De Beers Consolidated Mines Case Study

INTRODUCTION
Background in Brief
The De Beers Group of Companies (DeBeers) was founded in 1888 by Cecil Rhides. De Beers consolidated Mines was formed in 1888 by the merger of the companies of BarneyBarnato and Cecil Rhodes, by which time the company was the sole owner of all diamond mining operations in the country.De Beers doing diamond exploration, diamond mining, diamond retail, diamond trading, and industrial diamond manufacturing. The company operates in 28 countries and mining take place in Botswana, Namibia, South Africa, and Canada ((Wekipedia). In the early 1990s, De Beers dominated diamond industry. De Beers produce 45% of world diamond, but sold 80% of world supply (Reavis, 2008).

The Organization Today
By limited supply, De beers successfully control diamond price and be the monopoly through out 20 century.De Beers products are currently available in more than 1530 authorized retail store in 29 contries. Now De Beers is no longer monoploly as before, now it supply 35%of world comsuption by volume (Betting on De Beers, 2011). In 2012, De Beers rough diamond sals fell 15% to $5.5 billion. Sales through auctions declined 12% to $356 million. De Beers ended the year with free cash follow of $ 697 million, down 15% from year earlier (Krawitz, 2013).

Mission
The company’s stated mission is:
We are driven to turn “ diamond dreams” into lasting realities. De Beers have two main objectives to achieve: to unlock full economic value to its leadership position across diamond pipeline and to make diamond reality to everyone by increasing partnership, by employee skilled and committed people and by relying on emotional value of their diamond products (Hannah Lee). Goals and Objectives

Pull together
Being united with principle and action, turning diversity of people, skill, and experience (Fowler).
Shape the future
Taking new way, setting a demand target and achieving by tough decision and risk analysis.
Be passionate
Taking opportunity and facing challenge
Show we care
Caring about customers’ needs, environment, and society.
Think about what we do and consequences.
Build trust
Listening first, then act with open mind and honesty.

Stakeholders
De Beers have several stakeholders in product market, capital market, and organizational market. These groups described more detail in Table 1. TABLE 1: Organizational Stakeholders1
Stakeholder Group
Group Demands / Attributes
Product Market
Customer
Unions
Communities
Government
Suppliers
-High 4C’s quality (color, cut, clarity, carat weight)
-Store of value
-Unique design
-Price security(for suppliers, government, unions, communities)
-Employment/GDP (government)
-Human rights (unions)
Capital Market
Shareholders
Lenders
-Growth of stock price, dividends
-Increasing cash flow, profits
– Solvency and financial stability; ability to meet interest obligations. Organizational
Employees
Managers
-Business opportunities
-Employment
-Training
– Stable jobs with no layoffs.
– Fair compensation and benefits packages.
– Effective communication between levels of management.

EXTERNAL ANALYSIS
General Environment
There are six segments in the general environment that affects De Beers’ strategic competitiveness and returns. These six segments are shown in detail in Table 2 below:

TABLE 2: External Environment

Segment
Description
Demographic
-Diamond products are luxury. People will not buy too many of them. – Female customers are more important than males.
-Different groups of customers have different needs and styles.
Political/Legal
– Import/export tariffs can affect pricing and profit margins in different national markets. – Labor market regulations affect overhead, and create changes in the supply and demand of human talent. Economic

– National economic conditions impact consumer confidence and disposable income, which affect demand for De Beers’ products. -Global economic fluctuations make it difficult to forecast consumer demand. Hence, it is hard to adjust prices across countries. Socio-cultural

-“Blood diamond” has negative impacts on consumer demand. -Environment concern affects demand and mining activities.
-Workers’ health is another issue.
-Mining process safety is important.
Technological
-New technological development is like synthetic diamond.
-New technology could decrease costs or increase effectiveness. Global
– Diplomatic relationships between nations affect trade policies, mining process, distribution that impacts the costs and availability of new markets. – Wars, economic crises, and other international events can have unpredictable effects on demand and profit margins.

Industry Environment
There are Porter’s five forces that are related to the environment of the diamond industry. The details are shown in Table 3 below: TABLE 3: Industry Factors
Factor
Description
Bargaining Power of Suppliers:

Moderate
Before De Beers changed to “supplier of choice” strategy, it built up a stockpile over supply. Therefore, at that time the bargaining power of suppliers was high. Now, with “supplier of choice” strategy, De Beers forms a partnership with firms that shares in its vision. Thus, the bargaining power of suppliers is moderate now. Bargaining Power of Buyers:

Low
– Buyers have no power on the diamond industry since the diamond industry adopts the “supply control” strategy to control price. Threats of Entry:

Low
The cartel such as the character of the diamond industry has created barriers to entry, making it impossible for new entrants into the industry. It is possible for mid-tier or junior companies to come on stream. Merger and acquisition may happen between mid-tier companies (Maduekwe).

Threats from Substitute Products:

Low

Synthetic diamond could be considered as a substitute of natural diamond. However, a synthetic diamond cannot be created over one carat with current technology. In addition, Synthetic diamond has low 4C’s quality and therefore synthetic diamond cannot be used to make jewelry. Different brands could substitute for others. However, the price of diamond stays high. Consumers are mainly choosing style, design, and brand value. Overall, threats from substitute products are low.

Industry Rivalry:

Severe
The major competition is between the established brands, like De Beers and Tiffany & Co. Consumers pay more attention to style, design, and brand name. The barriers to exit are costly. Inventory of diamond jewelry, supply chain and retail stores are significantly valuable. Loyalty of and relationship with employees and partners are important. Therefore, internal competition is severe.

Competitor Analysis
De Beers’ top competitors are Tiffany & Co., BHP Billiton, and Lev Leviev. These companies are competing with De Beers in regard to service, quality, design, mining stage, and other aspects. The details are included in the table 4 below. Several other diamond manufacturers are also producing high quality diamonds, such as Rio Tinto, US Kela Capital Inc., and so on and so forth. TABLE 4: Competitor Analysis

Tiffany & Co.
BHP Billiton
Lev Leviev
Future Objectives
Tiffany & Co. is renowned for its luxury goods.
Tiffany markets itself as an arbiter of taste and style.
BHP began to diversify offshore in a variety of projects
Lev Leviev is moving beyond the ancient game of one-upmanship-and beyond the dirty business of diamond (Goldman, 2003).

Current Strategy
Tiffany provides high quality and exquisite products.
Tiffany focuses heavily on customer service. Each store is staffed with knowledgeable professionals to deliver excellent service. It adopts centralized control strategies to ensure the best standard of diamonds (Tiffany&Co, n.d.). BHP explores high quality diamonds. For example, BHP owns 80% Ekati diamond mine, which is the world’s largest high quality diamond mine in North Canada. It has become one of the most efficient and sophisticated diamond manufacturers in the world, and has developed and built the most modern and efficient polish factories. State-of-art technology (Rapaport, 2001).

Assumptions

Tiffany&Co. will continually:
-Expand its stores globally.
-Enhance customer awareness.
BHP will remain on exploring high quality rough diamonds.
Different from De beers’ blood diamond. Lev Leviev focuses on legal right on Angola’s diamond industry. Capabilities

Supply from high quality diamond

BHP has high-level technology on mining with control of damage to the environment. Lev Leviec Group has an exclusive right to all Angola’s diamond production and is a major worldwide manufacturer of polish diamond and jewelry. General Notes

Tiffany& Co. distributes physical stores followed by its online stores, B2B, It is the world’s largest mining company. BHP is mining in 25 countries around the world. Lev Leviev takes significant business away from De Beers in Russia and Angola.

Analysis of Dynamics of External Forces
Due to severe internal competition, De beers and its competitors have potential to gain first-mover advantages while developing a new technology of making synthetic diamond that could be used on jewelry. Between De Beers and BHP Billiton, BHP Billiton could take advantage of cost saving, safe and environmentally friendly mining operations with the government. Among Tiffany & Co., Lev Leviev, and De Beers, on the one hand, Tiffany & Co. and Lev Leviev can capture market shares if they successfully expand their market and build customer loyalty. On the other hand, De Beers could earn more profits if it is able to sell its product over their target with their new strategy.

