Issue is whether s 128B of the Income Tax Assessment Act 1936 (ITAA 1936) applied to payments that Seven Network Limited (Seven), a resident of Australia, paid to the International Olympic Committee (IOC), a resident of Switzerland, between March 2006 and August 2008 for the broadcasting rights to the Olympic Games. Whether s 128B of the ITAA 1936 applied to the payments turns on whether the payments were “royalties” as defined in Art 12(3) of the Swiss Treaty. For the reasons that follow we agree with the primary judge that the payments were not “royalties” and, therefore, s 128B of the ITAA 1936 did not apply.
FEDERAL COURT OF AUSTRALIA
Commissioner of Taxation
v.
Seven Network Ltd.
KENNY, PERRAM AND DAVIES, JJ.
NSD NO. 87 OF 2015
MAY 23, 2016
G. McGowan, QC and D. Hume for the Appellant. D.H. Bloom, QC, D.C. Catterns, QC and P. Kulevski for the Respondent.
REASONS FOR JUDGMENT
THE COURT:
INTRODUCTION
1. This appeal concerns Art 12(3) of the Agreement between Australia and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income [1981] ATS 3 (Swiss Treaty) as in force during the relevant income years (income years). In issue is whether s 128B of the Income Tax Assessment Act 1936 (ITAA 1936) applied to payments that Seven Network Limited (Seven), a resident of Australia, paid to the International Olympic Committee (IOC), a resident of Switzerland, between March 2006 and August 2008 for the broadcasting rights to the Olympic Games. Whether s 128B of the ITAA 1936applied to the payments turns on whether the payments were “royalties” as defined in Art 12(3) of the Swiss Treaty. For the reasons that follow we agree with the primary judge that the payments were not “royalties” and, therefore, s 128B of the ITAA 1936 did not apply.
2. Between March 2006 and August 2008, Seven made payments totalling $122,178,261 to the IOC for broadcasting rights to the Olympic Games. The total payment was consideration for what the IOC granted to Seven under the Signal Utilisation Deed (SUD), including for Seven’s “use” of a signal (ITVR Signal). The ITVR Signal was used by Seven in its live television broadcasts in Australia for the Olympic Games in 2002, 2004, 2006 and 2008 (relevant Olympic Games).
3. The Commissioner of Taxation (Commissioner) contended that Seven, a resident corporation, was obliged to withhold part of the total payment of $122,178,261 on account of the IOC’s liability for withholding tax. Seven disputes this with respect to $97,742,609 (Disputed Amount). The Commissioner issued Seven with three notices of penalty, respectively dated 6 June 2007, 31 October 2008 and 23 December 2009; and Seven lodged an objection against each of them. In his Notice of Objection decision dated 2 December 2011, the Commissioner maintained his earlier stated opinion that the Disputed Amount was a “royalty” for the purposes of the Swiss Treaty.
4. On 27 January 2012, Seven filed an application in this Court for judicial review under s 39B of the Judiciary Act 1903(Cth) seeking declaratory and other relief. Three days later, on 30 January 2012, Seven filed an appeal to the Court under Part IVC of the Taxation Administration Act 1953 (Cth) (TAA) against the appealable objection decisions made by the Commissioner. Senior counsel for Seven, Mr Bloom QC, explained that the s 39B proceeding was instituted in case it was found that the key issue – whether the Disputed Payment was a royalty or not – could not be raised in the Part IVC proceeding: cf. Trylow v. Commissioner of Taxation [2004] FCA 446, [2004] ATC 4406 at [9] (Hill J). Case management orders were made early on that the two proceedings be heard together and the evidence filed in the tax appeal be treated as evidence filed in the judicial review proceeding.
5. The applications were successful. On 24 December 2014, the primary judge declared in both matters that:
(a)
The Disputed Amount was not a royalty within Art 12(3) of the Swiss Treaty;
(b)
Seven was not liable under s 12-280 of Schedule 1 to the TAA to withhold any of the Disputed Amount; and
(c)
Seven was not liable under s 16-30 of Schedule 1 of the TAA to pay any penalty for failing to withhold from the Disputed Amount an amount as required by Division 12 of Schedule 1 to the TAA.
Her Honour further ordered that:
(a)
the appeal under Part IVC be allowed; and
(b)
the Commissioner’s objection decisions be set aside and remitted to the Commissioner for determination according to law.
In both proceedings, the primary judge ordered, on 13 March 2015, that the Commissioner pay Seven’s costs up to 10:00 am on 31 October 2013 on the ordinary basis and after that time, on an indemnity basis.
6. The Commissioner appealed from her Honour’s judgment and subsequent costs orders. These are our reasons for dismissing the appeal against the declarations and orders made by the primary judge on 24 December 2014 and 13 March 2015 in proceeding NSD146/2012 and in proceeding NSD148/2012.
LEGISLATIVE CONTEXT
Under s 128B(2B) of the ITAA 1936, royalties that a non-resident entity derives from an Australian source (including a resident of Australia) are subject to withholding tax. Section 12-280(a) of Schedule 1 to the TAA relevantly provides that the amount of the tax must be withheld by the resident entity from the royalty that it pays to the non-resident. Section 16-5 of the TAA further provides that the resident entity must withhold the amount of the tax when making the payment. Section 16-25 of the TAA makes a contravention of s 16-5 a criminal offence; and s 16-30 of that Act imposes administrative penalties for a contravention of s 16-5. Section 298-20 of the TAA provides for the remission of administrative penalties.
“Royalty” is a defined term in s 6 of the ITAA 1936. The definition relevantly includes:
… any amount paid or credited … as consideration for:
(a)
the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right; ….
(db)
the use in connection with television broadcasting or radio broadcasting, or the right to use in connection with television broadcasting or radio broadcasting, visual images or sounds, or both, transmitted by:
(i)
satellite; or
(ii)
cable, optic fibre or similar technology.
