TURNER ENTERTAINMENT NETWORKS ASIA, INC. FOR MUSE COMMUNICATION CO., LTD v. COMMISSIONER OF INLAND REVENUE

HCIA 4/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO. 4 OF 2010

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JUDGMENT

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Introduction

1.  This is an appeal against assessments to profits tax, which by agreement, pursuant to section 67 of the Inland Revenue Ordinance Cap 112 (“IRO”), has been transferred to be heard by the Court of First Instance directly.  

2.  The appeal gives rise to a question of the proper statutory interpretation of sections 15(1)(a), (b) and (ba) of the IRO, which provide:

“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, trademark, 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, trademark, copyright material, secret process or formula or other property;

(c) 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, trademark, 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, trademark, copyright material, secret process or formula or other property, which are deductible in ascertaining the assessable profits of a person under this Part”.

3.  (Though there are other paragraphs under section 15(1), it is common ground that they need not be considered for the purposes of the proper interpretation of the paragraphs quoted above.)

4.  In this Judgment, references to numbered sections are to the numbered sections of the IRO unless the context otherwise makes clear.

Background

5.  The material facts have been agreed as follows.

6.  Turner Entertainment Networks Asia, Inc. (“the Company”) has objected to the Profits Tax assessments raised on Muse Communication Co. Ltd. (“Muse”) in the name of the Company for the years of assessment 2005/06 to 2007/08 (“the Assessments”).  The Company claims that certain sums received by Muse from it should not be chargeable to Profits Tax.

7.  The Company was incorporated in the United States of America in July 1994 and is a non-Hong Kong company registered under Part XI of the Companies Ordinance since December 1994.  It carried on business in Hong Kong in the provision of products and services relating to general and family entertainment.  The Company closed its accounts on 31 December annually.

8.  Muse engaged in the distribution of animation programming for television and other audio and visual businesses in Taiwan. Muse did not carry on any business in Hong Kong.

9.  By a Licence Agreement dated 30 May 2005 (“the 2005 Licence Agreement”) [a copy of which is at Annex A to the Determination of the Acting Deputy Commissioner of Inland Revenue dated 13 May 2010 (“the Determination”)], Muse (as the licensor) granted to the Company (as the licensee) the right to exhibit three series of TV programmes in the language of Chinese Mandarin with Chinese subtitles in Taiwan on the following terms and conditions:

Series	Programme	Term	Licence fee (US$)	Technical cost# (US$)
1	B-Legend! Battle B-Daman, Episode No. 1-52	2 years, from 18 July 2005 to 17 July 2007	554,655	30,900
2	B-Legend! Battle B-Daman, Episode No. 53-103	2 years, from 18 July 2006 to 17 July 2008*
3	Machine Robo Rescue, comprising 53 episodes	2 years, from 1 October 2005 to 30 September 2007	100,435	-

*By agreement, the term of Series 2 was subsequently amended to 2 years from 19 May 2006 to 17 July 2008.

#For the provision of dubbed and subtitled tracks.

10.  By a Licence Agreement dated 21 December 2006 (“the 2006 Licence Agreement”) [Annex B to the Determination], Muse (as the licensor) granted to the Company (as the licensee) the right to exhibit a series of TV programmes in the language of Chinese Mandarin with Chinese subtitles in Taiwan on the following terms and conditions:

Programme	Term	Licence fee (US$)	Technical cost# (US$)
Bakukye Hit! Crash B-Daman, comprising 50 episodes	From 28 March 2007 to 15 August 2009	269,250	15,000

#For the provision of dubbed and subtitled tracks.

11.  The Company filed Profits Tax returns for the years of assessment 2005/06 to 2007/08 with supporting accounts and Profits Tax computations.  The Company declared adjusted losses for all these years.

a.     In the accounts of its Hong Kong branch, the company reported the following revenue, against which an expense described as “amortization of licensed programming rights/subtitling costs” (“Amortization Costs”) was claimed, among others, as an allowable deduction:

