- (1.) IMPERIAL Chemical Industries (hereinafter call 'I.C.I.') appealed to the Commissioners for the Special Purposes of the Income Tax Acts against the following assessments to income tax made under Case I of Schedule D in respect of its trade in fibres : 1958 -59, pounds 2,186,000 less pounds 1,815,000 capital allowances; 1960 -61, pounds 4,712,000 less pounds 2,118,000 capital allowances; and applied under section 341 of the Income Tax Act, 1952, for an adjustment of its liability for the year 1955 -56 by reference to a loss claimed to have been sustained therein in that year.
(2.) THE question for the commissioners determination on the appeal was whether certain sums received under provisions contained in agreements or heads of agreement entered into by I.C.I. with nine overseas concerns were sums falling to be included as trading receipts in computing the amount of the assessments or the loss.
(3.) THE relevant facts found by the commissioners were summarised in the judgment of Cross J. as follows : In 1941, Mr. Whinfield and Dr. Dickson, two research chemists employed by Calico Printers Association Ltd. (C.P.A.), invented a method of producing terylene polymers and of so manufacturing them that they could be drawn cold to yield fibres of great strength and pliability, a high melting point and a low degree of solubility in powerful solvents. C.P.A. took out a number of patents in respect of this invention, both in the United Kingdom and in many overseas countries, but it was too small a company to undertake the development of the invention on a commercial scale. Towards the end of the war, it was suggested that I.C.I. might be prepared to develop into between the two companies on November 17, 1947, under which C.P.A., in return for royalties, granted I.C.I. for 20 years or the duration of the patents, whichever should be longer, an exclusive licence to exploit the rights of C.P.A. under its patents throughout the world, except in the United States of America, where C.P.A. under its patents throughout the world, except in the United States of America, where . had already arranged for the development of the invention by others. Clause 6 of the agreement expressly empowered . at its discretion to grant licence rights in respect of the patents to third parties. In the course of the next few years, . expended much money and effort in the development of the invention. As a result of its own research, it took out a number of patents ancillary to the C.P.A. master patents; it established a pioneer plant at Huddersfield for the production of terylene polymer, where output had reached some 600 tons a year by 1952; and it also established a pioneer spinning plant at Hillhouse in Lancashire to manufacture yarn and fibre made from terylene polymer so as to supply Terylene to the textile trade and get guidance as to the forms in which it would be suitable for use by the trade. By the end of 1950, it was clear, not only to I.C.I. and C.P.A. but to the textile trade both here and abroad, that Terylene had enormous commercial possibilities. In November, 1950, I.C.I. authorised the expenditure of 8 1/2 million pounds on the construction of a full -scale terylene plant at Wilton, and, before it was completed, it was decided in April, 1953, to double its capacity so as to enable it to produce 10,000 tons a year. But even this was not more than enough to meet the domestic demand and I.C.I. was faced with the problem how best to meet the demand for Terylene outside the country. The alternatives open appeared to be either to set up plants in foreign countries and manufacture Terylene itself locally or to grant licences to selected foreign companies enabling them a manufacture equivalents of Terylene under the C.P.A. and I.C.I. patents. Even if I.C.I. had been itself prepared to face the huge capital expenditure involved in setting up sufficient terylene plants abroad to meet the foreign demand it was very doubtful whether at that time - 1952 or 1953 - Treasury approval would have been forthcoming. Accordingly, after prolonged consideration, I.C.I. decided to grant licences to manufacture equivalents of Terylene to five European companies who were thought by reason of their competence, financial stability and enthusiasm for the project to be best fitted to make good use of the licences. These companies were Rhodiaceta in France, Montecatini in Italy, Hoechst and Glanzstoff in Germany and A.K.U. in Holland. Heads of agreement were entered into between I.C.I. and these five companies in 1953 and 1954, and formal agreements implementing the heads were executed at various dates in 1956. There were a number of minor differences between these arguments which were referred to in detail in the case, but neither side sought to draw any distinction between them on the basis of those differences and Cross J. proposed to neglect them and to set out the relevant parts of one agreement as representative of all. For this purpose, he would take that between I.C.I. and A.K.U., executed on April 14, 1956. The relevant parts of that document were as follows : 'ARTICLE I (A). The Agreement Products referred to in this agreement are : (i) flat singles continuous filament yarns, thrown single continuous filament yarns, towns, staple fibres and tops made of highly polymeric polymethylene terephthalates, the filaments or fibres of which have when in the drawn condition a greatest cross -sectional diameter not exceeding 2.0 mm.; (ii) monofils made of highly polymeric polymethylene terephthalates which have when in the drawn condition a greatest cross -sectional diameter not exceeding 2.0 mm.; and (iii) highly polymeric polymethylene terephthalates in basis forms, that is, in the earliest commercially saleable forms which will normally be discrete particles such as powders or granules. (B) The Manufacturing Licence Field is the processes and apparatus for the manufacture of : (i) terephthalic acid and polymethylene terephthalate -forming derivatives of terephthalic acid from paraxylene, including all products which are intermediate between paraxylene and polymethylene terephthlate -forming derivatives of terephthalic acid; and (ii) the agreement products. (C) The User Licence Field is the process and apparatus (exclusive of those in the manufacturing licence field) for using or treating agreement products, including the manufacture of textile