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Determination Of The Number Of Businesses For Tax Purposes

The Special Commissioners Of Income Tax (SCIT) had the opportunity to determine whether a taxpayer, who is in the business of manufacturing electrical conductivity grade copper rods, wires, and strips, was undertaking a single business or two separate businesses. The taxpayer employed various technologies including the Upcast Technology from Finland, Dip Forming Technology from Japan and the latest Southwire Technology from the United States. The final products which were, copper rods and wires, were sold to various industries worldwide.

As part of its expansion, the taxpayer constructed a new factory building and purchased new machineries. The new factory building, which was located next to the existing factory building, employed Southwire Technology to manufacture Electrolytic Tough Pitch copper rods. The taxpayer applied for an income tax incentive under Section 127(3A) of the Income Tax Act 1967 (ITA) and was granted tax exemption equivalent to 70% of its statutory income for a period of 10 years.

The SCIT ruled that the taxpayer undertook a single business despite operating a new factory using a different technology. The taxpayer, a multinational company, was successfully represented by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar together with Senior Associate, Nur Amira Mohd Azhar.

Whether The Taxpayer Runs A Single Business? 

The primary issue before the SCIT was whether the taxpayer's manufacturing activity undertaken in the existing factory building (which used the older technologies) and the manufacturing activity in the new factory building using the new Southwire Technology constituted a single manufacturing business. The Revenue took the position that the taxpayer undertook 2 separate businesses because the taxpayer was required to maintain separate accounts as part of its tax incentive approval.

The taxpayer’s position was that the manufacturing activity in the existing and new factory buildings constituted a single business. Accordingly, the taxpayer did not segregate their capital allowance claims and the deduction of their business expenses arising from its manufacturing activity.

The Revenue's Contention: Commencement Of A New Business 

The Revenue contended that the main reason the taxpayer applied for an incentive under Section 127(3A) of the ITA was because the taxpayer was manufacturing a new product using a new technology. The Revenue further contended that only the new technology could manufacture the new product. Further, the requirement under the tax incentive approval was that the taxpayer should keep separate accounts suggesting that the taxpayer was running two different businesses.

Hence, the Revenue argued that capital allowances claimed for the manufacturing activity using the Southwire Technology cannot be claimed against the income arising from the taxpayer’s existing manufacturing activity. As the manufacturing activity using Southwire Technology constituted a new business, the operational and interest expenses incurred in setting up the new factory building were not disallowed as such expenses were treated as pre-business commencement expenses.

The Taxpayer's Rebuttal

In response to the Revenue’s contention, the taxpayer led evidence through witnesses and documents that the requirement of maintaining separate accounts does not result in the taxpayer running two different businesses. A taxpayer may keep a separate account for various reasons, such as for tax reporting purposes or for tracking income and expenses related to a specific activity or project. However, whether keeping separate accounts amounts to a separate business or not would depend on various factors such as the taxpayer's intent and the nature of the business activity.

The taxpayer amongst others, referred to the English case of Scales v George (1927) 13 TC 83, where held that the method of bookkeeping should not be the determining factor in assessing the number of businesses a taxpayer operates. Instead, the main factors in making this determination lie in whether there exists any interconnection, interlacing, interdependence or unity embracing those business activities.

In the present appeal, the taxpayer argued that it operated a single business for the following reasons:

(a)There were no changes in the taxpayer’s business with the use of the new Southwire Technology as the taxpayer continued to produce a similar product i.e. copper rods.

(b)The use of the new Southwire Technology was to increase the taxpayer’s capacity in manufacturing copper rods in line with the taxpayer’s business of manufacturing electrical conductivity grade copper rods, wires and strips.

(c)The addition of a new production line was essential and formed an integral part of the taxpayer’s business of manufacturing copper rods. Hence, the use of the new technology was adjunct, ancillary to and very advantageous to the taxpayer’s business of manufacturing copper rods.

(d)Both the factory buildings were housed in the same complex, adjacent and connected to each other making both the factory buildings to operate as a single integrated manufacturing hub for copper rods and copper wires using 3 different types of production lines.

(e)The suppliers of the raw material (i.e. copper cathode) were the same for the products manufactured by the taxpayer despite using different technologies.

(f)The supply chain for all the products was also managed on a unified basis.

(g)The direction and management of the taxpayer’s operations were centralised at the taxpayer’s head office. There was a common management team to run this business as a whole- (i.e. quality control department, planning department, electrical maintenance department, stores department, human resources and administration department, finance department and logistics department manage both the new and old production line)

SCIT’s Decision

The SCIT ruled in favour of the taxpayer, affirming that the taxpayer ran a single business. The decision was based on the fact that the products produced were fundamentally the same (copper rods) with distinctions in quality and specifications. The introduction of new technology did not constitute the commencement of a new business. The requirement for separate accounts was related to the tax exemption condition and not the establishment of a distinct business.

This case underscores the importance of clarity in tax exemption conditions. While the taxpayer's obligation to maintain a separate account was interpreted by the Revenue as an indication of a separate, new business, the SCIT's decision clarified that this was for compliance with the tax exemption condition.

16 November 2023


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