Commissioner of Taxation (Cth) v Sherritt Gordon Mines Ltd

On 24th November 1967 the taxpayer entered into an agreement in writing ("the Agreement") with Western Mining Corporation Ltd. ("Western Mining"), a company incorporated in the State of Victoria and resident in Australia, having no residence outside Australia, whereby in consideration of certain royalty payments the taxpayer agreed to provide certain technical services for Western Mining. During the year ended 30th June 1971 a sum of $232,079 became due and payable by Western Mining to the taxpayer pursuant to Art. III of the Agreement. The Commissioner directed Western Mining under s. 256 of the Income Tax Assessment Act 1936, as amended, to retain a specified amount as and for tax which is due or might become due. Pursuant to that direction Western Mining retained $109,735.55 and remitted $122,341.54 to the taxpayer.

In its return of income for the year ended 30th June 1971 the taxpayer showed $232,079 as the income arising from the Agreement and claimed expenditure of $69,623 as a deduction. After objection taken by the taxpayer, the Commissioner issued an amended assessment allowing $42,546 as a deduction and assessing the taxpayer to tax in the amount of $90,028.65. The taxpayer appealed against this assessment to the Supreme Court of Victoria where McInerney J. allowed the appeal and set aside the assessment [1] . The Commissioner now appeals to this Court.

1. [1977] V.R. 342; 10 A.L.R. 441; 6 A.T.R. 344; 76 A.T.C. 4130.

According to the Commissioner the questions for decision are whether the amount payable by Western Mining to the taxpayer represents (1) royalties in the ordinary sense of that term ("ordinary royalties"); or (2) royalties within the meaning of the extended definition contained in s. 6 (1) of the Assessment Act. If either question is answered in the affirmative, it is said that the appeal must succeed.

The principal problem in this case lies not so much in finding answers to these questions as in discovering how they are the questions which should be answered. The relevant provisions of the Income Tax (International Agreements) Act, the double taxation agreements to which it gives effect, and the Assessment Act present a labyrinthine maze which is a tribute to the obliquity of the draftsman's art.

An understanding of what is involved is best obtained by an examination in the first instance of the Canadian agreement, the Income Tax (International Agreements) Act 1953-1967 and the provisions of the Income Tax Assessment Act 1936-1967 and by then considering the effect of certain amendments which were made to these two statues by Acts Nos. 3 and4 of 1968.

Article III.1 of the Canadian agreement which was executed on behalf of the Contracting States on 1st October 1957 and which has not been relevantly amended since its execution, provides, so far as it is material to the present case:

The industrial or commercial profits of a Canadian enterprise shall not be subject to Australian tax unless the enterprise is engaged in trade or business in Australia through a permanent establishment in Australia

Article II.1 (k) defines the expression "industrial or commercial profits", unless the context otherwise requires, as including -

the profits of an industrial or commercial enterprise or undertaking, but does not include income in the form of dividends, interest, rent, royalties, management charges or remuneration for personal services, or income from the operation of ships or aircraft. (emphasis supplied)

Section 6A of the Income Tax (International Agreements) Act provides:

Subject to this Act, the provisions of the Canadian Agreement, so far as those provisions affect Australian tax, have the force of law in relation to tax in respect of income of the year of income that commenced on the first day of July, One thousand nine hundred and fifty-seven, and in respect of income of all subsequent years of income in relation to which the agreement remains effective.

Before it was amended by Act No. 3 of 1968, s. 4 of the Income Tax (International Agreements) Act provided:

(1) Subject to the next succeeding sub-section, the Assessment Act is incorporated and shall be read as one with this Act.

(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act or in an Act imposing Australian tax.

And before its amendment by Act No. 3 of 1968, the expression "the Assessment Act " was defined by s. 3 (1) of the Income Tax (International Agreements) Act to mean "the Income Tax and Social Services Contribution Assessment Act 1936-1953 ", unless the contrary intention appeared. It was subsequently amended to read "the Income Tax Assessment Act 1936-1968 " by Act No. 3 of 1968.

