TMI Blog1968 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the second agreement dated 1st March, 1954, and was not, therefore, subsisting at the material time. The sum of Rs. 63,478 was received by the assessee in accordance with the terms of the third agreement dated 23rd April, 1957, which was entered into in pursuance of the second agreement. We are, therefore, concerned only with the latter two agreements and more particularly with the last agreement dated 23rd April, 1957. It is not disputed that the assessee had unabsorbed business losses of the past years carried forward to the present assessment year. Its claim to set off the sum of Rs. 63,478 against the said losses was based on the ground that the said sum was its income from business. The claim was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner because both of them took the view that the sum of Rs. 63,478 was not income from business falling under section 10 but it was income from other sources falling under section 12 and consequently was not capable of being allowed to be set off against the unabsorbed business losses of the past years under section 24(2) of the Act. The Tribunal, however, has accepted the claim of the assessee that the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o discover new products, etc., and was spending considerable amount for the maintenance and development of such departments and as Cilag Hind Ltd. was desirous of acquiring the extensive knowledge and practical experience in the pharmaceutical field that Cilag had acquired by reason of its long and extensive research work and scientific and practical experience which it had acquired in connection with the importation, introduction and distribution of the said products in India and also in other territories to be mutually agreed to between the parties and also for conditioning and manufacture of the same in India, the agreement was being entered into between the parties. Under clause (1) of the agreement, Cilag Hind Ltd. were appointed the authorised importers, distributors, processors and manufacturers of the said products of Cilag Ltd. for the duration of the agreement. Clauses (2), (3) and (4) related to the supply of the products of Cilag Ltd. to Cilag Hind and the price to be paid for by the latter in respect of the same. Under clause (5) Cilag Ltd. agreed to put at the disposal of Cilag Hind Ltd. all their professional knowledge and experience useful in introducing the said pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation supplied to it or made available to it by Cilag and in particular all processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture of the said products and to keep the same under lock and key. Cilag Hind also undertook that the said products manufactured and conditioned by it in India shall also in all respects conform in quality, presentation and outer appearance to Cilag's regulations and prescriptions. It was also agreed that Cilag should be entitled at any time to request samples of the said products to be sent to it by Cilag Hind for approval of Cilag. It was further agreed that Cilag Hind was to be guided in all respects by Cilag's directions and advices as to the conditions of such samples, and the improvements, if any, to be made thereto. Cilag Hind also agreed to permit Cilag's representatives to inspect the plants, installations and laboratories of Cilag Hind and to supervise the manufacturing and conditioning processes, whenever required by Cilag. Under clause (14) Cilag Hind agreed that the imported, manufactured and/or conditioned products in India will be sold, marketed and distributed only under the respective registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... five years of such a licence's validity. It was in pursuance of this clause (12) of the agreement that the agreement of 23rd April, 1957, was entered into between the parties, viz Cilag Limited and Cilag Hind. this agreement having stated in its preamble that it was being entered into in pursuance of the agreement dated 1st March, 1954, and after having referred to the relevant provisions of the said agreement, stated that whereas Cilag in terms of the said agreement granted to Cilag Hind exclusive and non-transferable licences for all of Cilag's relevant patents, whether protected or not, secret industrial and laboratory processes, formulae, scientific and technical data and assistance in connection with the manufacture in India by Cilag Hind of several active substances and whereas Cilag Hind has with the assistance of such information, processes, formulae, scientific and technical data and assistance commenced manufacture in India of some active substances and will in due course manufacture other active substances, but no formal agreement has been entered into between the parties as to the compensation, fee, royalty or payments to be made by Cilag Hind to Cilag as aforesaid, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts in India. Obligations undertaken by Cilag Hind under this agreement showed that by the grant of the licences to use the secret processes and patents of Cilag, Cilag was not parting with its commercial trade of manufacture and development of the said products. The secret processes and the technical information supplied by Cilag to Cilag Hind could not be divulged by Cilag Hind to any one else and had to be employed only for the purpose of producing the products of Cilag. On the termination of the agreement, Cilag Hind was to cease to use the patents, trade marks, names, information, data, formulae, processes, etc., covered by the