SECRETARY FOR JUSTICE v. HONG KONG CABLE TELEVISION LTD

HCA 1398/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1398 OF 2005

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J U D G M E N T

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Background:

1.  This case raises a short issue as to the interpretation of a transitional provision.

2.  Cable TV has been the holder of a subscription television broadcasting licence since 1 June 1993.  The licence was granted under the Television Ordinance Cap 52, (TVO), which was subsequently repealed by s 44(1) of the Broadcasting Ordinance Cap 526, (BO), on 7 July 2000.

3.  Under TVO, Cable TV was liable to pay to the Government a subscription royalty pursuant to s 41A TVO, and Reg. 3 of the Television (Royalty and Licence Fees) Regulations, Cap 52 Sub Leg F, (the Regulations).  Section 41A provides as follows:

“	41A	Subscription royalty
		(1)	In addition to any royalty which may be payable under section 41, a subscription television broadcasting licensee and a program service licensee shall, as regards each of its accounting years, pay to the government a subscription royalty determined by reference to the subscription is receivable in respect of that licensee’s television broadcasts, and as regards a particular such year, the amount of such subscription royalty shall be determined in accordance with the rates prescribed by regulation made under section 32A.
		(2)	The amount of the subscription royalty payable by virtue of this section as regards any particular accounting year shall not exceed an amount which is equal to 7.5% of the subscriptions receivable for that year.
		(3)	Subject to the modifications (if any) prescribed by regulation made under section 32A, section 41(3) to (11) shall apply to the payment of subscription royalty under this section as it applies to the payment of advertising royalty under that section.”

Section 41(3) to (11), first makes provision for payments to be made on a quarterly basis: see ss (3) to (5); ss (7) to (9) are irrelevant for present purposes; ss (10) to (11) define certain periods, less than a whole accounting year, as being, for the purposes of the section, regarded as an accounting year.

4.  The subscription royalty was calculated by multiplying the annual subscription received for each accounting year, i.e. from 1 January to 31 December of that particular year, as certified by Cable TV’s auditor, by the applicable rate in respect of particular numbers of authorised decoders for which Cable TV was entitled to receive a subscription.

Subscription royalty requirement repealed:

5.  Under the new BO regime, which came into effect on 7 July 2000, there is no requirement for Cable TV to pay a subscription royalty.  Instead, a full cost recovery licence fee system is put in place.  Subscription royalty was payable, however, for the period prior to the repeal of the TVO, i.e. 1 January 2000 to 6 July 2000, a period of 188 days. 

6.  Part 4 of Schedule 8 of the BO made the following transitional provision in respect of the royalty payment:

“	8	Section 23 of Interpretation and General Clauses Ordinance
		(1)	Subject to sections 2 to 7 inclusive, section 23 of the Interpretation and General Clauses Ordinance (Cap 1) shall apply to the repeal effected by section 44(1) of this Ordinance.
		(2)	It is hereby declared that a royalty within the meaning of the repealed Ordinance payable by a licensee (or former licensee) within the meaning of that Ordinance is payable on a pro-rata basis in respect of that portion of the licensee’s (or former licensee’s) accounting year which has effluxed before the relevant day, and subsection (1) shall apply accordingly.”

The dispute:

7.  The issue in dispute is the quantum of subscription royalty, payable by Cable TV, for the part period in the year 2000 for which subscription royalty was due.  There is no dispute that the applicable rate for the calculation of subscription royalty was at all material times 7.5%. 

8.  There is no dispute that the subscription income actually received by Cable TV for the accounting year 1 January 2000 to 31 December 2000, was $973,526,000.  Cable TV have produced a certificate from their auditor certifying that the subscription income actually received for the period 1 January 2000 to 6 July 2000, was $483,565,000, from which a revenue adjustment of $1,197,000 was deducted, giving an audit certified net subscription received, of $482,368,000.  The Government do not argue that if Cable TV’s interpretation is correct, that is the appropriate sum upon which calculation of the subscription royalty would be based.  As I understand it from the papers, payment of the royalty based upon that sum has been made and accepted by the Government.