The consequence of the pre-1968 provisions was that although royalties (an expression which was not defined by the Canadian agreement) derived by a Canadian resident not resident in Australia were not expressed to be subject to Australian tax by the Canadian agreement they were nevertheless not expressed to be exempted from Australian tax by that agreement. Moreover, before 1968 royalties derived by a Canadian resident not resident in Australia were not subject to income tax under the Income Tax Assessment Act 1936-1967. However, as royalties derived by a Canadian resident were not exempted from Australian income tax by the Canadian agreement the inclusion in the Assessment Act of a provision making them liable to tax would not constitute an inconsistent provision within the meaning of s. 4 (2).

The Assessment Act then contained no definition of "royalty" or "royalties". The word "royalty" appeared in s. 26 (f) of the Assessment Act where it signified ordinary royalties. Section 26 (f) included ordinary royalties in the assessable income of a taxpayer. However, s. 23 (r) exempted from income tax income derived by a non-resident from sources wholly out of Australia. As the Assessment Act then contained no provision relating to the source of royalties, the source of royalties was a matter governed by the general law. By making an agreement outside Australia and providing for the relevant information to be made available overseas and for the payments to be made outside Australia, the parties could ensure that the royalties payable to a non-resident had a source out of Australia, so securing for them an exemption from Australian income tax (Federal Commissioner of Taxation v. United Aircraft Corporation [2] ).

This universe was disturbed by Acts Nos. 3 and4 of 1968 which came into operation on 1st July 1968. Apart from amending the definition of the Assessment Act in s. 3 (1) of the Income Tax (International Agreements) Act, Act No. 3 of 1968 substituted a new double taxation agreement with the United Kingdom for the old agreement contained in the First Schedule to that Act. The new United Kingdom agreement contained in Art. 10 (5) a definition of "royalties" - this was an innovation because none of the earlier double taxation agreements, including the Canadian agreement, entered into by Australia had contained a statutory definition of the expression. Article 10 (5) of the United Kingdom agreement provides:

In this Article the term "royalties" means payments of any kind to the extent to which they are paid as consideration for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark, or other like property or right, or industrial, commercial or scientific equipment, or for the supply of scientific, technical, industrial or commercial knowledge, information or assistance, and includes any payments of any kind to the extent to which they are paid as consideration for the use of, or the right to use, motion picture films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but does not include royalties or other amounts paid in respect of the operation of mines or quarries or of the extraction or removal of natural resources.

Act No. 4 of 1968 inserted into s. 6 (1) of the Assessment Act the following definition of "royalty":

"royalty" includes any payment to the extent that the payment falls within the definition of royalties in paragraph (5) of Article 10 of the Agreement between the Government of the Commonwealth and the Government of the United Kingdom a copy of which is set out in the First Schedule to the Income Tax (International Agreements) Act 1953-1968. By the same Act s. 26 (f) was amended so as to read: The assessable income of a taxpayer shall include -

(f) any amount received as or by way of royalty, other than an amount that, but for the definition of royalty in sub-section (1.) of section six of this Act, would not be such an amount.

The consequence of this curious provision is that ordinary royalties fall within s. 26 (f) whereas other royalties coming within the new extended statutory definition are subject to s. 25, that is, they form part of a taxpayer's assessable income if, and only if, they are correctly characterized as income and not as capital. That this distinction should be made in dealing with the two species of royalties is not as pointless as might appear at first glance. Before s. 26 (f) was introduced into the Assessment Act in 1936, the only avenue by which ordinary royalties could become part of a taxpayer's income or assessable income was by virtue of a general provision similar to the existing s. 25. Similarly, other royalties that now come within the new extended definition of "royalties" were also subject to a general provision of that kind and fell within its reach if they were income and not capital. When s. 26 (f) was introduced into the Assessment Act ordinary royalties were thereby automatically included in a taxpayer's assessable income, there being no need to resort to s. 25 in relation to them, whereas other royalties now within the extended definition became subject to s. 25. And when the extended statutory definition was introduced in 1968 the contemporaneous amendment of s. 26 (f) ensured that there was no material change in this approach, ordinary royalties falling within s. 26 (f), other royalties being subject to s. 25. This is not to say that ordinary royalties were excluded from the operation of s. 25; plainly they were within the ambit of the section but there was no need to call it in aid when specific provision was made by s. 26 (f).