agreement and was to return to Cilag all copies of such information, scientific data or material, etc. Provision was made under the agreement that the manufactured products by Cilag Hind under the licence granted to it had to conform in all respects to the manufactured products of Cilag Limited. And Cilag in that connection was entitled to ascertain and insist upon the same. The goods manufactured had to be sold, marketed and distributed under the registered trade marks of Cilag only and there was no change to be made either in the trade mark or in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrendered by making it public to the world, the payment which he may receive on the sale of the process or for its disclosure to the world may be a payment received on a disposal of a capital asset and not income from business. What is required to be considered is whether, on the facts and the circumstances of a given case, the licence granted to make use of the patents or the secret information to another was in the nature of parting of an asset or only in the nature of employing it in trade. In the present case, in our opinion, the latter is the true position. Cilag Limited was engaged in the manufacture and development of chemicals, medical, pharmaceutical, biological, bacteriological and related products and specialties. It had carried on extensive research work and was maintaining laboratories for a continuous research and further advancement and improvement. It had its trade all over the world including India. The vast experience, the extensive knowledge and the practical experience in the pharmaceutical field, which Cilag Ltd. had acquired, it was using in its trade. By the present agreement, which it has entered into with Cilag Hind, it was employing its technical knowle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manufacture of its own engines, and its value was expressed in the successful sales which it achieved of those products. I dare say that the company would have preferred, ideally, to reserve its 'know-how' solely for the purposes of its own manufacture. I am not sure of that, when I read some of the chairman's speeches at the annual meetings. However that may be, it is clear that it saw that, having the 'know-how', it could derive profit from the manufacture of its engines even by others, in parts of the world where it either could not or would not sell or manufacture them itself, provided only that it equipped those others with the requisite expertise. So it turned the 'know-how' to account by undertaking, for reward, to impart it to the others in order to bring about this alternative form of manufacture. " In our opinion, in the case before us also, Cilag Limited, by the terms agreed to under the contract, has turned its " know-how " to account by undertaking to allow its use to be made by the Indian company to bring about an alternative form of manufacture of its own products. Mr. Joshi, the learned counsel for the revenue, has argued that the payment, which is made under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income but were capital receipts representing the price of the minerals removed. It was held that the royalty amount was income from other sources within the meaning of section 12 of the Act. It may be pointed out that the owner, who granted the leases was not carrying on any business of mining coal. Nor was it any body's case that the income was income from business. The dispute was whether the receipt was a receipt of a capital nature or of income, and what the Privy Council had to consider was whether it was an item of income or capital. In the context of the facts of the case, Lord Wright observed: " Royalties cannot be regarded as 'profits or gains' of a business. The sources of the royalties may properly be deemed to be the lessees' covenants to pay them, and hence royalties fall under ' other sources'." We have no doubt whatsoever that when it was said that royalties cannot be regarded as profits or gains of business, it was not intended to lay down a general proposition that royalties can never be regarded as income from business. It was on the facts of the case that the Privy Council held that it was not possible to regard royalties as income from business. Mr. Joshi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y referred to, Viscouat Simonds observed as follows : " In the circumstances of that case, regard in particular being had to the fact that the transaction was an isolated one of its kind, the conclusion was inevitable that the so-called capital sum was a receipt of a capital nature." Lord Reid observed : " In that case it was held that the company parted with a capital asset and received for it a capital sum. For one thing, is lost its Burmese market. And, further, it was said to be obvious that the capital value of the secret processes must have been greatly diminished by their disclosure to the Burmese Government. Ever case of this kind must be decided on its own facts ; and, at least in these two respects, that case was very different from the present case. There is also the difference that in that case there was a single transaction, whereas in the present case there was a series of similar transactions." According to Lord Radcliffe in Evans Medical Supplies case the company had sold to the Burmese Government a secret process upon which the success of its business in Burma had to depend and it had, in effect, disposed altogether of its Burmese trade. To do that was to d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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