articles from the agreement products, including the manufacture of textile articles from the agreement products. . . (E) C.P.A. means the Calico Printers Association Limited of Manchester, England. (F) The C.P.A. patents in The Netherlands, Belgium, Austria, Brazil, Czechoslovakia, Hungary, Poland and Spain owned by C.P.A., which are set out in the First Schedule hereto all of which are licensed exclusively to I.C.I. (G) the I.C.I. patent rights are the patents in The Netherlands, Belgium, Austria, Brazil, Czechoslovakia, Hungary, Mexico, Poland and Spain owned by I.C.I. which : (i) are set out in the Second Schedule hereto; and (ii) have resulted or will result from any patent application in the said countries set out in the Second hereto; and (iii) result from any patent application in the said countries based on any British patent application having a first filing date earlier than January 1, 1954, of which the subject matter is wholly or partly within the manufacturing or user licence fields. ARTICLE II Grant of patent licences in the manufacturing and user licence fields. 1. In return for the respective royalties set out in Article III below I.C.I. hereby grants to the licensee : (A) sub -licences under the C.P.A. patent rights; and (B) licences under the I.C.I. patents rights. Such sub -licences and licences shall be for the respective lives of the patents to which they relate and shall confer on the licences the following rights : (i) in The Netherlands and Belgium, exclusive rights for the manufacture, use, treatment, import and sale of the products of the manufacturing and user licence fields subject, however, to the provisions of clauses 2 and 3 of the article; and (ii) in Austria, Brazil, Czechoslovakia, Hungary, Mexico, Poland and Spain, non -exclusive rights. . . . ARTICLE III Royalties for sub -licences and licences granted under the C.P.A. and I.C.I. patent rights. 1. The consideration for the sub -licences granted under the C.P.A. patent rights will be a royalty payable as long as The Netherlands Patent Number 60,828 is in force by the licenses to I.C.I. in sterling in London on the net invoice value of all agreement products sold or utilised by the licences or any authorised sub -licences or imported under any sub -licence granted by the licensee to any third party at the following rates. (i) On the first 10,000,000 lb. of agreement products sold, utilised or imported in any agreement year, 5 1/4 per cent. (iii) On all agreement products sold, utilised or imported in such year in excess of 10,000,000 lb., 3 per cent. . . . ARTICLE IX Technical assistance. 1. For the purpose of enabling the licensee to design, erect, and operate a plant in The Netherlands and/or Belgium for the manufacture of agreement products I.C.I. will impart to the licensee before or as soon as practicable after January 1, 1954, all necessary technical information relating to the manufacturing licence field which it is free to disclose. For the purpose of assisting the licensee in selling, treating and using the agreement products I.C.I. will impart to the licensee before or as soon as practicable after January 1, 1954, all necessary technical information relating to the user licensee will be all such information which shall have come into I.C.I.s possession before January 1, 1954, and it shall be imparted by I.C.I. supplying to the licensee copies of relevant existing drawings, technical reports and data of I.C.I. and by allowing responsible members of the licensees technical staff access to appropriate pilot and commercial plants and laboratories of I.C.I. and giving them all facilities and advice so as to enable the licensee to put on the market the best possible saleable products. I.C.I. shall not, however, be under any obligation itself to design the licensees plant or to make special new drawings for the licensee. 2. I.C.I. agree that it will not from the date of this agreement to December 31, 1966, give such information in the manufacturing licence field as is furnished to the licensee under this agreement to any other person, firm or company in The Netherlands or in Belgium to enable any such person, firm or company to manufacture agreement products in The Netherlands or Belgium other than for use in the manufacture of films and further I.C.I. agrees that I.C.I. will as a condition of giving technical information in the manufacturing licence field in any agreement entered into with any third party in any field in any agreement entered into with any third party in any such agreement to keep such information secret and confidential (to the extent to which the licensee is required to keep the same secret and confidential hereunder) and not to use it in manufacturing operations in The Netherlands or Belgium except for the manufacture of films and except in the case of Society Rhodiaceta S.A. in Belgium for the conversion of flat singles continuous filament yarns and the conversion of tows into staple fibres or tops and the conversion of staple fibres into tops. ARTICLE X Sale of manufacturing and selling rights. 1. For the consideration mentioned below I.C.I. hereby covenants for itself and C.P.A. that during the period from February 2, 1954, until December 31, 1966, neither I.C.I. nor C.P.A. will themselves or either of them manufacture or sell nor aid any third party to manufacture or sell agreement products in The Netherlands, Belgium or Luxembourg except for use in the manufacture of films. I.C.I. hereby further covenants with the licensee that it is fully authorised and entitled on behalf of C.P.A. to enter into the foregoing convenient on behalf of C.P.A. 2. In consideration for the above covenants by I.C.I. the licensee will play to I.C.I. in sterling in London a net capital sum of pounds 400,000. The said capital sum of pounds 400,000 shall be payable in six equal instalments each of pounds 66,666 13s. 4d., the first such instalment being due and payable on January 1, in each of the five subsequent years, provided that the said capital sum of pounds 400,000 or any outstanding part thereof shall be payable over a shorter period or in one payment at the option of the licensee, which option may be exercised at any time on six months notice to I.C.I. in writing. If the licensee shall elect to exercise such option a discount will be allowed to the licensee at a rate to be agreed between the parties.' ;