Turner Entertainment Networks Asia, Inc. for Muse Communications Co Ltd v. Commissioner of Inland Revenue

CACV 259/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 259 OF 2012

(ON APPEAL FROM INLAND REVENUE APPEAL NO 4 OF 2010)

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J U D G M E N T
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Hon Kwan JA :

1.I agree with the judgment of Barma JA.

Hon Barma JA :

Introduction

2.This was an appeal by Turner Entertainment Networks Asia, Inc. (“the appellant”) from a judgment of Deputy High Court Judge Coleman SC dated 22 October 2012, by which he allowed, to a limited extent, the appellant’s appeal against a determination of the Acting Deputy Commissioner of Inland Revenue dated 13 May 2010 dealing with objections raised by the appellant to profits tax assessments raised on Muse Communications Co. Ltd (“Muse”) in the name of the appellant for the years of assessment 2005/06 to 2007/08.  The appellant contends that the Deputy Judge should have allowed its appeal in its entirety.  The Commissioner of Inland Revenue (“CIR”) is content with the decision below and does not cross-appeal against it.

3.The appeal turns on the proper construction of sections 15(1)(a), (b) and (ba) of the Inland Revenue Ordinance (Cap 112) (“the Ordinance”).  These sections read as follows :

“15. Certain amounts deemed trading receipts

(1) For the purposes of this Ordinance, the sums described in the following paragraphs shall be deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong –

(a) sums, not otherwise chargeable to tax under this Part, received by or accrued to a person from the exhibition or use in Hong Kong of cinematograph or television film or tape, any sound recording, or any advertising material connected with such film, tape or recording;

(b) sums, not otherwise chargeable to tax under this Part, received by or accrued to a person for the use of or right to use in Hong Kong any patent, design, trade mark, copyright material, secret process or formula or other property of a similar nature, or for imparting or undertaking to impart knowledge directly or indirectly connected with the use in Hong Kong of any such patent, design, trade mark, copyright material, secret process or formula or other property;

(ba) sums, not otherwise chargeable to tax under this Part, received by or accrued to a person for the use of or right to use outside Hong Kong any patent, design, trade mark, copyright material, secret process or formula or other property of a similar nature, or for imparting or undertaking to impart knowledge directly or indirectly connected with the use outside Hong Kong of any such patent, design, trade mark, copyright material, secret process or formula or other such property, which are deductible in ascertaining the assessable profits of a person under this Part;”

4.The material facts were agreed, and were set out in paragraphs 6 to 21 of the Deputy Judge’s judgment.  For present purposes, it suffices to note the following :

(1) The appellant is a non-Hong Kong company that has been registered under Part XI of the Companies Ordinance (Cap 32) since 1994.  Its business involved the provision of products and services relating to general and family entertainment.  Muse was engaged in the distribution of animation programming for television and other audio-visual businesses in Taiwan.  It did not carry on any business in Hong Kong.

(2) Muse (as licensor) granted the appellant (as licensee) licences to exhibit four series of Mandarin language television programmes in Taiwan between 2005 and 2009, under two Licence Agreements dated 30 May 2005 and 21 December 2006 respectively.  The agreements provided for the payment by the appellant to Muse of certain amounts described as licence fees and other amounts described as technical costs.  The technical costs were paid for the provision of dubbed and subtitled programming.

(3) The appellant filed profits tax returns for the years of assessment 2005/06 to 2007/08, in each of which it declared adjusted losses.  In each year of assessment, the appellant claimed an expense described as “amortization of licensed programming rights/subtitling costs” (“Amortization Costs”) as an allowable deduction.  Included in the sums claimed under this heading were the amounts in respect of licence fees paid to Muse, which were capitalized in the appellant’s balance sheets and amortized in its profit and loss accounts over the licence periods.  Following enquiries by the CIR, the appellant clarified the amounts it had paid to Muse in the relevant years of assessment as follows :

(a) Year of assessment 2005/06 – US$380,455 by way of licence fee;

(b) Year of assessment 2006/07 – US$274,635 by way of licence fee and US$15,300 by way of technical cost; and

(c) Year of assessment 2007/08 – US$269,250 by way of licence fee and US$15,000 by way of technical cost.

