GVK Industries Ltd. v. Income-tax Officer
[Citation -2015-LL-0218]

Citation 2015-LL-0218
Appellant Name GVK Industries Ltd.
Respondent Name Income-tax Officer
Court SUPREME COURT
Relevant Act Income-tax
Date of Order 18/02/2015
Judgment View Judgment
Keyword Tags deemed to accrue or arise in india • business connection in india • deduction of tax at source • permanent establishment • non-resident company • isolated transaction • condition precedent • technical service • tax evasion • ultra vires • tax treaty
Bot Summary: With advice of NRC the appellant-company approached the Indian financial institutions with the Industrial Development Bank of India acting as the lead financier for its rupee loan requirement and for a part of its foreign currency loan requirement it approached the International Finance Corporation, 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. 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; 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 by the NRC. It was also stated as the NRC had no business connection. 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. 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 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. 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 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. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. The nature of service referred to by the NRC, can be said with certainty would come within the ambit and sweep of the term consultancy service and 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.


JUDGMENT judgment of court was delivered by Dipak Misra J.-Appellant No. 1 is company incorporated under Companies Act, 1956, for purpose of setting up 235 MW Gas based power project at Jegurupadu, Rajahmundry, Andhra Pradesh, at estimated cost of Rs. 839 crores and appellant No. 2 is director of company. main object of appellant company is to generate and sell electricity. With intention to utilise expert services of qualified and experienced professionals who could prepare scheme for raising required finance and tie up required loan, it sought services of consultant and eventually entered into agreement with ABB - Projects and Trade Finance International Ltd., Zurich, Switzerland, (hereinafter referred to as "the non-resident company/NRC"). NRC, having regard to requirements of appellant- company offered its services as financial advisor to its project from July 8, 1993. Those services included, inter alia, financial structure and security package to be offered to lender, making assessment of export credit agencies world- wide and obtaining commercial bank support on most competitive terms, assisting appellant loan negotiations and documentation with lenders and structuring, negotiating and closing financing for project in co-ordinated and expeditious manner. For its services NRC was to be paid, what is termed as, "success fee" at rate of 0.75 per cent. of total debt financing. said proposal was placed before board meeting of company on August 21, 1993, and board of directors approved appointment of NRC and advised that it be involved in proposed public issue of share by company. NRC rendered professional services from Zurich by correspondence as to how to execute documents for sanction of loan by financial institutions within and outside country. With advice of NRC appellant-company approached Indian financial institutions with Industrial Development Bank of India (IDBI) acting as lead financier for its rupee loan requirement and for part of its foreign currency loan requirement it approached International Finance Corporation (IFC), Washington DC, USA. After successful rendering of services NRC sent invoice to appellant-company for payment of success fee amount, i.e., US $. 17,15,476.16 (Rs. 5.4 crores). As facts would unfurl after receipt of said invoice appellant- company approached concerned Income-tax Officer, first respondent herein, for issuing "no-objection certificate" to remit said sum duly pointing out that NRC had no place of business in India; that all services rendered by it were from outside India; and that no part of success fee could be said to arise or accrue or deemed to arise or accrue in India attracting liability under Income-tax Act, 1961 (for brevity, "the Act") by NRC. It was also stated as 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 not attracted. first respondent scanning application filed by company refused to issue 'no-objection certificate' by his order dated September 27, 1994. Being dissatisfied with said order passed by first respondent appellant-company preferred revision petition before Commissioner of Income-tax, Hyderabad, second respondent herein, under section 264 of Act. On March 21, 1995, second respondent permitted appellant- company to remit said sum to NRC by furnishing bank guarantee for amount of tax. company took steps to comply with said order but afterwards on October 25, 1995, revisional authority revoked earlier order and directed company to deduct tax and pay same to credit of Central Government as condition precedent for issuance of "no-objection certificate". Thus, order passed by first respondent was affirmed and resultantly revision petition was dismissed. non-success in revision compelled company to approach High Court in W. P. No. 6866 of 1995 for issue of writ of certiorari for quashing of orders passed by Income-tax Officer and that of by revisional authority. In writ petition, stand and stance put forth before authorities were reiterated. On behalf of Revenue counter-affidavit was filed contending, inter alia, that NRC was very actively associated not only in