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TMI Blog1985 (12) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... t the taxability of the technical know-how fees received in a Jump sum by the assessee in U.K. and also of the service fees. Assessment year 1971-72: For the assessment year 1971-72, the assessee-company had filed the return in which it showed the income from the service agreement only. The assessment was completed on 1-1-1975. The quantum of income from service was disputed by the assessee, which was settled by the Tribunal in IT Appeal No. 2662 (Bom.) of 1979, vide order dated 18-12-1980. 4. The copy of the request made by the ITO to the Commissioner for issuing of the notice under section 148 of the Income-tax Act, 1961 ('the Act'), vide his letter dated 10-1-1977 and the endorsement of the Commissioner, according sanction has been filed by the learned departmental representative. 5. Shri S.E. Dastur, the learned authorised representative of the assessee, submitted by referring to the copy of the service agreement filed at pages 23---32, that at page 24 clause 1 (iii) specific reference to the technical know-how agreement was very much contained therein. He also referred to the letter to the IAC dated 4-4-1975 wherein detailed particulars about the agreement, approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement was entered into in U.K., (b) the know-how was handed over to the Indian company at U.K., and (c) the payment was also made in U.K. Therefore, according to him, as per the departmental Circular Nos. 21 of 9-7-1969, 23 of 23-7-1969 and 202 of 5-7-1976], [see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., pp. 35, 176 and 686 of Vol. 2, on the basis of these undisputed facts, no part of the income could be said to accrue in India. He further added that clauses 10 and 11 only specify and provide for a guarantee that any one who has acted in accordance with its directions will positively achieve the target. It also provided for a safety clause to the assessee from being liable for any failure on its part as per clause 12, by which it had agreed to provide for such modifications as are required on the plant and its operations so that the target as specified in the know-how agreement is achieved. According to Shri Dastur, such tests are merely for ensuring itself that the Indian company has acted in accordance with its directions and this act cannot be said to bring in any business connections at all or lead to the conclusion that a part of the fee for know-how attr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be said that any income has escaped assessment. Whereas according to the department, some passing reference in the service agreement about the know-how agreement cannot be said to be a proper and full disclosure and that the ITO had no chance of applying his mind at all. 8. It is, therefore, necessary to consider the service agreement which was before the ITO at the time of passing of the original assessment. Clauses 1(i) to (iv), 3 to 7, 9 and 10 have been reproduced below : "1(i) IDI has entered into an agreement hereafter called 'Purchase agreement' dated the twentieth day of February, 1970 with Mafatlal Ltd. Spirella House, Oxford Circus, London WIR 5 DA England, hereinafter called 'Mafatlal', a copy of which has been seen by AW. (ii) The plant shall mean the plant defined in the Engineering Agreement (hereinafter called 'The Engineering Agreement') of even date made between the same parties hereto to manufacture Sodium Hydrosulphite of the quantities and qualities therein set out. (iii) The plant includes the equipment to be supplied by Mafatlal as detailed in the First Schedule to the engineering agreement and other equipment to be purchased and fabricated locall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AW shall, after approval and assistance during erection, confirm the accuracy of installation of the equipment. (a) AW shall ensure with the help of IDI Technicians that a detailed log book of progress during erection of the plant is kept and reports are prepared as mutually agreed. (b) After installation of the equipment and before the operation of the plant, AW shall certify the accuracy of installation to its satisfaction. (c) AW shall advise on proper maintenance of each equipment to be observed until the test operation of the plant. 4. Technical assistance after plant start up AW will give free of charge in U.K. for a period of two years from the start up of the plant and all technical assistance required for the better operation of the plant provided IDI sends to AW the operating logs and any other information concerning the performance of the equipment. It is hereby agreed by the parties herein that such technical assistance does not include the sending of the AW's personnel to India. But in the event IDI requires the services of such technicians, AW will recommend and depute them on such terms and conditions as mutually agreed upon, subject to the approval of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effected for the visitant engineers at the expenses of IDI. (ii) Security of life and property IDI shall take proper measure of life protection, health preservation and property security for the visitant engineers. IDI shall effect at its own expenses such personal accident insurance for the visitant engineers in line with IDI's own senior staff scheme to enable them or their designated beneficiary to receive compensation payable in English currency subject to the Government regulations prevalent at the time of effecting such insurance and paying such claim. (iii) Medical assistance In case of visitant engineers suffer from illness or injury, IDI shall procure for them emergency rescue and proper medical treatment including, if necessary, hospitalization in a first class hospital. The expenses incurred thereof shall be borne by IDI except when due to recklessness of the visitant engineers or the injury occurs in an environment absolutely unrelated in their duties. (iv) Duty hours The following provisions shall also apply as to the duty hours, holidays and vacation and suspension of service period : (a) The duty hours of the visitant engineers will be