ABB v Comptroller of Income Tax [(2010) MSTC 70-000] The appellant is the widow of an employee taxpayer and brought the appeal in her capacity as the executrix of his estate. Prior to his death, the taxpayer was granted share options in several companies in a group of related companies. The various share option schemes were administered by Executive Committees which had the discretion to allow a participant to retain share options which would otherwise have lapsed, vary the number of shares comprised in the share option and the period during which they have to be exercised. After the death of the taxpayer in 2005, the Committees exercised their discretion to allow the estate to retain and exercise the share options that had been granted to the taxpayer prior to his death, which would prima facie have lapsed due to the death of the taxpayer. In addition, the exercise periods for certain of the share options which were not exercisable yet were brought forward such that those share options could be exercised immediately by the estate. Effectively the Committees’ decision only restored the share options, which would have lapsed, but did not confer any new share options on the estate. The share options were subsequently exercised by the estate in 2006, and the gains derived from the exercise which amounted to over $8m for the year of assessment 2007, were taxed by the respondent. Tax from the gains amounted to $1.7m. On appeal to the Income Tax Board of Review, the Board found that the retention of the options was a benefit accruing to the estate by reason of the taxpayer’s employment and the gains derived by the estate were consequently taxable. The appellant appealed to the High Court. In order to subject the gains obtained by the Estate from the exercise of the Share Options to income tax under s 10(1) (b) of the Act, the respondent must show that:
(a) The retention of the Share Options by the Estate was a benefit extended by the Companies by reason of the Taxpayer’s employment; and
(b) s 10(6) of the Act and the former s 10(5) apply to share options retained by a deceased taxpayer’s estate. First, whether a particular gain can be treated as having arisen by reason of employment depends on the facts and circumstances of that individual case. Second, for the gain in question to be regarded as having arisen from employment, it must be a reward for services past, present or future. Since the question of whether a gain or benefit has arisen by reason of employment would depend on the unique facts of each case, the “reward for services” test should not be regarded as the only applicable test. The problem with the “reward for services” test is that it focuses entirely on the services rendered by the employee, whereas s 10 (6) of the Act (and also the former s 10 (5)) requires the court to determine whether the benefit in question arises from an employment relationship. It is not that the “reward for services” test is wrong. But, there could be circumstances where a benefit, although arising by reason of the taxpayer’s employment, has nothing to do with the taxpayer’s services, past, present or future. A gain from employment should be distinguished from a mere gift which accrues to the taxpayer in his personal capacity and which is hence not taxable. Admittedly, in particular circumstances, the line may not be so easily drawn. The circumstance that a large payment is to be made by someone other than an employer may be a considerable indication, though by no means a conclusive one, that the payment is not by way of remuneration. Remuneration is, as a rule, something that an employer has arranged or contemplated or at least knows about. This is so even though payments may come other than from the employer and may depend on the liberality of others. In the light of all the above authorities, the applicable principles may be summarised as follows:
(a) Any gain or benefit obtained by a person in his capacity as an employee would constitute a gain or benefit from employment and is taxable as income.
(b) A gift made to an employee on personal grounds is not a benefit from employment, but the voluntary or discretionary nature of a payment (or other benefit) will not ipso facto render that payment a gift.
(c) In determining whether a benefit is obtained by reason of employment, the court will look at the true nature of the benefit and not what the parties call it.
(d) Whether a benefit is one arising from employment ultimately depends on the facts and circumstances of each case.
The court will consider the following factors in answering this question (bearing in mind that no single factor is conclusive and that it is the overall picture which emerges that will be determinant): (i) the value of the benefit; (ii) the purpose of the benefit; (iii) the class of persons to whom the benefit was granted; (iv) whether the benefit was granted by the employer or a third party; (v) whether the employment had ceased when the benefit was granted; (vi) whether the benefit had a foreseeable element of recurrence; (vii) whether the benefit was granted pursuant to the terms of the contract of employment; and (viii) whether the benefit was granted voluntarily. As I see it, the focus of the inquiry should be on the substance of the transaction as a whole, rather than the exact mechanism or the exact wording of the provision by which the Share Options were conferred on the Estate. As mentioned earlier in determining whether a payment (or other benefit) arises from employment, the court should look at the true nature of the payment and not what the parties call it. It would be most undesirable if an employer and an employee can contractually determine the latter’s tax liability through the use of appropriate labels. Ultimately, the Share Options were retained by the Estate through the exercise of the Committees’ discretion. Whether or not these options lapsed at the time of the Taxpayer’s death and were subsequently restored, or whether they remained valid all along, is not crucial to the overall picture. What matters more are the circumstances surrounding the exercise of discretion by the Committees.

