28-5-2024 (KUALA LUMPUR) The Court of Appeal has directed the Inland Revenue Board (LHDN) to refund RM286 million to Penang-based electronics manufacturer Keysight Technologies Malaysia Sdn Bhd, overturning a long-standing dispute over the taxation of proceeds from the sale of intellectual property (IP) rights.
Delivering the unanimous decision of the three-member bench, Justice Collin Lawrence Sequerah ruled that the High Court and Special Commissioners of Income Tax (SCIT) had erred in upholding the LHDN’s tax assessment for the year 2008.
The crux of the matter revolved around the classification of proceeds derived from the sale of IP rights. The Court of Appeal concurred with Keysight’s assertion that such proceeds constitute capital receipts rather than taxable income.
“The receipt from the sale of such capital assets constitutes capital receipt. It was not income in nature, and therefore not taxable,” Justice Sequerah stated in the landmark ruling issued on Friday.
The bench, which also comprised Justices Kamaludin Said and Abu Bakar Jais, unanimously agreed that Keysight’s sale of technical know-how under a global restructuring program did not constitute taxable income.
The LHDN had previously initiated an audit and subsequently assessed the proceeds from the IP sale as income, alleging that the funds represented compensation for the loss of the taxpayer’s future income streams.
However, Keysight had already paid the contested RM286 million assessment to the LHDN and subsequently filed an appeal with the SCIT, which was dismissed in March 2020. The High Court had upheld the SCIT’s decision in May 2021.
In a further blow to the tax authority, the Court of Appeal ruled that the LHDN’s assessment was time-barred, as it was issued past the five-year limitation period stipulated under the Income Tax Act 1967.
The bench observed that the LHDN had failed to establish the requisite “negligence exception” required to lift the time bar, noting that the mere act of claiming a tax treatment with which the LHDN disagreed could not constitute negligence.
Furthermore, the court affirmed that Keysight had made full and frank disclosures in its tax returns and sought professional advice in preparing them, further undermining the LHDN’s case.
In addition to the landmark ruling on the taxation of IP sales, the Court of Appeal’s decision also carries broader implications for taxpayers, reinforcing the importance of adhering to statutory time limits and establishing clear thresholds for negligence allegations.
The LHDN was ordered to refund the RM286 million to Keysight and pay RM20,000 in legal costs, marking a significant victory for the electronics manufacturer and setting a precedent for future disputes over the taxation of intellectual property rights.