Act No. 4 of 1968 also dealt with the subject of source by introducing a new section, s. 6C, into the Assessment Act which, so far as it is presently material, provides:

(1) This section applies to income that is derived on or after the first day of July, One thousand nine hundred and sixty-eight, by a non-resident and consists of royalty that -

(a) is paid to the non-resident by the Commonwealth, by a State, by an authority of the Commonwealth or of a State or by a person who is, or by persons at least one of whom is, a resident and is not an outgoing wholly incurred by the Commonwealth, the State, the authority or that person or those persons in carrying on business in a country outside Australia at or through a permanent establishment of the Commonwealth, the State, the authority or that person or those persons in that country; or

(2) For the purposes of sections twenty-five and two hundred and fifty-five of this Act, but subject to the next two succeeding sub-sections, income to which this section applies shall be deemed to have been derived from a source in Australia.

The section attributes to a royalty an Australian source if the royalty is paid to a non-resident by a person who is a resident and if the royalty is not an outgoing wholly incurred by the payer in carrying on business in a country outside Australia. It will be noted that the section makes no reference to s. 26 (f).

The Commissioner contends that, if we put to one side the Canadian agreement and the Income Tax (International Agreements) Act and look only to the Assessment Act as it stood after it was amended in 1968, that Act now makes provision for two bases on which a non-resident may become liable for Australian income tax on royalties paid or payable by an Australian resident: first, ordinary royalties; and secondly, other royalties according to the extended statutory definition. In each case it is said the royalties are deemed to have an Australian source by s. 6C.

It is convenient now to turn to the question of source and to the application of s. 6C to the amount payable by Western Mining to the taxpayer. The problem here is that the principal operative provision, s. 6C (2), indeed the relevant provision upon which the Commissioner relies, is expressed to be limited in its operation. It gives royalty income a notional source in Australia, but in terms it does so only for the purpose of ss. 25 and 255. In terms, therefore, it is only effective to fix with an Australian source royalties caught by s. 25, thereby bringing such royalties within s. 25 (1) (b) and neutralizing s. 23 (r). There is, as I have said, no reason why ordinary royalties as well as other royalties should not be subject to s. 25. It follows that s. 6C has no application to s. 26 (f) but this a a matter of no importance because it is common ground that the amount in question has the character of income, not capital, and would but for the questions still to be resolved, fall within s. 25 (1) (b).

I come now to the meaning and application of the statutory definition of royalty in s. 6 (1). It will be recalled that royalties in Art. II.1 (k) of the Canadian agreement is not defined by that agreement. By Art. II.3 it is provided:

In the application of the provisions of this Agreement by one of the Contracting States any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes which are the subject of this Agreement. Whether the reference to "the meaning which it has under the laws of that Contracting State" is ambulatory or static is a serious question. But it is a question which I am not disposed to answer because, on the assumption that the reference is ambulatory and therefore appropriate to pick up the statutory definition of "royalty" (cf. royalties in Art. II.1 (k)) introduced into the Assessment Act in 1968, that definition, so it seems to me, is not apt to catch payments made by an Australian resident to a Canadian resident. My reasons for this conclusion may be briefly stated.

The statutory definition does not incorporate by reference the provisions of Art. 10 (5) of the United Kingdom agreement. Nor is the statutory definition an exclusive definition. What it does is to include any payment to the extent that the payment falls within the definition of royalties in Art. 10 (5) of the United Kingdom agreement. It is designed to add to or supplement the ordinary meaning of "royalty" by including as well payments which fall within the definition contained in the article. Although Art. 10 (5) is expressed in general terms, the context in which it is found makes it very clear that only payments made by an Australian resident to a United Kingdom resident or vice versa fall within its embrace. To say, as the Commissioner seeks to say, that Art. 10 (5) picks up a payment made by an Australian resident to a Canadian resident is to give the paragraph an operation which is quite foreign to the scope and purpose of the United Kingdom agreement. It would be very different if the statutory definition repeated the very words of the definition contained in Art. 10 (5) for then the words would be liberated from the confining context of the United Kingdom agreement. Again, it might be different if the statutory definition incorporated by reference the definition contained in the article, though even then it might be contended successfully that the effect of the incorporation of the words was to carry the meaning derived from the original context. But neither of these courses has been adopted. Instead the Parliament has chosen to include any payment to the extent that it falls within Art. 10 (5).

