Le
Dain,
J:—This
is
an
appeal
from
a
judgment
of
the
Trial
Division
dismissing
the
appellant’s
appeal
from
a
decision
of
the
Tax
Review
Board
which
had
dismissed
an
appeal
from
an
income
tax
re-assessment
in
respect
of
the
1967
taxation
year.
What
is
in
issue
is
the
character
of
a
sum
of
$378,000
which
the
appellant
received
pursuant
to
an
agreement
between
it
and
the
Government
of
the
United
States
of
America
respecting
a
licence
to
use
certain
patents
and
“background
data”
or
“know-how”
for
the
manufacture,
according
to
a
new
process,
of
trinitrotoluene
(“TNT”).
The
appellant
(hereinafter
referred
to
as
(“CIL”)
had
been
manufacturing
TNT
for
many
years
by
what
is
called
the
“batch
process”.
That
process
is
vulnerable
to
fire,
and
after
its
plant
at
McMasterville,
Quebec,
burned
down
in
1958,
CIL
began
research
efforts
to
discover
a
safer
method
of
producing
TNT.
It
found
that
an
engineering
firm
in
Sweden
(hereinafter
referred
to
as
“Chematur”)
held
the
right
to
a
new
process
for
manufacturing
TNT
called
the
“continuous
process”,
but
had
not
developed
a
plant
for
the
application
of
the
process.
CIL
and
Chematur
entered
into
a
letter
agreement
dated
June
27,
1960
(hereinafter
referred
to
as
the
“CIL-Chematur
agreement”)
which
licensed
CIL
to
use
the
continuous
process,
contemplated
that
it
would
build
the
first
continuous
process
plant,
and
provided
that
the
parties
would
share
in
the
proceeds
of
any
licence
arrangements
by
which
others
might
be
permitted
to
build
such
plants.
Its
provisions
are
as
follows:
1.
Chematur
undertakes
to
communicate
to
C-l-L,
as
and
when
C-I-L
may
so
request,
complete
design
and
operating
information
on
its
continuous
TNT
nitration
and
purification
process,
including
detailed
flow
sheets
and
detailed
drawings
and
descriptions
of
equipment.
2.
In
full
consideration
of
the
information
supplied
above,
C-l-L
will
pay
Chematur
a
sum
equal
to
Chematur’s
engineering
costs
for
supplying
such
information
(including
the
time
devoted
to
writing
reports
on
the
technical
aspects
of
the
process)
plus
110%
of
such
costs
to
cover
overhead.
The
total
sum
paid
hereunder
will
be
deducted
from
the
price
of
such
equipment,
designed
by
Chematur,
as
C-l-L
may
purchase
from
Chematur.
We
understand
you
estimate
that
the
nitration
equipment
as
itemized
in
your
letter
of
19th
September,
1958,
but
for
a
larger
output
of
1400
Ib/hr,
would
now
cost
us
approximately
$80,000
(Canadian),
and
that
on
a
Similar
basis
the
purification
equipment
would
cost
us
in
the
vicinity
of
$15,000
to
$20,000
(Canadian).
3.
Chematur
shall
grant
to
C-l-L
non-exclusive,
irrevocable
licences
under
any
patent
rights
in
Canada,
and
any
know-how,
relating
to
the
continuous
TNT
nitration
and
purification
process.
Such
licences
shall
include
the
right
of
C-I-L
to
export
its
products
to
any
country
other
than
Norway.
4.
If
C-I-L
builds
the
first
TNT
plant
to
commence
operation
using
the
Chematur
process
then
the
following
conditions
will
apply:
(a)
The
grant
of
licences
to
C-l-L
pursuant
to
paragraph
3
above
shall
be
royalty-
free.
(b)
Chematur
will
grant
non-exclusive
royalty-free
licences
under
the
process
and
any
relevant
patents
to
Imperial
Chemical
Industries
Limited,
Great
Britain,
African
Explosives
and
Chemical
Industries
Limited,
South
Africa,
Imperial
Chemical
Industries
(India)
Limited,
at
their
request,
to
use
the
said
process
in
their
respective
countries.
(c)
C-l-L
and
Chematur
will
share
equally
licence
fees
for
any
future
plants
using
this
process
to
be
built
on
the
North
American
continent
by
others
than
C-l-L.
Each
licence
fee
will
be
set
by
mutual
agreement
between
Chematur
and
C-I-L,
taking
into
consideration
the
demonstrated
advantages
of
the
process.
C-l-L
will
negotiate
all
such
licence
agreements
itself
and
will
supply
the
licensee
with
complete
design
and
operating
information
on
its
own
plant
(excluding,
however,
the
NITROPEL
operation).
The
licensee
will
have
the
right
of
either
engineering
his
own
plant,
basing
himself
on
the
information
obtained
from
C-I-L,
or
of
obtaining
Chematur’s
services
therefor
on
payment
of
Chematur’s
engineering
costs
plus
110%
for
overhead.
The
licensee
will
be
free
to
purchase
the
necessary
equipment
from
Chematur
or
from
any
supplier
of
its
choice.
C-l-L
will,
for
an
additional
fee,
train
operators
for
the
licensee
if
so
requested.
(d)
In
full
consideration
of
the
rights
granted
above,
C-I-L
will
supply
Chematur
with
a
complete
set
of
working
drawings
and
operating
data
on
the
completed
plant
(excluding,
however,
the
NITROPEL
operation)
and
the
right
to
use
such
plant
as
a
reference.
5.
Should
the
first
TNT
plant
to
commence
operation
using
the
Chematur
process
not
be
the
one
built
by
C-I-L,
then
C-I-L
shall
pay
to
Chematur,
in
addition
to
the
payments
referred
to
in
paragraph
2
above,
and
in
consideration
of
the
grant
of
licences
pursuant
to
paragraph
3
above,
a
lump
sum,
non-recurring
licence
fee
based
on
performance
and
calculated
from
the
rates
of
efficiency
obtained
during
a
trial
run.
Such
fee
shall
be
the
equivalent
of
$250
for
each
kilogram
of
toluene
required
under
495
kilograms
per
100
kilograms
of
refined
TNT
produced,
plus
$250
for
each
kilogram
of
nitric
acid
reguired
under
1,150
kilograms
per
1000
kilograms
of
refined
TNT
produced.
The
above
rates
of
efficiency
shall
be
determined
in
respect
of
the
production
of
refined
TNT
having
a
minimum
setting
point
of
80.2°C,
passing
an
Abel
Heat
Test
of
20
minutes
at
160°F
and
using
a
sellite
purification
process.
After
a
further
period
of
research
and
development,
based
on
the
ideas
obtained
from
Chematur,
CIL
succeeded
in
building
the
first
continuous
process
plant
for
the
manufacture
of
TNT
at
McMasterville,
Quebec,
in
1962.
A
second
continuous
process
plant
was
built
by
CIL
at
Valleyfield,
Quebec,
in
1965.
Almost
the
entire
production
of
the
Valleyfield
plant
was
of
TNT
for
military
purposes.
The
United
States
Governmet
was
virtually
CIL’s
sole
customer
for
such
purposes.
CIL
sold
an
insignificant
amount
of
TNT
for
military
purposes
to
the
Canadian
Government.
The
United
States
Government
had
several
batch
process
plants
which
had
been
built
around
1940,
but
it
was
encountering
certain
difficulties
with
their
operation.
CIL
was
the
only
company
from
which
it
bought
additional
requirements
of
TNT.
About
1966,
or
a
year
or
so
after
the
Valleyfield
plant
was
built,
the
United
States
Government
approached
CIL
with
a
view
to
obtaining
the
right
to
use
the
continuous
process
to
build
plants
of
its
own.
