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Evans Medical Supplies Ltd. Vs. Moriarty (inspector of Taxes). - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Reported in[1958]33ITR700(Cal)
AppellantEvans Medical Supplies Ltd.
RespondentMoriarty (inspector of Taxes).
Cases ReferredHandley Page v. Butterworth
Excerpt:
- lord evershed m.r. the question raised on this appeal is whether a sum of pounds 100.000 paid to evans medical supplies ltd. (whom i will hereafter call' the company') by the government of burma pursuant to an agreement dated october 20, 1953, was rightly included in the companys assessment for income tax for the year 1954-1955 as part of 'the annual profits or gains arising to the company from its trade' during the year of assessment under case i of schedule d. now incorporated in section 122 of the income tax act, 1952. [his lordship stated the facts and continued :]the agreement begins by certain recitals, thus : '(1) the government of the union of burma propose to build in burma a factory and laboratories (hereinafter together referred to as the factory) for the purpose of.....
Judgment:
LORD EVERSHED M.R. The question raised on this appeal is whether a sum of Pounds 100.000 paid to Evans Medical Supplies Ltd. (whom I will hereafter call' the company') by the Government of Burma pursuant to an agreement dated October 20, 1953, was rightly included in the companys assessment for income tax for the year 1954-1955 as part of 'the annual profits or gains arising to the company from its trade' during the year of assessment under Case I of Schedule D. now incorporated in section 122 of the Income Tax Act, 1952. [His Lordship stated the facts and continued :]

The agreement begins by certain recitals, thus : '(1) the Government of the Union of Burma propose to build in Burma a factory and laboratories (hereinafter together referred to as the factory) for the purpose of establishing an industry there for the production of pharmaceutical and other products. (2) Evens Medical has developed and own 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 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 Pounds 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 pharmaceutical and other products mentioned in the schedule hereto. (B) Evans Medical will supply to the Government of the Union of Burma designs and lay-out for the erection of plant including machinery and equipment and all other requisites and shall supply full data and specifications with drawings and instructions and all other information relating to the sources and manufacturers and suppliers of such machinery and equipment. (C) Evans Medical will make available to the Government of the Union of Burma all information relating to the supply of prototype machinery and equipment..... (D) Evans Medical hereby undertake that during the currency of this agreement the facilities hereby agreed to be furnished to the Government of the Union of Burma under the preceding sub-clauses of this clause shall be exclusive to the said Government and shall not' - that is, the facilities supplied by Evans Medical shall not -'during the currency hereof be furnished to any other person or corporation in Burma.'

Part II is of greater length and consists of eight clauses, many of them subdivided. I shall not read them all. But under the first clause Evans Medical undertook to advise the Government about how to proceed with the building and operation of the factory, and also provided that they would act as purchasing agents for the purchase of the plant, Clause 2 put upon the company an obligation to act as managers, and, according to clause 3, they therefore undertook to provide and train all the necessary staff, particularly to train Burmese nationals for the purpose.

In clause 5 it is provided that 'As remuneration for the services provided for in Part II of this agreement the Government of the Union of Burma, will pay to Evans Medical a fee in respect of each year of the continuance of this agreement amounting' to whichever should be the greater of two sums, five per cent, of the value of the products produced at the factory, or Pounds 25.000 sterling. There were further provisions as to that payment. In clause 6 was a provision for repaying disbursements, The rest of Part II, I can, I think, for present purposes pass over.

Part III consists of one single sentence; 'With the exception of Part I of this agreement' - that is the first obligation to give advice and all the rest of it - 'this agreement shall apply to alcohol and medicinal yeast.'

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.

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 be unreasonably withheld.' The last provision was more an aspiration than a bargain : 'It is the desire and intention of the parties to this agreement to enter into similar agreements in respect of other pharmaceutical and similar products as may be mutually agreed from time to time.'

