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Issues Involved:
1. Nature of the payments made by the English company to the French company (capital or income). 2. Applicability of Rule 21 of the General Rules to the payments. 3. Interpretation of the contractual terms between the parties. 4. The role of the Commissioners' findings and their weight in the appellate court. Issue-Wise Detailed Analysis: 1. Nature of the Payments Made by the English Company to the French Company (Capital or Income): The main issue was whether the payments made by the English company to the French company under the agreement of October 25, 1929, were capital payments or income payments. The Special Commissioners and Finlay, J., concluded that the lump sum of lb25,000 payable in instalments was a capital payment, while the annual payments of lb2,500 as royalty were income payments. The court upheld this distinction, noting that the lump sum was a fixed and definite amount, whereas the annual payments were described as royalty and were inherently annual in nature. The court emphasized that the true nature of a payment must be ascertained from an accountancy point of view and that this is a question of fact. 2. Applicability of Rule 21 of the General Rules to the Payments: Rule 21 of the General Rules mandates that tax must be deducted from "any royalty or other sum paid in respect of the user of a patent." The Crown argued that both classes of payments (the lump sum and the annual royalties) fell under this rule. However, the court disagreed, stating that Rule 21 is a machinery provision for tax collection and does not alter the fundamental principle that income tax is a tax on income, not capital. The court concluded that the lump sum payment was a capital payment and not subject to tax under Rule 21, while the annual royalties were income payments and thus subject to tax. 3. Interpretation of the Contractual Terms Between the Parties: The court examined the contractual terms to determine the nature of the payments. The agreement granted the English company exclusive rights to manufacture and sell certain aero engines, and included provisions for the free use of patents, maintenance of patents, and the right to grant sub-licenses. The court noted that the agreement did more than just grant a right to use a patent; it also restrained the French company from exercising the patent in the territory and required them to prevent others from infringing the patent. This was seen as fundamentally different from a mere right of user, supporting the conclusion that the lump sum payment was a capital payment. 4. The Role of the Commissioners' Findings and Their Weight in the Appellate Court: The court emphasized the importance of the Commissioners' findings, noting that they are skilled persons in matters of business and their conclusions should be given great weight. The Commissioners had concluded that the lump sum payments were capital payments, and the court found no reason to disagree with this conclusion. The court also referenced the principle that the true nature of a payment must be determined on the facts of each particular case, including the contractual relationships between the parties. Conclusion: The court dismissed both the Crown's appeal and the taxpayer's cross-appeal, upholding the decision of the Special Commissioners and Finlay, J. It was concluded that the lump sum payments were capital payments and not subject to tax under Rule 21, while the annual royalty payments were income payments and subject to tax. The court also affirmed the importance of the Commissioners' findings and their weight in the appellate process.
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