This is not a surprising result. Indeed it would be somewhat surprising if it were otherwise. It is quite appropriate that the Assessment Act should be amended so as to effect an alteration in the law consequential upon the introduction of the new United Kingdom agreement, so long as the alteration in the law is confined to the scope and sphere of operation of that agreement. It is quite inappropriate that the Assessment Act should be amended so as to have a much wider application to taxpayers whose affairs are dealt with by other international agreements, in particular the Canadian agreement which contains no provision corresponding to Art. 10 (5). Indeed, the very occasion for the inclusion of the statutory definition by Act No. 4 of 1968 strongly suggests that it was designed only to give effect to the new United Kingdom agreement and that its purpose was not to affect the liability of taxpayers whose affairs were governed by other double taxation agreements to which Australia was a party.

Accordingly, it is my opinion that the statutory definition of royalty in s. 6 (1) of the Assessment Act fails to catch the amount in question. It fails because the amount is not a payment falling within Art. 10 (5) of the United Kingdom agreement. This disposes of the Commissioner's contention so far as it is based on the extended definition of "royalty".

All that remains is the case based on ordinary royalties. In this respect the provisions of the Agreement between the taxpayer and Western Mining have been comprehensively set forth in the judgment of McInerney J. There is no occasion to reiterate here all that his Honour said. Suffice it to say that by the Agreement, the taxpayer agreed - (1) to provide Western Mining with technical assistance and information in connexion with the treatment of nickel-bearing ores, a field in which the taxpayer had acknowledged expertise (art. 2.01); (2) to make available to Western Mining the services of the taxpayer's qualified personnel in Australia (art. 2.01); (3) to make available to Western Mining research work at the taxpayer's laboratories in Fort Saskatchewan in Canada (art. 2.01); (4) that Western Mining should have the right to use the taxpayer's know-how and processes in Australia, the relevant know-how and processes not being the subject of patents held by the taxpayer (art. 2.02); (5) that Western Mining might use and sell throughout the world the products produced in consequence of the taxpayer's know-how and processes (art. 2.02).

For its part, Western Mining agreed to make certain payments to the taxpayer. The obligation so to do was created by Art. 3.01 of the Agreement in the following terms:

For the rights granted herein, Western shall pay to Sherritt an aggregate sum expressed as a percentage of the Aggregate Sales Value of the nickel and by-products produced in whole or in part by the practice of the Sherritt System There followed provisions fixing the percentage of Aggregate Sales Value and it was then provided that the payments were to be spread over a period of fifteen years after the commencement of operations, that date being the date when 150 tonnes of nickel metal had been produced by Western Mining using the Sherritt system.

The Commissioner submitted that "the rights granted herein" constituted that part of the taxpayer's agreement which is set out in the paragraphs numbered 4 and 5 above and this because art. 2.02 alone was couched in language appropriate to the grant of a right.

Although the consideration moving from the taxpayer has already been summarized, it is necessary to state how it was expressed in art. 2.01 and art. 2.02 of the Agreement. They provide as follows:

2.01 Subject to all the terms and conditions herein contained Sherritt agrees, within the limits of available personnel, to furnish technical assistance and information in connection with the Sherritt System to Western commencing three months after the Date of Commencement of Operations as and when requested by Western. Subject to Article 4.03 this assistance shall include making available to Western the services of qualified personnel of Sherritt in Australia and research work at the laboratories of Sherritt at Fort Saskatchewan, Alberta.

2.02 Subject to all the terms and conditions herein contained Sherritt agrees that Western shall have the right to practise the Sherritt System within the Commonwealth of Australia and may use and/or sell throughout the world the products produced as a result of such practice

The difference in language between the two articles may be acknowledged without requiring an acceptance of the Commissioner's contention. In my opinion the primary judge was plainly correct in holding that the consideration for the payments to be made by Western Mining was the totality of the consideration given by the taxpayer. The principal consideration received by Western Mining was the provision of technical assistance and information and the other matters referred to in art. 2.01. Once that was provided Western Mining was at liberty to use the technical assistance and information and to sell the products produced by virtue of its use without the grant of any right so to do by the taxpayer. In these circumstances it would be wrong to read the expression "the rights granted" as relating back exclusively to art. 2.02; the expression refers back as well to art. 2.01 which is its principal point of reference, and to the rights which arose in Western Mining in consequence of the obligations entered into by the taxpayer in that article.