(4) The Assessor considered that the license fees and technical costs received by Muse from the appellant were chargeable to profits tax, and requested the appellant to file profits tax returns for Muse for the years of assessment in question.  The appellant filed such profits tax returns, but in each declared nil assessable profits for Muse, asserting that the licence fees and technical costs paid to Muse were offshore sourced income of Muse and related to the exhibition of television programming in places other than Hong Kong, and were not taxable under any of sections 15(1)(a), (b) or (ba) of the IRO.

(5) The Assessor considered that the licence fees and technical costs received from the appellant by Muse were chargeable to profits tax, and raised profits tax assessments on Muse in the name of the appellant in the amounts of HK$155,155, HK$118,111 and HK$91,219 for the respective years of assessment 2005/06, 2006/07 and 2007/08.  The 2005/06 assessment was subsequently increased to HK$161,516 to take account of technical costs which had earlier been omitted.

(6) The appellant unsuccessfully objected to the assessments.  The Acting Deputy Commissioner confirmed the assessments, on the basis that the licence fees and technical costs were chargeable to profits tax under section 15(1)(ba) of the IRO.

The decision below

5.Before the Deputy Judge, the appellant contended that the relevant sums were not chargeable to tax under section 15(1)(ba) of the IRO because :

(1) they were not paid for the “use” of or for the “right to use” any copyright material;

(2) alternatively, section 15(1)(ba) does not apply to what Mr Wong SC, appearing for the appellant, called “media works” (such as the subject matter of the licence agreements), as those were taxable only under section 15(1)(a) and not section 15(1)(ba), and only if they were used or exhibited in Hong Kong; and

(3) the technical costs were payments for services rendered by Muse to the appellant in Taiwan, and were not paid for the right to exhibit or use any copyright materials (or media works, as Mr Wong called them), and thus did not fall within either of sections 15(1)(a) or (ba) in any event.

6.The Deputy Judge accepted only the third of these submissions, and accordingly allowed the appellant’s appeal to him only to the extent of excluding the technical costs from Muse’s assessable profits for the years of assessment in question.  As the licence fee element represented by far the larger portion of the amounts which the Assessor had regarded as being chargeable to profits tax, the effect was that the assessments were only reduced to a modest extent.

The taxpayer’s contentions

7.Before us, Mr Wong SC (who had appeared for the appellant in the court below) renewed the first and second of the submissions made below, i.e. that there had been no relevant “use” of the television programmes within the meaning of section 15(1)(ba), and that section 15(1)(ba) did not cover fees paid for the use of “media works”, which fell exclusively within section 15(1)(a).  The first of these submissions had two sub-arguments :

(1) First, that “use” in sections 15(1)(b) and (ba) was to be understood in a technical intellectual property sense as referring to the exclusive right which ownership of the intellectual property conferred on the owner to use it, rather than in some broad (or ordinary) economic sense of employing, utilising or otherwise deriving benefit from the deployment of something.  Mr Wong submitted that this interpretation of the word “use” was the necessary consequence of the decision of the Court of Final Appeal in CIR v Emerson Radio Corp (1999) 2 HKCFAR 501.  Adopting this interpretation, Mr Wong pointed out that (with the exception of computer programs) use of copyright material did not amount to infringement of the copyright owner’s rights, and submitted that sections 15(b) and (ba) could only (in relation to copyright materials) cover payments made for the use of or right to use computer programs, and accordingly did not cover payments made for the right to use the television programs in question here.

(2) Second, that as section 15(1)(a) referred both to the “exhibition” and “use” of cinematograph or television film or tape, or sound recording (which Mr Wong collectively referred to as “media works”), there must have been intended to be a difference between “exhibition” and “use”, so that “use” did not include “exhibition” (which would otherwise be mere surplusage).  It followed (Mr Wong submitted) that “use” in sections 15(1)(b) and (ba) should be given the same meaning, i.e. as not including exhibition of media works, which was the subject matter of the licence fees in this case.

8.With respect, I am unable to accept the appellant’s submissions.  I shall deal with each of them in turn.

