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TMI Blog1947 (7) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... as concisely as I can those which appear to me to bear more closely on the question. The original trade of the company, which was incorporated in the year 1935, was the manufacture of rustproof metal window frames. Since 1939 the company had been increasingly engaged in war production, particularly the manufacture of ammunition boxes for the Admiralty. In 1935 the company had purchased from Mr. Williams letters patent relating to a galvanizing process which were assigned to it on January 31, 1936. The process was suitable for the treatment of the ammunition boxes required by the Admiralty. The licence agreement was made at the request of the Government, who were anxious to have other sources of supply for ammunition boxes treated in accordance with the process. A company called Fisher Ludlow, Ltd. (whom I will call the licensee ) had made a contract dated November 8, 1939, with the Director of Navy Contracts for the manufacture of ammunition boxes. This contract was not before us, but from its terms as stated in the licence agreement it appears that it was for the manufacture of 75,000 boxes. The object of the licence agreement was to grant to the licensee the right to use the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract with the Director of Navy Contracts. There follow a number of covenants contained in numbered paragraphs. Paragraph 1 contains the licensee's covenant to pay at quarterly intervals a royalty of three pence per box. It is followed by a proviso to the effect that if the licensee's contract with the Director should be determined by the Government before all the 75,000 boxes had been treated with the process the licensor should pay to the licensee a sum bearing the same proportion to 1,000 as the number of the boxes not so treated should be to 75,000. Paragraph 2 contains a covenant by the licensor to erect at the licensee's works at the licensee's expense the plant and machinery necessary for the treatment of ammunition boxes with the process with provisions as to what was to happen to the plant and machinery at the expiration or determination of the licence. The concluding sentence of this paragraph is as follows: During the continuance of this licence and at all times hereafter the licensee shall use its best endeavour to keep secret the manner of using the said invention and any further invention or discovery falling within the scope of clause 12 hereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... call the ? 3,000 a capital sum and that a contrast is drawn in the agreement itself between that sum and what are called royalties. They then argued that a lump sum paid in respect of the future user of a patent which is not based upon the calculation of a royalty of so much per article manufactured in accordance with the patent must necessarily be of a capital nature. A lump sum paid for the right to a patent, as distinct from a lump sum built up of payments of royalty based on actual user, cannot, it is said, in its nature be income in the hands of the licensor. In the present case, they said, the sum of 3,000 was payable whether or not a single ammunition box was treated with the process under the licence and the provision for payment by the licensor to the licensee in the event of a determination of the licensee's contract by the Government which is contained in paragraph 1 is limited to 1,000 at the most. It is better to state the proposition submitted in counsel's own words which were as follows: In the case of a lump sum paid for a non-exclusive licence, unless it can be found to have been arrived at by reference to royalties or returns for specified quantitati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Mills v. Jones [1929] 14 Tax Cas. 769. I am quite unable to agree. That case was decided on the simple ground that once it was found (as the Commissioners had found) that the amount of future user included in the sum awarded was negligible there was an end of the case. No proposition such as that contended for by counsel for the company is involved in the decision. He next argued that his proposition was established by the decision of Mackinnon, J., (as he then was) in Desoutter Bros., Ltd. v. Hanger Co. [1936] 1 All E.R. 535, and that this decision had been approved by this Court in Nethersole v. Withers [1946] 175 L.T. 108. I do not read the judgment of this court in the Nethersole case as affirming or approving any such proposition. The object of the reference made to the Desoutter case was to show that a certain principle suggested for deciding this class of case could not be accepted, since decided cases showed that it had not been acted upon. The Desoutter case was one of such cases. The next case referred to for this purpose in the Nethersole judgment was Inland Revenue Commissioners v. British Salmson Aero Engines, Ltd. [1938] 2 K.B. 482; 7 I.T.R. 245, a decision of thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain argument submitted by counsel for the company was one which Atkinson, J., appears to have accepted. As counsel put it to us it was, if I correctly understood it, to the following effect. The case is not, he said, a simple case of a grant of a non-exclusive licence granted for a lump sum; there is in it the element of the secret knowledge of the licensors as to the application of the process to ammunition boxes. He argued in the first place that the ? 3,000 was, on the true construction of the licence agreement, the consideration paid by the licensees for the communication to them of this secret knowledge and that it was therefore a capital receipt. This argument cannot, in my opinion, be accepted. It is quite impossible to link the 3,000 in this way with the alleged communication of secret knowledge. Counsel for the company then argued that as the agreement contemplated that in using the licence the licensees would have communicated to them or would acquire information of a secret nature as to the use of the patented process the result would be to diminish the value of the patent and that the effect of the licence would therefore be to diminish the value of the company' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead the specification. But the acquisition of practical knowledge of this kind is not the same thing as the acquisition of the knowledge of a secret process. It is nothing more than what normally happens in the case of a licence; a person who has used the patent is likely to be more knowledgeable and efficient in its use than a person who has not. But the acquisition of this practical knowledge by a licensee cannot, as it appears to me, be said in any sense to effect a depreciation of the value of the patent nor can practical instruction given to the licensee be said to depreciate any business asset of the licensor. The only person to whom such practical knowledge can be of use is a person entitled to use the invention comprised in the patent. During the currency of the patent no one but the patentee or a licensee from him is entitled to use the patent. It is clear, therefore, that during the currency of the patent the fact that this practical knowledge has been acquired by or communicated to the licensee could not in any way affect the value of the patent. After the expiration of the patent the patented process can be used by the public and the presumption must, I think, be, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already said, inventions or discoveries not by the licensors but by the licensees. The argument, therefore, fails to convince me. I will now turn to the real question in the case, namely, whether, having regard to all the relevant circumstances, the receipt is of a capital or of an income nature. In my opinion it is of an income nature and the Special Commissioners came to the right conclusion. The licence is a non-exclusive licence and the company's right to exploit the patent by the grant of other licences is therefore unimpaired. It is granted for a specific purpose only, namely, to enable the licensee to fulfil a particular contract. The right which it confers is to use the invention for a number of boxes up to the limit of 75,000. It is not therefore even a right to use it for an unlimited number of boxes. The time during which the licence is to continue is limited to the time required for the application of the process to the contractual number of boxes. There seems to me to be no capital element in a receipt of this nature in those circumstances. The only considerations on the other side, once the company's arguments above discussed are rejected, are that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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