TaxTMI 
TaxTMI 
1957 (10) TMI 36
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....s assessment the sum of GBP 100,000 was treated as a receipt of its trade liable to be included in the computation of its profits. Against this assessment the company appealed to the Commissioners for the Special Purposes of the Income Tax Acts, who upheld the assessment but at the instance of the company stated a case for the opinion of the High Court. The case came on for hearing before Upjohn J., who allowed the appeal of the respondent company and reversed the determination of the Special Commissioners. From his judgment the Crown appealed to the Court of Appeal. That court discharged the order of the learned judge and ordered that the case be remitted to the Special Commissioners with the direction "to ascertain in accordance with the judgments and subsequent proceedings of the Court of Appeal what part, if any, of the amount of GBP 100,000 should be attributed to the imparting of the secret processes to the Government of Burma, such part to be treated as a capital receipt, and to adjust the assessment accordingly, and with power to the parties to call such evidence as they may consider necessary," and it was further ordered that the commissioners should (if required by either....
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....he supply of equipment for manufacture, and to impart to them the processes, formulae, and knowledge necessary to the production and manufacture of pharmaceutical products in Burma. " 5. The said trade mission got into touch with firms of wholesale manufacturing chemists on the Continent of Europe and, also, through the medium of United Kingdom Government Departments, with the Association of the British Pharmaceutical Industry, and finally treated with three leading firms of manufacturing chemists in the United Kingdom of which the company is one. There was keen competition with several continental firms and the British Government was anxious Government. Negotiations were opened between the company and the trade mission on behalf of the Burmese Government, and the company at first suggested a lump sum of GBP 35,000 for the sale of drawings, designs, plans, and technical and other data, and 'know-how' necessary for the establishment, erection and installation of the factory and the commencement of production, and for management services for a period of years. The Burmese Government were unwilling to agree upon a single lump sum, but desired that part of the consider....
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....rma all information relating to the supply of prototype machinery and equipment for the manufacture of the pharmaceutical and other products mentioned in the schedule. "(D) Evans Medical hereby undertake that during the currency of this agreement the facilities hereby agreed to be furnished to the Government of the Union of Burma under the preceding subclauses of this clause shall be exclusive to the said Government and shall not during the currency hereof be furnished to any other person or corporation in Burma." Part II of the agreement provides for the giving of advice and rendering of services by the company to the Government. It is, for instance, to advise the Government as to the building and operation of the factory, to act as purchasing agent for the Government to act as managers, to engage and train the staff, to procure and train as quickly as possible Burmese national in Europe and Burma and cause such nationals to be appointed to positions of responsibility in the factory and to render similar services. It them provides that as remuneration for the services provided for in that part of the agreement the Government would pay to the company a fee in respect of....
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....products, as broadly classified in the schedule to the agreement, number about 3,500 out of 6,500 such products actually manufactured by the company. Here again, there is no secret as to the composition of the various ointments, pastes, tablets, and capsules. The ingredients are set out in the British Pharmacopoeia, and similar products are manufactured by other British and foreign manufacturing chemists. The secret processes consist in the actual methods of preparation of the products and, also, in the method of storing and packaging. For example, a special type of ampoule is used by the company for certain of its products, and the company, by its agreement, undertook to impart its own methods of manufacture and packing to the Burmese Government. "(iv) The processes referred to in sub-paragraphs (i), (ii) and (iii) above cannot be learned by the study of textbooks. Knowledge of these processes is in some cases imparted by the company to the Burmese Government by training suitable Burmese or European staff for employment in the factory in Burma. In other cases the knowledge is being imparted by the direct communication of written information. "11. The company migh....
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....t, the said sum of GBP 100,000 no less than the annual sum of GBP 25,000, was received by the company for providing services in the course of carrying on its trade as wholesale druggists; (ii) that, on the true construction of the said agreement, Parts I and II were inter-locking and inter-dependent, and involved services to be rendered to the Burmese Government, and that the payment of the said sum of GBP 100,000 was only the first instalment of remuneration for such services; (iii) that the disposal of secret processes by the company was not the sale or assignment of property of the company but a method of developing and exploiting its business by imparting its knowledge and experience to the Burmese Government return for a consideration of an income nature; (iv) that the provision of the facilities agreed to be furnished under Part I of the said agreement was within the trading objects of the company, and, in so far as the said sum of GBP 100,000 was received in consideration for provision of these facilities, it arose to the company either from the trade it had previously carried on, or from a new trade which it had commenced to carry on October 20, 1953; (v) that, in any event....