The meaning of “use”: limited to technical intellectual property sense

9.So far as the argument as to the meaning to be given to “use” in section 15(1)(ba) is concerned, the argument ran as follows :

(1) In Emerson Radio, the Court of Final Appeal considered the meaning of the term “use of or right to use in Hong Kong … a trade mark” in section 15(1)(b). The Court of Final Appeal held, by reference to the territorial concept inherent in trade mark law (i.e. that a trade mark granted in a particular territory provides rights only in relation to that territory, and hence can only be “used” in that territory), that where goods were manufactured outside Hong Kong, there was no relevant “use” of a trade mark in Hong Kong, whereas there was such use in relation to goods manufactured in Hong Kong for export (see section 39 of the then version of the Trade Mark Ordinance (Cap 483)).

(2) It was (according to Mr Wong) clear that Lord Hoffmann, who gave the main judgment in the Court of Final Appeal, with which most of the other members of the Court agreed (Litton NPJ delivered a separate concurring judgment), applied trade mark law concepts in considering whether there had been use of a trade mark in Hong Kong, and not the approach that had up to then been adopted by the CIR of treating “use” as meaning economic use, which must be taken to have occurred when a Hong Kong business incurred expenses for such use to earn profits that were sourced in Hong Kong, even if the goods were manufactured and the trade mark applied outside Hong Kong.

(3) Although section 15(1)(ba) was introduced in order to reverse the effect of Emerson Radio, it did so by extending the geographical reach of the provision, and did not thereby alter the meaning to be given to “use”.

(4) As sections 15(1)(b) and (ba) related to intellectual property rights of various sorts, this informed the meaning to be given to the word “use” in those sections.  Various types of intellectual property shared the feature that the owner had exclusive rights in relation to the intellectual property concerned, so that if someone other than the owner used the intellectual property, this would be an infringement of the owner’s rights.  The only reason to pay for the right (or licence) to use the intellectual property in question would be to avoid liability for infringing the owner’s rights.  Thus, only payments made for this purpose (i.e. to avoid infringement) were caught by sections 15(1)(b) and (ba).

(5) Sections 15(1)(b) and (ba) were not intended to catch payments for rights to use a chattel in which intellectual property subsisted as a chattel, as opposed to for the right to use the intellectual property rights themselves.

(6) Thus, the right for which payment was made had to be an exclusive right of the payee’s.

(7) But use as an exclusive right is a concept unknown to copyright law, save in relation to computer programs, which are reproduced on being loaded each time they are used.  Thus payments for the use of copyright material (other than computer programs) are not relevant payments for the purposes of sections 15(1)(b) and (ba), as they do not amount to a payment to avoid the use infringing the rights of the copyright owner.

(8) Sections 15(1)(b) and (ba) can therefore have no application to copyright works other than computer programs, and thus do not apply to payments made for use of (or the right to use) media works such as the television series the subject of the payments in this case.

10.In my view, the reasoning of Lord Hoffmann in Emerson Radio does not support the argument that Mr Wong has advanced. 

11.In that case, an American corporation owned a trade mark comprising its name.  It had a subsidiary in Hong Kong, with which it entered into a royalty agreement by which the subsidiary agreed to pay the parent for the use of the parent’s trademark on products sold by the subsidiary to its customers in the United States.  Those products were manufactured in various places, both in Hong Kong and elsewhere (e.g. Thailand), pursuant to orders placed by the subsidiary with the manufacturers.  The royalties paid by the subsidiary to the parent were deducted from the subsidiary’s income for the purpose of computing its assessable profits.  The subsidiary also filed profits tax returns for the parent in relation to the royalties it had paid.  All such royalties received by the parent company (which did not carry on business in Hong Kong) were treated by the CIR as being assessable to tax, regardless of where the goods in respect of which they were paid had been manufactured.  However, the Court of Final Appeal (upholding the judgments of Mr Recorder Ribeiro (as he then was) and the Court of Appeal) held that only royalty income attributable to the sale of goods manufactured in Hong Kong could be deemed to be profits of the parent arising from the use of the trademark in Hong Kong.  Royalty income attributable to the sale of goods manufactured elsewhere could not.

