Rolls-Royce Ltd v Jeffrey (Inspector of Taxes), Same v Inland Revenue Commissioners
[1962] 1 All ER 801(Judgment by: Lord Morris of Borth-y-Gest)
Between: Rolls-Royce Ltd
And: Jeffrey (Inspector of Taxes)
Between: Same
And: Inland Revenue Commissioners
Judges:
Viscount Simonds
Lord Reid
Lord Radcliffe
Lord Morris of Borth-y-GestLord Guest
Subject References:
Income Tax
Income
Payment of lump sums for imparting technical knowledge
Whether income or capital receipt
Case References:
British Dyestuffs Corpn (Blackley) Ltd v Inland Revenue Comrs - (1923), 129 LT 538, affd CA; (1924), 12 Tax Cas 586; 28 Digest (Repl) 25, 105
Butterworth v Page - [1935] All ER Rep 943; 153 LT 34
sub nom Handley Page v Butterworth - 19 Tax Cas 328; 28 Digest (Repl) 26, 111
Davies v Shell Co of China Ltd - (1951), 32 Tax Cas 133; 28 Digest (Repl) 37, 165
Doncaster Amalgamated Collieries Ltd v Bean - [1946] 1 All ER 642; 175 LT 10
sub nom Bean v Doncaster Amalgamated Collieries Ltd - 27 Tax Cas 296; 28 Digest (Repl) 121, 467
Edwards v Bairstow - [1955] 3 All ER 48; [1956] AC 14; 36 Tax Cas 207; [1955] 3 WLR 410; 28 Digest (Repl) 397, 1753
Haig's (Earl) Trustees v Inland Revenue Comrs - [1939] SC 676; 22 Tax Cas 725; 28 Digest (Repl) 126, 373
Moriarty (Inspector of Taxes) v Evans Medical Supplies Ltd, Evans Medical Supplies Ltd v Moriarty (Inspector of Taxes) - [1957] 3 All ER 718; 37 Tax Cas 540; [1958] 1 WLR 66; 28 Digest (Repl) 268 112
Rustproof Metal Window Co Ltd v Inland Revenue Comrs - [1947] 2 All ER 454; [1947] LJR 1479; 177 LT 657; 29 Tax Cas 243; 28 Digest (Repl) 438, 1916
Van den Berghs Ltd v Clark - [1935] All ER Rep 874; [1935] AC 431; 104 LJKB 345; 153 LT 171; 19 Tax Cas 390; 28 Digest (Repl) 117, 450
Judgment date: 1 March 1962
Judgment by:
Lord Morris of Borth-y-Gest
My Lords, the decision in this case turns on what is the correct legal result which should follow from the facts which are recorded in the Case Stated. The Special Commissioners were of the opinion that the "case" for the appellants succeeded. Shortly stated that "case" was that the lump sum payments which were received under the various agreements did not fall to be included in the profits or gains of the appellants for the reason that such lump sum payments represented capital receipts. The appellants claimed that in the course of their business they had acquired a vast store of knowledge and secret information relating to their secret processes of manufacture all of which (compendiously labelled as "know-how") represented a fixed capital asset of their trade: they claimed that the lump sum payments were capital receipts in respect of such fixed capital assets. The respondent on the other hand (while not suggesting that the appellants had set up a new trade consisting of dealing in patents and secret processes) submitted that it had become a part of the normal trade or business of the appellants to enter into agreements for the production of their engines by other persons under licence on payment of lump sums (and royalties and other payments) and that such lump sum payments were not capital receipts but were trading receipts. My Lords, the facts having been found, it was open to an appellate court to say that the view that the lump sum payments were of a capital nature rather than of an income nature was erroneous in law (see eg Doncaster Amalgamated Collieries Ltd v Bean and Rustproof Metal Window Co Ltd v Inland Revenue Comrs ). It is manifest that the circumstances that in the agreements which they made the appellants themselves employed the phrase "a capital sum" cannot determine the nature of the receipt.