Seven accepted that the Disputed Payments arguably come within par (db) of the definition of “royalty” and that s 128B(2B) might therefore apply to those payments unless the withholding tax provisions of the ITAA 1936 did not apply because Art 12 of the Swiss Treaty did not treat the Disputed Payments as royalties. It is necessary to refer to certain provisions of theInternational Tax Agreements Act 1953 (Cth) (International Tax Agreements Act) to understand the latter part of this proposition.
The Swiss Treaty is a double tax agreement, the nature of which is discussed in McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation [2005] FCAFC 67, 142 FCR 134 at [2]-[3], [10] and GE Capital Finance Pty Ltd v. Federal Commissioner of Taxation [2007] FCA 558, 159 FCR 473. In GE Capital Finance (supra), Middleton J explained, with reference to the “USA Double Tax Treaty”, that the Treaty:
… is one of the many double tax treaties entered into by Australia, and has been entered into for the avoidance of double taxation with respect to taxes on income. To achieve its aim of avoiding double taxation, the … Treaty allocates taxing “rights” between the treaty partners. As with all international treaties to which Australia is a party, it forms part of domestic law only because there is legislation which provides for the treaty to be incorporated into Australian law.
The Swiss Treaty is set out in Schedule 15 to the International Tax Agreements Act and is incorporated into Australian domestic law in accordance with s 11E of that Act. Section 4(1) of that Act incorporates the “Assessment Act” as defined in s 3(1), with the effect that the ITAA 1936 and the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) are so incorporated; and, subject to s 4(2), s 4(1) provides the “Assessment Act” “shall be read as one with this Act”. Section 4(2) provides that, subject to a not presently relevant exception, the International Tax Agreements Act prevails over provisions of the ITAA 1936 and the ITAA 1997.
The effect of a provision such as s 4(1) was discussed in GE Capital Finance Pty. Ltd. (supra), referring to Amalgamated Television Services Pty Ltd. v. Australian Broadcasting Tribunal [1984] 1 FCR 409 at 413. As Lockhart J there said:
The effect of such a provision is to transpose the earlier into the later Act or to write every provision of the earlier Act into the later Act as if they had been actually printed into it. It is a rule if construction of statutes; but it cannot be used in effect to amend the provisions of the earlier Act which is to be read as one with the later Act.
Section 17A(5) of the International Tax Agreements Act makes it clear that s 128B of the ITAA 1936 has no operation if the relevant double tax agreement does not itself treat an amount as a “royalty” even though it would otherwise be a “royalty” as defined in s 6(1) of the ITAA 1936. Section 17A(5) provides as follows:
(5) Section 128B of the Assessment Act (which deals with liability for withholding tax) does not apply to the payment of a royalty as defined in subsection 6(1) of that Act if:
(a)
the royalty is paid to a person who is a resident of a Contracting State or territory (other than Australia) for the purposes of an agreement; and
(b)
the agreement does not treat the amount paid as a royalty.
The word “agreement” is defined in s 3(1) to mean, unless the contrary intention appears,
(a)
a convention or agreement a copy of which is set out in a Schedule to this Act;
…
The word “agreement” thus includes the Swiss Treaty.
7. In the income years in question, Art 12 of the Swiss Treaty relevantly provided as follows:
1.
Royalties arising in one of the Contracting States being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State.
2.
Such royalties may be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed 10 per cent of the gross amount of the royalties.
3.
The term “royalties” in this Article means payments (including credits), whether periodical or not and however described or computed, to the extent to which they are consideration for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade-mark, or other like property or right, or industrial, commercial or scientific equipment, or for the supply of scientific, technical, industrial or commercial knowledge or information, or any assistance of an ancillary and subsidiary nature furnished as a means of enabling the application or enjoyment of such knowledge or information or any other property or right to which this Article applies, or for the use of, or the right to use, motion picture films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, or for total or partial forbearance in respect of the use of a property or right referred to in this paragraph.
…
5.
Royalties shall be deemed to arise in one of the Contracting States when the payer is that Contracting State itself or a political sub-division of that State or a local authority of that State or a person who is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether he is a resident of one of the Contracting States or not, has in one of the Contracting States a permanent establishment or a fixed base in connection with which the obligation to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. …(Emphasis added.)
In this case, Australia is the first “Contracting State” and Switzerland is the “other” State for the purposes of Arts 12(1) and 12(2).
It is relevant to note at this stage that in the relevant income years the definition of “royalties” in Art12(3) of the Swiss Treaty did not contain an equivalent paragraph to paragraph (db) of the definition of “royalty” in s 6(1) of the ITAA 1936. The Swiss Treaty was, however, amended in 2013, with effect from 14 October 2014, to include a provision similar to paragraph (db). It was not in dispute that the amended definition does not apply to the income years in issue.
FACTS AND EXPERT EVIDENCE
8. The parties proceeded before the primary judge on the basis of a Statement of Agreed Facts dated 15 October 2013 (Agreed Facts): Seven Network Ltd. v. Commissioner of Taxation [2014] FCA 1411 (PJ) at [24]. The following account derives from the Agreed Facts, the Joint Statement of Experts (which her Honour called the “Joint Experts’ Report”) and the experts’ evidence, as narrated by the primary judge.
9. ITVR Signal
10. Each of the relevant Olympic Games had a host broadcaster, which among other things was to film the various sporting events and, from that filming, to produce the ITVR Signal. This was a digital signal that could be provided to other broadcasters. The ITVR Signal was typically produced by the host broadcaster for each field of play (or competition venue).The ITVR Signal was transmitted by the relevant host broadcaster to a telecommunications carrier, and then transmitted to broadcasters, including Seven.
11. Before the ITVR Signal left the control of the host broadcaster, the signal was “split”. The effect of the splitting was that two tandem signals were generated each containing identical images and sound. A signal was recorded by the host broadcaster in a recording device as a “protection copy”; and an identical signal was sent to a telecommunications carrier and, via it, to the international broadcasting centre (IBC), where international broadcasters, such as Seven, received the ITVR Signal. At the IBC, the host broadcaster made a further recording of the ITVR Signal, although it too was not “in series” with that received by Seven.
