GVK INDS. LTD Vs THE INCOME TAX OFFICER
Bench: SUDHANSU JYOTI MUKHOPADHAYA,DIPAK MISRA
Case number: C.A. No.-007796-007796 / 1997
Diary number: 11291 / 1997
Advocates: GAGRAT AND CO Vs
SUSHMA SURI
Page 1
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7796 OF 1997
GVK Industries Ltd. & Anr. ... Appellants
Versus
The Income Tax Officer & Anr. ... Respondents
J U D G M E N T
Dipak Misra, J.
The appellant No. 1 is a company incorporated under
the Companies Act, 1956 for the purpose of setting up a 235
MW Gas based power project at Jegurupadu, Rajahmundry,
Andhra Pradesh at an estimated cost of Rs.839 crores and
the appellant No. 2 is a director of the company. The main
object of the appellant company is to generate and sell
electricity.
Page 2
2. With the intention to utilize the expert services of
qualified and experienced professionals who could prepare a
scheme for raising the required finance and tie up the
required loan, it sought services of a consultant and
eventually entered into an agreement with ABB – Projects &
Trade Finance International Ltd., Zurich, Switzerland,
(hereinafter referred to as “Non-Resident Company/NRC”).
The NRC, having regard to the requirements of the
appellant-company offered its services as financial advisor
to its project from July 08, 1993. Those services included,
inter alia, financial structure and security package to be
offered to the lender, making an assessment of export credit
agencies world-wide and obtaining commercial bank support
on the most competitive terms, assisting the appellant loan
negotiations and documentation with lenders and
structuring, negotiating and closing the financing for the
project in a coordinated and expeditious manner. For its
services the NRC was to be paid, what is termed as,
“success fee” at the rate of 0.75% of the total debt
financing. The said proposal was placed before the Board
meeting of the company on August 21, 1993 and the Board
2
Page 3
of Directors approved the appointment of the NRC and
advised that it be involved in the proposed public issue of
share by the company. The NRC rendered professional
services from Zurich by correspondence as to how to
execute the documents for sanction of loan by the financial
institutions within and outside the country. With advice of
NRC the appellant-company approached the Indian Financial
Institutions with the Industrial Development Bank of India
(IDBI) acting as the Lead Financier for its Rupee loan
requirement and for a part of its foreign currency loan
requirement it approached International Finance Corporation
(IFC), Washington DC, USA. After successful rendering of
services the NRC sent invoice to the appellant-company for
payment of success fee amount i.e., US $.17,15,476.16
(Rs.5.4 Crores).
3. As the facts would unfurl after the receipt of the said
invoice the appellant-company approached the concerned
income tax officer, the first respondent herein, for issuing a
‘No Objection Certificate’ to remit the said sum duly
pointing out that the NRC had no place of business in India;
that all the services rendered by it were from outside India;
3
Page 4
and that no part of success fee could be said to arise or
accrue or deemed to arise or accrue in India attracting the
liability under the Income-tax Act, 1961 (for brevity, ‘the
Act’) by the NRC. It was also stated as the NRC had no
business connection Section 9(1)(i) is not attracted and
further as NRC had rendered no technical services Section
9(1)(vii) is also no attracted. The first respondent scanning
the application filed by the company refused to issue ‘No
Objection Certificate’ by his order dated September 27,
1994. Being dissatisfied with the said order passed by the
first respondent the appellant-company preferred a revision
petition before the commissioner of Income-tax, Hyderabad,
the second respondent herein, under Section 264 of the Act.
On March 21, 1995 the second respondent permitted the
appellant-company to remit the said sum to the NRC by
furnishing a bank guarantee for the amount of tax. The
company took steps to comply with the said order but
afterwards on October 25,1995 the revisional authority
revoked the earlier order and directed the company to
deduct tax and pay the same to the credit of the Central
Government as a condition precedent for issuance of the ‘No
4
Page 5
Objection Certificate’. Thus, the order passed by the first
respondent was affirmed and resultantly the revision
petition was dismissed.
