1968 (3) TMI 5 - HC - Income Tax

Foreign company's technical know-how payment qualifies as business income, eligible for set-off under Income-tax Act

The court ruled in favor of the assessee, determining that the sum of Rs. 63,478 constituted 'income from business' rather than 'income from other ... Income from Business - set off against the carried forward losses Issues Involved:1. Whether the sum of Rs. 63,478 received by the assessee under certain agreements for the year 1959-60 could be set off against its past business losses under section 24(2) of the Indian Income-tax Act.Issue-wise Detailed Analysis:1. Nature of Income:The primary issue was whether the sum of Rs. 63,478 received by the assessee constituted 'income from business' or 'income from other sources.' The Income-tax Officer and the Appellate Assistant Commissioner had disallowed the set-off, categorizing the income as 'income from other sources' under section 12, not eligible for set-off against past business losses under section 24(2). The Tribunal, however, accepted the assessee's claim that the sum represented 'income from business.'2. Agreements and Business Activity:The assessee, a foreign company incorporated in Switzerland, entered into multiple agreements with an Indian subsidiary. The relevant agreements were dated 1st March 1954 and 23rd April 1957. The 1954 agreement appointed the Indian subsidiary as the authorized importer and distributor of the assessee's products in India and granted licenses for using the assessee's patents, secret processes, and technical know-how. The 1957 agreement fixed the compensation, royalty, or payments for these licenses.3. Commercial Exploitation of Know-How:The court examined whether the supply of technical know-how and secret processes to the Indian subsidiary constituted a business activity. The technical knowledge and patents were commercial assets of the assessee, used in its development, manufacture, and sale of products. The court found that granting licenses to use these assets in India was a method of exploiting them commercially, rather than parting with them.4. Precedents and Analogies:The court referred to the case of Handly Page v. Butterworth, where it was held that a patentee could either exploit the patent directly or license it to others for royalty, both constituting business activities. The court also cited Jeffery v. Rolls-Royce Ltd., where sums received under similar agreements were considered trade receipts.5. Distinguishing from Capital Transactions:The court distinguished the present case from instances where the supply of know-how might be considered a capital transaction, such as in Evans Medical Supplies Ltd. v. Moriarty. In Evans, the company had entered into an isolated agreement that adversely affected its business, whereas in the present case, the assessee was furthering its business interests in India by facilitating local manufacture through its subsidiary.6. Conclusion:The court concluded that the assessee was employing its commercial assets in trade by granting licenses to its Indian subsidiary, thereby generating business income. Consequently, the sum of Rs. 63,478 was deemed 'income from business,' eligible for set-off against past business losses under section 24(2).Judgment:The court answered the question in the affirmative, ruling in favor of the assessee. The Commissioner was directed to pay the costs of the assessee.