1982 (12) TMI 59 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of income accrued from technical know-how and services agreements.
2. Validity of the addition of Rs. 50,000 to the assessee's income for the assessment years 1973-74 and 1974-75.
3. Deduction of 10% of gross royalty as expenditure for the assessment year 1978-79.

Issue-wise Detailed Analysis:

1. Taxability of Income Accrued from Technical Know-how and Services Agreements:
The assessee, a non-resident company, entered into two agreements with an Indian company on 17-12-1971, one for the supply of engineering and know-how and the other for rendering services. The Income Tax Officer (ITO) contended that income accrued in India from these agreements, as the assessee had obligations that could only be discharged in India, such as preliminary layout and guarantee performance tests. The ITO relied on the decision of the Bombay High Court in Aziende Colori Nazionali Affini v. CIT to support his claim that part of the income accrued in India.

2. Validity of the Addition of Rs. 50,000 to the Assessee's Income for the Assessment Years 1973-74 and 1974-75:
The ITO added Rs. 50,000 to the assessee's income for each of the assessment years 1973-74 and 1974-75, representing 20% of the first and second instalments of Rs. 2,50,000 each, received under the engineering and know-how agreement. The Commissioner (Appeals) deleted this addition, holding that the guarantee performance tests were performed in India by the Indian company, not by the assessee. The Commissioner (Appeals) relied on the principles laid down by the Andhra Pradesh High Court in CIT v. Hindustan Shipyard Ltd., which stated that services connected with the effective fulfilment of the contract of sale and incidental to the contract do not establish a business connection in India.

3. Deduction of 10% of Gross Royalty as Expenditure for the Assessment Year 1978-79:
For the assessment year 1978-79, the Commissioner (Appeals) directed the ITO to allow 10% of the gross royalty as expenditure in computing the assessee's income from royalty. The ITO had previously allowed similar deductions in the assessment years 1976-77 and 1977-78. The learned departmental representative could not provide any valid reason to disturb this order.

Conclusion:
The Tribunal confirmed the order of the Commissioner (Appeals) for the assessment years 1973-74 and 1974-75, holding that no part of the sum of Rs. 5 lakhs could be treated as having accrued or arisen to the assessee in India. The guarantee performance tests were carried out by the Indian company, and the presence of the assessee's engineers, who were already in India under a separate service agreement, did not establish any business connection in India. The Tribunal also upheld the Commissioner (Appeals)'s decision to allow a 10% deduction of gross royalty as expenditure for the assessment year 1978-79. Consequently, all three appeals filed by the revenue were dismissed.