INTERNAL ANALYSIS
Resources
Tangible
De Beers have diamond mines in Botswana, Namibia, South Africa, and Canada. Those mines, rough diamond, and machinery are resources. The patents, trademarks and copyrights are resources that De Beers creates over the years. Partnership, diamond-trading companies (DTCs), manufacturing and retailing are also De Beers’ tangible resources. In 2012, De Beers Group has total sales of $6,074 million, free cash flow of $697 million and third-party debt of $722 million (De Beers Group , 2013). Intangible

The intangible resources of De Beers include employees, skilled professionals, technology innovation, reputation, ideas, design, and perceptions of product quality and durability.

Capabilities
(1) Manufacturing
In 2012, De Beers recovered 1,560,000 carats in Canada, 20,216,000 carats in Botswana, 1,667,000 carats in Namibia, and 4,432,000 carats in South Africa (De Beers Group , 2013). De Beers takes advantage of a centralized quality control system to ensure its diamonds are of high quality. (2) Pricing control

At De Beers’ monopoly stage, by stockpiling excess supply, De Beers has successful controlled the market price in a stable high level. After De Beers adopted the “suppliers of choice” strategy, it still can sell products at a high price. (3) Management

De Beers chooses suppliers who share its vision. By enhancing partnership, De Beers can acquire high quality products and share information. (4) Human resources management
De Beers enhances its relationship with employees, skilled professionals, managers, and other stakeholders to build trust, loyalty, and improve effectiveness and efficiency. Core Competencies

The core competencies exist for De Beers when it has a strong relationship with its partners. Partners are valuable and rare since they have ongoing businesses for providing high quality diamond. It is impossible or very costly for competitors to destroy their strong relationship. De Beers shares information and experience with its partners that allow their day-to-day operations to be more efficient and effective.

Performance
The figures below are the world’s annual volume share and sales share of diamonds between ALROSA and De Beers (AWDC, 2013). ALROSA has been the leader in production volume since 2009, and it turned out 34.4 million carats in 2012, which was 27% of total production in the world. De Beers contributed 22% of the world’s production in the same year, ranking top 2. From 2006-2009, De Beers is Top 1 in production volume instead of ALROSA. However, De Beers is Top one in rough diamond sale all the time from 2006-2012. In 2012, ALROSA contributed 30% of world total sale, while De Beers is 37%. We can see the production volume of De Beers is decreasing, but De Beers’ profits margin is on the increase. It is resulted from De Beers’ new strategy “suppliers of choice”.

STRATEGY
Business Level Strategy
De Beers’ business level strategy is focused differentiation. Its business focuses on diamond products and differentiated by high quality, brand, design, and service. De Beers has changed from “managing supply” to “driven demand”. Corporate Level Strategy

De Beers’ corporate level strategy is backward vertical integration. De Beers has built a strong partnership with a few suppliers for providing high quality rough diamond and exchange information. In addition, De Beers has excellent diamond – trading companies (DTCs) for its marketing. International Strategy

De Beers is using a global strategy. Its diamonds are standardized with high 4C qualities. For De Beers’ jewelry, there are several series of product lines with similar designs and standards.

Cooperative Strategies
In De Beers’ value chain, there are several joint ventures, including Debswana, DTCB, Namdeb, NDTC, Debmarine Namibia, and De Beers Diamond Jewellers.

SYNTHESIS
Strengths
The organization has the following strengths:
Financial:De Beers acquires significant tangible assets, including diamond mines in Botswana, Namibia, South Africa, and Canada. It supplies 35% of world comsuption by volume (Betting on De Beers, 2011). De Beers has large cash reserves, a steady decrease of inventory, and financial products through derivative options trading. Managerial: The sales and marketing – diamond trading companies (DTC) that comprises a number of companies within De Beers is the marketing arm of De beers. It purchases, sorts, values and markets rough diamonds mined by De Beers. The DTC’s primary sales outlet is in London, approximately two thirds by value of the world’s annual supply of rough diamond. De Beers has implemented a strategy that would mitigate a potential decrease in sales. This strategy includes: decreasing inventory of diamonds to free up capital to spend on marketing and R&D; decreasing numbers of wholesalers that De Beers would deal with; branded luxury items more than rings (Cadieux, 2005).

Weaknesses
The organization has the following weaknesses (you could also put this into a table with weaknesses): Logistical: The HIV/AIDS epidemic in Africa strongly affects De Beers’ workers, and thus the performance of De Beers. Currently, HIV/ AIDS has affected over African employees in 3000 De Beers. This is a challenge that De Beers faces in improving lost-time-injury frequent rate (Hannah Lee).

Marketing: One challenge that De Beers and the industry are confronted with is synthetic diamonds. Laboratory diamond producers focus on costs, the environment, and political advantages rather than natural diamond. The costs of synthetic diamonds are significantly lower than natural ones. In regard to the environmental, synthetic diamonds will not destroy the environment like the mining process. In addition to the costs and environmental protection, synthetic diamonds emphasize on political advantages, and customers will not take risk of buying “blood diamond” (Reavis, 2008) (Reavis, 2008).

Opportunities
The environment presents the following opportunities:
Foreign markets: Although De Beers has built up a strong brand presence among high-income demographics in Europe and North America, it still has limited the markets where there are a growing number of rich consumers. Countries like China and India have large populations with significant high-income consumer demographics. These markets have significant potentials for De Beers. If De Beers can successfully market its products and build loyalty with those groups, then it will put entry barriers for competitors. Product line expansion: De Beers’ mining processes take place in Botswana, Namibia, South Africa, and Canada. However, except for those four countries, Australia, the Democratic Republic of the Congo, and Russia are other large diamond supply countries. De Beers can expand its product line to those countries. Threats

The environment presents the following threats:
New competition: Although the barriers of diamond industry are very high, there are still some companies entering and diversifying its products through providing different designs, services, and quality to compete with our products. For example, both Tiffany & Co. and Lev Leviev are already famous with their diamond products. Environmental concerns: Even though De Beers continually spends money on control pollution, the mining process still brings harm to the environment. In this case, synthetic diamonds take advantage of environmental protection to compete with us. However, the current technology cannot make a synthetic diamond over one carat. Therefore, synthetic diamond is not a big issue here. In addition, changes in government policies may affect our supply chain activities.

SWOT Matrix

Strengths
Weaknesses
Opportunities
Owns 40% of rough diamond industry (Hannah Lee).
Owns over 50% of the U.S. diamond market share
Able to influence prices when selling to manufacturers
Over 20,000 employees around the world (MBASkool.com)
High quality
Tie-up relationship with business partners
Acquisition of small business to increase brand position and reach

Low brand recognition by consumers
Strong competition from other bands means limited market share growth High production cost

Threats
Increase entry of competition
Synthetic/Cultural diamonds
Offer premium diamond jewelry, which includes various products through 50 exclusive stores globally. De Beers is known for its association with international celebrities as brand ambassadors. Excellent branding and marketing team make it a top-of-mind brand. Trend changes quickly, and high R&D costs.

Association with conflict diamonds
Preference of people choosing gold over diamond, make it a premium product for occasions Government policies and taxes affect segments

SWOT fit with strategy
The SWOT analysis identifies the needs for De Beers to change strategies in order to take competitive advantages. De Beers has successful markets in the U.S., but De Beers needs to expand its market in other areas especially in Asia and India. It should continually tie up with its partners for providing high quality products and exchanging market information. De Beers can consider spending more money on R&D for synthetic diamond technology or mining technology. In addition, employee health conditions are an important issue in South Africa.

ANALYSIS OF ALTERNATIVES
Alternatives
There are alternatives for De Beers:
1. Increase brand awareness by advertising.
2. Open more authorized retail stores in China and India
3. Take new mining process in a new country of Australia, the Democratic Republic of the Congo, and Russia by acquisitions or mergers.
4. R&D on synthetic diamond as our new business.
Criteria for Analysis of Alternatives
A) Impact on revenues and cash flow.
B) Impact on operational expenses and profit margins.
C) Impact on brand identity.
D) Impact on corporate culture.

Evaluation of Alternatives
The above alternatives are evaluated according to the listed criteria in Table 6 below: Table 6: Table of Alternatives to Criteria
Criteria:
Alternative 1: Advertising
Alternative 2:
Expansion of retailing
Alternative 3:
Expansion of mining
Alternative 4:
R&D
Revenues/Cash Flow
Low growth in the current well-known market, e.g. the U.S.
High growth in a new market, e.g. China
Low growth in the current well-known market, e.g. the U.S.
High growth in a new market, e.g. China
Higher cash out flows in a short term.
Increase revenue by more inputs.
Uncertain
-Positive
-Negative
-Little
-Huge
Expenses/Profit Margins
Modest expense, modest margins.