The alternate calculations:

9.  The case for the Government is that the subscription royalty should be calculated by applying the applicable rate of 7.5% to Cable TV’s subscription revenue for the entirety of the year 2000, and then pro-rating the resulting sum by reference to the number of days that had effluxed before the commencement of the BO, i.e. by multiplying the resulting sum, 188/366, (the year 2000 was a leap year).

10.  By adopting this method, the sum arrived at by the government is $37,504,690 as follows:

$973,526,000 x 7.5% x 188/366 = $37,504,690

11.  The case for Cable TV is that the subscription royalty should be calculated by applying the applicable rate of 7.5% to Cable TV’s actual subscription revenue generated the period 1 July 2000 to 6 July 2000.

12.  By adopting this method, the sum arrived at by Cable TV is as follows:

$483,565,000 x 7.5% = $36,267,375

13.  The resultant difference of $1,237,190 is the subject matter of the dispute.

14.  In simple terms the difference between the parties is that the Government says that starting point to determine the subscription royalty is the whole of the subscriptions received during an accounting year, whereas Cable TV says that the starting point is the actual subscription revenue generated during the period for which it was liable for payment of subscription royalty.

15.  If the subscription revenue remains constant throughout the accounting year then the same result will be arrived at which ever method of calculation is used.  But if the subscription revenue for the latter half of the accounting year exceeds that of the first half of the accounting year, then under the Government’s method of calculation, a higher figure is arrived.

16.  That is a consequence of the calculation having the effect of averaging the subscription revenue through the whole of the accounting year.  In actual fact Cable TV’s subscription revenue for the latter half of the year did exceed that of the first half of the year, hence the difference between the parties.

The case for the Government:

17.  Mr Fung meticulously took me through the background to the legislation, emphasising his submission that the calculation of royalties was based upon the concept of an accounting year, and that a distinction had to be made between the calculation of the royalty, and the date of payment of the royalty.  Calculation, Mr Fung submitted was to be made with reference to the entire accounting year, and the date of payment was to be determined quarterly.

18.  I am satisfied that the method of calculation adopted by the Government is wrong for five reasons.

Reason 1:  No averaging provision:

19.  First, ss 41 and 41A of the TVO do not provide any mechanism for averaging, or pro-rating, the royalty payments over a whole accounting year. 

20.  The evidence demonstrates that the calculation of royalty is based on actual subscriptions received during the year.  That that is so is demonstrated particularly by the document at page 319 of the bundle which sets out the royalty payments made between 1993 and 2000.  Of particular interest is the adjustment made in the third quarter of 1996.  In July the number of decoders, the basis upon which subscription royalty is calculated, stood at 248,628, attracting a royalty percentage of 5%.  In August and September the number had risen to 267,995, exceeding the trigger mark of 250,000 decoders and thereby raising the applicable percentage to 7.5%.

21.  In making the calculation the third quarter was effectively pro-rated, calculating July at the lower percentage of 5%, in August and September at a higher percentage of 7.5%.

22.  The effect of the position taken by the Government in the present dispute is to average the royalty payments over the whole of an accounting year.  In 1996 the parties recognized that there was no basis in the legislation for such an averaging exercise.  That is entirely consistent with the absence of any averaging provision in the legislation.  The consequence of the effect of averaging is to increase the amount payable.

Reason 2:  The royalty provision is a penal provision:

23.  Second, the effect of the position taken by the Government is that the royalty rate that would be applied to the period 1 January 2000 to 6 July 2000 exceeds the sum of 7.5%, the maximum rate that maybe applied.

24.  It is clear that the intention of the legislation is to impose the royalty payment upon the subscriptions actually received by the television licence holder.  Under the Government’s method of calculation the royalty payable is $37,504,690.  It is clear that the subscriptions actually received by Cable TV during the period for which it was liable to subscription royalty was $483,565,000.  If the Government’s method of calculation is applied, the royalty payment would amount to 7.75% of the subscriptions actually received.  That is 0.25% in excess of the maximum rate.