The business of the appellants in the early years after their incorporation in 1906 had been confined to the manufacture and sale of motor cars. During the first world war they began to manufacture aircraft engines and with the development of the aircraft industry the manufacture of aircraft engines became the larger and more inportant part of their business. The appellants had continuously been engaged in metallurgical research and in the development of engineering techniques and secret processes and as a result acquired a fund of technical knowledge of which only a comparatively small part was capable of forming the subject-matter of patent rights. The successful development of successive types of aircraft engines all derived from the appellants' fund of knowledge and experience.
The appellants were assessed as "manufacturers of motor cars and aero engines". They manufactured and they also sold motor cars and aero engines. But types and designs of aero engines do not remain static. New engines will be designed and the newer designs will supplant the older ones. New knowledge will create new skill which in turn will generate further skill. With recognition of this it was open to the appellants to conduct their business as manufacturers in the way that they decided was most expedient and advantageous. There were some parts of the world in which for one reason or another they either could not or did not sell products made by themselves to their own designs and by the use in England of their knowledge and experience. In respect of such territories it would seem therefore that their current designs (with their transient novelty and superiority) could yield them no advantage. It would seem natural therefore that in reference to such territories they should as manufacturers use their knowledge, their designs and their skill in the best available way. As they could not in those territories sell that which they themselves had manufactured they could do the next best thing, which was to permit governments or others on payment of sums of money to manufacture within such territories and in order to enable that to be done to give all the necessary assistance by making documents available and by giving instruction. That is in effect what they did. Whatever description is given to that which in this case has been denoted by the words "know-how" the course of activity embarked on by the appellants was to put their current "know-how" to the most advantageous available use while it had its maximum current value. The appellants acted in the way in which they considered that they could best carry on their trade as manufacturers. This may have involved a development of the method in which they had previously traded, but the fact that many successive licensing agreements were made suggests to my mind that of set policy the appellants decided that their methods of trading as manufacturers should include that development. I cannot regard the licensing agreements as involving sales of successive portions of a fixed capital asset. So to regard the licensing agreements seems to me to be quite unreal. The appellants did not part with or get rid of their "know-how". The remarks made in the chairman's reports point to the conclusion that it had become a recognised part of the company's trading activities as manufacturers to obtain trading receipts by entering into licensing agreements: in that way profits would be derived from the use of the manufacturing knowledge and experience that the appellants had acquired and which was constantly being added to and kept up to date. The appellants considered that the demand for licences to manufacture reflected appreciation of the merits of what the appellants manufactured. Furthermore the licensing agreements contained provisions under which the appellants would divulge information to the other party if the appellants had made developments affecting the type of engine which was the subject of an agreement: as a result the other party would be enabled to enter into a further licensing agreement which would cover the development. Thus under the China agreement which was made on 13 February 1946, it was provided that the commission (acting for the Chinese government) was to select and designate the desired type of jet engine and notify Rolls-Royce of such selection "whereupon such engine so selected shall be the basic type of engine referred to in this agreement": there was a provision in regard to advising the commission as to improvements and modifications in the manufacture and design of the engine referred to: there was also a provision that if within five years Rolls-Royce put in series production a new type of gas turbine aircraft engine then (subject to a condition) Rolls-Royce would not license anyone to manufacture the engine in the conceded territory without first giving the commission an option on payment of a further "capital sum" to acquire a licence to do so.
The various circumstances to which I have referred distinguish the present case on its facts from Moriarty (Inspector of Taxes) v Evans Medical Supplies, Ltd . In that case there was not the feature of the repetition of licensing which exists in the present case and, as Upjohn LJ pointed out ([1961] 2 All ER at p 475), there was an isolated transaction which resulted in the imparting of certain knowledge of methods of preparation of products and of storing and packaging them in hot climates which knowledge would probably be applied in manufacture for a long time. The imparting of the knowledge would be to the detriment of the company's position and prospects in Burma. In the present case it is possible to survey the activities of the appellant company over the period of years following the time of the China agreement. Such a survey seems to me to show that the appellants decided as a matter of trading policy that in regard to certain territories they would adopt the method of permitting local manufacture on the terms of the various agreements that were entered into and in order to enable this to be done and so that the name and reputation of the appellants should not suffer that they would give all neessary assistance to ensure that the engines would be satisfactorily manufactured.
For the reasons which I have indicated I feel impelled to the view that the sums which are in question and which the appellants received under the terms of the agreements were trading receipts on revenue account.
I would dismiss these appeals.