JD Limited v Comptroller of Income Tax [(2006) MSTC 7504] The taxpayer is an investment holding company listed on the Singapore Exchange. It focuses on making long-term share investments. During the years of assessment 1985 to 1996, the taxpayer received dividends from long-term share investments held in various subsidiary companies as its only income. The taxpayer financed the purchase of the share investments by both (a) obtaining overdrafts and loans from banks and from related companies at various interest rates or (b) issuing its own shares or obtaining interest-free loans from related companies. These funds were mixed and banked in a same bank account. Later, the funds were utilised for acquisition of the taxpayer’s shares investments and also for re-financing its earlier loans and the making of advances to other companies. Some of the company in which the taxpayer has shareholdings did not declare dividend in the year of assessment. Various other companies also did not declare dividend income for certain of those years of assessment. The taxpayer initially was assessed on the basis that only interest expenses attributable to shareholdings which produced income were deductible. Interest expenses that derived from non-income producing shareholdings were not allowed for deduction. The taxpayer go against the method of assessment that followed by comptroller. He appealed to the board for two main issues. This court only concerned with the issue relating to the interest expenses that disallowed: If interest expenses are incurred to maintain a portfolio of share investments in which some share investment counters do not yield dividend income, is the entire sum of interest expenses deductible, or are only those interest expenses attributable to the income-producing share investment are deductible? Both the taxpayer and comptroller agreed to the application of the total assets formula in determining the amount of interest expenses applicable. The comptroller on the other hand, regarded each share investment counter as a separate source of income and allowed deductions of interest expenses only for those shareholdings which produced dividend income at any time during the years of assessment in dispute. The Comptroller thus aggregated the interest expenses incurred only in respect of the income-producing share investment counters to determine the total amount of deductible expenses for the particular year of assessment. This figure was then used in determining the chargeable income for that year of assessment. The Income Tax Board of Review and the High Court found in favour of the respondent. The Board interpreted ‘source’ in sec 14(1) according to its natural and ordinary meaning of “channel or stream of income”. Therefore, the Board regarded dividends from each of the different share investment counters as constituting a separate and distinct source of income for the purpose of deduction. Further, the Board ruled that the Total Assets Formula (for allowing an apportionment of interest into the non-income producing and income-producing elements in determining the amount of expenses deductible) adopted by the respondent to be legally tenable and had been reasonably applied to the facts of the case. It therefore upheld the respondent’s position to disallow the deduction of interest expenses attributable to non-income-producing shares. The High Court affirmed the Board’s reasoning and decision. The appellant appealed to the Court of Appeal. The appeal missed. In my opinion, the decision by the high court and the tax board is reasonable. The decision is supported by Section 14(1), for the purposes of as ascertaining the income of any person for any source chargeable with tax under this act. Section 10 (1) ,income tax shall subject to the provisions of this act, be payable at the rate or rates specified here in after for each year of assessment upon the income of any person accruing or derived from Singapore or received in Singapore from outside Singapore.