The schedule, which had been referred to, as will be recalled, in Part I, contained under five heads various types of pharmaceutical medicinal, bacteriological, chemical and similar products. The first was 'human and veterinary antitoxins sera and vaccines toxins and toxoids.' The second was 'vaccine lymph,' and the third, fourth and fifth were other types of products. I have mentioned, however, specifically (A) and (B) for reasons which will later appear.

I have recited the terms of the agreement at length since one of the complaints made by the company of the determination of the Special Commissioners is that it proceeded upon an erroneous interpretation of the agreement, in so far as the commissioners declined to treat the consideration moving from the company in return for the payment of Pounds 100,000 provided by Part I as limited by the terms of Part I itself.

[His Lordship read paragraph 15, subparagraphs (i), (ii) and (iii), of the case and continued :] It is an obvious truism that as a general rule no part of any written document can be read or construed save in the relevant context provided by the document as a whole; and, to do them justice, I am not entirely clear that the commissioners meant by the language I have read from paragraph 15 of the case to do more than acknowledge the general rule. At the same time, I think it is true that the obligations which the company undertook in return for the payment were confined to those specified in the four paragraphs lettered (A) to (D) of the agreement, and if the commissioners intended otherwise, then they were wrong. Having said so much, I doubt whether the solution of the present problem is thereby much, advanced. Part I of the agreement cannot on any view be considered in complete isolation from the rest of the agreement. To take one example, the duration of the obligations imposed in paragraph (D) involve a necessary reference to part IV. Broadly speaking, it may fairly and justly be said that the obligations undertaken by the company in Part I were obligation not merely to impart secret formula, 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 to 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 Pounds 100.000 was to be paid by the Burmese Government; for the latter an annual sum of not less than Pounds 25,000, from the date of the agreement. Put as briefly as possible - and this is the substance of the companys case - the payment of Pounds 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.

But, in my judgment, this analysis of the agreement does not in the end much advance the solution of the question which have to be determined. These are stated by the judge thus : first, whether the transaction recorded in the agreement fell within the scope of the companys business as it was carried out at the time the agreement was made; and, second, whether, if it did, nevertheless the sum of Pounds 100,000 ought in the companys hands to be treated not as capital but as income or as part of the annual profits or gains arising from the companys trade. If either of these question ought properly to be answered in the negative, then the company in entitled to succeed on this appeal.

The judge so answered both questions. As regards the first, the commissioners undoubtedly, in my judgment, purported to give an affirmative answer; to find as a fact upon the evidence that the 1953 agreement, though of a special and unprecedented character imposed by special conditions dictated by Burmese Government policy, was none the less within the general scope of the companys continuing and existing business operations - the means which the companys board of directors chose as best adapted in the circumstances for the development of its business interests. The judge, however, though of opinion that the question was one of fact exclusively, came to the conclusion that the determination of the commissioners could not be supported. 'I am content to rest my judgment on this part of the case by saying that, in view, there was no evidence to support the commissioners determination or in Lord Radcliffes words,.......... the true and only reasonable conclusion contradicts their determination.'

Upon this matter I am, with all respect to the judge, unable to agree with him. Upon this question, as also upon the second, it seems to me that the difficulties of the judge may have been increased by the suggestion originally put forward by or on behalf of the Crown that the transaction entered into with the Burmese Government constituted a new departure on the companys part, an embarking by it upon a distinct trade or business different from that (sometimes in the case called, though I venture to think inadequately, 'wholesale druggists') in which the company had previously engaged. Had this been in truth the case, the Crown would plainly have been in difficulty in sustaining the claim for the inclusion of the Pounds 100,000 in the general sum of taxable profits arising from the companys 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 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 judges 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.

