Commissioners of Inland Revenue v British Salmson Aero Engines Ltd ; British Salmson Aero Engines Ltd v Commissioners of Inland Revenue

JurisdictionEngland & Wales
Date1938
CourtCourt of Appeal
[COURT OF APPEAL.] COMMISSIONERS OF INLAND REVENUE v. BRITISH SALMSON AERO ENGINES, LIMITED. BRITISH SALMSON AERO ENGINES, LIMITED v. COMMISSIONERS OF INLAND REVENUE. 1938 May 11, 12. SIR WILFRID GREENE M.R., SCOTT and CLAUSON L.JJ.

Revenue - Income Tax - Patent - Grant of Exclusive Licence - Consideration - In part lump sum payable in three instalments - In part annual royalties - Capital or income - Lump sum a capital sum - Royalties subject to income tax - Income Tax Act, 1918 (8 & 9 Geo. 5, c. 40), Sch. D, Rules applicable to Cases I. and II., r. 3 (m); All Schedules Rules, rr. 19, 21.

Rule 21 of the All Schedules Rules to the Income Tax Act, 1918, provides: “(1.) Upon payment …. of any royalty or other sum paid in respect of the user of a patent, not payable, or not wholly payable out of profits or gains brought into charge, the person by or through whom any such payment is made shall deduct thereout a sum representing the amount of the tax thereon at the rate of tax in force at the time of the payment.” By sub-r. 2 (as amended) the payer is bound to account for the tax to the Revenue:—

Held, that the rule does not make tax necessarily payable on any royalty or other sum paid in respect of the user of a patent. It must be determined on the facts of the particular case whether the payment is a capital or income payment, and income tax is payable on income payments only.

Lanston Monotype Corporation, Ld. v. Anderson [1911] 2 K. B. 1019 applied.

Constantinesco v. R. (1927) 11 Tax Cas. 730 and Mills v. Jones (1929) 14 Tax Cas. 769 considered and explained.

Decision of Finlay J. affirmed.

APPEAL from a decision of Finlay J. on Case stated by the Commissioners for the Special Purposes of the Income Tax Acts.

At a meeting of the Commissioners held on October 23, 1935, British Salmson Aero Engines, Ld. (hereinafter called “the English company”), appealed against the following assessments to income tax — namely:-

(a) An assessment in the sum of 15,000 l. for the year ending April 5, 1930.

(b) An assessment in the sum of 12,133 l. 5s. for the year ending April 5, 1931.

(c) Assessments in the sum of 1950 l. for each of the years ending April 5, 1932, 1933, 1934.

All the assessments were made under r. 21 of the General Rules applicable to Schs. A, B, C, D and E of the Income Tax Act, 1918, as amended by s. 26 of the Finance Act, 1927, and were in respect of sums paid by the English company to a French company called the Société des Moteurs Salmson of France (hereinafter called “the French company”) to acquire the sole licence to manufacture and sell in the United Kingdom of Great Britain and Ireland, its dominions, colonies and dependencies, the aeroplane engines made by the French company.

By an agreement dated October 25, 1929, and made between the French company (therein called “the Constructors”) and the English company (therein called “the Licensees”) it was covenanted and agreed as follows:—

PRELIMINARY.

“The object of the present agreement is to grant to the licensees, the exclusive right for the period of 10 years from 25th October, 1929, until 24th October, 1939, to construct use and sell in the United Kingdom of Great Britain and Ireland and its Dominions the Salmson aero engines described as 9 A.D. 40 H.P. — 5 A.C. 60 H.P. — 7 A.C. 95 H.P. and 9 A.C. 120 H.P.”

Article I. provided that the Constructors would furnish the Licensees -

(a) with designs for the construction of the types of engine above mentioned;

(b) with such information and assistance as was at their disposal to facilitate the manufacture and sale in England;

(c) with access to their aviation works for five of the licensees' staff;

(d) with the free use of the devices patented by the Constructors in use in all the above mentioned types of motors;

(e) with the right to use Salmson Engines.

The article concluded: “During the life of these covenants, the Constructors shall not sell direct in the United Kingdom of Great Britain and Ireland and its Dominions the types of engines this subject of this licence.”

ARTICLE II.

“As consideration for the licence thus granted to them the Licensees shall pay to the Constructors the sum of 25,000 l. (twenty-five thousand pounds) payable as follows:-

“15,000 l. on the signing of this agreement;

“5000 l. six months after the signing of this agreement;

“5000 l. twelve months after the signing of this agreement.