12.In his judgment, Lord Hoffmann expressed the view that as a matter of construction, the royalty agreement dealt only with the United States registered trade mark. However, the taxpayer in that case conceded that the agreement also included the right to use the mark registered in other countries (including Hong Kong) if that was necessary for the purpose of manufacturing goods in such other country.  Although Lord Hoffmann had doubts about the correctness of that concession, he accepted it, and pointed out (at p. 506E-H) that by causing the parent’s trade mark to be applied to such goods as were manufactured in Hong Kong, there had been a use by the Hong Kong subsidiary of the Hong Kong mark in Hong Kong, pursuant to section 39(1) of the then current version of the Trade Marks Ordinance (Cap 43).  However, he also pointed out (at p. 507G-J and 508I-J) that because of the territorial nature of the rights conferred by trade marks, such rights could only be used in the territory in which the mark was registered.  Thus, the United States registered mark could only be used in the United States, the Hong Kong registered mark only in Hong Kong and a Thai registered mark only in Thailand.  It was therefore only in relation to goods manufactured in Hong Kong that it could be said that the relevant (Hong Kong) mark was used in Hong Kong.  For goods manufactured (say) in Thailand, the mark that was used would be the Thai registered mark.  In neither case would the United States mark have been used, since it conferred no rights on its owner in either Hong Kong or Thailand.

13.From these statements, Mr Wong sought to derive the proposition that as reference had been made to concepts of trade mark law (in relation to a form of use defined in the Trade Marks Ordinance, and the concept of territoriality), it followed that “use” in sections 15(1)(b) and (ba) of the Ordinance must refer to a use in the technical, intellectual property sense.  With respect, that does not follow.  As Mr Fung SC, appearing for the CIR pointed out, clearly an activity, such as the placing of the mark on goods intended for export, that was identified in the Trade Marks Ordinance as a form of use would be “use” within the meaning of the sections that we are construing here.  However, that does not mean that other commercial activities that might not be regarded as use in the context of whether or not there had been an infringement of a trade mark could not constitute “use” within the meaning of sections 15(1)(b) and (ba).

14.Nor does the reference to the territoriality of trade mark rights take matters any further.  Given that territoriality, a trade mark can only be said to be used, whether in a strict trade mark sense or otherwise, in the territory in which it is registered.  If, for example, in the Emerson Radio case products had been manufactured in, say, Vietnam, where there was no mark that had been registered, the application of a device identical to any of the Hong Kong, Thai or United States marks would not have constituted use of any of those marks, since they had no validity outside their respective territories.  It might well involve a use of the device, but not of any trade mark.  In other words, where there is no registered trade mark in a territory, there is nothing to be used in that territory, whether in a technical sense, or some wider general sense. In this respect, I would agree with Mr Fung SC’s contention that the only relevant technical feature of trade mark rights that needs to be taken cognisance of is the fact of their territorial nature.

15.That said, I would also note (as Mr Fung pointed out) that in his judgment at first instance (reported in [1999] 1 HKLRD 250), Mr Recorder Ribeiro stated (at p. 267J-268C), in a passage of which no criticism was made by Lord Hoffmann, that :

“ It is true that the [Trade Marks] Ordinance does legislate as to the use of trademarks in various different contexts, eg, as to what constitutes an infringing use; or as to what constitutes lack of use justifying the expunging of registration. … However, I am unable to see why judicial considerations of use of a trademark in such particular and varied contexts should apply to narrow the meaning of the provisions of s.15(1)(b).

This is particularly so since s.15(1)(b) deems certain receipts chargeable not merely in respect of the use of a trademark but also in respect of use of ‘patent, design, … copyright material or secret process or formula or other property of a similar nature’. I do not accept that it was intended that judicial decisions grappling with various types of use for various purposes in relation to all these different forms of intellectual property should be read into the provision so as to modify the ordinary meaning of the words in s.15(1)(b).  In my view, ‘use’ of the various forms of intellectual property listed is to be given a broad and non-technical meaning.”

