Federal Commissioner of Taxation v United Aircraft Corporation
68 CLR 525(Judgment by: LATHAM CJ)
Between: FEDERAL COMMISSIONER OF TAXATION
And: UNITED AIRCRAFT CORPORATION
Judges:
Latham CJRich J
Williams J
Subject References:
Taxation and revenue
Income tax
Assessment
Foreign company
Income derived directly or indirectly from sources in Australia
Legislative References:
Income Tax Assessment Act 1936 No 27 - s 6; s 25(1)
Judgment date: 6 December 1943
SYDNEY
Judgment by:
LATHAM CJ
This is an appeal from a judgment of Starke J. allowing an appeal from an assessment of the respondent company, the United Aircraft Corporation, to income tax under the Commonwealth Income Tax Assessment Act 1936-1940 in respect of income derived during the twelve months ended 30th June 1940. The company has been assessed to income tax upon an amount of PD5,092 paid to it by Commonwealth Aircraft Corporation Pty Ltd under an agreement between the companies made on 6th April 1937.
The United Aircraft Corporation is a company incorporated in the State of Delaware in the United States of America which carries on business there as the manufacturer and seller of, inter alia, aeroplane engines. This company will be referred to as the American company. Commonwealth Aircraft Corporation Pty Ltd , which will be referred to as the Australian company, is a company incorporated in Victoria which manufactures aeroplanes. On 6th April 1937 the companies made an agreement in New York. In form the agreement consisted of a grant by the American company to the Australian company of a licence to manufacture aeroplane engines of the type described in the agreement for a period of five years ending on 5th April 1942, with a provision for extension for a further five years. The agreement professes to grant rights to use Australian patents and registered designs and it contains a number of provisions relating to such patents and designs. The American company, however, did not in fact own any Australian patents or any designs registered in Australia. The American company agreed to deliver to the agent of the Australian company in New York drawings and specifications of the engine, together with manufacturing equipment, including patterns, dies, machines, tools, jigs, fixtures, gauges, etc The patterns, etc, were to be paid for at prices to be agreed. The American company agreed to allow six technicians of the Australian company to visit its factory for the purpose of obtaining information, and further agreed to give to the Australian company such information and advice as might be reasonably required by it to enable it to manufacture the parts of the engine which were manufactured by the American company. The American company also agreed to lend a skilled engineer for a year to the Australian company, such engineer to be paid by the Australian company. In accordance with the agreement, drawings, manufacturing equipment, etc, were delivered in New York, and the Australian company duly paid for the equipment. Information and advice were given as required and one of the engineers of the American company came to Australia, where he worked for the Australian company, being paid by the Australian company.
The agreement provided that the Australian company should, in consideration of "the rights granted to the licensee," pay 25,000 dollars at or before the execution of the agreement and a further sum of 25,000 dollars upon the delivery of drawings and specifications. These sums have not been assessed as part of the income of the American company. The agreement further provided that the "licensee" should pay royalties of 500 dollars for each "licensed engine regardless of whether or not such licensed engine is or will be sold leased used or otherwise disposed of," together with further sums for extra or spare parts. The agreement also contained a provision that in each six months the licensee should pay not less than 5,000 dollars to the American company. This sum, it was provided, was to be a minimum payment for each six months, but was to be credited to the royalty account, and in all the maximum sum payable as minimum royalties during the five year period of the agreement was a total sum of 40,000 dollars. All payments were to be made in "New York funds." Thus the Australian company was bound to pay in New York to the American company a minimum sum of 10,000 dollars in each year, even though it manufactured no engines. In the income period in question the sum paid by the Australian company to the American company exceeded the minimum sum.
The company is a non-resident within the meaning of the Income Tax Assessment Act: See definition of "non-resident" in s. 6. The assessable income of a non-resident taxpayer includes the gross income "derived directly or indirectly from all sources in Australia, which is not exempt income" (s. 25). The question which arises upon this appeal is whether the sum of PD5,092 paid in American currency in New York in pursuance of the terms of the agreement was income of the American company derived directly or indirectly from a source in Australia.
The agreement purports to grant a licence to manufacture engines of a certain description. But in fact no licence was granted by the agreement. A licence provides an excuse for an act which would otherwise be unlawful as, for example, an entry upon a person's land, or the infringement of a patent or copyright. It is an authority to do something which would otherwise be wrongful or illegal or inoperative: See Byrne's Law Dictionary-sub "licence." The American company had no patents in Australia and had no right to manufacture engines in Australia other than that possessed by every person in the world. Any person could, without infringing any right of the American company, have manufactured the engines in question in Australia if he had the necessary knowledge, skill, and means of manufacture. The agreement was in reality an agreement for the communication of information which would facilitate the manufacture of the engines in Australia. The American company communicated the information in New York and it received payment in New York.
Part of the money paid to the American company during the relevant period (10,000 dollars) was payable irrespective of the manufacture of any engines. So far as portion of the money became payable by reason of the manufacture of engines, that money was not derived from the manufacture of the engines. It was the Australian company which manufactured the engines and when it sold them it derived income from its operations, but the American company derived no income from those operations. The manufacture of engines in Australia was a condition upon the occurrence of which money became payable to the American company, but it does not follow that the money received by the American company was derived from the acts which constituted the performance of the condition. Money may become payable under a contract upon the expiry of a period, or upon the death of a person, or upon the occurrence of a natural event such, for example, as a fire or flood; but it would be a misuse of language to say that the money which so became payable was derived from the expiry of the period or from the death of the person or from the fire or flood.
Before the agreement was made and after the agreement was made the American company owned no property in Australia of any kind. The making and the performance of the agreement did not vest in the American company any property in Australia. It owned no rights which could be regarded as located in Australia. It did not derive income from any property in Australia.
