COMMISSIONER OF INCOME TAX Vs. CILAG LIMITED

JUDGEMENT

(1.) THIS is a reference under section 66(1) of the Indian Income -tax Act made by the Income -tax Appellate Tribunal at the instance of the Commissioner of Income -tax referring to this court a question of law arising out of its order relating to the assessment of the assessee for the assessment year 1959 -60, for which the relevant previous year is the calendar year 1958, which is as follows :

(2.) ALTHOUGH three agreements are mentioned in the question as framed by the Tribunal, the first of them, namely, the agreement dated 6th October, 1950, was superseded by the second agreement dated 1st March, 1954, and was not, therefore, subsisting at the material time. The sum of Rs. 63,478 was received by the assessee in accordance with the terms of the third agreement dated 23rd April, 1957, which was entered into in pursuance of the second agreement. We are, therefore, concerned only with the latter two agreements and more particularly with the last agreement dated 23rd April, 1957. It is not disputed that the assessee has unabsorbed business losses of the past years carried forward to the present assessment year. Its claim to set off the sum of Rs. 63,478 against the said losses was based on the ground that the said sum was its income from business. The claim was disallowed by the Income -tax Officer and the Appellate Assistant Commissioner because both of them took the view that the sum of Rs. 63,478 was not income from business falling under section 10 but it was income from other sources falling under section 12 and consequently was not capable of being allowed to be set off against the unabsorbed business losses of the past years under section 24(2) of the Act. The Tribunal, however, has accepted the claim of the assessee that the sum of Rs. 63,478 represents income from business and has accordingly allowed it to be set off against the carried forward losses. It is not denied that the assessee would be entitled to the set off if the income is from business. The short question to be considered, therefore, is whether the sum of Rs. 63,478 was the assessee's income from business as held by the Tribunal.

(3.) IT will be thus seen that under the agreement dated 1st March, 1954, Cilag Hind was to be the sole importer and distributor of the products of Cilag Limited in India. It was also to be provided by Cilag Ltd., with active substances necessary for the conditioning of the products of Cilag Limited in India. Apart from these two things, Cilag Limited was also to put at the disposal of Cilag Hind its know -how for the manufacture of the active substances and also of its products. The technical know -how and the secret processes which Cilag Limited had acquired because of its extensive knowledge and practical experience and research in the particular field and the patents which it had developed and acquired clearly constituted the commercial assets of Cilag Limited, which it was using in the course of its business of development, manufacture and sale of chemicals, medical, pharmaceutical, biological, bacteriological and related products. Under this agreement of 1st March, 1954, Cilag Limited was granting to Cilag Hind an exclusive and non -transferable licence to use in India Cilag's patents and secret processes for manufacturing the same kind of products. Which Cilag Limited itself was manufacturing. Clauses (3), (9) and (11) provided for the necessary and ancillary held required by Cilag Hind for the purpose of employing the licences granted by Cilag Ltd. in the manufacture and development of Cilag's products in India. The obligations undertaken by Cilag Hind under this agreement show that by the grant of the licences to use the secret processes and patents of Cilag, Cilag was not parting with its commercial trade of manufacture and development of the said products. The secret processes and the technical information supplied by Cilag to Cilag Hind could not be divulged by Cilag Hind to any one else and had to be employed only for the purpose of producing the products of Cilag. On the termination of the agreement, Cilag Hind was to cease to use the patents, trade marks, names, information, data, formulae, processes, etc., covered by the agreement and was to return to Cilag all copies of such information, scientific data or material, etc. Provision was made under the agreement that the manufactured products by Cilag Hind under the licence granted to it had to conform in all respects to the manufactured products of Cilag Limited. And Cilag in that connection was entitled to ascertain and insist upon the same. The goods manufactured had to be sold, marketed and distributed under the registered trade marks of Cilag only and there was no change to be made either in the trade mark or in the trade name, or even in the get -up of the finished products. The goods manufactured by the use of the licences granted were not to be exported outside India except with the permission of Cilag Limited. What has got to be considered is whether having regard to these terms, Cilag Limited was exploiting its commercial assets in carrying on its business or was engaging in an activity, which was other than the activity of its business. The income -tax officer has taken the view that the activity of the assessee was the supply of a technical know -how, which cannot be regarded as an activity of carrying on business. The compensation or the royalty which the assessee received was for the technical advice given by the assessee to the Indian company, which did not constitute its business activity. The income, therefore, which was received by the assessee could not be regarded as business income, but was income received from other sources. The view taken by the Appellate Assistant Commissioner was that the royalty received by the assessee was for the use of its patents and secret information by others and the income received therefrom was not the income from business since it could not be said to be the business of the assessee to supply technical know -how to others.