It
had
for
some
time
been
looking
for
a
better
way
of
manufacturing
TNT.
The
testimony
of
Mr
A
S
Donohoe,
sales
manager
for
CIL,
implied
that
CIL
had
no
choice
but
to
agree.
As
he
put
it,
“You
cannot
fight
Uncle
Sam.”
In
1967
CIL
entered
into
agreements
to
permit
the
United
States
Government,
with
the
assistance
of
CIL,
to
build
continuous
process
plants
for
the
manufacture
of
TNT.
There
were
two
agreements.
The
one
that
is
of
concern
in
this
appeal
was
entitled
“Patent
and
Data
Sub-License
Agreement”
(hereinafter
referred
to
as
the
“Licence
Agreement”)
and
was
entered
into
by
CIL
and
the
United
States
Goverment
as
of
June
30,
1967.
Its
purpose
was
to
give
the
United
States
Government
the
right
to
use
certain
United
States
Patents
concerning
the
continuous
process,
which
were
controlled
by
Chematur,
and
the
“know-how”
concerning
the
process
that
had
been
developed
by
CIL,
and
which
it
claimed
as
its
property.
The
second
agreement
(hereinafter
referred
to
as
the
“Services
Agreement”)
was
entered
into
as
of
the
same
date
between
CIL
and
the
prime
contractor
of
the
United
States
Government,
a
company
which
may
be
referred
to
as
“Hercules”.
It
provided
for
the
assistance
to
be
furnished
by
CIL
to
Hercules,
in
the
form
of
information
and
services,
to
permit
the
construction
of
the
first
continuous
process
plants
for
the
United
States
Government.
The
Services
Agreement
is
referred
to
in
the
Licence
Agreement
as
“Sub-Contract
No
397”.
The
amount
paid
to
CIL
under
the
Services
Agreement
was
treated
as
income
for
tax
purposes
and
is
not
in
issue
in
the
present
appeal.
It
is
the
amount
that
was
paid
under
the
Licence
Agreement
that
is
in
issue.
CIL’s
undertaking
to
impart
“know-how”
is,
however,
covered
to
some
extent
by
both
agreements.
CIL
is
referred
to
in
the
Licence
Agreement
as
the
“Contractor”
and
the
United
States
of
America
as
the
“Government”.
Article
1
of
the
Licence
Agreement
reads
in
part
as
follows:
ARTICLE
1.
LICENSE
GRANT
(a)
Contractor
agrees
to
and
does
hereby
grant
and
convey
to
the
Government,
and
to
its
officers,
agents,
and
employees
acting
within
the
scope
of
their
official
duties,
an
irrevocable,
nonexclusive
license
to
use
by
or
for
the
Government
in
the
United
States
of
America
for
governmental
(non-commercial)
purposes
only,
all
or
part
of
the
background
data:
originated
by
contractor
prior
to
the
date
of
execution
of
the
license
herein,
including
any
such
background
data
claimed
by
Contractor
to
be
proprietary,
pertinent
to
the
aforesaid
process
for
the
continuous
manufacture
of
TNT
and
developed
by
Contractor
prior
to
the
effective
date
of
this
and
the
aforesaid
Contract
No
397;
and
any
and
all
such
data
which
may
be
developed
by
Contractor
under
the
terms
of
the
aforesaid
Contract
No
397
to
construct
a
plant
to
meet
Government
requirements
of
least
fifty
(50)
tons
of
TNT
per
day,
said
TNT
of
a
grade
commensurate
with
Government
specifications;
said
license
to
cover
data
to
be
delivered
at
a
time
and
place
designated
by
the
Government
and
to
include,
but
not
limited
to,
the
following:
(1)
Copies
of
all
publications,
reports,
memorandums,
documents,
and
other
writings
relating
in
whole
or
in
part
to
the
design,
construction,
operation
and
maintenance
of
the
process
for
the
continuous
manufacture
of
TNT
and
of
the
apparatus
and
plant
therefor.
(2)
Detailed
design
drawings
sufficient
to
teach
the
complete
construction
and
operation
of
a
plant
embodying
Contractor’s
process
for
continuous
manufacture
of
TNT.
(3)
Data
describing
step-by-step
procedures
for
operating
and
maintaining
Said
plants,
safety
procedures
and
known
hazards,
material
and
operating
balances,
process
conditions
and
unique
process
steps,
results
of
efficiency
tests
conducted
by
Contractor,
operating
problems
experienced
or
anticipated
by
Contractor,
critical
special
relationships
of
equipment,
control
and
instrumentation
design,
and
waste
disposal
features.
(4)
Information
identifying
critical
design
features
of
said
process
and
equipment,
and
critical
material
quantities
and
concentrations
including
means
for
increasing
the
capability
of
units
by
varying
equipment
capacities
and
numbers
or
material
concentrations
and
quantities.
PROVIDED,
that
nothing
contained
in
this
Article
1(a)
or
elsewhere
in
this
contract
is
intended
to
imply
or
be
construed
as
granting
a
license
to
the
United
States
Government
or
others
under
any
patents
or
patent
applications
of
any
country
other
than
the
United
States
of
America.
(b)
Contractor
further
agrees
to
and
does
hereby
grant
and
convey
to
the
Government,
as
represented
by
the
Secretary
of
the
Army,
an
irrevocable,
nonexclusive,
nontransferable
license
under
any
and
all
United
States
patents
and
applications
for
patent
of
Contractor,
based
on
inventions
now
owned
or
controlled
by
Contractor
or
with
respect
to
which
Contractor
on
the
date
of
execution
of
the
license
herein
has
the
right
to
grant
licenses,
or
inventions
to
become
the
property
of
or
controlled
by
Contractor
or
with
respect
to
which
Contractor
will
acquire
the
right
to
grant
licenses
for
a
period
of
ten
(10)
years
from
the
date
of
the
aforesaid
Contract
No
397,
which
form
an
integral
part
of
the
process
which
is
the
subject
matter
of
the
aforesaid
Contract
No
397
as
said
process
exists
at
the
effective
date
of
this
and
said
Contract
No
397
and
as
it
may
be
modified
to
meet
Government
requirements
of
at
least
fifty
(50)
tons
of
TNT
per
day,
to
practice
by
the
Government
for
governmental
(non-commercial)
purposes
only,
and
to
cause
to
be
practiced
for
the
Government
for
such
purposes
only,
any
or
all
of
the
inventions
thereof
in
the
use
of
any
method,
in
the
manufacture,
use
and
disposition
of
any
product
and
in
the
disposition
of
any
plant
or
part
thereof
in
accordance
with
law,
Said
patents
and
applications
for
patent
to
include
the
following:
(1)
US
Patent
No
3,034,867
for
Continuous
Trinitrotoluene
Manufacture
issued
to
Erik
Samuelson
on
15
May
1962;
(2)
US
Patent
No
3,087,971,
for
Method
for
Trinitrotoluene
Manufacture
issued
to
Erik
Samuelson
on
30
April
1963;
(3)
US
Patent
No
3,087,973
for
Continuous
Trinitrotoluene
Manufacture
issued
to
Erik
Samuelson
on
30
April
1963;
(4)
US
Patent
No
3,204,000
for
Manufacture
of
Nitrotoluene
issued
to
Erik
Samuelson
on
31
August
1965;
(c)
Contractor
further
agrees
to
provide
the
Government
with
copies
of
applications
for
US
patent
based
upon
inventions
or
improvements
owned
or
controlled
by
Contractor
pertaining
to
the
continuous
manufacture
of
TNT
for
a
period
of
ten
(10)
years
from
the
effective
date
of
the
aforesaid
Contract
No
397.