High expense,
High profits margins.
Higher expense,
Lower margins.
High expense,
Profits margin is unknown.
Brand Identity
No diversified.
Low diversified, may introduce Chinese style products.
Low diversified.
High diversified.
Corporate Culture
Quickly introduce corporate culture in the new market.
Quickly introduce corporate culture in the new market.
Moderate
Quick if succeed
No if failed.

Recommended Alternatives
Short Term
The recommendation for De Beers in a short term is a combination of advertising and opening new retail stores in China and India. When a new retail store is open, advertising is a good method to introduce our brand, such as “A diamond is forever.” India and China are very large countries with a large population. A huge population indicates they are very large markets. We should take steps carefully to take up the market share. Therefore, it is better to open few retail stores first to study customer needs. In china, for example, De Beers can choose five high-level consumption cities including Peking, Shanghai, Hong Kong, Macao, and Chongqing as its first batch. In terms of the advertisement types, it could use TV ads, Magazines, and endorsements. Long Term

Depending on short-term performance, the long-term strategy is based on the successful short-term strategy that De Beers is well-known and our market share is growing. Then De Beers should consider opening another 20 retail stores in high-income cities in China. After learning local customers’ needs, De Beers is able to produce customized jewelry for the Chinese market by investing in R&D. The services will improve and be customized for local customers.

-Prepare documents for exportation.

-Find and sign contracts concerning locations for retail stores.

-Begin magazine ads
-Open retail stores in Beijing, Shanghai, Hong Kong, Macao, and Chongqing.

-Continually invest in R&D to satisfy local customer needs and provide customized service.

-Begin TV ads
-Open ten more retail stores

-Begin R&D on producing Chinese cultural products
-Open ten more retail stores. (It depends on whether De Beers’ market is already balanced or some condition may change.)

-Exhibition and reservation for Chinese style products.

-Continue operation

-Change our strategies to make them fit to the local market.

Rationale for Action Plan
China is a large market where diamonds are not balanced. China will account for an estimated 29% of the global growth of rough diamond market through 2023. The value of the diamond market will be about $5 billion in 2023 (AWDC, 2013). India is an underdeveloped diamond market that offers significant potential growth as GDP. The middle class population estimated an increase from 16% to 46%. The market value will be approximately $5 billion in 2023 (AWDC, 2013). New Structure and Control Systems Needed

To work effectively, De Beers should have skilled professional groups to study and analyze the Chinese market. De Beers also needs to found excellent marketing companies in China and India to advise brand and take up market share. De Beers may face other competitors in the Chinese and Indian market, like Tiffany & Co. or other competitors from Japan, Russia, and Australia. It is important for De Beers to identify their future objectives, current strategy, and capabilities. A quick response information system is needed for De Beers to know what competitors are doing, their product lines and activities. Criteria to Evaluate Success of Implementation

The following will be employed to evaluate the success of the selected alternatives: Gains in the Market Share: The peak seasons are the New Year, Golden Week, Chinese Valentine’s day in China, and the weeding season and Diwali festival in India. The share of polished diamonds sold in jewelry to Chinese customers grew from 3% in 2003 to 13% in 2013 of global demand. Gains in Profitability: from 2003 to 2013, the average price of China’s polished diamond jumped by 32% with average carats per piece rising from 0.18 to 0.25. The value of sales in 2013 is over RMB 8,000 million.

References

AWDC. (2013). THE GLOBAL DIAMOND REPORT 2013 Journey through the Value Chain. Bain&Company. Betting on De Beers. (2011, Nov 12). Retrieved Mar 4, 2015, from The Economist: http://www.economist.com/node/21538145 Cadieux, D.
(2005). De Beers and the global diamond industry. . Ivey Management Services. . De Beers Group . (2013). Operating and Financial Review 2012 . Fowler, J. A. (n.d.). CASE HISTORY FOR DE BEERS CANADA INC. – EXPERIENCES WITH DIAMOND EXPLORATION AND THE VICTOR PROJECT, ONTARIO . Goldman, P. B. (2003, Sep 15). Cracked De Beers Lev Leviev is taking on the most successful cartel in the world. Retrieved Mar 5, 2015, from Forbes: http://www.forbes.com/global/2003/0915/046.html Hannah Lee, H. K. (n.d.). De Beers Consultants .

Krawitz, A. (2013, Feb 15). De Beers Group Sales -16%, Earnings -49% in 2012. Retrieved Mar 5, 2015, from Rapaport: http://www.diamonds.net/News/NewsItem.aspx?ArticleID=42350&ArticleTitle=De+Beers+Group+Sales+-16%25%2C+Earnings+-49%25+in+2012 Maduekwe, N. C. (n.d.). THE DYNAMIC DIAMOND INDUSTRY: IS IT FEASIBLE FOR ITS PLAYERS TO GAIN SUSTAINABLE COMPETITIVE ADVANTAGE? . MBASkool.com. (n.d.). DE BEERS. Retrieved from MBASkool.com: http://www.mbaskool.com/brandguide/lifestyle-and-retail/2681-de-beers.html Rapaport, M. (2001, Nov 1). Lev Leviev’s Market Strategy. Retrieved Mar 4, 2015, from RAPAPORT: http://www.diamonds.net/News/NewsItem.aspx?ArticleID=5910 Reavis, D. M. (2008, Jan 07). DeBeers’s Diamond Dilemma . MIT Sloan Management. Tiffany&Co. (n.d.). Tiffany&Co. Retrieved Mar 4, 2015, from Global Strategy: https://brandtiffanyandco.wordpress.com/business-strategy/ Wekipedia. (n.d.). Retrieved March 5, 2015, from http://en.wikipedia.org/wiki/De_Beers

DE BEERS CONSOLIDATED MINES, LIMITED, APPELLANTS; HOWE (SURVEYOR OF TAXES), RESPONDENT.

[1905] 2 K.B. 612

 

COUNSEL: Cohen, K.C. (Danckwerts, K.C., and Felix Cassel with him), for the appellant company.

Sir R. B. Finlay, A.-G. (S. A. T. Rowlatt with him), for the Crown.

 

SOLICITORS: For appellants: Hollams, Son, Coward & Hawksley.

For the Crown: Solicitor of Inland Revenue.

 

JUDGES: Phillimore J., Collins M.R., Mathew, and Cozens-Hardy L.JJ.

 

DATES: 1905 April 17; June 2, 6.

 

 

Revenue – Income Tax – Residence – “Person residing in the United Kingdom” Company registered Abroad – Head Office Abroad – General Meetings Abroad – Directors’ Meetings in England and Abroad – Majority of Directors in England – Company’s Business in England and Abroad – Income Tax Act, 1853 (16 & 17 Vict. c. 34), s. 2, Sched. D.

 

A foreign corporation may be resident in this country for the purposes of income tax.

 

A company was incorporated and registered in South Africa. The office denominated its head office was in Kimberley in the Cape Colony, and it had an office in London. It owned extensive diamond mines in South Africa. The essential part of its business was the sale of the diamonds from its mines to a syndicate of diamond merchants of London under such conditions as to control the diamond trade of the world. The contracts of sale, which were annual contracts dealing with a year’s output, were executed in London; they provided for the sale of diamonds to the syndicate, with delivery at Kimberley, in specified amounts at specified prices, and contained terms regulating the output of diamonds, the effect of which was to control the diamond trade. The general meetings of the company were held in Kimberley. Members of the company might name an address in South Africa to be registered as their address for the service of notices, and any member not naming such an address was to be deemed to have waived service of the notice upon him. The control of the company was vested in three life governors and sixteen ordinary directors, of whom four had to reside in England. Two of the three life governors and nine of the sixteen ordinary directors resided in the United Kingdom. The chairman and six ordinary directors resided in the Cape Colony. Meetings of the directors were held weekly in Kimberley and London with an interchange of minutes between the two places. The proceedings of the boards of directors sitting in Kimberley and London were regulated by by-laws which provided as follows: (1.) That the course of business respecting technical management of the company’s work and operations at its mines, expenditure for wages, and such like, should be determined upon by the directors in Kimberley, who should however consult the directors in London on matters of exceptional importance: (2.) All other expenditure exceeding 25,000l. was to be determined upon by the majority of all the directors; but the directors in Kimberley with the sanction of the chairman might under special circumstances incur expenditure not exceeding at one time 50,000l. in addition. No further expenditure could be incurred unless the authority of the Kimberley directors was confirmed by the [*613] majority of all the directors: (3.) The policy of the board respecting the disposal of diamonds and other assets, the working or development of the mines and the output of diamonds, application of profits, and appointment of directors was to be determined by the majority of all the directors: (5.) Matters to be determined by the majority of all the directors were to be determined by resolution to be submitted to meetings of directors in Kimberley and London, and the decision was to be in accordance with the vote of the majority thus ascertained: (6.) Except as before provided the directors in Kimberley and the directors in London were to have equal and concurrent authority. The majority of the directors was always in London. Matters referred to in by-law 3 were always dealt with in London, and in all important matters under by-law 5 the majority voting had always been in London. No case had ever occurred where the directors in Kimberley had overruled the decision of the directors in London. Under powers conferred upon the directors generally, the directors in London had appointed four committees to control various departments of the company’s business and report to them. The general accounts of the company were kept at Kimberley, but the majority of the directors had a controlling influence upon the accounts:–

 

Held, that the conclusion to be drawn from the facts was that the company was residing in the United Kingdom within the meaning of s. 2, Sched. D, of the Income Tax Act, 1853, and also that the company exercised their trade in this country within the meaning of the same schedule.