12. Each ITVR Signal was an encoded and combined digital signal, transmitted virtually instantaneously to each Olympic broadcaster. The process of transmitting the ITVR Signal from the host broadcaster to each Olympic broadcaster did not involve any recording or storage of the ITVR Signal.
13. The ITVR Signal was received by Seven via copper coaxial cable: it was an electromagnetic force that transmitted data. There was no picture, image or sound recorded or permanently stored in the copper coaxial cable that transmitted the signal. No picture, image or sound could be recorded or permanently stored in the ITVR Signal. The signal was not tangible and did not give physical form to an image or sound. The ITVR Signal was a live signal.
14. Upon receiving the ITVR Signal, Seven made a further recording of the signal and used the signal as recorded to create its own product. The ITVR Signal was not suitable for broadcast purposes to the Australian public in its “raw” form, but was the major ingredient in the broadcasts that Seven made. Images and sounds could not be reproduced from the ITVR Signal, although images and sounds could be produced from the ITVR Signal by the use of a receiving device. Seven could access multiple ITVR Signals, one for each field of play. The ITVR Signal transmitted data of graphics, replays and natural sound from the venues, when decoded and viewed, but no commentary, interviews or advertising.
15. Although the host broadcaster and Seven could simultaneously record and store the ITVR Signal as it was being transmitted, the Signal received by Seven was not taken from any recorded version. A national broadcaster such a Seven could also pay to have its own cameras and unilateral signals, including commentator positions, transmitted from a field of play. This was something Seven did.
16. Agreements between the IOC and Seven
17. The 1996 Agreement
18. Seven had exclusive Australian broadcasting rights for the relevant Olympic Games under agreements with the IOC. Specifically, on or about 12 January 1996, Seven entered into an agreement with the IOC pursuant to which the IOC specifically identified the rights granted to Seven as including “exclusive Australian broadcast rights for the Games” for a defined period (1996 Agreement): Agreed Facts, [3] and [4]. Although it was a general agreement, the1996 Agreement concerned the relevant Olympic Games; and it was subject to a number of amendments and restatements, including a 2003 reiteration to address concerns about AUD/USD exchange rates (2003 Agreement): Agreed Facts, [6].The 1996 Agreement provided that the IOC granted Australian broadcast rights to Seven for the Games in consideration of the Rights Fees payable to the IOC in US dollars (Rights Fees), as set out in Schedule 1 to the 1996 Agreement: Agreed Facts, [5].
19. Games TV Deeds
20. Additionally, between 19 February 2002 and 11 February 2007, Seven Network(Operations) Limited, a wholly owned subsidiary of Seven, entered into deeds for the relevant Olympic Games with the IOC and the relevant Organising Committee in respect of exclusive “visual broadcast rights” (Games TV Deeds): Agreed Facts, [9]-[13]. Whilst the Games TV Deeds were each specific to one or other of these Olympic Games:
(a)
all recited that the IOC owned all rights in respect of the Olympic Games including all television and other broadcast rights;
(b)
all recited that the IOC had power to grant a broadcasting organisation exclusive rights to broadcast the games in a specified territory;
(c)
in all, the IOC granted Seven exclusive television and radio rights throughout Australia during a defined period; and
(d)
in all, the IOC (and the relevant host organising committee) agreed not to grant the opportunity or permit any broadcaster, federation or other entity infringing Seven’s exclusivity and to take all reasonable steps to remove any person from the Olympic venues who so infringed Seven’s exclusivity.
21. Each of the Games TV Deeds also dealt with ownership of copyright. The deeds relating to the 2002 and 2004 Olympic Games stated that the IOC shall be the copyright proprietor throughout the world of “all depictions, transcriptions, recordings and television … and audio broadcasts” of the Games produced by the Olympic Broadcasting Organisation (OBO), including the ITVR Signals (although the IOC’s rights were not to limit Seven’s rights under the Deed). At the same time, Seven granted the IOC “all rights under copyright … to all such depictions, transcriptions, recordings and broadcasts produced or broadcast by” Seven. Later deeds relating to the 2006 and 2008 Olympic Games instead provided that Seven was the initial copyright proprietor of all depictions, transcriptions, recordings and television and audio broadcasts produced by the relevant OBO. Seven then assigned that copyright interest to the IOC seven days after the conclusion of the Games. Each of the Games TV Deeds contained provisions for protection against third party infringements of the parties’ rights under the Deed.
22. Signal Utilisation Deed
23. On 30 September 2005, Seven and the IOC also entered into the SUD, Recital C to which stated that the IOC and Seven agreed “on the terms of this Deed” “to restate and clarify certain terms of the 1996 Agreement”. Recital D recited that Seven and the IOC “ratifie[d] and confirm[ed] the 1996 Agreement (as amended by the 2003 Agreement) as amended by [the SUD]”.
24. Clause 5 of the SUD provided as follows:
During the Games Period, Seven shall be the copyright owner in Australia of all depictions, transcriptions, recordings and television (visual broadcast) and audio broadcasts, or other dissemination by any means of the Games produced from ITVR Signal for the purposes of Australian Broadcasting, by or on behalf of, Seven in Australia (“Copyright”). At the end of the particular Games Period, Seven assigns to the IOC the Copyright.
25. The expression “ITVR Signal” was defined in cl 1.1 of the SUD to mean “the international television signals (picture and sound), to be produced by the host broadcaster appointed by the Organising Committee of Games events”. The expression “Australian Broadcasting” was also broadly defined.
26. As already noted, the fees payable by Seven for which it acquired the rights under the SUD was AUD$122,178,261: see cl 1.1. Clause 3 apportioned this amount as follows:
3.1 Fees for Use of Signal during Games Period and Access to Venues
The Fees are apportioned as follows:
(a)
$97,742,609 for the ITVR Signal for use in connection with exclusive Australian Broadcasting during the Games Period; and
(b)
$12,217,826 for access to the various Games venues.
