TMI Blog1967 (12) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances of the case, the payment made in accordance with the terms of the agreements dated 15th November, 1944, and 18th June, 1948, for meeting the expenses of Suit No. 890 of 1946, is an allowable expense under section 10(2)(xv) of the Income-tax Act ? " In answer to the first question the High Court recorded that the payment made by the assessee to Ciba Ltd., Basle, in pursuance of the agreement dated December 17, 1947, is an admissible deduction under section 10(2)(xv) of the Income-tax Act, but not under section 10(2)(xii) of the Act. The second question was answered in the negative. Against the answer recorded on the first question the Commissioner of Income-tax has appealed and against the answer recorded on the second question the assessee has appealed. The assessee, which was originally floated in the name of Ciba Pharma Ltd., and is now called Ciba of India Ltd., is an Indian subsidiary of Ciba Ltd., Basle (hereinafter referred to as 'the Swiss company') which is engaged in the development, manufacture and sale of medical and pharmaceutical preparations. The Swiss company originally carried on business in India of selling its products through a subsidiary ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture or processing of a preparation is taken up by Ciba Pharma with the prior approval of Ciba Basle, the pertaining patent right and trade marks will be licensed to Ciba Pharma according to the terms of articles II and III. In this case Ciba Basle undertakes to deliver to Ciba Pharma all processes, formulae, scientific data, working rules and prescriptions pertaining to the manufacture or processing of said products, which have been discovered and developed in Ciba Basle's laboratories and will forward to Ciba Pharma as far as possible all scientific/and bibliographic information, pamphlets or drafts, which might be useful to introduce licenced preparations and to promote their sale in India. . . . 2. Ciba Pharma agrees not at any time to divulge to third parties without Ciba Basle's consent any confidential information received under this agreement from Ciba Basle and in particular to keep all data connected with the manufacturing processes under lock and key. " By clause 2 of article II, the Swiss company granted to the assessee " full and sole right and licence " in the territory of India under the patents listed in Schedule I, to make use, exercise and vend the invention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd shall expressly refrain from communicating any such information, scientific data or material received by it hereunder to any person, firm or company whomsoever other than Ciba Basle. " Article VI incorporated an arbitration agreement. By a supplementary agreement dated July 15, 1949, the contribution under article III payable by the assessee was reduced from 10 per cent. to 6 per cent. of the net selling price of the pharmaceuticals. Pursuant to this agreement, the assessee paid year after year diverse sums of money to the Swiss company. In proceedings for assessment to tax for the assessment years 1949-50 to 1953-54 payments made to the Swiss company were claimed as permissible allowance in the computation of taxable income under section 10(2)(xii) of the Indian Income-tax Act, 1922. The Income-tax Officer disallowed the claim (except as to 2 per cent. paid as royalty on trade marks used by the assessee). The order was confirmed in appeal by the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal held that the payments made by the assessee to the Swiss company were allowable under section 10(2)(xii) and in any event under section 10(2)(xv). The High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny granted to third parties after that date : (clause 2 of article II and clause 3 of article II). In consideration of the right to receive scientific and technical assistance the assessee had agreed to make the stipulated contributions, and had agreed : (a) not to divulge to third parties without the consent of the Swiss company any confidential information received under the agreement : (article I, clause 2) ; and (b) without the written consent of the Swiss company not to assign the benefit of the agreement or grant sub-licences of the patents and trade marks of the Swiss company (article IV, clauses 1 and 2) ; and had further agreed, (c) upon the termination of the agreement for any cause to cease to use the patents and trade marks and to return to the Swiss company all copies of information, scientific data or material sent to it and to refrain from communicating any such information, scientific data or material received by it to any person : (article V, clause 3). The assessee did not, under the agreement, become entitled exclusively even for the period of the agreement, to the patents and trade marks of the Swiss company ; it had merely access to the technical knowledge a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who had made technical " know-how " available to another in consideration of a certain payment. The nature of a receipt as capital or revenue is not always determinative of the nature of the outgoing in the hands of the person who pays it. Again the view expressed by the majority of the House does not lay down any principle which may be of value in deciding this case. In Evans Medical Supplies Ltd.'s case the Burmese Government granted a contract to the taxpayer company engaged in the manufacture of pharmaceutical products with a word-wide trading organisation and which till then carried on business in Burma through an agency to set up a pharmaceutical industry in Burma. The company undertook to disclose secret processes to the Burmese Government and to provide other information in consideration of the payment of a " capital sum of pound 100,000 ". The assessee had not entered into any other similar agreement with any other foreign Government or any other party. The Court of Appeal held that the amount of pound 100,000 arose to the assessee as a receipt of its trade, but a part of that sum which was attributable to the disclosure of secret processes was a capital receipt, and on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia and Canada and also contracted with the Government of Australia and an American aircraft manufacturing corporation to license the manufacture of a bomber which the taxpayer had designed and developed, and received fixed lump sum payments as a consideration for imparting " manufacturing technique " to the licensee. The receipts were held to be income. In the case in hand it cannot be said that the Swiss company had wholly parted with its Indian business. There was also no attempt to part with the technical knowledge absolutely in favour of the assessee. The following facts which emerge from the agreement clearly show that the secret processes were not sold by the Swiss company to the assessee 1 (a) the licence was for a period of five years, liable to be terminated in certain eventualities even before the expiry of the period ; (b) the object of the agreement was to obtain the benefit of the technical assistance for running the business ; (c) the licence was granted to the assessee subject to rights actually granted or which may be granted after the date of the agreement to other persons ; (d) the assessee was expressly prohibited from divulging confidential information t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intiff, it was found necessary during the progress of the suit to amend the specifications of the patents. The High Court of Calcutta made it a condition in granting the application for amendment that May and Baker shall not institute any action for any act of infringement of the patent committed prior to the date of the amendment, and that they shall pay to Boots Pure Drug Co. costs of and incidental to the application for amendment of the specifications. May and Baker complied with the order of payment of costs and the Swiss company paid its share of costs to May and Baker under the terms of clause 5 of the agreement. The assessee reimbursed that amount to the Swiss company and claimed it as a permissible deduction in proceedings for assessment to tax. The Income-tax Officer disallowed the claim. In appeal, the Appellate Tribunal held that in the payment made by the assessee there was no capital element and the assessee incurred the expenditure in the course of its business and for the purpose of ensuring that the patents with which it was connected were not infringed. The High Court held that the assessee-company was not responsible for the payment because the liability of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he schedules to the agreement dated December 11, 1949. The right to the patents of May and Baker for the manufacture of " sulphathiazol " and the trade mark in respect of thiazamide did not however devolve upon the assessee. It cannot, therefore, be assumed that the rights to the patents standing in the name of May and Baker were available to the assessee under its agreement with the Swiss company. No argument was apparently advanced either before the Tribunal or before the departmental authorities that the assessee was entitled to these patent rights, and no investigation was permissible on that question in the High Court. Suit No. 890 of 1946 was filed before the assessee was registered. By paying to the Swiss company the share of costs in that Suit No. 890 of 1946, the assessee was not seeking to protect its trading interest. We also agree with the High Court that it is not proved that the obligation of the Swiss company to pay a share of the costs in Suit No. 890 of 1946 incurred by May and Baker was transmitted from Ciba (India) Ltd., to the assessee. We are unable to agree with the contention of counsel for the assessee that the Tribunal had found that the liability of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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