Income Tax Appellate Tribunal - Mumbai
Albright And Wilson Ltd. vs Income-Tax Officer on 20 December, 1985
Equivalent citations: [1986]19ITD125(MUM)
ORDER
A. Kalyanasundaram, Accountant Member
1. These are two appeals by the assessee which involve a common issue and, therefore, they are disposed of by a common order.
2. The assessee in the instant case is a foreign company based in U.K. with no branches in India. The assessee-company, by means of an agreement dated 20-2-1970 with Indian Dyestuff Industries Ltd., an Indian company, was to provide the engg. & technical know-how for the manufacture of sodium hydrosulphite in India and also specify the plant and equipments necessary for the manufacture of the product the requisite capacity and quality. The assessee-company also entered into a separate service agreement wherein it was provided that all drawings and specifications of various plants and equipments were to be scrutinised and approved by the assessee-company.
3. The issue involved in these two years, appeals are about the taxability of the technical know-how fees received in a lump 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 l(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 Government for entering into the know-how agreement, the amount already remitted to U.K. under permission of RBI, and by drawing reference of Circular No. 21 dated 9-7-1969 [see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 176] according to which any sum paid out of India in respect of services rendered out of India are outside the scope of the Act in India, it was requested that instruction be given to the ITO to issue the 'no-objection certificate' for remittance of the 3rd and the last instalment was made. He further submitted that on 11-4-1975, the ITO had granted the certificate on the basis of which the 3rd and the final instalments were received by the assessee-company. According to him, therefore, there was no failure on the part of the assessee-company at all. Alternatively, he submitted that in case it is a failure by the company in not disclosing the fact of the know-how agreemert then since the agreement was given effect to out of India as such, no income accrued in India and, therefore, income could not be said to have escaped assessment, the reopening accordingly under Section 148 was bad. He relied on the decision of the Supreme Court in the case of Gemini Leather Stores v. ITO [1975] 100 ITR 1. Referring to the know-how agreement which is filed at pages 1 - 22, he submitted that the grievance of department is due to the misreading of clauses 10, 11 and 12 of this agreement. Clause 10 provides for the guarantee that if the Indian company had carried out the erection and the operation of the plant in accordance with the advice of the assessee-company, then such plant shall produce the product of the quality specified by the assessee company and the capacity as specified shall also be reached. Clause 11 provides for such tests to be undertaken by the assessee to ensure itself that the Indian company has acted in accordance with its directions. It also provided that, any flaw in the working of the plant, shall be removed and modified with such additional guarantee. Clause 12 provides for the liability clause with a view to protect the Indian company in case of a failure by the assessee-company in carrying out the test for satisfactory performance, by which the assessee-company shall be liable to the maximum of 25 per cent of the fee of the know-how agreement.
Shri Dastur submitted further that the undisputed facts are :
(a) the 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 attracts tax in India. He relied on the decisions in the cases of Carborundum Co. v. CIT [1977] 108 ITR 335 (SC), CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC), with specific reference to page 531, Anglo-French Textile Co. Ltd. v. CIT [1953] 23 ITR 101 (SC), CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 (AP) and also the Tribunal decisions at pages 63-74.
6. The learned departmental representative, Shri P.L. Roongta, submitted that the service agreement only made a reference to certain technical know-how agreement from which no one could draw any inference to the factum of the agreement as also the taxability of the amounts involved. According to him, the primary fact which is the know-how agreement not having been filed at all along with the original return, the ITO did never had any opportunity of examining it and as such there was failure on the part of the assessee to disclose fully and truly the material facts. He further added that clause 11 required specific performance which could be carried out in India only and, therefore, some income relatable to that activity could be only said to have secured in India, and, thus, income to that extent has escaped assessment, the action under Section 148 was therefore, justified. He also added that the letter dated 11-4-1975 addressed to the IAC was from the Indian company requesting for remittance, though with reference to the agreement with the assessee-company, was never before the ITO who had the jurisdiction over the assessee-company and as he had no knowledge of the assessee, he could not have considered it at all. He then added that in view of clauses 11 and 12, a portion of the activity had to be necessarily carried out in India which has been estimated by the ITO at only 10 per cent is very reasonable under the circumstances.
7. We have heard the parties at length and have also considered the various materials on record. We shall first take up the first issue whether the assessee-company could be said to have made full and true disclosure of the primary fact or not.
According to the assessee-company, the service agreement contained reference to the separate technical know-how agreement and since the contract was executed out of India, no part of the fee could be said to have accrued in India and, therefore, there was neither any failure on its part to disclose the primary and material facts, nor it could 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 locally in India as detailed in the Second Schedule of the Engineering Agreement. All the equipments shall conform to the engineering date and specifications furnished to IDI by AW in U.K.
