Wolf Electric Tools Ltd v Wilson (Inspector of Taxes)
[1969] 2 All ER 724(Judgment by: Pennycuick J) Court:
Judge:
Pennycuick J
Case References:
British Dyestuffs Corpn (Blackley) Ltd v Inland Revenue Comrs (1924) - 12 Tax Cas 586; 28 Digest (Repl) 25, 105.
Edwards (Inspector of Taxes) v Bairstow - [1955] 3 All ER 48; [1956] AC 14; [1955] 3 WLR 410; 36 Tax Cas 207; 28 Digest (Repl) 397, 1753.
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; 28 Digest (Repl) 26, 112.
Musker (Inspector of Taxes) v English Electric Co Ltd Inland Revenue Comrs v English Electric Co Ltd (1964) - 41 Tax Cas 556; Digest (Cont Vol B) 386, 112b.
Rolls-Royce Ltd v Jeffrey (Inspector of Taxes), Same v Inland Revenue Comrs - [1961] 2 All ER 469; [1961] 1 WLR 867
Rolls-Royce Ltd v Jeffrey (Inspector of Taxes), Same v Inland Revenue Comrs - [1962] 1 All ER 801; [1962] 1 WLR 425; 40 Tax Cas 443; Digest (Cont Vol A) 845, 112a.
Judgment date: 26 November 1968
Judgment by:
Pennycuick J
I have before me an appeal by Wolf Electric Tools Ltd (to whom I shall refer as "the company") against a decision of the Special Commissioners whereby they affirmed in principle an assessment under Case I of Sch D to the Income Tax Act 1952 for the year 1960-61 on the company in respect of its profits as mechanical and electrical engineers. The issue in the case is whether, in computing those profits, there should or should not be taken into account the value of 3,625 ordinary shares of 100 rupees each in an Indian company, Ralliwolf Private Ltd received by the company under certain arrangements made in the year 1959.
I will first recite the facts as they appear in the Case Stated. I will not read the Case Stated in full, because certain parts of it have, I think, only a rather indirect bearing on the question which I have to decide. Paragraph 1 sets out the assessment under Case I. It also sets out an assessment under Case VI of Sch D in respect of the proceeds of sale of patent rights. That contention has been abandoned by the Crown, and I do not pursue it.
"2: Shortly stated the questions for determination were whether 3,625 Ordinary shares of 100 Rupees each in an Indian Company, Ralliwolf Private Limited, (hereinafter called 'Ralliwolf') represented receipts of the Company's trade to be taken into account in computing the profits assessable under Case I ... "
Paragraph 3 gives the names and qualifications of the three witnesses who gave evidence. They were Mr G M Wolfe, the chairman and managing director of the company and of its holding company, Wolf Electric Tools (Holdings) Ltd (which is referred to as "the Holding Company" in the Case); Mr Sheppard, the chief accountant and secretary of Rallis India Ltd (which is referred to as "Ralli" in the Case); and Mr McGilchrist, a member of the firm of Fuller, Jenks Wise and Co the auditors of the company. Paragraph 4 sets out a number of documents which are annexed to the Case and available for inspection. I shall refer later on to two or three of those documents.