4. The non-success in revision compelled the company to
approach the High Court in W.P. No. 6866 of 1995 for issue
of writ of certiorari for quashing of the orders passed by the
Income-tax officer and that of by the revisional authority.
In the writ petition, the stand and stance put forth before
the authorities were reiterated.
5. On behalf of the revenue a counter affidavit was filed
contending, inter alia, that the NRC was very actively
associated not only in arranging loan but also in providing
various services which fall within the ambit of both
managerial as well as consultancy services.
6. A reference was made to the letter dated July 8, 1993
wherefrom it is evident that NRC is a financial advisor with a
worldwide experience and has been engaged in India and
requested that it be appointed as “financial consultant” for
the project. The company responded by appointing the NRC
as the financial advisor vide its letter dated 2.8.1994. On
behalf of the revenue, the proceedings of the Board of
5
Page 6
Directors meeting was highlighted stating that they
disclosed that the NRC was appointed not only to arrange
for the loan but also to render several other financial and
general services and also to involve itself in the public issue
of the company and on that bedrock it was urged that it
squarely falls within the ambit of Section 9(1)(vii)(b) of the
Act. It was also averred that NRC is a financial segment of
the ABB which is participating in the equity of the appellant
company besides IFC, Washington. The further stand of the
revenue was that Section 5(2) read with Section 9(1)(i)(vii)
(b) will apply to the remittance to be made by the company
to the NRC as the income would be deemed to have accrued
or arisen in India and hence, the Indian company was liable
to deduct tax at the prescribed rate before remitting any
money to the NRC. The order passed by the authorities
below were supported on the foundation that there is a
business connection between the NRC with the company in
India and the voluminous correspondence between the two
wings discloses the said connection. It was also contended
that the services rendered by the NRC were not a one time
affair as alleged, for the company itself had acted on behalf
6
Page 7
of the NRC for processing, negotiating and obtaining loans
from IDBI India and IFC, Washington. Emphasis was laid on
the fact that the company had contracted the NRC not only
for the limited purpose of getting loan but also for the
further participation in its business activity which was
evincible from the correspondence made between the two
and, therefore, the income will accrue or deemed to have
accrued or arisen to the NRC in India within the provisions of
the Act. Justifying the order of revocation by the
Commissioner of Income-tax, it was set forth that order
dated 21.03.1995 was only an interim order and the final
order came to be passed on 25.10.1995 by which the
revision was dismissed. It was asserted by the revenue that
the services of the NRC, as demonstrable from the material
brought on record, was rendered within India and, therefore,
the company is obliged in law to deduct income-tax before
remitting “success fee” to the NRC. On this premise, the
denial of ‘No Objection Certificate’ (NOC) was sought to be
justified.
7. A rejoinder affidavit was filed by the appellant company
asseverating that the NRC is an independent unit and is, in a
7
Page 8
way, subsidiarised by ABB. That apart, merely because
expert advice was obtained, it could not be said that it
pursued the application for loan/financial assistance on
behalf of NRC and further the advisory services were
rendered from outside India. The stand of the revenue that
there has been an admission by the company to the effect
that there was business connection with the NRC by the
company, was controverted. It was put forth that the
company was always the principal directly concerned with
the making of application for financial assistance for the
project and pursuing the same; that the NRC did not have
any office or establishment in India at any relevant point of
time; that it operated from Zurich; that there was no
business connection between the company and the NRC;
and that the success fee did not accrue or arise to the NRC
in India and hence, no income is deemed to have accrued or
arisen to NRC in India. In addition to the aforesaid it was
urged Section 9(1)(i) and Section 9(1)(vii) have to be read
together and in that case the stand of the revenue was
absolutely unjustified and assuming Section 9(1)(vii) of the
Act is read in isolation, the plain interpretation could not be
8
Page 9
applicable regard being had to the nature of service
rendered by NRC. It was also pleaded that merely because
the amount of success fee was paid by the appellant-
company to NRC in India for the services rendered from
outside India, the income of NRC would not deemed to have
accrued or arisen in India.
