Full disclosure and foreign know-how taxation: reopening sustained, but incidental Indian activities did not make the know-how fee taxable.

Reopening under section 148 was upheld because the assessee had not disclosed the primary material agreement itself, and a passing reference in the return and related service agreement was insufficient to satisfy full and true disclosure. The lump sum technical know-how fee was held not taxable in India in part, as the know-how was supplied outside India and the Indian activities were only incidental or protective, so no business connection or income attribution arose from them. Service-agreement income was sustained because the services were to be performed in India and the assessee did not prove deductible expenses. No further relief was allowed for professional fees, as the existing apportionment was considered reasonable on the record.

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Issues: (i) Whether reopening under section 148 was valid for failure to disclose fully and truly all material facts in relation to the technical know-how agreement; (ii) whether any part of the lump sum technical know-how fee was taxable in India on the footing that some services and guarantee tests were performed in India; (iii) whether the service-agreement income brought to tax could be sustained; and (iv) whether any further relief was admissible in respect of professional fees.

Issue (i): Whether reopening under section 148 was valid for failure to disclose fully and truly all material facts in relation to the technical know-how agreement.

Analysis: The return and service agreement contained only a passing reference to the separate engineering and know-how agreement. The agreement itself was not placed before the Assessing Officer at the time of the original assessment, so the Revenue had no occasion to examine the primary facts bearing on taxability. Full disclosure required production of the material agreement itself, not merely an indirect reference to it. On these facts, the non-disclosure was treated as material and capable of leading to escapement of income.

Conclusion: The reopening under section 148 was upheld and the issue was decided against the assessee.

Issue (ii): Whether any part of the lump sum technical know-how fee was taxable in India on the footing that some services and guarantee tests were performed in India.

Analysis: The agreement showed that the technical know-how was supplied outside India, the fee was payable outside India, and the in-India activities such as scrutiny, supervision, guarantee testing, training, and related assistance were only incidental and protective clauses intended to ensure performance of the main foreign-supplied know-how. Those ancillary acts did not amount to a business connection generating taxable income in India, and no part of the know-how fee could be attributed to services rendered in India merely because limited incidental steps were connected with the contract.

Conclusion: The addition of 10 per cent of the technical know-how fee was quashed and the issue was decided in favour of the assessee.

Issue (iii): Whether the service-agreement income brought to tax could be sustained.

Analysis: The service agreement contemplated services to be carried out in India, and the earlier Tribunal decision for the same line of receipts was followed. Since the assessee did not substantiate the quantum of deductible expenses, no further deduction was available against the service income brought to tax.

Conclusion: The addition in respect of service-agreement income was sustained and the issue was decided against the assessee.

Issue (iv): Whether any further relief was admissible in respect of professional fees.

Analysis: The professional bill covered several taxation-related items, but the separate amount attributable to each item was not available. The allowance already granted by the appellate authority was treated as reasonable on the available material, and no further apportionment or relief was justified.

Conclusion: No further relief was allowed on professional fees and the issue was decided against the assessee.

Final Conclusion: The reassessment was sustained, the technical know-how addition was deleted, the service-income addition was maintained, and the appeal was disposed of by granting only limited relief to the assessee.

Ratio Decidendi: For reopening, the assessee must disclose the primary material facts themselves, and incidental or protective obligations attached to a foreign know-how contract do not by themselves create taxable income in India when the know-how is supplied abroad.

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