3.2 Fees for Use of Signal after Games Period and Use of Olympic Marks
The Fees are apportioned as follows:
(a)
$6,108,913 for the ITVR Signal for use in connection with delayed Australian Broadcasting of the Games after the Games Period;
(b)
$6,108,913 for Seven to create an IOC-approved Seven logo using the Olympic Rings as an integral part and to otherwise use the Olympic Marks.
27. The parties agreed that “Australian Broadcasting during the Games Period” in cl 3(a) corresponded to “right (a) under “Rights Granted” in the 1996 Agreement; that is, “exclusive Australian broadcast rights for the Games”: see Agreed Facts, [4], [23]. Seven subsequently paid the $97,742,609 due under cl 3.1(a) to the IOC in several instalments.
THE DECISION OF THE PRIMARY JUDGE
28. The primary judge noted (at PJ, [32]) that Seven’s approach to withholding amounts from the payments made under clauses 3.1(b), 3.2(a) and 3.2(b) was not in dispute. Her Honour found (and the parties accepted) that the Disputed Amount corresponded to the payment made in accordance with cl 3.1(a) of the SUD (above).
29. The primary judge explained the nature of the ITVR Signal as set out in the Joint Statement of Experts and in the experts’ own evidence. According to her Honour (PJ, [40]), the experts agreed that:
The ITVR Signal was transmitted by the relevant host broadcaster to Seven’s master control room at the IBC.
Each ITVR Signal comprised an International Television (ITV) and International Radio Signal (IR).
The ITV and IR Signal were produced by the host broadcaster and combined and transmitted live to the IBC for distribution to each Olympic broadcaster, such as Seven.
Each Olympic broadcaster could use or alter the ITV or IR Signal as it saw fit to create its broadcast signal.
The ITVR Signal was not suitable for broadcast purposes in its “raw” form.
The ITVR Signal was the major ingredient in the broadcasts which Seven made, together with commentary, commercials, background pre-produced vignettes and short features which might be added by Seven.
Each ITVR Signal was an encoded and combined digital signal, transmitted virtually and instantaneously to each Olympic broadcaster.
The process of transmitting the ITVR Signal from the host broadcaster to each Olympic broadcaster did not involve any recording or storage of the ITVR Signal.
The ITVR Signal was received by Seven on a copper coaxial cable i.e. it was an electromotive force that transmitted data. There was no picture, image or sound recorded or permanently stored in the copper coaxial cable that transmits the signal.
No picture, image or sound can be recorded or permanently stored in a signal.
The signal is not tangible and does not give physical form to an image or sound.
Visual images and sounds cannot be reproduced from an ITVR Signal.
The ITVR Signal was a live signal and was not stored or recorded prior to being obtained (with one minor exception which is not presently relevant).
Seven and the host broadcaster could simultaneously record and store the signal as it was being transmitted, however the ITVR Signal received by Seven was not taken from this recorded version.
30. Her Honour repeated some of the above (PJ, [77]), including that:
The ITV video and audio signals were combined to create the ITV Signal. The IR signal was not mixed to correspond to the ITV video signal but was embedded into the ITV signal by the host broadcaster at the Outside Broadcast Compound (OBC) to create the ITVR Signal. The OBC is defined in the Joint Experts’ Report to be a ‘secure area, usually in close proximity to the field of play, containing the host broadcaster facilities necessary to produce the ITV Coverage and IR Coverage of the events taking place on that field of play‘). Data capable of conversion into ITV coverage and IR coverage was received via the ITVR Signal. These data could be decoded and converted into visual images and sounds by appropriate equipment such as a television.
The signals are capable of being converted by a television or other device into images and sounds. Visual images and sounds can be produced from the signal by use of a receiving device but images and sounds cannot be reproducedfrom the ITVR Signal.
The recordings made at the IBC were outside the series, that is, outside the chain of delivery to Seven. (Emphasis original.)
31. Further, her Honour noted (PJ, [78]) that the experts agreed that:
The ITVR Signal can be disseminated, identified and controlled.
The ITVR Signals were encoded and combined digital signals and each is a complex, constantly changing aggregation of video, one or more audio and multiple data channels in a constant signal, accompanied by metadata; data are continuously streaming.
The video signals from the camera head were transmitted to a vision switcher at which point effects could be added by the producer and director, such as the Olympic logo and text.
The output of the vision switcher was the video component of the ITV signal for a field of play. While the video signal was not recorded or permanently stored within the vision switcher, it was sometimes temporarily held, in the sense of buffered, for approximately 1/25th of a second (equivalent to one frame) for synchronisation.
32. Her Honour also said (PJ, [41]-[45]):
The data transported by the ITVR signal could be converted into television coverage, that is, visual images and sounds, by use of a receiving device. This means that, as transmitted and as received, the signal was a continuous stream of data, from which visual images and sounds could be seen and understood, but only by use of appropriate equipment.
The agreed expert evidence is that there is no technology that allows the information transmitted by the signal to be reproduced.
The evidence on which both parties rely is that the camera head converts light energy that can be interpreted by television into a repeated sequence of still images which the human eye interprets as if it were perceiving the moving events seen by the camera. The camera head converts an image into a digital signal by sampling a number of pixels presented to the lens and converting them into ‘a binary representation of their amplitude at that particular moment‘. Each pixel is represented as a unique sequence of binary digits, representing ‘a continuous stream of data that can be reconstructed later by a television receiver into a series of still images on the television screen‘ (emphasis added).
Although recordings were made at the IBC, they were not distributed to broadcasters such as Seven unless, for example, the broadcaster missed recording an ITVR Signal. They were a “protection copy”, or library copy, for future replay if required. They were never transmitted as live ITVR Signal to broadcasters.
Generally, many ITVR and unilateral signals were distributed to the broadcasters by the host broadcaster within the IBC at the same time. In most cases the delivery was virtually instantaneous. In some cases they were delivered within no more than 600 milliseconds of the activities taking place on the field of play, which is regarded as “real time”.
