1985 (12) TMI 81 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of technical know-how fees received by the assessee.
2. Taxability of service fees received by the assessee.
3. Validity of reopening the assessment under section 148 of the Income-tax Act, 1961.

Detailed Analysis:

1. Taxability of Technical Know-How Fees:
The primary issue revolves around whether the technical know-how fees received by the assessee, a foreign company based in the U.K., are taxable in India. The assessee entered into an agreement with an Indian company to provide engineering and technical know-how for manufacturing sodium hydrosulphite. The assessee argued that the entire documentation and delivery of know-how occurred outside India, and therefore, no part of the income accrued in India.

The Tribunal examined clauses 10 to 12 of the agreement, which specified that the assessee guaranteed the plant's performance and would conduct certain tests to ensure compliance. The Tribunal concluded that these clauses were incidental to the main know-how agreement and did not constitute a business connection in India. The Tribunal referenced the case of Hindustan Shipyard Ltd., where similar incidental services were deemed not to establish a business connection. Consequently, the Tribunal held that even 10% of the technical know-how fees brought to tax was unjustified and quashed this part of the assessment.

2. Taxability of Service Fees:
The service fees issue was linked to the technical know-how agreement. The assessee had filed a return showing income from the service agreement only. The Tribunal noted that the service agreement made references to the technical know-how agreement. The assessee contended that since the agreement was executed and payments were made outside India, no part of the income was taxable in India.

The Tribunal reviewed the service agreement clauses and found that the primary fact of the engineering know-how agreement was not disclosed to the Income Tax Officer (ITO) initially. The Tribunal determined that the assessee failed to disclose the primary fact of the engineering know-how agreement, leading to the possibility of some income escaping tax. Therefore, the Tribunal upheld the department's action under section 148 for reopening the assessment.

3. Validity of Reopening the Assessment under Section 148:
The Tribunal addressed whether the assessee had made a full and true disclosure of primary facts. The assessee argued that the service agreement contained references to the technical know-how agreement, and since the contract was executed outside India, no part of the fee accrued in India. The department contended that mere references in the service agreement did not equate to full disclosure of the technical know-how agreement.

The Tribunal emphasized that the duty of an assessee is to provide complete information about all incomes, including those that may be exempt or not attract tax. The Tribunal concluded that the assessee failed to disclose the primary fact of the engineering know-how agreement, justifying the action under section 148. The Tribunal referenced the Supreme Court case of Gemini Leather Stores, which highlighted the importance of full disclosure by the assessee.

Conclusion:
The Tribunal decided against the assessee on the issue of full disclosure, supporting the department's action under section 148. However, it ruled in favor of the assessee regarding the taxability of the technical know-how fees, concluding that no part of the income accrued in India. The Tribunal quashed the assessment of 10% of the technical know-how fees brought to tax.