(d)
Contractor
pursuant
to
the
provisions
of
the
aforesaid
Contract
No
397
will
provide
the
Government
or
its
selected
Contractor
with
any
technical
assistance,
in
the
form
of
personnel
or
otherwise,
necessary
to
scale-up
the
design
of
Contractor’s
existing
facilities
for
the
continuous
manufacture
of
TNT
to
design
an
operable
plant
capable
of
producing
at
least
fifty
(50)
tons
of
TNT
per
day,
said
TNT
to
be
of
a
quality
and
grade
in
accordance
with
Government
specifications.
(e)
The
Government
shall
have
the
right
to
examine
by
an
authorized
representative
or
representatives
at
any
time
and
from
time
to
time
during
regular
business
hours,
those
plants
of
the
Contractor
manufacturing
TNT
by
the
continuous
process
for
the
purpose
of
identifying
operating
improvements
in
said
process,
and
the
Contractor
agrees
at
this
time
to
disclose
those
improvements
incorporated.
Contractor
further
agrees
to
make
such
data
available
with
the
right
to
use
same
in
the
operation
of
Government
plants.
The
Government
in
like
manner
agrees
to
make
available
to
Contractor
Government
owned
or
controlled
data
relating
to
similar
improvements
made
in
Government
plants.
The
foregoing
arrangement
shall
exist
for
a
period
of
ten
(10)
years
from
the
effective
date
of
this
agreement.
(g)
Contractor
further
agrees
that
after
ten
(10)
years
from
the
effective
date
of
this
contract
the
Government
shall
have
the
right,
at
any
time,
to
dispose
of
any
plant
or
facility
constructed
in
accordance
with
the
design
and
process
data
furnished
by
Contractor
pursuant
to
the
aforesaid
Contract
No
397,
and
to
disseminate
to
any
person,
including
purchasers
of
such
plants
or
facilities,
all
such
data.
In
the
event
that
the
Government
decides
to
dispose
of
any
such
plant
or
facility
within
said
ten
(10)
year
period,
the
Contractor
shall
b
given
the
first
opportunity
to
purchase
said
plant
or
facility.
If
such
plant
or
facility
is
sold
to
anyone
other
than
Contractor,
the
purchaser
shall
be
contractually
obligated
to
restrict
his
use
of
data
embodied
in
the
plant
or
facility
to
the
purchased
premises
for
governmental
(non-commercial)
purposes
only
and
not
to
divulge
said
data
to
anyone,
for
the
remainder
of
said
ten
(10)
year
period,
provided,
however,
that
Contractor
agrees
to
make
available,
on
fair
and
reasonable
terms,
a
license
to
operate
the
same
plant
for
commercial
purposes.
(h)
Contractor
agrees
to
mark
with
a
restrictive
legend
all
that
data
relating
to
apparatus,
processes
or
components
developed
at
private
expense
and
provided
pursuant
to
the
aforesaid
Contract
No
397.
The
Government
arid
its
selected
contractor
agree
to
observe
the
restrictions
for
the
period
of
ten
(10)
years
from
the
effective
date
of
this
and
the
aforesaid
Contract
No
397,
PROVIDED,
that
such
restrictions
shall
not
apply
to
that
data
in
the
public
domain
or
otherwise
available
to
the
Government
without
limitations.
Article
4
of
the
agreement
provides
for
payment
as
follows:
ARTICLE
4.
PAYMENT
The
Government
in
consideration
of
this
license,
subject
to
the
availability
of
funds,
shall
be
obligated
to
pay
the
Contractor
a
total
capital
sum
of
$600,000
for
the
incorporation
and
use
of
said
data,
know-how
and
inventions
in
the
construction
and
use
by
the
Government
of
plants
or
facilities
for
said
continuous
manufacturing
process,
said
total
capital
payment
of
$600,000
to
be
made
as
follows:
One-half
(%)
on
the
effective
date
of
Contract
No
397;
and
the
remaining
one-half
(2)
upon
acceptance
of
the
data
specifically
called
for
in
the
aforesaid
Contract
No
397.
The
stated
total
capital
sum
will
be
payment
in
full
for
the
receipt
and
use
of
said
data
in
accordance
with
the
terms
of
this
agreement,
and
additional
plants
or
facilities
shall
be
free
from
any
obligations
for
payment
on
the
part
of
the
Government.
The
sum
payable
was
later
increased
by
agreement
to
$650,000.
By
letter
dated
August
9,
1967
CIL
and
Chematur
agreed
concerning
the
distribution
of
this
sum
as
follows:
We
wish
to
refer
to
the
agreement
between
our
companies,
dated
27th
June,
1960,
concerning
our
purchase
of
rights
under
your
continuous
TNT
process,
and
our
recent
correspondence
in
connection
with
our
sale
of
rights
under
such
process
to
the
United
States
Government.
This
letter
will
serve
to
confirm
that
in
consideration
of
the
nature
of
the
knowhow
to
be
supplied
to
the
US
Government,
and
notwithstanding
the
terms
of
Clause
4(c)
of
our
agreement
of
June
27th,
1960,
it
has
been
agreed
by
our
two
companies
that
the
price
received
from
the
US
Government
would
be
shared
between
us
on
the
basis
of
Chematur
receiving
$300,000
and
C-I-L
keeping
$350,000
of
the
capital
sum
of
$650,000.
Mr
Harley
Prime,
manager
of
an
engineering
group
and
explosive
research
for
CIL,
testified
that
the
relative
importance
of
the
research
and
development
contributed
by
CIL
and
Chematur
to
the
construction
of
the
first
continuous
process
plant
was
CIL—80%;
Chematur—20%.
Pursuant
to
the
Licence
Agreement
and
the
Services
Agreement
the
United
States
Government
immediately
constructed
3
continuous
process
plants
with
the
assistance
of
CIL.
Eventually
it
constructed
20
such
plants,
14
of
which
were
operating
and
6
of
which
were
in
the
process
of
completion
at
the
time
of
the
hearing
before
the
Tax
Review
Board
in
1974.
Eventually
the
United
States
Government
ceased
to
purchase
TNT
from
CIL.
Precisely
when
this
occurred
is
not
clear
from
the
evidence.
CIL
had
definitely
ceased
to
sell
TNT
to
the
United
States
Government
by
the
time
of
the
hearing
before
the
Tax
Review
Board.
At
that
time
the
Valleyfield
plant
was
manufacturing
a
variety
of
products.
Its
production
of
TNT
for
military
purposes
was
confined
to
small
quantities
for
the
Canadian
government,
which
placed
restrictions
on
sale
by
CIL
of
TNT
for
such
pur-
poses
to
others.
It
is
possible
to
conclude
from
the
evidence,
however,
that
CIL
continued
to
sell
TNT
for
military
purposes
to
the
United
States
Government
for
some
time
after
the
Licence
Agreement.
It
is
the
contention
of
CIL
that
as
a
direct
result
of
entering
into
the
Licence
Agreement
and
performing
its
obligations
thereunder
it
lost
its
entire
market
for
TNT
with
the
United
States
Government.
Up
to
the
time
of
the
trial
the
agreement
with
the
United
States
Government
was
the
only
one
that
CIL
had
entered
into
of
the
kind
contemplated
by
the
CIL-Chematur
agreement
for
the
establishment
of
continuous
process
plants.
The
issue
in
the
appeal
is
whether
the
sum
of
$378,000
(the
Canadian
equivalent
of
$350,000
(US))
which
CIL
received
as
its
share
of
the
payment
under
the
Licence
Agreement
was
an
income
receipt
or
a
capital
receipt.
