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Issues Involved:
1. Assessment of consideration received by the assessee for services rendered under the contract with Fertilisers and Chemicals Travancore Ltd. (FACT) as fees for technical know-how under section 9(1)(vii) of the Income-tax Act, 1961, versus under the head 'Profits and gains of business'. 2. Determination of the amount of tax payable by the non-resident and whether it should be added to the income remitted to the non-resident, with tax payable determined with reference to the gross figure. Detailed Analysis: Issue 1: Assessment of Consideration as Fees for Technical Know-How The core issue was whether the consideration received by the assessee, a non-resident company, for services rendered under a contract with FACT should be assessed as fees for technical know-how under section 9(1)(vii) of the Income-tax Act, 1961, or under the head 'Profits and gains of business'. The assessee contended that the amount should be treated as business income, while the assessing authority treated it as income falling under section 9(1)(vii) read with section 44D(b) of the Act, thus disallowing any deductions. The agreement between the assessee and FACT involved rendering technical and management assistance to bring the NPK Granulation Plant to its full designed capacity. The services included operational and maintenance guidance, granulation guidance, and specific engineering know-how for de-bottle-necking and upgrading plant performance. The assessee argued that the services rendered fell under the excluded category specified in Explanation 2 to section 9(1)(vii) of the Act, as the work involved dismantling and reassembly of the plant. Conversely, the Revenue argued that the services were purely technical, unrelated to construction or assembly, and thus fell under the definition of fees for technical services in Explanation 2. The Tribunal and authorities concluded that the work undertaken by the assessee did not fall under the excluded category of construction or assembly, based mainly on the preamble of the agreement. However, the court found that the authorities did not consider the entire terms of the agreement or verify records to ascertain the actual nature of work done. The court emphasized the need to consider the entire agreement and factual details to determine if the services were connected to construction or assembly. Issue 2: Determination of Tax Payable by the Non-Resident The second issue was whether the amount of tax payable by the non-resident should be added to the income remitted to the non-resident, with tax determined based on the gross figure. The assessing authority grossed up the tax liability by applying the rates prescribed in section 115A at 40% for technical service fees, which was affirmed by the first appellate authority. However, the Tribunal followed the Andhra Pradesh High Court's decision in CIT v. Superintending Engineer, which held that the tax deductible at source should be determined with reference to the gross figure arrived at by adding the amount of tax payable by the non-resident. The court upheld the Tribunal's decision, stating that in cases where the contract stipulates that the tax liability is to be borne by the resident company, the tax liability should be added to the total income for determining the non-resident's tax liability. However, since the matter was remanded to the assessing authority for fresh consideration of the first issue, the court did not provide a conclusive answer to the second question but laid down the principles for grossing up. Conclusion: The court set aside the orders of the Income-tax Appellate Tribunal and the authorities below, remanding the matter to the assessing authority for fresh consideration. The assessment should be completed in accordance with the law and the directions contained in the judgment, considering the entire terms of the agreement and verifying the actual work done by the assessee. The principles regarding the method of grossing up were laid down, but the final decision on the second issue was deferred pending the reassessment.
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