Commissioners of Inland Revenue v Rolls-Royce Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE HOLROYD PEARCE,LORD JUSTICE UPJOHN,LORD JUSTICE DONOVAN |
| Judgment Date | 26 April 1961 |
| Judgment citation (vLex) | [1961] EWCA Civ J0426-2 |
| Date | 26 April 1961 |
| Court | Court of Appeal |
[1961] EWCA Civ J0426-2
In The Supreme Court of Judicature
Court of Appeal
Lord Justice Holroyd Pearce
Lord Justice Upjohn and
Lord Justice Donovan
Mr R.A. BORNEMAN, Q. C. and Mr ALAN S. ORR (instructed by the Solicitor of Inland Revenue) appeared on behalf of the Appellants.
Mr F. HEYWORTH TALBOT, Q.C. and Mr C.N. BEATTIE (instructed by Messrs Claremont Haynes & Co.) appeared on behalf of the Respondents.
: The facts are fully and clearly set out in the Case Stated.
In February 1946 the Company entered into an agreement with China, the first or prototype manufacturing agreement. It did so at the wish of the British Government in order that Rolls Royce engines might be manufactured in China. By that agreement the Company were to supply complete drawings and manufacturing and engineering data and information necessary to enable engines of the Derwent type to be manufactured by the Chinese and to provide full information from time to time with regard to improvements and modifications of its manufacture and design. The Company also agreed to receive into its works trainees from China and to release competent members of its own staff to undertake employment by the Chinese. The agreement was to last for five years with an option to the Chinese to extend it for a further five years. There were provisions for the substitution of a different type of engine. The Chinese had to pay a specified royalty on engines and parts of engines manufactured by them. In addition they had to pay a capital sum of £50,000 as "consideration for the rights granted there under".
Thus the £50,000 covered all the benefits received by the agreement - the provision of technical knowledge, of plans, of a licence, and of the facilities for interchange of staff. It was not allocated to any particular benefit. Probably the major part of that sum was intended to be in respect of the transfer of technical knowledge. Nevertheless the agreement is one undivided whole and the £50,000 is consideration for all the benefits obtained there under.
The words "a capital sum" do not decide the matter, being "a mere label attached with an eye no doubt to tax considerations" (per Lord Greene, Master of the Rolls, in Rustproof Metal Window Co. Ltd. v. Commissioners of Inland Revenue, 29 Tax Cases, at page 271). It is conceded by the Crown that if on one occasion only the Company had merely sold its technical knowledge for a lump sum, it would be selling a capital asset and the receipt of that sum would be a capital receipt. In Evans Medical Supplies Ltd. v. Moriarty, 37 Tax Cases, at page 552, Mr Justice Upjohn expressed it clearly thus: "The Company was, in fact, parting for ever with its secret information in its methods of preparation, packing and preservation to the Burmese Government; that may not in law amount to an assignment of all its risks in Burma, for the Company in legal theory, though hardly in practical Burmese politics, remained at liberty to use the processes itself in Burma. Of course, it also remained at liberty to carry on its business of wholesale druggists there by selling its products made in this country, in Burma, through its usual agents. But it was parting for ever with part of a valuable asset, and was doing so to enable an entirely new and competing industry to be set up there. That industry, established by the skill and 'know-how' of the Company, could embark on an export trade which could compete with the Company's own products in other countries. In that sense the Company was dissipating its asset, and it must be remembered that a secret process once communicated to another is in jeopardy; if it gets into the wrong hands, the grantor has no protection. Even if it be a necessary ingredient to support a capital payment to show some dissipation of a capital asset (which, in my judgment, it is not) that element seems to me to be present here". See also per Lord Justice Romer in Handley Page v. Butterworth 19 Tax Cases, at page 359, and per Lord Simon in Nethersole v. Withers, 28 Tax Cases, at page 518.
The case of Evans Medical Supplies Ltd. v. Moriarty went to the House of Lords and caused much diversity of view (37 Tax Cases, page 573). For that reason, and because in that case there was only one agreement under consideration and that was in a form different from those which we are here considering, it does not provide great help in the present case.