33. So far as the primary judge was concerned, the sole issue that arose for determination was whether the Disputed Amount was a royalty; and this turned on whether it was consideration for the use of, or right to use, copyright or “other like property or right” within Art 12(3) of the Swiss Treaty. The primary judge concluded (at [158]):
The subject matter of the [Disputed] Amount is not a cinematograph film, and [it is] not a copyright or other like property or right.
The [Disputed] Amount is not a “royalty” within the terms of Art 12(3) of the Swiss Treaty.
Seven is and was not liable under s 12-280 of Schedule 1 to the [TAA] to withhold any amount from the Payment.
Seven is and was not liable under s 16-30 of Schedule 1 to the [TAA] for penalties for failing to withhold.
Accordingly, the primary judge held (at [159]) that the penalty notices should be set aside and made the orders as indicated [The application were successful. On 24 December, 2014, the primary Judge declared in both matters that]-[Her Honour further ordered that:] above.
34. The primary judge’s reasons were as follows. First, her Honour rejected the Commissioner’s submission that, for the purposes of Art 12(3) of the Swiss Treaty, the Disputed Amount was for the use of, or the right to use, copyright in a cinematograph film transmitted by the ITVR Signal. Her Honour rejected the Commissioner’s argument that the footage filmed of the relevant Olympic Games events and transmitted via the ITVR Signal to Seven was a cinematograph film, as defined in s 10(1), read with s 24, of the Copyright Act 1968 (Cth) (Copyright Act) (PJ, [98], [124], [127], [158]).There was, so her Honour held, no embodiment of visual images in a “thing” (PJ, [120], [124], [127]); and there was no capacity for reproduction from the ITVR Signal (PJ, [124], [127]).Whilst her Honour accepted that by operation of s 184(1)(a) of theCopyright Act, the copyright protection in s 90 applies to a cinematograph film of which the maker was Swiss or which was made in Switzerland, her Honour observed that, by virtue of s 22(4), there must be a first copy of the film produced, and the maker is the person by whom the arrangements necessary for the making of the film were undertaken (PJ, [118]). These considerations did not support the Commissioner’s contention.
35. Secondly, the primary judge rejected the Commissioner’s argument that, for the purposes of Art 12(3) of the Swiss Treaty, the Disputed Amount was for the use of, or the right to use” some “other like property or right”. Her Honour held that there was no “other like property or right” involved in the use of the ITVR Signal and that the other “like right” must be an intellectual property right by the domestic law of the resident making the supposed royalty payment – here, Australia (PJ, [132]). Her Honour held that there was no evidence as to whether Swiss law would provide protection for the ITVR Signal, but that, in any event, the question was not to be determined under Swiss law (PJ, [145]-[146]). Hence, so her Honour said, the expression “copyright … or other like property or right” extended the operation of “royalty” to enable each country to enlarge its protected intellectual property rights, so long as they fell within the genus of intellectual property (PJ, [133]). The primary judge rejected the Commissioner’s submission that the right to use visual images and sounds transmitted by the ITVR Signal was a right to use “other like property” and was “like” a copyright, because the rights were of a broadly similar nature (PJ, [134]-[135]).
36. Thirdly, although the primary judge recognised that, under s 91 of the Copyright Act, copyright subsists in television broadcasts or sound broadcasts made to the public in Australia and under a licence or class licence granted pursuant to theBroadcasting Services Act 1992 (Cth) (Broadcasting Services Act), her Honour recognised that Seven, not the IOC, held the relevant broadcasting licence and was a broadcasting service within the meaning of that Act. It followed, so her Honour held, that there was a broadcast in which copyright subsisted only when Seven transmitted its signal in Australia to the public (PJ, [150]). The primary judge rejected, as contrary to the facts, the Commissioner’s contention that the film came into existence when it was broadcast (PJ, [152]). The primary judge also noted (PJ, [153]):
Further, and in the alternative, the Commissioner raised the contention that the IOC has authorised the doing of acts in future copyright subject matter, namely the cinematograph film that came into existence when broadcast or recorded (s 10(1)) and that the rights to use the ITV and IR Coverage transmitted via the ITVR Signal was the right to use copyright subject matter within the meaning of Art 12(3) of the Treaty. This contention was not pressed at the hearing.
37. Fourthly, on the subject of future copyright, the primary judge said (at PJ, [154]-[157]):
The Commissioner says, in opening, that the rights granted under the Atlanta and Sydney Deed, and the other Television Agreements which are relevantly identical, are broadcast rights, exclusive visual broadcasts of the games events. Counsel for the Commissioner characterised the subject matter as a linear sequence, such that the viewer watching the television sees what the camera captures. The submission is that Seven was granted a right under s 86(c) of the [Copyright Act] to communicate that ITV coverage to the public and that this is a copyright right within Art 12(3) of the Treaty. The Commissioner appears to distinguish between the ITVR Signal and the “ITV Coverage” which, he says, is the ‘visual images and sounds captured by the cameras at the Games events…and…converted digitally by the camera‘.
This argument appears to converge with an alternative … proposition advanced by the Commissioner, that the visual images and sounds are embodied into the television set so as to be capable of being shown as a motion picture. That is, the television has been treated in a way to make it capable of reproduction. That is then said to be a future copyright right within s 10(1) of the [Copyright Act].
At the hearing, the Commissioner was not able to enunciate the relevance of Seven’s right to broadcast …
This issue was not revisited. There was no reference to “future copyright” and it was not addressed by Seven. I have taken the view that it is not an issue.
38. The primary judge held that the Commissioner’s rejection of Seven’s Calderbank offer (made in accordance withCalderbank v. Calderbank [1975] 3 All ER 333 on 29 October 2013, expiring at 10.00am on 31 October 2013) was unreasonable. Hence, her Honour held that Seven was entitled to indemnity costs after the date of expiry of its offer: seeSeven Network Ltd. v. Commissioner of Taxation (No 2) [2015] FCA 201 at [25]-[26].
