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2024 MarsdenLR 2385
COURT OF APPEAL (PUTRAJAYA)
KAMALUDIN MD SAID, ABU BAKAR JAIS, COLLIN LAWRENCE SEQUERAH, JJ
Keysight Technologies Malaysia Sdn Bhd – Plaintiff
Versus
Ketua Pengarah Hasil Dalam Negeri – Defendant
CIVIL APPEAL NO W-01(A)272-05 OF 2021
The court established that the gain from the sale of intellectual property rights constituted a capital receipt, not taxable income, and reinforced the applicability of the badges of trade test in determining the tax status of such transactions.
Headnote:(A) Income Tax Act 1967 - Sections 4(f), 91(1), 91(3), and 113(2) - Tax assessment dispute regarding the sale of intellectual property rights with a value of RM 821,615,000. The assessee argued that the receipt was capital in nature and not taxable income. The court found that the badges of trade test is applicable and should have been used to determine whether the gain was capital or income. The assessment was made beyond the 5-year time bar provided and was lifted due to alleged negligence of the taxpayer, which the court found unjustified. (Paras 40, 61, 153, 190, 192)
Facts of the case:
The Appellant sold its IP rights to a company and was assessed by the Revenue for income tax on the gains, which the Appellant contended were capital gains. (Paras 2, 10, 15, 18, 30)
Findings of Court:
The court confirmed that the gain was from the disposal of a capital asset and hence not subject to income tax; the negligence claim by the Revenue to lift the time bar was unfounded. (Paras 73, 172, 189)
Issues: Whether the receipt was taxable income or capital gain, whether the Revenue's assessment was time-barred, and whether the imposition of penalties was justified. (Para 38)
Ratio Decidendi: The badges of trade test was the correct standard, and the Revenue failed to meet the necessary criteria for lifting the time bar due to negligence. (Paras 40, 189)
Result: Appeal allowed with costs, and the amount paid by the Appellant is to be refunded without interest. (Paras 192, 198)
| Table of Content |
|---|
| 1. appeal against tax assessment (Para 1 , 2 , 3 , 4) |
| 2. appellant's conversion to contract manufacturer and ip rights sale (Para 5 , 6 , 7 , 10 , 12) |
| 3. assessment beyond time bar; negligent reporting (Para 18 , 27) |
| 4. badges of trade and their inapplicability to ip rights (Para 21 , 22 , 24 , 25) |
| 5. arguments on capital vs income nature of receipt (Para 28 , 29 , 33 , 36 , 179) |
| 6. decision to allow appeal with costs (Para 190 , 192 , 193 , 197) |
[1]The Appellant’s appeal is against the decision of the learned High Court Judge (“HCJ”) delivered on 6.5.2020.
[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 12.3.2020.
[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 1.3.2008, 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 31st 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 1.3.2008 (“IP Transfer Agreement”) for RM 821,615,000.
[11]After the sale of the IP Rights, by way of a Manufacturing Services Agreement dated 1.3.2008 (“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 31.10.2008, 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 RM 821,615,000 as a gain which is capital in nature, and hence not taxable.
[16]On 30.8.2013, the Respondent initiated a transfer pricing audit on the Appellant. On 9.3.2017, 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 Section 4 (f) Income Tax Act 1967
[17]The Respondent alleged that the Appellant was negligent for “failing to report this income”.
[18]Subsequently, on 13.6.2017, the Re