25.  It is well established that a penal provision in legislation, if ambiguous, must be construed in favour of not placing liability on the citizen: see Dickenson v Fletcher (1873) LR 9 CP 1.  An aspect of the application of that principle is that by the exercise of state power, the property or other economic interests of a person should not be taken away, impaired or endangered, except under clear authority of law: see Statutory Interpretation, A Code, Bennion 2002, p 728.  A fiscal provision in legislation, such as the imposition of a requirement for a royalty payment to Government, is penal because it interferes with the economic interests of the person required to make the payment.

26.  The legislature has specifically fixed the cap on the royalty payment at 7.5% of subscriptions actually received.  If a method of calculation is to be used which has the effect of increasing that cap, then clear words must be used.  In my view the only words that could properly be used would be specific words increasing the rate of the royalty.  It is not sufficient to achieve an increase in the rate by the application of a method of calculation using the “lower” rate.

Reason 3:  s 23 Cap 1 protects existing rights:

27.  Third, I am satisfied that the interpretation contended for by the Government has the effect of offending against s 23, Interpretation and General Clauses Ordinance Cap. 1.  The effect of that section is to preserve obligations and rights created under legislation that has been repealed.

28.  Under TVO, a television licence holder had an obligation to pay a subscription royalty, and at the same time a right not to have to pay a subscription royalty in excess of the sum of 7.5% of subscriptions actually received in an accounting year.

29.  If an interpretation is adopted which has the effect of increasing the subscription rate above that for which specific legislative provision has been made, then it offends against the licence holders rights under the repealed legislation.

Reason 4:  No statutory liability for subscription royalty after 7 July 2000:

30.  Fourth, it is clear that the effect of the BO is that from on and after 7 July 2000, no subscription royalty is payable.  It would seem strange indeed if it were held that the intention of the legislature were to require the inclusion of a period in which no subscription royalty is payable, in the calculation of the subscription royalty.  That is all the more so when the effect of including that period is to increase the rate of royalty for the period in which it is payable.

31.  The omission from the calculation of the period in which no subscription royalty is payable is entirely consistent with the scheme of the TVO.  It is the intention of the legislature not to require a licensee to pay subscription royalty during a period when he would not be liable for that royalty.  That may be seen from s 41(10), where the manner of construing the accounting year of a licensee may vary in certain circumstances, such as when a licence is surrendered or revoked.  In such cases the relevant accounting period is taken to end up on the surrender or revocation.

Reason 5:  Double charging:

32.  Finally, regard must be had to the fact that in the new regime imposed by the BO, provision was made for full cost recovery licence fees to the payable by licensees immediately after the abolition of royalties.  I accept Mr Coleman’s submission that it cannot have been the legislative intention that any part of the income of a licensee should be subject to a double charge, namely to the new licence fee, and by a pro-rating towards a royalty payment.

Conclusion:

33.  I am satisfied that the use of the expression “pro rata” in Reg 8(2), is to refer to the time period of days or weeks after an exact quarter, the need for such a provision arising from the fact that the commencement of the BO and the repeal of the TVO took effect on a non-quarter day.

34.  It is clear that the subscription royalty payable for the first two quarters is simply the application of the 7.5% rate to the actual subscription income received.  That is the way it was always calculated in the past.  The requirement for pro-rating arises solely because the date upon which liability for royalty ceased was not a quarter day.

35.  I accept Mr Coleman’s submission that it makes no sense at all to calculate royalty payments by reference to money that was not chargeable for royalty payments at the time became due, and to use it to pro-rate the royalty, thereby causing higher rates than those prescribed by the regulations to become applicable.

36.  The interpretation of the transitional provision advanced by Cable TV is entirely consistent with the only sensible interpretation of the legislative intent, namely that the royalty payment was to be in respect of the subscriptions received in respect only of the effluxed part of the accounting year until 7 July 2000.  In respect of subscriptions received after that date, the full cost recovery licence fee regime dealt with the situation.

Conclusion:

37.  In these circumstances there must be judgement for Cable TV.  The claim is dismissed.

38.  There will be a costs order nisi in favour of Cable TV.