"5: As a result of the evidence, both oral and documentary, adduced before us we find the following facts proved or admitted:--(i) The Company was incorporated in 1908 to take over and carry on the trade formerly carried on by a partnership. [Then an extract from the memorandum is annexed.] The Company's trade was mainly concerned with the manufacture of electric power tools of which some fifty different industrial and domestic models were produced. In the course of the development of its electric tools the Company evolved various production methods and a series of drawings, jigs, processes and schedules of manufacture. They were valuable assets of the Company and safeguarded by strict security. Taking as an example a typical mechanical part, a drawing would provide the basic information necessary to make a die from which a casting could be produced. When the casting had been produced it required machining so that other components could be fitted to it. The Company worked to clearances of a thousandth and sometimes a ten-thousandth of an inch. The particular casting required eighteen different machining operations which had to be performed in the correct order. The research and development activities of the Company were carried out in a separate building which could only be entered by those employees who were concerned with this work. Much of the information was patentable but patents were not always taken out. (ii) For many years the Company had carried on an extensive export trade with the Commonwealth and other countries through its own branches and also through sales agencies which sold and serviced the Company's English products ... [The Case then goes on to give particulars of a subsidiary of the company established in Australia. I do not think anything really turns on that. It further gives particulars of an agreement with a French company made in 1956 in relation to one particular machine. Again, I do not think anything turns on that.] The Company had started to trade with India before 1933 when Mr. Wolfe, the present Managing Director of the Company became the Company's export manager. At that time the Company had two agents in India, one in Bombay and the other in Calcutta. In 1937 Marshall Sons and Company was appointed sole agent in India. After the war the Company resumed its exports to India with the same agent. In or about 1950 the Company's sole agency in India was taken over by Ralli who had branches in all the main centres. Ralli bought from the Company on a principal to principal basis. In the two years 1954 and 1955 the Company's total exports amounted to 60,533 machines with accessories and spare parts. Ralli imported at least 3,000 machines into India each year which represented 10% of the total annual exports of the Company by volume and, because the exports to India were mainly of the heavier and more expensive models, the percentage by value was even greater. This volume of business with India represented the Company's largest export market outside the countries where the Company maintained its own branches. In addition, from 1950, when import licensing restrictions in India became more stringent, the Company made arrangements to deal directly with the Indian Government's Stores Department by tender through the High Commissioner's Office in London. (iii) In 1954 Ralli informed the Company that because of the Indian Government's policy of encouraging the setting up of local factories for making tools, unless the Company undertook to manufacture in India the whole of the Indian market would be lost. The Company was aware that certain foreign manufacturers of power tools were ready to set up factories in India on the Indian Government's terms. The Indian Government's Development Officer indicated to Ralli that unless a scheme was submitted by Ralli quickly, it might not be considered. It was also indicated that while indigenous components would be expected to be used when available, unrestricted import would be permitted of any components which could not be obtained locally. Ralli were also informed that while there would be protection of locally made tools by way of restricted import of foreign made competitors provided that the locally made tools were only slightly more expensive, if the price of the locally made tools were out of all proportion to the price of the imported articles, the scheme for local manufacture would not be approved. On 13 September, 1955, the Company wrote to Ralli's agents in London, Ralli Brothers Ltd as follows: 'whilst we are naturally reluctant to sanction the manufacture of our products by any organisation not controlled by our own management, we appreciate the peculiar circumstances which exist in the case of India, and the development towards self-sufficiency in Asia generally which must take its course. After due deliberation, therefore, we are prepared to agree the principle of the assembly/manufacture of selected Wolf electric tools in India by your associates, and agree that, in the initial stage, this manufacture need not involve the formation of a new company, but should be controlled and financed by Rallis.' On 30 July, 1956, the Company signed an agreement with Ralli for the assembly and partial or complete manufacture of certain tools in India. The agreement stipulated that the tools should bear the name 'wolf', that the Company would grant a licence to Ralli to use in India any patent rights and that Ralli would be given all formulae and technical information then used by the Company and all new inventions and formulae relating to the manufacture of the selected tools which the Company might obtain by means of development and research work in England. The Company also agreed that it would supply all the drawings, schedules and date sheets required for the manufacture of the selected tools for which Ralli would pay to the Company a fee of £500 a year until a new company was promoted and commenced business. It was also agreed that control of the proposed company would go by means of a majority shareholding to Indian interests. This requirement was insisted upon by the Indian Government. [That agreement is annexed but it is, I think, sufficiently summarised in the foregoing paragraph. The agreement was superseded later on.] (iv) On 31 October, 1958, Ralliwolf was incorporated in India to carry on the Company's trade in India. The consent of the Indian Government to the formation of Ralliwolf was given on the condition