England and Wales High Court (Administrative Court) Decisions

1. MR JUSTICE MOSES: This appeal from the VAT Tribunal raises questions as to the place where a service is supplied. The Respondent, Chinese Channel Limited (Hong Kong) ("CCHK"), supplies a satellite broadcasting service to Chinese speakers in Europe, particularly in the United Kingdom. CCHK has its main place of business in Hong Kong. CCUK contribute office, editorial and production services from its offices in London. The question is, whether the Tribunal was right to conclude that the service was supplied from Hong Kong or whether they erred in law in so concluding.

2. If I conclude that the Tribunal was wrong, then this case also raises the question as to the appropriate test for the place where service is to be supplied under Article 9 of the Sixth Directive, the relevant legislation. Article 9(1) of the Sixth Directive 77/388 EEC states:

3. Section 9(1) of the Value Added Tax Act 1994 states:

4. CCHK had control of that key and could switch it on and off and subscribers were thus able to receive the programmes. The subscription agreements were governed by Hong Kong law.

5. Mr Le Druillnec, whose evidence was accepted by the Tribunal, most of the programmes came from TVB, they were selected by CCHK's personnel (who were some 3 to 4 people) who worked for it directly. CCHK drafted the schedules and produced a draft TV guide for subscribers.

6. In addition, besides the editing, there was also community news which CCUK shot in Europe. There was also Chinese Channel "hot gossip" which would be filmed in the CCUK office with one person sitting behind a desk speaking to the Chinese Community in Europe.

7. In addition, although there was no presenter in front of the camera, there was a Chinese voice over. Trailers were created in London, advertisements were produced by advertisers or produced to order for advertisers by CCUK.

8. It is important to appreciate the nature of the argument before the Tribunal. The argument rested on the United Kingdom legislation in section 9(2) and section 9(5)(a) of the Value Added Tax Act 1994. The Commissioners contended that CCHK had a business establishment in Hong Kong and a fixed establishment in the United Kingdom and that the establishment most directly concerned with the supply of the services was CCUK, and thus in the United Kingdom. Alternatively, the Commissioners argued that CCHK carried on a business through an agency in the United Kingdom and was thus deemed, pursuant to section 9(5)(a) to have a business establishment in the United Kingdom.

9. The Tribunal concluded:

10. The Tribunal identified the nature of supplies as "Satellite Broadcasting Services" (see page 24). At page 28 as "broadcasting to subscribers", and at page 29, the supply of the facility of receiving broadcasts which it had selecting.

11. At page 24 of its decision, it said:

12. At page 28, it said:

13. At page 29 it said:

14. It concluded at page 30.

15. The legal context in which the arguments have been mounted differs from the argument as presented to the Tribunal. The argument before me has concentrated upon the provisions of Article 9(1) of the Sixth Directive and the jurisprudence of the European Court of Justice in relation to that article. In my judgment, the parties are right to have focused their arguments in this way. The Directive is of direct effect throughout the European Union. The domestic legislation of Member States must be construed, so far as possible, consistently with the Directive (see Marleasing v La Commercial Interacional de Alimentacion [1990] ECR 4135).

16. In those circumstances the determination of the place of supply must be determined in accordance with the provisions of that article as interpreted by the Court. The conclusion as to the place of supply ought to be the same under Article 9 as under domestic legislation; if that were not so, it would demonstrate that the domestic legislation was inconsistent with the provisions of the Directive. The Tribunal struggled to find consistency between section 9(5)(a) and Article 9(1). That struggle is unnecessary if one concentrates upon the Directive.

17. Mr Kent QC, on behalf of the Commissioners, argued that under Article 9, CCHK has a fixed establishment from which the service is supplied, and that that is the appropriate test to apply, even though the supplier had established its main place of business in Hong Kong.

18. Mr Cordara QC, on behalf of CCHK, argues that that is not the appropriate test. The correct test is to determine where CCHK has established its business and that place, it is not disputed, is Hong Kong.

19. It can be seen from the nature of this legal dispute that the legal argument as to which test is appropriate will be of no avail to the Commissioners unless they can establish that on the primary facts found by the Tribunal, the true and only unreasonable conclusion is that CCHK did have a fixed establishment in the United Kingdom from which the services are supplied or, at least, had the Tribunal not misdirected itself in law (as to whether a separate legal entity can be a fixed establishment) they might have reached that conclusion on the facts found, in which event the matter should be remitted.