The situation which in Burma faced this world-wide business was that, as a matter of policy, the Government of that country had determined to undertake locally themselves or through some government agency the production of the pharmaceutical and other articles which had hitherto been imported into Burma from abroad. That being so, what, as a matter of business, was the company to do The evidence of the companys chairman and managing director upon the matter (given, no doubt, in answer to questions put by one or other of the commissioners but none the less reliable on that account) is recorded as follows in paragraph II of the case; 'In entering into the agreement, the company chose the method of developing its business which seemed to its directors to be the best available in the circumstances.' This evidence is picked up, as it were, and repeated in the commissioners conclusions in paragraph 15, subparagraph (iv), of the case : 'We also rejected the companys alternative contention that the said sum did not arise to the company as a receipt of its trade as wholesale druggists because it had never previously entered into such an agreement. On the contrary, we held that the company had, on the evidence in this case, chosen the method which appeared to its directors to be the best means of exploiting its business as wholesale druggists in Burma, such method being in our opinion clearly within the powers taken by the company in its memorandum of association.'

Mr. Senter subjected this paragraph to considerable textual criticism. Thus, he said that the reference to the memorandum and articles indicated that the commissioners had regarded the fact that what was done in October, 1953, was intra vires the companys memorandum as being conclusive of the question of fact which they had to determine. I do not agree. It does not seem to me that the commissioners were doing more than not (as Bankes L.J. did in British Dyestuffs Corporation (Blackley) Ltd. v. Inland Revenue Commissioners that what was done was done was in fact within the scope of the companys business powers.

Mr. Senter also strongly criticized the final sentence of paragraph (iv), which reads as follows : 'We, therefore, held that the said sum of Pounds 100,000 arose to the company either in the course of the trade which it had hitherto 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 companys 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 II of the case. I add a reference to a supplement issued by the directors to the companys 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 the Western World, they want to make the goods themselves. So the West must be prepared to sell know-how..... Some time ago the Burmese Government decided to set up a pharmaceutical industry to make Burma less dependent on outside supplies of necessary medical goods. It was no use, in Britain, to shed tears about the possible loss of future exports. Burma meant to have her new industry, and many continental firms were willing and able to provide her with the means to do so. Evans Medical, with the approval of Her Majestys Government, joined in the competition. On October 20 the agreement was signed.' Then it states what was the substance of the agreement.

In my judgment, it cannot be doubted, with all respect to the judge, that there was ample evidence to justify the commissioners conclusion of fact in paragraph 15, subparagraph (iv), of the case stated.

Upjohn J.s reference to Lord Radcliffe in the passage from his judgment which I have read was a reference to the noble Lords speech in Edwards v. Bairstow and Harrison. The question there was whether the purchase for resale in parcels at a substantial profit constituted 'an adventure in the nature or trade.' The question had been answered negatively by the Special Commissioners, and this court, affirming the decision of the judge of first instance [Wynn-Parry J.], had thought (in reliance upon certain earlier decisions) that the determination of special Commissioners ought not to be disturbed. The House of Lords, on the other hand, held that the question whether the facts, as found to have occurred, did or did not constitute 'an adventure in the nature of trade' was, in truth, one of law, and that the facts found pointed irresistibly and inevitably to the result that they did.

I quite agree with Mr. Senter that the principle stated by Lord Radcliffe cannot be confined to the simple question whether particular deals constituted 'an adventure in the nature of trade.' Whatever the specific question is -whether particular facts fall or do not fall within some formula in the statute - that question must ultimately depend upon a proper interpretation of the formula. No such 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; 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.

There remains the second question, namely, is the Pounds 100,000, though received in the course of trade generally, capital in the hands of company The judge answered 'Yes'. He said : '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 manfacture of these known pharmaceutical products and for their processing by these secret processes. after the expiry of the contract (but not before), the company was at liberty to impart its know-how in relation to these matters to others in Burma.' The judge thought, and I agree with him, that for this purpose the recitals which I have already read (particularly the second recital) were important. As appears from the passage I have read, in his view the company was' parting for ever with an asset. So again he says : 'the company was, in fact, parting for ever with its secret information in its methods of preparation, packing and preservation... it 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 companys 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 the wrong hands, the grantor has no protection.' In reference to that paragraph it will, however, be recalled that the Burmese Government was under obligation (subject to certain qualifications) not to export the goods and information save with the consent of the company.

