COMMISSIONER OF INCOME-TAX, BOMBAY vs. CIBA OF INDIA LTD.

CIVIL APPEAL No. 9/1967Supreme Court[1968] 2 S.C.R. 69615 December 1967Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, VISHISHTHA BHARGAVA COMMISSIONER13 pages
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What were the facts?

The assessee, Ciba of India Ltd., an Indian subsidiary of Swiss company Ciba Ltd., took over the pharmaceutical business in India from January 1, 1948. An agreement dated December 17, 1947, was made between the Swiss company and the assessee for technical assistance, use of patents, and trade marks. The assessee paid recurrent contributions based on sales for this assistance. Separately, the Swiss company had an agreement with May and Baker Ltd. for cross-licensing of patents. In a suit by May and Baker against Boots Drug Co. for patent infringement, costs were incurred, and the Swiss company paid its share to May and Baker. The assessee reimbursed this amount to the Swiss company. The Income Tax Officer disallowed both claims. The Appellate Tribunal referred two questions to the High Court. The High Court held the first claim deductible under Section 10(2)(xv) but not 10(2)(xii), and the second claim not deductible.

What did the Supreme Court hold?

The Tribunal held that the payments made by the assessee to the Swiss company for technical and research assistance were not deductible under Section 10(2)(xii) because the expenditure was not laid out or expended by the assessee on scientific research relating to its business. Payments made to recoup another for expenditure incurred by that other person, even if beneficial, are not deductible unless carried on for or on behalf of the assessee. However, the expenditure was held to be an admissible allowance under Section 10(2)(xv) as it was not of a capital nature, was laid out or expended wholly and exclusively for the purpose of the assessee's business, and the assessee merely acquired the right to use technical knowledge for a limited period without acquiring an asset of an enduring nature. Regarding the second claim, the Tribunal held that the assessee was not entitled to the Indian patents of May and Baker under its agreement with the Swiss company. The obligation of the Swiss company to pay a share of costs in the suit was not proven to have devolved upon the assessee. Therefore, the High Court was correct in holding against the assessee on the second claim.

What were the issues?

1. Whether the payment made by the assessee to Ciba Ltd., Basle, in pursuance of the agreement dated December 17, 1947, is an admissible deduction under Section 10(2)(xii) of the Income-tax Act, 1922, and if not, whether it is deductible under Section 10(2)(xv) of the Act, either in part or whole? - Assessee's contention: The payments were for technical and research assistance, use of patents and trade marks, and were not of a capital nature, thus deductible under Section 10(2)(xv). - Revenue's contention: The payments were not laid out or expended by the assessee on scientific research relating to its business, hence not deductible under Section 10(2)(xii). The High Court's finding that it was deductible under Section 10(2)(xv) was also challenged by the Commissioner. 2. Whether the payment made by the assessee in accordance with the terms of agreements dated November 15, 1944, and June 18, 1948, for meeting the expenses of Suit No. 890 of 1946 is an allowable expense under Section 10(2)(xv) of the Income-tax Act? - Assessee's contention: The assessee was entitled to rights to patents of May and Baker through its agreement with the Swiss company, and the costs incurred for defending the Swiss company's rights ensured for the benefit of the assessee, protecting its trading interests. Alternatively, the obligation of the Swiss company was a debt that devolved upon the assessee. - Revenue's contention: The assessee was not responsible for the payment as the liability of the Swiss company had not devolved upon the assessee. The High Court's finding against the assessee was supported.

Which sections of the Income-tax Act were involved?

Section 10(2)(xii),Section 10(2)(xv)

AI-generated summary — verify with the full judgment below

696 COMMISSIONER OJ.' 11"COME-TAX, BOMBAY v. CIBA OF INDIA LTD.

December 15, 1967 (J. C. ~HAI!. V. RAMASWAMI AND V. BHARGAVA, JJ.J Income-tax Act ( 11 of 1922), ss. 10(2) (xii) ar,,J (xv )-Scop• of. A Swiss compan), Ciba Ltd. of Basle, carried on ~he business of selling its products in India, through a subsidiary called Ciba (India)

Ltd. Afler the incorporation of the ~e the activities of the Swiss A B Co. in India were bifurcated : the pharmaceutical section was taken C over by rbe assessee Ciba of India Ltd. and the other Jines of business were continued by Ciba (India) Ltd.

An agreement was entered into between the Sv.·iss Co. and the asscssee for providing the la:ter with technical assistance for running the business.

The SY:iss Co., which was continually carrying on research had agreed to make the results available to rbe assessee. and the assessee was expressly prohibited from divulging confidential information to thir.d partie<; without the consent ~f the Swiss Co. A li'.'Cnce was granted to the assessce to use the Swiss co·s patents D and trade marks in India.

The licence was to be for a period of 5 years liable to be terminated in certain eve

The order continues below.

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