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TMI Blog1956 (11) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) Evans Medical has developed and owns processes formulae and knowledge relating to the manufacture of pharmaceutical products and to the use of machinery plant appliances and devices used in such manufacture. (3) For facilitating the building and running of such factory Evans Medical propose to supply the Government of the Union of Burma with information and to organize the factory in the manner hereinafter mentioned." The agreement is then divided into separate parts-I, II, III, IV and V-and it may be said that the second and third recitals relate particularly to Parts I and II respectively. The first part, which I will read substantially in full, is as follows : "Part I. In consideration of the payment to Evans Medical by the Government of the Union of Burma of the capital sum of £100,000 sterling payable in the United Kingdom free from any deduction whatsoever (A) Evans Medical will provide and make available to the Government of the Union of Burma all drawings designs and plans and technical and other data and 'know-how' necessary for the establishment erection and installation of the factory and the commencement of production thereat of the pharmaceut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l yeast." 6. Part IV states the term of the agreement, and it will be recalled that in paragraph (D) of Part I the obligations as to non-disclosure to anyone else in Burma were expressed to be for the currency of the agreement. "The period during which this agreement shall remain in force shall be seven years from the date hereof but this agreement may be renewed on the same or similar terms," and it is said that the parties should consider renewal by a certain date. Paragraph 2 provides : "Subject as hereinafter mentioned the Government of the Union of Burma will not without the written consent of Evans Medical export to any other country any of the goods manufactured in accordance with the provisions of this agreement"; and there were provisos which qualified, to some extent not material for present purposes, that obligation. 7. Part V contained two provisions. "1. The Government of the Union of Burma will not divulge to any other Government person body or corporation such information as is conveyed to them by Evans Medical under the provisions of this agreement without the written consent of Evans Medical which consent is not to be unreasonably wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormulae, but were obligations to give to the Burmese Government the necessary instructions, information and advice to enable the Government to erect and establish the local factory capable of producing thenceforward the required supply of pharmaceutical and other articles. By way of contrast, Part II imposed on the company an obligation for a specified period to manage the production business, when started, and for that purpose to train the necessary Burmese personnel, and in the meantime to provide trained personnel themselves. For the former obligation, the single sum of £100,000 was to be paid by the Burmese Government ; for the latter an annual sum of not less than £25,000, from the date of the agreement. Put as briefly as possible-and this is the substance of the company's case-the payment of £100,000 was a single lump sum payment, the price which the Government of Burma agreed to pay in order to be given the necessary information so as to be put in the required position to enable them to set up in Burma the means of production of the required pharmaceutical and other articles. 10. But, in my judgment, this analysis of the agreement does not in the end m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficulty in sustaining the claim for the inclusion of the £100,000 in the general sum of taxable profits arising from the company's then trade for the taxable year in question. During the hearing before him Upjohn J., as we were informed, strongly pressed counsel for the Crown upon this part of their contentions as recorded in paragraph 14(iv) of the case stated Paragraph 14 : "(iv) that the provision of the facilities agreed to be furnished under Part I of the said agreement was within the trading objects of the company, and, in so far as the said sum of £100,000 was received in consideration for provision of these facilities, it arose to the company either from the trade it had previously carried on or from a new trade which it had commenced to carry on October 20, 1953", and the particular contention was ultimately abandoned before him by the Crown. It may be that this course of events in some degree influenced the judge's conclusion. Agreeing with him, however, that the question is one "essentially of fact" I have found it impossible to accept his view that there was no evidence to support the commissioners' determination. 13. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on or in the course of a new trade which it commenced to carry on on October 20, 1953, and that in either event the said sum was properly included in the computation for income tax purposes of the company's profits as wholesale druggists for the said year 1954-1955." The sentence undoubtedly reflects the argument of the Crown that the agreement marked the adoption by the company of a new and distinct trade, to which I have already referred. But, in my judgment, the sentence records the determination of liability-possibly not with entire accuracy in the circumstances-which flowed from the finding of fact in the all-important sentence preceding it, which in turn echoed the clear finding, based on the evidence of the chairman and managing director, contained in paragraph 11 of the case. I add a reference to a supplement issued by the directors to the company's report and accounts for the year 1953 which was exhibited to the case stated. In that document occur the following observations : "Experience and technology, let us call it know-how, is becoming an increasingly important export commodity. Under-developed countries are no longer content to buy goods of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question, however, here arises. The point here is whether what the company did was done by it in the course of its trade then being carried on ; and that question, as the judge himself stated, is essentially one of fact and does not involve any question of interpretation of the terms of the statute. 