Wolf Electric Tools Ltd v Wilson
| Jurisdiction | England & Wales |
| Judgment Date | 26 November 1968 |
| Date | 26 November 1968 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income Tax, Schedule D - Profits of trade - Disclosure of "know-how" to associated foreign company in return for shares therein - Whether value of shares capital or income.
The Appellant Company carried on business as mechanical and electrical engineers. In particular, it manufactured electric power tools, in which it had an extensive export trade. About 1950 its sole agency in India was taken over by R Ltd., an Indian company, which bought from the Company on a principal to principal basis. In 1954, when the Company's exports to India represented over 10 per cent. of its total exports, R Ltd. informed the Company that, because of the Indian Government's policy of encouraging the setting up of local factories for making tools, the whole market would be lost unless it undertook to manufacture tools in India. Preliminary arrangements to that end were made in 1956, and in 1958 P Ltd. was incorporated in India to carry on the Company's trade in tools selected for manufacture there; the Government of India consented to the formation of P Ltd. on condition that R Ltd. took a majority shareholding, which in the event was 55 per cent. In 1959 the Company subscribed for the remaining 45 per cent. (9,000 Rs. 100 shares) of the issued capital of P Ltd., in consideration, as to 5375 shares, for the transfer of plant and equipment for the Indian factory, and as to 3625 shares, for the supply of drawings, designs, technical knowledge, etc. The Company also agreed with P Ltd. to "keep out" of India and Nepal, as regards the selected tools, for 10 years.
The Company was assessed to income tax under Case I of Schedule D for the year 1960-61 on the basis that the value of the aforesaid 3625 shares in P Ltd. was a trading receipt. On appeal, the Company contended that the information in question was a capital asset of its trade and the disclosure thereof an investment operation; alternatively, that the shares were received as consideration for the "keep-out" agreement. For the Crown it was contended that the transaction was a method of increasing the Company's income as mechanical and electrical engineers by using know-how to the best advantage in a market which might otherwise be closed, and that the "keep-out" agreement amounted, not to an outright sale, but merely to an assignment for 10 years in respect of the selected tools only. The Special Commissioners held that the case fell within the decision in Jeffrey v. Rolls-Royce Ltd.40 T.C. 443; [1962] 1 W.L.R. 425 and dismissed the appeal.
Held, that the effect of the entire transaction was simply to alter the Company's capital profit-making structure so that, instead of having its own goodwill in India as regards the selected tools, it acquired a 45 per cent. interest in P Ltd. and thenceforward derived its profit through those shares.
Stated under the Income Tax Act 1952, s. 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 6th and 7th February 1967, Wolf Electric Tools Ltd. (hereinafter called "the Company") appealed against the following alternative assessments to income tax;
(a) under Case I of Schedule D for the year 1960-61 on the profits of the Company as mechanical and electrical engineers in the sum of £250,000, and
(b) under Case VI of Schedule D on proceeds of the sale of patent rights under the provisions of s. 318, Income Tax Act 1952, as enlarged by s. 24 and Part II of Sch. 6, Finance Act 1952, in the sum of £4,500 for each of the years 1959-60 to 1964-65 inclusive.
2. Shortly stated, the questions for determination were whether 3625 ordinary shares of Rs. 100 each in an Indian company, Ralliwolf Private Ltd. (hereinafter called "Ralliwolf"), represented receipts of the Company's trade to be taken into account in computing the profits assessable under Case I, and if not, whether the shares were properly to be considered to be the proceeds of a sale of patent rights assessable under Case VI.
3. The following witnesses gave evidence before us: Mr. Geoffrey Maxwell Wolfe, the chairman and managing director of the Company and also of Wolf Electric Tools (Holdings) Ltd. (hereinafter called "the holding company"), who had been associated with the Company and its predecessors since 1933; Mr. Kenneth Arthur Sheppard, an incorporated accountant, who had been employed as chief accountant and secretary of Rallis India Ltd. (hereinafter called "Ralli") from 1950 to 1960, and was now employed by Ralli Bros., bankers, in London; Mr. Charles Malcolm McGilchrist, a Scottish chartered accountant, a member of the firm of Fuller, Jenks, Wise & Co. (formerly Jenks, Percival & Co.), which firms had acted as auditors of the Company and of the holding company.
