Musker v English Electric Company Ltd
| Jurisdiction | England & Wales |
| Judgment Date | 08 April 1964 |
| Date | 08 April 1964 |
| Court | House of Lords |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
COURT OF APPEAL-
HOUSE OF LORDS-
Income Tax, Schedule D, and Profits Tax - Sales of technical "know-how" - Whether receipts capital or income.
The Respondent Company, in the course of carrying on its trade of engineering manufacturers, acquired a fund of specialised information and technique in engineering processes. It had not been its practice to turn this information and technique to account by imparting it to others. In 1949, however, at the request of the Admiralty, the Company entered into an agreement to design and develop a marine turbine and to license its manufacture by a limited number of companies in the United Kingdom, Australia and Canada. Later, in 1950 and 1952, the Company, at the request of the Ministry of Supply, entered into agreements with the Government of Australia and an American aircraft manufacturing corporation, respectively, under which it licensed them to manufacture the Canberra bomber which it had designed and developed. All three agreements provided, inter alia, for the imparting of "manufacturing technique" to the licensees and in consideration of this the Company received specified lump sum payments.
The profits of the Company's trade were assessed to Income Tax under Case I of Schedule D for the years 1951-52 and 1952-53, and to Profits Tax for the chargeable accounting period 1st January, 1950, to 31st December, 1950, on the footing that these payments should be included as trading receipts. On appeal to the Special Commissioners, the Company contended that the sums were of a capital nature. The Special Commissioners allowed the appeals.
Held, that the sums in question were of an income nature.
Jeffrey v. Rolls-Royce, Ltd., 40 T.C. 443, applied.
(1) Musker (H.M. Inspector of Taxes) v. English Electric Co., Ltd.
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 29th February and 1st, 2nd and 3rd March, 1960, English Electric Co., Ltd. (hereinafter called "the Company"), appealed against assessments to Income Tax under Schedule D in respect of profits as engineering manufacturers for the year 1951-52 in the sum of £3,100,000 and for the year 1952-53 in the sum of £3,420,000. The ground of appeal was that in computing the profits of the Company for those years there were included certain lump sums received under agreements with the Admiralty, the Government of Australia and the Glenn L. Martin Co. of America, which lump sums the Company contended were of a capital nature.
2. Over 70 Exhibits were put in and examined at the hearing before us. A list of those Exhibits is attached as an appendix to this Case(1). Each Exhibit, in whole or such part as was considered to be relevant, was read to us or in the case of photographs and models was examined by us. In so far as they are not attached to this Case all the items mentioned in the list are available for the use of the High Court if desired.
Oral evidence was given before us by the following persons:
Mr. Percy Horsfall, who has been a director of the Company since 1930;
Mr. George Alexander Riddell, who became chief accountant of the Company in 1947 and was subsequently appointed controller of the Company and all its subsidiaries;
Mr. William Marshall Hurton, who joined a predecessor company as an engineering student in 1912, who was employed by the Company when it was formed in 1918, and who is now a director of the group manufacturing development of the Company and its subsidiaries;
Mr. Ronald Frederick Charles Acford, who is an Associate Member of the Institution of Mechanical Engineers and an Associate Member of the Institution of Production Engineers, and who joined the Company in 1936 and is now the head of a development and process department concerned, in particular, with steam turbines;
Mr. John Brian Sell, who is a Graduate Member of the Institution of Mechanical Engineers and of the Institution of Production Engineers, and who joined the Company in 1943 and has, since 1947, been concerned as a draughtsman with plant and process development work relating to steam turbines;
Mr. Horace Instone, who is an Associate Member of the Institution of Production Engineers, and who joined the Company in 1933 as a jig and tool draughtsman and, since 1943, has been concerned with and is now the head of a development and process department dealing in particular with aircraft manufacturing;
Mr. James Gillibrand, who joined the Company in 1919 and from 1945 onwards was concerned with the designing of aircraft and later was appointed liaison officer between the Company and the Australian Government and between the Company and the Glenn L. Martin Co. of America;
Mr. Leonard Bentley Shuffrey, who is a Fellow of the Chartered Institute of Patent Agents and has been manager of the patent department of the Company since 1945.