GROUNDS OF APPEAL
39. There were five grounds of appeal stated in the Commissioner’s amended notice of appeal filed on 29 April 2015, which were advanced in the Commissioner’s submissions summarised below. Further, at the hearing of the appeal the Commissioner sought to leave to amend his amended notice of appeal in order to raise a new proposedground6. This was as follows:
The learned trial judge erred in failing to find that:
(a)
persons other than Seven had copyright in the images and sounds comprising Olympic Games coverage and accordingly had a copyright right to publicly communicate those images and sounds in Australia;
(b)
the Payment [effectively, the Disputed Amount] was consideration for Seven obtaining a legal or practical guarantee that those persons would not exercise their copyright rights within Australia;
(c)
the Payment was accordingly consideration for total or partial forbearance in respect of the use of any copyright; and
(d)
therefore, the Payment was a “royalty” within the meaning of Art 12(3) of the Swiss Treaty.
We indicated that we would defer the question of leave until after we had heard argument.
THE PARTIES’ SUBMISSIONS
40. Commissioner’s submissions
41. The Commissioner’s amended notice of appeal challenged the primary judge’s determination that the Disputed Amount was not consideration for the use, or the right to use, copyright in a cinematograph film. At the hearing of the appeal, senior counsel for the Commissioner submitted that cll3.1(a) and 5 of the SUD made “it clear that the payment is in respect of copyright”; and referred in this connection to the Games TV Deeds, including for the Olympic Winter Games in Torino in 2006 (cl 11(a)) and for the Olympic Games in Beijing in 2008 (cl 11(a)).
42. The Commissioner submitted that the critical question under ss 10(1) and 24 of the Copyright Act was whether the images comprising or including the “Games Footage” were embodied in an article or thing so as to be capable, by the use of the article or thing, of being shown as a moving picture (i.e., a “cinematograph film”). Citing Sega Enterprises Ltd. v.Galaxy Electronics Pty Ltd. [1996] 69 FCR 268, at 272-275, the Commissioner submitted that the copper cable, electrons and ITVR Signal were, relevantly, physical articles or things and that the images and sounds from the field of play (which the Commissioner termed the “Games Footage”) were embodied in them. Referring to Garnett K, Davies G and Harbottle G, Copinger and Skone James on Copyright (16th ed, Sweet & Maxwell, 2011) at 133 [3-110], the Commissioner submitted that an embodiment was not required to be permanent or semi-permanent. The Commissioner contended that the electrons, copper cable and ITVR Signal were so treated that the “Games Footage” was capable of being reproduced from them and shown as a moving picture, as Seven’s broadcasts to Australian televisions derived from the ITVR Signal exemplified.
43. Citing Galaxy Electronics Pty Ltd. v. Sega Enterprises Ltd. [1997] 75 FCR 8 at 23, the Commissioner submitted that the use of the word “aggregate” in the definition of “cinematograph film” ins 10(1) of the Copyright Act did not impose a condition as to the quantity or quality of the images that must be embodied in the thing. The Commissioner submitted that the word “aggregate” indicated the scope of the copyrighted subject matter. Hence, the Commissioner submitted that “what is protected as a cinematograph film is the aggregate of visual images and sounds embodied (albeit briefly and not all at once) in the copper cable and electrons delivering the ITVR Signal and which is capable of being shown as a moving picture by using that copper cable together with a recording device”. At the hearing senior counsel for the Commissioner, Mr McGowan QC, said:
[I]n our case the images first appear on the field of play. And that’s where they are captured by the cameras. And they are delivered via the ITVR Signal and reproduced … by the devices held by the various people who receive it, including Channel Seven… [N]o prior existence of the aggregate of images and sounds is required before embodiment.
44. The Commissioner contended that these “cinematograph films [gave] copyright protection to the images and sounds comprising the Games Footage” under the Copyright Act by reason of r 4(1) of the Copyright (International Protection) Regulations 1969 (Cth) (CIP Regulations). In the Commissioner’s submission, the Disputed Payment was consideration for Seven’s right to exercise, within Australia, the copyright rights that otherwise inhered in the owner or assignee of the copyright in the “Games Footage”.
45. In the alternative, the Commissioner submitted that the Disputed Payment was consideration for a property or right which was “like” copyright within the meaning of the Swiss Treaty. Citing Thiel v. Federal Commissioner of Taxation[1990] HCA 37, 171 CLR 338 at 344 and McDermott 142 FCR 134 at [38], the Commissioner submitted that the meaning of the expression “other like property or right” was to be ascertained from the Swiss Treaty construed in light of any relevant extrinsic material. The Commissioner submitted that the class of property or right in question was “wider than traditional IP rights because they include[d] things like plans”. The Commissioner further submitted that, in return for the Disputed Payment, the IOC gave Seven a practical monopoly on the broadcasting of Olympic Games in Australia; and relying on Commissioner of Taxation v. Franklin Mint Pty Ltd. [1993] 44 FCR 109, submitted that these monopoly rights and freedoms were “like property or right” within the meaning of Art 12(3) of the Swiss Treaty, because they were functionally equivalent to the rights of a copyright holder.
46. The Commissioner further submitted:
[I]t [did] not matter that the 1996 Agreement, the SUD and the specific agreements in respect of the …[relevant] Olympic Games pre-dated some or all of the coming into existence of the relevant copyright in the Games Footage. At the time those agreements were entered into, the copyright in the Games Footage was “future copyright” within the meaning of s 10(1) of the [Copyright Act]. So far as the agreements were in relation to such future copyright, their effect was to vest the copyright in the cinematograph films for a limited period upon the coming into existence of that film: s 197(1). A payment in consideration for such a future vesting is plainly a payment for the use or right to use copyright and, for that reason, a royalty under the Swiss Treaty.