4. The following documents were admitted before us:
A. Extract of the first page of the Company's memorandum of association (1908) and copy of a special resolution of the Company, dated 12th May 1949, changing its name from S. Wolf & Co. Ltd. to Wolf Electric Tools Ltd.
B. Copy of an agreement of 30th July 1956 between Ralli and the Company.
C. Copy of the memorandum and articles of association of Ralliwolf.
D. Copy of an agreement of 5th January 1959 between Ralli and the holding company.
E. Copy of an agreement of 16th February 1959 between the holding company, Ralli and Ralliwolf.
F. Copy of an agreement of 16th February 1959 between the holding company and Ralliwolf.
G. Copy of an agreement of 19th August 1959 between the holding company and Ralliwolf.
H. Copies of the annual report and statement of accounts of the holding company for the nine months ended 31st December 1951, and for each of the years ended 31st December 1952 to 1964 inclusive, and of the accounts of the Company for each of the years ended 31st December 1953 to 1964 inclusive.
I. Copy of minutes of a meeting of directors of Ralliwolf held on 16th April 1959.
J. Copies of correspondence in 1955 between the Company, Ralli Bros. Ltd. and Ralli.
K. Copies of correspondence in 1955 between the Company and Wolf Sales Pty. Ltd., Sydney, Australia.
L. Copy of an agreement of 29th June 1956 between the Company and Gendron Frères S.A., Villeurbanne, France.
Copies of documents A to H inclusive are annexed hereto and form part of this Case.(1) Copies of documents I to L inclusive, which are not annexed hereto as exhibits, are available for inspection by the Court if required.
5. As a result of the evidence, both oral and documentary, adduced before us we find the following facts proved or admitted:
(2) The Company was incorporated in 1908 to take over and carry on the trade formerly carried on by a partnership. An extract of the first page of the Company's original memorandum of association and a copy of a special resolution of 12th May 1949 altering the Company's name are annexed hereto, marked "A", and form part of this Case.(1)The Company's trade was mainly concerned with the manufacture of electric power tools, of which some fifty different industrial and domestic models were produced. In the course of the development of its electric tools the Company evolved various production methods and a series of drawings, jigs, processes and schedules of manufacture. They were valuable assets of the Company and safeguarded by strict security. Taking as an example a typical mechanical part, a drawing would provide the basic information necessary to make a die from which a casting could be produced. When the casting had been produced it required machining so that other components could be fitted to it. The Company worked to clearances of 1/1,000 and some times 1/10,000 of an inch. The particular casting required 18 different machining operations, which had to be performed in the correct order.
(3) The research and development activities of the Company were carried out in a separate building, which could only be entered by those employees who were concerned with this work. Much of the information was patentable, but patents were not always taken out.
(4) For many years the Company had carried on an extensive export trade with the Commonwealth and other countries through its own branches and also through sales agencies which sold and serviced the Company's English products.
(5) The Company also had a subsidiary company in Sydney, Australia, which was set up in the 1950s to manufacture one particular type of tool and control the distribution of the Company's machines imported from England. The Australian subsidiary company was capitalised from the United Kingdom. The Australian situation was governed by import licences on a valuation basis; key components were supplied from England for local assembly and other components were bought locally. Goods were supplied by the Company to the Australian company at a cost which was lower than normal, and a handling charge was made. A sales company, which carried on the distribution and servicing of the Company's products in Australia, was also established in Australia by the Company's previous agents.
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(6) In 1956 the Company made an agreement with a French company, Gendron Frères Société Anonyme, in order to allow the French company to manufacture in France an electric sanding machine, for which purpose the Company
was to provide the necessary drawings and information for a period of seven years. The machine was not the subject of any patent or registered design. This machine was sold under the French company's trade name. The consideration received by the Company was a nominal payment for the drawings of £250 and a licence fee in respect of each sanding machine produced in France. The French company used part of the Company's designs and incorporated its own electrical component in a modified form. The Company had no business in France for...
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