		2005/06		2006/07		2007/08
		US$		US$		US$
Revenue
	Programming licensing revenue	24,756,922		25,589,265		29,173,214
	Merchandise licensing revenue	2,878,632		2,928,721		2,659,376
	Home video licensing revenue	--		480,095		626,941
	Interactive licensing revenue	317,227		232,525		483,002
	Advertising revenue	20,434,167		17,206,267		16,905,795
	Service income	1,313,399		1,724,811		4,224,140
	Interest income	3,755		13,628		14,745
	Net foreign exchange gain	--		--		112,053
		49,704,101*		58,175,312		54,199,265*
		===========		===========		===========
Amortization Costs		7,818,596		9,811,508		11,406,820
		===========		===========		===========

*Rounded down by US$1.

b.     The following licence fees paid to Muse were capitalized in the Company’s balance sheets and amortised in its profit and loss accounts over the licence periods:

	2005/06		2006/07		2007/08
	US$		US$		US$
Sums paid to Muse	401,536		305,152		299,169

The amortised licence fees paid to Muse were included in the Amortization Costs in (a) above.

c.      In its Profits Tax computations, the Company asserted that:

1.      “License fees are paid for the licensing of film rights for use or exhibition in the programming services operated by [the Company].  Subtitling/dubbing costs are similarly paid in the production of the program.”

2.      “[The licence fees to certain recipients including Muse] were paid for exhibition rights covering specific territories that do not include Hong Kong, and therefore are not subject to profits tax under Section 15(1)(a), (b) or (ba) of the Inland Revenue Ordinance (“IRO”).”

12.  For the years of assessment 2005/06 to 2007/08, the Assessor, in computing the Company’s adjusted losses, allowed the Amortization costs, which included the sums paid to Muse, as deductible expenses.

13.  In response to the Assessor’s enquiries, the Company clarified that it had paid the following sums to Muse:

	2005/06		2006/07		2007/08
	US$		US$		US$
Licence fee	380,455		274,635		269,250
Technical cost	-	*	15,300		15,000
	380,455		289,935		284,250	*

*The Company subsequently advised that it had also paid technical cost of US$15,600 to Muse during the year of assessment 2005/06.

14.  The Assessor considered that the licence fees and technical costs received by Muse from the Company should be chargeable to Profits Tax and therefore requested the Company to file Profits Tax Returns for Muse for the years of assessment 2005/06 to 2007/08.

15.  The Company declared nil assessable profits in the Profits Tax Returns for Muse.  The Company made the following assertion and provided, among other things, copies of the documents shown below:

a.      “[The licence fees and technical costs] paid to [Muse] … have not been reported in the Profits Tax returns filed [for Muse] because they are offshore sourced income to [Muse] … the underlying TV program rights were licensed to [the Company] for exhibition in Taiwan only.  As those license fees were not received for the exhibition or use of the licensed TV programs in Hong Kong, they are not subject to Profits Tax under Section 15(1)(a) of the [IRO].  Further, the subject TV program exhibition rights do not fall within the ambit of Sections 15(1)(b) and/or 15(1)(ba) of the IRO.  The technical fees paid to [Muse] were for the provision of dubbing and subtitling services performed outside Hong Kong.  The income is offshore sourced and thus not subject to Profits Tax under Section 14 of the IRO.”

b.      Certain invoices issued by Muse to the Company (Annexes C to C5 to the Determination).  The invoice for the final payment of the 35% of the contracted sum under the 2005 Licence Agreement could not be located.

16.  The Assessor considered that the licence fees and technical costs received by Muse from the Company were chargeable to Profits Tax, and raised the following Profits Tax assessments on Muse in the name of the Company:

Year of Assessment 2005/06
	Assessable Profits (US$380,455 x 7.7679 x 30%)	$886,600
	Tax Payable thereon	$155,155
Year of Assessment 2006/07
	Assessable Profits [US$(274,635+15,300) x 7.7595 x 30%]	$674,925
	Tax Payable thereon	$118,111
Year of Assessment 2007/08
	Assessable Profits [US$(269,250+15,000) x 7.7879 x 30%]	$664,113
	Tax Payable thereon	$91,219

17.  The Company objected to the Assessments in the following terms:

“[The licence fees and technical costs] were not received for the exhibition or use of the licensed TV programs in Hong Kong, they are not subject to Profits Tax under Section 15(1)(a) of the [IRO]. As these licensed rights fall within the scope of Section 15(1)(a) of the [IRO]. As these licensed rights fall within the scope of Section 15(1)(a), Sections 15 (1)(b) and/or (ba) of the IRO do not apply. … Sections 15(1)(b) and 15(1)(ba) are only relevant to the license fees other than the TV program license fees covered by Section 15(1)(a).”

