China Mobile Hong Kong Co Ltd v Commissioner Of Inland Revenue

CourtHigh Court (Hong Kong)
Judgment Date27 February 2018
Neutral Citation[2018] HKCFI 373
Citation[2018] 2 HKLRD 146
Judgement NumberHCIA2/2017
SubjectInland Revenue Appeal
HCIA2/2017 CHINA MOBILE HONG KONG CO LTD v. COMMISSIONER OF INLAND REVENUE

HCIA 2/2017

[2018] HKCFI 373

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 2 OF 2017

____________

BETWEEN
CHINA MOBILE HONG KONG COMPANY LIMITED Appellant
and
COMMISSIONER OF INLAND REVENUE Respondent

____________

Before: Hon Chow J in Chambers (Open to Public)
Date of Hearing: 1 November 2017
Date of Decision: 27 February 2018

__________________

D E C I S I O N

__________________

INTRODUCTION

1. The principal issue for determination is whether it is reasonably arguable that certain upfront lump sum spectrum utilisation fees (“Upfront SUFs”) paid by China Mobile Hong Kong Company Limited (“Taxpayer”) to the Telecommunications Authority (“TA”) are “revenue”, as opposed to “capital”, in nature.

2. A subsidiary issue for determination is whether an appellant is required to formulate a proper question, or proper questions, of law in the statement required by Section 69(3)(a)(ii) of the Inland Revenue Ordinance, Cap 112 (“the Ordinance”) when seeking leave to appeal, and whether the Taxpayer has done so in the present case.

Basic facts

3. The background facts of this matter are set out in a written decision (“the Decision”) of the Board of Review (“the Board”) dated 17 January 2017. The following brief summary should suffice for the present purpose.

4. The Taxpayer is a mobile telecommunications and related services provider. Over the years, it has been granted various licences to operate mobile telecommunications services in Hong Kong. It uses certain frequency bands on the radio spectrum in its day-to-day provision of services to its customers, from which it derives income which is assessable to profits tax in Hong Kong.

5. In December 2007, the TA proposed to allocate some frequency bands for the provision of broadband wireless access services. An auction (“the 4G Auction”) of radio spectrum for the provision of 4G broadband wireless access services would be held, and the use of, or the right to use, the frequency bands would be subject to the payment of an one-off Upfront SUF, the amount of which was to be determined by the highest valid bid for the frequency bands in the auction.

6. In 2008, the TA further proposed to make available certain frequency bands to incumbent 2G licensees, of which the Taxpayer was one. An auction (“the 2G Auction”) would be conducted for the assignment of additional 2G frequency bands to the incumbent 2G licensees, and the use of, or the right to use, the frequency bands would be subject to the payment of SUFs consisting of (i) annual payments determined by reference to network turnover or the bandwidth assigned (whichever is higher), and (ii) an upfront payment determined by the highest valid bid for the relevant frequency bands in the auction.

7. The 4G Auction was completed on 22 January 2009. The Taxpayer was the successful bidder of one of the frequency bands. The Upfront SUF payable by the Taxpayer was in the lump sum of HK$494,700,000.

8. The Taxpayer was also the successful bidder of two of the frequency bands at the 2G Auction, which was completed on 10 June 2009. The Upfront SUFs payable by the Taxpayer were in the total sum of HK$15,120,000.

9. The aforesaid Upfront SUFs were paid, or treated as paid (by set-off), in 2009. In its audited financial statements for the years ended 31 December 2009 to 2011, the Taxpayer classified the Upfront SUFs as Non-Current Intangible Assets and amortised them on a straight-line basis over the relevant licence periods.

10. The Assessor opined that the Upfront SUFs were capital expenditures, and disallowed the deduction of amortization charges on the Upfront SUFs. Accordingly, he raised on the Taxpayer additional profits tax assessments for the years of assessment 2009/10 to 2011/12 (“the Assessments”). The Assessments were confirmed by the Deputy Commissioner of Inland Revenue on 30 December 2014.

11. The Taxpayer’s appeal against the decision of the Deputy Commissioner was dismissed by the Board, which held that the Upfront SUFs were capital in nature. The Board took the view, inter alia, that:-

(1) the subject matter of each of the 4G Auction and the 2G Auction was the granting of the relevant unified carrier licence (“UCL”), together with the right to use the specified frequency bands; and

(2) by paying the Upfront SUFs, the Taxpayer acquired the exclusive right to use the assigned spectrum for a period of about 12 years under the amended 2G UCL and 15 years under the 4G UCL without the interference of other mobile telecommunications operators in the market (see paragraph 58 of the Board’s Decision).

12. On 15 February 2017, the Taxpayer issued a summons (“the Summons”) under Section 69(3)(a)(ii) of the Ordinance seeking leave to appeal against the Board’s Decision. In the Summons, the following single question of law, described by Mr Stewart Wong, SC (for the Taxpayer) as the overarching question, is identified:-

“Whether the spectrum utilization fees paid by the Appellant to the Telecommunications Authority, the annual amortised amounts of which were...

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8 cases
  • Francois Ngo v Commissioner Of Inland Revenue
    • Hong Kong
    • High Court (Hong Kong)
    • 19 November 2018
    ...point of law involved or any specific legal error or question: §2(2) of Practice Direction 34 and China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146, §§27, 30(4) per Chow (3) A proposed appeal has a reasonable prospect of success if it is reasonably arguable, not that it will probably s......
  • Cheng Hung Kit v The Commissioner Of Inland Revenue
    • Hong Kong
    • High Court (Hong Kong)
    • 27 January 2021
    ...is not necessary to show that the proposed appeal will probably succeed: China Mobile Hong Kong Co Ltd v Commissioner of Inland Revenue [2018] HKCFI 373, §16, Chow J. 4. The applicant must identity the point of law involved or any specific legal error or question: China Mobile, §27 and 30(4......
  • China Mobile Hong Kong Co Ltd v Commissioner Of Inland Revenue
    • Hong Kong
    • High Court (Hong Kong)
    • 27 February 2018
    ...CHINA MOBILE HONG KONG CO LTD v. COMMISSIONER OF INLAND REVENUE .auto-style1 { white-space: nowrap; } HCIA 2/2017 [2018] HKCFI 373 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE INLAND REVENUE APPEAL NO 2 OF 2017 ____________ BETWEEN CHINA MOBILE HO......
  • Heath Brian Zarin v The Commissioner Of Inland Revenue
    • Hong Kong
    • High Court (Hong Kong)
    • 24 December 2019
    ...as to applications under section 69 can be found, for example, in the decisions of Chow J in China Mobile Hong Kong Co Ltd v CIR [2018] 2 HKLRD 146 at §30, and of G Lam J in CIR v Right Margin Ltd [2017] 5 HKLRD 398 at §§12-13. That guidance includes that: (a) The right to appeal is not unq......
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