 

CASE stated under s. 59 of the Taxes Management Act, 1880 (43 & 44 Vict. c. 19), by the Commissioners for the general purposes of the Income Tax Acts for the City of London on appeal against an income tax assessment.

 

1. At a meeting of the Commissioners for the general purposes of the Income Tax Acts for the City of London, held at the Guildhall in the said City on Thursday, July 31, 1902, the De Beers Consolidated Mines, Limited (hereinafter called the appellant company), of 62, Lombard Street, in the City of London, appealed against a supplementary assessment made upon them for the year ending April 5, 1901, in the sum of 1,557,693l., and against an additional assessment for the year ending April 5, 1902, in a similar sum of 1,557,693l. in respect of the profits of the company in the United Kingdom and elsewhere.

 

2. The appellant company was registered with limited liability in the Deeds Office of Griqualand West, in the Colony of the Cape of Good Hope (hereinafter for brevity termed “the [*614] Cape Colony”) on March 13, 1888. It was also registered on September 3, 1888, as an incorporated company in the said Colony in terms of s. 3 of Act 13 of 1888 of the said Colony according to the laws then subsisting in the said Colony. The appellant company is not registered in the United Kingdom as a joint stock company.

 

3. The present authorized capital of the appellant company is 4,500,000l. in 800,000 preference shares and 1,000,000 deferred shares of 2l. 10s. each, having been increased to that amount from 3,950,000l. in December, 1901. The company has also 3,500,000l. 5 per cent. first mortgage debentures authorized and issued in 1894 under a scheme for consolidation and conversion of the company’s debenture debt of which there are outstanding 2,638,320l., also 301,780l. De Beers 41�2 per cent. Bultfontein Obligations authorized and issued in May, 1900, of which there are outstanding 205,480l., and also 1,750,000l. De Beers South African Exploration 41�2 per cent. debentures authorized and issued in June, 1900, all of which are outstanding.

 

4. By art. 3 of the articles of association it is provided that the head office of the company shall be in Kimberley in the Cape Colony, or at such other place either in the said Colony or in such other country as the directors shall from time to time consider advisable, with such branch or branches elsewhere as the directors shall deem fit, or with such agent or agents in other places or countries as the directors may deem fit. The company has offices at London and at Kimberley.

 

5. The appellant company owns or is interested in extensive diamond mines and mining property in South Africa, together with various farms and landed property there, and investments in English Government securities and shares in an English joint stock company.

 

6. The profits of the appellant company during the years of assessment and for many years previously have been chiefly made by the raising and sale of diamonds, the produce of their said mines, to a syndicate composed of six or seven firms of diamond merchants, with whom the company have had a series of contracts in that behalf since the year 1895, including [*615] an agreement dated December 2, 1901. (1) The said contracts were negotiated and executed in London, and the firms

 

(1) This was an agreement made between the appellant company, whose London office was stated to be at No. 62, Lombard Street, in the City of London, of the first part, and seven firms, all carrying on business as merchants and diamond merchants in the City of London and therein called the syndicate, of the other parts. By this agreement it was (inter alia) provided that the company should sell and the syndicate should purchase the output of rough diamonds as it was produced, including débris, tailings, and small diamonds produced and got from the De Beers, Kimberley, and Wesselton Mines of the company during the months of October, November, and December, 1901, and the months of January and February, 1902, up to but not exceeding on an average a monthly total of 105,000 carats from the De Beers and Kimberley Mines, and on an average a monthly total of 35,000 carats from the Wesselton Mine. The agreement then provided for the prices to be paid by the syndicate to the company. Delivery of diamonds was to take place at Kimberley, and payment was to be made in cash or its equivalent against each delivery. The company was to retain until February 28, 1902, in hand its entire output of rough diamonds produced from any of its mines during the months of August and September, 1901. The syndicate were to keep accounts of all transactions relating to diamonds purchased from the company. By clause 10 of this agreement, in addition to the payments to be made by the syndicate to the company, the syndicate were to account for and pay to the company one-half of all net profits made by the syndicate on realization or dealing with the diamonds under this agreement as appearing from the accounts, and all risks in the realization or dealing with the diamonds were to be on joint account, and borne by the company and the syndicate in equal shares, and if the syndicate covered any risks it was to cover them on joint account, subject, however, to the terms of clause 11, by which the syndicate, in making up the accounts, were entitled to charge as part of the expenses of realization and dealing with the diamonds purchased from the company, all charges incidental to the importation and sale of the same and all insurances, and in addition 30,000l. per annum to cover office rent, secretarial and accountancy charges and expenses, and also a sum equal to 5 per cent. on the net amount of goods sold or brought into account. The 5 per cent. was only to be charged if the account shewed an equivalent amount of profit made; but if the profit made did not reach 5 per cent., then whatever profit was made was to go to the syndicate, and if a loss was made the loss was to be borne in equal parts by the company and the syndicate. The syndicate was also entitled to charge, and was to be debited with, interest at the rate of 5 per cent. per annum in account current in respect of all moneys advanced or received by them in connection with the realization and dealing with the said diamonds. By clause 12 the syndicate was entitled to purchase from the company the output of rough diamonds (including débris and small diamonds) produced and got from the De Beers, Kimberley, [*616] composing the syndicate are all therein described as of London. These contracts, which vary greatly in detail, provide for the purchase by the syndicate (with delivery at Kimberley) of the produce of the mines up to the amounts specified at specified prices with various and often complicated options in respect of the remainder, and with provisions for the company sharing in certain profits to be made by the syndicate on resale, and other provisions designed to control or affect the output and sale of diamonds from the company’s mines.

 

The object and effect of these arrangements by the company (who practically control the diamond trade of the world) is to

 

Wesselton, Bultfontein, and Dutoitspan Mines, and any other mines under the control of the company during the months of March, April, May, and June, 1902, provided the syndicate on or before February 20, 1902, gave notice to the company that it elected so to do. The price to be paid for the diamonds purchased under this clause was to be ascertained as follows: The syndicate was to inform the company of the net price realized for the diamonds then already sold and the net estimated price to be realized on the diamonds then in hand, and the syndicate was to pay for the diamonds to be purchased a sum per carat equal to the total average prices so realized and estimated respectively, less 12 per cent. thereof. If the syndicate should not elect to purchase under clause 12, the company were to be at liberty to sell the diamonds elsewhere, giving the syndicate the first offer to purchase them at the price and on the terms at and on which the company were willing and able to sell them. By clause 15, if the syndicate elected to purchase, it was to have a similar right as to the output for the months from July to December, 1902, the election to be made on or before June 20, 1902, at the same price as already provided. And it was to have the like option during each succeeding six months until June 30, 1906. By clause 17, on June 30 in each year the syndicate was to prepare a balance-sheet shewing the result of the dealings in diamonds to be audited by the auditors of the company in London, and all sums thereby shewn to be due to the company from the syndicate, or vice vers�, were forthwith to be paid by the syndicate to the company or by the company to the syndicate, as the case might be. By clause 19 the company were not during the continuance of the agreement to sell or otherwise dispose of any rough diamonds, large or small, or débris, or fine sand diamonds, small stuff, or rubbish to any firm, syndicate, or corporation except the syndicate, but the syndicate was to have the option at any time of purchasing from the company the excess of diamonds, large and small, débris, and fine sand diamonds, small stuff, and rubbish produced from any mines under the control of the company over and above the quantity purchased by the syndicate from the company under the agreement. [*617] regulate and support the market for diamonds, and the negotiation and maintenance of these arrangements is an essential part of the business of the company.

