque for S$9m drawn by Delacom in favour of Nazly Pura in payment of part of the purchase price of such interest, to which I shall advert shortly.

On 25 May 1976 Chandos opened a bank account with the Singapore branch of Bank Nationale de Paris (BNP), the bank account number being 0011-00891-7. Previous to that, the bank had agreed to provide overdraft facilities to Chandos up to the limit of S$9 m. Delacom also had an account with the Singapore branch of BNP. It arranged to borrow from Chandos a sum of S$9m, and on 25 May 1976 the board of directors of Chandos, at a meeting held in Hong Kong, formally approved the borrowing from BNP and the loan to Delacom. Accordingly, a loan agreement expressed to be made between Chandos and Delacom was prepared.

On 26 May 1976 the persons representing the parties concerned made a short journey to Johore Bahru, Malaysia. There, the loan agreement between Chandos and Delacom was executed. It was executed on behalf of Chandos by Nadaisan Logaraj, the director resident in Singapore, and on behalf of Delacom by JM Parker under a power of attorney, in the presence of an advocate and solicitor, Mr Chan Kai Meng practising in Johore Bahru. Immediately, after the signing of the loan agreement, a cheque for S$9m, representing the loan, was drawn on behalf of Chandos on BNP payable to Delacom and was handed to the representative of Delacom. Upon receipt of the cheque, the latter immediately drew a cheque for a similar amount on BNP payable to Nazly Pura to pay for part of the purchase price of the Australian mineral rights which Delacom had purchased, and the cheque was handed over in Johore Bahru. Both the cheques were payable at the Singapore branch of BNP. After the completion of these transactions, the representatives of the parties then returned to Singapore and the cheques drawn respectively by Chandos and Delacom were credited to the respective bank accounts of the parties concerned with the Singapore branch of BNP on 26 May 1976.

Interest on the loan was determined by Chandos and notified to Delacom in accordance with the terms of the loan agreement. Pursuant to cl 10 of the loan agreement, the interest payable by Delacom was capitalised from time to time and this was effected by Delacom crediting in its books of account in Australia the account of Chandos with the relevant amount of interest. Under the Australian income tax law, when Chandos was credited with interest, Delacom paid 10% withholding tax to the Australian Commissioner of Taxation. Apart from small amounts paid to the directors of Chandos in Hong Kong as directors fees, at no time had any interest payable by Delacom to Chandos been paid. Also, at no time had any interest ever been remitted to Chandos in Singapore.

By a notice of assessment dated 4 September 1981 the Comptroller of Income Tax, the respondent, assessed Chandos for the year of assessment 1978 to tax on the interest derived from the loan in a sum of $513,646.80. Chandos objected to the assessment and upon the Comptroller refusing to amend the assessment, Chandos appealed to the Board of Review, but the appeal was dismissed. The Board held that notwithstanding that the cheque for the loan was drawn and handed to the borrower in Johore Bahru, the fact remained that the origin of the loan was the funds in the account of Chandos with BNP in Singapore. There was no nexus between Johore Bahru and Chandos or Delacom, save that the agreement was executed there and the cheques were handed over there and it would be untenable to hold that the loan was made in Johore Bahru. The fact that Delacom on receipt of the cheque immediately drew another cheque for an identical amount on the bank in favour of a third party did not, in the opinion of the Commissioners, alter the source of the funds for the loan; Delacoms cheque could never have been met until Chandos cheque was first cleared. They held further that if the handing over of the cheque in Johore Bahru was material to determine the source of the loan, then, when the cheque was brought into Singapore by the representative of Delacom and placed into Delacoms account with the bank, the funds provided by such loan had been brought into Singapore. Against the decision of the Commissioners this appeal is now brought.

The charging provision is s 10(1) of the Income Tax Act (Cap 141, now Cap 134, 1985 Ed), which, so far as relevant, is as follows:

10(1) Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of -

(a) ...

(b) ...

(c) ...

(d) dividends, interest or discounts;

(e) ...

(f) ...

(g) ...

The terms, derived from Singapore, has been extended by s 12(6), which so far as relevant, is this:

12(6) There shall be deemed to be derived from Singapore

(a) ...

(b) any income derived from loans where the funds provided by such loans are brought into or used in Singapore.

The only question in this appeal is whether the interest on the loan to Delacom was derived from Singapore and this question turns on a finding of the source of the interest, as the word derived connotes a source.

It was argued by Mr Ang on behalf of Chandos that the source of the interest was outside Singapore, and the source was the transaction entered into between Chandos and Delacom which gave rise to the obligation by Delacom to pay interest, and the transaction was entered into in Johore Bahru. He relied on what in his submission was the majority view of the Court of Appeal of New Zealand in the case of Commissioner of Inland Revenue (NZ) v NV Philips Gloeilampenfabrieken 10 ATD 376 namely, the judgment of North J with whom Hay J concurred, and the judgment of Turner J. Miss Rosalind Tan on behalf of the Comptroller of Income Tax also cited that case in support of her argument that the source of the interest was in Singapore, but she relied on the judgment of Barrowclough CJ in the Supreme Court, who first heard the case, and the judgment of Gresson J in the Court of Appeal. As the various judgments in this case had been quoted in extenso by both counsel in their arguments it would be helpful to examine them in some detail.

In that case, a Dutch company incorporated and resident in Holland sold and exported its products to a New Zealand company operating in New Zealand. Arising from the trading transactions, the New Zealand company owed the Dutch company an amount of £80,000 (English sterling) for goods supplied and unpaid, and was unable to discharge this liability. It negotiated with the Dutch company for an extension of time for payment, and arising from the negotiation, it was agreed that the liability would be converted into a loan from the Dutch company repayable with interest by instalments. A loan agreement was prepared and executed. Pursuant to the loan agreement, the Dutch company sent to the New Zealand company a cheque for £80,000 (English sterling) drawn by the Dutch company on Midland Bank in London and made payable at that bank to the New Zealand company. Upon receipt of the cheque, the New Zealand company endorsed it and sent it back to the Dutch company in payment of the amount owing for goods sold and unpaid. The New Zealand company also sent to the Dutch company a receipt for the loan of £80,000, and made appropriate entries in its books. Thereafter, the New Zealand company paid interest on the loan, and deducted in each year the amount of such interest in making returns of its assessable income. The Commissioner of Inland Revenue, New Zealand, assessed the New Zealand company as agent for the Dutch company for income tax and social security charges in respect of the interest received by the Dutch company in terms of the loan agreement. The question was whether the interest was derived from New Zealand and a case was stated for decision by the Supreme Court....