The commissioners had taken a different view, as evidenced from paragraph 15, subparagraphs (ii) and (iii), of the case, already recited. In their opinion, Part I amounted to no more than an obligation to provide services without any sale or assignment.

I have found this point one of considerable difficulty, but I take as my test the proposition stated by Bankes L.J. in the Dyestuffs case : 'The real question is, looking at this matter, is the transaction in substance as parting by the company with part of its property for a purchase a 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 ?'

On the side of the Crown it is said, first, that the obligations in Part I and Part II of the agreement are really of the same kind. They are, as the commissioners describe them, obligation to provides services. Secondly, it is said that although there are references 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 Pounds 100,000 was 'paid for the companys 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 cases no parting with it.

On the other side, Mr. Senter has said that the secret processes were in fact extremely valuable assets, and that the obligation in Part I was to give the benefit of them to the Burmese Government. In other words, says he, the sum paid by the Burmese Government was to put them in a position to start up their work. An example was given in the course of the argument of a well-known beverage, made according to a secret formula. If the proprietors of that beverage agreed to disclose that formula to someone else, there is no doubt that that someone else would pay a very large price for it, and no doubt also, I should have thought, that the sum received by the proprietors would be capital in their hands.

It will be seen that the question of secret processes looks, therefore, very large, and I refer particularly to paragraph 10, subparagraphs (i) and (ii) of the case stated. [His Lordship read the subparagraphs and continued :] We were referred to a very large number of cases. For the most part they deal with such obvious subject-matters of property as patents or copyrights and show that a parting with some interest in these, even though limited, may be equivalent to parting, with a capital asset, especially when supported by restrictive convenants. Lord Greene M.R. said in Withers v. Nethersole that the only principle to be extracted was that each case depended on its own circumstances, which (states the Master of the Rolls) 'is not particularly helpful.' Later, however, in his judgment in that case, he used these words, after referring to Inland Revenue Commissioners v. British Salmson Aero Engines Ltd. : 'This decision is a clear authority, so far as this court is concerned, that a lump sum payment received for the grant of the patent licence for a term of years may be a capital and not a revenue receipt : whether or not it is so must depend on any particular facts which, in the particular case, may throw light upon its real character, including, of course, the terms of the agreement under which the licence is granted. It the lump sum is arrived at by reference to some anticipated quantum of use it will, we think, normally be income in the hands of the recipient. If it is not, and if there is nothing else in the case which points to an 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. 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 : '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 himself or the profit, or he can grant licences to other to do so on payment of royalty. The profit derives by eercising the invention himself or the profit he derives from the royalty are profits and gains with the meaning of Schedule D, notwithstanding the fact that every year his capital asset is diminishing in value. If, on the other hand, he sells the monopoly, or if - I cannot remember that such a case has ever happened - he surrenders his monopoly in consideration of a payment, the payment he received for the sale of the patent or the payment he received for surrendering his monopoly would be a capital asset in his hands and none the less so because, after surrendering the monopoly, he himself was in a position which enabled him, in competition with the rest of the world, still to exercise his own invention. The owner of a secret process, such as was possessed by Mr. Handley Page, stands in a very analogous position; he has not a monopoly at law but he has a monopoly in fact - a monopoly in fact arising from the possession by him of the secret knowledge of the process that he is carrying on. That secret knowledge is as much his capital asset as is the patent monopoly the capital asset of the patentee, and, like the patent, he can use that capital asset in either or both of the following ways : he can himself carry on the secret process or he may - it is very seldom done owing to the obvious danger involved - grant a licence to a third person to carry on the secret process, securing himself against his secret process being divulged by that third party to others. In both these cases the profits he derives from carrying on the secret process himself and the royalty he might derive from the licensee would be annual profits or gains within the meaning of Schedule D. But, supposing he sells his secret process, or supposing, as here, he surrenders his quasi monopoly by making it public to the world, then I say that, if he gets paid for doing either one or the other of those things, the money he receives in payment is a capital asset. Here, at the invitation of the Government, he surrendered to the world his secret knowledge, and his capital asset thereupon ceased to exist.' I note, however, that in that case Mr. Handley Page had disclosed his secret processes to the world and had therefore destroyed his secret processes as such. Here the disclosure is only made to one person, and the substantial benefit of these processes still remains with the company.

