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TMI Blog1962 (2) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... cts found by the commissioners and to the inferences drawn by them from those facts, must ultimately determine as a question of law alike whether receipts by the taxpayer are capital or income for purposes of income-tax and whether expenses incurred by him are for the same purposes to be treated as incurred on income or capital account. In the present case the appellant company over a number of years received under agreements, which were sometimes called licence agreements and sometimes convention agreements, various sums of money and amongst them substantial sums which were described as capital sums. It was urged on its behalf that these sums were the consideration that it received for the sale of a fixed capital asset and that therefore they could not be regarded as income for tax purposes. My Lords, it appears to me to beg the question to refer to that which the appellant sold as a fixed capital asset. I will not analyse the several agreements made by the appellant first with the Chinese Government and afterwards with other foreign governments and companies. It may be said compendiously, in the words of Holroyd Pearce L.J. [1961] 1 W.L.R. 897, 899; [1961] 2 All E.R. 469, C.A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision did not establish or purport to establish a principle that whenever and however often a company communicates what is called "know-how" to a third party and receives what is called a lump sum for it, that sum is for tax purposes a capital receipt. The circumstances may lead, as, in my opinion, they lead in the present case, to the opposite conclusion. I would dismiss these appeals. 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Evans Medical Supplies Ltd. v. Moriarty [1958] 1 W.L.R. 66; [1959] 35 I.T.R. 707. 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 respects that case was very different from the present case. There is also the difference that in that case there was a single tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . But it is a reality when associated with production and development such as that of Rolls-Royce, and a large part, though not the whole of it, finds its material record in all those lists, drawings and manufacturing and engineering data that are specified in the various licence agreements. It is fundamental to the appellants' case that we should categorise this asset as being part of their fixed capital. Indeed, their argument proceeds from the premise that it is fixed capital. That, I think, is to start from too assured a base. An asset of this kind is, I am afraid that I must use the phrase, sui generis. It is not easily compared with factory or office buildings, warehouses, plant and machinery or such independent legal rights as patents, copyright or trademarks, or even with goodwill. "Know-how" is an ambience that pervades a highly specialised production organisation and, although I think it correct to describe it as fixed capital so long as the manufacturer retains it for his own productive purposes and expresses its value in his products, one must realise that in so describing it one is proceeding by an analogy which can easily break down owing to the inheren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as recorded in the drawings and other data and as conveyed by direct instruction, advice and information. If one analyses the various things that the appellants are to do in return for the money they are to get they all come down to forms of instruction and advice. By clause 2 they are to supply "complete drawings and manufacturing and engineering data and information adequate and reasonably necessary to enable the commission to manufacture" the particular Rolls-Royce engine selected. No doubt the things to be supplied are tangible objects, but then so are textbooks, formulae or recipes. They are teaching at long range. There are supplementary obligations. By clause 10 the appellants are to give the commission advice as to further improvements and modifications in the engine's manufacture and design so far as they lawfully can. Again, clause 14 binds them to receive and instruct in their works persons nominated by the commission with a view to rendering them capable of constructing the engine; and under clause 16 the appellants undertake to release one or more competent members of their staff for temporary secondment to help in construction work in China. Finally, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e products. I daresay that they would have preferred, ideally, to reserve their "knowhow" solely for the purposes of their own manufacture. I am not sure of that, when I read some of the chairman's speeches at the annual meetings. However that may be, it is clear that they saw that, having the "knowhow "they could derive profit from the manufacture of their engines, even by others, in parts of the world where they either could not or would not sell or manufacture them themselves, provided only that they equipped those others with the requisite expertise. So they turned the "know-how" to account by undertaking for reward to impart it to the others in order to bring about this alternative form of manufacture. My Lords, in my opinion, moneys so obtained arise from the appellants' trade as "manufacturers of motor-cars and aero-engines." I appreciate their point that such moneys are not derived from their own operations of manufacture and therefore, if assessable at all, must be attributable to a new and separate trade consisting of the exploitation of "know-how" for reward. But this, with all respect, is a verbalism, and I thin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 upon 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 upon 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58] 1 W.L.R. 66; [1959] 35 I.T.R. 707. In that case there was not the feature of the repetition of licensing which exists in the present case, and as Upjohn L.J. pointed out, 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 upon 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 necessary assistance to ensure that the engines would be satisfactorily manufactured. For the reasons which I have indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r disclosed to anyone before, involved the gradual cessation of the company's own wholesale trading activities in Burma. The company parted with an asset which was the source or one of the sources of its profits. No similar agreement had been entered into by the company with any other foreign government or party. The ratio of the speech of Viscount Simonds, who held that the ? 100,000 was a capital receipt, was that the process was a secret process and that the transaction "necessarily involved the realisation of a considerable part of its capital value," quoting from Lord Fleming's judgment in Earl Haig's Trustees v. Inland Revenue Commissioners [1939] 22 Tax Cas. 725, 735; [1939] S.C. 676. It was a "once for all" sale. My Lords, the circumstances of the present case are very different. The case is said, like Evans Medical Supplies [1961] 1 W.L.R. 897, to involve the sale of "know-how." There is no mystique attaching to this word. In fact, what the appellants did was to hand over in terms of the agreements the complete drawing and manufacturing and engineering data necessary to enable the other contracting parties to manufacture the aero e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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