that Ralli would be the majority shareholders. [Then a copy of the memorandum and articles of association of Ralliwolf is annexed. It was pointed out in argument that under the articles Mr G M Wolfe was to be one of the first directors of Ralliwolf, the other two being in India.] On 5 January, 1959, Ralli agreed with the Holding Company, on behalf of the Company, to take 55% of Ralliwolf's issued share capital and the Holding Company agreed to take 45% of Ralliwolf's share capital. It was also agreed that the Holding Company should supply all present and future technical knowledge relating to the tools selected for manufacture in India. [That agreement is annexed. Its provisions were duly carried into effect by two subsequent agreements. It is only significant, I think, as showing that the two subsequent agreements, although they differ by some months in date, were steps in a single pre-arranged transaction.] The authorised share capital of Ralliwolf was 50 lacs of Rupees divided into 50,000 shares of 100 Rupees each. The issued share capital of Ralliwolf was 20,000 shares. Under an agreement of 16 February, 1959, between the Holding Company, Ralli and Ralliwolf, the Holding Company undertook to subscribe for 9,000 Ralliwolf shares, the consideration being:--(a) as to 5,375 shares, the transfer of plant and equipment to enable the Indian factory to commence work and (b) as to the remaining 3,625 shares (which form the subject matter of this appeal) the supply of drawings, designs, schedules, technical knowledge and other data required for the establishment of the factory and the production of the Company's tools selected for manufacture in India. [That agreement is annexed. I need not refer further to it.] (v) On the same day, 16 February, 1959, the Holding Company and Ralliwolf signed an agreement ... "
which is annexed and marked F. I must refer to that agreement more specifically. The agreement is made between the company (called "Wolfs") of the one part and Ralliwolf Private Ltd (called "Ralliwolf") of the other part. It recites:
"(i) Processes and formulae relating to the manufacture of certain ranges or portable electric tools (hereinafter comprehensively referred to as 'the selected tools' and set out in the schedule hereto) and components thereof and accessories thereto are exclusively owned by [the company]. (ii) Ralliwolf was incorporated on the 31st day of October 1958 with an authorised capital of 50 lacs of rupees divided into 50,000 Equity shares of 100 rupees each. (iii) Ralliwolf has as its main object the manufacture and marketing in India of, inter alia, portable electric tools. (iv) Ralliwolf proposes to build in Bombay a factory for the manufacture of the selected tools. (v) For facilitating the establishment and organisation by Ralliwolf of a factory for the purpose of manufacturing the selected tools [the company] have agreed for the consideration hereinafter mentioned to execute such Agreement as is hereinafter contained.
"Now therefore this agreement witnesseth as follows: 1. In consideration of the issue to [the company] by Ralliwolf of 3625 Ordinary shares of 100 rupees each in the capital of Ralliwolf credited as fully paid up (which shares shall be so issued to [the company] immediately after the execution of these presents) (i) [the company] will provide and make available to Ralliwolf all present and future drawings designs schedules and technical knowledge and data necessary for the establishment erection and installation of the factory and the production thereat of the selected tools."
The company then goes on to undertake to supply various designs, and so forth, and to grant or assign to the company all Indian patents, the benefit of all future inventions, and so forth, all related to the selected tools. Then, in cl 1 (iv):
"[The company] hereby undertake that during the currency of this agreement the facilities hereby agreed to be furnished to Ralliwolf under the preceding sub-clauses of this clause shall be exclusive to Ralliwolf and shall not during the currency of this Agreement be furnished to any other person or corporation in India."
Then, cl 4:
"This Agreement shall come into force on the signing hereof and shall remain in force for so long as the said Manufacturing and Marketing Agreement remains in force."
That agreement has already been referred to, and was in fact executed on 19 August 1959. To return to the Case:
"(vi) As well as supplying Ralliwolf with drawings and specifications of the components of the Company's tools and the many schedules of manufacturing processes required to make them, the Holding Company undertook to design the lay-out of the Indian factory and to supply to Ralliwolf full data and specifications and all other information relating to the machinery and equipment necessary for the manufacture or assembly of the Company's tools. The design of some of the Company's tools was more complex than of others but their years of experience had taught the Company the best and simplest methods of constructing each component of a tool and while this information was not covered by patents it was secret in so far as it was not available to the Company's competitors. [The Case then refers to patents which were not considered to be of much value.] (vii) On 19 August 1959, a further agreement was made between the Holding Company and Ralliwolf in which Ralliwolf agreed, inter alia, that the tools assembled or manufactured in India would be marketed only in India and Nepal but the Holding Company would consider permitting exports by Ralliwolf when the possibility of exports arose. It was also agreed that the Company would afford training at its works in England to men selected by Ralliwolf and intended to fill technical posts in the latter's factory."
That agreement is annexed and I must read certain provisions from it. The agreement is made between the company (called "Wolfs") of the one part and Ralliwolf Private Ltd (called "Ralliwolf") of the other part. It recites:
"Whereas the parties have agreed for the assembly and partial or complete manufacture in India of certain electric tools and associated accessories, as set out in the First Schedule hereto (hereinafter referred to as 'the selected tools') to be marketed under the trade marks of [the company] and for the purpose of regulating their relationship Ralliwolf and [the company] have decided to enter into this agreement upon the terms and in the manner hereinafter appearing.