The
Tax
Review
Board
and
the
Trial
Division
held
that
it
was
income.
The
appellant
contends
that
the
sum
received
was
a
capital
receipt
on
the
ground
that
it
was
consideration
for
giving
up
a
part
of
the
capital
assets
of
the
company.
It
is
argued
that
the
payment
under
the
Licence
Agreement
was
a
once-for-all
lump
sum
payment
unrelated
to
the
actual
use
of
the
patents
and
the
so-called
proprietary
“background
data”
or
“know-how”,
and,
further,
that
as
a
direct
result
of
entering
into
the
Licence
Agreement
CIL
lost
its
entire
business
for
the
sale
of
TNT
for
military
purposes
to
the
United
States
Government.
The
respondent
contends
that
the
agreement
between
CIL
and
Chematur
contemplated
the
kind
of
transaction
that
was
entered
into
as
part
of
a
business
from
which
revenue
would
be
derived,
that
the
licence
to
use
the
patents
and
the
“know-how”
was
of
a
non-exclusive
nature
which
left
the
appellant
free
to
make
other
such
arrangements
in
the
United
States,
and
that
there
is
no
evidence
that
the
appellant
lost
its
business
with
the
United
States
Government
as
a
direct
result
of
entering
into
the
Licence
Agreement.
Reference
was
made
in
argument
to
several
cases,
but
the
argument
focused
particularly
on
the
application
of
four
of
them:
Evans
Medical
Supplies,
Ltd
v
Moriarty,
37
TC
540;
Jeffrey
v
Rolls-Royce,
Ltd,
40
TC
443;
Musker
v
English
Electric
Co,
Ltd,
41
TC
556;
and
Wolf
Electric
Tools
Ltd
v
Wilson,
45
TC
326.
The
appellant
contended
that
the
sum
received
under
the
Licence
Agreement
was
of
the
same
character
as
the
lump
sum
payments
that
had
been
held
to
be
capital
in
the
Evans
Medical
Supplies
and
Wolf
Electric
cases.
The
respondent
argued
that
it
fell
within
the
principles
applied
in
the
Rolls-Royce
and
English
Electric
cases,
where
the
lump
sum
payments
were
held
to
be
income.
It
is
necessary
to
consider,
then,
what
these
cases
appear
to
stand
for
in
relation
to
the
issue
in
the
appeal.
Evans
Medical
Supplies
and
Wolf
Electric
involved
agreements
whereby
companies
undertook
to
disclose
secret
processes
and
other
“know-how”
and
otherwise
to
provide
the
necessary
assistance
to
enable
other
companies
to
become
established
in
their
kind
of
business,
and
as
a
direct
result
of
which
they
lost
their
entire
business
in
the
countries
in
question.
This
result
is
the
feature
of
the
cases
that
is
stressed
by
the
appellant.
It
would
also
appear
to
be
the
feature
of
Evans
Medical
Supplies
that
was
emphasized
by
the
House
of
Lords
in
Rolls-Royce
and
English
Electric
as
distinguishing
it.
In
these
cases
there
were
agreements
by
which
companies
undertook
to
impart
their
“know-how”
to
governments
and
other
companies
for
lump
sum
payments
unrelated
to
the
extent
of
use,
but
it
was
held
that
they
had
not
lost
any
business
by
doing
so.
On
the
contrary
they
had
been
enabled
by
these
agreements
to
carry
on
their
business
in
countries
in
which
they
would
not
otherwise
have
been
able
to
do
so.
Because
of
the
appellant’s
reliance
on
Evans
Medical
Supplies
it
is
necessary
to
take
a
more
detailed
look
at
the
facts
of
that
case
and
the
variety
of
opinion
expressed
in
the
House
of
Lords.
The
Burmese
Government
had
decided
that
Burma
should
have
its
own
pharmaceutical
industry
and
sought
to
obtain
the
assistance
of
some
well-established
pharmaceutical
company
to
enable
it
to
do
so.
Evans
Medical
Supplies
Ltd
was
such
a
company
with
a
world-wide
business,
including
a
business
in
Burma
which
it
carried
on
through
an
agency.
Encouraged
by
its
own
government,
and
desiring
to
make
the
best
of
the
situation,
the
company
entered
into
the
necessary
agreement
with
the
Burmese
Government
by
which
it
agreed
to
disclose
its
secret
processes
and
otherwise
to
assist
the
government
to
establish
a
pharmaceutical
industry.
As
consideration
the
company
received
what
the
agreement
described
as
a
“capital
sum’’
of
£100,000.
As
a
result
of
entering
into
the
agreement
the
company
lost
its
entire
business
in
Burma.
This
was
the
only
case
in
which
the
Company
made
a
disclosure
of
its
secret
processes
to
enable
another
company
to
enter
into
business
in
competition
with
it.
Opinion
was
divided
in
the
House
of
Lords.
Two
of
the
members,
Lord
Simonds
and
Lord
Tucker,
held
that
the
sum
was
wholly
capital.
Two,
Lord
Denning
and
Lord
Keith
of
Avonholme,
held
it
was
income.
The
fifth
member,
Lord
Morton
of
Henryton,
held
that
it
was
capital
in
so
far
as
it
was
attributable
to
disclosure
of
the
secret
processes,
and
that
the
case
should
be
sent
back
for
the
determination
of
that
proportion.
The
company’s
appeal
succeeded
for
the
whole
of
the
amount
because
Lord
Denning,
while
considering
the
sum
to
be
income,
held
that
it
had
not
been
received
in
the
course
of
the
company’s
existing
trade
and
could
therefore
not
be
brought
into
the
assessment
of
that
trade
for
the
taxation
year
in
question.
Thus,
it
must
be
observed
that
there
was
not
a
majority
in
the
House
of
Lords
for
the
conclusion
that
the
whole
of
the
sum
was
capital.
Lord
Simonds,
with
whom
Lord
Tucker
concurred,
adopted
the
test
expressed
by
Bankes,
LJ
in
British
Dyestuffs
Corporation
(Blackley),
Ltd
v
CIR,
12
TC
586,
at
596
as
follows:
...
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?
Lord
Simonds
likened
the
secret
processes
to
a
patent,
held
that
they
were
a
capital
asset,
and
that
the
company
had
“parted
with
its
property
for
a
purchase
price.’’
As
to
the
character
of
a
secret
process,
he
referred
to
the
decision
of
the
Court
of
Appeal
in
Handley
Page
v
Butterworth,
19
TC
328,
where
in
a
case
involving
compensation
by
the
government
after
the
war
for
the
use
of
secret
processes
which
the
inventor
had
been
obliged
to
disclose,
Romer,
LJ
said
at
359-360,
after
describing
the
position
of
a
patentee:
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
thrid
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
monoploy
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.
The
payment
in
question,
in
my
opinion,
was
made
to
him
for
the
surrender
of
his
capital
asset
and,
in
his
hands,
is
capital
money
not
taxable
under
Schedule
D
or
any
other
Schedule.
Lord
Morton
of
Henryton,
who
held
that
the
lump
sum
payment
was
a
capital
receipt
in
so
far
as
it
was
attributable
to
the
disclosure
of
the
secret
processes
of
the
company,
adopted
the
reasoning
of
the
judges
in
the
Court
of
Appeal,
in
which
reference
was
made
to
the
characterization
by
Romer,
LJ
of
secret
processes
in
Handley
Page.
