Case: Commissioner of Income Tax, Bombay City I Vs. Ciba of India Limited

to or applied for by it in respect of "sulphathiazole products" against infringement, and agreed to share equally all costs incurred and all damages or other sums received in respect thereof. Under Clause 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 Clause 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 developed 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 expenditure 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. 15. 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 enured 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. 16. 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 11, 1949. The right to the patents of May and Baker for the manufacture of "sulphathiazole" 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 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. 17. 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. 18. 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 in 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 not 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]7. Expenditure (not being in the nature of capital expenditure) laid out or expanded on scientific research related to the business of a person is an admissible allowance under Section 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 Clause (xii) of Section 10 (2) is that the expenditure must be laid out or expanded on scientific research by the assessee.The amounts paid by the assessee were not laid out or expanded by the assessee on scientific research related to the business of the assessee. Payment made to recoup an other 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 expanded on scientific research related to the business of the assessee. The High Court was, therefore, right in rejecting the claim for allowance under Section 10 (2) (xii) of the Income-tax ActThe expenditure incurred by the assessee is not an allowance of the nature described in Clauses (i) to (xiv). Again the expenditure is laid out or expanded wholly and exclusively for the purpose of the business of the assessee12. 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 assessee13. 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 license 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 license 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 consent 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 assessee16. 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 11, 1949. The right to the patents of May and Baker for the manufacture of "sulphathiazole" 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 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 Court17. 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 interest18. 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 in 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 not 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.