16.I would respectfully agree with and adopt that approach.  The deployment of one of the forms of intellectual property referred to in section 15(1)(b) or (ba) in a particular way might constitute use of it in a technical sense (applicable to that form of intellectual property) so as to infringe the rights of the owner of that property.  But a similar deployment in relation to some other form of intellectual property might not amount to an infringing use of that other form of property.  In both cases, the deployment would be the same, and in my view, it would be right to say in both cases that the property had been used.  The fact that sections 15(1)(b) and (ba) cover a variety of forms of intellectual property is, in itself, a factor that militates against the adoption of technical and limited meanings of use in relation to each, since that would require the same single word, in the same provision, to be given different meaning or content in relation to the different forms of intellectual property listed in that same provision.

17.Indeed, as Mr Fung submitted, the fact that Mr Wong was constrained to submit that, in order to accommodate his interpretation of the word “use” in a (somewhat broader) technical sense of an infringement of the intellectual property owner’s exclusive rights, sections 15(1)(b) and (ba) should be understood as not referring to copyright materials other than computer programs (for the reason explained above), demonstrates the fallacy in that interpretation. Sections 15(1)(b) and (ba) refer expressly to “copyright materials” among the various forms of intellectual property listed.  They do not refer to “copyright materials in the form of computer programs”.  There is nothing in the terms of the subsections to limit the types of copyright material to which they are intended to apply.  That being so, the fact that “use” that does not involve reproduction, in relation to copyright materials, will not result in an infringement of the copyright owner’s rights, strongly suggests that the limited sense of “use” for which Mr Wong contends is not the sense in which it is used in subsections 15(1)(b) and (ba).  It cannot, I think, be right to adopt a meaning of “use” which will have the effect that most types of copyright material will not be covered by the subsections, when no such limitation is expressed in the subsections themselves.

18.For the reasons explained above, I am unable to agree with Mr Wong that in sections 15(1)(b) and (ba) the word “use” is to be given the meaning for which he contends.

19.In coming to this conclusion, I have not had to have regard to the context of the statutory provisions, which Mr Fung also prayed in aid.  But I would add that, in my view, the relevant context does not assist the appellant.  Mr Wong suggested that the context was that sections 15(1)(b) and (ba) were provisions that concerned the payment of fees for the use of intellectual property, and that this was a matter that called for the employment of intellectual property concepts in interpreting them.  With respect, it seems to me that to view the matter thus involves a mischaracterisation of the context – to my mind, the relevant context is that these sections are deeming sections in taxation legislation, with a purpose of revenue protection by providing for certain situations not otherwise assessable to profits tax nonetheless to give rise to assessable profits.  That context does not require technical meanings, applicable in other areas of law, to be imported into the construction of the Ordinance.

The meaning of “use”: does not include “exhibition”

20.I turn now to Mr Wong’s alternative argument as to the meaning of “use” in sections 15(1)(b) and (ba).  This argument has been set out in paragraph 7(2) above, and is based on the way in which Mr Wong suggests that “use” is to be interpreted in section 15(1)(a), as excluding the exhibition of cinematograph or television film or tape.

21.With respect, I am unable to agree with this argument either.  It is true that the word “use” in section 15(1)(a) ought to be read as having a different meaning from “exhibition”.  But it seems to me that all that could have been intended by the employment of the phrase “exhibition or use” in that subsection was to indicate that any other form of use of cinematograph or television film or tape, in addition to, or other than, by way of exhibition, was to be covered by the subsection.  That is to say, the phrase should be read as meaning “exhibition or other use”, with the word “other” being omitted because the sense of the provision remains the same whether or not it is included.  If this is the right way to read the provision, as I think it is, “use” in section 15(1)(a) would clearly encompass “exhibition”, and Mr Wong’s argument breaks down.

22.Further, and in any event, even if the word “use” in section 15(1)(a) were to be given the restricted meaning for which Mr Wong contends, I think that Mr Fung was right to say that it would not be appropriate to transpose that restricted meaning to sections 15(1)(b) and (ba), which deal with a wider range of forms of intellectual property.  There is no reason why “use” in those subsections should not include “exhibition” where that is how a particular form of intellectual property (such as certain types of copyright materials) might be deployed by someone other than the copyright holder in consideration of the payment of a fee to the copyright holder.  If “use” were to be construed as excluding “exhibition”, the effect would be to exempt payments for one particular form of use from being assessable to tax, when payments received for all other forms of use would be assessable, with no apparent logical rationale for doing so.