The
judges
in
the
Court
of
Appeal
had
held
that
the
fact
the
disclosure
was
not
a
disclosure
to
the
world,
as
in
Handley
Page,
did
not
prevent
it
from
being
a
parting
with
a
valuable
part
of
the
company’s
assets.
Lord
Denning
held
that
there
had
not
been
a
sale
of
secret
processes,
since
the
company
retained
the
right
to
use
the
processes,
and
that
what
the
transaction
amounted
to
was
the
supply
of
“know-how”.
He
said
“knowhow”
could
not
be
sold
as
a
capital
asset
for
a
capital
sum,
it
could
only
be
used
by
a
company
or
taught
to
others
for
profit.
Acknowledging
that
there
might
be
a
sale
of
secret
processes
for
a
sum
that
would
be
a
capital
receipt,
he
said
at
589:
“Even
with
a
company
which
owns
secret
processes,
the
supply
of
‘know-how’
is
not
like
the
sale
of
goodwill
or
a
secret
process,
for
such
a
sale
imports
that
the
seller
cannot
thereafter
avail
himself
of
the
special
knowledge
with
which
he
has
parted:
see
Trego
v
Hunt,
[1896]
AC
7,
at
24-5;
and
it
may
then
rightly
be
regarded
as
the
sale
of
a
capital
asset:
see
Handley
Page
v
Butterworth,
19
TC
328.
But
the
suppliers
of
‘know-how’
always
remains
entitled
to
use
it
himself,
as
was
the
case
here.”
Lord
Keith
of
Avonholme
held
that
there
was
ample
evidence
to
support
the
conclusion
of
the
Commissioners
that
the
company
was
trading
in
“know-how”.
The
subsequent
commentary
by
the
House
of
Lords
on
the
decision
in
Evans
Medical
Supplies
is
significant
as
indicating
what
are
to
be
considered
the
distinguishing
features
of
that
case.
In
Rolls-Royce,
where
the
House
of
Lords
held
that
the
lump
sum
payments
received
for
the
disclosure
of
“know-how”
were
income
receipts,
Viscount
Simonds
said
at
490-1,
with
reference
to
Evans
Medical
Supplies,
that
the
inference
had
been
drawn
in
that
case
that
the
capital
sum
had
been
paid
for
the
communication
of
secret
processes,
‘‘with
a
resulting
total
loss
to
the
company
of
its
Burmese
trade”,
that
particular
regard
was
had
to
the
fact
that
the
transaction
was
an
isolated
one,
and
that
an
analogy
had
been
drawn
between
secret
processes
and
patents.
He
added:
“The
decision
did
not
establish,
or
purport
to
establish,
a
principle
that
whenever,
and
however
often,
a
company
communicates
what
is
called
“know-how”
to
a
third
party
and
receives
what
is
called
a
lump
sum
for
it,
that
sum
is
for
tax
purposes
a
capital
receipt.
The
circumstances
may
lead,
as
in
my
opinion
they
lead
in
the
present
case,
to
the
opposite
conclusion.”
Lord
Reid
at
492
said
the
distinguishing
features
of
Evans
Medical
Supplies
were
that
the
company
had
lost
its
Burmese
market,
that
the
capital
value
of
the
secret
processes
had
been
greatly
diminished
by
their
disclosure
to
the
Burmese
Government,
and
that
there
was
a
single
transaction,
in
contrast
to
Rolls-Royce,
in
which
there
had
been
a
series
of
transactions
arising
out
of
a
deliberate
policy.
Lord
Radcliffe
said
at
495:
“What
weighed
with
the
majority
judgments
in
that
case
was
that
the
company
had
sold
to
the
Burmese
Government
a
secret
process
upon
which
the
success
of
its
business
in
Burma
had
to
depend
and
it
had,
in
effect,
disposed
altogether
of
its
Burmese
trade.
To
do
that
was
to
dispose
finally
of
part
of
its
fixed
capital,
and
monies
received
in
return
were
not
trading
receipts.
The
case
was
regarded
as
being
an
equivalent
to
Handley
Page
v
Butterworth,
19
TC
328,
in
which
the
owner
of
a
secret
process
had
destroyed
his
property
by
making
it
available
to
the
world.’’
Lord
Morris
of
Borth-y-Gest,
referring
to
Evans
Medical
Supplies
at
497,
stressed
the
fact
that
there
had
been
an
isolated
transaction
and
not
the
repetition
of
licensing
found
in
the
Rolls-Royce
case,
and
that
the
imparting
of
knowledge
had
been
to
the
detriment
of
the
company’s
business
in
Burma.
Lord
Guest
said
at
498
that
he
regarded
Evans
Medical
Supplies
as
“a
very
special
case
decided
upon
its
own
particular
facts”.
He
said
that
the
disclosure
of
the
company’s
secret
processes,
which
had
never
been
disclosed
to
anyone
before,
“involved
the
gradual
cessation
of
the
company’s
own
wholesale
trading
activities
in
Burma”,
and
that
the
company
“parted
with
an
asset
which
was
the
source,
or
one
of
the
sources,
of
its
profits.”
He
said
there
had
been
the
realization
of
a
considerable
part
of
the
capital
value
of
the
secret
processes
in
a
“once
for
all”
sale.
Evans
Medical
Supplies
was
also
the
subject
of
commentary
by
the
House
of
Lords
in
the
English
Electric
case,
where
once
again
it
was
unanimously
held
that
the
company
had
been
trading
in
“know-how”
and
the
lump
sum
payments
received
were
income.
The
case
was
held
to
be
governed
by
Rolls-Royce.
Lord
Donovan,
with
whom
Lord
Reid
agreed,
said
with
reference
to
Evans
Medical
Supplies
at
588:
“What
distinguishes
Evans
Medical
Supplies,
Ltd
v
Moriarty
in
this
respect
is,
I
think,
the
circumstances
of
the
transaction,
which
was,
in
effect,
the
disposal
by
degrees
of
the
company’s
branch
business
in
Burma.
Where
a
business
is
sold,
or
relinguished
by
degrees,
and
part
of
the
consideration
is
a
lump
sum
for
the
disclosure
of
secret
processes
which
will
enable
the
purchaser
of
the
business
to
carry
it
on,
it
may
well
be
that
the
lump
sum
should
be
regarded
simply
as
part
of
the
entire
consideration
for
the
sale,
and
thus
as
capital.”
In
Wolf
Electric,
on
which
the
appellant
also
relies,
the
company,
a
manufacturer
of
power
tools
in
England
with
an
extensive
export
trade,
was
selling
tools
in
India
through
an
agency
on
a
principal
to
principal
basis,
when
it
was
told
for
reasons
of
governmental
policy
similar
to
those
in
Evans
Medical
Supplies
that
it
would
have
to
establish
manufacturing
facilities
in
India.
A
company
was
incorporated
in
India,
and
Wolf
Electric
agreed
to
supply
it
with
the
necessary
confidential
information
to
enable
it
to
manufacture
certain
tools,
and
it
further
agreed
that
the
Indian
company
should
have
the
exclusive
right
in
India
for
a
specified
period
to
manufacture
the
selected
tools.
In
return
for
the
supply
of
information
Wolf
Electric
received
45%
of
the
shares
of
the
Indian
company.
The
issue
was
whether
the
value
of
these
shares
was
a
capital
or
income
receipt.
Pennycuick,
J
in
the
Chancery
Division
of
the
High
Court
held
that
it
was
capital.
He
said
that
what
had
taken
place
was
a
change
in
the
profit-making
structure
of
the
company
whereby
it
had
exchanged
its
good-will
in
India
for
the
shares
in
the
Indian
company.