18.  The Assessor maintains the view that the full amounts (including both the licence fees and the technical costs) paid by the Company to Muse are chargeable to tax under section 15(1)(ba).  To bring the omitted technical costs for the year of assessment 2005/06 to the charge of Profits Tax, the Assessor considered that the Profits Tax assessment for the said year of assessment should be revised as follows:

Profits assessed per Fact (11)	$886,600
Add:  Technical cost (US$15,600 x 7.7679 x 30%)	36,354
Assessable Profits	$922,954
Tax Payable thereon	$161,516

19.  By the Determination, the Acting Deputy Commissioner of Inland Revenue confirmed the Assessments (for the year of assessment 2005/06 as revised as stated above).

20.  By a Notice of Appeal dated 10 June 2010, the Company, through its solicitors, appealed from the Determination against the Assessments.

21.  By letters dated 10 June 2010 and 28 June 2010, the Company and the Commissioner of Inland Revenue (“CIR”) agreed, pursuant to section 67, to transfer this appeal to be heard by the Court of First Instance directly.

Appellant’s Points in Summary

22.  Mr Stewart Wong SC, for the Company, asserts that on these facts and the proper interpretation of the IRO the relevant sums are not chargeable to tax under section 15(1)(ba) because:

a. the sums were not for the “use” of, or for the “right to use”, any copyright material;

b. alternatively, as a matter of construction, section 15(1)(ba) does not apply to matters referred to in section 15(1)(a) (defined by Mr Wong as “media works”); the subject matter of the Licence Agreement was media work which would fall solely within section 15(1)(a); but as that section requires the exhibition or use “in Hong Kong”, the licence fee does not fall within the section;

c. the “technical costs” were payments for services rendered by Muse in Taiwan to the Company, and not for the “exhibition” or “use” of any media works or copyright material, and do not fall within section 15(1)(a) or (ba).

Approach to statutory interpretation

23.  The search for the correct interpretation of a statutory provision begins with a consideration of the plain meaning of the words used in the statute.

24.  In addition, it is now established that a purposive approach is applicable to the interpretation of, at least, revenue statutes: see, for example, Lam Soon Trademark Limited v. CIR (2006) 9 HKCFAR 391 at [20].

25.  In interpreting a statute, the function of the court is to ascertain the intention of the legislature, as expressed in the legislation. The statute must be considered as a whole – sometimes called the search for a "purposive unity" – and any provision must be understood in its context in its widest sense, legal and social.  The court should adopt an interpretation which is consistent with and gives effect to the legislative purpose, as is emphasised by section 19 of the Interpretation and General Clauses Ordnance Cap 1.  See also, for example, Medical Council of Hong Kong v. Chow Siu Shek (2000) 3 HKCFAR 144, at 154B-C; Town Planning Board v. Society for the Protection of the Harbour Limited (2004) 7 HKCFAR 1 at [28]-[29].

26.  There are a number of other possibly material canons and aspects of statutory interpretation, but they can be considered as each point is dealt with below.

Statutory Context

27.  For the purposes of looking for the proper statutory interpretation of section 15(1) – and in particular section 15(1)(ba) – it is helpful first to put it in its general statutory context.

28.  Section 14 is the section which makes assessable profits chargeable to profits tax.  A person is charged profits tax on his assessable profits if he is carrying on a trade, profession or business in Hong Kong.  In other words, profits tax in Hong Kong is generally levied on profit which has a Hong Kong source.

29.  But although section 14 identifies that only assessable profits arising in or derived from Hong Kong are chargeable to tax, section 15(1) is a deeming provision by which the sums described in the section – which are not otherwise chargeable to profits tax under the IRO – “are deemed to be receipts arising in or derived from Hong Kong for a trade, profession or business carried on in Hong Kong”.

30.  In brief, the legislative history of section 15(1) is as follows.  In 1966, the Inland Revenue Ordinance Committee was asked to consider the issues concerning royalties and films.  The Committee considered various ways to deal with the issues, including the option of introducing a deeming provision.  It is that option which was chosen, leading to the enactment of section 15(1)(a) and (b) in 1971.