8. The High Court framed the following two issues for
consideration:
“(1) Whether ‘success fee’ payable by the petitioner-company to the NRC or any portion thereof is chargeable under the provisions the Act; and
(2) Whether the petitioner-company is entitled to ‘No Objection Certificate’.”
9. The High Court referred to clause (b) of sub-section 2 of
Section 5 and Section 9 of the Act and adverted to the
expression all income accruing or arising, whether directly
or indirectly, through or from any business connection in
India, or through or from any property in India, or through
from any asset or source of income in India or through the
transfer of a capital asset situate in India and thereafter
referred to Section 163(1)(b) which uses the expression
“business connection” and thereafter referring to various
9
Page 10
authorities, culled out the principles as to what the
expression “business connection” conveys. It observed that
expression “business connection” is too wide to admit of any
precise definition though it has some well known attributes;
that whether there is a business connection between an
Indian company and a non-resident company is a mixed
question of fact and law which is to be determined on the
facts and circumstances of each case; that the essence of
“business connection” is existence of close, real, intimate
relationship and commonness of interest between the NRC
and the Indian person; that in a case where there is control
of management or finances or substantial holding of equity
shares or sharing of profits by the NRC of the Indian
company/person, the existence of close/intimate
relationship stand substantiated; and to constitute business
connection, there must be continuity of activity or operation
of the NRC with the Indian company/person and a stray or
an isolated transaction is not enough to establish a business
connection.
10. After culling out the principles, the High Court referred
to the contents of the correspondence, the nature and
1
Page 11
extent of services which the NRC had undertaken under the
agreement, the resolution passed by the Board of Directors
which had perused the letter dated July 8, 1993 addressed
by the NRC stipulating the scope of services to be
undertaken by NRC; the decisions of the Board to pay a fee
to NRC and came to hold thus:
“On a careful reading of the letter of proposal of the NRC and the extract of resolution of the Board of Directors of the petitioner-company, it is clear to us that it was no part of the services to be provided by the NRC to manage public issue in India to correspond with various agencies to secure loan for the petitioner-company, to negotiate the terms on which loan should be obtained or to draft document for it. The NRC has only to develop a comprehensive financial model, tie up the rupee/foreign currency loan requirements of the project, assess export credit agencies worldwide and obtain commercial bank support, assist the petitioner-company in loan negotiations and documentation with the lender. It appears to us that the service to be rendered by the NRC is analogous to draw up a plan for the petitioner-company to reach the required destination indicating roads and highways, the curves and the turns; it does not contemplate taking the petitioner-company to the destination by the NRC. Once the NRC has prepared the scheme and given necessary advice and assistance to the petitioner-company for obtaining loan, the responsibility of the NRC is over. It is for the petitioner-company to proceed on the suggested lines and obtain loan from Indian or foreign agencies. On the petitioner-company obtaining loan, the NRC becomes entitled to ‘success fees’.”
1
Page 12
11. The High Court scanned the letters with due
consideration and opined that the business connection
between the petitioner company and the NRC had not been
established. Thereafter, the writ court adverted to the
proposition whether success fee could fall within clause (vii)
(b) of Section 9(1) of the Act. Interpreting the said
provision, the High Court opined that:
“Thus from a combined reading of clause (vii) (b) Explanation (2) it becomes clear that any consideration, whether lump sum or otherwise, paid by a person who is a resident in India to a non-resident for running any managerial or technical or consultancy service, would be the income by way of fees for technical service and would, therefore, be within the ambit of “income deemed to accrue or arise in India”. If this be the net of taxation under Section 9 (1) (vii) (b), then ‘success fee’, which is payable by the petitioner- company to the NRC as fee for technical service would be chargeable to income tax thereunder. The Income-tax officer, in the impugned order, held that the services offered by the NRC fell within the ambit of both managerial and consultancy services. That order of Income-tax officer found favour by the Commissioner in revision. In the view we have expressed above, we are inclined to confirm the impugned order.”
