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TMI Blog1982 (12) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... 'nil' return. In Part III of the return, the assessee stated that a sum of Rs. 5,00,000 was receivable from Metazinc (P.) Ltd. and claimed that no income accrued from this amount of Rs. 5,00,000 for the reason that this represented the amount paid for technical know-how handed over outside India and as such no income accrued in India. 5. The ITO, however, did not accept this claim of the assessee. For the reasons elaborately discussed by him in the assessment order for 1974-75, he held that the first instalment of Rs. 2,50,000 was receivable according to the terms of the agreement during the previous year, relevant for the assessment year 1973-74 and that income from this receipt accrued in India. He further held that both the agreements entered into by the assessee with the Indian company on 17-12-1971, one for engineering and know-how and the other for services, should be read together in order to understand the real intention of the parties, that it was very clear that the assessee's responsibility did not end with the handing over outside India of the technical know-how, that even under the first agreement, the assessee had certain obligations, which could be discharged only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income accrued or arose out of the amount of Rs. 5,00,000 received by the assessee under the engineering and know-how agreement from the Indian company. 7. The assessee preferred appeals objecting to these assessments and raised a number of contentions. The Commissioner (Appeals) considered the same at great length in the light of the various clauses of the agreement and the decisions relied on by the learned counsel and held in paragraph 20 of this order, that on a fair reading of clause 8.2 of the service agreement regarding the assessee's technicians, it would appear that while they were in India, they continued to be the employees of the assessee and that it was not as in the Carborandum Co. v. CIT [1977] 108 ITR 335, before the Supreme Court, where the Court had observed that the employees of the American company were taken over as employees by the Indian company and paid their salary as they worked under the direct control of the Indian company. The Commissioner (Appeals), therefore, held that this being the position it was manifest that there was merit in the IAC's conclusion that the guarantee test was performed in India by the assessee. Then the Commissioner (Appeals) ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian companies and foreign companies, was to bifurcate between services rendered in India and outside India and advise the parties to execute two separate agreements, one for the supply of know-how and the other for rendering services and giving assistance to the Indian company, so that there would not be any confusion in the interpretation of the agreements ; and that it was in conformity with these instructions of the Government, the assessee had entered into the two agreements with the Indian company on the same date on 17-12-1971, one for the supply of know-how and the other for rendering services and giving assistance to the Indian company. Shri Palkhivala contended that the entire erection and supervision of the plant in India was the work and responsibility of the Indian company and for this purpose he relied on clauses 4.1, 4.1.1 and 4.1.3 of the agreement. He submitted that this was not a case of execution of a turn-key project by the assessee-company in India, but was a case of mere assistance rendered to the Indian company for the erection of the plant by supplying the engineering data and know-how, outside India. He further relied on clause 5 relating to the guarantee p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in paragraph 6(f) that 'no doubt the scope of the technical data to be furnished by BCL as contemplated in clause 3 of the agreement related to documentation of know-how. The supply of know-how in the form of technical data has taken place outside India and the necessary material was handed over to the Indian company in the UK'. The ITO then refers to clause 5 of the agreement and quotes clause 5.2 relating to the guarantee performance tests and proceeds to hold that this clause read along with the other clauses of the agreement go to show that the assessee-company was under an obligation not only to supply the necessary documentation in UK but also guarantee its due performance in accordance with certain specified standards and that this guarantee clause, by its very nature, can be given effect to only within the country because what is guaranteed is the performance of the plant erected according to the documentation provided in the UK. Thus, it would be clear that the entire case of the revenue is based on the fact that the guarantee performance tests carried out under clause 5.2 of the agreement brought the assessee within the mischief of section 9(1) of the Act and that, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the date on which such tests will begin and thereupon MTZ shall make all necessary arrangements for such tests. For the above purpose MTZ shall provide free of charge such raw materials, labour, electricity, fuel and water as may be required from time to time to carry out efficiently such tests. Guarantee performance tests shall only cover production capacity of the plant and quality of the product. BCL shall be deemed to have completely fulfilled and exhausted the guarantee provisions set out in clause 5.1 when the plant shall have operated for a period of 7 days continuous operations and shall have produced during such period not less than 43 tonnes of the product of the quality specified in the second schedule hereto when analysed by the methods specified in the manual on analytical techniques provided by BCL to MTZ pursuant to clause 3(1). If the results of the performance tests carried out pursuant hereto do not meet the capacity and quality specifications set out in the Second Schedule hereto, BCL shall as soon as possible advise MTZ of the modifications required to achieve such specifications and further guarantee performance tests shall be carried out in like mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany did not carry out any operation in India for the purpose of performing the guarantee performance tests under clause 5.2 of the above agreement to hold that any income accrued or arose to the assessee-company in India out of the sum of Rs. 5 lakhs payable under the first agreement. We may point out that the two agreements executed by the assessee-company with the Indian company are in conformity with the guidelines issued by the Ministry of Industry and Civil Supplies, in Circular No. 25, dated 20-10-1975. In this view of the matter, we would hold that the Commissioner (Appeals) was right in his conclusion that no part of the sum of Rs. 5 lakhs could be treated as having accrued or arisen to the assessee in India to justify the estimated addition of Rs. 50,000 in each of these years, with reference to the carrying out of the guarantee performance tests contemplated in clause 5.2, referred to above. 15. Even assuming, for the sake of argument that the guarantee performance tests were carried out by the assessee-company only, in India, as held by the IAC and as approved by the Commissioner (Appeals), still we are of the view that it would not in any way justify the inference o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tests in India to satisfy its buyer, namely, the Indian company, to establish that it had given the right type of technical know-how and engineering documentation under the agreement to the Indian company to enable it to achieve the production capacity of 2,000 tonnes per annum and also to assure the quality of the product manufactured in the plant as acceptable for use in the rubber industry as specified in the agreement. When once these two conditions relating to production capacity and the quality of the product manufactured, are achieved by the guarantee performance tests carried out by the assessee-company in the new plant erected by the Indian company, then the assessee is discharged from its liability as specified in this clause. If these tests do not yield the above results, there is the further liability on the assessee-company to advise possible modifications to the plant, at the cost of the Indian company, not exceeding Rs. 1 lakh. The guarantee clause or any work performed thereunder is only the usual condition of guarantee or implied warranty given by the seller of any goods to a buyer in the course of the sale. It does not establish that the assessee-company had any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical service or assistance fee received by the assessee-company in the present case. Therefore, this decision of the Bombay High Court is not applicable to the facts of the present case, as rightly contended by the learned counsel for the assessee. 18. The two decisions of the Tribunal, relied on by the learned counsel are also in favour of the assessee and the facts of the said cases were also similar to the facts in the present case. We, therefore, respectfully follow the decision of the Andhra Pradesh High Court in the case of Hindustan Shipyard, and the two decisions of the Tribunal and hold that the Commissioner (Appeals) was right in accepting the assessee's contentions that no portion of the amount of Rs. 2,50,000 received in each of these two years, was chargeable to tax as income which accrued or arose in India and in consequently deleting the addition of Rs. 50,000 made by the ITO, in each of these years. Accordingly, we confirm the order of the Commissioner (Appeals) deleting the additions of Rs. 50,000 in both the years. 19. In the third year 1978-79, the revenue's objection is to the direction given by the Commissioner (Appeals) to allow 10 per cent of the gros ..... X X X X Extracts X X X X X X X X Extracts X X X X
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