(iv) AW is in a position to render technical assistance and advice in the supervision of erection and establishments and operation of the plant to IDI in India including engineering services, training services, approval of equipment and erection and start up of the plant and making available suitably qualified technicians for these purposes.
3 AW's duties in India AW will scrutinise and advise on the technical aspects of tenders for Indian equipment received by IDI.
(i) AW shall review the specifications, construction drawings, working drawings, assembly drawings. Construction programmes to be presented through IDI to AW by the local contractors and suppliers of IDI. AW will examine and give technical advice as to the contents of such presented date and arrange the same.
AW shall be informed of construction and working plans of the plant programmed by the local contractors of IDI and AW shall give necessary comments on such plans.
If non-compliance of such advice given by AW is feared to hinder timely construction or performance of the plant and to be prejudicial to the ultimate benefit to IDI. IDI shall force the local contractors and suppliers to follow such advice.
(ii) AW shall approve from time to time that the machinery and equipments fabricated indigenously at the manufacturer's site are in accordance with the drawings of machinery and equipments obtained by IDI from AW.
(iii) IDI shall procure that AW shall be allowed access to the factories of the local contractors and suppliers of IDI. In case their facilities are found unfit to take part in this project, AW shall advise it to IDI.
(iv) IDI shall make arrangements for the receipt and shall inform AW of all deliveries and AW shall scrutinise in conjunction with IDI the unpacking of all imported equipments and such other equipments as AW shall consider necessary. In case either party finds any defect or damage in the incoming goods. AW shall give advice to IDI on appropriate measure of repair or replacement. AW shall certify that the equipment purchased is in accordance with AW's drawings and specifications.
AW shall approve, assist and be responsible for the proper technical reaction of the plant.
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 the Government.
5. Office for AW IDI shall provide at its own expense an office for use of AW and by the visitant engineers hereinafter mentioned with reasonable space, equipment and utilities including potable water, electricity, airconditioning, sanitary apparatus and other office requisites. The expenses connected with other work, such as telephone cables, mail and the services of a typist will be at IDI's charge.
(i) IDI shall provide a liaison office in Mafatlal House and/or at the office of the Works at Kalyan for use of AW and the visitant engineers.
6. Visitant Engineers In connection with the work to be done by AW as provided in this agreement, AW will make available for temporary employment up to 5 experienced technicians for the establishment of the plant as acceptable to both the parties to the Agreement for an aggregate period of seventy two man months. The said foreign engineers are hereinafter called 'Visitant Engineers'.
IDI shall inform one month in advance as to the date IDI wishes to have the visitant engineers arrive in India and IDI shall take note of AW's wishes in this matter. IDI agrees to reimburse the local living expenses and the social costs in the British Isles of the visitant engineers as stipulated in clause 12 hereof. IDI should make available the transport facilities for visitant engineers. In addition thereto, IDI shall bear and pay the following expenses of the said visitant engineers.
(i) Travelling
(a) IDI shall pay air fares, tourist economy for the visitant engineers between the place of departure abroad and Bombay and Bombay to the place of return. The ticket for the said return trip shall be made available to the visitant engineers at the place of departure not later than two weeks before departure of the visitant engineers.
(b) Expenses for any other travelling to be made for the purpose related to the purchase of project shall be borne by IDI with the following accommodation :
Facility : Aeroplane Tourist Economy
Train Air-conditioning
First Class
Boat First Class.
(c) Travel insurance shall be 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 accordance with IDI's senior technical staff at the plant.
(b) The visitant engineers shall be deemed to have worked the duty hours referred to in clause 6(iv)(a) if they are prevented from working these hours due to a cause beyond their control.
(c) The visitant engineers shall not be required to work on holidays or in off-duty hours, unless required by the needs of the project.
(v) Suspension of service period AW reserves the right to replace the visitant engineers only on a valid reason as may be mutually agreed upon with IDI and in such event, the substitute shall arrive in India before the departure of the former and all costs and expenses incurred will be borne by IDI.
7. Erection and start up of the plant The erection and starting up of the plant will be carried out by IDI at its expense and with its own personnel in accordance with AW's instructions and supervision. AW will supervise 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. Guarantee performance test and plant acceptance In order to verify the fulfilment of the guarantees herein, guarantee performance tests shall be carried out as specified in the engineering agreement. 1D1 shall within 7 days of the fulfilment by AW of the guarantee contained in the engineering 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 1DI 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 £ 5,518 (five thousand live 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 with supervision of erection, etc., which included approval of equipment, etc. Clause 3(ii) talks of drawings of machinery and equipments provided by the assessee. Clause 10 talks of guarantee performance tests wherein it was provided that the Indian company shall notify the assessee-company of its fulfilment of the guarantee contained in the engineering agreement and issue a certificate to that effect.