"Now this Agreement witnesseth: 1. Subject to the special conditions stated in Clause 13 hereof and relative to the subject-matter of that Clause this Agreement shall be in force subject to renewal or modification with the prior approval of the Government of India for an initial period of ten years from the date hereof unless previously cancelled by mutual consent of both parties or terminated as hereinafter mentioned. 2. The territory to be covered by the terms of this Agreement shall be the Union of India and Nepal (hereinafter called 'the territory'). Ralliwolf agree that the tools assembled and/or manufactured in India will be marketed in the territory only but [the company] will consider permitting exports from the territory when the possibility of such exports arises. [The company] agree that during the currency of this Agreement they will not establish any other factory in the territory or grant trade mark or patent licences to any other person firm or company in the territory and that they will not sell any of the completed tools of the types manufactured or to be manufactured under this Agreement in or to the territory except to Ralliwolf or with the consent of Ralliwolf."
There follow a considerable number of provisions, including those for technical training of Ralliwolf's employees in England.
To return again to the Case Stated:
"(viii) After 19th August, 1959, when the Indian Government approved the Ralliwolf manufacturing scheme, import licences were issued for components from England in decreasing quantities as Ralliwolf took over the local manufacture of components on a progressive basis. Prior to August, 1959, the value of the Company's goods imported into India was some £75,000 to £90,000 per annum. The total sales of the Company's products imported into India from 1960 to 1966 amounted to £5,085, an average of only £700 a year. The percentage value of the Company's Indian exports in terms of the value of total exports (other than to associated companies) from after the war until July 1956 was about 15%: for the period from 1st August, 1956, to 19th August, 1959, the percentage value was about 4 1/2%. After the 19th August, 1959, the total value of the Company's global exports was never less than £1 million and was increasing annually. After August, 1959 components were supplied to Ralliwolf on a cost basis which resulted in no profits to the Company. In the accounts of the Holding Company for the year ended 31st December, 1960, the item of trade investment, £40,937 represented the total value of the Company's shareholding in Ralliwolf including the 3,625 shares issued in consideration of supplying the drawings and information but no money value was attributed to these shares in the Company's books. Ralliwolf had subsequently issued further shares to the Company in the period 1963 to 1965. The 3,625 shares represented a nominal value of £27,092 at the agreed rate of exchange."
Then there are annexed the holding company's accounts for a number of years. Those accounts contain a report of the chairman's speech at the annual general meeting of the holding company each year. It is quite clear from those reports that the holding company intended that the company should continue to derive a profit from India through the medium of its holding in the Ralliwolf company when established.
"6. It was contended on behalf of the Company as follows: ... (i) that the information was a capital asset of the Company's trade; (ii) that the disclosure of information was not an activity of the Company's trade; (iii) that the disclosure of information was not, in any event, a realisation of assets for money's worth, being an investment operation; and (iv) in the alternative, that the shares in question of Ralliwolf were received as consideration for what could be described as 'keep out payments' and were not trading receipts ...
"7. It was contended by H.M. Inspector of Taxes: ... (i) that the transaction in regard to the 3,625 shares was a natural development of the Company's technique for exploiting the Indian market to provide trading income; (ii) that the receipt by the Holding Company on behalf of the Company of the shares was not a separate trading activity of divulging expertise but a method of increasing the Company's income as mechanical and electrical engineers by using know-how to the best advantage in a market which could otherwise be closed; (iii) that the Agreements entered into by the Holding Company on behalf of the Company did not amount to an outright sale but merely an assignment for a period of ten years in respect of the selected tools which did not exclude the Company from the Indian market in regard to other tools manufactured by the Company or to the supply of components. While there was evidence of restriction of imports by the Indian Government this was not covered by the Holding Company's Agreements with Ralli or Ralliwolf; (iv) that the Company told others how to manufacture its tools and the receipts for the information were revenue in the Company's hands."
Paragraph (viii) sets out the cases which were referred to. I shall mention certain of those at a later stage.