Mr. A v Ketua Pengarah Hasil Dalam Negeri. [(1999) MSTC 3071] The taxpayer was a partner of Ernst & Whinney. He had objected to the merger of EW and another accounting firm, Arthur Young (Malaysia) to form Ernst & Young (“EY”) with effect from 1 July 1990. He withdrew from the partnership under a Settlement Agreement dated 31 July 1990. Under the Settlement Agreement, the taxpayer was to be paid based on 1.5 times EW's 1989 profits; i.e., a total sum of RM1,219,913 (including non-deductible tax adjustments), which the IRB sought to tax. The amount was to be paid over 23 equal installments. The taxpayer contended that these payments were capital in nature and not subject to tax. The taxpayer argued that the payments were capital consideration for retirement; that it represented withdrawal of capital, that it was consideration for loss of rights; that it was consideration to refrain from competition and that it was not consultancy payments. Further, the sum included non-tax-deductible adjustments which had no relevance to the taxpayer and should not be regarded as income. Finally, the taxpayer argued that the accounting treatment of the payments made by EY does not bind the taxpayer. The IRB argued that from the construction of the Settlement Agreement, the sums received were profits of the partnership, that at law, a retired partner was able to share in the profits of a partnership, and that in general; the payments were of revenue and not a capital nature. By virtue of the Settlement Agreement, there was a restructuring of the framework of the partnership of EW where there was a destruction of the taxpayer's profit making apparatus, a substantial imposition of restrictions and covenants and loss of rights. Payments made pursuant to these descriptions are generally not regarded as income. At a hearing held in Kuala Lumpur on 20 August and 10 September 1998, the Special Commissioners of Income Tax heard the appeal by Mr. A (hereinafter referred to as “the Appellant”) against two Notices of Assessment and one Notice of Additional Assessment issued by the Director General of Inland Revenue (hereinafter referred to as “the Respondent”) under the Income Tax Act 1967 (hereinafter referred to as “the Act”) as follows:

Year ofAssessment | Type ofAssessment | Date ofNotice ofAssessment | TaxPayable(RM) | 1991 | Original | 31.12.91 | 141,731.34 | 1991 | Additional | 16.05.95 | 114,611.80 | 1992 | Original | 01.05.95 | 318,509.63 |

It is pertinent to note here that there are two other appeals filed by Mr. B and Michael Yee Kim Shing against the assessments of the Respondent in respect of amounts received by them from the accounting firm of Ernst & Young. They were also partners of the accounting firm of Ernst and Whinney who had objected to the merger of that firm and the accounting firm of Arthur Young (Malaysia) to form Ernst & Young. Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner or his estate, then, in the absence of any agreement to the contrary, the outgoing partner or his estate is entitled, at the option of himself or his representatives, to such share of the profits made since the dissolution as the court may find to be attributable to the use of his share of the partnership assets, or to interest at the rate of eight per cent per annum on the amount of his share of the partnership assets. Provided that where, by the partnership contract, an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner or the outgoing partner or his estate as the case may be, is not entitled to any further or other share of profits; but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof; he is liable to account under the preceding provisions of this section.”. Regarding the issue of sharing profits of a partnership firm by a retired partner, there is no legal prohibition to this effect. The right of a retired partner to share in the profits of a partnership can be provided for in the Agreement by virtue of section 21 of the Partnership Act 1961. In fact, section 44 of the Partnership Act further stipulates, inter alia, where any member of a firm has died or otherwise ceased to be a partner, and the surviving partners carry on the business of the firm with its capital or assets without any final settlement of accounts as between the firm and the outgoing partner, the outgoing partner is entitled to a share of the profits attributable to the use of his share of the partnership assets. However, strangely, for reasons best known to EY, the aforesaid words, descriptions and phrases were not stated in clause 3 except in clause 2 of the Agreement which is, of course, admitted to by the Appellant as they were the Appellant's due share of profits of EW before he retired and the tax liable on those profits, duly paid by him. The letters referred to above do contradict the Agreement as submitted by the Appellant The word “profits” in clause 2, “additional payment” in clause 3 and the words “undrawn profits” for six months to 30 June 1990 and “outstanding balances” in clause 4 all put together clearly support the Appellant's contention strongly when Counsel for the Appellant said in his oral submission as follows:
“The Respondent relied completely on the accounts and correspondence of EY. The accounts are incorrect, misleading, discriminating and illegal. It was a misrepresentation to the Inland Revenue Board. It was an attempt by EY to get deductions.” We concur with the submission of the Appellant that the accounting treatment of EY does not bind the Appellant and that the question is what is the real character of the payment, not what the parties call it.