The Commissioner then submits that, notwithstanding this view of the Agreement, the payments are royalties in the accepted sense of that term because they are measured by reference to the value of goods produced by means of a technical or industrial process, being payments made in consideration of the right to use technical information supplied in relation to the processes. It is said that a fee for the provision of technical assistance and information may constitute a royalty and that the fee will have this character when the owner of a right or asset grants or sells the right or permits the asset to be used for a consideration calculated by reference to the quantity or value of the thing taken or the occasion on which the right is exercised or the asset used.

This proposition reflects an endeavour to invoke what was said by the Court in Stanton v. Federal Commissioner of Taxation [3] where Dixon C.J., Williams, Webb, Fullagar and Kitto JJ. said of the word "royalty":

In other words it is inherent in the conception expressed by the word that the payments should be made in respect of the particular exercise of the right to take the substance and therefore should be calculated either in respect of the quantity or value taken or the occasions upon which the right is exercised. There the Court was considering an agreement between the owners of land and a sawmiller whereby there was a sale of standing timber to the sawmiller for a lump sum payable in quarterly instalments which became due independently of the amount of timber removed. The Court held that the payments were not royalties and in the passage already quoted made it clear that it is of the essence of a royalty that the payments should be made in consideration of the grant of a right, that they should be made in respect of particular exercises of the right and therefore should be calculated in the manner stated. The tenor of the passage is in my opinion quite opposed to the Commissioner's contention. Here the substantial, if not the sole, consideration for the payments was not the grant of a right but for the provision of technical assistance and information which Western Mining was entitled to use once it was supplied, without the grant of any additional right so to do. The express grant of the right to use and sell in art. 2.02 was no more than a recognition of the consequence which automatically flowed from the provision of the technical assistance and information. 1. (1955) 92 C.L.R. 630, at p. 642.

This view of the present case accords not only with the observations made by the Court in the Stanton Case but with the decision of Owen J. in Barrett v. Federal Commissioner of Taxation [4] , and with the observations of Latham C.J. in McCauley v. Federal Commissioner of Taxation [5] . In Barrett's Case, Owen J. held that payments received by the owner of land and quantified by reference to the amount of soapstone removed from his land were not royalties because the owner of the land did not own the minerals. The payments were therefore not made in consideration of the grant of rights with respect to the soapstone.

1. (1968) 118 C.L.R. 666. 2. (1944) 69 C.L.R. 235, at pp. 240, 241.

In McCauley's Case Latham C.J. pointed out that the use of the term "royalty" is not confined to patents, copyright and minerals and that it "has been used to describe payments for removing furnace slag from land (Shingler v. P. Williams & Sons [6] ), and to payments for flax cut (Akers v. Commissioner of Taxes (N.Z.) [7] ) the person paying the royalties becoming the owner of the slag or of the flax" [8] .

1. (1933) 17 Tax Cas. 574. 2. (1926) G.L.R. (N.Z.) 259. 3. (1944) 69 C.L.R., at p. 240.

In other cases where payments have been calculated by reference to the quantity of articles or goods produced in accordance with technical information provided by the payee and the payments have been described as royalties the courts have been careful to avoid adopting that description as a correct description of the character of the payments. Thus in the United Aircraft Corporation Case [9] , where the agreement provided for the payment of sums calculated by reference to the aircraft engines manufactured as consideration for the grant of a licence to manufacture the engines in Australia, the taxpayer providing technical information and assistance pursuant to the agreement, Rich J. referred to the payments as "payments which are called royalties" and "the so called royalties". In Rolls-Royce Ltd. v. Inland Revenue Commissioners [10] Lord Radcliffe, in speaking of agreements by which Rolls-Royce, in consideration of lump sum payments and royalties, undertook to supply foreign governments or companies with technical knowledge to enable them to manufacture aircraft engines, the payments being calculated by reference to the number of engines manufactured, said this:

The money which the appellants get in return under the agreement consists of a "capital" sum payable by instalments and recurring sums described as royalties. They are only royalties in the sense that the measure of these recurrent payments is taken to be so many pounds sterling per engine manufactured in China, and a fixed percentage on the commercial selling price of all spare parts so manufactured. 1. (1943) 68 C.L.R., at pp. 539-540. 2. [1962] 1 W.L.R. 425, at p. 432.

I am therefore of the opinion that the payments provided for in the Agreement are not royalties in the ordinary sense of that term.