47. The Commissioner argued that, even if there was no copyright in what was carried by the ITVR Signal, Seven acquired copyright as a result of receiving the ITVR Signal because Seven obtained a broadcast copyright in the images and sounds carried by that signal upon broadcasting them. In consequence, so the Commissioner argued, the Disputed Payment was for that later-acquired copyright. At the hearing of the appeal, senior counsel for the Commissioner emphasised in reply that the “idea of alienation is not the touchstone of property”, citing R v. Toohey, Ex Parte Meneling Station Pty Ltd. [1982] 158 CLR 327 at 342-3, Georgiadis v. Australian and Overseas Telecommunications Corporation [1994] 179 CLR 297 at 311-312 and Barclay v. Penberthy [2012] HCA 40, 246 CLR 258 at 282-3 [39].
48. In support of the proposed new ground 6, the Commissioner contended, in the further alternative, that the Disputed Payment was consideration for total or partial forbearance in respect of the use of copyright. Senior counsel for the Commissioner submitted at the hearing that the “payment was for the IOC’s exclusive licence to use the ITVR plus forbearance to ensure effective exclusivity”. The Commissioner’s argument was that the IOC undertook to Seven that it would ensure that it and others would forbear from exercising their copyright right to communicate the relevant Olympic Games in Australia and that the Disputed Payment was in substance for the forbearance so guaranteed.
49. The Commissioner contended that Seven was not the only owner of the right to publicly communicate the “Games Footage” in Australia, because the host broadcaster also had that right. The Commissioner submitted that the IOC was in a position to ensure that others, including the host broadcaster, with the right to copy and communicate “Games Footage” in Australia, did not exercise those rights. The Commissioner contended that when the host broadcaster recorded the ITVR Signal in the recording devices, the sounds and images carried by the signal were embodied in those devices; and even if there was no cinematograph film in the ITVR Signal before the recording, a film came into existence at the point of the recording. According to this argument, in this circumstance the host broadcaster acquired rights under ss 85, 86, 89 and 90 of the Copyright Act. The Commissioner submitted that this third-party copyright did not affect Seven’s freedom to broadcast the “Games Footage” in Australia, because Seven’s ITVR Signal was not “in series” with the ITVR Signal used to create the host broadcaster’s recordings and the broadcasts created by Seven from its signal were not derived from the cinematograph films made by the host broadcaster. The position was much the same, so the Commissioner said, with respect to the subsistence of Seven’s copyright in the “Games Footage”, which it obtained by creating a copy of the ITVR Signal at the IBC and also by broadcasting the footage, because this did not affect the freedom of the host broadcaster, the IOC or any other broadcasters to broadcast the “Games Footage” in Australia, since they had derived their footage from their branches of the ITVR Signal. Hence, so the Commissioner submitted, “Seven needed comfort that the rights it had to use Games Footage would be exclusive (for the Australian territory)” and Seven “obtained that comfort from the Games TV Deeds and the 1996 Agreement”. The Commissioner contended that:
[U]nder those agreements, the IOC agreed to forebear from exercising in Australia any copyright it had in the Games Footage and agreed to ensure that others forbore from exercising in Australia any copyright that… they had in the Games Footage.
50. Accordingly, so the Commissioner said, the Disputed Payment was consideration for that forbearance and a royalty within the meaning of Art 12(3) of the Swiss Treaty. The Commissioner accepted that this proposed new ground had not been raised before the primary judge, but argued that it was nonetheless in the interests of justice for the Commissioner to be permitted to raise it before us.
51. Seven’s submissions
52. Seven’s answer to the Commissioner’s primary case was that the Disputed Payment was for physical access to the ITVR Signals and the Games venues, and that it was not for copyright or for future copyright. Seven submitted that the ITVR Signal received no protection by virtue of ss 10 and s 24 of the Copyright Act; and that there was no identification of relevant technology in the Copyright Act that accommodated the concept of a copyright in the ITVR Signal. Referring to s 8 of the Copyright Act, Seven emphasised that, apart from Crown copyright, copyright does not subsist except by virtue of that Act; and, citing Computer Edge Pty Ltd. v. Apple Computer Inc [1986] 161 CLR 171 at 187-188 and Roadshow Films Pty Ltd. v. iiNet Ltd. [2012] HCA 16, 248 CLR 42 at [119]-[120], submitted that the Court should not give the Copyright Act a strained interpretation in order to meet perceived advances in technology. Seven contended that the only relevant copyright that subsisted was that in Seven’s broadcast, an ingredient of which was the ITVR Signal.
53. Referring to Network Ten Pty Ltd. v. TCN Channel Nine Pty Ltd. [2004] HCA 14, 218 CLR 273 (The Panel), Seven noted that copyright attached to broadcasts only by virtue of the specific statutory provision (cf: s 10) that had been made for them. Seven distinguished Galaxy Electronics Pty Ltd. (supra) on the basis that the relevant images were embodied in a material, physical form in the integrated circuits of the video game in a permanent fashion. Seven submitted that Stevens v.Kabushiki Kaisha Sony Computer Entertainment [2005] HCA 58, 224 CLR 193 and Galaxy Electronics Pty. Ltd. (supra) required the aggregate of visual images and sounds to be stored in a material, not evanescent form, in order to fall within the statutory definition of “cinematograph film”.
54. At the hearing of the appeal, senior counsel for Seven, Mr Bloom QC, submitted that the words “property” and “rights” in the expression “other like property or rights” had a well understood legal meaning, which should be applied, in the interests of certainty, particularly where, as here, the interpretative choice affected the operation of a provision under a double tax treaty. Seven contended that the expression “other like property or right” was attached to “copyright, patent, design or model, plan, secret formula or process, trade-mark” in Art 12(3) of the Swiss Treaty, in order to cover all rights that are recognised as intellectual property rights by the domestic legal systems of either country. Mr Catterns QC expanded on these submissions, submitting that the reference to “model” was to a “utility model”, which was the equivalent of an Australian petty patent or innovation patent and the reference to “plan” was either to copyright in drawings or, alternatively, a plan in the category of trade secrets. In the latter regard, he noted that although trade secrets were not protected by statute, the law nonetheless protected them; and a proprietary character has been attributed to confidential information because of the protection the law afforded it. Seven emphasised that the amendments to the domestic definition of “royalty” in s 6(1) of the ITAA 1936 (and later picked up in the 2013 Swiss Treaty)illustrated the limited reach of para (a) of the domestic definition in s 6(1) of the ITAA 1936, which mirrors the first part of the definition in Art 12(3) of the version of the Swiss Treaty governing this case.