31.  Section 15(1)(ba) was added by way of amendment in 2000, in the circumstances dealt with at paragraphs 34 and 35 below.  In short, it provided a geographical extension of the deeming provision under section 15(1)(b).

32.  Section 20B provides for the implementation of section 15(1) in respect of a non-resident person who is chargeable to tax under that section.  Section 20B(2) renders the non-resident person chargeable to tax in the name of any person in Hong Kong who paid or credited the relevant sums to that or any other non-resident person, so that the tax is recoverable from the person in Hong Kong.

33.  Section 21A deals with the computation of assessable profits under the section 15(1) – though no issue as to computation arises on this appeal.

Were the sums for the “use” of, or for the “right to use”, any copyright material?

34.  Mr Wong drew my attention to the circumstances in which the new section 15(1)(ba) came into the IRO. The Explanatory Memorandum of the relevant amendment Bill identified that the Bill

"amends section 15(1) of the Ordinance to ensure that all sums payable for the use of intellectual property (whether in or outside Hong Kong) by a person carrying on a trade, profession or business in Hong Kong and deductible in ascertaining the assessable profits of that person are deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong."

35.  The amendment was apparently introduced in response to the judgment of the Court of Final Appeal in Commissioner of Inland Revenue v. Emerson Radio Corp (1999) 2 HKCFAR 501.

36.  Mr Wong relied on that Court's approach to the interpretation of the meaning of the term "use of or right to use in Hong Kong … a trade mark" in the then section 15(1)(b), and in particular to the application of the territorial concept inherent in trade mark law.  Goods manufactured outside Hong Kong did not fall within the relevant subsection as there was no "use" of a trade mark in Hong Kong for goods manufactured outside Hong Kong.  However, for goods manufactured in Hong Kong for expert, there was such "use", by virtue of the then section 39 of the Trade Marks Ordinance Cap 43.

37.  So, says Mr Wong, it is clear that the Court was applying trade mark law concepts in considering whether there had been any "use" of a trade mark in Hong Kong for the purposes of the subsection.  Hence, the relevant "use" in section 15(1)(b) must be one in the trade mark law sense.  This is not the same as some economic use of the trade mark.

38.  Therefore, when the amendment was made, it was for the purposes of expanding the territorial scope of the (Hong Kong) section 15(1)(b) by the addition of the new (offshore) section 15(1)(ba). But there was no change to the scope or meaning of the terms "use" or "right to use", and those terms must continue to be interpreted in the intellectual property law sense.

39.  Mr Wong's argument then continues that as section 15(1)(b) and (ba) relate only to payments for the "use" of intellectual property rights, the payments falling within the scope of the section are only those for the grant of a licence to "use" or a "right to use" when that would otherwise be an infringement.  Thus, the sums chargeable to profits tax must be sums paid for a licence to "use" an exclusive intellectual property right, and not because the payee is paid this sum for the use of the material which happens to be protected by intellectual property rights.

40.  The argument continues that because "use" as an exclusive right is a concept alien to copyright law – because (save for computer programmes) "use" of a copyright work is not infringement – it is impossible to describe any sum as paid for the "use" of copyright, or as a payment for a licence for "use" without which there would be copyright infringement in the necessary sense for the purpose of the section.  As a result, section 15(1)(ba) does not apply to copyright works, except computer programmes.  In particular, it is said, the section does not apply to media works the subject of the relevant licence agreements in this case.

41.  Mr Wong had a subsidiary or alternative point based upon a distinction in section 15(1)(a) between the "exhibition" and the "use" of copyright material in so far as "media works" (his definition, as that phrase does not appear in the section) are concerned.

42.  On the assumption that the two words used by the legislature are intended to have different meanings, "use" (at least as far as media works are concerned) is different from, and does not include "exhibition".  So, says Mr Wong, there is no reason to suggest that the word "use" in section 15(1)(b) and (ba) should have a different, and wider, ambit than the same word when employed in section 15(1)(a).  Thus, sums paid for the "exhibition" of media work, are not considered to be within "use" of the media work for the purposes of section 15(1)(b) and (ba).

43.  Mr Wong then says that as the relevant sums here (except for the technical costs) are sums paid for a licence to exhibit the films in Taiwan, section 15(1)(ba) does not apply.

