Commissioner of Income-Tax, Bombay Vs.
Ciba of India Ltd. [1967] INSC 303 (15 December 1967)
15/12/1967 SHAH, J.C.
SHAH, J.C.
RAMASWAMI, V.
BHARGAVA, VISHISHTHA
CITATION: 1968 AIR 1131 1968 SCR (2) 696
CITATOR INFO :
RF 1987 SC 798 (11) R 1989 SC1913 (14)
ACT:
lncome-tax Act (11 of 1922), ss. 10(2) (xii)
and (xv)-Scope of.
HEADNOTE:
A Swiss company, Ciba Ltd. 'of Basic, carried
on the business of selling its products in India, through a subsidiary called
Ciba (India) Ltd. After the incorporation of the assessee the activities of the
Swiss Co. in India were bifurcated : the pharmaceutical section was taken over
by the assessee Ciba of India Ltd. and the other lines of business were
continued by Ciba (India) Ltd. An agreement was entered into between the Swiss
Co. and the assessee for providing the latter with technical assistance for
running the business. The Swiss Co., which was continually carrying on research
had agreed to make the, results available to the assesse, and the assessee was
expressly prohibited from divulging confidential information to third parties
without the consent of the Swiss Co. A licence was granted to the assessee to
use the Swiss Co's patents and trade marks in India. The licence was to be for
a period of 5 years liable to be terminated in certain eventualities even
before the expiry of that period. It was subject to rights actually granted or
which may be granted after the date of the 'agreement to others. In
consideration of the right to receive scientific and technical assistance the
assessee stipulated to make certain recurrent contributions dependent upon the
sales and only for the period of the agreement.
'Pursuant to this agreement, the 'assessee
paid diverse sums of money to the Swiss Co. and claimed them as admissible
deductions either under s. 10(2) (xii) or s. 10(2) (xv) of the Indian
Income-tax Act, 1922, in proceedings for assessment to tax.
The Swiss Co. had also entered into an
agreement with May and Baker Ltd. of England, who were also carrying on
business as pharmaceutical manufacturers in India. By that agreement the two
companies mutually agreed to grant to one another a non-exclusive licence in
respect of certain products in different countries including India. By cl. 5 of
the agreement the two companies agreed to take all necessary steps to defend
patents granted to or applied for in respect of those products against
infringement, and agreed to share equally all costs incurred. In a suit
instituted by May and Baker against M/s. Boots Drug Co. alleging that the
latter has infringed the Indian patents of the plaintiffs. May and Baker had co
incur certain costs and the Swiss Co. paid its share to May and Baker as per
the terms of cl. 5 of the agreement. The assesse reimbursed that amount to the
Swiss Co. and claimed it as a permissible deduction under s. 10(2) (xv) in
proceedings for assessment to tax The High Court, on reference, held in favour
of the assesses that the first claim was an admissible deduction under s.
10(2) (xv) but not under s: 10(2) (xii), and
held that the second claim was not a permissible deduction.
In appeals, by the Commissioner of Income-tax
and the assessee,
HELD : (1) Expenditure (not being in the
nature of capital expenditure) laid out or expended on scientific research
relating to the business 69 7 of a person is an admissible allowance under s.
10(2) (xii) if the expenditure was laid out or expended by the assessee.
In the present case, the amounts paid to the
Swiss Co. were not laid out or expended by the assesses on scientific research
relating to the business of the assessee. Payment made to recoup another for
expenditure for scientific research incurred by that other person, even if it
may ultimately benefit the assessee is, unless it is carried on for or on
behalf of the assessee, not expenditure, laid out or expended in relation to
the business of the assessee.
Therefore, the expenditure was not allowable
under s. 10(2) (xii). [701 G-H; 702 A-B] But, it was an admissible allowance
under s. 10 (2) (xv), because, the expenditure incurred by the assessee was not
an allowance of the nature described in cls. (i) to (xiv) of s. 10(2), it was
laid out or expended wholly or exclusively for the purpose of the business of
the assessee, and it was not of a capital nature. The assessee did not become
entitled exclusively even for the period of the, agreement to the patents and
trademarks of the Swiss Co.; it acquired merely the right to draw. for the
purpose of carrying on its business upon the technical knowledge of the Swiss
Co. for a limited period; by making that technical knowledge available the
Swiss Co. did not part with any asset of its business nor did the assessee
acquire and asset or advantage of an enduring nature for the benefit of its
business. [702 B-C, H; 703 E-F] Evans v Medical Supplies Ltd. v. Moriarty (H.
