Rank Xerox Ltd v Lane
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE BUCKLEY,LORD JUSTICE BRIDGE |
| Judgment Date | 12 May 1978 |
| Judgment citation (vLex) | [1978] EWCA Civ J0512-1 |
| Docket Number | 1975 No. 26 |
| Date | 12 May 1978 |
| Court | Court of Appeal (Civil Division) |
[1978] EWCA Civ J0512-1
In The Supreme Court of Judicature
Court of Appeal
On Appeal from the High Court of Justice
Chancery Division
(Revenue Paper)
(Mr. Justice Slade)
Lord Justice Buckley
Lord Justice Bridge
and
Sir David Cairns
HM Inspector of Taxes
MR. M.P. NOLAN Q.C. and MR. A. THORNHILL (instructed by Messrs. Linklaters &, Paines, Solicitors, London EC2V 7JA) appeared on behalf of the Appellant (Appellant).
MR. D.C. POTTER Q.C. and MR. B.J. DAVENPORT (instructed by The Solicitor for Inland Revenue, Somerset House, Strand, WC2R 1LB) appeared on behalf of the Respondent (Respondent).
I have asked Lord Justice Bridge to read the judgment of the court.
The question at issue in this appeal is whether an amount was rightly included in the assessment to corporation tax on the appellant taxpayer company, Rank Xerox Limited ("RXL") for the accounting period of twelve months to 30th June, 1970 as representing a chargeable gain accruing to RXL on the disposal of certain assets in December 1969. RXL appealed against the assessment to the Commissioners for the special purposes of the Income Tax Acts. The Commissioners dismissed the appeal. From this decision an appeal by Case Stated to the High Court was in turn dismissed by Mr. Justice Slade. RXL now appeals to this court. The question raised for decision at all levels has been that of liability only. The amount of the chargeable gain, if there was one, will depend on difficult questions of valuation which happily are for another day.
By section 238 of the Income and Corporation Taxes Act 1970, the profits of companies on which corporation tax is charged include chargeable gains as well as income and section 265 provides, so far as relevant for present purposes, for the computation of chargeable gains in accordance with the principles applying for capital gains tax, which are to be found in Part III of the Finance Act 1965. It is common ground both that the rights the subject of the present dispute are assets to which section 22 of the Act of 1965 applies and that there was in December 1969, a disposal of those assets by RXL. It follows from the application of the provisions of section 22 subsections (9) and (10) and section 23 subsections (1) and (2), that, subject to the valuation question, there was a chargeable gain (or an allowable loss)accruing to BXL on that disposal unless the rights in question fall within the provisions of Schedule 7, paragraph 12 (c), which enacts: "No chargeable gain shall accrue to any person on the disposal of a right to, or to any part of … annual payments which are due under a covenant made by any person and which are not secured on any property".
The Special Commissioners decided that the rights in question were to "annual payments", but that the payments were not "due under a covenant". The learned judge decided that the payments were "due under a covenant", but were not "annual payments". Thus both arrived at the same result by precisely contrary routes.
To do justice to the arguments it is necessary to examine the commercial history leading to the 1969 disposal of assets in some detail. In 1956 the Bank Organisation Limited and a subsidiary of that company agreed with the Xerox Corporation ("Xerox"), then known as the Haloid Company, to engage in a joint venture for the world wide exploitation, outside the United States of America and Canada, of the reproduction process known as xerography. BXL was the company which was to be, and was, formed to implement the agreement. Under the agreement Xerox were to transfer to BXL all patents, patent applications and licence rights relating to the process in those parts of the world to which the agreement related. The relevant patents granted, patent applications pending and licence rights subsisting at the date of the agreement were set out in a Schedule to the agreement.
After RXL had been formed, an agreement was entered into on 1st May 1957, between Xerox and RXL which was called a licence I agreement. This recited the 1956 agreement already referred to and provided that pursuant to that agreement Xerox granted to RXLan exclusive licence to use the inventions comprised in the letters patent and an exclusive sub-licence to use the inventions comprised in the licence rights set out in the Schedule to the 1956 agreement. The licence agreement included a provision obliging Xerox to secure an assignment to RXL of the Scheduled letters patent and patent applications on obtaining title thereto and the right to grant title. There is no finding in the Case as to what, if any, assignments were ever made pursuant to this provision.