20. The Commissioners accept rightly that the Tribunal's conclusion that the supplies were made from Hong Kong from CCHK, and that CCHK was most directly concerned with the supply, preclude a finding that CCHK had a fixed establishment from which the service was supplied in the United Kingdom. Thus, the Commissioner's attack on the Tribunal's factual conclusion is essential to its success in this appeal.

21. The test as to whether a supplier has a fixed establishment from which a service is supplied has been considered in the European Court of Justice in Gunter Berkholtz v Finanzamt Hamburg-Mitte-Altstadt [1985] ECR 2251 ECJ and Customs & Excise Commissioners v DFDS A/S [1997] STC 384.

22. Three conditions must be satisfied:

23. It is important to recall that although that case concerned travel agents, the Court's reasoning was based on its jurisprudence relating to Article 9, as explained in Berkholz. Thus, in my judgment, DFDS is of significance not just in the case of travel agents, but also in relation to other services which may be supplied in a number of Member States. After all, the second sentence of Article 26(2) is dealing with the place of supply in similar terms to Article 9(1).

24. The Court's conclusion was that the English subsidiary was not independent, it merely acted as an auxiliary organ of the parent Danish company. I described this in condition 2 as the paradigm of a fixed establishment from which the service is supplied. I have done so because there is a danger in elevating an appropriate description based upon the facts of a particular case to the status of a test of general application. A mere auxiliary organ of a supplier will be a fixed establishment from which the service is made, if it otherwise has sufficiently permanent, necessary human and technical resources, but it is possible to conceive of a non-independent company acting as the fixed establishment of a supplier which is not a mere auxiliary organ. It is the reality which matters, not the label.

25. The Tribunal reached the conclusion that because CCUK was a separate legal entity, it could not be a fixed establishment (the route by which they reached that conclusion was via Section 95(a) but for present purposes that does not matter). It is not their fault since they were without the benefit of the decision of the European Court of Justice in DFDS. The question is whether their primary findings of fact support the conclusion that CCUK was not a fixed establishment from which the service was supplied.

26. Mr Kent attacks the description of the activities of CCUK. It did not merely provide office services such as accounting, record keeping and receiving tapes for onward transmission (see page 28 of the Tribunal's decision) Its main contribution was not the provision of administrative and accounting facilities (see page 24 of the decision).

27. He asserts that the Tribunal ignored the important editorial and production functions. He says they accounted for approximately half the programmes. The Tribunal, he contends, concentrated too much on the fact that CCHK made the contracts with a subscriber (see page 29 of the decision). The supply, he said, was not the contract but performance under the contract. He points to the substantial activities in the United Kingdom and the large number of personnel there working when compared with Hong Kong (40 compared to 3 or 4).

28. In order to assess the part played by CCUK, it is necessary to identify the nature of the supply, the Tribunal's description of which I have already stated.

29. Mr Cordara described it, at one stage, as the supply of the right to receive the programmes of Chinese Channel. That is, in my judgment, too limited a description. The service provided, as he was later disposed to accept, was the facility of receiving broadcasts selected by CCHK. This consisted of the provision of a right, the transmission of programmes and the content of those programmes.

30. In my judgment, the Tribunal was entitled, on the facts which they found, to conclude that that service was provided from Hong Kong. It is not just a matter of comparing the activities of the two companies, it is more important, as the Tribunal recognised, to consider the significance of those activities and the part they play in their contribution to the service supplied (see final paragraph of page 28 Tribunal's decision). True it is that CCUK appear to have employed a far greater number and can therefore be said to have spent more man hours that CCHK, but non constat that their activities made an equal or greater contribution to the service. The Tribunal clearly took the view that the main contribution consisted of making contracts, arrangements for transmission and selecting programmes. That may have taken less time than it did to perform the production and editorial functions in the United Kingdom, but that is nothing to the point if those United Kingdom activities may be fairly judged to have played a lesser part.

