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TMI Blog1976 (12) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... ement dated November 27, 1958, are liable to be assessed as business income under section 28 or as income from other sources under section 57 ? " The short facts giving rise to these two questions may be stated : The question relates to the assessment year 1962-63, the relevant previous year being the calendar year ending 31st December, 1961. The assessee, M/s. Gilbert Barker Manufacturing Co., U.S.A. (hereinafter referred to as " Gilbarco "), is a non-resident company. For many years Gilbarco has been manufacturing certain gasoline dispensing and metering pump apparatus, which in reality only means petrol pump and during its manufacture had acquired many years of experience and information on the performance of pumps from a great many installations of its pumps in the United States of America, Canada, Great Britain, Europe, Australia and elsewhere and had also acquired much valuable information on efficient manufacturing procedures, details of production and technical knowledge, all of which is recognised as of most substantial benefit to have in manufacturing, selling and servicing pumps. By an agreement dated November 27, 1958, entered into with an Indian company called " L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time to time new information, drawings, designs and specifications with regard to the pumps and with regard to any inventions, improvements and developments in relation thereto and under clause 5 Gilbarco undertook to furnish Larsen from time to time as a continuing service during the period of the agreement all technical advice and instructions reasonably required by Larsen to further the business in connection with the manufacture of Gilbarco pumps. During the accounting period relevant to the assessment year 1962-63 the assessee received the sum of Rs. 88,039 from Larsen representing 5% of the sale price of pumps and parts in accordance with the agreement. This amount is described as " fee " in the agreement but has been referred to as " royalty " in the assessment proceedings ; but the nature of payment being clear, nothing turns upon the particular word to describe the same in its return for the aforesaid assessment year the assessee returned the income of Rs. 88,039 subject to certain expenses which were claimed as and by way of deductions in a letter dated 8th November, 1962. There were three items of expenses, viz., travelling expenses (U.S. Dollars 616), estimated cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which would be useful to Larsen during the duration of the agreement. It was also contended that since the income of the assessee was being brought to tax under the head " Other sources " under section 57 of the Act, expenses not directly incurred for earning the income could not be allowed. On behalf of the assessee a new contention was urged that the income from the fees received by the assessee was assessable as " business income " under section 28 and not as income from " Other sources " under section 57 since the assessee could be said to be carrying on business in India through the agency of Larsen and it was in the course of this business that Gilbarco had to undertake research and continuously keep abreast of new developments and incorporate the fruits of such research in improved designs as otherwise Gilbarco's products would go out of the market and if the income was assessed under section 28 of the Act all the expenses claimed by the assessee would have to be allowed. On behalf of the department an objection was raised to the assessee being permitted to raise a new point or a new contention that the income should be assessed under the heading " Business income " under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to us by the Tribunal on its own under section 256(1) of the Act. So far as the first question is concerned, it is true that before the taxing authorities the assessee did not raise the contention that the income which it had returned for the concerned assessment year should be assessed as " business income " under section 28 of the Act and the case was proceeded as if the income was assessable under the beading " Other sources" under section 57 of the Act. It must, however, be observed that before the Appellate Assistant Commissioner the assessee had fully succeeded in getting all the items of expenses allowed as allowable deductions even under section 57 of the Act and, therefore, there was no question of the assessee filing any cross-objections before the Tribunal in the appeal that had been preferred by the department against the Appellate Assistant Commissioner's order. Rule 11 of the Appellate Tribunal Rules, 1963, runs thus : " 11. Grounds which may be taken in appeal.--The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal in deciding the appeal, shall not be confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention that was being permitted to be raised by the respondent for the first time in appeal. In our view, therefore, there was no question of placing the appellant in a worse position, which seems to be the implication of the question as framed. The Tribunal, in our view, was justified in permitting the respondent to agitate. before it its contention that its income was assessable under the heading "Business income" and, accordingly, the first question is answered in the affirmative. Turning to the second question, it may be stated that neither before the Tribunal nor before the taxing authorities was any contention raised on the aspect of the quantum of expenditure that should be allowed as and by way of deduction. The very frame of the question also rules out any such enquiry and all that we are concerned to decide is whether the fees that were earned by the assessee under the agreement dated November 27, 1958, were liable to be taxed as business income under section 28 or income from other sources under section 57 and if we come to the conclusion that the income returned is assessable as business income under section 28 of the Act, then obviously the entire item of expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical, bacteriological and related products and specialities. It had carried on extensive research work and was maintaining laboratories for a continuous research and further advancement and improvement. It had its trade all over the world including India. The vast experience, the extensive knowledge and the practical experience in the pharmaceutical field, which Cilag Ltd. had acquired, it was using in its trade. Finding that it would be more desirable and practicable in the circumstances which were existing to set up a machinery in India for the purpose of manufacturing its own products than to trade in India with goods brought in from Switzerland it entered into an agreement with Cilag Hind which was a 60% subsidiary of Cilag Ltd. under which Cilag Hind was to be the sole importer and distributor of the products of Cilag Ltd. in India. It was also to be provided by Cilag Ltd. with active substances necessary for the conditioning of the products of Cilag Ltd. in India. Apart from these two things, Cilag Ltd. was also to put at the disposal of Cilag Hind its know-how for the manufacture of the active substances and also of its products. Cilag Hind was to pay to Cilag, compensation, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered is whether, on the facts and the circumstances of a given case, the licence granted to make-use of the patents or the secret information to another was in the nature of parting of an asset or only in the nature of employing it in trade. In the present case, in our opinion, the latter is the true position. " The above observations make the position quite clear that the principle that is required to be applied is to consider whether, on the facts and the circumstances of a given case, the licence granted to make use of the secret information to another is in the nature of parting of an asset or only in the nature of employing it in trade. Applying this principle to the case before us it seems to us quite clear that, having regard to various clauses that are to be found in the agreement dated November 27, 1958, it is clearly a case of not parting with capital asset or technical know-how or using a registered trade-mark but a case where a licence has been granted to employ this capital asset in trade. That being the position, in our view, the Tribunal was right in coming to the conclusion that the income returned by the assessee are liable to be taxed under the heading "Busi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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