R v Attorney General, ex parte Imperial Chemical Industries Plc

JurisdictionEngland & Wales
Judgment Date24 February 1986
Date24 February 1986
CourtCourt of Appeal (Civil Division)

Court of Appeal (Civil Division).

R
and
Attorney-General, ex parte Imperial Chemical Industries PLC

Mr. R.S. Alexander Q.C., Mr. D.A.J. Vaughan Q.C. and Mr. G.E. Barling (instructed by the Solicitor for Imperial Chemical Industries PLC) for the company.

Mr. S.A. Stamler Q.C., Mr. F.G. Jacobs Q.C. and Mr. J.F. Mummery (instructed by the Treasury Solicitor) for the Crown.

Before: Lord Oliver of Aylmerton, Lloyd and Nourse L.JJ.

The following cases were referred to in the judgments:

Arsenal Football Club Ltd. v. Smith (Valuation Officer) & Anor.ELR[1979] A.C.1

Associated Provincial Picture Houses Ltd. v. Wednesbury CorporationELR[1948] 1 K.B. 223

Chief Constable of North Wales v. Evans WLR[1928] 1 W.L.R. 1155

Garden Cottage Ltd. v. The Milk Marketing Board ELR[1984] A.C. 130

I.R. Commrs. v. National Federation of Self-Employed and Small Businesses Ltd. ELR[1982] A.C. 617

Mahon v. Air New Zealand Ltd. & Ors. UNK[1984] 3 All E.R. 201

Mills v. Tomlinson [1960] 6 RRC 146

O'Reilly & Ors. v. Mackman & Ors. ELR[1983] 2 A.C. 237

Steen Kolenmijnen [1961] ECR 1

Petroleum revenue tax - Valuation - Petrochemical industry - Overcapacity in ethylene production - Construction of new plant by oil companies - Likely to be uneconomic - Discussions between government and oil companies on taxation - Arrangement to make plant economically viable - Undervaluation of ethylene - Whether Government proposing to act unlawfully by enacting and giving effect to statutory provisions resulting in undervaluation - Whether government misinterpreting statute or acting in unreasonable manner - Whether competitor had locus standi to seek judicial review of Government decision - Finance Act 1982.Finance Act 1982 section 134sec. 134, Sch. 18; EEC Treaty (Rome, 1957), eu-treaty treaty article 93(3)Art. 93(3).

This was an appeal by Imperial Chemical Industries (ICI) and a cross appeal by the Revenue from a decision of Woolf J. contained in two judgments delivered on 25 January 1985 ([1985] BTC 8003)and 3 April 1985 ([1985] BTC 8055) on the application of ICI for judicial review of alleged decisions made by the Revenue regarding their approach or prospective approach to the valuation of ethane gas to be supplied by other oil companies to their affiliates for petrochemical purposes pursuant to the provisions of the Oil Taxation Act 1975 and the Finance Act 1982.

The appeal was concerned with the sale of gas won from the North Sea under the authority of statutory licences. For the purposes of the Finance Act 1975 such gas was included in the definition of oil. When the 1975 Act came into force the British Gas Corporation was the only buyer of such gas in the UK. Shell, Esso and BP exploited gas and oil resources in the Brent complex of fields in the North Sea, oil and gas from which was brought ashore at St. Fergus in Northern Scotland. Gas was provided from the Brent field to BGC under the Brent contract which regulated the supplies. In the Brent complex, natural gas was found in association with crude oil. It contained methane and a number of gas liquids consisting, among other things, of ethane. Ethane was one of several possible feed stocks for the production of ethylene. Shell, Esso, BP and ICI were the producers of ethylene in the UK. The predominant feedstock produced in its production was naphtha. However, ethane as a feedstock had the advantage that it was cheap to produce.

In 1976 it was forecast that the world demand for ethylene would increase and on the strength of this, Shell and Esso agreed to share the cost of a project to establish ethylene plants using ethane as feedstock for production at Mossmorran. BP already had two ethylene plants at Grangemouth. The predicted demand for ethylene did not occur and demand decreased. The question arose how far it was worthwhile the oil companies proceeding with their project. The prospect of completion of the new plants posed a threat to ICI which had had to shut down some of its plants.