31. I do not accept the Commissioner's contention that approximately half the programmes were prepared by CCUK.

32. Mr Kent based this contention on the finding that about half the programmes were on tape. It does not follow that all the others were produced in CCUK. There were other means of providing programmes, such as real time news from TVB via satellite (see page 14 of the decision). There are clear findings that most of the programmes came from TVB (see page 12 of the decision). This is supported by examination of the interesting document, Chinese Channel TV guide, where one can see a typical week's programmes between midnight and 7 a.m. at page four. In those circumstances, there was a proper factual basis for the factual conclusion that by far the larger part of their activity of broadcasting to subscribers took place in Hong Kong (see page 28).

33. Mr Kent correctly emphasised a number of features which would support a conclusion that CCUK was not acting independently. Although it was not a subsidiary of CCHK, it shared a grandparent. It bore no financial risk (see clause 5.1 which provides for 108 per cent remuneration of total costs). It was under an obligation not to act for competitors. Thus it shared many of the characteristics of the English subsidiary of the Danish company in DFDS as described by the Advocate General (see paragraph 4 at page 387 and paragraph 22 at page 391). There is, as Mr Kent would be the first to recognise, a danger in conducting a mechanical exercise of comparing the features of one case with another. A Tribunal is required to reach a judgment as a matter of fact as to the independence of the company operating the alleged fixed establishment. But, in my judgment, the Tribunal might have reached the conclusion that CCUK was not independent, had it not misdirected itself that the fact that it was a separate legal entity precluded such a finding. Had the question of independence been the sole issue, I might have been disposed to refer the matter back to the Tribunal to reconsider that issue in the light of DFDS.

34. But that is not the sole issue. Article 9 requires a factual judgment as to whether the service is supplied from a fixed establishment. The Tribunal concluded as a matter of fact that the service was supplied from Hong Kong and not from the United Kingdom. It is plain that CCUK made a contribution to that service. Thus a judgment was required as to whether, despite that contribution, it could be said that the service was supplied from Hong Kong and not from United Kingdom. This is a question of degree for the Tribunal. It may require consideration of which establishment, either the main place of business or the fixed establishment, if any, was most directly concerned.

35. In other words, the test contained in United Kingdom legislation in Section 9(2)(b) is a test to be used in order to answer the question posed by Article 9. That Article, in cases where aspects of the service are provided from the main place of business and others from a fixed establishment, requires a decision as to whether the service is supplied from the fixed establishment. That question cannot be answered by saying that some aspects of the service are and some are not; an overall conclusion must be reached. In my judgment, the Commissioners fail because they are unable successfully to impugn the conclusion that, having assessed the contribution made by CCHK and CCUK to the service, the Tribunal concluded that the service was supplied from Hong Kong.

36. I should add, that Mr Cordara for CCHK contended that CCUK could not be a fixed establishment because it lacked the technical resources necessary for the service. That may be right, all the transmission aspects of the service and indeed the holding of the licence was controlled and arranged by CCHK, but since the Tribunal reached no concluded findings on that issue, I need not reach a concluded view.

37. For the reasons given above, since the primary facts do support the conclusion that the service was supplied from Hong Kong, this appeal must fail.

38. My conclusion has the unfortunate result that an important legal issue between the parties does not fall for resolution. I say unfortunate, because the issue is of significance for both tax payers and Commissioners alike. The issue is whether it is appropriate to apply the fixed establishment test at all. Mr Cordara has submitted that even if the factual conclusion had been that Hong Kong had a fixed establishment in the United Kingdom from which the service was supplied, the place of supply was deemed under Article 9 to be Hong Kong, because the appropriate test was the place where the supplier had established its business, in Hong Kong. Thus, any factual conclusion adverse to CCHK would be trumped by the contention that the wrong test had been applied.

39. This raises the important question as to the priorities of the test set out in Article 9. The European Court of Justice has consistently stated:

40. Thus, although it is for a taxing authority to choose the most appropriate test, it cannot choose the fixed establishment test unless the preliminary test of the main place of business does not lead to a rational result or creates a conflict with other Member States.

41. This itself raises a question as to what is meant by 'a rational result'. In DFDS, in circumstances where Member States have the power to exempt travel agents from VAT, the main place of business test could lead to distortions of competition; travel agents would set up their headquarters in tax exempt Member States (see paragraph 23 page 398). In ARO the main place of business test was appropriate in the interests of simplification, uniformity and clarity where cars were leased from headquarters in the Netherlands to customers predominantly in Belgium who chose their cars from dealers in Belgium.