in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement give to AW a Certificate of Acceptance of the plant. Notwithstanding anything to the contrary contained in this agreement AW's liability under this agreement shall not exceed that contained in the engineering agreement. (i) If by any act or action, wilful or otherwise of IDI including the use of plant, there is a delay in carrying out the performance tests within six months from the date of completion of mechanical testing the plant shall be deemed to be accepted by IDI. 11. Fees In consideration of the obligations of AW under this agreement. IDI shall pay in U.K. to AW Pounds Sterling pound 5,518 (five thousand five hundred and eighteen pounds) subject to Indian taxes, if any payable in three equal instalments at the following times: (a) On signature of this agreement (b) Within one year of the date of this agreement (c) After 60 (sixty) but not later than 61 (sixty-one) months of the date of this agreement. Clause 1(ii) and (iii) talks of an engineering agreement of even date but does not provide that such an agreement was with the assessee-company. Clause 1(iv) then mentions about the technical assistance to be provided by the assessee in connection wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of some income escaping tax, the action taken under section 148 is entirely in accordance with law. This issue is therefore, decided against the assessee and in favour of the department. 10. We shall now consider the merits as to the justification of the action of the ITO on taking 10 per cent of the engineering know-how agreement as accruing in India. We reproduce below the salient clauses of the agreement: Clause 1(iii): AW is in a position to supply in UK to IDI such engineering data specifications and know-how for establishing and operating the plant and provide such services as are hereafter mentioned. (iv) 'AW's present processes' means the processes to which AW is at present entitled for the production of products. (v) 'AW's further processes' means any further processes for the production of the product which may be developed by AW or IDI as improvements to AW's present processes prior to the expiration of the term of this agreement. (vi) 'AW's processes' means AW's present processes and AW's further processes and each and every of them. (vii) 'AW's Technical information' means all information in the form of know-how, operating techniques and process design in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together with instrumentation line diagram and schedule of instruments required for the whole plant in each case within battery limits. (m) Preliminary list and specifications of the spare parts required for two years of normal operation of the plant. (n) Final flow sheets. (o) Operating manual advising on the efficient operation of the plant with all its equipment. (p) Advice on routine and extraordinary maintenance of the plant equipment. 6. Prior to the completion of the plant, AW shall give free of charge training in AW's processes, maintenance and control techniques for a period not exceeding two calendar months of not more than five Indian technicians (present at the same time) selected by IDI (and approved by AW) at AW's plant for the production of Sodium hydrosulphite at Bromtorough, Cheshire, England, IDI will bear and pay all the expenses of such technicians including their salary, travelling expenses and living expenses. 7. Technical information to be furnished by AW AW shall (to the extent that it shall not have disclosed to IDI pursuant to clause 4 of its processes and technical information) discloses to IDI in London AW's processes and information wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecifications set out in Fourth Schedule hereto, AW shall as soon as possible advise IDI of the modifications required to achieve such specifications and further guarantee performance tests shall be carried out in like manner to those specified in clause 11(iv) within one month of such modifications being made. 12(i) AW Liability In the event that the guarantee referred to in clause 10 hereto is not fulfilled in accordance with the provisions of clause 11(iv) within six months of the completion of the mechanical testing of the plant, the fee paid or payable by IDI to AW pursuant to clause 13 hereof shall be refunded or reduced in accordance with the formula set out in the Fifth Schedule hereto to the intent that the maximum liability of AW to IDI shall not exceed 25 per cent of the fee payable by IDI to AW pursuant to clause 13 hereof after deduction of AW's expenses in connection with its performance of this agreement such expenses to be determined in default of agreement by AW's auditors. (ii) AW does not assume responsibility for any direct contingent or consequential damages (including in particular but without prejudice to the generality of the foregoing for loss of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct the assessee-company against the liability that may arise on it which has been provided for in clause 12. In clause 11(b), the assessee-company had also undertaken to provide such modifications as may be necessary for the know-how already provided to suit the conditions of the Indian company at no additional cost. Reading of these clauses together gives us an indication that clause 11 is only a protection clause provided for the benefit of the assessee. According to the assessee, this was purely incidental to the main know-how agreement and, therefore, no income accrued to it. On this issue, reliance was placed in the case of Hindustan Ship Yard Ltd.'s case. In this case, the Indian company entered into an agreement with a Polish company for purchase of diesel engines with accessories. The property was to pass to the purchaser on delivery on board of the vessel. The agreement also provided for inspection, testing and acceptance of the engines. The engines were to be erected by the staff of the purchaser for which purpose a supervising engineer was placed by the Polish company at the disposal of the Indian company. The Polish company also agreed to carry out the erection and, als ..... X X X X Extracts X X X X X X X X Extracts X X X X
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