TMI Blog1981 (6) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ubjects on which the foreign collaborator aids the Indian concerns. First comes the establishment or setting up of the factory or industrial unit. Then comes the running of the factory. Provision for assignment of patents or provision for licence for working the patents, training of technical personnel, sharing of the results of the research and development, are some of the aspects of collaboration connected with the running of the factory. It is usual to find in collaboration agreements all these aspects of aid by the foreign collaborator to the local concern. The consideration provided for in the agreements may, however, take different forms. In some of them, we find only a composite payment. In other agreements we would find consideration specifically related to each and every one of the different aspects of collaboration. In the present case the foreign collaboration between the assessee and the foreign firm was on the subject of production of what in the trade is called P. V. C. pipes. The foreign collaborators are Industriele Onderneming Wavin N.V., hereinafter referred to as " Wavin ". They are a Dutch company. They are specialists in the manufacture of P.V.C. pipes. They ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Indian company had to make a recurring payment to the foreign collaborator. That payment was to last for a stated period of ten years from the commencement of the agreement. The payment was to be measured in terms of the sales turnover of P.V.C. pipes and other products produced in the assessee's factory, subject to a ceiling on the amount calculated on that basis. For instance, for 2,000 tons of products manufactured and sold by the assessee-company during a year, a payment has to be made by the assessee to Wavin at the rate of 15p. per kilo. Why this consideration was payable by the assessee to Wavin as collaborator, was also expressly set out in the agreement. The relevant clause is cl. 10. The first paragraph in that clause expresses the consideration both ways. Since this clause has played an important part in the discussion at the bar in considering the real nature of the expenditure in question, it is necessary to set out that clause verbatim. Clause 10-As a contribution towards the cost of research carried out by Wavin in the Netherlands and in other laboratories in the Netherlands with whom Wavin has arrangements, the Indian company shall pay in Dutch guilders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for the day to day running and other provisions in its factory. For coming to this conclusion, the Tribunal went into the materials placed before it by the assessee. According to the Tribunal these materials showed that the results of research and development which were being passed on by Wavin from time to time to the assessee related entirely to the process of manufacture of P.V.C. pipes and other products in the assessee's factory. The Tribunal noted that the results of research and development shared by Wavin with the assessee consisted of advance scientific information about reinforced epoxy pipes, screw revolutions, pipelines for hydraulic filling, new vacuum cooling and calibrating system and the like. The Tribunal was satisfied that the results of research and development, provided by Wavin to the assessee, really were found useful and beneficial to the assessee, especially in the matter of production of P.V.C. pipes and allied products in the assessee's unit. In view of these considerations the Tribunal held that the payment made by the assessee under cl. 10 of the collaboration agreement must be regarded as related to the day to day production carried out by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med in cl. 10 as pertaining to the matters covered by cl. 8. Sub-clause (c) of cl. 8 of the agreement which relates to the passing on by Wavin of the results of research and development work to the assessee, does not expressly state that the providing of research and development information is free of charge. But it is to be noted, at the same time, that the sub-clause does not provide for any specific consideration either. Considering that sub-cl. (c) is to be read with sub-cls. (a) and (b) of cl. 8, it might be proper to construe even the provision of research and development information as not being meant to be paid for under any specified consideration. Apart from the fact that cl. 8 either expressly or impliedly dispense with any passing of consideration from the assessee to Wavin, the express words of cl. 10 very clearly show that the contribution which the assessee has to pay to the foreign collaborator is specifically intended to meet " the costs of research carried out by Wavin in the Netherlands ". We are satisfied that having regard to the manifest objective of the payment which the assessee is liable to make under the agreement it, cannot be related to anything other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel on both sides often referred to what might be regarded as a leading case on the subject, namely, the Ciba case, decided by the Supreme Court and reported as CIT v. Ciba of India Ltd. [1968] 69 ITR 692. This decision was cited by the one side or the other before us, not so much for the detailed reasonings contained therein, but, for the observation of the Supreme Court of a general nature in regard to the allowances of expenditure incurred by an Indian taxpayer following the implementation of foreign collaboration agreements. We think it would be proper to refer to the basis of this decision in some detail. The Ciba case was a case of a Swiss company engaged in the manufacture of drugs in Switzerland, entering into a collaboration agreement with an Indian subsidiary. Under the terms of the collaboration agreement, the Swiss company had to part With consultancy and technical services to the, Indian company as well as to pass on the research work done in Switzerland. There was a provision in the agreement whereby the Swiss company had to supply raw material and also to permit the use of distinctive trade marks by the Indian concern. The collaboration agreement provided for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was urged by the learned counsel for the assessee, Mr. S. V. Subramaniam, that even though s. 35 does not in terms apply, there cannot be any difficulty in considering the allowability of the expenditure under the general provisions of s. 37 of the Act. The argument of Mr. Subramaniam bears examination. Section 37 insists that an item of expenditure, in order to be allowed in the computation of an assessee's business income, must be one which has been laid out or expended " wholly and exclusively" for the purpose of the assessee's business. The requirement of s. 37 can be regarded as having been satisfied in this