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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.

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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  

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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;  

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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  

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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  

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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  

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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  

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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  

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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  

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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  

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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’.”

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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  

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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  

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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]

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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  

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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:

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(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  

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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.   

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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  

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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

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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  

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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  

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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  

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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  

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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  

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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.   

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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  

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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.  

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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.

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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.

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(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  

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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

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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’  

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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.

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