 

7. The articles of association of the appellant company were put in evidence, and were to be taken as forming part of the case. (1)

 

8. The management of the business and the control of the appellant company during the years of assessment were, under the articles of association, vested in three life governors and sixteen ordinary directors. There were three trustees for the 5 per cent. debenture-holders and two trustees for the South African Exploration debentures.

 

By the articles of association it was provided that four at least of the directors should reside in England.

 

9. Meetings of directors have been held at the company’s office in London weekly from November 21, 1888. Weekly meetings of directors have also been held at Kimberley during the same period and minutes have been kept. At the first meeting in London on November 21, 1888, twelve directors were present including two life governors. Minutes of the proceedings at all meetings in London and Kimberley have been duly kept. There is an exchange of minutes between the two places – London and Kimberley. The proceedings of the board of directors sitting in Kimberley and London are regulated by by-laws framed pursuant to Nos. 107 and 119, sub-s. 21, of the company’s articles of association.

 

10. These by-laws, having been drawn up in London and communicated to Kimberley, were discussed and finally approved at meetings of directors held in London on February 10, 12, and 17, 1891. Fifteen directors including the chairman (the Right Honourable Cecil J. Rhodes) were present at the meeting on February 10, 1891; ten directors were present on February 12, 1891; and fourteen directors including the chairman (the Right Honourable Cecil J. Rhodes) were present at the meeting on February 17, 1891.

 

The by-laws are as follows:–

 

“(1.) The course of business as respects the technical

 

(1) The articles of association which appear to be material are set out in a note at the end of this case, p. 644, post. [*618] management of the company’s work and operations at its mines and the expenditure there for wages, materials, and such like shall be determined upon by the directors for the time being in Kimberley, who will however, where practicable, consult the directors for the time being in London on matters of exceptional importance.

 

“(2.) All other expenditure exceeding 25,000l. shall be determined upon by the majority of all the directors for the time being; but the directors for the time being in Kimberley, with the previous sanction of the present chairman of the board, the Honourable Cecil J. Rhodes, may, should special circumstances arise, expend or incur liabilities not exceeding altogether at any one time 50,000l. in addition to the above 25,000l. No further expenditure or liability under this proviso shall be incurred until the previous exercise of the authority hereby given has been confirmed by the majority of all the directors for the time being.

 

“(3.) The policy of the board (a) as respects the disposal of its diamonds or other assets, (b) in connection with the working or development of the company’s mines and the output of the diamonds, (c) as respects the application of the company’s profits, and (d) as respects the appointment of elected directors and the filling up of casual elective vacancies in the board of directors, shall be determined by the majority of all the directors for the time being.

 

“(4.) In the case of an equality of votes upon any question submitted for the decision of the directors the chairman of the board shall have a casting vote.

 

“(5.) All matters to be determined by the majority of all the directors for the time being shall be determined by resolution to be submitted to meetings of the directors in Kimberley and London to be convened in the usual way, at which the votes of those present and voting shall be recorded, and the decision arrived at shall be in accordance with the vote of the majority thus ascertained, notwithstanding that any director whether in Kimberley or London may be absent or abstain from voting. On any vote taken under this by-law no person appointed by any life governor his alternative director” (see art. 85) “shall vote if the life governor appointing him votes, [*619] and if in fact both a life governor and his alternative should vote the vote of the alternative shall not be counted.

 

“(6.) Except as before provided, a quorum of the directors” (see art. 107) “sitting in Kimberley and a quorum of the directors sitting in London shall have in all respects equal and concurrent authority, including authority to incur expenditure not exceeding 25,000l.

 

“(7.) These by-laws shall continue in force until repealed or varied by a majority of all the directors for the time being.”

 

11. The chairman of the appellant company attended meetings of the directors in London when important business was to be transacted or the policy of the board determined, as appears from minutes of the board meetings dated April 17, May 1, 15, and 17, June 17 and 19, 1889; February 10 and 17, 1891; April 13 and 20, October 26 and 28, November 2, and December 7 and 14, 1892; November 28, 1894; January 23, 1895; February 24 and March 3, 1897; May 4 and 11, 1898; January 25 and 27, May 3 and 10, June 14 and 28, 1899; April 9, 18, and 20, 1900; July 26 and October 9, 1901; and January 8 and 15, 1902.

 

The meetings of directors in London which have been attended by the general manager, who during the last few years has been resident in South Africa for six months of the year and for six months in England, are as follows – namely, seven meetings in 1898, five in 1900, ten in 1901, and twelve in 1902.

 

In each of the years 1900 and 1901 there was, including three life governors, a total of nineteen directors. In each of these years sixteen of the said directors at one time or another attended meetings of directors in London.

 

Two of the three life governors and nine of the sixteen ordinary directors were resident in the United Kingdom. Two of the remaining directors travel to and fro between England and Africa. The Right Honourable Cecil J. Rhodes, chairman, and six ordinary directors were resident in the Cape Colony. One director had a residence in each country.

 

The highest attendance at any board meeting in London was fifteen. The highest attendance at any board meeting in [*620] Kimberley was eight, but included three persons acting as alternatives, appointed under the articles of association, as representing life governors, when those life governors were absent from Kimberley. The average attendance of ordinary directors at the London meetings was largely in excess of the average attendance at the Kimberley meetings.

 

12. The evidence shewed that matters falling within the terms of clause 3 of the by-laws were always dealt with at meetings of the directors in London, where the majority of all the directors always was. Matters of policy within the said clause were discussed and approved and then communicated to Kimberley. There is no instance of the vote of the Kimberley directors turning a minority in London into a majority or negativing the decision of the London board. It was admitted that the majority of the directors had always given their votes in connection with any important matter to be determined under by-law 5 at the meetings of directors in London.

 

The directors meeting in London have appointed four committees, namely, (a) the finance committee, (b) the diamond committee, (c) the machinery committee, and (d) the dynamite committee, to act in London and to deal with matters falling respectively under such headings; and these committees have been continued to the present time. To the finance committee, first appointed on November 21, 1888, was entrusted (inter alia) the final carrying out of the scheme for consolidation and conversion of the company’s debentures, under which 3,500,000l. of 5 per cent. first mortgage debentures was issued in London in 1894; and the minutes shew that the committee is required to make weekly reports to the directors in London as to the finances of the company, including the payment and discounting of bills. Accounts were submitted shewing the total receipts and payments through the London office for each of the years ended June 30, 1900, and June 30, 1901, as follows: Year ended June 30, 1900 – receipts, 5,700,674l. 2s. 10d.; payments, 5,663,758l. 13s. 4d. Year ended June 30, 1901 – receipts, 3,700,858l. 7s.; payments, 3,738,487l. 10s. 6d.

 

The diamond committee was first appointed in June, 1889, and under its direction and control the company’s diamonds [*621] received in London were arranged to be disposed of. From 1890 the committee were required to report at the weekly meetings of directors in London the sales of all diamonds, and from 1894 they submitted for the approval of the directors in London the terms under which the company’s production of diamonds was disposed of to the diamond syndicate in London, which took over in Kimberley the whole produce of the mines and paid for it by bills on members of the syndicate in London under the contracts already mentioned in paragraph 6.

 

The machinery committee, first appointed on December 5, 1888, executes in London all orders from Kimberley for the purchase of machinery and plant for the company’s use, the directors meeting in London having by minute of November 28, 1888, called upon the directors at Kimberley to pass all such orders through the London office. The machinery committee acts only on requisitions from Kimberley, and never initiates any policy relating to machinery. Their function is control. The accounts of the London office for the years ended June 30, 1900, and June 30, 1901, shew goods and sundry payments to the amount of 178,372l. 10s. and 151,967l. 1s. 3d. for each of the years mentioned respectively, and these sums are almost entirely in payment of orders received from Kimberley. The materials are passed by the London machinery committee, who engage the services of an expert to advise them in relation thereto.

 

The dynamite committee accepted tenders and made contracts for the purchase of dynamite. On September 14, 1898, this committee accepted a tender from Nobel’s Explosives Company for two years from April 1, 1899. The payments made under the direction and by order of this committee through the London office in connection with explosives during the year ended June 30, 1900, amounted to 33,046l., and for the year ended June 30, 1901, to 30,703l. All orders are in pursuance of requisitions from Kimberley. The dynamite committee never initiates any policy relating to dynamite. Their function is control.

