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TMI Blog1938 (5) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany to the French company, and it is in respect of those payments that the assessments now under consideration were made. The agreement, which was in the French language, provided that its object was to grant to the licensees that is the English company-the exclusive right for the period of ten years from October 25, 1929, until October 24, 1939, to construct, use, and sell in the territory which I have mentioned certain Salmson aero engines. Then there were certain other provisions of the agreement to which I must just refer. Provision is made for the free use of certain patents in use in the types of engines described, and Article II provides: 'As consideration for the licence thus granted to them the licensees shall pay to the constructors'-that is, the French Company-'the sum of 25,000 payable as follows: 15,000 on the signing of this agreement, 5,000 six months after the signing of this agreement, 5,000 twelve months after the signing of this agreement. There shall be paid in addition to the foregoing payments and as royalty 2,500 twelve months after the signing of this agreement, and a like sum each twelve months during the following nine years'. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay, J., affirmed the decision of the Commissioners, and both sides appeal to this Court. The Attorney-General ( Sir Donald Somervell , K. C. ), and R. P. Hills, for the appellant Needham , K. C., and F. Martineau, for the respondent JUDGMENT Greene, M.R., having stated the facts continued: In my opinion, the Commissioners and Finlay, J., came to a right conclusion. The argument for the Crown is based on the language of rule 21, which provides: Upon payment any interest of money, annuity or other annual payment charged with tax under Schedule D, or any royalty or other sum paid in respect of the user of a patent, not payable, or not wholly payable out of profits or gains brought into charge, the person by or through whom any such payment is made shall deduct thereout a sum representing the amount of the tax thereon at the rate of tax in force at the time of the payment. The words on which the Crown relies are royalty or other sum paid in respect of the user of a patent. Both classes of sums, they say, were paid in respect of the user of a patent, and they contend that the effect of this language is that, whether or not a sum paid in respect of the user of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to pay yearly sums as royalty. Speaking quite apart from any close examination of authority, and simply regarding the distinction between these two payments, it would appear on the face of it that, with regard to the latter class, the parties are creating an obligation as between themselves which they choose to describe as a royalty payable each year at a fixed rate. I should have found it very difficult, in the face of so strong an indication as that, to appreciate an argument which said that those sums were not in the nature of income payments. They do not start from a capital sum which is afterwards split up into instalments. Their existence from beginning to end is an annual existence, and nothing else, and the parties have indicated what, to their minds, is the nature of that annual payment. Here I may get rid of one point which has emerged in the course of the argument. There were before the Commissioners certain letters written between the parties before the agreement was executed. Those letters suggest, at any rate at the time when they were written, that the proposal was that there should be a lump sum of ? 50,000 payable by instalments, which would have corresponded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged, deductions are prohibited in respect of any royalty or other sum paid in respect of the user of a patent . The scheme, therefore, is that where a business is being carried on with the use of patents in respect of which royalties or other sums fall to be paid, the person carrying on the business, in computing his profits, cannot deduct the sums in question. On the other hand, he is entitled under rule 19, and bound under rule 21, when he comes to make the payment, to deduct the tax. Although it now appears broken up into two parts of the Act of 1918, it originated in section 25 of the Finance Act, 1907. That section prohibited such a deduction in calculating profits and gains, but authorised the person paying to deduct tax when he paid. It is not suggested on behalf of the Crown that the position since the Act of 1918 is in any way different with regard to the matters with which we are concerned from what it was under section 25 of the Act of 1907. The re-arrangement under the Act of 1918 has not affected the law. Section 25 came up for consideration before this Court in Lanston Monotype Corporation Ltd. v. Anderson. The question there arose in rather a special and indire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an income, as distinct from a capital, nature. Similarly, the direction to the person paying the royalty or sum to deduct, or giving the authority to deduct, the tax, relates to royalties or sums of the same character, that is to say, sums of an income nature. Nobody is going to dispute that the general type of payment, there described royalty or other sum paid in respect of the user of a patent , is of an income nature, and payments of that kind, in the common form, of a royalty per machine, or so much based on turnover, and so forth, common commercial payments, are unquestionably of an income nature. But I am unable to read this machinery enactment, which was enacted merely for the purpose of altering the method by which the tax should be collected, as being something which brings into charge something of a capital nature which otherwise would not have been chargeable. There were in 1925, and there have been since, many cases where this matter of capital or income, has been debated. There have been many cases which fall on the borderline; indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he invention for the services of the Crown on such terms as may, either before or after the use thereof, be agreed on, with the approval of the Treasury, between the department and the patentee, or, in default of agreement, as may be settled by the Treasury after hearing all parties interested . One of the functions of the Royal Commission was to settle the amount of payment, in lieu of having it settled by the machinery laid down by that section. But the only matter with which they had to concern themselves was the terms of user. In Constantinesco v. R., the user had taken place before the terms were settled. The claimant, Mr. Constantinesco, had put forward a claim for a royalty, based on ? 