M. Inspector of Taxes), 37 T.C. 540; Jeffrey v. Rolls Royce Co. Ltd. 40 T. C.
443 and Musker v. English Electric Co., Ltd. 41 T.C.
556, referred to.
(2) From the terms of the agreement between
the Swiss Co. and the assessee, the assessee was entitled to certain Indian
patents, but they did not include the Indian patents of May and Baker obtained
by he Swiss Co. from May and Baker. It could not therefore be assumed that the,
rights to patents standing in the name of May and Baker were available to the
assessee under its agreement with the Swiss Co. The rights to the patents and
trademarks did not devolve upon the assessee when it took over the
pharmaceutical business from Ciba (India) Ltd., nor was there any proof that
the obligation of the Swiss Co. to pay a share of the costs of the suit,
incurred by May and Baker was taken over and transmitted by Ciba (India) Ltd.,
to the assessee. Therefore, the High Court was right in holding against the
assessee regarding the second claim. [707 E-G, H; 708 A-B]
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 9 to 16 of 1967.
Appeals from the judgment and order dated
January, 20, 21 of 1965 of the Bombay High Court in Income-tax Reference No.67
of 1961.
B. Sen, S. K. Aiyar and R. N. Sachthey, for
the appellant (in C.As. Nos. 9 to 13 of 1967) and the respondent (in C.As. Nos.
14 to 16 of 1967).
A. K. Sen, B. A. Palkhivala and J. B.
Dadachanji, for the appellant (in C.As. Nos. 14 to 16 of 1967) and the
respondent (in C.As. Nos. 9 to 13 of 1967).
698 The Judgment of the Court was delivered
by Shah, J. The Income-tax Appellate Tribunal referred two questions to the
High Court of Judicature at Bombay under s. 66(l ) 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 17-12-1947 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 or the case, the payment made in accordance with the
terms of the agreements dated 15-11-1944 and 18-6-1948 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 Incometax 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 called Ciba (India) Ltd.
After the incorporation of the assessee on December' 13, 1 947 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, 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 approval of Ciba Basle be manufactured or processed or sold by Ciba
Pharma. Whenever manufacture 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
11 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 licensed 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 700 Ciba Basle and in particular
to keep all data connected with the manufacturing processes under lock and
key." By cl. 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 Sch. 1, to make use, exercise and vend the inventions
referred to therein, and to use the Trade-Marks set out in Sch. 11 in the
territory of India. By cl. 3 the sole right of the assessee under the Swiss
Company's Indian patents was limited by existing licences granted by the Swiss
Company to third parties, and right was also reserved to the Swiss Company to
conclude other licence agreements with third parties. By the first clause of
Article III, it was provided:
"As consideration for Ciba Basle's
obligations stipulated in Article 1 and 11, Ciba Pharma agrees to pay to Ciba
Basle half-yearly the following percentage contributions of the total of the
net selling prices of all pharmaceutical products manufactured or processed
and/or sold by Ciba Pharma :
(a) Contribution towards technical consultancy
and technical service rendered and research work done.
5% (b)Contribution towards cost of raw
material used for experimental work......
3% (c) Royalties on trademarks used by Ciba
Pharma.
2% Total .... 10%" Article IV imposed
certain restrictions upon the assessee. it provided :
"1. Ciba Pharma shall not assign the
benefit and the obligations of this Agreement without the written consent of
Ciba Basle; and
2. Ciba, Pharma shall not grant any sublicence
under the patents and/or trademarks of Ciba Basle without its previous written
consent." Article V dealt with duration and termination of the agreement.
It provided :
"1. This Agreement comes into force on
January 1st, 1948, and shall continue in force for a period of 5 years.
