2004 (8) TMI 623 - AT - Income Tax

Summary

Issues Involved:
1. Accrual of income to the non-resident company (Tolerant/Veritas).
2. Disputes between HCL and Tolerant affecting the accrual of income.
3. Jurisdiction of the Assessing Officer to make a reassessment.

Issue-wise Detailed Analysis:

1. Accrual of Income to the Non-Resident Company (Tolerant/Veritas):
The central issue was whether the amounts remitted by HCL to Tolerant under the "manufacturing and software license agreement" accrued as income to Tolerant during the relevant accounting year. HCL argued that due to disputes under the agreement, no income accrued to Tolerant until the disputes were settled by arbitration in 1990. The Tribunal noted that under the agreement, Tolerant was obligated to provide technology and software, including a fully commented source code to be deposited in escrow. The non-fulfillment of this obligation by Tolerant led to disputes, which postponed the accrual of income to Tolerant until the arbitration award was accepted by both parties in 1990. The Tribunal concluded that the amounts remitted by HCL were merely advances and did not constitute income until the arbitration award was finalized.

2. Disputes Between HCL and Tolerant Affecting the Accrual of Income:
The Tribunal examined the disputes between HCL and Tolerant, which included issues such as the inadequacy of the processor supplied, lack of updates, and failure to execute the deposit agreement for the source code. These disputes led HCL to withhold the final payment. The Tribunal held that the disputes were significant enough to postpone the accrual of income to Tolerant. The Tribunal emphasized that income under a contractual liability accrues only when disputes are resolved, as established in the case of CIT v. Swadeshi Cotton & Flour Mills P. Ltd. The Tribunal rejected the Department's argument that the earlier remittances were not under dispute and that income had accrued upon these remittances. The Tribunal found that the disputes existed during the relevant accounting year, and thus, no income accrued to Tolerant until the arbitration award was made and accepted in 1990.

3. Jurisdiction of the Assessing Officer to Make a Reassessment:
HCL challenged the jurisdiction of the Assessing Officer to make a reassessment under section 148 of the Income-tax Act. However, these grounds were dismissed as "not pressed" by the Tribunal, indicating that HCL did not pursue these arguments further.

Conclusion:
The Tribunal concluded that the technical know-how fees received by Tolerant amounting to Rs. 48,38,314 were not assessable in the year under appeal. The income accrued only when the arbitration award was made and accepted by both HCL and Tolerant (now Veritas). The appeal was partly allowed, with no order as to costs, and the jurisdictional challenge by HCL was dismissed as "not pressed."