19. There remains the second question, namely, is the £100,000, though received in the course of trade generally, capital in the hands of the company ? The judge answered "Yes." He said [1956] 1 WLR 794, 805 : "The effect of the contract was this : the company parted with its secret processes to the Burmese Government for ever, but upon the terms that the Government would not without the consent of the company impart such information to another, such consent not to be unreasonably withheld. The company remained at liberty to carry on its wholesale trade there, and, in legal theory, could no doubt have thereafter set up a competing factory in Burma. In addition, the company was to supply technical data, drawings, designs and plans for the erection of a factory and of the installation of machinery appropriate and suitable for the manufacture of these known pharmaceu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences to secret processes in the argument and also in Upjohn J.'s judgment and in the case, there is, save in the recital in Part I, no mention in terms of such secret processes at all. Therefore, the disclosure of secret processes was merely incidental to the main obligation ; and it does not follow, as Sir Reginald Hills pointed out, that a payment is not an income payment merely because some capital assets are thereby involved. Consequently, thirdly, once it is agreed or held that the transaction was within the scope of the ordinary existing business of the company, there is nothing amounting to a parting at all with a capital asset. To my mind these arguments are formidable. There is no evidence that the £ 100,000 was "paid for the company's superiority" in this field of business. There are no grounds, as Sir Frank Soskice observed, for saying that any secret processes or knowledge were necessarily impaired ; it may be that their value might be enhanced. In other words, on this argument, there is no capital asset involved, and, in any case, no parting with it. On the other side, Mr. Senter has said that the secret processes were in fact extremely valua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income character, it must, in our opinion, be regarded as capital. This distinction is in some respects analogous to the familiar and perhaps equally fine distinction between payments of a purchase price by instalments and payment of a purchase price by way of an annuity over a period of years." One case, however, is more directly in point, namely, Handley Page v. Butterworth [1935] 19 TC 328. In that case, part of the payment received by the taxpayer was in respect of the disclosure by him of secret processes. The question arose, therefore, as it has arisen here, whether the disclosure could be regarded sensibly as in the nature of the sale of some asset or piece of property. In that connexion, the late Lord Romer, when sitting as a member of this court, said Ibid. 359 : "A patentee has, of course, a monopoly, and that monopoly, which is a right of preventing other people utilising his invention, is a capital asset in his hands. He may exploit that capital asset in either or both of the following ways : he can himself exercise his invention for profit, or he can grant licences to others to do so on payment of royalty. The profit he derives by exercising the invention hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the obligations under Part I are, in substance, obligations to give advice and instruction for completing the factory and getting it ready to start production, and if communication of the secret knowledge and processes is but incidental, then it would appear to me, having regard to the answer which I have already given to question (1), that question (2) should likewise be answered in the same sense as it was answered by the commissioners ; that is, that no sale or disposition of a capital asset has been involved, but that the £100,000 was a fee for general services rendered in the course of business. 24. It was pointed out in support of this view that, as I have already recited, the obligations in Part I, like those in Part II, would endure over a period of time. It was also observed that the factory has not yet, in fact, been built ; and Mr. Senter agreed, as I understood him, that the company would have to disclose relevant information and "know-how" acquired at least up to the date when the factory was completed. Paragraph (D) of Part I is in terms linked with the whole period of the agreement, and by those terms the company undertakes not to furnish "f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . I would on the whole, therefore, refer the case back to the commissioners to inquire and determine to what extent the £100,000 should be attributed to the transmission by the company to the Burmese Government of their secret processes. This court somewhat rarely refers back cases to the commissioners for further findings ; but, having regard to the terms of their existing findings (in paragraph 10 (i) particularly), I think this is a case in which justice requires that we should exercise that discretion. But the right to treat the £100,000 as capital must be limited to the extent to which it was referable to secret processes properly so called ; that is, to formulae or secret processes truly analogous to the subject-matter of letters patent, copyright and things of that kind. It would not, for example, include the sort of information recorded in the plans which were shown to us illustrating the way in which the company would lay out the factory and dispose the apparatus therein. Plans and designs of that kind only represent, I think, the recorded fruit of practical manufacturing or operational experience. 