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SUPREME COURT OF INDIA
J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.
The Commissioner of income-tax, Bombay City I. Bombay, Appellant
Versus
Ciba of India Ltd., Respondent.
Civil Appeals Nos. 9 to 16 of 1967.
D/-15-12-1967.
Advocates appeared
Mr. B. Sen, Senior Advocate (M/s. S. K. Aiyar and R. N. Sachthey, Advocates, with him), for Appellant (in Civil Appeals Nos 9 to 13 of 1967) and Respondent (in Civil Appeals Nos. 14 to 16 of 1967); Mr. A. K. Sen Senior Advocate, (Mr. B. A. Palkhivala, Advocate, and Mr. J. B. Dadachanji. Advocate of M/s. J. B. Dadachanji and Co. with him), for Appellant (in Civil Appeals Nos. 14 to 16 of 1967) and Respondent (in Civil Appeals Nos. 9 to 13 of 1967).
INCOME TAX - Deductions - Technical and research contribution paid to foreign company - Whether allowable under S. 10 (2) (xii) or S. 10 (2) (xv) of the Income-tax Act, 1922 - Expenditure incurred for meeting the expenses of suit - Whether allowable under S. 10 (2) (xv) of the Act.
Fact of the Case:
The assessee, an Indian subsidiary of a Swiss company, made payments to the Swiss company for technical and research assistance, and also for meeting the expenses of a suit filed by the Swiss company against a third party for infringement of patents. The assessee claimed these payments as allowable deductions under Section 10 (2) (xii) or Section 10 (2) (xv) of the Income-tax Act, 1922.
Finding of the Court:
The Court held that the payments made for technical and research assistance were not allowable under Section 10 (2) (xii) of the Act, as they were not incurred by the assessee on scientific research related to its business. However, the Court held that the payments were allowable under Section 10 (2) (xv) of the Act, as they were incurred wholly and exclusively for the purpose of the assessee's business. The Court also held that the payment made for meeting the expenses of the suit was not allowable under Section 10 (2) (xv) of the Act, as the assessee was not liable to pay those expenses.
Issues: Whether the payments made for technical and research assistance were allowable under Section 10 (2) (xii) or Section 10 (2) (xv) of the Income-tax Act, 1922.
Ratio Decidendi: The Court held that the payments made for technical and research assistance were not allowable under Section 10 (2) (xii) of the Act, as they were not incurred by the assessee on scientific research related to its business. However, the Court held that the payments were allowable under Section 10 (2) (xv) of the Act, as they were incurred wholly and exclusively for the purpose of the assessee's business. The Court also held that the payment made for meeting the expenses of the suit was not allowable under Section 10 (2) (xv) of the Act, as the assessee was not liable to pay those expenses.
Final Decision: Both the sets of appeals failed and were dismissed with costs.
Judgement
SHAH, J. :- The Income-tax Appellate Tribunal referred two questions to the High Court of Judicature at Bombay under S. 66(1) of the Indian Income-tax Act, 1922:
"(1) Whether on the facts and in the circumstances of the case, the payment made by the assessee to Ciba Ltd., Basle, in pursuance of the agreement dated 17th December, 1947 is an admissible deduction under the "provisions of S. 10 (2) (xii) of the Income-tax Act, and if not, under S. 10 (2) (xv) of the Act, either in part or whole ?
(2) Whether on the facts and in the 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 S. 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 S. 10 (2)(xv) of the Income-tax Act, but not under S. 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.
2. 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 called Ciba (India) Ltd. After the incorporation of the assessee on December 13, 1947 the activities of the Swiss Company in India were bifurcated: the pharmaceutical section was taken over by the assessee from January 1, 1948, and the other lines of business relating to dyes and chemicals were continued by its subsidiary Ciba (India) Ltd., the name whereof was later changed to Ciba Dyes Ltd.
3. By a deed dated December 17, 1947 the Swiss Company agreed with the assessee in consideration of payment of a "technical and research contribution for the use of its Indian patents and/or Trade Marks" to communicate the results of its research work, insofar as they relate to the products which were already manufactured or processed or sold by the assessee or which may with the prior approval of the Swiss Company, in future be manufactured or processed or sold by the assessee. The preamble of the agreement, inter alia, recited :
"Ciba Pharma has installed its own tabletting, ampoule filling and finishing work and has an organisation suited for the distribution and promotion of the said products. Ciba Pharma wishes to acquire the extensive knowledge and practical experience in the pharmaceutical field that Ciba Basle commands by reason of its long and extensive research work and scientific and practical experience. Therefore the parties have agreed that Ciba Pharma shall pay to Ciba Basle a technical and research contribution for the use of its Indian patents and/or Trade Marks referring to the said products. The technical and research contribution is at the same time a consideration for the scientific and technical assistance and will refund partly Ciba Basle s costs and expenses for the maintenance and development of the research work described in this Preamble." The preamble was followed by six Articles and two Schedules-the first Schedule setting out the numbers of the Indian Patents, and the Second Schedule setting out the names and numbers of the Indian Trade-Marks. Article I provided :
"1. Ciba Basle will communicate currently and/or at request of Ciba Pharma all the results of its research work, insofar as they relate to the said products which are already manufactured or processed or sold by Ciba Pharma or which shall hereafter with the prior appro
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