He
said
the
case
fell
within
Evans
Medical
Supplies
rather
than
Rolls-Royce
or
English
Electric.
Quoting
from
what
was
said
by
Lord
Radcliffe
in
English
Electric,
he
said
at
340
that
the
obligation
to
supply
information
was
one
element
of
‘‘a
comprehensive
arrangement
by
virtue
of
which,
quoad
the
selected
tools,
the
Company
effectively
gave
up
its
business
in
India.”
In
conclusion
he
observed
that
in
the
Rolls-Royce
and
English
Electric
cases
the
companies
had
no
pre-existing
goodwill
in
the
countries
in
which
they
made
agreements
to
impart
their
“know-how”,
and
that
the
pre-existing
goodwill
in
India
in
the
Wolf
Electric
case
was
the
crucial
factor
in
concluding
that
the
transaction
was
of
a
capital
nature.
It
is
not
clear
how
much
significance
Pennycuick,
J
attached
to
the
exclusively
provision
in
the
agreement,
but
the
importance
of
the
distinction
between
a
non-exclusive
and
an
exclusive
licence
under
a
patent
was
stressed
in
Murray
v
Imperial
Chemical
Industries
Ltd,
44
TC
175,
where
the
issue
was
the
character
for
tax
purposes
of
a
lump
sum
payment
received
as
consideration
for
a
“keep-out”
covenant
that
was
held
to
be
ancillary
to
patent
licences.
It
was
held
to
be
capital.
The
licences
were
for
the
life
of
the
patents,
and
together
with
the
“keep
out
covenant”,
were
held
to
be
the
equivalent
of
an
assignment
of
the
patent
rights
for
a
lump
sum
consideration
unrelated
to
use
in
the
countries
concerned.
Lord
Denning,
MR,
in
the
Court
of
Appeal,
discussed
the
significance
of
different
kinds
of
licence
transactions
involving
a
lump
sum
payment.
The
respondent
invokes
this
passage
in
support
of
his
contention
that
the
non-exclusive
character
of
the
licence
in
the
present
case
prevents
the
transaction
from
being
a
capital
one.
I
quote
only
a
part
of
the
passage
in
the
reasons
of
Lord
Denning
which
begins
at
211.
After
pointing
out
the
distinctions
in
the
rights
granted
by
an
ordinary
or
non-exclusive
licence,
a
“sole”
licence,
and
an
exclusive
licence,
of
which
the
licence
with
“keep-out”
covenant
is
a
particular
form,
as
well
as
the
various
kinds
of
payment
which
the
owner
of
patent
rights
may
receive.
Lord
Denning
said
at
212:
If
and
in
so
far
as
he
disposes
of
the
patent
rights
outright
for
a
lump
sum,
which
is
arrived
at
by
reference
to
some
anticipated
quantum
of
user,
it
will
normally
be
income
in
the
hands
of
the
recipient
(see
the
judgment
of
Lord
Greene,
MR
in
Nethersole
v
Withers
(1948),
28
TC
501,
at
512,
approved
by
Lord
Simon
in
the
House
of
Lords,
at
518).
But,
if
and
in
so
far
as
he
disposes
of
them
outright
for
a
lump
sum
which
has
no
reference
to
anticipated
user,
it
will
normally
be
capital
(such
as
the
payment
of
£25,000
in
the
British
Salmson
case).
It
is
different
when
a
man
does
not
dispose
of
his
patent
rights,
but
retains
them
and
grants
a
nonexclusive
licence.
He
does
not
then
dispose
of
a
capital
asset.
He
retains
the
asset
and
he
uses
it
to
bring
in
money
for
him.
A
lump
sum
may
in
those
cases
be
a
revenue
receipt
(see
C/R
v
Rustproof
Metal
Window
Co
Ltd
(1947),
29
TC
243,
at
270-1
per
Lord
Greene,
MR,
who
emphasized
that
it
was
a
non-exclusive
licence
there).
Similarly,
a
lump
sum
for
“know-how”
may
be
a
revenue
receipt.
The
capital
asset
remains
with
the
owner.
All
he
does
is
to
put
it
to
use.
The
lump
sum
in
the
present
case
is
clearly
one
that
was
fixed
without
reference
to
an
anticipated
quantum
of
user.
It
was
paid
for
a
non-exclusive
licence
to
use
an
invention
and
for
“know-how”.
The
appellant
contended
that
it
was
well
established
by
a
long
line
of
authorities
that
a
payment
of
this
character
was
to
be
considered
to
be
capital.
I
do
not
think
that
the
weight
of
authority
supports
this
unqualified
contention,
as
appears
from
the
judgment
of
Lord
Denning
in
the
Imperial
Chemicals
case
which
I
have
quoted.
In
Constantinesco
v
Rex,
11
TC
730,
in
which
a
lump
sum
payment
made
after
the
use
of
a
patent
was
held
to
be
income,
Rowlatt,
J
said,
“Supposing,
before
the
user,
it
said:
‘Now
pay
£25,000’—or
whatever
sum
the
parties
agree
to—‘and
use
it
as
much
as
you
like,
for
a
definite
time
or
for
the
whole
length
of
the
patent.’
That
will
clearly
be
a
lump
sum.
It
would
not
be
parting
with
the
patent,
because
other
people
might
use
it,
but
it
would
be
clearly
a
capital
sum,
in
my
judgment.”
In
Desoutter
Bros,
Ltd
v
J
E
Hanger
&
Co,
Ltd,
[1936]
1
All
ER
535,
MacKinnon,
J,
relying
on
this
statement,
held
that
a
lump
sum
payment
in
advance
for
a
licence
to
use
a
patent,
without
regard
to
the
extent
of
the
anticipated
use,
was
capital.
There
was
nothing
to
indicate
that
the
licence
was
an
exclusive
one,
and
no
reference
was
made
to
any
distinction,
in
this
respect,
between
a
nonexclusive
licence.
These
expressions
of
judicial
opinion
certainly
support
the
appellant’s
contention.
In
British
Salmson
Aero
Engines,
Ltd
v
CIR,
22
TC
29,
the
Court
of
Appeal
held
that
a
lump
sum
payment,
unrelated
to
extent
of
use,
for
an
exclusive
licence
under
a
patent
was
capital.
The
Crown
had
argued,
on
the
basis
of
something
said
by
Greer,
LJ
in
Mills
v
Jones,
14
TC
769,
concerning
a
lump
sum
payment
of
royalties,
that
any
payment
for
a
licence
to
use
a
patent,
whether
lump
sum
or
not,
whether
related
to
use
or
not,
was
income.
Finlay,
J
in
the
King’s
Bench
Division,
said
that
what
Greer,
LJ
had
said
in
Mills
v
Jones
appeared
to
cast
doubt
on
the
dictum
in
Constantinesco
but
that
he
felt
bound
by
Desoutter.
In
the
Court
of
Appeal,
Sir
William
Greene,
MR
said
that
Finlay,
J
came
to
the
right
conclusion,
but
in
his
own
reasons
he
drew
particular
attention
to
the
exclusive
character
of
the
licence
that
had
been
granted
and
stressed
the
importance
in
this
respect
of
the
distinction
between
a
non-exclusive
and
an
exclusive
licence:
see
pp
39-40
and
46-7.
He
said
that
Greer,
LJ
in
his
observations
in
Mills
v
Jones
had
expressly
reserved
the
case
of
an
exclusive
licence.
It
is,
I
think,
a
clear
implication
of
the
reasons
of
the
Court
of
Appeal
in
British
Salmson
that
the
case
was
decided
the
way
it
was
because
the
licence
was
an
exclusive
one.