"(ix) We, the Commissioners who heard the appeals, gave our decision as follows ... [and they set out the assessment. Then] The first question we have to decide is whether the 3,625 shares of 100 Rupees each in an Indian company, Ralliwolf, issued fully paid by Ralliwolf to the Holding Company on behalf of the Company is a receipt on revenue account or capital account ... After consideration of all the evidence, both oral and documentary, and the arguments addressed to us and the authorities cited to us we are of opinion that this Case is not on all fours with Moriarty (Inspector of Taxes) v. Evans Medical Supplies Ltd.. We think rather that this case falls within the decision in Rolls-Royce, Ltd. v. Jeffrey (Inspector of Taxes). In arriving at this conclusion we have applied the criterion laid down by VISCOUNT SIMONDS in the Rolls-Royce ([1962] 1 All ER at p 803; 40 Tax Cas at p 491.) case where he quoted from the test laid down by BANKES, L.J., in British Dyestuffs Corpn. (Blackley) Ltd. v. Inland Revenue Comrs. ((1924) 12 Tax Cas 586 at p 596.): '... looking at this matter, is the transaction in substance a parting by the Company with part of its property for a purchase price, or is it a method of trading by which it acquires this particular sum of money as part of the profits and gains of that trade?' We are of the opinion that this case falls under the second category rather than the first of BANKES, L.J.'s two categories. While we accept that the Company has had considerable trading difficulties over the Indian Government's restrictions on imports we do not think these affected the character of the consideration as being receipts of its trade."
They accordingly held that the appeal failed in principle, and they rejected the alternative assessments under Case VI. As I have said, the Crown has abandoned any contention based on those alternative assessments.
It has not been challenged on behalf of the Crown that this is a case in which the court has the right and duty to review the decision of the commissioners and to reverse that decision if it reaches the conclusion that the decision was not justified by the particular facts established before the commissioners. I need not therefore refer to the well-known case of Edwards (Inspector of Taxes) v Bairstow.
I find it impossible to reach the same conclusion as did the commissioners in this case. The position before the execution of the 1959 agreements was that the company had among its assets, first, a fund of confidential material in relation to its manufacturing processes and, second, its connection with India through the Ralli company, which purchased the company's products as principal and in due course, no doubt, distributed them. The Indian connection was of the nature of goodwill. Both those assets as I have stated them were in themselves plainly capital assets of the company's trade. In 1959 the company and the Ralli company entered into the agreements which I have mentioned. Those agreements were made under the threat of Indian legislation restricting imports. There were certain transitional agreements to which, I think, I need not further refer. The effect of the final agreements made in 1959 was that an Indian company--ie, the Ralliwolf company--was established with a capital issued as to 55 per cent to the Ralli company and as to 45 per cent to the company. The Ralliwolf company took over the manufacture of the selected tools, and it also took over the benefit of the Ralli company connection. The Ralli company did not, I think I am right in saying, undertake any specific obligation to distribute the Ralliwolf company's products, but it is clearly implicit in the entire transaction that the Ralli company, being the majority shareholder in that company, would distribute that company's products. The company undertook to supply confidential material to the Ralliwolf company in order that the Ralliwolf company should be enabled to carry on the manufacture of the selected tools. In addition, by the exclusivity provisions the company undertook not to compete, in effect, with the Ralliwolf company in India as regards the selected tools. The Ralliwolf company issued 45 per cent of its shares to the company in return for the obligation to provide confidential material.
The effect of that transaction as regards the company was simply, it seems to me, to alter the company's capital profit-making structure; ie, instead of having its own goodwill in India as regards the selected tools, the company acquired a 45 per cent interest in the new company and thenceforward derived its profit through those shares. If the transaction had embraced the entire Indian connection of the company, and if the share consideration had been expressed to be attached to a transfer of that connection--ie, in effect, goodwill--it is perfectly clear that no element of taxable profit would have been involved. The contrary is not, I think, suggested on behalf of the Crown. If it is suggested, then I think the answer would be plainly in the negative. One can illustrate that point, if illustration is necessary, by considering what would have been the position if, instead of the Ralliwolf company being owned as to 55 per cent by the Ralli company and 45 per cent, by the company, the new Indian company had been a wholly-owned subsidiary of the company.
