COMMISSIONER OF INCOME TAX Vs. GILBERT AND BARKER MANUFACTURING CO USA

JUDGEMENT

(1.) TWO questions have been referred to us in this reference for our determination ; the first one at the instance of the CIT on a direction issued by this Court on this notice of motion under S. 256(2) of the IT Act, 1961, while the other at his instance by the Tribunal itself under S. 256(1) of the Act. The two questions are as follows :

(2.) THE short facts giving rise to these two questions may be stated : The question relates to the asst. year 1962 63, the relevant previous year being the calendar year ending 31st December, 1961. The assessee, M/s Gilbert & Barker Manufacturing Co., U.S.A. (hereinafter referred to as "Gilbarco"), is a non resident company. For many years Gilbarco has been manufacturing certain gasoline dispensing and metering pump apparatus, which in reality only means petrol pump and during its manufacture had acquired many years of experience and information on the performance of pumps from a great many installations of its pumps in the United States of America, Canada, Great Britain, Europe, Australia and elsewhere and had also acquired much valuable information on efficient manufacturing procedures, details of production and technical knowledge, all of which is recognised as of most substantial benefit to have in manufacturing, selling and servicing pumps. By an agreement dated November 27, 1958, entered into with an Indian company called "Larsen & Toubro Ltd." (hereinafter referred to as "Larsen") Gilbarco granted licence to Larsen to manufacture, sell and service in India for Larsen's business pumps of the type manufactured by it and sold by it for its own business purpose in U.S.A. and elsewhere. The agreement was to run for a period of two years in the first instance and subject to approval by the Government of India was automatically to be continued from year to year thereafter, unless terminated earlier by mutual agreement. The agreement was for the promotion of manufacture in India of all petrol pumps and according to cl. (c) of the preamble to the agreement "Gilbarco intends to continue its efforts and research work for the improvement and development of its said pumps and expects to apply for patent rights in India from to time on such further improvement and additional features of invention in pumps as it believes patentable". It appears that Gilbarco had also registered the trade marks of two of their pumps known as "Gilbarco" and "Gilcometer" in India since 1942, but under the agreement Gilbarco licensed Larsen to manufacture, sell and service in India for Larsen's business pumps of the type manufactured by Gilbarco known as " Gilbarco". The material provisions of the agreement are to be found is cls. 2, 3, 4, 5 and 7, all of which have been set out seriatim by the Tribunal in the statement of case and, therefore, we do not think it necessary to set them out here again. Briefly stated, Gilbarco under cl. 2 granted to Larsen exclusive licence to make, or have made for it and to sell and service in India pumps of its manufacture embodying inventions disclosed by any patent rights which may be acquired by Gilbarco and any other Indian patents which may be acquired by Gilbarco with the right to licence others and there was also further provision that though Gilbarco agreed in principle with Larsen that Larsen may export pumps produced under the agreement before Larsen could undertake any such export business, Larsen was to obtain Gilbarco's consent so that such business should not get in conflict with Gilbarco's licensing commitments to third parties in those other countries. Under cl. 4 Gilbarco undertook to supply to Larsen all information, drawings and specifications necessary or desirable to procure the efficient manufacure of such pumps as also to supply from time to time new information, drawings, designs and specifications with regard to the pumps and with regard to any inventions, improvements and developments in relation thereto and under cl. 5 Gilbarco undertook to furnish Larsen from time to time as a continuing service during the period of the agreement all technical advice and instructions reasonably required by Larsen to further the business in connection with the manufacture of Gilbarco pumps.

(3.) ON behalf of the Department an objection was raised to the assessee being permitted to raise a new point or a new contention that the income should be assessed under the heading "Business income" under S. 28 and it was urged that such a new contention should not be allowed, especially as no cross objections have been filed by the assessee against the AAC's order. The Tribunal permitted the assessee to raise this new contention principally on two grounds. In the first, it took the view that the cross objections were really confined to only such points or aspects which have been decided by the lower authorities against the assessee and since the contention which was sought to be urged before the Tribunal had never been dealt with by the AAC the assessee could not file any cross objections ; moreover, the assessee had completely succeeded before the AAC even on the basis that the income was assessable under the heading "Other sources" Secondly, the Tribunal took the view that since no fresh investigation into the facts was necessary and since all the facts were on record it was left to the discretion of the Tribunal to allow investigation into the facts under rule I I of the Tribunal Rules, 1963, and it thought fit to exercise that discretion in favour of the assessee. On merits the Tribunal took the view that so far as the first two items of expenses were concerned, these would have to be allowed even if the assessment was made under s. 57 of the Act. But after considering, the facts which were already on record and relying upon the decision of the House of Lords in Jeffrey vs. Rolls Royce Ltd. reported in (1962) 40 TC 443. (1965) 56 ITR 580, the Tribunal held that the assessee was in fact carrying on business in India by exploiting technical know how, patents and other assets through the agency of Larsen in India and as such the income returned by the assessee was the business income liable to tax under S. 28 of the Act. After arriving at this conclusion the Tribunal considered the question as to whether the item of expenditure in connection with research and development expenses amounting to Rs. 46,202 could be allowed or not and it came to the conclusion that such expenses would be allowable. Accordingly, it dismissed the Department's appeal. As stated above, the first question has been referred to us by the Tribunal as a result of direction issued by this Court under S. 256(2) of the 1961 Act, whereas the second question has been referred to us by the Tribunal on its own under S. 256(1) of the Act.