 

In addition to the above transactions, various other transactions of considerable magnitude were considered, arranged, [*622] and carried out by the directors in London and the said committees.

 

13. Evidence was given from the minutes shewing that the directors meeting in London carried through (inter alia) the following important financial and other transactions: The final approval and sealing with the common seal of the company in October, 1889, of an agreement for purchasing the property and undertaking of the Bultfontein Consolidated Mining Company; also of the Pullinger Company in June, 1889; the arrangement and approval in May and June, 1899, of the purchase of the London and South African Exploration Company and the Kimberley Diamond Mining Company, and the approval and sealing with the common seal of the company of the agreement for that purpose; the appointment of a committee to settle the purchase of the New Bultfontein Company; the approval and sealing of various agreements with other companies; the consolidation and conversion of the company’s debentures of 3,500,000l. in May and June, 1894. From July to November, 1901 (the then life governors being in London), the directors in London considered and finally arranged for the commutation of the life governors’ profits, and for the distribution of a bonus of 400,000l. to shareholders on account of accumulated profits. In connection with these transactions it was arranged that the then existing capital should be increased from 3,950,000l. to 4,000,000l., each of the 5l. shares being divided into two shares of 2l. 10s., one of which was designated a preference and the other a deferred share. The directors in London also arranged for an increase of the capital of 4,000,000l. to 4,500,000l. by the creation and issue of 200,000 deferred shares of 2l. 10s. each. It was shewn that the directors were empowered under the articles of association to increase the capital of the company by the creation of new shares up to one-sixth of the nominal capital of the company for the time being; but the directors in London, acting under legal advice, required the agreement with the life governors and the respective increases of capital before referred to to be submitted to the shareholders at an extraordinary general meeting at Kimberley on December 23, 1901. [*623]

 

In all these cases it was stated in evidence that the transactions were always subject to confirmation at Kimberley; but this is only true in the sense that the majority of the directors did not use their power as such majority without formal communication with their colleagues in Kimberley. It was admitted that an absolute majority of all directors, if present in London, could not have been overruled by the directors at Kimberley, and, further, that as a matter of fact no conflict ever arose, everything decided at meetings in London at which the Right Honourable Cecil J. Rhodes was present being accepted without demur. No case was shewn in which the directors in Kimberley ever overruled the decision of the directors in London.

 

On May 14, 1902, the directors in London (eleven directors being present) unanimously appointed one L. L. Michell chairman of the company’s directors from July 1, 1902, and resolved to send the following telegram to Kimberley: “Board unanimously appoint Michell chairman from July 1 next for five years, subject to his annual re-election as director. Terms not finally settled yet. Please pass special resolution and cable confirmation. We will make special announcement here.” On hearing this telegram read the directors in Kimberley on May 14 resolved that L. L. Michell should be appointed chairman of the company from July 1 next for a period of five years, subject to his annual re-election.

 

14. The following minutes shew the relation between the directors in London and the directors in Kimberley: “June 3, 1890. Kimberley board called upon to rescind resolutions and purge the minutes of meeting of April 30, when two directors only were present, ‘the other two gentlemen being alternatives of directors’” – scil. life governors – “‘acting in London.’” “June 24 and July 22, 1891. Independent auditor appointed by London directors.” “January 21, 1892. Unanimously resolved that this board do not approve of the advances made to the Chartered Company, and urge their Kimberley colleagues to use their best endeavours to obtain the earliest repayment of these advances, and not to sanction any more.” “May 31, 1892. It was proposed by Mr. Atkinson, seconded by Mr. C. [*624] Meyer, and carried unanimously, that the board select a firstclass accountant to proceed to Kimberley to take charge of the company’s accounts as chief accountant, to be directly responsible to the directors.” “November 28, 1894. It was resolved that having heard the explanation of Mr. Rhodes …. the directors in London agree to leaving the distribution of this sum (a profit of about 9000l.) in the hands of Mr. Rhodes …. on the understanding that Mr. Rhodes will render an account to the board at the end of the financial year, as previously proposed by the directors in Kimberley.” “June 2, 1896. The secretary was directed to write to Mr. Oats expressing the opinion of the board as to the necessity of strengthening the board in Kimberley, and inquiring if it would be convenient to him to proceed to Kimberley at an early date.” “September 30, 1896. Resolved to send the following cable to Kimberley: ‘We have received your cables of September 24 and 26. This board is of opinion that you exceeded your authority. They most decidedly object to purchase for many reasons, and A. Beit will telegraph to C. J. Rhodes to-day, advising withdrawal purchase till C. J. Rhodes arrives home. Thirteen directors present.” “July 7, 1897. It was resolved that the London board see no reason for acquiring an interest in the Dundee coal properties, and unanimously decline to confirm. This resolution to be telegraphed to Kimberley to-day.”

 

[On further representation, however, the London board of directors subsequently did confirm the proposal.]

 

“May 3, 1899. Resolved that the authority given by the by-laws to the Kimberley board (with the approval of Mr. Rhodes) should be increased to 100,000l. instead of 75,000l. as it is now; such amount not to be expended more than once in every year without the confirmation of the London board.” “July 3, 1901. The secretary was directed to ask for information about the farm referred to in the Kimberley minutes of May 30, and why an offer was made for it.”

 

15. With regard to the general meetings of the company, evidence was given that they had always been held in Kimberley. [*625] The general accounts of the company are kept at Kimberley, and balance-sheets, including the audited returns of the London office, are first drawn up there and then submitted to all the directors for approval. Evidence taken from the minutes shews that the directors in London, who have always been a majority of the board, exercise a controlling influence over these accounts.

 

It is shewn by the minutes that the dividends, which must under the Acts be declared by the directors but which are always announced in Kimberley and London simultaneously, were arrived at as the result of communications between the directors in London and Kimberley, the dividends being suggested from either side.

 

16. The appellant company contended that it was not resident within the United Kingdom, and that it did not exercise any trade within the United Kingdom, and was not subject to assessment to income tax under the Income Tax Acts.

 

17. On behalf of the Revenue it was contended that the operations of the company were controlled from London by the directors here; that London was the real seat of its business regarded as a whole; and that the company was resident here, and liable to assessment under s. 2 of the Income Tax Act, 1853, on the whole profits wherever made.

 

It was further contended as an alternative that, as the whole produce of the mines of the appellant company had been habitually disposed of under contracts made in England with the diamond syndicate in the manner and to the effect hereinbefore mentioned, the appellant company exercised a trade or business within the United Kingdom, and was chargeable to income tax on the whole of the profits made by them from the sale of the produce of the said mines under the said contracts.

 

18. The Commissioners having heard counsel on behalf of the appellant company and the inspector of taxes for the Inland Revenue, and having taken into consideration the facts set forth and certain other evidence adduced before them, came to the conclusion – (1.) That the trade or business of the appellant company constituted one trade or business, and was carried [*626] on and exercised by the appellant company within the United Kingdom at their London office. (2.) That the head and seat and directing power of the affairs of the appellant company were at the office in London, from whence the chief operations of the company both in the United Kingdom and elsewhere were in fact controlled, managed, and directed.

 

19. The Commissioners determined that the appellant company was a person residing in the United Kingdom, and was liable as such to be assessed under s. 2 of the Income Tax Act, 1853, Sched. D, paragraph 1 (1), on the whole of the annual profits or gains arising or accruing from its trade whether the same was carried on in the United Kingdom or elsewhere, and accordingly confirmed the said assessments.

 

The appellant company thereupon expressed their dissatisfaction with the determination of the Commissioners as being erroneous in point of law, and duly required them to state and sign a case for the opinion of the High Court of Justice, which they accordingly stated as above.

