1985 (12) TMI 82 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of technical know-how fees received in a lump sum by the assessee in the U.K.
2. Taxability of service fees.
3. Validity of reopening under section 148.
4. Levy of interest under section 139(8).
5. Deduction of professional fees for consultation.

Detailed Analysis:

1. Taxability of Technical Know-How Fees:
The primary issue was whether the technical know-how fees received by the assessee, a foreign company based in the U.K., were taxable in India. The assessee contended that the technical know-how agreement was executed, and the know-how was handed over in the U.K., and payments were also made in the U.K. As per Departmental Circulars No. 21, 23, and 202, no part of the income could be said to accrue in India. The Tribunal, however, noted that the assessee failed to disclose the primary fact of the engineering know-how agreement to the ITO, which led to the action under section 148 being justified. On the merits, the Tribunal found that the guarantee tests and modifications specified in the agreement were merely incidental to the main technical know-how agreement and did not constitute a business connection in India. Therefore, even 10% of the technical know-how fees brought to tax was deemed bad in law and quashed.

2. Taxability of Service Fees:
For the assessment year 1971-72, the assessee had shown income from the service agreement only. The Tribunal had previously settled the quantum of income from the service agreement. The Department argued that the service agreement made only a reference to the technical know-how agreement, and the primary fact of the know-how agreement was not disclosed, justifying the action under section 148. The Tribunal upheld that the service agreement indicated that services had to be carried out in India, and part of the service might involve data collection from the U.K. The Tribunal confirmed the CIT (A)'s order, denying any deduction for expenses not substantiated by the assessee.

3. Validity of Reopening Under Section 148:
The Tribunal examined whether the assessee had made full and true disclosure of the primary fact. The assessee argued that since the contract was executed out of India, no part of the fee could be said to have accrued in India. However, the Tribunal found that mere passing reference to the know-how agreement in the service agreement was insufficient disclosure. The Tribunal cited the Supreme Court's decision in Gemini Leather Stores vs. ITO, emphasizing the duty of an assessee to provide complete information about all incomes. Hence, the action under section 148 was justified.

4. Levy of Interest Under Section 139(8):
The issue regarding the levy of interest under section 139(8) for the assessment year 1971-72 was not pressed by the assessee and was therefore dismissed.

5. Deduction of Professional Fees for Consultation:
The assessee claimed Rs. 12,530 as professional fees for consultation, which included services related to tax clearance certificates and other matters. The CIT (A) had allowed a partial relief of Rs. 2,500. The Tribunal found that the CIT (A) was reasonable in giving relief and no further relief was warranted.

Conclusion:
The Tribunal partly allowed the appeals of the assessee. It quashed the taxability of 10% of the technical know-how fees and upheld the CIT (A)'s decision on service fees and professional fees. The reopening under section 148 was deemed justified, and the levy of interest under section 139(8) was dismissed.