Keysight Technologies Malaysia Sdn Bhd (KTM) was incorporated in 1998 and active as a full-fledged manufacturer of various microwave devices and test instruments in which capacity it had also developed valuable intangibles.
In 2008, KTM was converted into a contract manufacturer under an agreement with Agilent Technologies International s.a.r.l. and at the same time KLM purportedly transferred its intangibles to Agilent Technologies. KTM received an amount of RM 821 million which it reported as non-taxable gains form sale of intangibles in its tax return.
Following an audit the tax authorities issued a notice of assessment for FY 2008 where the sum of RM 821 million had been considered revenue in nature and thus taxable under Section 4(f) of the ITA. This resulted in a claim of RM 311 million together with a 45% penalty.
According to the tax authorities the transfer of technical knowhow was not actually a sale as KTM was still using the technical knowhow in its manufacturing activities. The proceeds were related to the conversion of KLM from a full-fledged manufacturer to a contract manufacturer, which had resulted in a reduction in taxable profits.
“The gain on the transfer of technical knowhow was for the payment on the loss of income since it was related to the change of the Appellant’s function from a full-fledged manufacturer to a contract manufacturer which resulted in a reduction of profit margin of the Appellant after the change of the function.”
KTM filed an appeal against the assessment in which it stated that proceeds from the sale of know-how were not revenue in nature and therefore not taxable under the ITA. KLM also appealed against the penalty imposed under Section 113(2) of the ITA.
The appeal was dismissed by the Special Commissioners of Income Tax, and an appeal was then filed by KTM with the High Court.
Judgement of the High Court
The High Court Judge dismissed KTM’s appeal and upheld the decision of the Special Commissioners of Income Tax.
According to the High Court KTM had “failed to support the claim that the gain from the transfer of technical knowhow (i.e. the marketing and manufacturing intangibles) by KTM to Agilent Technologies International totalling of RM821,615,000.00 is an outright sale.”. There were no documents showing that the IP rights had been registered in the name of Agilent Technologies International s.a.r.l. Hence the proceeds was considered revenue in nature and taxable under Section 4(f) of the Income Tax Act 1967(“ITA”).
Malaysia vs Teysight Technologies 20-05-2022 Case No WA-144-03-2020