44.  I am afraid I am not attracted to Mr Wong's submissions, which seem to me to be unduly technical and reliant on unnecessarily complicated considerations as to what would or would not constitute an infringement of copyright.

45.  The starting point for statutory interpretation is that words should be given their ordinary meaning in the context in which they are used (unless there is some powerful reason for giving some other meaning), and the words "for the use of, or right to use" seem to me to be ordinary, and not technical, words.  As a matter of ordinary language, the word "use" means to employ or utilise or otherwise derive benefit from the deployment of something.

46.  Further, as the phrase "for the use of, or right to use" appears before all of the words "any patent, design, trade mark, copyright material, secret process or formula or other property of a similar nature", the proper interpretation of the phrase must attempt to provide some meaning as respect all of the words that follow.  This is unlikely to be achieved if a very technical approach is taken, where differing intellectual property rights might have differing ways of being exploited, and where the word "use" in the context of the rights might or might not have a technical meaning. 

47.  This is particularly so when there may be the "use" of intellectual property outside Hong Kong, and the intellectual property law of the particular place outside Hong Kong may differ from the intellectual property law of Hong Kong.

48.  So, it does not seem to me to assist Mr Wong that the Emerson Radio case turned on the meaning of "use" in the context of a trade mark.  As the title of ‘Trade Mark Use’ edited by Phillips and Simon suggests, and as the content of the book makes clear (see §§1.04 and 1.05), the concept of use goes to the very heart of trade mark law.  As the editors say, there is no significant aspect of trade mark law does not require an understanding of the concept of use.  But they also point out that there is no single cogent and authoritative definition of use.  Hence, the decision to publish the book.

49.  It is, therefore, not surprising that in the Emerson Radio case focus was on the territoriality of the rights conferred by a trade mark.  The question in the case was whether there had been use of the trade mark in Hong Kong.  On the facts of the case, the relevant licence agreement was in respect of the use of a mark on products to sell to US customers, so that must have meant the US registered trade mark.  Further, in authorising the use of the mark in Thailand, the Hong Kong company was using the Thai mark and the only place where the Thai mark could be used was Thailand. 

50.  But, as I have pointed out above, the word "use" is not tied only to the use of trade marks.  I think that means that the word "use" might well have a different or wider meaning in respect of other types of intellectual property right, or where the consideration is of the "use" of a range of intellectual property rights described in the widest terms.

51.  I accept the argument of Mr Rimsky Yuen SC, for the Commissioner, that in ordinary language a person who has the right to use an intellectual property right is a person who can exploit that right or exploit the intellectual property.

52.  Mr Yuen also pointed to the fact that the phrase "use of, or right to use … copyright material" specifically referred to "copyright material" – and not just "copyright".  This suggests that the "use" or the "right to use" is in respect of material in which copyright subsists.

53.  In addition, after the reference to the various specific intellectual property rights, and secret process or formula, the section contains reference to "or other property of a similar nature".  The phraseology is indicative of the intention to refer to all forms of intellectual property.  That broad intention is also apparent from the passage in the Explanatory Memorandum quoted in paragraph 34 above.

54.  As to Mr Wong's subsidiary or alternative submission, Mr Yuen suggested that there is no justification for distinguishing between "exhibit" and "use", nor justification for any contention that there is no "use" of copyright material. 

55.  First, Mr Yuen says that for the purposes of section 15(1)(ba) the distinction sought to be drawn between "exhibit" and "use" is a distinction without any material difference.  Further, that there may be some overlap between the different paragraphs of section 15(1), each of which is aimed at a different mischief, does not mean that they were or were intended to be mutually exclusive.  Indeed, section 15(1)(b) and (ba) cover a more general spectrum of intellectual property rights than section 15(1)(a) which refers specifically to cinematograph, television film or tape, sound recording or advertising materials connected therewith.

56.  Secondly, as Mr Yuen pointed out, there must have been a reason for entering into the 2005 and 2006 Licence Agreements. 

57.  The obvious reason was that, but for those agreements, the Company would not have had the right to exhibit the TV programmes in Taiwan.  So, it seems to me, the fees paid under the 2005 and 2006 Licence Agreements must have been paid and were received "for" the "use" or "right to use" Muse's intellectual property rights.  Indeed, it was part of the express terms and conditions of those agreements that Muse granted the Company "the right" to exhibit the TV programmes in the territory of Taiwan.