If the true view of the transaction is that the obligation under Part I are, in substance, obligation 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 Pounds 100,000 was a fee for general services rendered in the course of business.

It was pointed out in support of this view that, as I already recited, the obligation 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 'facilities' to anyone else in Burma. In these respects, there is an obvious similarity between Part I and Part II. This in not a case o making once and for all and at one time disclosure of some secret formula or secret formulae, as in the suggested case of the beverage which I have mentioned. Moreover, there is undoubtedly some overlap between Part I and Part II - the obligation to give advice so as to enable the Government to proceed with the building of the factory in paragraph 1(A) of Part II is, so far as I can see, equally covered by Part I(A).

If, therefore, the alternatives available to the court were to decide the second question either wholly in favour of the company or wholly in favour of the Crown, I should myself feel, on the evidence and the other material available, strongly inclined, if not compelled, with all respect to the judge, to adopt the latter alternative. But I think these are not the only choices and that there is a middle course, having regard to the findings in paragraph 10, subparagraphs (i) and (ii), of the case and to the law as it has been laid down in the Handley Page case, I am not satisfied that it would be just to conclude that the disclosure of the secret processes was merely incidental to the general obligations. In my judgment, the company ought at least to have the opportunity of establishing that the disclosure of these processes wan an important part of the obligation, and that to a substantial extent, at any rate, the sum of Pounds 100,000 ought (upon apportionment if necessary) to be attributable to this disclosure and, to that extent, to be treated as a capital receipt. For it is not, in my judgment, an answer to Mr. Senters argument in this respect that the company did not part with the information in the sense of making it over wholly to the other party so as to exclude the further use of it by the company anywhere in the world. The cases on patents, for example, Margerison v. Tyresoles Ltd.show that it is not a sufficient answer to a claim to treat money received as capital that only limited and non-exclusive rights were granted. In the example given of the beverage, it would be idle to say that the large price paid for disclosure was not capital because the proprietor still remained in possession of the secret himself and still remained entitled to trade as before.

I would on the whole, therefore, refer the case back to the commissioners to inquire and determine to what extent the Pounds 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 what we should exercise that discretion. But the right to treat the Pounds 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.

The form of the order may require to be considered so as to give the greatest possible help to the commissioners and to the parties, and this can be discussed by counsel after my brethren have delivered their judgments.

I would discharge the order made by the learned judge and substitute the order which I have indicated in its place.

BIRKETT L.J. I agree with the judgment of the master of the Rolls, and I have had the opportunity of reading and considering in advance the judgment which is about to be delivered by Romer L.J. and I agree with it.

These two judgments, in my opinion, cover most adequately and most fully every aspect of this case, both of fact and of law, and I feel that any further judgment would savour inevitably, of repetition. I am most anxious to avoid that, for no useful purpose is to served by saying again what has been so well said before. Therefore, I am content in this appeal to express my full agreement with the judgment delivered by the Master of the Rolls and that about to be delivered by Romer L.J.

ROMER L.J. I respectfully agree with the Master of the Rolls, and for the reason which he has stated, in the conclusion that there was evidence before the Special Commissioners upon which they could properly find that the sum of Pounds 100,000 now in question was received by the company in the course of its trade. There is nothing that I desire to add upon that aspect of the case, and I propose to confine such observations as I have to make to the question whether the sum should, for purposes of taxation, be treated in the hands of the company as income or as capital.

Upjohn J., reversing the decision of the commissioners, held that the Pounds 100,000 ought properly to be regarded as capital; and in so far as it represented consideration moving from the Burmese Government for the communication to them of the companys secret processes (properly so called) I am in agreement with the judge.

