High Court – BFH v Comptroller of Income Tax – [2013] SGHC 161

28 August 2013

Revenue Law – Income Taxation

BFH (“the Appellant”) operates and provides mobile telecommunications systems and services in Singapore. The telecommunications industry is regulated by the Info-communications Development Authority (“IDA”), which licenses the operation of telecommunications systems and services and oversees the use of electromagnetic spectrum rights.

In 2001, the Appellant paid about $100 million (“Relevant Expenditure”) to IDA for a 20-year grant of both a 3G Facilities-Based Operator (FBO) Licence and a right to use the electromagnetic spectrum at a frequency of 2100 Megahertz (“3G Spectrum Rights”). The issue in this appeal is the deductibility of this Relevant Expenditure for income tax purposes. The Comptroller of Income Tax (“the Comptroller”) did not permit the deduction in the ascertainment of the Appellant’s income on the basis that it constituted capital expenditure, which was disallowed under s 15(1)(c) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”). The Appellant disagreed and appealed to the Income Tax Board of Review (“ITBR”), which dismissed the Appellant’s appeal in its decision on 3 January 2013 (“the ITBR Decision”). The present appeal is against the ITBR Decision.

The ITBR held that the Relevant Expenditure was a capital expense since it procured for the Appellant 20 years of the 3G Spectrum Rights. This enabled the Appellant to install 3G systems and provide 3G services to existing and new customers. In so doing, the Relevant Expenditure opened up a new field of trade and thus enlarged the core structure of the Appellant’s business. Additionally, the Relevant Expenditure was a one-time payment, suggesting that it was capital in nature.

The respective arguments in the present appeal

The Appellant submits that the ITBR Decision did not give due regard to the purpose of the Relevant Expenditure and instead based its decision on the duration and manner of payment. Essentially, the Appellant argues that the Relevant Expenditure was revenue in nature (and thus deductible) because its purpose was to acquire additional spectrum rights to protect its customer base and maintain its ability to continue providing quality service. Besides, the Relevant Expenditure was merely for regulatory permission and conferred no proprietary rights or structural enhancement. That the Relevant Expenditure was paid as a lump sum does not determine whether it is revenue or capital in nature.

In reply, the Comptroller maintains that the Relevant Payment was capital in nature and therefore not deductible because the consequence of the Relevant Expenditure was a substantive enhancement of the Appellant’s core business structure and enabled the launch of a new line of trade in 3G services, which previously could not be provided by the Appellant. The Appellant’s capitalisation of the Relevant Expenditure as a “non-current asset” in its balance sheet also reflected its assessment that there would be future economic benefits flowing from the asset. The cases cited by the Appellant on payments made to preserve a business or avoid a catastrophic event were different from the present situation as the Appellant was not facing any crisis. The fact that the Relevant Expenditure was a one-time non-refundable lump sum payment of $100m with a 20-year duration suggested it was a capital expenditure. This conclusion is supported by the tax treatment of similar payments for 3G licences in other Commonwealth jurisdictions.

Deductibility under the Act

In ascertaining the net taxable income of a person for any period, the gross income during that period is taken as a baseline. Against this are deductions for outgoings and expenses allowed by the Act, subject to the overriding condition that such outgoings or expenses are not the subject of statutory prohibition.

Notwithstanding this, s 15 of the Act cites certain categories of expenses or payments in respect of which deductions are not allowed, the most pertinent of which, as described in s 15(1)(c), is “any capital withdrawn or any sum employed or intended to be employed as capital except as provided in section 14(1)(h)”. Section 14(1)(h) allows for deduction of capital expenditure as prescribed in subsidiary legislation “where the income is derived from the working of a mine or other source of mineral deposits of a wasting nature”.

The net effect of these provisions is that the Appellant may only deduct the Relevant Expenditure if it is revenue in nature, as neither s 14(1)(h) nor the other exceptions in the Act are applicable. The key question therefore, is whether the Relevant Expenditure should be characterised as capital or revenue in nature.

Case law on the capital-revenue distinction

Both parties accept that the applicable law on the capital-revenue distinction for income tax purposes is as stated in the High Court decision of ABD Pte Ltd v Comptroller of Income Tax [2010] 3 SLR 609 (“ABD v CIT”). In that case, Andrew Phang JA reviewed the various tests to aid the court in ascertaining whether or not a specific expenditure is capital or revenue in nature.

The general principle is that the court must look closely at the purpose of the expenditure and ascertain whether or not such expenditure created a new asset, strengthened an existing asset or opened new fields of trading not hitherto available to the taxpayer, in which case such expenditure would be capital in nature. In particular, the court should consider the following guidelines:

(i) The manner of the expenditure: a one-time expenditure, as opposed to recurrent expenditures, would suggest that the expenditure is capital in nature; and

(ii) The consequence of the expenditure: if the expenditure strengthens or adds to the taxpayer’s existing core business structure, it is more likely to be capital in nature. However, where the expenditure is for “assets” which comprise the cost of earning an income, such expenditure is more likely revenue in nature.

Key issue: whether the Relevant Expenditure was capital or revenue in nature

To recap, the Appellant is a mobile telecommunications provider. What the Appellant was acquiring through the Relevant Expenditure was an intangible right for 20 years to use the 3G Spectrum, as well as a licence to develop and operate a 3G telecommunication network. The question is – whether this expenditure created a new asset, strengthened an existing asset, or opened new fields of trading hitherto not available to the Appellant.

The fact that the Relevant Expenditure constituted a lump sum, one-time payment of $100m instead of recurrent annual payments, is indicative, but not determinative of its capital nature.

In order for an expense to be properly characterised as capital in nature, it should create an asset or advantage of a permanent character. The rights conferred upon the Appellant by the Relevant Expenditure, being valid for 20 years, are of a permanent character. The advantage of being able to use the 3G spectrum to develop and operate a 3G telecommunication network strengthened and enhanced the Appellant’s existing telecommunication systems. From a business perspective therefore, the Relevant Expenditure enlarged the Appellant’s current profit-making operations and provided additional avenues for growth.

It is irrelevant that the other two local telcos acquired the same rights as the Appellant such that the Appellant gained no competitive advantage by virtue of the Relevant Expenditure. The focus of the capital-revenue distinction is the effect of the expenditure on the taxpayer in terms of its assets or business, and not the relative effects of similar expenditure on different taxpayers.

Consistency with tax treatment of cellular licence fees in other jurisdictions

The judge also compared and deliberated on the manner in which the United Kingdom, Australia and Malaysia dealt with similar expenditure. The commonality in these jurisdictions (with tax laws similar to Singapore) is that, but for statutory intervention, such expenditure would not have been deductible as revenue expenditure nor would it have qualified for depreciation allowance. Under the existing statutory scheme in Singapore, no depreciation allowance is permitted for the Relevant Expenditure. Neither has there been any amendment to the Act to sanction the Relevant Expenditure as a revenue expense.


In view of the above considerations, the judge decided that the Relevant Expenditure was capital in nature and thus not deductible under s 14(1) of the Act. The appeal was dismissed.

The above judgement was delivered on 22 August 2013.