Taxability of foreign technical know-how receipts turns on strict compliance with CBDT circular conditions and place of receipt

Engineering fees already examined on identical facts in earlier years were not disturbed, so the addition of that amount was left out of income. Consideration for supply and delivery of know-how was held taxable in India because the receipt was satisfied by issue of equity shares in India, bringing it within the charging provision, and the CBDT circular on foreign technical know-how relief applied only when its conditions were strictly met. Where the contractual requirement for issue of shares at incorporation in lieu of lump-sum payment for know-how delivered abroad was not satisfied, exemption was unavailable.

---

---

Issues: (i) whether engineering fees of Rs. 28,498 were includible in the assessee's income; (ii) whether Rs. 2,62,500 received as consideration for supply and delivery of know-how was taxable in India or exempt under the CBDT circular.

Issue (i): whether engineering fees of Rs. 28,498 were includible in the assessee's income.

Analysis: The same factual setting had already been considered in earlier years, and the position had remained unchanged. Following the earlier view on identical facts, the addition made on this account was not disturbed.

Conclusion: The inclusion of Rs. 28,498 was not sustained and the assessee succeeded on this issue.

Issue (ii): whether Rs. 2,62,500 received as consideration for supply and delivery of know-how was taxable in India or exempt under the CBDT circular.

Analysis: The agreement required the English company to supply and deliver the know-how, and the surrounding circumstances showed that the place of delivery could be taken as England where the know-how was handed over to the Indian company's agent. Even so, the payment was satisfied by issue of equity shares in India, so the receipt of income fell within section 5(2)(a). The circular granting relief in cases of foreign technical know-how applied only where the contractual conditions were strictly met, and the present case did not satisfy the specific condition that the shares be issued at incorporation in lieu of lump sum payment for know-how delivered abroad.

Conclusion: The sum of Rs. 2,62,500 was taxable and the assessee failed on this issue.

Final Conclusion: The addition relating to engineering fees was left undisturbed in favour of the assessee, but the amount paid for know-how was held taxable in India, resulting in a mixed outcome with a remand only on the rate of tax.

Ratio Decidendi: Relief under a CBDT circular granting exemption to non-resident technical know-how transactions is available only when the case falls strictly within all the stipulated conditions, and where consideration is received in India by issue of equity shares, the receipt is taxable under the charging provisions.

---