TaxTMI 
TaxTMI 
1957 (10) TMI 36
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....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 £ 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 party) state ....
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.... 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 £ 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 consideration shou....
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....urma 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 ....
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....oducts, 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 might have....
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....agreement, the said sum of £ 100,000 no less than the annual sum of £ 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 £ 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 £ 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....
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....aken by the company in its memorandum of association. We, therefore, held that the said sum of £ 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 £ 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 muc....
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....reement, even if its parts are read together, could be regarded as one for the provision 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 ....
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....and when I say "its property" I mean, as the Lord Justice meant, a capital asset. In this respect I see no difference between a patent and a secret process, 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, ....
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....be made as to the court may seem just." But there was no specific suggestion that the sum of £ 100,000 could or should be split up, part being regarded as a capital, and part as an income, receipt. 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 £ 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 t....
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....ber 20, 1953, it is possible to server the imparting of the secret process from the rest of the consideration moving from the company under Part I of that agreement; secondly, whether the course of the proceedings in this 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 £ 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 serv....
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....have already been sufficiently stated. If I may summarize the position in a few words, the company, which had for many years prior to 1953 been selling its pharmaceutical and other products through an agency in Burma, found itself faced 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....
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....nformation to be supplied included information on secret processes used by the company. There is a reference to "know-how," and this may be significantly related to the reference to "know-how" in the question from the brochure already given. A person in trade or 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....
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.... 14, 29; 28 I.T.R. 579. If the company had undertaken to build and equip the factory for production it could hardly be doubted that any profit would have been a profit or gain of trade. Instead, it undertook to supply the necessary "know-how" for building and equipping the factory. It is, to my mind, immaterial if included in this "know-how" was information known only 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 £ 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 Governm....
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....as whether Miss Nethersole was liable in tax under Case IV of Schedule D as having receives sums of a revenue nature. What the Court of Appeal and the House of Lords held was that there was a sale or assignment by Miss Nethersole of her rights in a play an that the sums received were capital, the price, in others words, received from the realization of her property. Lord Simon said [1948] L.J.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 Mis....
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....y of a patentee, he says 150 L.T. 262, 272.: "The owner of a secret process such as was possessed by Mr. Handley Page stands in a very analogous position; he has not a monopoly at law, but he has a monopoly in fact--a monopoly in fact arising from the possession by him of the secret knowledge of the process that he is carrying on. That secret knowledge is an much his capital asset as is the patent monopoly the capital asset 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 e....
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.... Rolls, after he made the order, said: "It would not surprise me if it were years before this case was finally decided after going back to the Special Commissioners," and Birkett L.J. said: "I can imagine endless controversy." I very much doubt whether it was open to the Court of Appeal to remit this case as they did. The only point of law stated for the opinion of the court is whether "the said sum of £ 100,000" was properly included in the profits. It should be 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 £ 100,000" does not include a part of it. The case refers to the agreement under which the £ 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 ....
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....e, to consider the entire sum of £ 100,000. It was payable to Evans Medical on the execution of the agreement of October 20, 1953, and was, no doubt, received soon afterwards. The Revenue authorities included it in their assessment upon Evans Medical for the year 1954-55 under Case I, Schedule D. The question is whether it was properly so included. Applying the statute, this question can be divided into two parts: (1) Was the £ 100,000 to be included in the "annual profits or gains?"; (2) Did it arise or accrue to Evans Medical "from any trade" carried 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 £ 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 conv....
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.... to earn fees from his clients: or he can teach it to pupils for reward: and so produce revenue. But he cannot sell it as a capital asset for a capital sum. He cannot sell his brains. So with a company which has special manufacturing skill and experience, but has no secret processes. Its "know-how" is inseparable from the "know how" of its staff and servants. It cannot prevent them using it any more than it can prevent them using their own brains: see Herbert Morris Ltd. v. Saxelby [1916] 1 A.C. 688, 704; 32 T.L.R. 297. It cannot sell it as a capital asset. It can only use it or teach it. Even with a company which owns secret processes, the supply 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 ....
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..... But this abandonment does not get the Revenue authorities out of the difficulty. sir Frank Soskice for all his wit, cannot cancel half a line of the finding nor ca his tears wash out a word of it. The finding by the commissioners still remains an alternative finding. The Revenue authorities have no right tot take the first alternative which suits them and reject the second alternate which does not. For aught we know, the commissioners, if asked to decide between he two alternatives, might have come down in favour of the second. Sir Frank Soskice found himself, therefore forced to say that the only proper inference from the primary facts was that the £ 100,000 was received in the course of the existing trade. He relied on the fact found 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." 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 com....