The China agreement does not stand alone. A few months later the Company entered into a French manufacturing agreement in terms materially similar which provided for a "capital sum of £50,000". That was followed by a French variation agreement in 1950 and a further French agreement in 1953 providing for a capital sum of £100,000.
Similar agreements were made in 1947 in respect of the United States (capital sum £50,000) with two subsequent ancillary agreements. In 1947 an agreement was made with the Argentine, but for special reasons instead of receiving a capital sum for the provision of technical knowledge and other benefits the Company received payment of £1,000,000 as the price of engines in various stages of manufacture.
In 1948 the Company made an agreement with Belgium similar to the Chinese prototype and under that a capital sum of £50,000 was payable.
In 1950 the Company made a similar agreement with Australia in respect of which lump sums amounting to £120,000 were payable.
In 1952 a similar agreement was made with Sweden under which a capital sum of £100,000 was payable.
Some of these agreements provided for the payment of a large or small technical liaison fee which is admittedly taxable.
In 1953 the Company made an agreement with Westinghouse in respect of the United States. This agreement is more complicated and differs somewhat from the prototype of manufacturing agreement. But one clause in it provides that "as consideration for making available and the transfer to Westinghouse of the technical knowledge and information which Rolls Royce already possesses as provided in clause 4 (a) Westinghouse shall pay to Rolls Royce in United States dollars the sum equivalent to one million pounds sterling" payable by instalments.
In respect of all these lump sums the Company under an agreement with the British Government paid one third to them in acknowledgment no doubt of the fact that the research which led to the knowledge for which those sums were paid was partially defrayed by the Government and that without the Government's consent it could not be disseminated.
Against that background the Crown argues that that these oft repeated sales of growing technical knowledge constitute receipts of the Company's trade. It is not argued that they constitute a separate trade, but that they are a development of their general trade in the manufacture and sale of engines.
The Company contends that if one looks at the China agreement alone the sum of £50,000 represents the sale price of technical knowledge including secret processes. The Company had never before sold such knowledge; it had only sold motor cars and aeroplane engines. Therefore it is urged it was selling part of its fixed assets. The mere repetition of such a transaction, however frequent, did not, without more change the nature of the transaction nor the nature of the Company's trade, and the so-called capital, sums received under the various agreements were in truth capital sums. The Special Commissioners rightly, it is argued, found as a fact that the transactions subsequent to the China agreement continued to "be sales of a capital asset and that the sums so received were capital and not trading receipts. Further the Company contends that this Court cannot in any event properly disturb that finding of fact.
The Special Commissioners, after finding the various facts set out in the Case, expressed their conclusion on the issue before them as follows: "Upon consideration of the evidence adduced and the arguments addressed to us on behalf of the parties we are of opinion that the case for the Appellant succeeds and the appeal must be allowed".
One has, therefore, to refer to the Case for the Appellant to ascertain precisely what the Special Commissioners found on the crucial issue. The material parts of that Case are as follows: "In the course of its business the Company had acquired a vast store of knowledge and secret information relating to its secret processes of manufacture, referred to throughout the case as 'know-how', which represented a fixed capital asset of the Appellants' trade, but it had never been any part of the policy of the Company to make inventions and discover secret processes with a view to the earning of profits by realising its rights in those inventions and processes", The Chinese agreement is then described. The Case continues: "It was however contended for the Company that the lump sum paid and received under the China agreement apart from a small sum attributable as aforesaid to patent rights represented a capital receipt in respect of know-how which, did not fall to be included in the profits or gains of the Company". … "It is further contended for the Company that if the subject matter with which we are concerned, i.e. the know-how, is initially a fixed capital asset, then mere multiplicity of transactions in it does not convert it into a revenue or trading asset in the absence of other facts which suggest that there has been a conversion or that some new trade has been set up. It is said that there has been no such change of circumstances affecting the Company's know-how and therefore with regard to the remainder of...
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