5 October 2011

In ATG v The Comptroller of Income Tax [2011] SGITBR 2, the Income Tax Board of Review (ITBR) was asked to consider the appeal by the Appellant to allow a claim for capital allowances under s 19(2) and 19A of the Income Tax Act (Chp 134) (“the Act”) in respect of capital expenditure incurred for its plant and machinery used by its sub-contracts and vendors (collectively, “the Sub-contractors”). Revised assessments for YA 2003 and YA 2004 were issued where the Appellant’s tax assessment amounted to $27,159,001.42 and $42,177,255.62 respectively.

The Appellant is a Singapore incorporated company carrying on the manufacture of high precision components and devices (“the Products”) and the manufacture of certain equipment for manufacturing the Products. To be cost effective, parts of the Appellant’s manufacturing operations for the Products is outsourced to independent Sub-contractors, with businesses in and outside of Singapore.

In YA 2003 and 2004, the business arrangement with the sub-contractors with respect to the manufacturing of the Products was structured on a “buy-sell” model, where the Sub-contractors would:

• procure certain components of the Products from third-party parts vendors and/or the Appellant
• process and/or assemble them
• manufacture the finished Products and/or components, and
• sell the finished Products and/or components to the Appellant.

The pricing formula agreed between the Appellant and the Sub-contractors ensured that the Sub-contractors did not profit from the buying and ownership of the raw materials which were required to be purchased from specific Appellant-designated suppliers.

Certain plant and machinery for manufacturing the Products and components were placed by the Appellant at the Sub-contractor’s premises for the purpose of manufacturing the Products and components.

The Appellant had claimed annual allowances under s 19 of the Act and capital allowances under s 19A of the Act for YA 2003 and YA 2004.

The Respondent refused the Appellants’ claims by way of various assessments.  The Appellant appealed to the Board.

The appeal was allowed. The key findings are summarised below:

1. The sole issue is whether the plant and machinery placed by the Appellant with the sub-contractors for use in manufacturing processes for the Products were in use by the Appellant for the purpose of its trade, profession or business, thus entitling the Appellant to capital allowances on such plant and machinery under ss 19(2) and 19A(1) of the Act.

Section 19(2) of the Act reads:

“Where at the end of the basis period for any year of assessment, a person has in use machinery or plant for the purpose of his trade, profession or business, there shall be made to him, on due claim, in respect of that year of assessment an allowance for depreciation by wear and tear of those assets (to be known as an annual allowance) which shall be calculated in accordance with …”

Section 19A(1) of the Act reads:

“Notwithstanding section 19, where a person carrying on a trade, profession or business incurs capital expenditure on the provision of machinery or plant for the purpose of that trade, profession or business, there shall be made to him, on due claim for any year of assessment and in lieu of the allowances provided by section 19, an annual allowance of 33 1/3% in respect of the capital expenditure incurred.”

It should be noted that s 19A(1) provides for a period of claim for capital allowances as an alternative to that provided in section 19. Under s19A(1), the capital allowances may be claimed over a shorter three-year period.

2. Sections 19(2) and 19A(1) are to be strictly construed and with regard to their purposes (Ramsay v Inland Revenue Commissioners [1981] 2 WLR 449 at 456). The words and language in the section are to be given a natural meaning and should not be stretched in favour of the Comptroller (Attorney-General v Earl of Selborne [1902] 1 KB 388 at 396; The Union Cold Storage Company v Jones (H.M. Inspector of Taxes) 8 TC 725).

3. The purpose of the sections is to provide for allowances in respect of capital expenditure on the provision of plant or machinery for the purposes of the taxpayer’s trade, profession or business (Comptroller of Income Tax v GE Pacific Pte Ltd [1994] 2 SLR(R)948  at [27]).

4. The expression “for the purpose of trade” means “for the purpose of enabling a person to carry on and earn profits in the trade” (Smith’s Potato Estates Limited v Bolland (Inspector of Taxes) [1948] AC 508 at 526).

5. There must be a connection between the expenditure incurred and the taxpayer’s trade, profession or business. Whether there is such a connection is a question of fact and degree. In considering the question, it is important to consider whether the expenditure is “really incidental to the trade” in question or was incurred “for the purpose of earning the profits” (Strong & Co. v Woodifield [1906] AC 448 at 452 and 453). A finding of the purpose (of earning the profits) is not affected by the fact that the expenditure also benefits a third party to some extent (Usher’s Wiltshire Brewery Ltd v Bruce [1915] AC 433 at 469 to 470).

6. The plant and machinery were indeed used for the purpose of the Appellant’s trade or business and for earning profits for the Appellant. The fact that the Sub-contractors also obtained a benefit to some extent or earned profits from the use of the plant and machinery does not deprive the Appellant from claiming capital allowances on the plant and machinery under ss 19(2) and 19A(1) of the Act. Nor does the fact that the Sub-contractors incurred risks in the manufacturing process or had ownership of the Products before they were sold to the Appellant detract from the finding that the plant and machinery were used for the purposes of the Appellant’s trade or business.

7. In this case, there is a sufficient connection between the capital expenditure incurred on the provision on the plant and machinery and the Appellant’s trade or business as:

• The plant and machinery were placed at the Sub-contractor’s premises for the exclusive use of manufacturing the Products and their components for the Appellant and the Appellant continued to own and maintain the plant and machinery whilst they were at the Sub-contractors’ premises. The plant and machinery contained the Appellant’s proprietary design over which the Appellant maintained ownership and close control. Training and customised technical knowledge for the operation of the plant and machinery was supplied by the Appellant. Access to the plant and machinery was controlled, and measures were taken to prevent counterfeiting.
• The costs of maintenance and repairs were borne by the Appellant, as were depreciation costs. The Sub-contractors did not bear the depreciation costs and did not add these to the price of the Products sold to the Appellant.
• The Sub-contractors were not typical manufacturers making profits from materials used in the finished products. They did not profit from the buying and ownership of the raw materials. Sourcing of these materials was through Appellant-designated suppliers.
• There is nothing in s 19 or 19A to suggest that a taxpayer cannot claim capital allowances on such a plant or machinery even though a third party can also benefit from its use.

The above decision was delivered on 27 July 2011.