23.I therefore conclude that Mr Wong’s alternative submission as to why there was no “use” of the television programs within the meaning of section 15(1)(ba) should not be acceded to.

“Media works” not covered by sections 15(1)(b) and (ba)

24.That leaves Mr Wong’s argument to the effect that payments for the use (in the broad sense) of “media works” are only assessable under section 15(1)(a), and not under sections 15(1)(b) or (ba), with the consequence that since the relevant use in this case took place in Taiwan, and not in Hong Kong, the licence fees received by the taxpayer in respect of such use was not assessable to tax, since section 15(1)(a) applies only to fees paid for exhibition or use in Hong Kong, and there is no equivalent to section 15(1)(ba) that covers fees paid for exhibition or use outside Hong Kong.  In essence the argument was that the maxim generalibus specialia derogant applied, so that the existence of the specific provision for fees paid in respect of “media works” contained in section 15(1)(a) should be taken as indicating that they were to be covered under that subsection only, and not under section 15(1)(b), with the consequence that section 15(1)(ba) (which was no more than the geographical extension of section 15(1)(b)) could not cover “media works” either.

25.Again, I do not think this argument can succeed.  There are two differences between sections 15(1)(a) and (b) that are, in my view, of importance, and show that the two subsections deal with different things, albeit that they might overlap in some respects.

26.First, as Mr Fung submitted, section 15(1)(a) relates to sums derived “from the exhibition or use in Hong Kong of cinematograph or television film or tape …”, whereas sections 15(1)(b) and (ba) are concerned with sums received “for the use of or right to use” the various forms of intellectual property or similar things.  As Lord Hoffmann pointed out, the word “for” in section 15(1)(b) meant “in return for” and implied that the relevant “use is by, or the right to use has been conferred upon, someone else” other than the owner of the intellectual property in question (see Emerson Radio at p. 509A-B).  Section 15(1)(a) thus more naturally relates to a situation in which the owner of the film or sound recording is involved (perhaps together with others) in the exhibition or other use of it, whereas sections 15(1)(b) and (ba) relate to a situation where he is not, or at lease where the use is by another, or the right to use it is conferred on another. As appears from paragraph 88 of the Report of the Second Inland Revenue Ordinance Review Committee (1967), section 15(1)(a) was introduced partly to address perceived problems of manipulation of distributorship arrangements and partly to deal with the difficulty of establishing the quantum of profits earned by distributors from such arrangements.  That would not seem to be the purpose of section 15(1)(b).

27.Secondly, section 15(1)(a) refers to the “exhibition or use” of the “media works” it mentions.  This would seem to require the actual exhibition or use of such “media works”, and that the sums be generated from the exhibition or use itself, rather than from a licensing arrangement under which payment is made by someone other than the owner for the use of (or right to use) the “media works” in question.  Thus, under sections 15(1)(b) and (ba), fees paid would be assessable even if the licensee did not exhibit the “media works” or use the intellectual property the right to use which was the consideration for the fees.  To exclude “media works” from the ambit of intellectual property covered by sections 15(1)(b) and (ba) would leave a gap in relation to cases in which a fee was paid for the right to exhibit or use them was acquired but that right was not, for whatever reason, exercised, in that such fees would not be assessable, whereas fees paid for the right to use all other forms of copyright materials or intellectual property would be.

28.I therefore cannot accede to this argument of Mr Wong’s either.

Disposition of appeal and costs

29.Thus, for the reasons explained above, I would reject each of the arguments advanced by Mr Wong in support of the appeal.  I would therefore make an order dismissing the appeal, and uphold the decision of the Deputy Judge.  So far as costs are concerned, these should follow the event, and I would make an order nisi that the costs of this appeal be paid by the appellant to the CIR, to be taxed on the party and party basis if not agreed.

Hon To J :

30.I agree with the judgment of Barma JA and the orders he proposes.

Mr Stewart Wong SC, instructed by Baker & McKenzie, for the appellant

Mr Eugene Fung SC, instructed by the Department of Justice, for the respondent