Sabyasachi Mukharji, J.
1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court;
'Whether, on the facts and in the circumstances of the case and having regard in particular to the nature of the business carried on by the assesses and on a correct interpretation of the agreement dated 15thDecember, 1938, the Tribunal was correct in holding that the sura claimed as ' research and engineering expenses' was an expenditure laid out or expended wholly and exclusively for the purposes of the assessee's business and was accordingly allowable in computing the profits of the said business?'
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 :
Schlumberger Well Surveying Corp. (SWSC)Societe De Prospection Electrique (SPE)Schlumberger Eurenco (SURENCO)Schlumberger Seaco (Overseas) (OVERSEAS)Schlumberger of Canada (SOC)
Schlumberger Seaco Inc. (assesses)
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 revenuebearing 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 ' :
4. The ITO after taking into consideration the correspondence it hadwith the assessee rejected the assessee's claim on, inter alia, the followinggrounds:
' (i) As the assessee was not itself carrying on any research activities, the claim cannot be allowed under section 35 of the Act.
(ii) As the assessee was only giving expert advice to the OIL and ONGC, there is no connection between the services rendered by the assessee and the expenses incurred by SWSC and SPE.
(iii) As the assessee (Indian branch) was paying substantial royalty to its principal company for use of machinery and equipment brought into India, there was no question of allowing any expenditure in respect of research and development expenses against the Indian income.
(iv) No details were brought on record to show how much expenses were charged against Indian income. '
5. There was an appeal before the AAC. The AAC dealt with the points in great detail but relying on the decision of the Supreme Court in the case of CIT v. Ciba of India Ltd. : 69ITR692(SC) , he held that the assessee would be entitled to claim deduction under Section 37(1) of the Act. Accordingly, he deleted the aforesaid amounts from the total income of the respective years under reference.
6. Before we deal with the order of the Tribunal it may be necessary to refer to the agreement dated the 15th December, 1958, where, after recit-ing that the Schlumberger companies were wholly owned by SL and offered uniform oil field services to the oil industry throughout the world, the agreement went on to provide the definition of income as under :
'1.03. The term 'income' as used herein shall mean the operating income of a designated Schlumberger company, including its subsidiaries, from oil field services and oil field equipment sales and rentals to customers outside the Schlumberger organisation during a given period of time. The term ' total income' shall mean the sum of SWSC income, SPE income, SURENCO income, OVERSEAS income, and SOC income over the same period of time.'
7. It provided for the termination of the agreement, the nature of the services and it, inter alia, provided in Clause 2.05 as under:
' 2.05 SPE and SWSC each agrees to make available to the Schlumberger companies and their subsidiaries the results of their engineering and to freely exchange technical data and know-how, it being provided, however, that such results, data, and know-how shall be maintained confidential. '
8. There was a supplemental agreement effective from 1st January, 1963, which recited definition of 'income' and after reciting the facts it provided, inter alia, as follows :
'I. The agreement dated January 1, 1959, herebefore mentioned is unquestionably intended to include in its coverage SEACO and is hereby deemed so to do as SEACO is a wholly owned subsidiary of SOSA and the pro rata share of engineering expenses borne by SOSA thereunder is determined on a basis which includes SEACO income. SEACO, not having been made a formal party to the aforementioned agreement, is desirous of receiving the benefits thereof and is willing to contribute its pro rata share of engineering expenses in the same manner as SOSA, and SEACO, therefore, hereby undertakes to pay this share on a monthly basis.
II. The agreement dated January 1, 1959, provides that a supplemental agreement may be entered into by the parties to effectuate its purposes, and consequently this agreement is hereby made. SEACO accepts and agrees to all the terms and conditions of the earlier agreement which are made an integral part thereof, including the date of expiration of this agreement which shall be December 31, 1974.'
9. Being aggrieved by the order of the AAC, the Revenue went up in appeal before the Tribunal and after considering the rival contentions of the parties and the relevant clauses of the agreement entered into by the S.L. group of companies and following the ratio of the Ciba's case : 69ITR692(SC) , referred to hereinbefore, the Tribunal upheld the action of the AAC. It appears to us that having regard to the nature of the business carried on by the assessee, the basis of sharing of expenses of theresearch and having regard to the fact that the sharing was not on the basis of general revenue earned by these companies but on the basis of revenue earned by incurring these operational expenses, indicate that these were amounts of sharing of expenses for gathct ing information or knowledge which were utilised by the assessee for carrying on its business for the purpose of earning its profits. The fact that the assessee in this case unlike some other cases was not actually manufacturing goods but was rendering services in a specialised field which can be described as a kind of consultancy service, does not, in our opinion, make any difference in principle for an application of the principle to he applied. The expenses were jointly incurred and were proportionately divided on certain rational basis and such expenses, if as a result of incurring such expenses, the carrying on of the business or earning of the profits of the assessee was facilitated, would be allowed as revenue expenses. The knowledge that was gathered by incurring these expenses was necessary for the use of sophisticated equipment having regard to the nature and type of business the assessee was earring on. Certain decisions were referred to us but these do not in fact apply to this case though the principles of these decisions do not militate against the conclusion that we arc arriving at. Therefore, it is not necessary to deal with those decisions in detail.
10. In the premises, we will answer the question in the affirmative and in favour of the assessee.
11. In the facts and circumstances of the case, parties will pay and bear their own costs.
Suhas Chandra Sen, J.
12. I agree.