10 per gear manufactured on behalf of the Government. In point of fact, he received a lump sum award which began with the expression: The Commission have settled the terms of user of this invention as follows ; and they awarded him ? 50,000 and ? 20,000, making ? 70,000. It was as clear as anything ever could be, that the Government had in fact used the patent. They had manufactured a number of gears. The consideration to be paid or the award to be made in respect to the user had to be set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in was a claim as for royalty in respect of the successive uses of the invention. There he was referring to the claim, which was a claim for successive uses, that is to say, for each gear manufactured. That is what Lord Cave is quite obviously referring to as successive uses . He then referred to the practice of the Commission to take as a basis of their award a fair royalty as between a willing licensor and a willing licensee ; and he said he had no doubt that that basis was accepted. Then he stated, not as a necessarily determining factor, but as one of the facts in the case, that the corpus of the patent was not taken away from the appellant. And then he said: In view of all the facts -that is to say, the facts which he had very summarily stated- I am satisfied that the sum awarded is to be treated as profits or gains, and annual profits or gains, within the meaning of the Income Tax Act, 1918 . I find great difficulty in understanding how it can be said, in the light of that passage and that reasoning, directed as it was to the specific argument that the sum was a capital sum and resulting in the conclusion, based on an examination of the facts, that it was not a capital su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Appeal, in its judgment in Mills v. Jones, decided against the claimant on the ground now asserted by the Crown, that any payment in respect of the user of a patent, be it past user or be it future user, be it a lump sum or be it a lump sum payable by instalments, or whatever from it takes, is of necessity an income payment. Expressions in the judgment of Greer, L.J., are relied on in support of that argument. I am quite unable to extract from the judgments in the Court of Appeal any such sweeping proposition. The language used must be construed in reference to the particular facts of that case and the particular arguments which were being there put forward. I cannot agree that the paragraph on which so much reliance is placed is one which bears anything like the construction which is sought to be placed on it. Greer, L.J., himself, in a later passage, was quite clearly keeping open, to put it at the lowest, the case of exclusive licence, because he said so in terms. He drew a distinction between the ordinary licence to use and an exclusive licence. I venture to think that there is a very good ground for that distinction, because, as I have already pointed out, directly an excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms to me that there is nothing to prevent the Commissioners in the first place, or the Court, from examining the facts in the case of a payment made in respect of a royalty, and saying what its true nature is. If the answer is that its true nature is that it is a capital payment, then that is equivalent to saying that it is not chargeable with tax. I do not propose to add anything by way of expression of my own views on the principles on which that question ought to be determined. It is a question which has been investigated very carefully in a number of different connections, and different matters of fact have been regarded in different cases as of importance and of weight. It seems to me, on all the facts of this case, including the terms of the contract itself, which is the important and, indeed, the essential fact in the case, that the Commissioners were perfectly entitled to come to the conclusion to which they did, namely, that this class of payment was not of an income nature, but of a capital nature. I can find nothing in the facts of the case or in the construction of the documents, which would justify me in saying that the Commissioner's conclusion is wrong in law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue involving a question of law into which the Court can enquire, was dealt with very fully by Hamilton, J., in American Thread Co. v. Joyce, in a passage which was subsequently approved both in the Court of Appeal and in the House of Lords. The gist of what he said was, I think, that where the Commissioners have put before the Court in the special case the whole of the materials from which they drew their final inference, then it is a question of law whether, from that material, their inference was correct or not. But that foundation of the rule seems to me subject to a qualification which I do not think that Hamilton, J. or the other Courts who agreed with him, intended in any way to exclude. Where the Special Commissioners are skilled persons in matters of business, if on an analysis of the business arrangements out of which the case has arisen, they come to the conclusion as business men that a particular payment has what my Lord has called the accountancy quality of a capital payment or an income payment, that is a view to which, in my opinion, the Court is entitled and ought to give great weight. The position is analogous to the case of a trial in the Commercial Court befor ..... 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