1986 (6) TMI 15 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of payment for supply of know-how.
2. Business connection in India and its implications.
3. Apportionment of income between India and abroad.
4. Grossing up of income for tax purposes.

Summary:

1. Taxability of Payment for Supply of Know-how:
The assessee, a non-resident company, received a payment of 800,000 Canadian dollars from Hindusthan Steel Ltd. for providing secret knowledge and know-how. The Income-tax Officer attributed 80% of this payment to royalty and use of secret formula and designs in India, making it taxable. The Tribunal, however, held that the payment for obtaining know-how was not attributable to any business connection in India and thus not taxable. The High Court upheld this view, stating that the transaction for the supply of know-how took place entirely outside India and did not result in any income accruing within the taxable territories in India.

2. Business Connection in India and Its Implications:
The agreement between the parties consisted of two distinct parts: supply of know-how and services as a production adviser. The Tribunal found that these payments were separate and distinct. The High Court agreed, stating that the supply of know-how did not establish a business connection in India. The court emphasized that the trading activity related to the supply of know-how was completed outside India, and the subsequent advisory services were independent and not conditional upon the supply of know-how.

3. Apportionment of Income Between India and Abroad:
The Appellate Assistant Commissioner initially apportioned the total amount paid in the proportion of 60:40 between income accruing in India and outside. The Tribunal, however, concluded that no part of the receipt for obtaining know-how was attributable to any business connection in India, eliminating the need for apportionment. The High Court supported this view, stating that the supply of know-how was a distinct transaction completed outside India.

4. Grossing Up of Income for Tax Purposes:
The Income-tax Officer grossed up the amounts, considering that Hindusthan Steel Ltd. had undertaken to pay taxes on behalf of the assessee. This resulted in the taxable income being computed at 1,119,996 Canadian dollars. The Tribunal upheld this grossing up, and the High Court did not find any reason to contest this aspect, focusing instead on the primary issue of the taxability of the payment for know-how.

Conclusion:
The High Court answered the referred question in the affirmative, holding that no part of the sum of 800,000 Canadian dollars received by the assessee accrued or arose from any business connection in India and was not includible in the total income of the assessee under section 5(2) read with section 9(1) of the Income-tax Act, 1961. The court emphasized the distinct and separate nature of the transactions under the agreement and the completion of the know-how supply outside India.