Therefore provided that if one of the parties fails to perform or observe the
provisions of this Agreement the other party may cancel the same by giving to
701 the party in default 3 months' notice by registered letter or by cable.
2. If Ciba Basle shall be compelled for any
reason beyond its control to transfer or part with all or any of its shares in
Ciba Pharma, it will have the right to immediately determine this Agreement.
3. Upon the termination of this Agreement for
any cause Ciba Pharma shall cease to use the patents and trademarks to which
this Agreement refers except as to stocks then on hand and shall return to Ciba
Basle or to such persons as they may appoint for that purpose all copies of
information, scientific data or material sent to it by Ciba Basle under this
Agreement and then in its possession and 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% to 6% 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 s.
10 (2) (xii) of the Indian Incom etax Act, 1922. The Income-tax Officer
disallowed the claim (except as to 2% paid as royalty on trademarks 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 s. 10 (2) (xii) and in
any event under s. 10 (2) (xv). The High Court disagreed with the Tribunal as
to the admissibility of the expenditure under s. 10 (2) (xii) of the Indian
Income-tax Act, but agreed with the Tribunal on its admissibility under s.
10(2) (xv). Correctness of the view taken by the High Court is challenged on
behalf of the Commissioner.
Expenditure (not 'being in the nature of
capital expenditure) laid out or expended on scientific research related to the
business of a person in an admissible allowance under s. 10(2) (xii) of the
Indian Income-tax Act in computation of the taxable profits and gains of the
business of the assessee. One of the conditions of the admissibility of an allowance
under cl. (xii) of s. 10(2) is that the expenditure must be laid out or
expended on scientific 702 research by the assessee. The amounts paid by the
assessee were not laid out or expended by the assessee on scientific research
related to the business of the assessee. Payment made to recoup another person
for expenditure for scientific research incurred by that other person, even if
it may ultimately benefit 'the assessee is. unless it is carried on for or on
behalf of the assessee, not expenditure laid out or expended on scientific
research related to the business of the assessee. The High Court was. therefore
right in rejecting the claim for allowance 1 under s. 10(2) (xii) of the
Income-tax Act.
But the outgoing was properly treated as an
allowable expenditure under s. 10(2)(xv) of the Income-tax Act. Under the terms
of the agreement, 'the Swiss Company had-(1) undertaken to deliver to the
assessee all processes, formulae, scientific data, working-rules and
prescriptions pertaining to the manufacture or processing of products
discovered and developed in the Swiss Company's laboratories and to forward to
the assessee as far as possible all scientific and bibliographic information,
pamphlets or drafts, which might be useful to introduce licensed preparations
and to promote their sale in India : (cl. 1 of Article 1), and (2) had granted
to the assessee full and sole right and hence under the patents listed in Sch.
1, to make use, exercise and vend the inventions referred to in India and had
also granted a licence "to use the trade marks" in Sch. If in the
territory of India, subject to any existing licence which third parties held at
the date of the agreement, or which the Swiss Company granted to third parties
after that date : (cl. 2 of Article If and cl. 3 of Article 11). 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 1 cl. 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 trademarks of the
Swiss Company (Article IV, cis. 1 and 2) and had further agreed (c) upon the
termination of the agreement for any cause to cease to use the patents and trademarks
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 cl. 3).
The assessee did not, under the agreement,
become entitled exclusively even for the period of the agreement, to the
patents and trademarks of the Swiss Company : it had-merely access to the
technical knowledge and experience in the pharmaceutical field which the Swiss
Company commanded. The assessee was on 703 that account a mere licensee for a
limited period of the technical knowledge of the Swiss Company with the right
to use the patents and trade marks of that Company. The assessee contends that
tile contribution for being permitted to have access to this technical
knowledge for the purpose of running the business during the period of the
agreement falls within the terms of s. 10(2)(xv) of the Income-tax Act, 1922.