arranging loan but also in providing various services which fall within ambit of both managerial as well as consultancy services. reference was made to letter dated July 8, 1993, wherefrom it is evident that NRC is financial advisor with worldwide experience and has been engaged in India and requested that it be appointed as "financial consultant" for project. company responded by appointing NRC as financial advisor, vide its letter dated August 2, 1994. On behalf of Revenue, proceedings of board of directors meeting was highlighted stating that they disclosed that NRC was appointed not only to arrange for loan but also to render several other financial and general services and also to involve itself in public issue of company and on that bedrock it was urged that it squarely falls within ambit of section 9(1)(vii)(b) of Act. It was also averred that NRC is financial segment of ABB which is participating in equity of appellant company besides IFC, Washington. further stand of Revenue was that section 5(2) read with section 9(1)(i)(vii)(b) will apply to remittance to be made by company to NRC as income would be deemed to have accrued or arisen in India and, hence, Indian company was liable to deduct tax at prescribed rate before remitting any money to NRC. order passed by authorities below were supported on foundation that there is business connection between NRC with company in India and voluminous correspondence between two wings discloses said connection. It was also contended that services rendered by NRC were not one-time affair as alleged, for company itself had acted on behalf of NRC for processing, negotiating and obtaining loans from IDBI India and IFC, Washington. Emphasis was laid on fact that company had contracted NRC not only for limited purpose of getting loan but also for further participation in its business activity which was evincible from correspondence made between two and, therefore, income will accrue or deemed to have accrued or arisen to NRC in India within provisions of Act. Justifying order of revocation by Commissioner of Income-tax, it was set forth that order dated March 21, 1995, was only interim order and final order came to be passed on October 25, 1995, by which revision was dismissed. It was asserted by Revenue that services of NRC, as demonstrable from material brought on record, was rendered within India and, therefore, company is obliged in law to deduct income-tax before remitting "success fee" to NRC. On this premise, denial of "no-objection certificate" (NOC) was sought to be justified. rejoinder-affidavit was filed by appellant company asseverating that NRC is independent unit and is, in way, subsidiarised by ABB. That apart, merely because expert advice was obtained, it could not be said that it pursued application for loan/financial assistance on behalf of NRC and further advisory services were rendered from outside India. stand of Revenue that there has been admission by company to effect that there was business connection with NRC by company, was controverted. It was put forth that company was always principal directly concerned with making of application for financial assistance for project and pursuing same; that 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 company and NRC; and that success fee did not accrue or arise to NRC in India and, hence, no income is deemed to have accrued or arisen to NRC in India. In addition to aforesaid it was urged section 9(1)(i) and section 9(1)(vii) have to be read together and in that case stand of Revenue was absolutely unjustified and assuming section 9(1)(vii) of Act is read in isolation, plain interpretation could not be applicable regard being had to nature of service rendered by NRC. It was also pleaded that merely because amount of success fee was paid by appellant company to NRC in India for services rendered from outside India, income of NRC would not deemed to have accrued or arisen in India. High Court framed following two issues for consideration: "(1) Whether'success fee' payable by petitioner-company to NRC or any portion thereof is chargeable under provisions of Act; and (2) Whether petitioner-company is entitled to'no-objection certificate'." See page 572 of 228 ITR. High Court referred to clause (b) of sub- section (2) of section 5 and section 9 of Act and adverted to 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 transfer of capital asset situate in India and, thereafter, referred to section 163(1)(b) which uses expression "business connection" and, thereafter, referring to various authorities, culled out principles as to what 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 business connection between Indian company and non-resident company is mixed question of fact and law which is to be determined on facts and circumstances of each case; that essence of "business connection" is existence of close, real, intimate relationship and commonness of interest between NRC and Indian person; that in case where there is control of management or finances or substantial holding of equity shares or sharing of profits by NRC of Indian company/person, existence of close/ intimate relationship stand substantiated; and to constitute business connection, there must be continuity of activity or operation of NRC with Indian company/person and stray or isolated transaction is not enough to establish business connection. After culling out principles, High Court referred to contents of correspondence, nature and extent of services which NRC had undertaken under agreement, resolution passed by board of directors which had perused letter dated July 8, 1993, addressed by NRC stipulating scope of