27. The form of the order may require to be considered so as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and machinery were being obtained, payments, which the company admitted to be of an income nature, were being made, and we were unable to take the view that the said sum of £100,000 was paid simply for the sale or assignment to the Burmese Government of secret processes analogous to patents." It appears to me from this reasoning that the commissioners were construing the agreement in the light of what was done under it, which is not, in my judgment, a permissible course to adopt. Whether they would have come to a different conclusion if they had construed the language of the document in the light only of admissible surrounding circumstances, I do not know. 33. It is, of course, quite true that regard must be had to a written instrument as a whole in order to ascertain the meaning of each and every part of it ; and it would be permissible, and indeed, obligatory, to consider the whole of the agreement of 1953 in inquiring, for example, as to the true nature of the activities into which the company was entering, and whether such activities did or did not constitute a new or different trade from that which it had carried on before. But where the commissioners went wrong, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot; (that is, the factory which was to be built) "of the pharmaceutical and other products mentioned in the schedule hereto." This obligation is clearly linked up with, and was intended to implement, the second recital ; and under it the company bound itself to communicate to the Government the "processes, formulae and knowledge" mentioned in that recital. That this is the effect of paragraph (A) of Part I is, I think, plain, for the Government could not commence production of the scheduled products unless they knew how to make them ; and some at least of such products were made under formulae, and in accordance with processes, which were secret. I therefore conclude that part, at all events, of the £100,000 which was to be paid to the company was in respect of secret information as to pharmaceutical products which the company was to impart to the Government. That this information was of value sufficiently appears from certain findings of the commissioners which are stated in the case. By paragraph 4 the commissioners, after referring to the Burmese Government's decision in 1953 to build a factory and laboratories for the purpose of establishing an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that the company had not sold or assigned any property …….The provision by the company under Part I of the agreement of what, in clause (D) of that part, are called 'facilities' is not in our opinion the sale or assignment of a capital asset in consideration of a capital price, nor is it the grant of a licence in consideration of a capital payment." 36. Upjohn J. took a different view. After pointing out that the commissioners had misconstrued the agreement in the manner which I have already indicated, he said that the company [1956] 1 WLR 794, 806 "was parting for ever with part of a valuable asset, and was doing so to enable an entirely new and competing industry to be set up there. That industry established by the skill and 'know-how' of the company could embark on an export trade which could compete with the company's own products in other countries. In that sense the company was dissipating its asset, and it must be remembered that a secret process once communicated to another is in jeopardy ; if it gets into wrong hands, the grantor has no protection." I find myself in complete agreement with this analysis of the posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on its operations in Burma or elsewhere in the same way as it had been doing before ; and that, consequently, there was no justification for the view that the value of the secret processes to the company had been in any way impaired by the communication of those processes to the Burmese Government. 39. This appears to me to be an unrealistic way of regarding the position. The value of the processes to the company lay in the fact that they were secret ; and those in question ceased to be secret from the moment when they were communicated to the Burmese Government. True it is that by Part V of the agreement the Government pledged itself not to divulge the information to anyone else without the company's consent ; but they became possessed of the information themselves and they would possess it for ever. When, in addition to this, it is realized that the Government wanted the information in order to inaugurate and carry on the manufacture and sale in Burma of products in which the company had hitherto enjoyed a factual monopoly, I cannot doubt but that the imparting of the information diminished the value to the company of its secret processes. What then is the result ? " ..... X X X X Extracts X X X X X X X X Extracts X X X X
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