That clause, insofar as it is material, provides :
"Such profits or gains shall be computed
after making the following allowances, namely (xv) any expenditure not being an
allowance of the nature described in any of the clauses (i) to (xiv) inclusive,
and not being in the nature of capital expenditure or personal expenses of the
assessee laid out or expended wholly and exclusively for the purpose of such
business, profession or vocation." The expenditure incurred by the
assessee is not an allowance the nature described in cls. (i) to (xiv). Again
the expenditure is laid out or expended wholly and exclusively for the purpose
of the business of the assessee. Counsel for the Revenue however contends that
the expenditure is of capital nature and on that account not admissible as an
allowance in the computation of the taxable income.
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 business.
Counsel for the Commissioner strongly pressed
for acceptance of what he called the principle of the speeches of Viscount
Simonds and Lord Tucker and Denning in Evans Medical Supplies Ltd. v. Moriarty
(H.M. Inspector of Taxes) (1).
Counsel said that it was ruled in that case
by the majority of the House that money received 'by a tax-payer for making
available to another person a right to technical 'know-how' is liable to be
treated as a capital receipt. It must in the first instance be noted that the
House of Lords was dealing with the true character of a receipt by a tax-payer
who had made technical 'know-how' available to another in consideration of a
certain payment. The nature of a receipt as capital or (1) 37 T.C. 54).
704 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(1) the Burmese Government granted a contract 'to the taxpayer company
engaged in the, manufacture of pharmaceutical products with a world-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
1,00,000". 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 1,00,000 arose to the assesse 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 that view remanded ,the case 'to
the Commissioners to determine the part so attributable. The speeches of the
Law Lords in dealing with the appeals of 'the Crown and the Company disclose a
remarkable divergence ,of opinions. Viscount Simonds and Lord Tucker held that
by the ,transaction the assessee had parted with a capital asset for a price,
and that the Crown could not be permitted to make out a new ,case that a part
of the amount received by the assessee was capital and the rest income. Lord
Morton of Henryton agreed with the Court of Appeal. Lord Keith of Avonholm held
that the amount in its enitrely was received 'by the assessee in the course of
its trading activity and Lord Denning said that he could see no ,distinction
between the money paid for disclosing information of secret processes and money
paid for other information, and that it was a single payment for "know-how"
in the course of the assessee's trade and was on, that account income and not
capital, but since there was no finding that it was received in the course of
the existing trade which was being taxed, it was not liable to be brought to
tax. The view of the majority of the House reached on different and somewhat
contradictor' premises is of little assistance in deciding this case. In two
later cases decided by the House of Lords : Jeffrey v. Rolls Royce Ltd.(1); and
Musker v. English Electric Co. Ltd.(3), it was observed that in Evans Medical
Supplies Ltd.'s case(1) there was a total loss of the business of the company
by the communication of secret processes to the Burmese Government and on that
account the company parted with an asset against receipt of a capital sum. In
the case of Rolls Royce Ltd.
(2) payment received for licensing a foreign
Government to manufacture aero engines with the accumulated technical knowledge
of the taxpayer and for supplying the necessary infor(1) 37 T.C. 540.
(3) 41 T.C. 556.
(2) 40 T.C. 443.
705 mation and drawings, and for advising the
foreign Government as to improvements and modifications in manufacture and
design, instructing the licensee's personnel in their works and for releasing
members of their own staff to assist in the manufacture -of engines by -the
licensee was held to be received on revenue account of the taxpayer's trade. In
English Electric Company's case(1) the taxpayer contracted with the Admiralty
to design and develop a, turbine and to license its manufacture by a limited
number of companies in the United Kingdom, Australia 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 lumpsum 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 : (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 runningthe 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 to third parties without
the con-sent of the Swiss Company, (e) there was no transfer of the fruits of
research once for all : the Swiss Company which was continuously carrying on
research and had agreed to make it available to the assessee; and (f) the
stipulated payment was recurrent dependent upon the sales, and only for the
period of the. agreement. We agree with the High Court that the first question
was rightly answered in favour of the assessee.
The second question relates to the
admissibility of a share in, the costs incurred in a Civil Suit in the High
Court of Calcutta as an allowable expenditure under s. 10(2)(xv) of the
Income-tax Act. The relevant facts are these : In accordance with the terms of
the agreement dated June 18, 1948, the assessee took, over the pharmaceutical
section of Ciba (India) Ltd. The pharmaceutical stock-in-trade together with
all the pending contracts and orders were transferred to the assessee by Ciba
(India) Ltd' which then had changed its name to Ciba Dyes Ltd. Under an (1) 4
T.C. 556.
