COMMISSIONER OF INCOME TAX Vs. SCHLUMBERGER SEACO LTD

JUDGEMENT

(1.) In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court;

(2.) The assessee is a non-resident company and carries on the business of rendering technical services to oil industries engaged in prospecting and searching oil wells. The assessment years are 1964-65 to 1969-70 and the relevant accounting years are the 12 months period ending on 31st March, 1963, and 30th April, 1964, respectively, for the first two assessment years and the calendar years 1964 to 1968, respectively, for the other assessment years. The assessee is one of the subsidiaries of Schlumberger Seaco (Overseas) which is one of the five subsidiaries of Schlumberger Ltd. (SL). The set-up of Schlumberger group of companies was as under : <FRM>JUDGEMENT_540_ITR142_1983Html1.htm</FRM>

(3.) From the facts found by the Tribunal it appears that the activities of Schlumberger group of companies were to provide uniform oil field services throughout the world. For this purpose SWSC and SPE carried on development and engineering activities in the USA and France respectively. These companies were constantly engaged in developing and improving the design, testing and preparation for production of highly sophisticated and specialised sensitive electronic, radioactive and other tools and equipments. These tools and equipments were designed for particular purposes and were handled only by trained Schlumberger engineers working in the field operation and were not marketed as such. In order to rationalise and avoid duplication of research and development activities, the aforesaid five subsidiaries as well as SL entered into an agreement dated 15th December, 1958, under which SURENCO, OVERSEAS and SOC agreed to bear development and engineering expenses incurred by SWSC and SPE on pro rata basis. As the total operating revenue of these companies were derived from such services, it had been provided in the agreement that development and engineering expenses should be born by the respective companies on the basis of their operating revenue bearing to the total revenue of all the Schlumberger group of companies including their subsidiaries and branches. Each of the aforesaid subsidiaries, namely, SURENCO, OVERSEAS and SOC in turn entered into a supplementary agreement with their own subsidiaries and branches whereby the subsidiaries and branches had agreed to bear the development and engineering expenses on similar pro rata basis. We will refer to the main agreement and the supplementary agreement in a moment. The assessee-company through its branch in India rendered oil field operational services to Oil India Ltd. and Oil and Natural Gas Commission, a Govt. of India authority. In its return of income for the years under reference, the assessee had claimed deduction of the following amounts in respect of " research and engineering expenses : <FRM>JUDGEMENT_540_ITR142_1983Html2.htm</FRM>