From the documents and oral evidence given before us the facts given in paragraphs 3 to 14 of this Case were admitted or proved.
3. The Company was incorporated on 14th December, 1918. The objects clause of the Company's memorandum states, in clause 3:
(A) To purchase or otherwise acquire, lease, underwrite, subscribe for, and deal in real and personal property of all kinds,…(B) To carry on the business of electrical, mechanical, hydraulic and general engineers and contractors,…(H) To purchase or by other means acquire and protect, prolong and renew, whether in the United Kingdom or elsewhere, any patents, patent rights,…(L) To develop and turn to account any property or assets of or in which the Company is interested.
and in the final sentence at the end of clause 3:
And it is hereby declared that the objects specified in each paragraph of this clause shall be in no wise restricted by reference to or inference from the terms of any other paragraph....
It was accepted by the parties that the Company had power, if it so desired, to purchase or sell secret information.
4. The Company's authorised capital in 1950 was £8,000,000, and the issued capital was nearly £7,000,000. In each of the three calendar years 1950, 1951 and 1952 there was added to the Company's capital reserve account a sum of money described as "sales of manufacturing technique". The sums so added were, for the year 1950, £263,833; for the year 1951, £255,118; and for the year 1952, £177,468. The said sums were received by the Company from separate sources, namely, the Commonwealth of Australia, the Glenn L. Martin Co. of the State of Maryland, U.S.A., and the Admiralty. The two first named desired to manufacture aircraft; the third named desired the Company to provide information necessary for the manufacture by other firms of marine turbines. The following paragraphs 5 and 6 give certain facts concerning the Company's historical background and its trading policy before and during the three relevant years. Details of the agreements which gave rise to the sales of manufacturing technique are given in paragraphs 7, 8, 10 and 11 of this Case.
5. On its formation in 1918 the Company took over the businesses of a number of old-established companies; those businesses became branches of the Company. The businesses of four of the predecessor companies commenced between 80 and 90 years ago. At the Preston works railway carriages, tram cars and buses were manufactured prior to the 1914-18 war. At the Bradford works 150 aircraft had been built prior to 1918. Steam turbines for land use had been manufactured at Rugby since 1904, and diesel engines from 1906. After the formation of the Company, ranges of products were extended and additional works were opened.
6. The Company's trade is that of a manufacturer. Its policy is, and always has been, to manufacture and sell its manufactured products. The Company has always guarded very jealously its manufacturing processes and designs, and at all times treated them as trade secrets. The Company has never at any time developed manufacturing technique with a view to selling it. On a few occasions the Company has licensed other persons to use some device, whether patented or otherwise, but such occasions have been rare and the Company has only given such licence when pressed very hard to do it.
7. The Company has never manufactured marine turbines, but because of its outstanding reputation as a manufacturer of landturbines it was requested in 1949 by the Admiralty to design, develop and produce prototypes for marine turbines known as Y.100, Daring Class turbines and Y.E.A.D.I. The prototypes were in each case produced and paid for separately. The Company did not wish to manufacture marine turbines but it deemed it desirable to assist the Admiralty; and it therefore entered into discussions with Admiralty representatives on the understanding that if it produced a prototype which proved successful in its tests the Company would not itself manufacture marine turbines but it would be asked by the Admiralty to license marine turbine manufacturers in the United Kingdom and, if possible, in the Commonwealth, to manufacture to the Company's designs. Contracts were entered into, the terms of one of which (relating to the Y.100) are contained in a letter dated 31st August, 1949, from the Admiralty (Contract Department) to the Company. The letter reads as follows:
C.P. Br. 8B/9135/49.
SECRET.
Gentlemen,
Y.100. Turbine Design for A/S Frigates.
Messrs. Yarrow's Contract. C.P.62979/48 dated 9th March, 1949
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With reference to Sir George Nelson's letter of 25th August addressed to Mr. Coxwell, and to previous correspondence I have to confirm the following terms for:(a) The preparation of a design for, and the manufacture of a prototype...
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