In
C/R
v
Rustproof
Metal
Window
Co,
Ltd,
29
TC
243,
the
Court
of
Appeal
held
that
a
lump
sum
unrelated
to
extent
of
use
given
for
a
non-exclusive
licence
was
income.
The
Court
stressed
the
fact
that
the
licence
was
a
non-exclusive,
for
a
limited
purpose
and
for
a
limited
time.
In
the
King’s
Bench
Division
Atkinson,
J
had
rejected
the
argument
that
the
payment
was
income
because
the
licence
was
non-exclusive.
He
pointed
to
Desoutter
and
to
the
terms
in
which
Lord
Greene,
MR
had
expressed
himself
in
the
Court
of
Appeal
in
Nethersolev
Withers,
28
TC
501,
where,
according
to
Atkinson,
J,
he
had
expressed
approval
of
Desoutter
and
had
said
with
reference
to
British
Salmson
at
512:
“This
decision
is
a
clear
authority,
so
far
as
this
Court
is
concerned,
that
a
lump
sum
payment
received
for
the
grant
of
a
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.
If
the
lump
sum
is
arrived
at
by
reference
to
some
anticipated
quantum
of
user
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.”
In
the
Court
of
Appeal
in
Rustproof
Metal
Lord
Greene,
MR
rejected
the
proposition
that
a
lump
sum
paid
without
reference
to
the
extent
of
use
for
a
licence
to
use
a
patent
is
necessary
capital.
He
denied
that
what
was
said
in
Nethersole
was
intended
to
approve
such
a
proposition,
although
he
did
make
the
following
observation
concerning
the
concluding
sentence
in
the
passage
quoted
above:
“If
I
have
any
comment
to
make
on
this
language
it
is
that
the
concluding
sentence
possibly
puts
the
point
too
high
in
favour
of
capital.
It
is,
however,
qualified
by
the
crucial
words
‘if
there
is
nothing
else
in
the
case
which
points
to
an
income
character.’
At
pp
270-1
he
expressed
what
appear
to
have
been
the
essential
considerations
for
holding
the
payment
to
be
income
as
follows:
“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.”
In
the
Nethersole
case,
which
was
decided
on
the
basis
that
what
was
involved
amounted
to
a
sale
or
assignment
of
copyright,
Viscount
Simon
in
the
House
of
Lords
referred
to
Con-
stantinesco,
Mills
v
Jones,
Desoutter,
and
British
Salmson,
and
said
he
adopted
the
statement
by
Lord
Greene,
MR
in
Nethersole
that
“a
lump
sum
payment
received
for
the
grant
of
a
patent
licence
for
a
term
of
years
may
be
a
capital
and
not
a
revenue
receipt”
and
that
“whether
or
not
it
is
so,
must
depend
on
any
particular
facts
which,
in
the
particular
case,
may
throw
light
on
its
real
character,
including,
of
course,
the
terms
of
the
agreement
under
which
the
licence
is
granted.”
I
do
not
think
that
anything
said
by
Viscount
Simon
in
the
Nethersole
case
detracts
from
the
Significance
of
the
distinction,
emphasized
by
Lord
Greene
in
Rustproof
Metal,
between
an
exclusive
and
a
non-exclusive
licence.
On
the
contrary,
what
was
emphasized
in
Nethersole
was
that
there
had
been
a
disposition
of
property.
In
Evans
Medical
Supplies
there
was
reference
by
Upjohn,
J
in
the
Chancery
Division
and
by
Lord
Evershed,
MR
and
Romer,
LJ
in
the
Court
of
Appeal
to
what
was
said
by
Lord
Greene,
MR
in
Nethersole.
Upjohn,
J
rejected
the
distinction
between
an
exclusive
and
non-exclusive
licence
as
the
basis
for
determining
whether
a
lump
sum
payment
is
capital
or
income.
He
said
such
a
proposition
was
in
conflict
with
what
was
said
by
Lord
Greene,
MR
in
Nethersole
and
approved
by
Viscount
Simon
in
that
case,
and
with
the
decision
in
Desoutter.
Lord
Evershed,
MR
in
the
Court
of
Appeal
said
at
562:
“For
it
is
not,
in
my
judgment,
an
answer
to
Mr
Senter’s
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,
25
TC
59,
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.”
The
reference
to
Tyresoles
is
difficult
to
understand
because
that
appears
to
have
been
a
case
in
which
a
lump
sum
payment
was
made
for
an
undertaking
by
which
the
company
agreed
to
limit
its
activity
in
the
area
covered
by
the
agreement.
It
was
a
form
of
“keep-out”
covenant.
At
68
of
his
reasons
Wrottesley,
J
said,
“Prima
facie
here,
therefore,
what
the
Company
has
done
is
to
grant
an
exclusive
right
to
the
garage
owner,
which
will
be
enforced
by
the
Courts
of
Law,
and
which
will
pro
tanto
disentitle
the
Company
from
exercising
the
patent
rights
it
has
under
the
law”,
and
at
70
he
said
with
reference
to
what
Lord
Greene
had
said
in
British
Salmson,
“He
fastened
upon
two
elements
which
distinguised
the
Salmson
case
.
.
.
from
those
in
which
no
more
was
granted
than
the
mere
right
to
use
a
patent.
The
first
was
that
by
the
agreement
the
French
company,
the
patentees,
undertook
not
to
exercise
its
patent
rights
in
the
British
Empire.
This
was
as
the
Master
of
the
Rolls
pointed
out
something
quite
different
from
a
mere
right
of
user.
It
entitled
the
English
company
to
restrain
the
French
company
from
exercising
its
rights
in
that
territory.
Pausing
there,
I
find
something
of
the
same
kind
in
the
case
under
debate.
The
Company
could
be
restrained
by
the
garage
owner
from
exercising
in
the
area
specified
in
the
agreement
its
undoubted
patent
rights
to
the
extent
set
out
in
the
agreement.
The
Company
parted
with
this
amount
of
its
corpus.”
Romer,
LJ
in
the
Court
of
Appeal
in
Evans
Medical
Supplies
held
that
while
the
company
had
not,
strictly
speaking,
sold
or
assigned
any
property,
the
value
of
the
secret
processes
to
the
company
had
been
diminished
by
their
disclosure
to
the
Burmese
Government.
He
cited
the
statement
of
Lord
Greene,
MR
in
Nethersole
that
were
the
property
“is
premanently
diminished
or
injuriously
affected,
it
means
that
the
owner
has
to
that
extent
realised
part
of
the
capital
of
his
property
as
distinct
from
merely
exploiting
its
incomeproducing
character.”
There
was
no
reference
in
the
House
of
Lords
in
Evans
Medical
Supplies
to
the
distinction,
in
respect
of
a
lump
sum
payment
for
a
licence
under
a
patent,
between
a
non-exclusive
and
an
exclusive
licence.
Nor
was
there
any
such
reference
in
the
House
of
Lords
in
the
Rolls-Royce
and
English
Electric
cases.
Finally
there
is
the
statement
with
reference
to
this
distinction
by
Lord
Denning
in
the
Imperial
Chemicals
case,
part
of
which
has
been
quoted
above.
Davies,
LJ
and
Russell,
LJ
in
the
Court
of
Appeal
held
that
because
of
the
nature
of
the
licences
in
that
case,
which
were
exclusive
licences
for
the
term
of
the
patents
reinforced
by
“keep-out”
covenants,
there
had
been
a
disposition
of
a
part
of
the
fixed
assets
of
the
Company.
