TaxTMI 
TaxTMI 
1985 (12) TMI 81
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....ability 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 of the ....
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....ement 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 attrac....
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....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 lo....
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....ant. 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 app....
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....bsp; Train Air-conditioning First Class ....
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.... and assist IDI in the technical erection and start to and carrying out the performance test of the plant. AW will aid in the training of future operators of the plant. AW shall give to IDI's technicians all assistance, training facilities and practical operating experience of the various sections of the plant. 8. Plant completion In accordance with this agreement, after the plant has been erected and subjected to satisfactory mechanical testing and after the completion of pre-commissioning testing it is to be considered completed and only at that time AW will notify IDI that the plant is ready for start up in writing. After issue of such completion certificate, the plant will be started. 9. Performance AW in this project guarantees that the plant and equipments erected under their supervision and engineering assistance would be of the standard employed by AW in its own plant and in accordance with the most recent engineering standards known to AW in order to enable the production of products of such qualities and quantities as specified in the engineering agreement provided the plant is operated in accordance with AW's instructions and operating manuals. 10. Guarant....
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....ax in India. Any passing reference made in the service agreement about such an agreement, under no circumstances can be said to be equal to the placing of that agreement itself. This becomes evidently clear when we read the Supreme Court judgment in the case of Gemini Leather Stores. In that case the drafts which were apparently unexplained credits was before the ITO who by an oversight did not bring the same to tax. Their Lordships were considering the taxability of the same as a consequence of section 148 proceedings. Their Lordships observed that since the factum of the draft was known to the ITO and as he had carried out the examinations but by the sheer oversight omitted to bring them to tax it could not be considered under section 148 at all. They had further observed that the salient duty of an assessee is to provide the necessary information and the assessee's duty stops at that and that he cannot be expected to tell the ITO what inference he should draw. Thus, it can be seen that the duty of an assessee is to provide complete information about all his incomes of which some part may be taxable and some exempt under specific sections and some others not attracting tax at all....
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.... (d) Detailed list of plant and equipment with specifications that are required to be purchased indigenously together with the working, drawings and designs, and material of construction which would be necessary for the fabrication of the plant indigenously as per the second schedule to this agreement. (e) Engineering flow sheets and design data sheets with sketch or suppliers specifications for all plant items as considered necessary by AW to enable detailed working drawings to be prepared by IDI or its contractors. (f) Estimated consumption figures relating to raw materials, auxiliaries and utilities along with detailed specifications. (g) Board specifications and characteristics of the finished products according to AW standards. (h) Engineering flow sheets with specifications, material of construction and relevant information relating to the plant and equipment for indigenous fabrication. (i) Final layout of the plant including main outdoor equipment. (j) Basic building drawings with operating weights and/or design loan data of the equipment and machinery with construction and architectural data. (k) Line diagram showing the layout and scaling for the pl....
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....ch such tests will begin and also give at the same time a detailed and complete list of all the basic raw materials and other materials and their quantities and other facilities required for operating the plant for a period of at least twelve days as well as facilities required for carrying out the tests and to enable IDI to make necessary arrangements for such tests. (ii) For the above purpose IDI shall provide free of charge such raw materials, labour, electricity, fuel, and water as may be required from time to time and as may be reasonably deemed necessary to carry out efficiently such tests. (iii) Guarantee performance tests shall cover productions, capacity of the plant, quality of the product and consumption of utilities and raw materials. (iv) AW shall be deemed to have fulfilled the guarantee provisions set out in clause 10 when the plant shall have operated for a period of 72 hours and shall have produced during such period 54 consecutive batches of dried product (averaging during such period not less than 9.4 tonnes per twenty four hours) of the quality specified in the Fourth Schedule hereto when analysed by the methods specified in clause 11(v). (v) Analyti....
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....in one year of the date of this agreement. (c) After 60 (sixty) months but not later than 61 (sixty-one) months of the date of this agreement. The fee referred to above is based on a plant having a designed output capacity of 3,000 tonnes per annum. No additional fee shall, however, be payable to AW by IDI for tonnage produced on the plant up to 4,000 tonnes per annum. In the event IDI wish to produce more than 4,000 tonnes per annum, such production shall be on terms to be mutually agreed. 11. The claim of the assessee-company was that no part of the income accrued in India, as the entire documentation was done out of India and they were also delivered out of India. According to the department, since the assessee-company was to carry out certain guarantee tests in India to that extent, income did accrue in India. We have reproduced the salient clauses of the agreement above. Clauses 10 to 12 on which the department is laying emphasis indicate that the assessee-company has undertaken a guarantee that the plant constructed and operated upon by the Indian company would give the results as specified in the know-how agreement. The company in order to ensure itself that the Ind....
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....fits. It may come into existence in some other manner but there must be something more than mere transaction of purchase and sale between principal and principal in order to bring the transaction within the purview of the expression 'business connection' within the meaning of sections 9(1)(i) and 163(1)(b) of the Income-tax Act. In the instant case, though the Polish company agreed to render certain limited services, the services were connected with the effective fulfilment of the contract of sale and were merely incidental to the contract and were usually included in all such contracts by way of guarantee of the efficient working of the products sold. On the facts of the case, therefore, there was no business connection between the assessee and the Polish company." 12. In the instant case before us, the facts and circumstances are almost identical with that in the case before their Lordships of the Andhra Pradesh High Court. The guarantee provided is, therefore, only incidental to the main technical know-how. In the instant case also, the assessee-company had agreed to provide training of Indian technicians on the assessee's plant at U.K. Therefore, on these facts which are ide....