706 agreement between the Swiss Company with
Messrs. May and Baker Ltd., England-hereinafter called 'May and Baker'-who were
also carrying on business as pharmaceutical manufacturers in India, the two
contracting companies mutually agreed to grant to one another a non-exclusive
licence in respect of "sulphathiazol products" in different countries
including India. May and Baker had prior to the date of the agreement obtained
patents in India bearing Nos.
26513 and 36850, and the Swiss Company
obtained the benefit of 'those patents under the agreement. By cl. 5 of the
agreement the two companies agreed to take all necessary steps to defend
patents -ranted to or applied for by it in respect of "sulphathiazol
products" against infringement, and agreed to share equally all costs
incurred and all damages or other sums received in respect thereof. Under cl. 8
of the agreement each party had to take all steps within its power to secure
the observance of the terms of the agreement by its subsidiary or associated
companies' licensees and agents. 'Sulphathiazole' was sold in India by the
.Swiss Company and by May and Baker under the trade names of
"Cibasol" and "Thiazamide" respectively. In a suit
instituted by 'May and Baker in the Calcutta High Court against Messrs. Boots .Drug
Co. alleging that the latter had infringed the Indian patents of the plaintiff,
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 cl. 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 Swiss Company had not at any time
devolved upon Ciba (India) Ltd. prior to the transfer of the business in the
pharmaceutical section to the assessee, and ,since the assessee had undertaken
the liability to satisfy, discharge and pay all debts and liabilities of Ciba
(India) Ltd. and of no ,other person, the assessee was not entitled to claim
the amount paid to the Swiss Company as an allowable deduction. The High Court
also observed that since the agreement between Ciba (India) 'Ltd. and the
assessee contained no clause for sharing any expen707 diture between the
assessee and the Swiss Company as was to be found in the agreement dated
November 15, 1944 between May and Baker and the Swiss Company, the amount paid
by the assessee was not a permissible allowance, and even assuming that the
agreement to assist implied a stipulation to share the cost, the agreement was
only prospective, and did not attract liability in respect of any infringement
before the date of the agreement.
Counsel for the assessee contended in the
first instance that under the terms of the agreement between the Swiss Company
and May and Baker each Company became a licensee for the patents of the other,
and under the agreement with Ciba (India) Ltd. the assessee was entitled to the
rights to the patents of May and Baker and on that account the costs incurred
for defending the rights of the Swiss Company as a licensee from May and Baker
ensured for the benefit of the assessee and the assessee in paying the amount
'to the Swiss Company was acting for protecting its trading interest. In the
alternative, it was contended that the obligations of the Swiss Company arising
in respect of the patents, relating to sulphathiazole were debts which. Ciba
(India) Ltd. was liable to discharge, and from Ciba (India) Ltd.
under the terms of the agreement dated June
18, 1948, that liability devolved upon the assessee.
In our view, the contentions cannot be
accepted. From the terms of the agreement between the Swiss Company and the
assessee it is clear that the assessee was entitled to certain Indian patents
'but that did not include any patent either in respect of
"sulphathiazole" or "thiazamide" obtained 'by the Swiss
Company from May and Baker. The two patents Nos. 27,825 and 29,117 obtained by
the Swiss Company and the Indian Trade Mark No. 1621 in respect of
"Cibazol" are specifically referred to in the, Schedules to the
agreement dated December 1, 1949. The right to the patents of May and Baker for
the manufacture of "sulphalthiazole" 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 Jr 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.
708 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 ill 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 liability of the
Swiss Company in regard to the payment of share of costs of May and Baker
devolved upon the assessee. The Tribunal has riot expressly so found and there
is no evidence in support of that view. In our view the High Court was right in
answering the second question against the assessee.
Both the sets of appeals fail and are
dismissed with costs.
One hearing fee in each set.
V.P.S. Appeals dismissed.
L2Sup.CI/68-28-11-68-2,500-Sec. VI-GIPF.
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