42. In this case, Mr Cordara asserts, that the main place of business test is appropriate in the interests of uniformity, clarity and certainty in reliance particularly on ARO in which the Advocate General placed particular emphasis on those principles. It is plain that those principles are of the utmost importance. Uniformity of approach throughout the European Union is essential, if harmonisation is to be achieved and distortion of competition avoided. Certainty is necessary so that tax payers can properly manage their affairs. On the other hand, as Mr Kent points out, the fixed establishment test itself avoids distortion of competition, and has the merit that it reflects more closely the actual economic situation.

43. I pause to observe, if the actual economic situation was the predominant test, no priority would be given to the main place of business test. The question would always be to determine the place from which the service was supplied. Yet the Court has never adopted such an approach.

44. No one has yet succeeded in persuading the European Court of Justice that the fixed establishment test should predominate. The cynic might observe, however, that in every case where the court has emphasised the priority of the main place of business test, the court also found that no fixed establishment existed. It remains to be seen what the court would decide to be the appropriate test where they find that there was a fixed establishment from which the supplier was provided.

45. These are important issues because they may suggest that a taxing authority cannot choose the fixed establishment test merely because there exists a fixed establishment in its territory from which the service is provided. It can only do so if the preliminary test of main place of business does not lead to a rational result or causes a conflict between Member States. There may well, therefore, be scope for argument as to whether the United Kingdom legislation which allows the Commissioners to use the fixed establishment test, properly reflects the European Court of Justice's interpretation of Article 9, which regards the main place of business as the primary test and a fixed establishment as a derogation from that test (see paragraph 16 page 1285 of ARO).

46. Mr Kent raised the interesting question as to whether the choice of the main place of business test does not lead to a rational result, because in the instant case it leads to non-taxation. It is by no means clear that that is a relevant consideration where non-taxation only occurs outside the European Union, save in relation to the particular services to which Article 9(3) applies.

47. I mention these points without resolving them, lest it be thought that this case is any support for the proposition that in this or similar cases the fixed establishment test is the appropriate test. This case does not decide that it is. I have dismissed this appeal merely on the assumption that the fixed establishment is the appropriate test. Even if it was, the Commissioners have failed to demonstrate that the Tribunal's conclusion was wrong as a matter of law.

48. It is disappointing, therefore, that despite the sophistication and skill of the legal arguments, they did not call for resolution.

49. MISS CARGILL-THOMPSON: My Lord, in the circumstances, Chinese Channel would ask for their costs.

50. MR JUSTICE MOSES: First thing is, you ask for the appeal to be dismissed.

51. MR KENT: I cannot resist either application, my Lord.

52. MR JUSTICE MOSES: You may have your costs.

53. MR KENT: My Lord, I have an application which is for leave to appeal.

54. MR JUSTICE MOSES: You need it, do you?

55. MR KENT: We do these days.

56. MR JUSTICE MOSES: When did that change?

57. MR KENT: About 18 months ago. My Lord, the reason is that although your Lordship has decided against me on what might be described as a fairly common or garden issue----

58. MR JUSTICE MOSES: The lazy judge's way out.

59. MR KENT: Not at all, my Lord. We have to overcome that point in your Lordship's judgment before we got on to the interesting points which your Lordship raises. It may be that my instructions, when we have studied your judgment in full, would be that an appeal should be launched if only to preserve the possibility of a reference by a higher court to the ECJ on those other points. I ask for leave on that basis.

60. MR JUSTICE MOSES: I am not going to give leave. It seems to me, as Mr Kent rightly identifies, this was a classic Edward v Bairstow or whatever you like to think case, and although I fully accept that the other matters are of, as I have already said, great importance to Mr Kent's clients as indeed to taxpayers. In my judgment, they should wait until there is another opportunity, which I should have thought is bound to be raised, once tax payers start saying, well, fixed establishment tests, even if you the Commissioners are right on the facts as to that is not the right test at all, and I should have thought that that is going to come fairly soon, but, in my judgment, you will have to go to the Court of Appeal to persuade me that you should argue that in this case. Thank you both very much indeed.