Against that background the UK Government enacted Finance Act 1982 section 134sec. 134 and Sch. 18 to the Finance Act 1982. The section substituted for the market value of ethane sold under a non-arm's length transaction, ascertained on a monthly basis under the 1975 Act, a market value for taxation purposes in accordance with a price formula to be elected by the seller. It applied only to ethane supplied for petrochemical purposes. Notice of acceptance or rejection of an election by the Revenue had to be given within three months from the date of the election. A deemed acceptance was assumed if no notice was given within the appropriate period. The Revenue had power to call for a new price formula if the market value ceased to be readily ascertainable during the period covered by the election. The election came to an end if no acceptable alternative formula was provided within a given time limit. If the price formula ceased to be realistic because of changes in economic circumstances and the participator or the Board gave appropriate notice the election would cease to be effective for the next chargeable period unless the participator's notice was rejected by the Revenue. There was provision for notices specifying new price formulae and regulating the conditions under which such formulae might be accepted. A party whose election was rejected by the Board had a right of appeal to the Special Commissioners.

ICI alleged that the provisions of the 1982 Act were enacted to encourage the oil companies to proceed with their projects by offering them fiscal advantages to make investment worthwhile. This, it argued, added an additional and artificial fiscal advantage by engineering a low valuation of gas for petroleum revenue tax purposes which discriminated against ICI as the other ethylene producer in the UK. The oil companies had received some form of assurance from the Government, which had been or was intended to be implemented by the Government, that a sufficiently low inter-affiliate transfer price for ethane supplied for petrochemical purposes would be accepted to make the Mossmorran project financially viable.

ICI contended that arm's length sales for use as fuel in 1982 would produce prices of upwards of 20p per therm which, because of the impact of petroleum revenue tax (PRT), would render the Mossmorran and Grangemouth projects uneconomical. This supported the inference of an agreement between the oil companies and the Go vernment which would result in a lower valuation. The company further alleged that the operation by the Revenue of the provisions of the Act constituted an infringement of eu-treaty treaty article 92 article 93Art. 92 and 93 of the EEC Treaty.

The Crown contended that the substituted formula under the 1982 Act was to remove the anomaly that ethane for petroleum purposes was likely to be governed by long-term contractual arrangements to which the month-by-month valuation provisions in the 1975 Act would be inappropriate and might give rise to spot market values quite different from those to be expected under such a contract. It should be inferred that in fact the oil companies would have made actual contracts with their affiliates for the supply of ethane for petrochemical purposes in the later part of 1981, prior to the coming into force of the Act, because it was inconceivable that they would have gone ahead with the Mossmorran project without first ensuring that there was in existence a long-term supply contract from which an appropriate advantageous price formula could be derived.

The Crown further argued that the only buyer for ethane as fuel in 1981-82 would have been BGC and they would not have paid more than 10p per therm on the footing that the supply was firm or 7p per therm if it was variable, the prices being those payable for gas supplied under the "Brent Contract".

In any event the Crown argued that ICI had no locus standi to bring their application for judicial review because one taxpayer was not entitled to seek a judicial review of another taxpayer's affairs and ICI had insufficient interest to sustain its claim.

Woolf J. held that if the 1982 Act were properly applied the Revenue would neither be required nor permitted to grant an aid undereu-treaty treaty article 93Art. 93 of the EEC Treaty. However, the Revenue were adopting an approach to valuation which failed to pay proper regard to the requirement that the price of ethane should be fixed by reference to an arm's length contract for its sale, the terms of which were not to be affected by any commercial relationship between the seller and the buyer. ICI had locus standi to seek judicial review. Its interests related to the question of valuation under the 1982 Act on which it had succeeded in part. However, the judge was only prepared to grant a declaration directed to particular approaches which the Revenue should not adopt on any future election but not to any election already made which might be ultra vires and void.

The company appealed and the Revenue cross appealed against that decision.

Held, allowing ICI's appeal in part and dismissing the Crown's cross-appeal:

1. The judge was entitled to come to the conclusion on the facts that there was no credible evidence upon which the Revenue could reasonably have adopted a valuation for ethane of 10p per therm. An analysis of the evidence showed that no account had been taken of the hypothetical market value which had to be compared with the election price formulae under the 1982 Act. Instead the actual situation existing between BGC and the oil companies under the Brent contract had been taken into consideration having regard to the pre-existing relationship between those parties as buyers and sellers, an approach which failed to comply with the statutory requirement. Further, the consideration of the election was flawed in that it failed to take into account transport and separation costs which was a relevant and material matter.

2. Under the Finance...

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