The commissioners, in my judgment, approach this question on a misconstruction of the agreement of October 20, 1953. Their relevant finding on the matter is stated in paragraph 15(i) of the case as follows : 'We..... held that it was not possible on the evidence.... to consider each part of the agreement...... separately. While the factory was in course of erection; while the training of staff was proceeding; and while plant 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 Pounds 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.

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 in to 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, as I think, was to alter a clear and specific provision in the agreement because of the general complexion which they attributed to the agreement as a whole. The documents is divided into five parts. Under Part I, the company, in consideration of the payment to them of Pounds 100,000, undertook the obligation which were set forth in that part. Under Part II, the company undertook the further obligations therein mentioned and 'as remuneration for the services provided for in Part II' were to receive the annual payments provided for by paragraph 5 of the part. It appears to me that the parties to the agreement deliberately isolated the consideration payable to the company under Part I from that to which the company would become entitled under Part II. If the company had fully discharged the obligation undertaken by it under the first part and the Burmese Government had then diverted away from the company the obligations which it had agreed to discharge under the second part, it seems reasonably clear to me that the company could have successfully sued for the Pounds 100,000. From this it follows, and is in my opinion the fact, that the Pounds 100,000 was solely referable to the promises given by the company under Part I of the agreement, and none the less because there appears to be some degree of overlap between those promises and the services which it agreed to perform under Part II. Accordingly, the only relevant investigation, for the purposes of this aspect of the matter, is as to what the company had to do in order to earn the Pounds 100,000 as distinct from what it had to do before it could claim the annual remuneration.

It appears to me sufficiently clear that one of the obligations imposed upon and accepted by the company under Part I of the agreement was to its secret processes. The relevant recital in the agreement as to these is the second which, so far as is material, provides : 'Evans Medical had developed and owns processes formulae and knowledge relating to the manufacture of pharmaceutical products.' Subheading (A) of Part I provides : 'Evans Medical will provide and make available to the Government of the Union of Burma all... technical and other data and know-how necessary for the commencement of production thereat' (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 Pounds 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 to the Burmese Governments decision in 1953 to build a factory and laboratories for the purpose of establishing an industry for the production of pharmaceutical and other products, said : 'Accordingly, the Burmese Government dispatched a trade mission to Europe, with a view to inducing some leading firm of manufacturing chemists to advise as to the erection of such a factory, the supply of equipment for manufacture, and to impart to them the processes, formulae, and knowledge necessary to the production and manufacture of pharmaceutical products in Burma.' Then, in paragraph 10 of the case it is stated that all the products referred to in the schedule to the agreement 'are general types and do not include any of the companys proprietary products. By far the most valuable from the companys point of view were the secret processes involved in the preparation, storage, and packaging of certain human and veterinary antitoxins, sera and vaccines. The secret processes referred to.... have been evolved at great cost in several fields over a period of 50 years and the company considers that such secret process are superior to those evolved by other companies....... The company has, however, over a number of years experimented and perfected its own methods of preparing and conserving these products and has never, until it entered into this agreement with the Burmese Government, communicated these methods to any another person or corporation.......The secret processes consist in the actual methods of preparation of the products and, also, in the method of storing and packaging.... The processes.... cannot be learned by the study of text books.'

Notwithstanding these findings the commissioners decided that the whole of the Pounds 100,000 in question ought properly to be regarded as taxable profits of the companys trade. They did so for two reasons. First, they thought that the whole agreement must be read together; and finding that, so read, it was an agreement for the provision by the company of services, the declined to regard the Pounds 100,000 as referable only to the obligations which the company assumed under Part I. In this they were, in my judgment, as I have already said, mistaken. But secondly they held that 'even if the view were taken that the main part of the consideration of Pounds 100,000 was received by the company for imparting these secret processes to the Burmese Government, we were still of 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.'

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 '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 companys 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 position.