The combined effect of the 1956 and 1957 agreements, under provisions to which we need not refer in detail, was to impose upon the parties mutual obligations to exchange all information and know-how with respect to improvements and developments in the process of xerography and presumably, in so far as it was thought appropriate to protect such improvements and developments by patent applications, the necessary applications in countries outside the United States of America and Canada would have been made by RXL.
The 1957 licence agreement continued in force until 1964. During this period, in the commercial exploitation of the process of xerography, Xerox had the field to themselves in the United States of America and Canada, RXL had the field to themselves in the rest of the world. But in 1964 the parties agreed to a radical change in this state of affairs. In effect Xerox took over the entire business of RXL in Central and South America and thenceforth had the field to themselves in the whole of the Americas. In 1967 a further change was effected whereby Xerox similarly took over from RXL the territory of the West Indies. The agreements concluded in 1964 and 1967 whereby these changes were given effect are the crucial documents in the case, since it is thenature of the right to the payments due from Xerox to RXL under these agreements on which the appeal depends. For the purpose of deciding the questions in issue there is no material difference between the two agreements and it will suffice for the purposes of this judgment to consider the first agreement dated 20th February 1964.
The 1964 agreement uses some rather complex geographical formulae to indicate its area of operation, but we shall for brevity substitute the simple, if not entirely accurate, term "Latin America". Clause 1 provides: "RXL hereby sells, assigns and transfers to Xerox its entire right, title and interest in all property, rights and assets in (Latin America) of whatsoever nature and description, excluding only its stock in Rank Xerox in Mexico, S.A. and including, without limitation, its goodwill, technical information, know-how, trade secrets, customer lists, patents, patent applications, rights to apply for patents, trade marks and trade mark applications".
The effect of clause 2 is to amend the 1957 licence agreement so as to exclude Latin America from its ambit.
Clause 3 provides: "All licences and sub-licences applicable to any place in (Latin America) heretofore granted by Xerox to RXL, and any right of RXL under paragraph one of the licence agreement to a licence or sub-licence applicable to any place in (Latin America) are hereby cancelled and released".
Clause 4 provides: "In consideration of the premises, Xerox shall pay or cause to be paid to RXL a royalty of 5% of Net Sales in (Latin America)". "Net Sales" are then defined by reference to "sales and rentals of xerographic machines, equipment, apparatus, paper and supplies". And then, continuing the quotation fromclause 4: "Such royalty payments shall be made or caused to be made by Xerox quarter-annually in the currency of the country in which the xerographic machines, equipment, apparatus, paper and supplies are delivered, except that where the existing laws of any country specifically authorise payment in pounds sterling, royalties with respect to such country may, at the option of Xerox, be paid in pounds sterling in London".
Clause 6 provides: "This agreement is made in England and shall be construed in accordance with English law".
The agreement was executed under seal by Xerox.
To complete the story, in December 1969 RXL declared a dividend of £8.4 million to be satisfied by the distribution to shareholders in specie, as it is put, of the right to receive payments from Xerox under the provisions of clause 4 of the 1964 and 1967 agreements ("the Xerox payments"). Since there is, as we have already indicated, no dispute that this was a disposal of assets for capital gains tax purposes it is unnecessary to say more of the details of this transaction.
The two questions for decision, then, are whether the Xerox payments are "annual payments" and whether they are "due under a covenant" within the meaning of paragraph 12 (c) of Schedule 7 to the Finance Act 1965. This paragraph is grouped with paragraphs 11 and 13 under the heading "Debts and interests in settled property". In our judgment neither the group heading nor the provisions of the companion paragraphs in the group throw any conceivable light on the meaning of paragraph 12 (c).
Paragraph 12 as a whole reads: "No chargeable gain shall accrue to any person on the disposal of the right to, or to any part of - (a) any allowance, annuity or capital sum payable out ofany superannuation fund, or under any superannuation scheme, established solely or mainly for persons employed in a profession, trade, undertaking or employment, and their dependents, (b) an annuity granted otherwise than under a contract for a deferred annuity by a company as part of its business of granting annuities on human life, whether...
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Rank Xerox Ltd v Lane
...that they were due under a covenant, but that they were not annual payments, and so decided against the taxpayer. The Court of Appeal ( [1979] Ch. 113) reversed Slade J. holding in favour of the taxpayer that they were both "annual payments" and "due under a covenant". The special commissio......
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Rank Xerox Ltd v Lane (HM Inspector of Taxes)
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