PETITIONER:
COMMISSIONER OF INCOME-TAX, BOMBAY
Vs.
RESPONDENT:
CIBA OF INDIA LTD.
DATE OF JUDGMENT:
15/12/1967
BENCH:
SHAH, J.C.
BENCH:
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 trade marks 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 trade marks 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]
JUDGMENT:
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
(inC.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 Income-
tax 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 “tech-
nical 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 manu-
699
factured 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 biblio-
graphic 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 phar-
maceutical products manufactured or processed
and/or sold by Ciba Pharma :
(a) Contribution towards technical consul-
tancy and technical service rendered and
research work done.
5%
(b)Contribution towards cost of raw material
used for experimental work……
3%
(c) Royalties on trade marks 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 sub-
licence under the patents and/or trade marks
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 trade marks 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 Income-
tax Act, 1922. The Income-tax Officer disallowed the claim
(except as to 2% paid as royalty on trade marks 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 expen-
diture 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 trade
marks 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 trade marks
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 trade marks 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 running- the business; (c) the
licence was granted to the assessee subject, to rights ac-
tually 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
expen-
707
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” ob-
tained ’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.
709