12. At this juncture, it is necessary to note that a
contention was advanced before the High Court by the
assessee that the NRC did not render any technical or
1
Page 13
consultancy service to the company but only rendered
advise in connection with payment of loan by it and hence,
it would not amount to technical or consultancy service
within the meaning of Section 9(1)(vii)(b) of the Act. While
not accepting the said submission, the High Court observed
that for the purposes of attracting the said provision, the
business of the company cannot be divided into water-tight
compartments like fire, generation of power, plant and
machinery, management, etc. and to hold that managerial
and technical and consultancy service relate to
management, generation of power and plant and
machinery, but not to finance. Elaborating further, the High
Court observed that advice given to procure loan to
strengthen finances may come within the compartment of
technical or consultancy service and “success fee” would
thereby come within the scope of technical service within
the ambit of Section 9(1)(vii)(b) of the Act. Being of this
view, the High Court opined the assessee was not entitled to
the “No Objection Certificate”.
13. Be it stated, the constitutional validity of Section 9(1)
(vii)(b) of the Act was challenged on the ground of
1
Page 14
legislative competence and violation of Article 14 of the
Constitution. The Court referred to the earlier Division
Bench decision in Electrical Corporation of India Ltd. V.
C.I.T. rendered in W.P. No. 105/1987 on March 24, 1987 and
also took note of the fact that the said case was quoted with
approval in Electrical Corporation of India Ltd. V. C.I.T.1
In the ultimate eventuate, High Court rejected all the
contentions advanced by the assessee-company and
dismissed the writ petition.
14. Being aggrieved, the petitioner company approached
this Court. When the matter came up for consideration
before a two-Judge Bench of this Court, which taking note of
the far-reaching issues of constitutional purport and the fact
that they were earlier referred to in the case of Electrical
Corporation of India Ltd. (supra), which was ultimately
withdrawn, it, by order dated 28.11.2000, referred the
instant matter to a larger Bench. On 13.7.2010, the matter
again came up for consideration before a three-Judge Bench
and vide its order of the same date, the matter was referred
to the Constitution Bench, which answered the reference as
per decision on 1.3.2011 reported in (2011) 4 SCC 36. The
1 (1990) 183 ITR 43 (SC); [(1989) Supp. 2 SCC 642]
1
Page 15
issue before the Constitution Bench stated by the Court is
thus:
“It is necessary for purposes of clarity that a brief recounting be undertaken at this stage itself as to what was conclusively decided in ECIL and what was referred to a Constitutional Bench. After conclusively determining that clauses (1) and (2) of Article 245, read together, impose a requirement that the laws made by Parliament should bear a nexus with India, the three-Judge Bench in ECIL asked that a Constitutional Bench be constituted to consider whether the ingredients of the impugned provision i.e. Section 9(1)(vii) of the Income Tax Act (1961) indicate such a nexus.”
15. Before the Constitution Bench the appellant withdrew
its challenge to the constitutional validity of Section 9(1)(vii)
(b) of the Act and elected to proceed on the factual matrix
as to the applicability of the said provision. However, as the
learned Attorney General pressed upon for reconsideration,
the decision in three-Judge Bench in ECIL case, the larger
Bench considered the validity of the requirement of a
relationship to or nexus with territory of India as a limitation
on the powers of Parliament to enact laws pursuant to
clause (1) of Article 245 of the Constitution. The Court
adverted to the ratio in ECIL, took note of propositions of the
learned Attorney General and the principles relating to
interpretation of the Constitution, textual analysis of Article
1
Page 16
245, analysed the constitutional topological space of Article
245 and the wider structural analysis of Article 245 in the
context of Article 260 and came to hold thus:
“It would appear that the concerns of the learned Attorney General may have been more with whether the ratio in ECIL could lead to a reading down of the legislative powers granted to Parliament by Article 245. A thorough textual analysis, combined with wider analysis of constitutional topology, structure, values and scheme has revealed a much more intricately provisioned set of powers to Parliament. Indeed, when all the powers necessary for an organ of the State to perform its role completely and to effectuate the constitutional mandate, can be gathered from the text of the Constitution, properly analysed and understood in the wider context in which it is located, why should such unnecessarily imprecise arrogation of powers be claimed? To give in to such demands, would be to run the risk of importing meanings and possibilities unsupportable by the entire text and structure of the Constitution. Invariably such demands are made in seeking to deal with external affairs, or with some claimed grave danger or a serious law and order problem, external or internal, to or in India. In such circumstances, it is even more important that courts be extra careful.”