58.  I also consider some useful reference can be made to the last part of section 15(1)(ba), the phrase "which are deductible in ascertaining the assessable profits of a person under this Part".  These words seem to me to provide a further link to Hong Kong – consistent with the territorial-based taxation principle in Hong Kong – in that where a Hong Kong business is said to have incurred royalty expenses in producing its Hong Kong sourced profits, the intellectual property concerned must have been used in Hong Kong, so that the royalty income for the use of intellectual property should be taxable in Hong Kong.

59.  I am not, therefore, persuaded that the sums paid under the 2005 and 2006 Licence Agreements were not for the "use" of or the "right to use" intellectual property rights falling outside the scope of section 15(1)(ba).  On the contrary, I consider the basis of assessment to have been correct.

Does section 15(1)(ba) apply to ‘media works’?

60.  Mr Wong's second point was that in any event, as a matter of statutory construction, "copyright material" in section 15(1)(b) and (ba) does not include media works.

61.  So, if a person receives a sum for granting a licence to another for the "use" (whatever that means) of a media work in Hong Kong, the money is chargeable to profits tax under section 15(1)(a).  But if the Revenue is correct in its interpretation of section 15(1)(b), the sum received would also be chargeable to profit tax under that provision.

62.  On the other hand, says Mr Wong, if the "use" of the media work in Hong Kong is made by the copyright owner himself, income derived from that use would be chargeable to profits tax under section 14(1), given the wide meaning of the word "business" in the section.

63.  In either case, if the Revenue is correct, there is no need to resort to section 15(1)(a), which would render it mere surplusage, a meaningless provision.  Mr Wong submits that it is improbable that the framers of the legislation would have intended to insert a provision with virtually no practical effect, and the court should strive to see if there is another meaning, which produces a more reasonable result.

64.  Thus, says Mr Wong, properly construed, the use of media works is governed solely by section 15(1)(a), which would give it effect; section 15(1)(b) has no application to media works because of the proper construction of "copyright material"; and as section 15(1)(ba) is intended to be the ‘extra-territorial’ equivalent of section 15(1)(b), and uses the same term "copyright material", that term also does not cover media works.

65.  It seems to me that this argument is at least in part predicated on Mr Wong's first point having succeeded.  However, I have already held against him on that point. 

66.  I have already referred to what I read as a general provision intended to encompass the "use" or "right to use" all relevant forms of intellectual property.  But reference can also be made to the fact that the Copyright Ordinance Cap 528 itself identifies that copyright is a property right which may subsist in, amongst other things, sound recording, films, broadcasts or cable programmes: see sections 2(1)(b) and 6 to 9.

67.  Neither does it seem to me that the maxim generalibus specialia derogant advances Mr Wong's cause, as he would submit.  The maxim is explained by Bennion on ‘Statutory Interpretation’ 5^th Ed at 1164 as being:

“Where the literal meaning of a general enactment covers the situation for which specific provision is made by some other enactment within the Act or instrument, it is presumed that the situation was intended to be dealt with by the specific provision. … Acts very often contain general provisions which, when read literally, cover a situation for which specific provision is made elsewhere in the Act. This maxim gives a rule of thumb for dealing with such a situation: it is presumed that the general words are intended to give way to the particular. This is because the more detailed a provision is, the more likely is it to have been tailored to fit the precise circumstances of a case falling within it.”

68.  Mr Wong submits that it has always been the legislative intention to treat sums relating to the exhibition of media works under its own regime under section 15(1)(a), and not under the more general provisions in section 15(1)(b) or (ba).  Because the former section specifically deals with media works, the latter must be taken not to.

69.  But I accept Mr Yuen's submission that each of the paragraphs in section 15(1) is a deeming provision introduced to deal with an individual tax issue, and there is no ‘central theme’ to the section. Because the various paragraphs were intended to deal with different situations, they need not necessarily be mutually exclusive.  

70.  In any event, the maxim relied on applies only if there are inconsistencies between the two provisions, and I see no inconsistency between these material provisions.  That they may overlap does not mean that they are inconsistent; most likely it is the opposite.  Here, both provisions are intended to bring something within the tax net, which would otherwise not be subject to profits tax in Hong Kong, and both do so by deeming something to be the case when otherwise it would not be the case.