MP Holdings Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri. [(2000) MSTC 3115] The taxpayer was a company incorporated in Malaysia on 18 August 1975, and its principal business activity is that of a holding and investment company. The Appellant had entered into a management agreement with MPMSB, a related company. MPMSB rendered, inter alia, accounting, secretarial, human resource and corporate advisory services on matters relating to acquisition and disposal of assets. Management fees were paid by the taxpayer to MPMSB pursuant to the management agreement. The taxpayer purchased a property, K Estate, for the initial purpose of development on its own, but eventually decided to develop the property through a joint venture company under the name of MPDSB. Interest expenses arose from the allocations from interest expenses in relation to investments in shares, plantations and other real properties and on loans given out to its subsidiaries. The interest expenses were allowed to be set off by reference to income producing investments, but subsequently, the Revenue changed the basis of allowing interest expenses and restricting the deductions. The deductions related to years of assessment 1982 to 1988. The taxpayer contended that the dividend income and interest income for the relevant years of assessment should be treated as a distinct and singular source of income however or from wherever derived. The management fees were incurred wholly and exclusively for the purpose of managing the taxpayer's investment assets and should also be allowed. An investment dealing company had to be treated differently, for tax purposes, from a investment holding company. An investment holding company is one whose activities consist wholly in the making of investments and income is derived from the holding of such investments. An investment dealing company is one which has been incorporated with the object of buying and selling investments and to make a profit from such dealing activities. The tax position of an investment dealing company is analogous to that of a normal trading concern and its income from the dealing activities is assessable to tax under sec. 4(a). The investment income of an investment holding company is, by and large, assessable under sec. 4(c), (d), (e), and (f). The Revenue cannot, based on established case law, further sub-divide each source by treating each counter of share investment as a separate source or apportion the dividend between income producing and non-income producing. To treat each counter of share investment as a separate source is undoubtedly disintegrating the grouping or categories further than what is authorised by the Income Tax Act (“the Act”). Further, sec. 4 of the Act by itself or read together with sec. 26 of the Act suggested that the dividends were to be assessed in globo and not the dividend from each counter separately. As regards the disallowance of interest expenses incurred in the acquisition of the K Estate, a deduction was only allowable when income is derived from the housing development. As this had not taken place, the interest expenses were correctly disallowed by the Revenue. The taxpayer, being an investment holding company, derived dividend and interest income. The management agreement under which the management fees were paid, related to fees other than in relation to dividend and interest income. Further, the management fees were paid to MPMSB, which was a company related to the taxpayer. No evidence was led to establish that the management fees were incurred in the production of income. Also, sec. 60F of the Act was inserted and came into force from the Year of Assessment 1993 to allow a deduction of a certain percentage of the income of investment holding companies as management fees. Consequently, the management expenses claimed by the taxpayer are not deductible. Whether the dividend income of the Appellant for the Years of Assessment 1982 to 1988 should be treated as a distinct and singular source of income however or from wherever derived, in arriving at the Appellant's adjusted income under section 33 of the Act; Whether the interest income of the Appellant for the Years of Assessment 1982 to 1988 should be treated as a separate and singular source of income however or from wherever derived, in arriving at the Appellant's adjusted income under section 33 of the Act. The Appellant being an investment holding company its incomes are dividends, interest and rents and are taxable under section 4(c) and (d) and not under section 4(a) of the Act; Only gains or profits which fall under section 4(a) of the Act qualify for consideration under section 43 of the Act whereby adjusted losses from a business of a taxpayer for previous years of assessment can be set off from a source consisting of a business under section 4(a) but not against income from any other source; No evidence was led by the Appellant in respect of this contention; and Investment holding companies do not qualify for business losses.
Vodafone International Holdings BV v Union of India (UOI) & Anor [(2012) MSTC 90-002] Upon realising the great potential of the mobile market in India, Vodafone International Holdings BV (the petitioner) decided to acquire a controlling interest in CGP Investments (Holdings) Ltd (CGP), a company incorporated in the Cayman Islands that was an indirect wholly owned subsidiary of Hutchinson Telecommunications International Limited (HTIL). CGP held through other companies a 52% controlling interest in Hutchinson Esar Ltd (HEL renamed VEL), being a company resident in India and a joint venture vehicle through which the Hutchinson Group of companies acquired interests in 23 mobile telecommunication circles in India. On 11 February 2007 the petitioner and HTIL entered into a sale and purchase agreement (SPA) whereby HTIL transferred the entire issued share capital of CGP to the petitioner. The Indian tax authorities (the Revenue) were of the view that the SPA and other transactions, which constituted a transfer of the composite rights of HTIL in VEL and which resulted in the petitioner stepping into the shoes of HTIL, had a sufficient territorial nexus to India and were thus chargeable to income tax under the Income-tax