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2024 MarsdenLR 860
COURT OF APPEAL PUTRAJAYA
KEYSIGHT TECHNOLOGIES MALAYSIA SDN BHD – Appellant
Versus
KETUA PENGARAH HASIL DALAM NEGERI – Respondent
[Civil Appeal No: W-01(A)272-05/2021]
The sale of intellectual property rights constituted a capital receipt, not taxable as income, and the assessment was time-barred due to lack of negligence by the Appellant.
Headnote:(A) Income Tax Act 1967 - Sections 4(f) and 91(1) - Assessment for Year of Assessment 2008 - Appellant disputed tax assessment of RM311,057,602.46 claiming it was a capital gain from sale of IP Rights - High Court and Special Commissioners of Income Tax ruled gains were income, applying Badges of Trade test incorrectly - Court found sale constituted capital receipt, not taxable - Assessment issued beyond time bar under s 91(1) of ITA - Respondent's negligence allegations unfounded, penalties unjustified. (Paras 1-3, 21-22, 38-39, 190-192)
(B) Badges of Trade Test - Proper test to distinguish capital from income - Respondent's argument of 'outright sale' test rejected - Court upheld that the gain from IP Rights sale was capital in nature, not income. (Paras 40-50, 61-72)
(C) Time Bar - Respondent's assessment was time-barred under s 91(1) - Court found no negligence by Appellant to justify lifting time bar. (Paras 153-189)
(D) Penalties - Imposition of 45% penalty under s 113(2) of ITA was not justified. (Paras 190-192)
JUDGMENT
(A) Introduction
[1] The Appellant's appeal is against the decision of the learned High Court Judge ("HCJ") delivered on 6 May 2020.
[2] The Respondent is the Director General of Inland Revenue ("the Revenue"), who had assessed the Appellant to tax in the sum of RM311,057,602.46 for the Year of Assessment ("YA") 2008 under the Income Tax Act 1967 (" ITA 1967").
[3] The Appellant disputed the assessment raised by the Revenue and had appealed to the Special Commissioners of Income Tax ("SCIT"). The said appeal was dismissed by the SCIT on 12 March 2020.
[4] The Appellant then appealed against the decision of the SCIT to the High Court (HC) which appeal was dismissed. Hence, the appeal to this Court.
(B) Chronology Of Events
[5] The Appellant had since its inception and for some years now operated as a full-fledged manufacturer of various microwave devices, test accessories, amplifiers and transceivers. The Appellant sold its manufactured products to customers in various fields of industrial research, technology and other industries.
[6] In the course of its operations as a full-fledged manufacturer, the Appellant developed technical know-how in manufacturing and marketing activities ("hereinafter referred to as IP Rights").
[7] Following a restructuring, the Appellant, on 1 March 2008, converted from a full-fledged manufacturer into a contract manufacturer for Agilent Technologies International S.a.r.l ("ATIS").
[8] ATIS is the principal factory of the Agilent Technologies Group (to which the Appellant belonged to) located in Switzerland.
[9] The Appellant's audited financial statement for year ending 31 October 2008 under the heading "principal activities" reflects the conversion of the Appellant to a contract manufacturer.
[10] To effect its conversion to a contract manufacturer, the Appellant sold its IP Rights to ATIS by way of an Intellectual Property Transfer Agreement dated 1 March 2008 ("IP Transfer Agreement") for RM821,615,000.00.
[11] After the sale of the IP Rights, by way of a Manufacturing Services Agreement dated 1 March 2008 ("Manufacturing Services Agreement") between the Appellant and ATIS, ATIS granted the Appellant a licence to use the IP Rights for the sole and exclusive purpose of contract manufacturing for ATIS.
[12] Post-conversion the Appellant no longer produces and sell its own products, no longer owns the materials, the IP Rights and inventory and does not derive profit from the selling of the manufactured goods.
[13] Instead, the Appellant provides manufacturing services for products which belong to ATIS, with raw materials supplied by ATIS and is a licensee of the IP Rights.
[14] In exchange for the contract manufacturing services provided, the Appellant is compensated on a cost-plus basis.
[15] On 31 October 2008, the Appellant filed its tax returns and computations for Year Assessment ("YA 2008") with the Respondent. The Appellant reported the receipt from the sale of IP Rights of RM821,615,000.00 as a gain which is capital in nature, and hence not taxable.
[16] On 30 August 2013, the Respondent initiated a transfer pricing audit on the Appellant. On 9 March 2017, more than 9 years after the sale of the IP Rights and some 4 years after the commencement of the audit, the Respondent found no transfer pricing issues, but contended that the income received by the Appellant for the sale of the IP Rights was income in nature and therefore subject to income tax under s 4(f) of the Income Tax Act 1967 (" ITA ").
[17] The Respondent alleged that the Appellant was negligent for "failing to report this income".
[18] Subsequently, on 13 June 2017, the Respondent issued its Notice of Additional Assessment for YA 2008, imposing additional tax and 45% penalty on the Appellant amounting to RM311,057,602.46 ("Assessment").
[19] It is not in dispute that the assessment was issued beyond the 5- year time bar period provided for under s 91(1) of the ITA .
[20] The Appellant subsequently filed a notice