“There shall be paid in addition to the foregoing payments and as royalty 2500 l. twelve months after the signing of this agreement, and a like sum each twelve months during the following nine years.

“These various payments shall be made at the Société Générale pour favoriser le développement du Commerce et de l'Industrie en France A. J. Agency 91 Avenue des Champs Élysées in Paris.

“In default of payment within a fortnight of a demand made by registered letter to the Licensees of any of the above payments this agreement shall become void and sums paid by the Licensees shall remain the property of the Constructors together with any damages and interests which the Constructors may claim from the Licensees.”

Article IV. contained agreements (1.) that in the event of proceedings with a view to revoking the patents in the agreed territory, the Constructors would do everything necessary to keep them in force; (2.) for sharing the expenses and responsibilities if the motors manufactured by the Licensees were made the subject-matter of proceedings for infringement; (3.) that in the event of infringement of the patents the Constructors and the Licensees should take all necessary legal proceedings to protect the patents and should share the costs of the actions and the risks or advantages resulting therefrom.

ARTICLE V.

“The Licensees shall have the right to grant to any persons, firms or companies within the above mentioned territories such sub-licence as they may think desirable and nothing herein contained shall permit any sub-licensee to break the provisions regarding the territory for which the licence is granted.”

Article VII. contained covenants by the Constructors not to manufacture or sell directly in the countries granted to the Licensees and by the Licensees not to manufacture or sell directly outside these countries engines of the above mentioned types.

This agreement was entered into in France and was in the French language.

The negotiations leading up to the agreement of October 25, 1929, were commenced early in the year 1929, and copies of translations of three letters dated March 22, July 24, and July 25, 1929, were attached to the case to indicate the course of the negotiations.

In pursuance of Article II. of the agreement the company paid to the French company 15,000 l. in the year 1929–30, 12,500 l. in the year 1930–31, 2500 l. in each of the years 1931–32, 1932–33, and 1933–34. In respect of these payments assessments under r. 21 of the General Rules as amended by s. 26 of the Finance Act, 1927, were made upon the company.

It was contended on behalf of the company that -

(a) All the said payments were payments of a capital nature;

(b) the said payments were instalments of a capital sum, which was the purchase price of a capital asset;

(c) the company was not assessable to income tax in respect of any of the said payments.

It was contended on behalf of the Crown (inter alia) that -

(a) all the said payments were royalties or other sums paid in respect of the user of a patent;

(b) the company was assessable under r. 21 of the General Rules in respect of all the said payments made by them to the French company;

(c) the assessments were correct and should be confirmed.

Having considered the evidence and arguments adduced before them the Commissioners decided as follows:—

“By an agreement dated October 25, 1929, the appellants were granted the exclusive right for the period of ten years to construct, use and sell in the United Kingdom of Great Britain and Ireland and its Dominions Salmson aero engines.

“The consideration for this exclusive licence is set out in Article II. of the said agreement.

In determining the nature of the payments to be made under Article II. we do not consider that we are entitled to go outside the terms of the agreement itself and rely in any way upon the negotiations between the parties before the said agreement was entered into.

“We hold that the sums of 15,000&L, 5000 l. and 5000 l. represent instalments of a capital sum of 25,000 l.

“We hold that the appellants are not assessable under r. 21 of the General Rules in respect of these payments.

“As regards the ten further payments of 2500 l., we hold that these payments are royalties or other sums paid in respect of the user of a patent, and that the appellants are assessable in respect thereof under r. 21.”

The assessments were adjusted in accordance with the principle laid down in this decision to figures which were agreed between the parties.

Finlay J. said that there was an appeal and a cross-appeal from the decision of the Special Commissioners, and he had arrived at the conclusion that their decision ought to be affirmed and neither appeal allowed.

There had been a long line of authorities dealing with the question of capital or income, and two of the most recent cases in the Court of Appeal were Inland Revenue Commissioners v. RamsayF1 and Dott v. Brown.F2 But when these cases were read very little more could be obtained from them than that the question of capital or income was a question to be decided upon a survey of the particular facts in each particular case.

The particular matter here had reference to royalties which were dealt with in r. 19, sub-r. 2, and r. 21 of the General Rules, and it turned really upon the agreement. Mr. Needham had contended that the Special Commissioners were wrong in their decision as regards the ten yearly payments of 2500 l., and argued that the contention that they were called royalties was not conclusive. This was true, but it was a matter that must not be entirely...

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