9. In the instant case, the assessee had felt that it need not inform the ITO about the engineering know-how agreement as according to it, the contract having been effected out of India, no income was liable to tax in India. This feeling was perhaps based on some expert advice, which may be in accordance with the law, but it was never before the revenue officials for examination as to whether the assessee was right in its view that there was no income under that agreement, which is liable to tax 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 (supra). 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. Only in that situations, an assessee can claim that he had made a complete and full disclosure of all the primary facts.
In the instant case, therefore, we are of the view that the assessee had failed to disclose the primary fact of the engineering know-how agreement and due to the probability 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 information based on research development on operating experience relating to or primarily useful in the practice of AW's processes at present possessed by AW or hereafter acquired by AW prior to the expiration of the term of this agreement.
4. Scope of technical data to be furnished by AW
(a) Approximate capital cost of the plant, covering buildings, plant and equipment, piping, insulation, electrifications, instrumentations and auxiliary items for the plant under British conditions.
(b) Preliminary general layout of the building including the outline, floors and sections but excluding foundation details or accurate load data. The approximate equating weights of the plant items will be included in the data sheet.
(c) Detailed list of the plant and equipment and accessories with specifications that are required to be imported, as listed in the First schedule to this agreement.
(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 plant effluents. Specification of anti-corrosive coating for the building and plants based on UK standard.
(l) Schematic electrical diagram including interlocks wherever necessary within battery limits, general specification and layout for piping, instrumentation and cables required for the plant and lighting 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 within one month after completion of the mechanical testing of the plant.
10. Guarantee Provided that the plant has been constructed and operated in accordance with the advice and approval of AW and the raw materials used to meet the specifications set out in the Third Schedule hereto. AW guarantees that the plant will produce the product of such capacity and of such quality as that specified in the Fourth Schedule hereof.
11. Guarantee performance tests
(i) In order to verify the fulfilment of the guarantee herein, guarantee performance tests shall be carried out at AW's request and under its supervision in the presence of such personnel as AW shall approve as soon as possible after the completion of the mechanical testing of the plant but in any event not later than two months from the same. AW will give 15 days' notice to IDI in writing stating the date on which 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) Analytical methods to be used under the supervision of AW in connection with the performance tests shall be the methods specified in the operation manual provided by AW to IDI pursuant to clause 4(c).
(vi) If the results of the performance tests carried out pursuant to the clause 11(iv) do not meet the capacity and quality specifications 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 production costs of operating the plant or damage or loss of use of any equipment or installation including the plant) nor give or make any guarantee or warranty for the performance of services rendered by its personnel or representation in connection with the plant or give any performance guarantee or warranty save as mentioned in clause 10 hereof and then only in the event of breach subject to terms of clause 12(0 hereof which guarantee or warranty shall be in lieu of any other explicit or statutory responsibilities, guarantees, warranties and representation.
13. Fee to AW In consideration of the obligations of AW herein contained, IDI shall pay to AW in London, England, a fee of £ 82,800 (free of Indian taxes and all other deductions whatsoever) 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) 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 Indian company has acted in accordance with its directions and advice had specified in the agreement certain tests which it would be taking, which tests have to be undertaken within a period of two months from the date of completion of the mechanical testing of the plant. The guarantee tests have been provided with a view to protect 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 (supra). 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 also provided free of cost one guarantee engineer. The Polish company also provided various guarantees including organising of training course in Poland. The question which their Lordships of the Andhra Pradesh High Court were considering was whether there was any business connection at all and whether the income could be assessed as having accrued in India, The observation of their Lordships was :
To conform with the requirements of the expression 'business connection' which have been fairly settled by judicial decisions, it is necessary that the common thread of mutual interest must run through the fabric of the trading activities carried on outside and inside the taxable territory and the same has been described as 'real and intimate connection'. The commonness of interest may be by way of management control or financial control or by way of sharing of profits. 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)(6) 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.(p. 159)
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 identical with the facts before their Lordships of the Andhra Pradesh High Court, we are of the view that merely for the reason that certain incidental facts are done in India cannot lead to the conclusion that there was any business connection in India. Therefore, even to the extent of 10 per cent of the technical know-how fees is not taxable under the Act. Even referring to the Board's Circular dated July 1979 goes only to clarify such a situation. Circular No. 202 dated 5-7-1976 is also clarificatory to the extent that no part of the know-how could be said to be attributable such services in India if unless the know-how was developed by acts which are done in India. This only means that no part of the know-how as such should be developed in India. Therefore, if the entire know-how is supplied out of India and certain acts, if they are done with a view to ensure correct appreciation of the know-how by the Indian company then, under no circumstances they could be said to be attributable to any services rendered in India. We are, therefore, of the view that even the 10 per cent income of the technical know-how which has been brought to tax is bad in law and the same is accordingly quashed.
13 to 17. [These paras are not reproduced here as they involve minor issues.]