1967 (12) TMI 3 - SC - Income Tax

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 - payment made by the assessee to Ciba Ltd. Basle in pursuance of the agreement is not an admissible deduction under the provisions of s. 10(2)

Summary

Issues Involved:
1. Admissibility of payment made by the assessee to Ciba Ltd., Basle, under section 10(2)(xii) or section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Allowability of expenses incurred for Suit No. 890 of 1946 under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Detailed Analysis:

Issue 1: Admissibility of Payment under Section 10(2)(xii) or Section 10(2)(xv)

Facts and Circumstances:
The assessee, an Indian subsidiary of Ciba Ltd., Basle (the Swiss company), entered into an agreement on December 17, 1947, to pay a "technical and research contribution" for the use of Indian patents and/or trademarks. The agreement stipulated that the Swiss company would provide scientific and technical assistance, including research results, processes, formulae, and other relevant data.

High Court's Decision:
The High Court held that the payment made by the assessee was not admissible under section 10(2)(xii) but was allowable under section 10(2)(xv) of the Indian Income-tax Act.

Supreme Court's Analysis:
- Under Section 10(2)(xii): The Supreme Court agreed with the High Court that the expenditure did not qualify under section 10(2)(xii) as it was not laid out or expended by the assessee on scientific research related to its business. Instead, the payment was made to recoup the Swiss company for its research expenses, which does not meet the criteria of being directly expended by the assessee.

- Under Section 10(2)(xv): The Court found that the expenditure was allowable under section 10(2)(xv). The agreement provided the assessee with access to technical knowledge and experience, which was essential for running its business. The payments were recurrent, dependent on sales, and only for the period of the agreement, indicating they were revenue in nature. The Court emphasized that the assessee did not acquire any enduring asset but merely a license to use the Swiss company's technical knowledge and trademarks.

Conclusion:
The Supreme Court upheld the High Court's decision that the payment was not admissible under section 10(2)(xii) but was allowable under section 10(2)(xv).

Issue 2: Allowability of Expenses for Suit No. 890 of 1946

Facts and Circumstances:
The assessee reimbursed the Swiss company for its share of costs incurred in a civil suit (Suit No. 890 of 1946) filed by May and Baker Ltd. against Boots Drug Co. for patent infringement. The suit was related to "sulphathiazol products," covered under an agreement between the Swiss company and May and Baker.

High Court's Decision:
The High Court held that the assessee was not responsible for the payment because the liability of the Swiss company had not devolved upon Ciba (India) Ltd., and subsequently, to the assessee. Therefore, the expense was not allowable under section 10(2)(xv).

Supreme Court's Analysis:
- Liability and Connection to Assessee: The Supreme Court agreed with the High Court that the liability for the costs of Suit No. 890 of 1946 did not devolve upon the assessee. The patents in question were not transferred to the assessee under the agreement with the Swiss company.

- Nature of the Expense: The Court noted that the suit was filed before the assessee was registered, and the payment did not protect the assessee's trading interest. There was no evidence to support that the obligation of the Swiss company to pay a share of the costs was transmitted to the assessee.

Conclusion:
The Supreme Court upheld the High Court's decision that the expenses incurred for Suit No. 890 of 1946 were not allowable under section 10(2)(xv).

Final Judgment:
Both sets of appeals were dismissed, affirming the High Court's decisions on both issues. The payment to the Swiss company was allowable under section 10(2)(xv) but not under section 10(2)(xii), and the expenses related to Suit No. 890 of 1946 were not allowable.