55. Seven challenged the Commissioner’s capacity to rely on his argument as to future copyright, on the basis that it had been abandoned before the trial judge. (The Commissioner responded that, although the argument had not been pressed, it had not been abandoned.) Seven also submitted that, even if the Commissioner’s argument as to that character of the Disputed Payment were accepted, the Disputed Payment would not be a royalty because it would not be a payment for doing an act comprised in a copyright owned by another. As Seven put it, it was “not a royalty to pay someone for a right that one subsequently creates”; and for this reason the fact that a copyright will inure to Seven by virtue of broadcasting could not transform the Disputed Payment into a payment in the nature of a royalty.
56. Seven submitted that the fundamental difficulty with the Commissioner’s proposed new ground as to forbearance was that no-one other than Seven had the legal rights to broadcast in Australia and, in consequence, there was no forbearance. Mr Catterns QC expanded on this, by submitting that neither the host broadcaster nor the IOC was a “broadcasting service” within the meaning of the Broadcasting Services Act, since neither held a relevant licence under that Act. He added that like other global broadcasters (none of whom had a right to broadcast in Australia) Seven paid for access to multiple signals and venues. Seven submitted that it paid for this access and for the “ingredient” of the ITVR Signals in order that no other free-to-air Australian broadcaster would have that access. Seven submitted that the Disputed Payment was for the ITVR Signal “ingredient” and for access, and in exchange for a promise not to provide physical access to the ITVR Signal to other Australian broadcasters. This promise had, so Seven submitted, no element of forbearance in the relevant sense.
57. Seven opposed the Commissioner’s application for leave to allow the introduction of the proposed new ground, originally on the basis that it raised issues that would properly have been the subject of evidence at trial (for example, on the issue of apportionment) and on the basis it lacked merit. In response to the Commissioner’s submissions at the hearing, however, Seven focussed on the lack of merits of the proposed ground.
CONSIDERATION
58. Whether or not Seven was liable under s 12-280 of Schedule 1 to the TAA to withhold any of the Disputed Amount depends on whether the Disputed Amount is properly characterised as a royalty. If so, then the primary judge erred in holding that it was not a royalty.
59. As we have seen, the Disputed Amount was the amount paid under cl 3.1(a) of the SUD, “for the ITVR Signal for use in connection with exclusive Australian Broadcasting during the Games Period”. That is, the Disputed Payment was “for” the ITVR Signal (in that Seven was given physical access to it) “for use in connection with exclusive Australian Broadcasting” (in the sense that such access was given “to suit the purposes or needs of” (cf. Macquarie Dictionary, www.macquariedictionary.com.au) a particular activity- Australian broadcasting – that Seven was to undertake. Since that activity was to be exclusively Seven’s, by implication within the context of the SUD, the IOC also promised not to grant the same permission to anyone else). As we have seen, the Disputed Payment would constitute a royalty only if Seven’s payment for this access and exclusive permission was properly characterised as “consideration for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade-mark, or other like property or right” or “for total or partial forbearance in respect of the use of [such] a property or right”, for the purposes of Art 12(3) of the Swiss Treaty.
60. Copyright
61. The first question is whether, as the Commissioner contended, the Disputed Payment was for the use of, or the right to use, copyright in a cinematograph film. This in turn depends, for present purposes, on whether, as the Commissioner argued, the images and sounds from the field of play (which he beguilingly termed “Games Footage”) were embodied in the ITVR, copper cable and electrons so as to be a cinematograph film in which copyright existed. We do not consider that this latter question can be resolved by reference to “royalty” or “copyright” characterisations in Games TV Deeds. Rather we accept that, as Seven submitted, whether or not copyright subsisted in these images and sounds in the way the Commissioner claimed must be determined in this case by reference to the Copyright Act: see s 8.
62. Part IV of the Copyright Act concerns copyright in subject-matter other than literary, dramatic, musical or artistic works, such as sound recordings (s 89), cinematograph films (s 90), television broadcasts and sound broadcasts (s 91). In particular, at the relevant time, s 90 of the Copyright Act provided for cinematograph films in which copyright subsisted as follows:
(1)
Subject to this Act, copyright subsists in a cinematograph film of which the maker was a qualified person for the whole or a substantial part of the period during which the film was made.
(2)
Without prejudice to the last preceding subsection, copyright subsists, subject to this Act, in a cinematograph film if the film was made in Australia.
(3)
Without prejudice to the last two preceding subsections, copyright subsists, subject to this Act, in a published cinematograph film if the first publication of the film took place in Australia.
A “qualified person” in s 90(1) was defined as an Australian citizen or a person (other than a body corporate) resident in Australia; or a body corporate incorporated under a law of the Commonwealth or of a State: Copyright Act, s 84.
63. Section 90 therefore required that, in order for there to be copyright under the Copyright Act in a cinematograph film, there must be some territorial nexus between the film and Australia. This is consistent with s 184(1) of the Copyright Act, which provides for the making of regulations (the CIP Regulations) applying the provisions of the Copyright Act to a country other than Australia where the same kind of territorial nexus exists between the subject of copyright and that other country.
64. Also at the relevant time, s 10(1) of the Copyright Act provided that, unless the contrary intention appeared, “cinematograph film” meant
… the aggregate of the visual images embodied in an article or thing so as to be capable by the use of that article or thing:
(a)
of being shown as a moving picture; or
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