The Intevac group initially focused on designing and producing thin-film production systems for the manufacturing of hard disk drives (“HDD”). However, sometime in or around the mid-2000s, Intevac Asia Pte Ltd received a purchase order for a tool designed for the manufacturing of solar cells. Intevac Asia Pte Ltd did not possess the relevant R&D capabilities to develop such a tool and therefore entered into a Research and Development Services Agreement with Intevac US dated 1 October 2008 (“the RDSA”). The RDSA provided that Intevac US would undertake R&D activities in the US for the benefit of Intevac Asia Pte Ltd.
In 2009, the management of the Intevac group decided to plan for the possibility that Intevac Asia Pte Ltd would expand its R&D capabilities in relation to non-HDD products. Accordingly, Intevac Asia Pte Ltd and Intevac US entered into a Cost-Sharing Agreement dated 1 November 2009 (“the CSA”), which superseded the RDSA. The purpose of the CSA was to allow Intevac Asia Pte Ltd and Intevac US to combine their R&D efforts and to share the costs and risks of their R&D activities. It differed from the RDSA in the following respects.
- (a) Under the RDSA, the Appellant was to acquire all beneficial and economic rights to the Intellectual Property (“IP”) developed in the performance of the RDSA. However, under the CSA, the Appellant and Intevac US would each acquire the right to exploit any IP and intangible property generated in the performance of the CSA within their respective sales territories.
- (b) The Appellant was the only party that would benefit from the outcome of the R&D activities carried out under the RDSA. However, under the CSA, both the Appellant and Intevac US had a direct stake in any R&D developed for the joint benefit of the parties.
Under the new cost-sharing agreement, Intevac Asia Pte Ltd made payments to the U.S. company during FY 2009 and 2010 and claimed tax deductions for payments.
Following an audit, the tax authority concluded that deductions for R&D expenses incurred under the cost-sharing agreement was governed exclusively by Section 19C until FY 2012, and that the payments made by the taxpayer under the cost-sharing agreement were not deductible under Section 14D. Hence an assessment was issued where the additional deductions was added back to the taxable income of Intevac Asia Pte Ltd.
Judgement of the High Court
The court decided in favour of the tax authorities. The R&D payments made to the U.S. parent did not qualify as deductible costs under Section 14D(1)(d).