The income in question is subject to tax under the Income Tax Assessment Act 1936, as amended, if the income consisted of "royalties" within the ordinary meaning of that word. The complex statutory framework from which this result flows is analysed in the reasons for judgment of Mason J. and I have no need to repeat them.

The taxpayer made two almost contemporaneous agreements with Western Mining Corporation Ltd. ("Western Mining"). It agreed to grant a non-exclusive and non-revocable licence and right to use, in the treatment of nickel-bearing materials to recover nickel and by-products, the inventions covered by the Sherritt patents. For this licence and right it was to receive a single lump sum of $10,000 Canadian Currency. By another agreement made a few weeks earlier the taxpayer agreed with Western Mining to furnish technical assistance and information in connexion with "the Sherritt System" and agreed that Western Mining should have the right to practise the Sherritt system within the Commonwealth of Australia and to "use and/or sell throughout the world the products produced as a result of such practice". The evidence established that, although the patented apparatus and processes were the subject of the separate agreement the process used in the operations of Western Mining by application of the Sherritt system was covered by various patents at least in the sense that it involved the use of inventions covered by such patents. The "Sherritt System" was defined to mean:

all Sherritt Technology excepting Sherritt Technology as it pertains to treatment of lateritic and garnieritic ores. The exception is not presently material.

all processes, techniques, apparatus, know-how and trade secrets which are useful primarily in the treatment of nickel-bearing material to recover nickel and valuable by-products and which Sherritt now is, or during the period referred to in Article 3.02 shall become, free to grant the rights hereinafter provided.

all technical information, whether or not reduced to writing (including but not limited to research reports, data and conclusions relative thereto) concerning the Sherritt System, including any information which is or could be useful in the design, engineering, construction and operation of a facility employing the Sherritt System.

Payment for the rights granted in the agreement was to be "an aggregate sum expressed as a percentage of the Aggregate Sales Value of the nickel and by-products produced in whole or in part by the practice of the Sherritt System". The rights were to become fully paid up when Western Mining should have made the payments on production operations for a period of fifteen years after the defined commencement of operations.

The technical assistance agreed to be provided was to include making available to Western Mining the services of qualified personnel of Sherritt in Australia as well as research work at the laboratories of Sherritt in Canada but it was provided that Western Mining should pay directly the salary costs and expenses of Sherritt personnel in Australia.

I have reached the conclusion that the income in question did consist of "royalties" within the ordinary sense of that word at the time when the Income Tax Assessment Act 1936 was enacted. The difficulty with the word "royalties" lies in the fact that its ordinary acceptation has changed over the years. Originally royalties were, and in the primary meaning no doubt still are, regalitates, certain prerogative rights of the Crown. See Attorney-General (Ontario) v. Mercer [11] where it was held to have been used in this primary sense in s. 109 of the British North America Act of 1867 which refers to "All lands, mines, minerals, and royalties " The Judicial Committee stated [12] :

After full consideration, their Lordships agree with the Quebec Court in thinking that the mention of "mines" and "minerals" in this context is not enough to deprive the word "royalties" of what would, otherwise, have been its proper force. It is true (as was observed in some of the opinions of the majority of the Judges in the Supreme Court of Canada), that this word "royalties" in mining grants or leases (whether granted by the Crown or by a subject) has often a special sense, signifying that part of the reddendum which is variable, and depends upon the quantity of minerals gotten. There can be no doubt that the word "royalties" is used in its secondary sense in the Income Tax Assessment Act but the question is - what is that secondary sense? It is certainly not limited to royalties on minerals payable to the Crown or to private persons. It clearly extends to royalties as a consideration for the use of a patented process and to royalties in respect of copyright. It has been held to extend to the taking of standing timber for saw-milling: McCauley v. Federal Commissioner of Taxation [13] . See also Stanton v. Federal Commissioner of Taxation [14] . 1. (1883) 8 App. Cas. 767. 2. (1883) 8 App. Cas., at p. 777. 3. (1944) 69 C.L.R. 235. 4. (1955) 92 C.L.R. 630.

