China Mobile Hong Kong Co Ltd v Commissioner Of Inland Revenue

Judgment Date27 February 2018
Neutral Citation[2018] HKCFI 373
Citation[2018] 2 HKLRD 146
Judgement NumberHCIA2/2017
Subject MatterInland Revenue Appeal
CourtCourt of First Instance (Hong Kong)
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 disallowed as deductions in the additional profit tax assessments 2009/10, 2010/11 and 2011/12 raised on the Taxpayer, are revenue or capital in nature.”

13. Attached to the Summons is a “Statement of the Appellant (‘Taxpayer’) of the Grounds of Appeal and Reasons Why Leave Should Be Granted” (“the Statement”) pursuant to Section 69(3)(a)(ii) of the Ordinance. In paragraphs 8 to 16 of Section B of the Statement, 8 proposed grounds of appeal against the Decision, with detailed arguments in support of each ground, are set out.

14. The Commissioner opposes the application for leave to appeal, on 3 broad grounds:-

(1) The proposed question of law put forward by the Taxpayer is not a proper question of law for the purpose of Section 69 of the Ordinance.

(2) In any event, none of the 8 proposed grounds of appeal gives rise to any arguable question of law.

(3) In addition, the Taxpayer has no proper basis to suggest that there is some other reason in the interests of justice why the proposed appeal should be heard.

WHETHER ANY ARGUABLE QUESTION(S) OF LAW RAISED IN THE PROPOSED APPEAL

15. Under Section 69(3)(e) of the Ordinance, the Court of First Instance shall not grant leave to appeal unless it is satisfied:-

(1) that a question of law is involved in the proposed appeal; and

(2) that –

(a) the proposed appeal has a reasonable prospect of success; or

(b) there is some other reason in the interests of justice why the proposed appeal should be heard.

16. For this purpose, a proposed appeal has a reasonable prospect of success if it is “reasonably arguable”; it is not necessary to show that the proposed appeal will “probably” succeed.

17. The principal point raised by Mr Wong on behalf of the Taxpayer in the proposed appeal is that the Board erred in finding that the Upfront SUFs are capital in nature in that they were paid for the right to use radio spectrum, and not for the use of such spectrum. In this regard, Mr Wong places strong reliance on various provisions of the Telecommunications Ordinance, Cap 106 (“the TO”), including Section 32I(1), said to be the statutory basis for charging SUFs, which states as follows –

“Subject to the consultation requirement under section 32G(2), the Authority may by order designate the frequency bands in which the use of spectrum is subject to the payment of spectrum utilization fee by the users of the spectrum.” [emphasis added]

18. In support of the proposition that the Upfront SUFs were paid for the use of the radio spectrum, Mr Wong also relies on, inter alia, (i) various regulations made under the TO, (ii) the circumstances in which SUFs were changed from annual royalty payments to upfront lump sum payments, (iii) the fact that the Commissioner previously accepted that annual payments of SUF were revenue in nature and deductible, and (iv) the circulating capital test, which the Board considered did not...

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