16. Thereafter, the Court reiterated the two questions it
had set out in the beginning. The first question reads thus:
“(1) Is Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for:
1
Page 17
(a) the territory of India, or any part of India; or
(b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?”
Answering the same, the Court observed:
“The answer to the above would be yes. However, Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes— events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like—that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra- territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians.”
And thereafter:
“Whether a particular law enacted by Parliament does show such a real connection, or expected real connection, between the extra-territorial aspect or cause and something in India or related to India and Indians, in terms of impact, effect or consequence, would be a mixed matter of facts and of law. Obviously, where Parliament itself posits a degree of such relationship, beyond the constitutional requirement that it be real and not fanciful, then the courts would have to enforce such a requirement in the operation of the law as a
1
Page 18
matter of that law itself, and not of the Constitution.”
17. The second question that was posed by the
Constitution Bench is as follows:
“(2) Does Parliament have the powers to legislate “for” any territory, other than the territory of India or any part of it?”
The aforesaid question was answered thus:
“The answer to the above would be no. It is obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India, and also with respect to extra-territorial aspects or causes that have an impact on or nexus with India as explained above in the answer to Question 1 above. Such laws would fall within the meaning, purport and ambit of the grant of powers to Parliament to make laws “for the whole or any part of the territory of India”, and they may not be invalidated on the ground that they may require extra-territorial operation. Any laws enacted by Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra vires, as answered in response to Question 1 above, and would be laws made “for” a foreign territory.”
After the reference was answered, the matter was
directed to be listed before the appropriate Bench.
18. We have heard Mr. U.A. Rana, learned counsel for the
appellants and Mr. Arijit Prasad, learned counsel for the
respondents.
1
Page 19
19. At the very outset, it is necessary to mention as the
challenge to the constitutional validity of the provision has
been withdrawn, and the same accordingly has not been gone
into by the Constitution Bench, there is no necessity to dwell
upon the same. The crux of the matter is whether, in the
obtaining factual matrix, the High Court was justified in
concurring with the view expressed by the revisional authority
that the assessee-company was not entitled to “No Objection
Certificate” under the Act as it was under the obligation to
deduct the tax at source pertaining to payment to the NRC as
the character of success fee was substantiated by the
revenue to put in the ambit and sweep of Section 9(1)(vii)(b)
of the Act.
20. At this juncture, it is demonstrable that NRC is a Non-
Resident Company and it does not have a place of business in
India. The revenue has not advanced a case that the income
had actually arisen or received by the NRC in India. The High
Court has recorded the payment or receipt paid by the
appellant to the NRC as success fee would not be taxable
under Section 9(1)(i) of the Act as the transaction/activity did
not have any business connection. The conclusion of the High
1
Page 20
Court in this regard is absolutely defensible in view of the
principles stated in C.I.T. V. Aggarwal and Company2,
C.I.T. V. TRC3 and Birendra Prasad Rai V. ITC4. That being
the position, the singular question that remains to be
answered is whether the payment or receipt paid by the
appellant to NRC as success fee would be deemed to be
taxable in India under Section 9(1)(vii) of the Act. As the
factual matrix would show, the appellant has not invoked
Double Taxation Avoidance Agreement between India and
Switzerland. That being not there, we are only concerned
whether the “success fee” as termed by the assessee is “Fee
for technical service” as enjoined under Section 9(1)(vii) of
the Act. The said provision reads as follows:
“9. Income deemed to accrue or arise in India – (1) The following income shall be deemed to accrue or arise in India --
(vii) income by way of fees for technical services payable by—
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the
2 (1965) 56 ITR 20 3 (1987) 166 ITR 1993 4 (1981) 129 ITR 295
2
Page 21
purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
[Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.]
[Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.]
[Explanation 2.]—For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".]
21. Explanation to the Section 9(2) was substituted by the
Finance Act 2010 with retrospective effect from 1.6.1976.
Prior to the said substitution, another Explanation had been
2
Page 22
inserted by the Finance Act, 2007 with retrospective effect
from 1.6.1976. The said Explanations read as under:
“ As amended by Finance Act, 2010 Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non- resident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.]
As amended by Finance Act, 2007
Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.”
22. The principal provision is Clause (b) of Section 9(1)(vii)
of the Act. The said provision carves out an exception. The
exception carved out in the latter part of clause (b) applies to
a situation when fee is payable in respect of services utilized
for business or profession carried out by an Indian payer
outside India or for the purpose of making or earning of
income by the Indian assessee i.e. the payer, for the purpose
2
Page 23
of making or earning any income from a source outside India.
On a studied scrutiny of the said Clause, it becomes clear
that it lays down the principle what is basically known as the
“source rule”, that is, income of the recipient to be charged or
chargeable in the country where the source of payment is
located, to clarify, where the payer is located. The Clause
further mandates and requires that the services should be
utilized in India.
23. Having stated about the “source rule”, it is necessary
to appropriately appreciate how the concept has developed.
At the time of formation of “League of Nations” at the end of
1920, it comprised of only 27 countries dominated by the
European States and the United States of America. The
United Nations that was formed after the Second World War,
initially had 51 members. Presently, it has 193 members.
With the efflux of time, there has been birth of nation States
which enjoy political independence and that has led to cross-
border and international trade. The State trade eventually
has culminated in formulation of principles pertaining to
international taxation jurisdiction. It needs no special
emphasis to state that the said taxation principles are
2
Page 24
premised to promote international trade and to allocate
taxation between the States. These rules help and further
endeavour to curtail possibility of double taxation, tax
discrimination and also to adjudicate resort to abusive tax
avoidance or tax evasion practices. The nation States, in
certain situations, resort to principle of “tax mitigation” and in
order to protect their citizens, grant benefit of tax abroad
under the domestic legislation under the bilateral
agreements.
24. The two principles, namely, “Situs of residence” and
“Situs of source of income” have witnessed divergence and
difference in the field of international taxation. The principle
“Residence State Taxation” gives primacy to the country of
the residency of the assessee. This principle postulates
taxation of world-wide income and world-wide capital in the
country of residence of the natural or juridical person. The
“Source State Taxation” rule confers primacy to right to tax to
a particular income or transaction to the State/nation where
the source of the said income is located. The second rule, as
is understood, is transaction specific. To elaborate, the
source State seeks to tax the transaction or capital within its
2
Page 25
territory even when the income benefits belongs to a non-
residence person, that is, a person resident in another
country. The aforesaid principle sometimes is given a
different name, that is, the territorial principle. It is apt to
state here that the residence based taxation is perceived as
benefiting the developed or capital exporting countries
whereas the source based taxation protects and is regarded
as more beneficial to capital importing countries, that is,
developing nations. Here comes the principle of nexus, for
the nexus of the right to tax is in the source rule. It is
founded on the right of a country to tax the income earned
from a source located in the said State, irrespective of the
country of the residence of the recipient. It is well settled that
the source based taxation is accepted and applied in
international taxation law.