It appears to me that the essential feature of a royalty in modern usage in the secondary sense of the word is a payment for a benefit or advantage which the payee can provide to the payer and which can be used for some production or extraction or treatment based upon that which is provided where the amount of the payment is proportionate to the extent of that use or that production extraction or treatment. I do not think that the benefit or advantage which the payee provides need necessarily be something in which the payee has rights against the whole world, rights of property. It is sufficient if something is provided which is regarded as valuable to the payer and which he becomes entitled as between himself and the payee to put to use in his activity of production extraction or treatment. It happens that a right to use a patented process is a right in respect of a species of property because patent rights are good against the world. A right to put to use "know-how" as it is defined in the present agreement is not a right in respect of property because the possessor of the "know-how" has no right in it against the world (Federal Commissioner of Taxation v. United Aircraft Corporation [15] ). However, once he reveals and makes available "know-how" as defined to another in return for a payment rights are created between him and the payer, rights which are governed by the terms express or implied upon which that "know-how" is revealed. In this sense it may be said that the payment is made or reserved by the grantor for a right or privilege to use the "know-how". The "know-how" can only be used by the recipient to the extent and in the manner permitted to the grantee under the agreement. If payment is to be made proportionately to the use made of that right or privilege or benefit by the grantee then I think that the payments are ordinarily and generally referred to as "royalties" in the same way as payments proportionate to the use of a patented process are so referred to.

I do not think that it is necessary to isolate a distinct right as the consideration for the proportionate payments. The provision of technical assistance and information is a benefit or advantage. It comes within the definition of "know-how" in the agreement. The "know-how" need not be something directly used in the course of production. It may be the "know-how" which makes production possible, e.g. plant layout and design. If the payment for that "know-how" in respect of plant layout and design is used to facilitiate production and the payment therefor is based on the quantity of production then in my opinion the payments are in ordinary language described as royalties. The essential feature of royalties in its ordinary acceptation is that the payments are calculated proportionately to the use or the production extraction or treatment consequent upon the use of that which is provided, not the legal quality of that for which the payment is made.

Payments of the kind which I have described are, and have for many years been, described as royalties. They were so described in the agreements the subject of consideration in the United Aircraft Corporation Case and in Rolls-Royce Ltd. v. Inland Revenue Commissioner [16] . Perhaps more importantly when the ordinary meaning of a word is the subject of consideration, the words "royalty" or "royalties" have for many years been used in suggested forms of agreement for sale of know-how or secret process in order to describe such payments. The use of the word can be traced through the pages of The Conveyancer. In vol. 9 (published in 1923-1924) forms 19 and 20 are respectively precedents for a contract for exploitation of a secret process and a contract for purchase of a secret process. The consideration clause in form 19 was expressed as follows:

3. In consideration therefor the manufacturer will pay to the owner moneys and royalties not exceeding in all to be computed as follows: For all sales of goods manufactured by use of the said processes, formulae, secrets and inventions, there shall be paid to the owner a royalty which on all goods listed on the price list of the party of the second part at or over, shall be , and on all goods listed on such price list at less than , shall be until the whole amount paid to the owner for and on account of said royalties shall aggregate.

4. The purchaser agrees to pay to the vendor as the purchase price for the said formula and in consideration of his instruction a royalty of £ until £ shall thus have been paid to the vendor by the purchaser. The purchaser agrees to render from time to time at reasonable intervals accounts of the sums due to the vendor in respect of the said royalty and to accompany such statement of accounts with a remittance for the sums so due in respect of royalties and the purchaser agrees to continue to render such statements until the vendor shall have been paid £ without interest and without deduction of any kind.

The word "royalty" is similarly used by Mr. Blanco White in his article "Agreement for the Sale of "Know-how" " The Conveyancer, vol. 15 (N.S.) (1951), p. 89 and in the associated precedent at p. 509. Likewise in a precedent of an agreement for the sale, inter alia, of "know-how" in The Conveyancer, vol. 20 (N.S.) (1956), p. 717, form 13 and in a further article and precedent by Mr. Blanco White in The Conveyancer, vol. 26 (N.S.) (1962), pp. 366, 727. I am not aware of any published context where the use of the word "royalties" to describe such payments has been avoided. In these circumstances the word should be interpreted according to its usage. See Lake Macquarie Shire Council v. Aberdare County Council [17] per Barwick C.J. and Federal Commissioner of Taxation v. I.C.I. Australia Ltd. [18] per Walsh J.

1. (1970) 123 C.L.R. 327, at p. 331. 2. (1972) 127 C.L.R. 529, at p. 548.

For these reasons I would allow the appeal and confirm the amended assessment.