In fact, the transaction was not carried out in that simple manner. In three respects the transaction was different from a simple transaction of that kind. In the first place, the transaction was limited to the selected tools; in the second place, the transaction took the form of an exclusivity provision rather than of a transfer of goodwill; and, in the third place, the consideration was attached, and attached exclusively, to the obligation to supply information. I do not think that any of those features makes any difference in principle.
So far as the first one is concerned--ie, that the transaction was limited to selected tools--the facts as found by the commissioners are not entirely clear. It is I think clear that the company manufactured in England a range of tools much wider than the selected tools set out in the 1959 agreements. It does not appear whether the company had at that date been selling any tools in India--that is, to the Ralli company--other than the selected tools. I was troubled by this point, and wondered whether it was necessary to obtain further evidence on it before reaching a conclusion. However, I think that is not necessary. It is plainly open to a trader to transfer his connection, either generally or in a limited area, quoad only some limited range of the goods manufactured by him. If the subject-matter of the transfer is a capital asset, then the transfer is nonetheless the transfer of a capital asset, and the consideration a capital receipt, by reason of the fact that the asset is severed by the trader transferring one part and retaining the other. Junior counsel for the Crown, at any rate, was disposed to accept that as being a correct statement.
The second feature is that the transaction took the form of an exclusivity provision rather than of an assignment of goodwill. Generally speaking, I should have thought that where a trader has an existing connection in a given country the correct label to give a transaction such as the present would be an assignment of goodwill. An exclusivity or "keep out" provision is more appropriate where there is no existing connection. It may be that the reason why the exclusivity type of provision was chosen is that the 1959 transaction was confined to the selected tools, so that in form at least it would not have been appropriate to express the transaction as a simple transfer of the company's goodwill in India. However that may be, I do not think there is any difference in substance between a provision for exclusion from India quoad the selected tools and a provision for transferring the goodwill of the company in India quoad the selected tools. Again, at any rate junior counsel for the Crown was not disposed to suggest there was any substantial difference.
The third feature is that the consideration for the issue of the shares was expressed to be the obligation to supply information. That is a circumstance to which due weight must be given, but I do not think it affects the result. Where an obligation to supply information is given in connection with the transfer of a a local connection, that obligation represents on the face of it, and in the absence of any other special circumstances, the breaking up of part of the capital asset consisting of the fund of confidential material rather than its retention intact and its exploitation. It is perfectly plain that that would be so if the transaction were expressed to take the form of an assignment of goodwill coupled with an obligation to supply confidential information. I do not think that the form of transaction adopted here alters the position.
Counsel for the Crown made the contention, among others, that the shares in the Ralliwolf company represented machinery whereby the company intended to continue and did continue to earn profit in India. That is undoubtedly correct: the shares in the Ralliwolf company did indeed represent such machinery. But the consequence of that, it seems to me, is that the company thenceforward derived its profit from India through the dividends on the shares in the Ralliwolf company instead of through the sale of its own products. There is no reason that I can see why one should treat the machinery as a taxable profit as well as the dividend.
It will be remembered that the duration of the 1959 agreements was ten years, although that period could of course have been either curtailed or extended by mutual consent. It has not been strenuously contended, I think, that the restriction of the transaction to that relatively long period prevents the transaction from being in the nature of a disposal of capital. It is plain that after ten years the company's own Indian connection would have wholly disappeared as regards the selected tools.
I was taken at length, very properly, through the three cases of Moriarty (Inspector of Taxes) v Evans Medical Supplies Ltd; Rolls-Royce Ltd v Jeffrey (Inspector of Taxes); and Musker (Inspector of Taxes) v English Electric Co Ltd. Counsel for the company contended that this case fell within the scope of the Evans Medical Supplies case: counsel for the Crown contended that it fell within the scope of the Rolls-Royce and English Electric cases. The distinction between the two types of case is made in a number of speeches in the House of Lords in the two later cases. In the Rolls-Royce case ([1962] 1 All ER at p 803; 40 Tax Cas at p 490.) Viscount Simonds said:
"I must add a word on Moriarty (Inspector of Taxes) v. Evans Medical Supplies. Ltd., ... since I was a party to the majority decision in this House. In the Court of Appeal in the present case UPJOHN, L.J., who had given the first decision in that case pointed out the clear difference between the two cases. The facts in the earlier cases were complicated, but the inference was there drawn that the capital sum in question was paid for the communication of secret processes to the Burmese government with a resulting total loss to the company of its Burmese trade. I applied in that case and would apply here, too, the test laid down by BANKES, L.J., in British Dyestuffs Corpn. (Blackley) Ltd. v. Inland Revenue Comrs. [(1924), 12 Tax Cas at p 596.]: '... looking at this matter, is the transaction in substance a parting by the company with part of its property for a purchase price, or is it a method of trading by which it acquires this particular sum of money as part of the profits and gains of that trade?' In the circumstances of that case, regard in particular being had to the fact that the transaction was an isolated one of its kind, the conclusion was inevitable that the so-called capital sum was a receipt of a capital nature ... The circumstances may lead as in my opinion they lead in the present case to the opposite conclusion."