Act, 1961. Thus on 31 May 2010, a notice to show cause was issued under s 163 to the petitioner to show cause as to why it should not be treated as a representative assesse of HTIL. It was the Revenue’s case that upon a true construction of the SPA and other transaction documents there was a composite transaction involving a transfer of rights in VEL by HTIL that resulted in an accrual of income for HTIL from a source of income in India or through the transfer of a capital asset situated in India. The Revenue argued that since all the obligations cast upon the parties as per the transaction documents were performed in India, the income from the transaction accrued or arose in India and was chargeable to tax under the first limb of s 5(2)(b) of the Act. The Indian tax authorities, who were of the view that there ought to have been a deduction of tax at source as required under s 195 of the Act, issued a notice to show cause to this effect. The petitioner disputed the respondents’ case and contended that the transaction in question was only in respect of one share of CGP in the Cayman Islands and that this being a capital asset situated outside India there was no question of any income having accrued or arisen in India. The petitioner raised a jurisdictional challenge to the respondent’s show cause notice. The true nature of the transaction as it emerges from the transactional documents was that the transfer of the solitary share of CGP reflected only a part of the arrangement put into place by the parties in achieving the object of transferring control of VEL to the petitioner. The composite transaction between HTIL and the petitioner covered a complex web of structures and arrangements, not referable to the transfer of one share on an upstream overseas company alone. The transaction documents were in themselves adequate to establish the tenability of the petitioner’s submission that the transaction involved merely a sale of a share of a foreign company by one non-resident company to another. Under s 5(2) of the Act, the total income of a non-resident included all income from whatever source derived accruing or arising whether directly or indirectly to him in India. In assessing the true nature and character of a transaction, the label which parties may ascribe to the transaction was not determinative of its character. The nature of the transaction had to be ascertained from the covenants of the contract and from the surrounding circumstances. The subject matter of the transaction in the present case when viewed from a commercial and realistic perspective showed that the income accrued and arose and was derived as a consequence of the divestment of HTIL’s interest in India. If there was no divestment or relinquishment of its interest in India, there was no occasion for the income to arise. Once the court came to the conclusion that the transaction between the petitioner and HTIL had a sufficient nexus with Indian fiscal jurisdiction, the issue of jurisdiction would have to be answered by holding that the Indian tax authorities had acted within their jurisdiction in issuing a notice to show cause to the petitioner for not deducting tax at source. The jurisdictional issue was legitimately to be confined to the obligation of the petitioner to deduct tax at source under s 195 of the Act. The basic test under s 195 of the Act is that there had been a payment made to a non-resident of a sum chargeable under the provisions of the Act. Any person responsible for paying such a sum to a non-resident was liable to deduct income tax at the time when a credit of such income was affected or at the time when payment was made. In the present case, the transaction in question had a significant nexus with India. The essence of the transaction was a change in the controlling interest in VEL, which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements. The petitioner by the diverse agreements that it entered into had a nexus with Indian jurisdiction. In these circumstances, the proceedings, which had been initiated by the income tax authorities, could not be held to lack jurisdiction. Section 195 is inapplicable to offshore entities making offshore payments. Section 195 has to be read consistent with the established principles of conflict of laws and harmonious with the proposition that Parliament does not enact law that has extra territorial operation, unless expressly so stated. The statutory duty under Section 195 cast on the payer is accompanied by a duty under Section 200 to pay the tax and is visited with penal consequences for breach. All these consequences which operate against a person who is not an assessed can arise only where the person concerned has some nexus with India. A person who has no residential nexus whatsoever either temporary or permanent does not incur an obligation under Section 195. A foreign entity which has no presence in India, not even a branch office, cannot be subjected to the obligation to deduct and pay tax. It is the recipient who is a potential assessed because he has received a sum chargeable. This by itself does not create a nexus with the payer who has no income chargeable under the Act, nor has a presence of any kind in India. Moreover, Section 198 which deems tax deducted and paid to be income received by the payee and Section 199 which deems such a payment to be payment of tax on behalf of the person from whom such a tax is deducted, would not operate outside India in transactions such as the present. Payment of tax in India would not be a partial discharge of the obligation to pay consideration under the agreement outside India. Hence, even assuming that it is held that some part of the income may be taxable in India, considering the fact that (a) The Petitioner has no presence in India; (b) The transaction was consummated outside India; (c) The transaction related to transfer of a share outside India, contracted to be delivered outside India and the transfer of which was registered outside India; (d) The governing law of the contract pursuant to which it was transferred was English law; (e) Payment was made from a bank account outside India to a bank account outside India, there is no question of deduction of tax on such payments.