Know-how licensing receipts treated as trading income where repeated agreements exploited existing manufacturing expertise rather than capital assets.

Lump sums received under successive licensing arrangements for the disclosure and use of technical know-how, drawings and engineering data were treated as trading receipts rather than capital receipts. The House of Lords reasoned that the licensors did not dispose of a fixed capital asset or part with their capital structure; instead, they exploited their existing manufacturing expertise by allowing local manufacture in markets they could not themselves serve. The repeated and deliberate licensing arrangements formed part of a trading policy for deriving profit from know-how, not a once-for-all realisation of capital. The receipts were therefore connected with the business and taxable as trading profits.

---

---

Issues: Whether lump sums received under successive licensing arrangements for the disclosure and use of technical knowledge, drawings and engineering data constituted capital receipts or trading receipts chargeable to income tax, and whether such receipts formed part of the existing manufacturing trade.

Analysis: The technical knowledge described as "know-how" was treated as an intangible asset, but its use in the agreements did not amount to a disposal of a fixed capital asset. The appellants did not part with the whole or any substantial part of their capital structure; they exploited their knowledge by making it available for local manufacture in markets where they could not themselves sell engines. The repeated and deliberate licensing arrangements showed a trading policy and a method of deriving profit from existing manufacturing expertise, not a once-for-all realisation of capital. The receipts were therefore connected with the carrying on of the business and were properly characterised as trading receipts.

Conclusion: The lump sums were revenue receipts and taxable as trading profits. The answer was against the assessee and in favour of the Revenue.

---