Revenue Commissioners v Wen-Plast (Research and Developmenr) Ltd

• Jurisdiction: Ireland
• Judge: Mr. Justice Hedigan,Miss Justice Laffoy
• Judgment Date: 14 October 2009
• Neutral Citation: [2007] IEHC 66,[2009] IEHC 453
• Court: High Court
• Date: 14 October 2009

[2007] IEHC 66

THE HIGH COURT

2006/200 R

Revenue Commissioners v Wen-Plast (Research & Development) Ltd

BETWEEN/

THE REVENUE COMMISSIONERS

APPELLANTS

AND

WEN-PLAST (RESEARCH AND DEVELOPMENT) LIMITED

RESPONDENT

TAXES CONSOLIDATION ACT 1997 S141

TAXES CONSOLIDATION ACT 1997 S141(5)(d)

TAXES CONSOLIDATION ACT 1997 S234

TAXES CONSOLIDATION ACT 1997 S234(2)

TAXES CONSOLIDATION ACT 1997 S234(1)

TAXES CONSOLIDATION ACT 1997 S141(3)

TAXES CONSOLIDATION ACT 1997 S141(5)(d)(i)

TAXES CONSOLIDATION ACT 1997 S141(5)(c)

TAXES CONSOLIDATION ACT 1997 S141(5)(d)(ii)

TAXES CONSOLIDATION ACT 1997 S141(1)

FINANCE ACT 1996 S32

TAXES CONSOLIDATION ACT 1997 S141(5)

TAXES CONSOLIDATION ACT 1997 S141(5)(d)

INTERPRETATION ACT 2005 S5

INSPECTOR OF TAXES v KIERNAN 1981 IR 117

O CULACHAIN (INSPECTOR OF TAXES) v MCMULLEN BROS LTD 1995 2 IR 217

Abstract:

Revenue Law - Intellectual Property - Statutory interpretation - Point of law - Appeal Commissioners - Patent income - Invention - Radical - Taxes Consolidation Act 1997

Facts The Appeal Commissioner referred a point of law for interpretation as to whether the exemption provided for in s. 141 Taxes Consolidation Act 1997 for income from a qualifying patent in respect of an invention which involved radical innovation applied to income from the fire door set developed by the respondent. It was submitted that the concept of invention could exist separately from the concept of the product which incorporated it.

Held by Laffoy J. that the phrase “radical innovation” was to be construed by reference to their ordinary colloquial meaning. The Commissioner had properly construed the section of the Act as to whether the invention involved radical innovation. The Commissioner had been correct in rejecting an opinion which was based on a misinterpretation of the meaning of the phrase “invention which… involved radical innovation”. It was open to the Commissioner to reach such a view.

Reporter: E.F.

1 Judgment of Miss Justice Laffoy delivered on 9th March, 2007 .

2 This judgment gives the opinion of the court on a point of law referred to it pursuant to s. 141 of the Taxes Consolidation Act, 1997 ( TCA 1997) by Appeal Commissioner Ronan Kelly (the Commissioner). The question of law on which the opinion of the court is sought is stated as follows in the case stated:

"The question of law for the opinion of the High Court is whether I was correct in law in determining that the exemption provided by the provisions of section 141(5)(d) [TCA 1997] for '… income from a qualifying patent in respect of an invention which involved radical innovation …' applied to income from the fire door set developed by the Respondent in circumstances where I concluded that it is not necessary that radical innovation is capable of being demonstrated as part of the process leading to a patent but that it is sufficient that a combination of known technology could, and does in the instant case, result in an invention which involved radical innovation."

3 The determination of that question involves ascertaining the proper construction of the phrase from s. 141(5)(d) quoted in the question and applying it to the facts which form the basis of the respondent's claim for an exemption from tax by virtue of s. 141(5)(d).

4 Section 141(5)(d) TCA 1997 must be read in the context of s. 141 as a whole and s. 141 has to be read in conjunction with s. 234 TCA 1997. Section 234 deals with the treatment of certain income derived from patent royalties for income tax and corporation tax purposes, whereas s. 141 deals with distributions out of income from patent royalties, for example, distributions by a company to its shareholders by way of dividend.