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.... memorandum of association. We, therefore, held that the said sum of GBP 100,000 arose to the company either in the course of the trade which it had hitherto carried on or in the course of a new trade which it commenced to carry on October 20, 1953, and that in either event the said sum was properly included in the computation for income tax purposes of the company's profits as wholesale druggists for the said year 1954-55. Finally they stated the point of law for the opinion of the High Court in these terms: "17. The point of law for the opinion of the High Court is whether on the facts found by us and set forth in paragraphs 3-12 inclusive, there is evidence on which we could properly arrive at our determination that the said sum of GBP 100,000 was properly included in the computation for income tax purposes of the profits of the company's trade for the year 1954-55, and whether on the facts so found our determination was correct in law." My Lords, it is always easy to be wise after the event, and I would not be unduly critical of the way in which the commissioners discharge their very difficult task. But it is clear that much confusion has arisen in this case....
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....ion of services and nothing else. For Part I is still there. It was an error of the commissioners to treat the consideration which moved from the company under that part as being for services and nothing else. This argument was persisted in before the House, but it so flatly contradicts the language of the agreement that I need say no more about it. It was, no doubt, the corollary of their view that the agreement was one for the provision of services, that the commissioners should say that, in any event, the company had not "sold or assigned any property" to the Government. Here, again, they fell into an error which vitiates their determination. For it is manifest that a secret process, whether in composition or methods of storing and packing, something which can be disposed of for value and that, by imparting the secret to another, its owner does something which could not fairly be described as "rendering a service." I would not thin that authority is needed for so obvious a proposition, but it may be found in Butterworth v. Page [1933] 150 L.T. 262 (C.A.); [1935] 153 L.T. 34 (H.L.). It still remains to ask whether, assuming that the GBP 100,000 was in whole or in part consi....
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....rocess, and for that respect I find ample authority in the decision of the Court of Appeal in Page v. Butterworth 150 L.T. 262. A contention was put forward on behalf of the Crown that, even if the divulging of a secret process to the whole world could be regarded as parting with a capital asset, the same could not be said of divulging it to one other. This does not make sense. The whole value of the secret might conceivably not be lost at once to the original owner but that its value must be greatly diminished is obvious: in the present case it is doubtful whether, within a measurable time, it will have any value at all, at any rate so far as the Burmese market is concerned. I adopt with respect the apt words of Lord Fleming in Haigh's Trustees v. Inland Revenue Commissioners 1936 S.C. 676, 685; 22 T.C. 725, 735: "...........the transaction here in question was not merely a use of the subject salva rei substantia but necessarily involved the realization of a considerable part of its capital value." My Lords, I think that the commissioners have in this part of the case been led into error by two things: first, by the introduction by the Crown of the suggestion of a new tr....
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..... It is probable that, if such suggestion had been made at the outset, evidence would have been directed to the point. Should the taxpayer now, when it has been decisively determined that the GBP 100,000 was not a sum paid for the provision of services and nothing else, at this stage be subjected to the further or alternative claim that some part at least of that sum was so paid? I have been persuaded by what has fallen from your Lordships that he should not, and in particular by the opinion, which I have had the privilege of reading, of my noble and learned friend, Lord Denning. It would have been reasonable to come to a different conclusion if there had been any concealment by the company of relevant facts which have now come to light. But that has not been the case. Knowing all that was material to know, the Revenue authorities deliberately made a challenge which has been rejected. I do not think they should be allowed to make another. I may add that I am the more ready to adopt this view because I think that both sides were probably right in throughout regarding the whole sum of GBP 100,000 as indivisible. It would, I believe, pass the wit of man to apportion the sum between th....
