Rolls-Royce Ltd v Jeffrey (Inspector of Taxes), Same v Inland Revenue Commissioners

[1962] 1 All ER 801

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(Decision by: Lord Reid)

Between: Rolls-Royce Ltd
And: Jeffrey (Inspector of Taxes)
Between: Same
And: Inland Revenue Commissioners

Court:

Judges: Viscount Simonds

Lord ReidLord Radcliffe
Lord Morris of Borth-y-Gest
Lord 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

Hearing date: 7, 8, 12 February 1962
Judgment date: 1 March 1962

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Decision by:
Lord Reid

My Lords, in 1946 the appellants had an immense fund of technical knowledge and experience with regard to the design and manufacture of aircraft engines. Certain countries were unwilling to buy engines from them but wished to manufacture similar engines themselves. Between 1946 and 1953 agreements to grant "licences" were made in respect of Nationalist China, France, the United States of America, Belgium, Sweden, the Argentine, and Australia. Generally the appellants supplied a very large number of drawings and much other information and undertook to teach technicians from these countries and to send some of their own employees to supervise operations there. The payments made to the appellants under these agreements included lump sums and royalties. The question in this case is whether these sums were trading receipts. If they were the assessments appealed against are correct. If they were not the appellants admit that the royalties are taxable under the Income Tax Act, 1952, Sch D, Case III, but maintain that the lump sums are not taxable.

The appellants' case is that their fund of knowledge and experience, mostly embodied in documents and drawings and colloquially known as "know-how", was a capital asset, and that these agreements were in essence sales of parts of it, so that the lump sums were capital receipts. I do not find it necessary to decide whether that fund was a capital asset: I shall assume that it was.

The commissioners have made no specific findings of fact in the Case Stated with regard to matters in dispute. They simply set out certain admitted facts, the relevant parts of the agreements, excerpts from annual reports by the appellants' chairman and the contentions of the parties, and then they say that on consideration of the evidence and arguments they are of opinion that the case for the appellants succeeds. They adjourned the appeal for the agreement of figures on the footing that all lump sums fall to be treated as capital receipts. It was argued that in reaching this decision the commissioners must have made certain inference of fact favourable to the appellants, and that we must now deal with the case as if those inferences had been expressly stated: being inferences of fact they would now not be subject to review unless they were unreasonable or there was no evidence to support them. I am not prepared to proceed in that way. If inferences of fact had been stated they might or might not have been binding. But as none have been stated I must draw my own conclusions from the facts and documents set out in the Case. Both parties agreed that the final question whether these lump sums were capital or income is a question of law to be determined on a consideration of the whole facts.

I cannot accept the contention that by each of these agreements the appellants sold a part of that capital assets and received a price for it. There is nothing in the case to indicate that that capital asset was in any way diminished by carrying out these agreements. The whole of their knowledge and experience remained available to the appellants for manufacturing and further research and development, and there is nothing to show that its value was in any way diminished. They had not even given up a market which had been open to them. They could not sell their engines in these countries whether they made these agreements or not. If they had not made these agreements they would have got nothing from these countries; by making them they were able to exploit their capital asset by receiving large sums for its use there. In essence what they did was to teach the "licensees" how to make use of the "licences" which they granted.

The appellants found on the decision of this House in Moriarty (Inspector of Taxes) v Evans Medical Supplies Ltd . In that case it was held that the company parted with a capital asset and received for it a capital sum. For one thing they lost their Burmese market. And further it was said to be obvious that the capital value of the secret processes must have been greatly diminished by their disclosure to the Burmese government. Every case of this kind must be decided on its own facts and at least in these two repects that case was very different from the present case. There is also the difference that in that case there was a single transaction whereas in the present case there was a series of similar transactions. That in itself might not count for much, but it is, I think, important that these transactions arose out of deliberate policy. Even in the first agreement there was in cl 23 a provision that certain further payments should not be less favourable than the sums demanded from other manufacturers for a similar licence.

I have therefore no doubt that these lump sums were not capital receipts and that the commissioners' decision was wrong in law. But the appellants say that nevertheless these receipts did not come to them as receipts of their trade of manufacturing and selling aircraft engines and motor cars and for that reason should not enter the computation of the profits of that trade. I cannot agree. It is for each trader to determine the scope of his own trade. No doubt a trader can carry on two separate trades simulataneously. But the facts of this case clearly indicate that this course of granting "licences" was merely an extension of their existing trade devised to meet the difficulty that they could not sell their engines in the countries of the "licensees". It was merely another method of deriving profit from the use of their technical knowledge, experience and ability. The appellants sought to rely on the fact that in the assessments appealed against their trade is described as "manufacturers of motor cars and aero engines", but I see no reason why there should have to be set out a full description of the taxpayers' trade, and this abbreviated description in no way misled the appellants.

I agree that these appeals must be dismissed.