5 The core exempting provision in s. 234 is sub-s. (2) which provides that a resident of the State who makes a claim in that behalf and makes a return in the prescribed form of total income from all sources, as estimated in accordance with the Income Tax Acts, shall be entitled to have any income from a qualifying patent arising to the resident disregarded for the purposes of income tax, in the case of an individual, and corporation tax, in the case of a company. The expression "qualifying patent" is defined in sub-s. (1) as meaning a patent in relation to which the research, planning, processing, experimenting, testing, devising, designing, developing or similar activity leading to the invention which is the subject of the patent was carried out in the State. The expression "income from a qualifying patent" is defined in sub-s. (1) as meaning any royalty or other sum paid in respect of the user of the invention to which the qualifying patent relates where the royalty or other sum is paid in circumstances which fall within the ambit of paragraph (a) or (b) of the definition. Paragraph (a), in broad terms, covers income derived from the manufacture of goods.

6 The core exempting provision in s. 141 is sub-s. (3), which exempts distributions out of disregarded income, as defined in sub-s. (1), from tax. Sub-paragraph (i) of s. 141(5)(d) in issue here provides as follows:

"Notwithstanding paragraph (c) but subject to sub-paragraph (ii), if in an accounting period the beneficial recipient (in this paragraph referred to as 'the recipient') of the specified income shows in writing to the satisfaction of the Revenue Commissioners that the specified income is income from a qualifying patent in respect of an invention which -

(I) involved radical innovation, and

(II) was patented for bona fide commercial reasons and not primarily for the purpose of avoiding liability to taxation,

the Revenue Commissioners shall, after consideration of any evidence in relation to the matter which the recipient submits to them and after such consultations (if any) as may seem to them to be necessary with such persons as in their opinion may be of assistance to them, determine whether all distributions made out of specified income accruing to the recipient for that accounting period and all subsequent accounting periods shall be treated as distributions made out of disregarded income and the recipient shall be notified in writing of the determination."

7 The words to which emphasis has been added in the above quotation are the words which are the subject of the case stated.

8 In construing sub-para. (i) a number of matters come into play.

9 First, its effect is prefaced by the words "notwithstanding paragraph (c)". Paragraph (c) provides as follows:

"Where for an accounting period a company makes one or more distributions out of specified income which accrued to the company on or after 28th day of March, 1996, so much of the amount of that distribution, or the aggregate of such distributions, as does not exceed the amount of aggregate expenditure on research and development incurred by the company in relation to the accounting period shall be treated as a distribution out of disregarded income."

10 I will return to the significance of that provision in the context of para. (d)(i) later.

11 Secondly, sub-para. (i) is subject to sub-para. (ii). It is sub-para (ii) which provides for an appeal from a determination of the Revenue Commissioners to the Appeal Commissioners and provides for the jurisdiction of the Appeals Commissioners to state a case to this Court on a point of law.

12 Thirdly, sub-para. (i) refers to "specified income" and "disregarded income". The meaning of both expressions is to be found in the rather convoluted definition of "disregarded income" contained in sub-s. (1) of s. 141. Generally speaking, "disregarded income" is income from a qualifying patent which has been disregarded for income tax or corporation tax purposes by virtue of sub-s. (2) of s. 234. The concept of "specified income" was introduced into s. 141 when that section was amended by s. 32 of the Finance Act, 1996. Thereafter, "specified income" was not included in "disregarded income" for the purposes of s. 141. I gratefully adopt the pithy exposition of the effect of the introduction of the definition of "specified income" in 1996 contained in the respondent's written submission. Its effect, subject to sub-s. (5) of s. 141, which was also introduced by the 1996 amendment, was to exclude from "disregarded income" patent royalties paid by a connected party which would previously have been tax-exempt if they related to manufacturing activities.

13 Returning to the interaction between para. (c) and para. (d) of sub-s. (5), I again draw on the respondent's written submission in summarising the effect of the two provisions. In effect they provided for two specific circumstances in which "specified income" could be treated as "disregarded income" so as to enable a tax exempt distribution to be made. Under para. (c) such amount of specified income as would not exceed the aggregate expenditure by the company on research and development (as defined) in a relevant accounting period would be treated as disregarded income. Under para. (d)(i) specified income shown to the satisfaction of the Revenue Commissioners to be income from a qualifying patent in respect of an invention which complied with the requirements at (I) and (II) are to be treated as disregarded income for the relevant accounting period and subsequent accounting periods as the Revenue Commissioners shall determine.

14 As regards the application of sub-s. (5)(d)(i) to the respondent, no issue arises here as to compliance with the requirement at (II). What is at issue is the meaning of, and the application to the facts, of the requirement at (I). If that requirement was complied with, the effect is that any distribution out of the specified income in an accounting period is tax exempt by virtue of the core exempting provision in s. 141, that is to say, sub-s. (3).

15 The obvious...