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....is House and in the courts below affords any reason for reversing the order made by the Court of Appeal. My Lords, I realise fully that if the order of that court stands, it will be no easy task for the commissioners to ascertain what part, if any, of the GBP 100,000 should be attributed to the imparting of the secret processes to the Government of Burma, but I do not regard the difficulties as insuperable. Paragraph 10 of the case stated shows that the commissioners already have a considerable amount of knowledge as to the nature of these secret processes, and no doubt further evidence would be given before them as to the value to be attributed to the imparting thereof, on the terms set out in the agreement, as compared with the value of the other matters mentioned in Part I of the agreement. And, to my mind, the imparting of these secret processes, even if it can properly be described as a "service," is a service different in kind from all other services mentioned in Part I. However the imparting may be carried out, it is completed when the secret processes come into the knowledge of the Government of Burma; and I agree with the Court of Appeal in thinking that when that even ....
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....ced with a challenge to the continuance of this trade in the decision of the Burmese Government to set up a factory in Burma and acquire from some firm of manufacturing chemists the process formulae and knowledge necessary for the production of pharmaceutical products there. The company, in the face of keen competition and with the encouragement of the British Government, secured an agreement with the Burmese Government to give effect to this purpose. It is expressly found as a fact by the commissioners that in entering into the agreement the company chose the method of developing its business which seemed to its directors to be the best available in the circumstances. This finding cannot, in my opinion, be challenged, and it may be supplemented by a quotation from a brochure of the company which is made part of the case: "The agreement will, during the next seven years, add several million pounds to U.K. exports. A considerable part of the exports will consist entirely of 'know-how' and will require no raw materials." Upjohn J took the view that the effect of the agreement was to contradict the determination of the commissioners which he took to mean, I think correctly,....
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.... business who has a secret process which he decides to sell may do so in various situations. He may be retiring from business and selling his business to a purchaser. Obviously this is a capital transaction that attracts no tax. Again, he may remain in business, but, being unable from lack of capital or otherwise to develop his secret process, he may sell it outright to another trader. That again would be the sale of a capital asset which would not attract tax. A third type of case would be where the trader imparts his secret knowledge to some other trader, but retains the right to use it in his own business and it may be to share it further with other traders. In such a case it may be said that the secret knowledge is no longer secret knowledge. But that it not perhaps strictly accurate. It is not so secret as it was, but it may still retain a value. And if a trader, having developed some secret process, made a practice of turning it to profit by selling it like a commodity to other interested parties, possibly with restrictive conditions attached, there would seem to be no sound reason for saying that he was doing anything other than trading in "know-how." Like stock in trade, it....
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....ly to itself. That only goes to show that secret information was thrown into the general pool of things provided. If part of the information, facilities and services was provided as a trading operation, and this, to my mind, is an inescapable conclusion, then the whole, in my opinion, was supplied as a trading operation. I find it impossible to split the GBP 100,000 into a con-trading receipt and a trading receipt according as the information supplied was secret and non-secret. Further, alongside and contemporaneously with the obligation of Part I, the company was carrying out the obligations of Part II of the agreement. These included training Burmese and others in what must, ex hupothesi, have been both secret and non-secret "know-how." The annual payments made by the Burmese Government under Part II are accepted as payments that attract tax and, as I see it, necessarily so because they are payments for the supply of service. The Special Commissioners have held that the payment under Part I was also for the supply of services, and I think they were right in so holding. The services may have been different in kind from those given under Part II, but both were directed to the sa....
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.....R. 805, 809: "Here we have the sale and transfer outright of an item of property which previously belonged to the respondent, not the licence to use it granted by its unchanged owner, and this does not gives rise to annual profits or gains unless the sale takes place in the course of carrying on a trade or profession." The emphasis on the concluding words in this passage is mine. The other members of the House took the same view, though Lord Porter and Lord Uthwatt prayed in aid the language of the copyright Act. I would emphasize again, however, the words of Lord Uthwatt [1948] L.J.R. at 811: "A sale, not in the way of trade, of an asset does not attract tax on the consideration. Whatever else comes within the ambit of annual profits and gains, the consideration received by Miss Nethersole does not." It miss Nethersole had been carrying on the business or profession of authoress or dramatist, very different considerations would have arisen. It would, in my opinion, have been very difficult to reach the conclusion that the sums received by her were not business or trading receipts. A very similar case was that of Haig's Trustees v. Inland Revenue Commissioners 1939 S.C. 676. T....
