Evans Medical Supplies Ltd v Moriarty
| Jurisdiction | England & Wales |
| Judgment Date | 04 December 1957 |
| Date | 04 December 1957 |
| Court | House of Lords |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D - Disclosure of secret processes and provision of other information in consideration of lump sum payment - Whether sum received capital or income.
The Appellant Company, which manufactured pharmaceutical products and had a world-wide trade, carried on business in Burma through an agency. In 1953 the Burmese Government wished itself to establish an industry there for the production of pharmaceutical and other products, and the Company secured a contract, dated 20th October, 1953, from the Burmese Government to assist in setting up this industry. The Company undertook to disclose secret processes to the Burmese Government and to provide other information in consideration of the payment of a "capital sum of £100,000". The Company also undertook to provide certain services and to manage the proposed factory in return for an annual fee, which was admitted to be subject to tax. No similar agreement had been entered into by the Company with any other foreign Government or any other party.
The profits of the Company's trade as wholesale druggists were assessed to Income Tax under Case I of Schedule D for the year 1954-55 on the footing that the sum of £100,000 should be included as a trading receipt. On appeal to the Special Commissioners the Company contended that the sum of £100,000 was a capital sum received either for the sale of fixed capital or for the granting to the Burmese Government of an exclusive licence, and that in any event it did not arise in the course of a trade. The Crown contended, inter alia, that on a true construction of the agreement the sum in question was, like the annual fee admitted to be subject to tax, received by the Company for providing services in the course of a trade. The Special Commissioners held that the agreement should be read as a whole as one for the provision of services, and that the sum of £100,000 had been properly included in computing the Company's profits for Income Tax purposes.
The Chancery Division held that the sum in question was a capital payment.
The Court of Appeal held unanimously (1) that there was evidence to support the Special Commissioners' finding that the sum of £100,000 arose
to the Company as a receipt of its trade; but (2) that the sum in question, to the extent that it was attributable to the disclosure of secret processes, was a capital receipt. The Court ordered the case to be remitted to the Commissioners to determine the part so attributableThe House of Lords, dismissing the Crown's appeal and allowing the Company's cross-appeal, restored the Order of the Chancery Division.
Lords Simonds, Tucker and Denning held that, the Case having been stated by the Commissioners and the appeal argued throughout on the footing that the sum of £100,000 was indivisible, it was not open to the Court of Appeal to direct apportionment between consideration for the disclosure of secret processes and consideration for other matters.
Lords Simonds and Tucker were of opinion that the Company had parted with a capital asset for a purchase price. Lord Denning considered that there was nothing wrong in the Commissioners' finding that the amount in question was a payment for services, but that it was not received in the course of the Company's existing trade of wholesale druggists, etc., and therefore could not be brought into the assessment of the Company's existing trade for 1954-55.
Lord Morton of Henryton, dissenting as to the cross-appeal, agreed with the judgments in the Court of Appeal.
Lord Keith of Avonholm, dissenting, was of opinion that there was ample evidence that the Company was trading in "know-how" and that it was no more than a legitimate extension of their existing trade.
Stated under the Income Tax Act, 1952, Section 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 24th and 25th February, 1955, Evans Medical Supplies, Ltd. (hereinafter called "the Company"), appealed against an assessment for the year 1954-55 made upon it under Case I, Schedule D, in the sum of £281,163, less capital allowances £56,305, in respect of its profits as wholesale druggists. The sole question for our determination was whether a sum of £100,000 paid to the Company by the Government of the Union of Burma (hereinafter called "the Burmese Government") in the circumstances hereinafter described was a receipt of the Company's trade liable to be included in the computation of its profits for the purposes of the said assessment for 1954-55.
2. At the hearing of this appeal evidence was given before us by Mr. Ian Victor Lyon Fergusson, chairman and managing director of the Company.
The following documents were put in evidence before us and are attached to and form part of this Case(1):
Exhibit A Agreement dated 20th October, 1953, between the Company and the Burmese Government;
Exhibit B Memorandum and articles of association of the Company;
Exhibit C Report and accounts of the Company for the year ended 31st December, 1953;
Exhibit D Supplement to the report and accounts of the Company for the year ended 31st December, 1953.
The following documents were also put in evidence before us, but are not part of the Case stated by us. They are available for the information of the High Court:
Specimen package specification;
Sketch of containers used by the Company for certain of its products;
Layout plans for the factory and formulae.
The facts found by us on the foregoing evidence, or admitted or proved before us, are stated in the following paragraphs numbered 3 to 12 inclusive.
3. The Company was incorporated on 24th November, 1925,
to carry on business as Manufacturing Chemists, Wholesale Druggists, Drug Grinders, Importers, Exporters and Manufacturers of Pharmaceutical, Medicinal, Bacteriological and Chemical Preparations and Articles
(exhibit B, clause 3 (i), memorandum of association). The Company took over a business which began in the year 1809, and is one of the leading pharmaceutical manufacturers, with a world-wide trade.
4. The Company carries on its trade abroad, in some cases by means of subsidiary companies in various countries, in other cases by means of foreign agencies, and for a considerable period prior to the year 1953 it had an agency in Burma. In the year 1953 the Burmese Government decided to build a factory and laboratories in Burma for the purpose of establishing an industry there for the production of pharmaceutical and other products. Accordingly, the Burmese Government despatched a trade mission to Europe with a view to inducing some leading firm of manufacturing chemists to advise as to the erection of such a factory and the 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 that a British firm should, if possible, come to terms with the Burmese 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 £350,000 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 should take the form of fees based on production. The Company then made fresh proposals, which were accepted on behalf of the Burmese Government and embodied in the agreement of 20th October, 1953 (exhibit A).
6. The said agreement, which is in five parts with a schedule, provided, under part I, that the Company should provide the knowledge which would make large-scale manufacture of medical products possible in Burma. The said facilities were to be exclusive to the Burmese Government and were not during the currency of the agreement, which was a period of seven years subject to renewal (part IV, paragraph 1), to be furnished to any other person or corporation in Burma.
The consideration for the foregoing is described in part I as
a capital sum of £100,000…payable in the United Kingdom free from any deduction whatsoever.
7. Under part II of the agreement, the Company agreed to act as purchasing agent for all plant and equipment; to advise on the selection of architects and consulting engineers and on the design and layout of a factory on a site chosen by the Burmese Government; to train Burmese nationals in the United Kingdom and in Burma for all technical and administrative positions; to provide experienced European staff in the interim period; and to manage the factory for an initial period of seven years. The remuneration for the said services was to be an annual fee, during the currency of the agreement, of 5 per cent. of the value of all products produced at the factory or the sum of £25,000, whichever sum was the greater. Under paragraph 6 of part II, the Company was also entitled to be reimbursed for moneys expended on behalf of the Burmese Government and to remuneration of the Company's directors and employees who proceeded to Burma.
8. Under paragraph...
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