As to the decision of the commissioners, they were, I think, in strictness correct in saying that the company had not 'sold or assigned any property'. The company had not sold or assigned anything. What it did was to share commercial information which was known only to itself, information as to secret processes. In my judgment, however, it was not open to the commissioners, in view of the decision of this court in Handley Page v. Butterworth to hold that the secret processes which the company owned were not 'property'. In referring in that case to certain designs which the well-known aircraft designer Mr. Frederick Handley Page had worked out, but which were not capable of being registered or of being the subject of letters patent, Slesser L.J. said : 'what was his property His property was the knowledge which he had acquired of the methods for constructing these machines..... His property was his secret process and his knowledge.' Romer L.J. said : 'The owner of a secret process.... has not a arising from the possession by him of the secret knowledge of the process that he is carrying on. That secret knowledge is as much his capital asset as is the patent monopoly the capital asset of the patentee.'

The position then is, in my opinion, that at the date of the agreement the company was in possession of certain secret knowledge relating to pharmaceutical products; that that knowledge constituted property of a capital nature; that under the agreement it bound itself to communicate that knowledge to the Burmese Government; and that the obligation which the company so incurred constituted a part, at least of the consideration for which the company was to receive Pounds 100,000. Why, then, should that part of this sum which was properly referable to the imparting by the company of its secret processes be regarded as taxable income The answer of the Crown is that the company did not part with any capital asset and that the knowledge of the secret processes which the company had is still vested in it; that the company could still continue to exploit this knowledge for its own commercial purposes, and that there was nothing in the agreement to prevent it from doing so or from carrying on its operation in Burma or elsewhere is the same way as it had been doing before; and that, consequently, there was no justification for the view that value of the secret processes to the company had been in any way impaired by the communication of those processes to the Burmese Government.

This appear 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 pledged itself not to divulge the information to anyone else without the companys 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 'If the property,' said Lord Greene M. R. in Nethersole v. Withers, 'is permanently diminished or injuriously affected, it means that the owner has to that extent realized part of the capital of his property as distinct from merely exploiting its income-producing character.' Lord Greene M.R. was there speaking of copyright, but in my opinion exactly the same principle applies in the case of secret processes. 'Supposing', said Romer L.J., in Handley Page v. Butterworth, 'he sells his secret process, or supposing, as here, he surrenders his quasi monopoly by making it public to the world, then I say that, if he gets paid for doing either one or the other of those things, the money he receives in payment is a capital asset.' The difference between sharing as secret process with the world and sharing it with only one organization is undoubtedly a difference in degree, but it cannot be regarded as a difference in kind; in the former case a capital asset is dest royed, whilst in the latter case its value is (in Lord Greenes words) 'permanently diminished or injuriously affected.'

Upjohn J. treated the whole of the Pounds 100,000 as being attributable to the impairment of the value of the companys secret processes. This, I think, is unduly favorable to the company, for the subject-matter of Part I of the agreement extended also to such things as drawings, designs and plans and information relating to the supply of prototype machinery, etc., none of which, so far as I can see, is analogous to secret processes, though we have no detailed information about them. It may be, as Sir Frank Soskice suggested in an alternative submission, that the diminution in value of the companys secret processes resulting from the agreement is not great having regard to the world-wide activities of the company. This may or may not be so; as, however, on the true construction of the agreement, some part at least of the Pounds 1,00,000 related to the imparting of information as to the secret processes, that part, in my judgment, reflects the diminution in value of a capital asset of the company and is, accordingly, not subject to tax. The case should therefore be remitted to the commissioners so as to afford to the company an opportunity for proving what proportion of the Pounds 100,000 should be treated, having regard to all the relevant circumstances, as referable to the secret processes which were imparted to the Government; and that part, when ascertained, should be deducted from the assessment which has been made upon the company.

Case remitted to commissioners to call further evidence and to determine what part, if any, of the amount of Pounds 100,000 should be attributed to the imparting of the secret processes, such part to be treated as a capital receipt, and to adjust the assessment accordingly.

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Solicitors : Solicitor of Inland Revenue : Whitfield, Byrne & Dean for Whitley & Co., Liverpool.


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