case, in so far as the contribution made by the assessee towards the costs of research in Wavin's research establishment is concerned, for it was for a cause as dear to the assessee's business as to Wavin. Nor can there be any doubt that the purpose of the payment was not for any non-business consideration. According to the preamble to the collaboration agreement Wavin had established research and development laboratories in the Netherlands and it was the desire of the promoter of the assessee-company to continuously share with Wavin the results of research and developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contention of the Revenue, however, was rejected by the court. When the case went before the House of Lords the Revenue did not even think fit to press the point. Lord Reid nevertheless adverted to this argument as follows (p. 209): " It was maintained by the appellant at one stage that this expenditure, was not wholly and exclusively laid out for the purposes of the respondents' trade because their propaganda was directed against nationalisation of the industry of sugar refining as a whole, and was not confined to opposition to compulsory acquisition of their own concern. But this argument has now been given up. If the propaganda was to be effective it had to be on broad lines, and the fact that it would also benefit other concerns does not matter if the purpose was to preserve the respondents' own concern. We adopt Lord Reid's observations last mentioned. We may also observe that at no stage in the earlier stages of the proceedings, the Department had pertinently raised the issue whether the contribution made by the assessee to Wavin was wholly and exclusively for the purpose of the assessee's own trade. The only question mooted was whether any portion of the payment could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may, however, observe even to start with, that it is not quite apt to regard the assessee's payment towards Wavin's research costs as part of the assessee's day to day expenses. Research expenditure might in some way relate to running factory, but it is by no means a part and parcel of current running expenses. However, we must accept on the materials, to which reference has been made by the Tribunal in its order which are to the effect that the results of research and development in the research establishment of Wavin in the Netherlands related purely to the products which were being manufactured by the assessee. It is clear that such of the scientific research information which were passed on by them as a matter of course at the request of the assessee-company, all related directly to the production of P.V.C. pipes and fittings in the assessee's factory in India, such as glass-fibre reinforced epoxy pipes, screw revolutions, hydraulic pipelines for hydraulic filling, vacuum cooling and calibrating system. Hence, although there was no direct nexus between the contribution made by the assessee and the actual payments made by the assessee to the Wavin company and the actual produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he collaboration agreement, to which reference has been made, Mr. Subramaniam also relied on a passage from the judgment of the Supreme Court in the Ciba case [1968] 69 ITR 692. That observation by the Supreme Court was made in the context of the discussion as to how to interpret the nature of the advantage which the Indian company in that case derived by obtaining technical consultancy and technical service and research work from the Swiss company. The Supreme Court dealt with that question after having rejected the assessee's contention based on s. 10(2)(xii) of, the Indian I.T. Act, 1922. Explaining what was the nature of the advantage which the assessee derived under the collaboration agreement, the Supreme Court observed thus (p. 700): " The assessee acquired under the agreement merely the right to draw, for the purpose of carrying on its business as a manufacturer and dealer of pharmaceutical products, upon the technical knowledge of the Swiss company for a limited period; by making that technical knowledge available the Swiss company did not part with any asset of its business nor did the assessee acquire any asset or advantage of an enduring nature for the benefit of its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one and only purpose for which the payments were made under cl. 10 was towards the cost of research and this payment must, therefore, stand on the principle enunciated by the Supreme Court, viz., the method by which the assessee was enabled to throw open the scientific and technical knowledge which was available in the scientific establishments of the foreign collaborator. The Supreme Court has held that the mere right to throw open the knowledge cannot be regarded as an acquisition of any asset or advantage. Having regard to the purpose for which the payment was being made under the collaboration agreement in this case it seems to us that the principle laid down by the Supreme Court will have to be applied and adopted to this case. We have earlier remarked about the peculiar character of the provisions relating to payments in the present collaboration agreement. There is, however, a judgment of the Calcutta High Court, cited in the course of the argument, in which a more or less similar provision had figured in the collaboration agreement which was under consideration by that court. The case is CIT v. Indian Oxygen Ltd. [1978] 112 ITR 1025 (Cal). In that case, an Indian company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. On a reference, the Delhi High Court took a different view. Ranganathan J., who delivered the judgment of the court, went into the details of the scheme and the several ways in which the contribution by the participating members were disbursed for various development works. He found that under the scheme there was a provision for purchase and spraying of insecticides and other items which were essential for the production of sugarcane and for the manufacture of sugar. As a part of the scheme, bore-wells were dug up, godowns were constructed, culverts were built, and other capital works were established or installed. Notwithstanding these ingredients in the items of general expenditure incurred and laid out by the general council towards meeting which the assessee had made the contributions, it was held that it must be regarded as revenue in nature. The learned judge observed that the assessee had only contributed funds for the implementation of a general scheme, and the general object of the scheme was only to improve the quality of the sugarcane and to improve the methods of cultivation thereof. In this judgment, it was observed, (at p. 703) that the contribution by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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