Glaxo Group Ltd and Others v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 09 November 1995 |
| Date | 09 November 1995 |
| Court | Chancery Division |
Chancery Division.
Robert Walker J.
John Gardiner QC and Jonathan Peacock (instructed by Slaughter and May) for Glaxo.
Ian Glick QC and Michael Furness (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Argosam Finance Co v Oxley (HMIT) ELR[1965] Ch 390
Balen v IR Commrs TAX(1978) 52 TC 406
Banin v Mackinlay (HMIT) TAXTAX(1984) 58 TC 398; [1985] BTC 18
Barraclough v Brown ELR[1897] AC 615
Beach v Willesden General Commrs TAX[1982] BTC 25
Beecham Group plc v IR Commrs TAX[1992] BTC 625
Carver v Duncan (HMIT) ELRTAX[1985] AC 1082; [1985] BTC 248
Clinch v IR Commrs ELR[1974] QB 76
Congreve v IR Commrs TAX(1948) 30 TC 163
Cutmore v Leach (HMIT) TAXTAX(1981) 55 TC 602; (1982) BTC 8
Essex & Ors v IR Commrs & Anor TAX(1980) 53 TC 720
General Commrs for City of London Commrs v Gibbs ELR[1942] AC 402
Hallamshire Industrial Finance Trust Ltd v IR Commrs TAX(1978) 53 TC 631
IR Commrs v Barnato ELR[1949] Ch 258
Knight v IR Commrs TAX(1974) 49 TC 179
Owton Fens Properties Ltd v Redden (HMIT) TAXTAX(1984) 58 TC 218; [1984] BTC 395
R v Brixton Income Tax Commrs & Anor TAX(1913) 6 TC 195
R v IR Commrs, ex parte Barker & Anor TAX[1994] BTC 290
R v Special Commrs, ex parte Elmhirst TAX(1935) 20 TC 381
Royal Bank of Canada v IR Commrs ELR[1972] Ch 665
St Aubyn v A-G ELR[1952] AC 15
Vandervell Trustees Ltd v White & Ors ELR[1971] AC 912
Vandervell v IR Commrs ELR[1967] 2 AC 291
Vestey v IR Commrs ELR[1980] AC 1148
Wicker v Fraser (HMIT) TAX[1982] BTC 202
Wilover Nominees Ltd v IR Commrs WLR[1974] 1 WLR 1342
Transfer pricing - Sales at undervalue or overvalue - Direction by Board when appealed assessments remained open - Whether open assessments could be adjusted or whether fresh assessments had to be made -Income and Corporation Taxes Act 1970 section 485 subsec-or-para (3)Income and Corporation Taxes Act 1970, s. 485(3) (Income and Corporation Taxes Act 1988 section 770 subsec-or-para (2)Income and Corporation Taxes Act 1988, s. 770(2)).
By originating summons issued on 30 August 1995 three subsidiaries of Glaxo Wellcome plc (Glaxo Group Ltd, Glaxo Pharmaceuticals Ltd and Glaxo Operations Ltd) sought declarations that a direction made by the Board of Inland Revenue under the Income and Corporation Taxes Act 1970 section 485 subsec-or-para (3)Income and Corporation Taxes Act 1970, s. 485(3) (sales at under value or over value not at arm's length or "transfer pricing") was invalid.
Correspondence between the Revenue and the Glaxo group about the group's transfer pricing position had continued intermittently since 1976. In consequence, the companies had open assessments going back for many years. The Revenue had contended all along that the combination of an open assessment resulting from an unresolved appeal and a subsequent direction made by the Board under Income and Corporation Taxes Act 1970 section 485s. 485, was sufficient to enable the direction to be considered and taken into account on an appeal.
Glaxo claimed that a direction under Income and Corporation Taxes Act 1970 section 485s. 485 was ineffective unless followed by an assessment: normally a further assessment made under theTaxes Management Act 1970 section 29 subsec-or-para (3)Taxes Management Act 1970, s. 29(3) made within the six-year statutory time limit.
On 28 July 1995 the Revenue issued a press release which indicated that legislation in the next Finance Bill would be introduced to remove any doubt about the Revenue's ability to make adjustments to taxpayers' "open" tax assessments in order to give effect to a direction by the Board of Inland Revenue that a taxpayer's profits should be adjusted following a transfer pricing enquiry. Faced with the prospect of new legislation which Glaxo viewed as retrospective, they wished to establish the true effect of the existing legislation.
