SHAH, - (1.) THE following Judgment of the court was delivered by :
(2.) 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 17/12/1947 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 1/01/1948, 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 17/12/1947 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 researchwork, 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 - 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 . Rs. 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 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 : JUDGEMENT_1131_AIR(SC)_1968Html1.htm
(3.) ARTICLE IV imposed certain restrictions upon the assessee. it provided : Rs.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 : Rs.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 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 15/07/1949, 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.;