 

April 12. Cohen, K.C. (Danckwerts, K.C., and Felix Cassel with him), for the appellant company. The first question is whether this company resides in the United Kingdom. There is another and a different question – namely, whether it exercises a trade within the United Kingdom. A company may reside in one country and exercise a trade in another; it may reside abroad and exercise a trade in the United Kingdom: Attorney-General

 

(1) By s. 2, Sched. D, of the Income Tax Act, 1853, the duties are made payable “For and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any kind of property whatever, whether situate in the United Kingdom or elsewhere, and for and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any profession, trade, employment, or vocation, whether the same shall be respectively carried on in the United Kingdom or elsewhere, and to be charged for every twenty shillings of the annual amount of such profits and gains:

 

“And for and in respect of the annual profits or gains arising or accruing to any person whatever, whether a subject of Her Majesty or not, although not resident within the United Kingdom, from any property whatever in the United Kingdom, or any profession, trade, employment, or vocation exercised within the United Kingdom, and to be charged for every twenty shillings of the annual amount of such profits and gains: ….” [*627]

 

v. Alexander (1); or reside in the United Kingdom and exercise a trade abroad: Cesena Sulphur Co. v. Nicholson (2); San Paulo (Brazilian) Ry. Co. v. Carter. (3)

 

The appellant company is incorporated abroad; its head office is abroad; its mines are abroad; and the whole of its work is done abroad. A company incorporated abroad does not reside in the United Kingdom – Attorney-General v. Alexander (1) – unless either it exercises a trade in the United Kingdom in its own person and without the services of agents: Erichsen v. Last (4); Wingate v. Inland Revenue (5); or its head office is in the United Kingdom: Goerz & Co. v. Bell. (6) Further, the general meetings of shareholders of this company are all held abroad. To make such a company liable to pay income tax in the United Kingdom on all its profits would work an injustice like that indicated by Lord Herschell in Colquhoun v. Brooks. (7)

 

A company incorporated by the laws of a foreign country has no legal existence in this country. It owes its existence to the laws of the foreign country, and it is only by international comity that its existence is recognised outside the country of its incorporation: Blackstone Manufacturing Co. v. Inhabitants of Blackstone (8); Bank of Augusta v. Earle (9); Ohio and Mississippi Railroad Co. v. Wheeler. (10)

 

Secondly, this company does not exercise any trade within the United Kingdom. Its only source of profit in this kingdom is derived from entering into a contract once a year with a syndicate of diamond merchants in London. That contract is to be performed by the company in South Africa entirely, and not in the United Kingdom. A company must habitually enter into contracts during the year of assessment before it can be said to be exercising its trade: Erichsen v. Last (4), per Brett L.J.

 

A company incorporated in a foreign country, where alone

 

(1) (1874) L. R. 10 Ex. 20.

 

(2) (1876) 1 Ex. D. 428.

 

(3) [1896] A. C. 31.

 

(4) (1881) 8 Q. B. D. 414.

 

(5) (1897) 24 R. 939.

 

(6) [1904] 2 K. B. 136.

 

(7) (1889) 14 App. Cas. 493.

 

(8) (1859) 13 Gray (Mass.) 488.

 

(9) (1839) 13 Peters (U.S.) 519.

 

(10) (1861) 1 Black (U.S.) 286, 295, 297. [*628]

 

the general meetings of its shareholders are held, at which alone its directors are annually elected and at which alone they can be removed, whose head office and seat are abroad, and whose powers can only be exercised by the joint operation of directors in London and abroad, cannot be said to be resident in the United Kingdom.

 

Sir R. B. Finlay, A.-G. (S. A. T. Rowlatt with him), for the Crown. The findings of the Commissioners in this case are conclusive in favour of the Crown, and there is ample evidence to support them. The fallacy in the argument for the appellant company is in supposing that this company is merely a mining company. It is much more. It is just as much a financial company as was the appellant company in Goerz & Co. v. Bell. (1) By contracts such as that of December 2, 1901, it controls the sale of diamonds all over the world, and that control, which is an essential and inseparable part of its trade, is exercised in London. Moreover, the majority of its directors has always been in London, and therefore it cannot be said that this company does not exercise a trade in the United Kingdom. But if it exercises a trade here by its own officers, and not merely by agents, it must reside here. In Goerz & Co. v. Bell (1) Channell J. held that a financial company, such as the appellant company, resides where its head office is situate; but such a company may have more than one residence. Cases relating to the service of writs, though not directly in point, furnish close analogies to this case. Such cases are Haggin v. Comptoir d’Escompte de Paris (2) and Compagnie Générale Transatlantique v. Law; La Bourgogne. (3) The question where a company resides is mainly a question of fact. The place of its incorporation or registration is one circumstance, but only a circumstance, to be taken into account: Cesena Sulphur Co. v. Nicholson. (4)

 

Cohen, K.C., in reply. The place where a company resides cannot depend upon the question where the majority of its directors may happen to be at any particular time. The

 

(1) [1904] 2 K. B. 136.

 

(2) (1889) 23 Q. B. D. 519.

 

(3) [1899] A. C. 431.

 

(4) 1 Ex. D. 428. [*629]

 

judgment of Channell J. in Goerz & Co. v. Bell (1) is in favour of the appellant company.

 

Cur. adv. vult.

 

April 17. PHILLIMORE J. read the following judgment:- This is an appeal against two assessments made by the Commissioners for the general purposes of the Income Tax Acts for the City of London, one for the year ending April 5, 1901, and the other for the year ending April 5, 1902, each in the sum of 1,557,693l., in respect of the profits of the appellant company in the United Kingdom and elsewhere.

 

The appellant company was not incorporated in the United Kingdom; it derives its existence from a deed of settlement registered at Kimberley under the Cape Colony Act No. 4 of 1861, to which the further benefit of incorporation became attached by the Cape Colony Act No. 13 of 1888. It has nevertheless been found by the Commissioners to be “resident within the United Kingdom and liable as such to assessment for profit or gains accruing from its trade whether carried on in the United Kingdom or elsewhere” under the first paragraph of Sched. D of the Income Tax Act, 1853. The material facts upon which the Commissioners decided are set out fully in great detail, and with reference to many documents, in the case, which then concludes with the following paragraphs: “The Commissioners, having …. taken into consideration the facts above set forth and certain other evidence adduced before them, came to the conclusion (1.) that the trade or business of the appellant company constituted one trade or business and was carried on and exercised by the appellant company within the United Kingdom at their London office; (2.) that the head and seat and directing power of the affairs of the appellant company were at the office in London, from whence the chief operations of the company both in the United Kingdom and elsewhere were in fact controlled, managed, and directed. 19. The Commissioners determined that the appellant company was a person residing in the United Kingdom, and liable as such to be assessed under s. 2 of the Income

 

(1) [1904] 2 K. B. 136. [*630]

 

Tax Act, 1853 (Sched. D), paragraph 1, on the whole of the annual profits or gains arising or accruing from its trade, whether the same was carried on in the United Kingdom or elsewhere, and accordingly confirmed the said assessments.” The way in which the Commissioners have stated their conclusions of fact is more absolute than that in which they stated their conclusions in the somewhat similar case of Kodak, Ld. v. Clark (1); but it was contended by counsel for the appellant company, and not disputed by counsel for the Crown, that the intention of the case was that I should look at all the facts with a view to seeing whether the findings of the Commissioners were warranted, and without being fettered by their conclusions, although I must of necessity attach great weight to them. This course was taken by my brother Channell in Goerz & Co. v. Bell (2), and the counsel for the Crown agreed that I might rightly take it in the present case.

 

There is, as I have said, no doubt that this company owes its existence to its colonial incorporation, and that the corporate existence of foreign corporate bodies is only recognised in other countries by international comity. I doubt whether the same principle applies to colonial as to foreign corporations. Probably every corporation which has legal existence by virtue of an Act of the Sovereign Power exercised in any part of His Majesty’s dominions should be recognised as a corporation in every Court of His Majesty’s dominions. But, be this as it may, a foreign company, and certainly none the less a colonial company, may be treated by English Courts as existing, and as existing in this country, for the purposes of taxation. The language of Huddleston B., giving judgment in the two cases of Calcutta Jute Mills Co. v. Nicholson (3) and Cesena Sulphur Co. v. Nicholson (3), the inquiry entered upon by the Court of Session in Wingate v. Inland Revenue (4), and the decision of my brother Channell in Goerz & Co. v. Bell (2), shew that this is the case. It was the taxpayer who in Calcutta Jute Mills Co. v. Nicholson (3) and Cesena Sulphur Co. v. Nicholson (3)

 

(1) [1902] 2 K. B. 450; [1903] 1 K. B. 505.

 

(2) [1904] 2 K. B. 136.

 

(3) 1 Ex. D. 428.

 

(4) 24 R. 939. [*631]

 

contended that his company, though incorporated in England and having an office here, was not residing within the United Kingdom – a contention which in the particular facts of those cases failed. As then a company, though incorporated abroad, may be deemed to be residing within the United Kingdom for the purposes of the Income Tax Acts and vice vers�, it remains to consider whether this company is, notwithstanding its colonial incorporation, so resident.