The originating summons sought three declarations amounting to a decision that Income and Corporation Taxes Act 1970 section 485s. 485 had the effect for which Glaxo contended and that the words in the Taxes Management Act 1970 section 50 subsec-or-para (3)Taxes Management Act 1970, s. 50(3)(b), "to give reasons in support of the assessment" referred to "the assessment" as made and impliedly prohibited an inspector from asking the appeal commissioners to increase an assessment, especially on a new ground. The Revenue maintained that there was no such implication: the commissioners were, by Taxes Management Act 1970 section 50 subsec-or-para (7)s. 50(7) of the Taxes Management Act 1970, specifically empowered to increase an assessment.
However, it had first to be considered whether the court had jurisdiction to make the declarations sought. Glaxo contended that the court had jurisdiction in spite of the alternative route by way of appeal to the special commissioners. The Revenue did not oppose Glaxo's submissions on the jurisdiction question.
Held, ruling that the court had jurisdiction to consider the application but refusing to make the declarations sought:
1. The principle that the procedure of assessment and appeal laid down in the Taxes Management Act 1970 for determining liabilities to tax was to be followed to the exclusion of other possible means of determination could not be circumvented simply by dressing up proceedings in the High Court as an application for a declaration, if the substantial effect of a declaration would be to determine a liability which ought to be determined by the appeal commissioners. But the principle was not to be pushed too far so as to exclude any proceedings which might conveniently and usefully be heard in the High Court only because those questions arose between taxpayer and Crown and formed a basis, even a necessary basis, for an income tax assessment. The official press release of 28 July 1995 and the imminence of legislation gave the matter some further immediacy. In all the circumstances, including the fact that the Revenue did not object, jurisdiction would not be declined as a matter of discretion.Vandervell Trustees Ltd v White & Ors ELR[1971] AC 912 per Lord Wilberforce at p. 939.
2. The appeal commissioners' powers, on appeal against assessment, were not restricted to upholding an assessment in its precise terms. There was no fundamental objection to an inspector supporting an open assessment on an appeal, not merely up to the limit of the assessed sum, but beyond that sum in appropriate circumstances. Moreover, he might support the open assessment both up to and beyond the assessed sum on grounds which were not correctly specified, or were even non-existent, at the time when the assessment under appeal was made. Owton Fens Properties v Redden (HMIT) TAX[1984] BTC 395 at p. 405 followed; R v IR Commrs, ex parte Barker & Ors TAX[1994] BTC 290 at pp. 295-296 applied.
3. Looking at the term "assessment" as the whole process from the making of an assessment until it became final and conclusive, including the possibility of an appeal, an open assessment was included in the words "by assessment" in Income and Corporation Taxes Act 1970 section 485 subsec-or-para (3)s. 485(3).
This is an originating summons issued by three companies, Glaxo Group Ltd ("GGL"), Glaxo Pharmaceuticals UK Ltd ("GPUK") and Glaxo Operations UK Ltd ("GOL"), which are wholly-owned subsidiaries of Glaxo Wellcome plc and were until May 1995 wholly-owned subsidiaries of Glaxo plc, formerly Glaxo Holdings plc ("Glaxo"). GGL owns the group's intellectual property rights and is also the holding company of GPUK and GOL, which are both trading companies. All three companies are resident in the UK. It is not necessary, for present purposes, to go further into the evidence about the group's structure and activities.
The defendants to the originating summons are the Commissioners of Inland Revenue ("the Board"). The Board and their officers in the international division of the Inland Revenue have over a period of years been concerned with enquiries into transfer pricing activities which, in their view, may have taken place between some or all of the plaintiffs on the one hand, and associated companies overseas (particularly in Switzerland and Singapore) on the other hand. The plaintiffs do not accept that such activities have taken place. I must make it clear at the outset that I am not concerned to reach even a preliminary view on any factual issue of that sort. Nor am I concerned to express any view on whether officers of the Board have been dilatory or have changed their position (the Board does not accept that their officers are open to such criticism). I am concerned solely with a short but difficult point of statutory construction, and also with a preliminary question of jurisdiction - that is, whether I have jurisdiction to make any substantive order on this originating summons.
Transfer pricing is a convenient expression used to describe the supply of goods or services, between associated enterprises in different countries, on terms that are not arm's length commercial terms. It may take place for reasons that have nothing to do with tax, but it is potentially a versatile means of tax avoidance. Parliament recognised this over 40 years ago in enacting Finance Act 1951 section 37s. 37 of the Finance Act 1951 which was re-enacted (on consolidation) first as section 469s. 469 of theIncome Tax Act 1952 ("the 1952 Act") and then (with a small change of language which I shall come back to) by Income and Corporation Taxes Act 1970 section 485s. 485 of the Income and Corporation Taxes Act 1970 ("Income and Corporation Taxes Act 1970 section 485s. 485"). By Finance Act 1975 section 17s. 17 of the Finance Act 1975 the scope of the provisions was extended, the Board were given information-gathering powers, and jurisdiction was conferred on the special commissioners. These provisions were then re-enacted, on...
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