25. The two principles that we have mentioned
hereinabove, are also applied in domestic law in various
countries. The source rule is in consonance with the nexus
theory and does not fall foul of the said doctrine on the
ground of extra-territorial operation. The doctrine of source
rule has been explained as a country where the income or
2
Page 26
wealth is physically or economically produced. [See League
of Nations, Report on Double Taxation by Bruins,
Einaudi, Saligman and Sir Josiah Stan (1923)].
Appreciated on the aforesaid principle, it would apply where
business activity is wholly or partly performed is a source
State, as a logical corollary, the State concept would also
justifiably include the country where the commercial need for
the product originated, that is, for example, where the
consultancy is utilized.
26. From the aforesaid, it is quite vivid that the concept of
income source is multifaceted and has the potentiality to take
different forms [See Klans Vogel, World-wide V. Source
Taxation of Income – Review and Revision of
Arguments (1988)]. The said rule has been justified by
Arvid A. Skaar in Permanent Establishment; Erosion of Tax
Treaty Principle on the ground that profits of business
enterprise are mainly the yield of an activity, for capital is
profitable to the extent that it is actively utilised in a
profitable manner. To this extent, neither the activity of
business enterprise nor the capital made, depends on
residence.
2
Page 27
27. The purpose of adverting to these aspects is only to
highlight that the source rule has been accepted by them in
the UN Commentaries and the Organisation of Economic
Corporation and Development (OECD) Commentaries. It is
well known that what is prohibited by international taxation
law is imposition of sovereign act of a State on a sovereign
territory. This principle of formal territoriality applies in
particular, to acts intended to enforce internal legal provisions
abroad. [See the Introduction in Klaus Vogel on Double
Taxation Convention, South Asean, Reprint Edition
(2007)]. Therefore, deduction of tax at source when made
applicable, it has to be ensured that this principle is not
violated.
28. Coming to the instant case, it is evident that fee which
has been named as “success fee” by the assessee has been
paid to the NRC. It is to be seen whether the payment made
to the non-resident would be covered under the expression
“fee for technical service” as contained in Explanation (2) to
Section 9(1)(vii) of the Act. The said expression means any
consideration, whether lumpsum or periodical in rendering
managerial, technical or consultancy services. It excludes
2
Page 28
consideration paid for any construction, assembling, mining or
like projects undertaken by the non-resident that is the
recipient or consideration which would be taxable in the
hands of the non-recipient or non-resident under the head
“salaries”. In the case at hand, the said exceptions are not
attracted. What is required to be scrutinized is that the
appellant had intended and desired to utilize expert services
of qualified and experience professional who could prepare a
scheme for raising requisite finances and tie-up loans for the
power projects. As the company did not find any professional
in India, it had approached the consultant NRC located in
Switzerland, who offered their services. Their services
rendered included, inter alia, financial structure and security
package to be offered to the lender, study of various lending
alternatives for the local and foreign borrowings, making
assessment of expert credit agencies world-wide and
obtaining commercial bank support on the most competitive
terms, assisting the appellant company in loan negotiations
and documentations with the lenders, structuring, negotiating
and closing financing for the project in a coordinated and
expeditious manner.
2
Page 29
29. In this context, it would be appropriate to reproduce
the letter dated 8.7.1993 addressed by the NRC. It reads as
follows:
“We propose the following scope of services to be performed by ABB PTF:
Assisting GVK Industries Limited (“GVK”) in putting together the financial structure and security package to be offered to the lenders;
Evaluating the pros and cons of various lending alternatives, both for the local and the foreign borrowings;
Developing a comprehensive financial model to evaluate the project and to perform various sensivity studies;
Preparing a preliminary information Memorandum to be used as the basis for placing the foreign and local debt;
Accessing Export Credit Agencies world wide obtaining commercial bank support on the most comprehensive terms;
Assisting GVK in loan negotiations and documentation with lendors; and
Structuring, negotiating and closing the financing for this project in a coordinated and expeditious manner.
We propose a compensation structure based only on success. As an exception, ABB PTF does not propose either any retainers or any reimbursement for travel and other expenses incurred by ABB PTF.