All
of
the
judges
in
the
Court
of
Appeal
expressed
agreement
with
Cross,
J
in
the
Chancery
Division
who
in
the
course
of
his
reasons
said
at
205:
“But
the
agreements
in
question
contained
in
substance
dispositions
of
the
whole
interest
of
ICI
in
the
patents
in
the
various
countries
supported
by
‘keep-out’
covenants.”
What
emerges
from
this
analysis
is
that
it
is
not
sufficient
that
there
be
the
stipulation
of
a
lump
sum
payment
unrelated
to
the
extent
of
the
anticipated
use
of
the
patent
in
order
for
such
payment
to
be
capital
in
nature;
the
licence
for
which
it
is
consideration
must
amount
to
a
disposition
or
sale
of
part
of
the
patent
rights.
This
concept
of
a
disposition
of
or
parting
with
a
capital
asset
is
central
to
the
test
formulated
by
Bankes,
LJ
in
British
Dyestuffs,
which
has
been
cited
with
approval
in
several
cases.
It
is
central
to
the
view
that
is
reflected
in
Rustproof
Metal
and
which
appears
from
the
judgment
of
Lord
Denning
in
Imperial
Chemical
Industries
to
have
prevailed
in
the
Court
of
Appeal.
It
is
admittedly
contrary
to
the
view
expressed
by
Lord
Evershed,
MR
in
Evans
Medical
Supplies
which
would
appear
to
treat
a
non-exclusive
licence
as
a
sufficient
impairment
of
the
capital
asset
to
make
a
lump
sum
payment
unrelated
to
the
extent
of
use
a
capital
receipt,
but
what
was
said
by
him
and
Romer,
LJ
in
that
case
cannot
be
divorced
from
the
particular
facts
of
that
case
and
in
particular
from
what
was
the
ultimate
effect
of
the
agreement
on
the
company’s
business
in
Burma.
It
is
my
opinion,
therefore,
based
on
this
line
of
authority,
that
the
fact
the
lump
sum
payment
in
the
present
case
was
given
for
a
licence
to
use
patents
as
well
as
for
“know-how”
does
not
add
any
significant
force
to
the
appellant’s
contention
that
the
sum
must
be
considered
to
be
capital.
While
the
United
States
patents
are
clearly
capital
assets
the
licence,
which
is
non-exclusive,
for
a
limited
purpose
(to
the
United
States
Government
for
military
of
non-commercial
purposes)
and
for
a
limited
term,
cannot
be
considered,
on
the
analysis
to
be
found
in
the
cases,
to
be
a
parting
with
or
disposition
of
the
patent
rights.
The
right
stipulated
in
the
Licence
Agreement
to
sell
any
plant
built
under
the
Licence
and
to
disseminate
the
design
and
process
data
furnished
under
the
services
agreement
would
not
appear
to
have
any
bearing
on
the
nature
of
the
licence
to
use
the
United
States
patents.
Moreover,
I
would
observe
that
these
patent
rights
are
in
any
event
not,
strictly
speaking,
the
property
of
the
appellant.
CIL
was
given
the
right
to
grant
licences
under
them
by
those
who
control
the
patents
in
accordance
with
the
understanding
in
paragraph
4(c)
of
the
CIL-Chematur
agreement
that
CIL
would
negotiate
the
licence
agreements
for
continuous
process
plants
on
the
North
American
continent.
What
had
been
granted
to
CIL
by
that
agreement
was
a
non-exclusive
licence
under
any
Canadian
patents.
The
record
shows
that
Chematur
owned
or
controlled
the
rights
under
the
four
United
States
patents
referred
to
in
Article
1,
paragraph
(b)
of
the
licence
agreement.
In
so
far
as
the
licence
to
use
the
“background
data’’
or
“know-how’’
is
concerned,
it
is
quite
clear
on
the
authority
of
the
Rolls-Royce
and
English
Electric
cases
that
the
fact
a
lump
sum
payment
for
such
“know-how’’
is
unrelated
to
the
extent
of
use
is
not
sufficient
by
itself
to
make
it
a
capital
receipt.
The
appellant’s
case
then
comes
down
in
the
final
analysis
to
the
contention
that
it
reflects
the
essential
distinguishing
features
of
Evans
Medical
Supplies—namely,
that
the
“know-how’’
was
of
a
secret
or
confidential
character,
that
the
agreement
under
which
it
was
imparted
was
a
single
or
isolated
transaction,
and
that
the
imparting
of
it
resulted
in
a
loss
to
the
appellant
of
a
substantial
part
of
its
business.
I
am
prepared
to
regard
the
appellant’s
“know-how’’
as
the
equivalent,
for
purposes
of
analysis,
of
the
“secret
processes”
in
Evans
Medical
Supplies
and
Wolf
Electric,
but
that
does
no
more
than
give
it
the
character
of
a
capital
asset
analogous
to
patent
rights.
As
to
the
evidence
that
the
licence
agreement
was
the
only
one
of
its
kind
that
CIL
had
entered
into.
I
think
there
is
this
important
distinction:
while
it
may
have
been
obliged
to
enter
into
this
agreement
by
the
position
of
the
United
States
Government,
agreements
of
this
kind
were
contemplated
by
the
CIL-Chematur
agreement
as
a
form
of
business
to
be
shared
in
by
the
parties.
They
were
contemplated
as
a
deliberate
policy,
to
use
the
distinction
that
was
emphasized
in
Rolls-Royce
and
English
Electric.
It
comes
down
then
in
my
opinion
to
the
essential
question:
does
the
evidence
show
that
CIL
lost
its
business
for
military
TNT
with
the
United
States
Government
as
a
direct
and
necessary
result
of
entering
into
the
licence
agreement?
In
my
opinion
it
does
not.
The
evidence
shows
that
the
United
States
Government
eventually
ceased
to
purchase
TNT
from
CIL,
although
precisely
when
that
occurred
is
not
clear.
What
it
does
not
show
is
that
the
loss
of
this
business
was
inherent
in
the
licensing
arrangements
that
were
made.
These
arrangements
did
not,
as
in
the
case
of
Evans
Medical
Supplies
and
Wolf
Electric,
permit
someone
who
had
not
been
manufacturing
at
all
to
engage
in
manufacturing.
The
United
States
Government
had
been
purchasing
TNT
from
CIL
when
the
Government
had
its
own
“batch
process”
plants.
There
is
nothing
to
suggest
that
at
some
point
it
might
not
have
increased
its
own
production
and
ceased
to
purchase
from
CIL.
Conversely,
there
is
nothing
in
the
evidence
to
suggest
that
it
might
not
have
continued
to
purchase
from
CIL
after
the
licensing
arrangements
permitting
it
to
build
continuous
process
plants.
Nowhere
in
the
evidence
is
it
indicated
that
it
was
part
of
the
understanding
which
led
to
the
licensing
arrangements
and
the
lump
sum
payment
stipulated
that
the
United
States
Government
would
cease
to
purchase
from
CIL.
For
these
reasons,
I
do
not
think
the
case
can
be
brought
within
Evans
Medical
Sup-
plies,
assuming
that
that
case
may
still
have
some
application
to
a
lump
sum
payment
for
“know-how’,
despite
the
extent
to
which
its
significance
has
been
narrowed
by
subsequent
judicial
commentary.
In
effect,
I
can
see
no
reason
in
the
circumstances
of
the
present
case
not
to
apply
the
principles
affirmed
in
the
Rolls-Royce
and
English
Electric
cases
with
respect
to
the
nature
of
a
disclosure
of
“know-how”
and
to
hold
that
the
sum
received
was
an
income
rather
than
a
capital
receipt.
Accordingly,
I
would
dismiss
the
appeal
with
costs.
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