Technical costs

71.  The technical costs in question related to the provision of dubbed and subtitled tracks for the TV programmes.

72.  I accept, of course, that if the license fees are not for any reason chargeable to tax under section 15(1)(ba), then the technical costs would not be either.  However, I have found that the license fees are chargeable to tax under that section.

73.  For the CIR, Mr Yuen argues that the technical costs were paid for the purpose of and pursuant to the 2005 and 2006 Licence Agreements, and were part and parcel of the consideration for the rights conferred under those agreements.

74.  In support of that submission, he can point to the express term of the agreements that "In consideration for the Licence, Licensee shall pay Licensor the License Fee and Technical Cost set out in clause H and I of the Agreement, in accordance with clause J of the Agreement".  Under the heading, "Licence Fee", that provision at least suggests that the total consideration comprises both the licence fee itself, as well as the technical cost.  Nevertheless, the two elements are set out separately in the two clauses H and I.

75.  Mr Yuen also asks the question whether the technical costs would have been paid if the Company had not acquired the rights to broadcast TV programmes in Taiwan, and gives the obvious answer to the question by asserting that but for the right to broadcast the TV programmes, the Company would not have payed the technical costs.  Viewed thus, he says, the technical costs paid to Muse surely fall within the ambit of section 15(1)(ba), as they were for the use or the right to use the copyright material or other similar property rights, existing in the TV programmes.

76.  Mr Wong described that approach as sloppy reasoning. Referring to the Emerson Radio case at 507H, he said the question was whether the sums of the technical costs were received "for" the use of copyright material in Taiwan, having regard to the intellectual property rights of the Licencor.

77.  Mr Wong says that the technical costs were not payments for the use of copyright material, but were received for the additional and separate services provided in the provision of dubbing and subtitles to be included in the tapes provided.  They were not payments for the use of matters protected by intellectual property rights as such, but for the technical assistance rendered in the provision of the dubbed and subtitled tapes.

78.  Mr Wong gave the example of transport or installation costs for a patented product, and asked whether those costs would be chargeable under section 15(1)(b) or (ba), which he answered obviously not, on the basis that a sum cannot be chargeable to tax under the section simply because it is connected with the use of the matter protected by intellectual property, if on true analysis it is paid for something other than the use. 

79.  But the stated basis of Mr Wong’s answer tends simply to show that the analogy he has given may not be apt to the circumstances of this case.  Each case is likely to turn on its own facts, and an analysis of what was the purpose for the payment of the particular sum under consideration.

80.  Ultimately, however, in this case I think Mr Wong is correct that the technical costs do not fall within the section as chargeable to tax.  I reach that conclusion by reference to the specific terms of the 2005 and 2006 Licence Agreements.

81.  Under those agreements, the licenses were granted for the broadcasting or exhibition of the series of programmes, to be broadcast in Mandarin and with traditional Chinese characters subtitles.  Clause 4(a)(i) of the standard terms and conditions incorporated as express terms of the agreements placed an obligation on Muse to deliver to the Company tapes which were dubbed in Mandarin and subtitled with traditional Chinese characters.

82.  Albeit the delivery of the tapes in that format was to be at the cost of the Company, the payment was to put the tapes into the final form as agreed to be shown, and for which the licence was granted.  Put another way, the payment of technical costs was for the provision of material ready for the licence, not in fact for the right to use the material under the license.

83.  That the payment of the technical costs would not have occurred but for the grant of the licence does not seem to me to assist Mr Yuen in showing what that payment was actually for.

84.  I am therefore satisfied that the technical costs were not sums which fell within section 15(1)(ba) and should not have been included in the assessment of the profit.

Conclusion

85.  Therefore, I allow the appeal only to the extent of the technical costs, and the assessment can presumably be recalculated accordingly.

86.  As to costs, although the appellant Company has succeeded on the point about technical costs, most of the argument centred on the other two points, so I think a fair costs order would be for the CIR to receive 90% of its costs to be taxed on a party and party basis if not agreed. I accordingly make an order nisi in those terms, which order will become absolute if not challenged within 14 days.  If either party wishes to vary the costs order nisi, the variation sought and the basis for it should be set out in writing within the 14 days, and I will deal with the point on paper submissions.