Hk-tvb International Ltd v. Commissioner of Inland Revenue

Case No.CACV 88/1990

Court

Court of Appeal

Date—

Judge—

Case Document

100%Judiciary

CACV000088/1990

IN THE COURT OF APPEAL	1990, No. 88
	(Civil)

BETWEEN

HK-TVB INTERNATIONAL LIMITED

Appellant

AND

COMMISSIONER OF INLAND REVENUE

Respondent

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Coram: Hon Sir Derek Cons, Ag CJ, Kempster, JA and Kaplan J

Dates of Hearing: 7 and 8 March 1991

Date of Handing-down Judgment: 15 March 1991

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JUDGMENT

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Kempster, JA:

1. This is the judgment of the court on an appeal from a judgment of Godfrey J given on 9th April 1990 in favour of the Commissioner of Inland Revenue ("The Commissioner") on his appeal, by way of Case Stated, from the determination of the Board of Review that HK-TVB International Ltd ("the taxpayers") were not liable to profits tax assessed for the years 1980-81 to 1983-84 pursuant to section 14 of the Inland Revenue Ordinance (Cap 112)

2. At the outset it will be appropriate to set out the terms of section 14:

"Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business ..."

As the learned judge pointed out, by section 2 "profits arising in or derived from Hong Kong" include "all profits from business transacted in Hong Kong". The Board of Review found that the taxpayers' relevant profits did not arise in or derive from Hong Kong. The learned judge, reading the words of the section as if they read "carrying on a trade, business or profession from Hong Kong" found that they did.

3. It appears from the facts found by the Board and recited in the Case that the taxpayers, by reason of licences granted to them in consideration of the obligation to pay fees, were exclusively entitled to exploit, outside Hong Kong, the copyrights owned by Television Broadcasts Ltd, also outside Hong Kong, in certain films. It follows and is common ground that sections 19 and 49(5) of the Copyright Act 1956, which has been extended to Hong Kong and, in the absence of evidence to the contrary, is presumed to apply elsewhere, gave the taxpayers the right to enforce the owners' foreign rights. It is equally apparent and common ground that they carried on business, incurred administrative expenses as marketing agents, provided facilities, despatcned tapes from and made the significant decisions in the Colony, where they were incorporated, and that the profits in question derived from that business. To further that business their salesmen travelled abroad to promote, negotiate and on occasion complete agreements for the sale or sub-licensing of rights in the films to be exercised overseas. Some of these agreements were concluded by acceptance instantaneously received in Hong Kong and others, where such means were contemplated, by the posting of acceptance overseas. Brinkiborn Ltd v. Stahag Stahl (1983) 2 AC 34; Byrne v. Van Tienhoven (1880) 5 CPD 344. One at least was concluded at a press conference in Taiwan. However, to attach any significance to the place where one or other agreement was concluded, being quite fortuitous, would not, in our opinion, form a workable or sensible basis for determining the questions arising in this appeal and, as Schreiner JA said in Commissioner for Inland Revenue v. Lever Bros(1946)14 SATC1 at p. 17:

"....no one would ordinarily speak of the taxpayer deriving his income from the contract by which he leased the land or brought the shares or loaned the money".

4. Since the delivery of the judgment under appeal, which was canvassed in argument before them, the Privy Council has had occasion to consider the application of section 14 to profits deriving from the purchase and sale overseas of financial instruments by a Hong Kong bank Commissioner of Inland Revenue v. Hang Seng Bank Ltd (1990) 3 WLR 1120. The critical question there arising, as in the instant case, was whether or not the profits arose in or derived from Hong Kong. The Privy Council advised that they did not and that, accordingly, profits tax was not payable. At pp. 1124 and 1125 Lord Bridge said:

"...(3)

the profits must be 'profits arising in or derived from Hong Kong'. Thus the structure of the section presupposes that the profits of a business carried on in Hong Kong may accrue from different sources, some located within Hong Kong, others overseas. The former are taxable, the latter are not ... Their Lordships cannot accept that the only effect of restricting the scope of profits tax to 'profits arising in or derived from' Hong Kong is to exempt a Hong Kong profits taxpayer from liability to tax on the profits of an independent business carried on by him overseas. The Hong Kong taxpayer could in any event secure such exemption for himself, without statutory assistance, by ensuring that the separate business of his overseas branch establishment was carried on by a different company of subsidiary company. To accept the construction which underlies the commissioner's primary submission would reduce the effect of condition (3) to negligible significance."

Having explained the effect of Inland Revenue Rule 2A(1) in calculating assessable profits when income derives both from Hong Kong and from elsewhere Lord Bridge went on, at pp. 1128 and 1129, to reject the submission that profits should be regarded as arising in or derived from Hong Kong because:

"the investment decisions were taken on a day to day basis in the exercise of the skill and judgment of officers of the bank's foreign exchange department"

and to outline:

"the broad guiding principle ... that one looks to see what the taxpayer has done to earn the profits in question".

"If" he explained,

"he has rendered a service or engaged in an activity such as the manufacture of goods the profit will have arisen or derived from the place were the service was rendered or the profit making activity carried on. But if the profit was earned by the exploitation of property assets as by letting property, lending money or dealing in commodities or securities by buying and reselling at a profit, the profit will have arisen in or derived from the place where the property was let, the money was lent or the contracts of purchase and sale were effected".

5. The taxpayer here has carried on marketing activities outside Hong Kong resulting in agreements for the sale or sub-licensing of intellectual property rights also exercisable only outside the Colony. The consideration is paid because the purchasers and sub-licensees are entitled to exercise these rights. Essentially the profit making activity was carried on and the services, being the provision of the rights, were rendered outside Hong Kong. Alternatively, the profit was earned by the exploitation of property assets and arose or was derived from the places where those assets were when sold or licensed and remain; all outside Hong Kong. English, Scottish and Australian Bank Ltd v. Inland Revenue Cmr (1932) AC 238. To suggest, as did Mr. Feenstra for the Commissioner, that the charges made by the taxpayer for incidental facilities afforded, not the subject of any analysis to date, should be the subject of a separate assessment cannot reasonably be entertained.

6. When considered in the light of the principles established by the Privy Council the decision of the Board of Review was fully justified by the primary facts, betrayed no error of law and should be affirmed. We allow this appeal and make an order nisi for costs in the taxpayers' favour here and before Godfrey J.

Representation:

Miss G. Li, QC (M/s Deacons) for the Appellant

Peter Feenstra and Miss A. Au for the Crown/Respondent