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....sset of the patentee, and, like the patentee, he can use that capital asset in either or both of the following ways: he can himself carry on the secret process, or he may--it is very seldom done owning to the obvious danger involved--grant a licence to a third person to carry on the secret process, securing himself against his secret process being divulged by that third party to others. In both these cases the profits he derives from carrying on the secret process himself and the royalty he might derive from the licensee would be annual profits or gains within the meaning of Schedule D. But, supposing he sells his secret process, or supposing, as here, he surrenders his quasi monopoly by making it public to the world, then I say that, if he gets paid for doing either one or the other of those things, the money he receives in payment is a capital asset. Here, at the invitation of the Government, he surrendered to the world his secret knowledge, and his capital asset thereupon ceased to exist." While the case is not, I think, strictly in point where a man is using his secret process for purposes of trade as here, I would place this case, if necessary, in the second category specified....
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....e noticed that it does not say "or any part thereof." I realize, of course, that a whole is often taken to include a part without anything being said: but that is not a universal rule. I call to mind convenants against assignment or underletting where it has been held that the whole does not include a part. When this case is construed in its setting. I think "the said sum of GBP 100,000" does not include a part of it. The case refers to the agreement under which the GBP 100,000 was paid. It was paid as an entire sum for a specified consideration. The consideration was the imparting of information and technical data, all of which may be summed up in the new and expressive word "know-how." The Court of Appeal would seek to divide it into two parts: (1) information about secret processes; (2) information about other things. The information about secret processes had in the past been kept confidential to Evans Medical and their staff, and was especially valuable on that account. The information about other things was technical knowledge which was not secret but was no doubt valuable in that it could only be obtained from firms who were expert in it. I can see no sensible distinction be....
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....arried on by it? The first of these, for all practical purposes can be turned into the question: Was it capital or income? The second into the question: Was it received in the course of the company's trade? So far as the first question is concerned, the Special Commissioners made findings which show that, in their view, the GBP 100,000 was in the nature of income and not capital--see findings (i), (ii) and (iii): and Lord Evershed M.R. made it clear that, if he had to treat it as one entire sum, he, too, would say it was income and not capital. I find his reasoning on this part of the case very convincing: and it is forced home by the speech of my noble and learned friend, Lord Keith of Avonholm, to which we have just listened. I would just mention, if I may, that Romer L.J. made what looks to me like a slip at a critical point of his reasoning. He assumed that the GBP 100,000 was only payable after the consideration for it was fully performed. It was in truth payable in advance--and indeed so paid--for information to be given over an indefinite period in the future. This period might run into years and has in fact done so, for the factory was not even built three years late....
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....pply of "know-how" is not like the sale of goodwill or a secret process, for such a sale imports that the seller cannot thereafter avail himself of the special knowledge with which he has parted, see Trego v. Hunt [1896] A.C. 7, 24, 25; 12 T.L.R. 80, and it may then rightly be regarded as the sale of a capital asset, see Butterworth v.Page 150 L.T. 262 (C.A. ). But the supplier of "know-how" always remains entitled to use it himself, as was the case here. For my own part, therefore, I see nothing wrong in the findings (i), (ii) and (iii) o the commissioners, and am prepared to accept the view that the GBP100,000 was received for the supply of "know-how"-call it service if you like--over the ensuring years. But I feel difficulty in saying that it was received "in the course of the company's trade" as wholesale druggists and so forth. It may be said to be an activity of a different kind altogether. The Revenue authorities appear to have felt the same difficulty, but thought it did not matter so long as the GBP100,000 was received in the course of some trade or other. They took the view that it did not matter whether it arose from the existing trade which Evans Medical had ther....
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....he commissioners that "in entering into the agreement, the company chose the method of developing its business which seemed to its directors to be the best available in the circumstances." But this fact is neutral. "Its business" may mean either its existing business or its new business. When read with the alternative finding, it is clear that the commissioners did not intend by that sentence to decide whether the company was developing its existing business or starting a new one. The case stated, read as a whole, seems to me quite consistent with the view--which Upjohn J. thought was the only reasonably view--that [1956] 1 W.L.R. 794. 802; [1956] 2 All E.R. 706; 31 I.T.R. 466 "the company was not 'exploiting' its business in the only sense in which that word is relevant, that is, of carrying on its trade of wholesale druggists in Burma, but in and by the agreement it entered into the entirely new activity of acting as adviser of the Burmese Government by assisting to set up a completely now industry there." Such new activity might have been taxable as being and adventure in the nature of trade but it cannot be brought into the assessment of the company's existing trade....