Commissioners of Inland Revenue v Rolls-Royce Ltd
| Jurisdiction | England & Wales |
| Judge | Viscount Simonds,Lord Reid,Lord Radcliffe,Lord Morris of Borth-y-Gest,Lord Guest |
| Judgment Date | 01 March 1962 |
| Judgment citation (vLex) | [1962] UKHL J0301-2 |
| Date | 01 March 1962 |
| Court | House of Lords |
[1962] UKHL J0301-2
House of Lords
Viscount Simonds
Lord Reid
Lord Radcliffe
Lord Morris of Borth-y-Gest
Lord Guest
Upon Report from the Appellate Committee, to whom was referred the Cause Rolls-Royce Limited against Jeffrey (Inspector of Taxes), Rolls-Royce Limited against Commissioners of Inland Revenue, Rolls-Royce Limited against Commissioners of Inland Revenue (Second Appeal), Rolls-Royce Limited against Commissioners of Inland Revenue (Third Appeal), (Consolidated Appeals), that the Committee had heard Counsel, as well on Wednesday the 7th, as on Thursday the 8th and Monday the 12th, days of February last, upon the Petition and Appeal of Rolls-Royce Limited, whose registered office is situate at Nightingale Road, Derby, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 26th of April 1961, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Petition and Appeal of Rolls-Royce Limited, whose registered office is situate at Nightingale Road, Derby, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 26th of April 1961, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Petition and Appeal of Rolls-Royce Limited, whose registered office is situate at Nightingale Road, Derby, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 26th of April 1961, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet; as also upon the Petition and Appeal of Rolls-Royce Limited, whose registered office is situate at Nightingale Road, Derby, praying, That the matter of the Order set forth in the Schedule thereto, namely, an Order of Her Majesty's Court of Appeal of the 26th of April 1961, might be reviewed before Her Majesty the Queen, in Her Court of Parliament, and that the said Order might be reversed, varied or altered, or that the Petitioners might have such other relief in the premises as to Her Majesty the Queen, in Her Court of Parliament, might seem meet (which said Appeals were, by an Order of this House of the 20th day of July last, ordered to be consolidated); as also upon the Case of James Walter Jeffrey (Her Majesty's Inspector of Taxes) and the Commissioners of Inland Revenue, lodged in answer to the said Appeals; and due consideration had this day of what was offered on either side in this Cause:
It is Ordered and Adjudged, by the Lords Spiritual and Temporal in the Court of Parliament of Her Majesty the Queen assembled, That the said Orders of Her Majesty's Court of Appeal of the 26th day of April 1961, complained of in the said Appeals, be, and the same are hereby, Affirmed, and that the said Petitions and Appeals be, and the same are hereby, dismissed this House: And it is further Ordered, That the Appellants do pay, or cause to be paid, to the said Respondents the Costs incurred by them in respect of the said Appeals, the amount thereof to be certified by the Clerk of the Parliaments.
My Lords,
I am of opinion that this appeal must be dismissed and am so fully in agreement with the judgment of Lord Justice Holroyd Pearce in the Court of appeal that I need say very little.
It is common ground between the parties that the Court, while paying proper regard (as to which see Edwards (Inspector of Taxes) v. Bairstow [1956] A.C. 14) to the facts found by the Commissioners and to the inferences drawn by them from those facts, must ultimately determine as a question of law alike whether receipts by the taxpayer are capital or income for purposes of income tax and whether expenses incurred by him are for the same purposes to be treated as incurred on income or capital account.
In the present case the appellant company over a number of years received under agreements, which were sometimes called Licence Agreements and sometimes Convention Agreements, various sums of money and amongst them substantial sums which were described as capital sums. It was urged on its behalf that these sums were the consideration that it received for the sale of a fixed capital asset and that therefore they could not be regarded as income for tax purposes.
My Lords, it appears to me to beg the question to refer to that which the Appellant sold as a fixed capital asset. I will not analyse the several agreements made by the Appellant first with the Chinese Government and afterwards with other foreign governments and companies. It may be said compendiously in the words of Lord Justice Holroyd Pearce that what the Chinese Government received and the Appellant gave were technical knowledge, plans, a licence and facilities for the interchange of staff. An important and valuable part of the consideration was, I think, the undertaking by the Appellant to communicate, so far as it was permitted to do so, future improvements and developments. Can these things be regarded as a fixed capital asset and the communication of them as the disposal of that asset? I do not think so. It appears to me (and I venture once again to quote the apt words of the learned Lord Justice) that the only proper conclusion is that "in territories where the company could not hope to sell its engines it was pursuing a wise policy of allowing local manufacture from which it would receive the benefits of advertisement, lump sums and royalties". This it did, not by parting with its assets but by using or trading in them in the only or at least the most advantageous way that was open to it.
I must add a word on the case of Evans Medical Supplies Ltd. v. Moriarty [1958] 1 W.L.R. 66, since I was a party to the majority decision in this House. In the Court of Appeal in the present case Lord Justice Upjohn who had given the first decision in that case pointed out the clear difference between the two cases. The facts in the earlier case were complicated, but the inference was there drawn that the capital sum in question was paid for the communication of secret processes to the Burmese Government with a resulting total loss to the company of its Burmese trade. I applied in that case and would apply here too the test laid down by Bankes, L.J. in British Dyestuffs Corporation (Blackley) Ltd. v. Commissioners of Inland Revenue, 12 T.C. 586 at p. 596:
"… looking at this matter, is the transaction in substance a parting by the Company with part of its property for a purchase price, or is it a method of trading by which its acquires this particular sum of money as part of the profits and gains of that trade?".
In the circumstances of that case, regard in particular being had to the fact that the transaction was an isolated one of its kind, the conclusion was inevitable that the so-called capital sum was a receipt of a capital nature. The analogy of secret processes to patents was drawn to enforce this conclusion. The decision did not establish or purport to establish a principle that whenever and however often a company communicates what is called "know-how" to a third party and receives what is called a lump sum for it, that sum is for tax purposes a capital receipt. The circumstances may lead as in my opinion they lead in the present case to the opposite conclusion.
I would dismiss these appeals.
My Lords,
In 1946 the Appellants had an immense fund of technical knowledge and experience with regard to the design and manufacture of aircraft engines. Certain countries were unwilling to buy engines from them but wished to manufacture similar engines themselves. Between 1946 and 1953 agreements to grant "licences" were made in respect of Nationalist China, France, the United States, Belgium, Sweden, the Argentine, and Australia. Generally the Appellants supplied a very large number of drawings and much other information and undertook to teach technicians from these countries and to send some of their own employees to supervise operations there.
The payments made to the Appellants under these agreements included lump sums and royalties. The question in this case is whether these sums were trading receipts. If they were the assessments appealed against are correct. If they were not the Appellants admit that the royalties are taxable under Schedule D, Case III, but maintain that the lump sums are not taxable.
The Appellants' case is that their fund of knowledge and experience, mostly embodied in documents and drawings and colloquially known as "know how", was a capital asset, and that these agreements were in essence sales of parts of it, so that the lump sums were capital receipts. I do not find it necessary to decide whether that fund was a capital asset: I shall assume that it was.
The Commissioners have made no specific findings of fact in the Case Stated with regard to matters in dispute. They simply set out certain admitted facts,...
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