The distinction was taken up again in the English Electric case (12). I will cite one passage from the speech of Viscount Radcliffe ((1964), 41 Tax Cas at p 585.):
"In my opinion, there are two considerations which govern cases of this kind and which go a long way towards destroying the force of the analogies by which the Appellant's argument seeks to prove that the transactions under review were sales of fixed assets, and that receipts arising from them ought to be treated as receipts on capital account. One is that in reality no sale takes place. The Appellant had after the transaction what it had before it. There is no property right in 'know-how' that can be transferred, even in the limited sense that there is a legally protected property interest in a secret process. Special knowledge or skill can indeed ripen into a form of property in the fields of commerce and industry, as in copyright, trademarks and designs and patents, and where such property is parted with for money what is received can be, but will not necessarily be, a receipt on capital account. But imparting 'know-how' for reward is not like this, any more than a teacher sells his knowledge or skill to his pupil. Admittedly the Appellant was not in the same position after each transaction as before it. It had 'up-dated the background knowledge' of a possible competitor, to use the graphic phrase of one of its witnesses. Conceivably, by so doing it had affected for the worse its trading potential in some fields and in some respects, but the significance of that is almost unavoidably theoretical at the time when the transaction has to be judged, and the consequences are far too speculative to allow the imparting of 'know-how' to be treated for that reason as the disposal of a 'capital' asset analogous with the sale of all or part of an undertaking.
"The other point is that 'know-how', though very naturally looked upon as part of the capital equipment of a trade, is a fixed asset only by analogy and, as it were, by metaphor. The nature of receipts from it depends essentially, I think, upon the transaction out of which they arise and the context in which they are received. Where, as in Moriarty (Inspector of Taxes) v. Evans Medical Supplies Ltd. ... 'know-how' is imparted as one element of a comprehensive arrangement by virtue of which a trader effectively gives up his business in a particular area, the moneys paid for the 'know-how', whether or not independently quantified, may properly rank as capital receipts."
Lord Donovan makes observations of the same general tenor ((1964), 41 Tax Cas at pp 587, 588.).
It seems to me that the statement by Lord Radcliffe in the second paragraph of the passage which I have cited is precisely in point in the present case. Here, the obligation to supply information is indeed one element of a comprehensive arrangement by virtue of which, quoad the selected tools, the company effectively gave up its business in India. It was contended on behalf of the Crown that the position here is distinguishable, and less favourable to the taxpayer, by reason of the fact that the company, instead of going out of business altogether in India, transferred its connection in India quoad the selected tools to the new Indian company. I should have thought that, so far from that being a distinction unfavourable to the trader, the position here was a fortiori the position where the trader goes out of business altogether. In a case such as the present, the effect of the whole arrangement--and I must look at the whole arrangement--is that the trader receives a new capital asset, viz, the shares in the foreign company, in exchange for that which he previously had, viz, his connection or goodwill in the foreign country. That is a transaction of a wholly capital nature.
It would not, I think, be useful to go further into a comparison of the three cases. It is sufficient to say that the present case, it seems to me, falls clearly within the first of the two alternatives propounded in the British Dyestuffs Corpn case and approved by Lord Simonds, and that it thus does not fall within the second alternative. I would only emphasise this, that in the Rolls-Royce and English Electrie cases the companies concerned had no pre-existing goodwill in the countries with the governments of which they made the contracts for imparting "know-how". Here, the company did have this pre-existing connection of goodwill in India, and that circumstance, it seems to me, is the crucial factor which places the present case within the former and not the latter of the two alternatives. I propose, for the reasons which I have given, to allow this appeal.
Appeal allowed.