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

2. 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, 1947 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 Ltd3. 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 assessee6. 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 Seetion10 (2) (xii) of the Indian Income-tax Act, 1922. The Income-tax Officer disallowed the claim (except as to 2 per cent 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 Section 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 Section 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.

Reasoning: 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.