2
Page 30
The success fee will be 0.75% of the total debt, payable at financial closing.”
30. The said letter was placed before the Board of Directors
of the appellant company in its meeting held on August 21,
1993. The relevant part of the resolution passed by the Board
is extracted hereinbelow:
“.....It was explained to the Directors that ABB- PTF’s scope of service for the project include:
Developing a comprehensive financial model;
Tying up the rupee/foreign currency loan requirements of the project;
Assessing Export Credit Agencies worldwide and obtaining commercial banks support on the most competitive terms;
Assisting GVK in loan negotiations and documentation with lenders.
For the above scope of service ABB PTF would be paid a fee of 0.75% of the loan amount which is payable only on successful financial closing. The Directors while approving this arrangement, advised that ABB-PTF should also be involved in the public issue of the company.”
31. From the aforesaid two documents, it is clear as crystal
that the obligation of the NRC was to:
(i) Develop comprehensive financial model to tie-up the
rupee and foreign currency loan requirements of the project.
3
Page 31
(ii) Assist expert credit agencies world-wide and obtain
commercial bank support on the most competitive terms.
(iii) Assist the appellant company in loan negotiations and
documentation with the lenders.
32. Pursuant to the aforesaid exercises carried out by the
NRC, the company was successful in availing loan/financial
assistance in India from the Industrial Development Bank of
India (IDBI) which acted as a lead financier for the rupee loan
requirement. For foreign currency loan requirement, the
appellant approached International Finance Corporation,
Washington D.C., USA and was successful. In this backdrop,
“success fee” of Rs.5.4 crores was paid to the NRC.
33. In this factual score, the expression, managerial,
technical or consultancy service, are to be appreciated. The
said expressions have not been defined in the Act, and,
therefore, it is obligatory on our part to examine how the said
expressions are used and understood by the persons engaged
in business. The general and common usage of the said
words has to be understood at common parlance.
34. In the case at hand, we are concerned with the
expression “consultancy services”. In this regard, a reference
3
Page 32
to the decision by the authority for advance ruling In Re.
P.No. 28 of 19995, would be applicable. The observations
therein read as follows:
“By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it.”
35. In this context, a reference to the decision in C.I.T. V.
Bharti Cellular Limited and others6, would be apposite. In
the said case, while dealing with the concept of “consultancy
services”, the High Court of Delhi has observed thus:
“Similarly, the word “consultancy” has been defined in the said Dictionary as “the work or position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action”. It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who
5 (1999) 242 ITR 280 6 (2009) 319 ITR 139
3
Page 33
provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.”
36. In this context, we may fruitfully refer to the dictionary
meaning of ‘consultation’ in Black’s Law Dictionary, Eighth
Edition. The word ‘consultation’ has been defined as an act
of asking the advice or opinion of someone (such as a
lawyer). It means a meeting in which a party consults or
confers and eventually it results in human interaction that
leads to rendering of advice.
37. As the factual matrix in the case at hand, would exposit
the NRC had acted as a consultant. It had the skill, acumen
and knowledge in the specialized field i.e. preparation of a
scheme for required finances and to tie-up required loans.
The nature of activities undertaken by the NRC has earlier
been referred to by us. The nature of service referred by
the NRC, can be said with certainty would come within the
ambit and sweep of the term ‘consultancy service’ and,
therefore, it has been rightly held that the tax at source
should have been deducted as the amount paid as fee could
be taxable under the head ‘fee for technical service’. Once
the tax is payable paid the grant of ‘No Objection Certificate’
3
Page 34
was not legally permissible. Ergo, the judgment and order
passed by the High Court are absolutely impregnable.
38. Consequently, the appeal, being devoid of merit, stands
dismissed. However, in the facts and circumstances of the
case there shall be no order as to costs.
.........................................................J. [SUDHANSU JYOTI MUKHOPADHAYA]
..........................................................J. [DIPAK MISRA]
NEW DELHI FEBRUARY 18, 2015.
3