It was argued that the American company transferred to the Australian company information to be used by that company in Australia for a minimum period of five years. It was said that this amounted to a transfer of property-a kind of bailment for five years. I am unable to regard the communication of information as constituting a transfer of property. Upon such a communication the transferor still has everything that he had before and the transferee continues to have what he has received even though the five year period has elapsed, though he may be prevented from using the information, if a covenant not to use it throughout the indefinite future is not invalid as in unreasonable restraint of trade.
Knowledge is valuable, but knowledge is neither real nor personal property. A man with a richly stored mind is not for that reason a man of property. Authorities which relate to property in compositions, etc, belong to the law of copyright and have no bearing upon the question whether knowledge or information, as such, is property. It is only in a loose metaphorical sense that any knowledge as such can be said to be property. Either all knowledge is property, so that the teaching of, for example, mathematics, involves a transfer of property, or only some knowledge is property. If only some knowledge is property then it must be possible to state a criterion which will distinguish between that knowledge which is property and that knowledge which is not property. The only criterion which has been suggested is the secrecy of the knowledge-it is said that the fact that knowledge is secret in some way creates a proprietary right in that knowledge. I confess myself completely unable to appreciate this proposition as a legal statement. It is obvious that a monopoly of knowledge may be valuable, whether it be knowledge of a place where a person has discovered gold or knowledge of a method or process of making a machine or a chemical product, or of a means of deciphering cryptograms. But is such property knowledge only so long as it is secret? Does it cease to be property when it is communicated to one other person or to two other persons or to two hundred other persons? The value of secret knowledge as such depends upon ability to keep it secret and to use it and the possibility of persuading other people to pay for being let into the secret. These facts, however, do not show that the knowledge is property in any legal sense. However, in the present case there is no evidence whatever that any secret process exists. What the Australian company obtained was information in the form of drawings, designs and other information which would be of service in manufacturing aeroplane engines. Such knowledge was most valuable to those who wished to make aeroplane engines of a particular type. But it cannot in my opinion be described as the property either of the persons who originally had it or of other persons to whom it has been communicated, whether under and in pursuance of a contract or otherwise.
A person may be bound by contract express or implied to abstain from disclosing certain information to others. Such a contract may be enforced by an award of damages or by injunction. Persons who persuade a contracting party to break a contract, including a contract not to disclose information, are guilty of a wrong, but this wrong does not depend upon any interference with property owned by a plaintiff; it depends upon interference with contractual relations: See Lumley v Gye; [F1] Quinn v Leathem, [F2] at p. 510. All persons are perfectly free to acquire knowledge, even though that knowledge may at a given time be knowledge possessed by another person which he is keeping secret. Subject to provisions contained in patent and copyright law, persons are entitled to use as they please any knowledge that they have unless they are bound by contract express or implied not to use it, or have acquired it by means of a violation of right-as in Albert (Prince) v Strange. [F3] A and B cannot, by making a contract between themselves, prevent any other person C from using his own faculties and skill in acquiring knowledge and in using knowledge. If C is a stranger to A and B and has had no dealings with either of them it is irrelevant for all legal purposes that A has contracted to disclose that knowledge only to B, and that B has contracted not to disclose it to any other person. In my opinion knowledge cannot be described as property except in a metaphorical sense.
Property is one possible source of income. The work of persons or acts done by persons are other possible sources of income. I do not forget that in Commonwealth income tax law the distinction between income from property and income from personal exertion is largely a matter of terms. Income derived from property is defined so as to include all income which is not income derived from personal exertion. Companies are taxed under the Income Tax Acts upon their income with no distinction between income derived from personal exertion and income derived from property. But I have not been able to think of any sources of income other than property and acts done. If a person has rights over property or in relation to property he may derive income from that property. The American company had no such rights in Australia. If a person by himself or by his servants or agents does work of some kind or acts in some way, he may derive income from that work or act, but the American company did nothing in Australia. Income derived from property means, in my opinion, income derived from the property of the person sought to be taxed as having derived the income. So also the income of a person derived from acts done is income derived by that person from his own acts or from the acts of his servants or agents. If such a person being a company, has no servants or agents in Australia, it cannot, in my opinion, derive income from any acts done in Australia. A person who neither owns anything in a country nor does nor has done anything in that country cannot, in my opinion, derive income from that country.
There is a provision in the agreement that upon the termination of the agreement the Australian company shall "return" to the American company drawings, blueprints, specifications, etc, then in its possession or power with respect to the licensed engine, subject to a proviso that the licensee may retain two sets of blueprint drawings. If, upon the termination of the agreement, the Australian company still had some of the drawings which had been delivered to it by the American company, it would be under an obligation to return them, subject to the proviso. But there is no provision that the drawings shall continue to be the property of the American company. Even if there were such a provision, it could not be said that the moneys payable under the terms of the agreement upon the manufacture of engines were derived from property consisting of blueprints, drawings, etc
Thus, in my opinion it is impossible to point to any source in Australia which can be described as the source of the PD5,092 paid to the American company. The American company did nothing in Australia and owned no property in Australia. That which produced the income of the American company was the agreement made in New York, together with the performance of that agreement, which took place in America. In my opinion it can be truly said in this case, as in Studebaker Corporation of Australasia Ltd v Commissioner of Taxation (N.S.W.), [F4] that the income in question "arises from business transacted and wholly carried out in America." See also Premier Automatic Ticket Issuers Ltd v Federal Commissioner of Taxation, [F5] and Tariff Reinsurances Ltd v Commissioner of Taxes (Vict.). [F6]
In my opinion the decision of Starke J. was right and the appeal should be dismissed.