 

Now the case is one of much detail. I have attended to all the considerations urged upon me, but in this judgment I only profess to give the main ones. The company relies upon its incorporation, upon its head office being at Kimberley, upon general meetings of shareholders being always held at Kimberley, upon some of the directors meeting weekly in quasi-board meetings at Kimberley, upon the by-laws Nos. 2 and 5 requiring matters of grave importance to be submitted to meetings of directors to be held at Kimberley and in London, and upon the fact that the main industry of the company (which is the mining of diamonds) is entirely carried on in the Cape Colony.

 

The Crown relies on the facts that four at least of the directors must reside in England, that weekly quasi-board meetings have been held in London, that far the larger proportion of the directors have attended the London quasi-board meetings, so much larger a proportion that, whenever it has been necessary to add up the votes of the directors, the scale has never been turned by the Kimberley vote, that four committees sit and act in London, of which the finance committee and the diamond committee deal with the most important operations of the company, and, lastly, that a large portion of the company’s profit is earned by the judicious mode in which they regulate the sale of their diamonds and control the diamond market throughout the world by contracts made and carried into effect in the United Kingdom.

 

Upon a review of these various considerations I should come to the conclusion, if it was necessary to find that the company had one residence, and one residence only, that its residence was within the United Kingdom, where its business of control is carried on, even though its principal physical labours are [*632] abroad, as was the case in San Paulo (Brazilian) Ry. Co. v. Carter. (1)

 

But I do not think it necessary to determine that the only residence of the company is in the United Kingdom. As was pointed out in Goerz & Co. v. Bell (2), a person and a company may have for the purposes of taxation two residences. So a company may have two residences for the purpose of answering to justice: see Compagnie Générale Transatlantique v. Law; La Bourgogne. (3) I am satisfied that this company has existence and residence within the United Kingdom. It is from London that the policy and the important operations of the company are directed. It is in London that the governing work of the company is done, and where the principal officers of the company meet in greatest numbers and consult and determine its business.

 

I have one further observation. It is clear that, even if this company be not resident within the United Kingdom, it exercises a trade within the United Kingdom in respect of the profits of which it would be liable to assessment; to a certain extent – namely, in respect of profits derived under the agreement of December 2, 1901, this was admitted by counsel for the company, but this admission by no means reaches to the extent of the company’s liability. At one time I thought that this of itself was conclusive against the appellant company upon the principles stated towards the close of the judgment in Goerz & Co. v. Bell. (4) The company has to pay on the profits of its trade within the United Kingdom; if it is nonresident, it is assessed and pays by its agent in this country, but it has no such agent. It is its own agent, and must itself be assessed and pay. This argument, as I have said, I at one time thought conclusive. But I am not sure upon reflection that it is conclusive as to the whole assessment, because the assessment is upon profits earned, not only in the United Kingdom, but elsewhere. To support the full assessment the company must be determined to be resident within the United Kingdom, and I so determine. I have considered the case of

 

(1) [1896] A. C. 31.

 

(2) [1904] 2 K. B. 136, at p. 146.

 

(3) [1899] A. C. 431.

 

(4) [1904] 2 K. B. 136, at p. 151. [*633]

 

the Attorney-General v. Alexander. (1) I do not think that my decision conflicts with it. Throughout the case I have been assisted by the judgment in Goerz & Co. v. Bell (2); but I admit that the facts were stronger in that case than in the one before me, and that my judgment may be considered as going somewhat further.

 

The appeal must be dismissed.

 

Appeal dismissed.

        

 

A. P. P. K.

 

The company appealed.

 

June 2, 7. Cohen, K.C., and Danckwerts, K.C. (Felix Casselwith them), for the appellants.

 

Sir R. B. Finlay, A.-G., and Rowlatt (Sir E. H. Carson, S.-G.,with them), for the Crown.

 

The arguments were substantially to the same effect as in the Court below.

 

[The following authorities were cited in addition to those cited in the Court below: Grainger & Son v. Gough (3); Sulley v. Attorney-General (4); Alivon v. Furnival (5); Gilbertson v. Fergusson (6); Ex parte Breull. (7)]

 

COLLINS M.R. This is an appeal from a judgment of Phillimore J. holding that the appellants were liable to income tax under the terms of Sched. D. Those terms are as follows: “For and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any kind of property whatever, whether situate in the United Kingdom or elsewhere, and for and in respect of the annual profits or gains arising or accruing to any person residing in the United Kingdom from any profession, trade, employment, or vocation, whether the same shall be respectively carried on in the United Kingdom or elsewhere, and to be charged for every twenty shillings of the annual amount of such profits and

 

(1) L. R. 10 Ex. 20.

 

(2) [1904] 2 K. B. 136.

 

(3) [1896] A. C. 325.

 

(4) (1860) 5 H. & N. 711.

 

(5) (1834) 1 C. M. & R. 277; 40 R. R. 461.

 

(6) (1881) 7 Q. B. D. 562.

 

(7) (1880) 16 Ch. D. 484. [*634]

 

gains; and for and in respect of the annual profits or gains arising or accruing to any person whatever, whether a subject of Her Majesty or not, although not resident within the United Kingdom, from any property whatever in the United Kingdom, or any profession, trade, employment, or vocation exercised within the United Kingdom, and to be charged for every twenty shillings of the annual amount of such profits and gains.” The learned judge has held that the appellant company is resident in the United Kingdom, and also that it exercises a business in the United Kingdom; and that, on either of these grounds, the company is liable to be assessed to income tax under Sched. D on the profits of that business. The really important question, according to the appellants’ counsel, is whether the company can be said to be resident in the United Kingdom. The Attorney-General does not admit that this question is of the supreme importance ascribed to it by the appellants. He says that, from the standpoint of the Crown, if the company exercises its business in the United Kingdom, the result is that, under the special circumstances of the case, the position is the same with regard to income tax as if the company were resident in the United Kingdom; because, he contends, the business of the company is one entire business which is exercised in this country: so that, in either view of the case, whether the company is resident in England or not, the Crown is entitled to the income tax claimed, as there is only one business which is carried on by them in the United Kingdom. I propose to deal shortly with both points. The question, as regards both points, appears to me to depend on the inferences of fact to be drawn in this case, and, subject to one point, there does not appear to me to be really any dispute as to the law applicable.

 

As regards the first point, namely, whether the company is resident in England or not, the appellants’ counsel meets that in limine with a proposition of law, and, relying on certain American authorities, affirms that a corporation can have no residence outside the sovereignty of the country wherein, and under the laws of which, it is incorporated. He bases that proposition on dicta to be found in the American cases which [*635] he cited – namely, Blackstone Manufacturing Co. v. Inhabitants of Blackstone (1); Bank of Augusta v. Earle (2); Ohio and Mississippi Railroad Co. v. Wheeler. (3) When those dicta come to be considered with reference to the points raised in these cases, and certain qualifications appended to them, I do not know that for the present purpose they amount to very much, or that they contain anything very inconsistent with the possibility of a corporation residing in a country other than the country in which it is incorporated, to the extent at any rate of bringing it within the jurisdiction, and making it amenable to all the laws of that country. For, though the learned judges who uttered those dicta seem to consider that a corporation can, in point of law, have only one domicil and residence, namely, within the sovereignty of the country from which it derives its existence, they go on apparently to qualify that view by saying that it is possible for it to carry on business in another country, which possibility they derive from the comity of nations. Whether it rests on comity or on the view that, a corporation being an entity, that entity is legally capable of existing within a jurisdiction other than that of the country which gave it birth, the result is that it can carry on business in a country other than that in which it was incorporated. However this may be in American law, it seems to me clear that by the law of this country a foreign corporation is capable of residing in this country. In Carron Iron Co. v. Maclaren (4) Lord St. Leonards laid it down that a corporation can have more than one domicil. He said: “I think that this company may properly be deemed both Scotch and English. It may, for the purposes of jurisdiction, be deemed to have two domicils. Its business is necessarily carried on by agents, and I do not know why its domicil should be considered to be confined to the place where the goods are manufactured. The business transacted in England is very extensive. The places of business may, for the purposes of jurisdiction, properly be deemed the domicil. The corporation cannot have the benefit of its place of business

 

(1) 13 Gray (Mass.) 488.

 

(2) 13 Peters (U.S.) 519.

 

(3) 1 Black (U.S.) 286.

 

(4) (1855) 5 H. L. C. 416, at pp. 449, 458. [*636]

 

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