services to be undertaken by NRC; decisions of board to pay fee to NRC and came to hold thus: "On careful reading of letter of proposal of NRC and extract of resolution of board of directors of petitioner-company, it is clear to us that it was no part of services to be provided by NRC to manage public issue in India to correspond with various agencies to secure loan for petitioner- company, to negotiate terms on which loan should be obtained or to draft document for it. NRC has only to develop comprehensive financial model, tie up rupee/foreign currency loan requirements of project, assess export credit agencies worldwide and obtain commercial bank support, assist petitioner-company in loan negotiations and documentation with lender. It appears to us that service to be See page 582 of 228 ITR. rendered by NRC is analogous to drawing up plan for petitioner-company to reach required destination indicating roads and highways, curves and turns; it does not contemplate taking petitioner-company to destination by NRC. Once NRC has prepared scheme and given necessary advice and assistance to petitioner- company for obtaining loan, responsibility of NRC is over. It is for petitioner-company to proceed on suggested lines and obtain loan from Indian or foreign agencies. On petitioner-company obtaining loan, NRC becomes entitled to'success fees'." High Court scanned letters with due consideration and opined that business connection between petitioner company and NRC had not been established. Thereafter, writ court adverted to proposition whether success fee could fall within clause (vii)(b) of section 9(1) of Act. Interpreting said provision, High Court opined that : "Thus from combined reading of clause (vii)(b) and Explanation 2 it becomes clear that any consideration, whether lump sum or otherwise, paid by person who is resident in India to non-resident for running any managerial or technical or consultancy service, would be income by way of fees for technical service and would, therefore, be within ambit of'income deemed to accrue or arise in India'. If this be net of taxation under section 9(1)(vii)(b), then 'success fee', which is payable by petitioner company to NRC as fee for technical service would be chargeable to income-tax thereunder. Income-tax Officer, in impugned order, held that services offered by NRC fell within ambit of both managerial and consultancy services. That order of Income-tax Officer found favour by Commissioner in revision. In view we have expressed above, we are inclined to confirm impugned order." At this juncture, it is necessary to note that contention was advanced before High Court by assessee that NRC did not render any technical or consultancy service to 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 meaning of section 9(1)(vii)(b) of Act. While not accepting said submission, High Court observed that for purposes of attracting said provision, business of 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 See page 582 of 228 ITR. management, generation of power and plant and machinery but not to finance. Elaborating further, High Court observed that advice given to procure loan to strengthen finances may come within compartment of technical or consultancy service and "success fee" would thereby come within scope of technical service within ambit of section 9(1)(vii)(b) of Act. Being of this view, High Court opined assessee was not entitled to "no-objection certificate". Be it stated, constitutional validity of section 9(1)(vii)(b) of Act was challenged on ground of legislative competence and violation of article 14 of Constitution. court referred to earlier Division Bench decision in Electronics Corporation of India Ltd. v. CIT rendered in W. P. No. 105 of 1987 on March 24, 1987, and also took note of fact that said case was quoted with approval in Electronics Corporation of India Ltd. v. CIT. In ultimate eventuate, High Court rejected all contentions advanced by assessee-company and dismissed writ petition. Being aggrieved, petitioner company approached this court. When matter came up for consideration before two-judge Bench of this court, which taking note of far-reaching issues of constitutional purport and fact that they were earlier referred to in case of Electronics Corporation of India Ltd. (supra), which was ultimately withdrawn, it, by order dated November 28, 2000, referred instant matter to larger Bench. On July 13, 2010, matter again came up for consideration before threejudge Bench and, vide its order of same date, matter was referred to Constitution Bench, which answered reference as per decision on March 1, 2011, reported in [2011] 4 SCC 36. issue before Constitution Bench stated by court is thus: "It is necessary for purposes of clarity that brief recounting be undertaken at this stage itself as to what was conclusively decided in ECIL and what was referred to Constitutional Bench. After conclusively determining that clauses (1) and (2) of article 245, read together, impose requirement that laws made by Parliament should bear nexus with India, three-judge Bench in ECIL asked that Constitutional Bench be constituted to consider whether ingredients of impugned provision, i.e., section 9(1)(vii) of Income-tax Act, 1961, indicate such nexus." [1990] 183 ITR 44 (AP). [1990] 183 ITR 43 (SC); [1989] Supp. 2 SCC 642. G. V. K. Industries Ltd. v. ITO [2011] 332 ITR 130, 136 (SC). Before Constitution Bench appellant withdrew its challenge to constitutional validity of section 9(1)(vii)(b) of Act and elected to proceed on factual matrix as to applicability of said provision. However, as learned Attorney General pressed upon for reconsideration, decision in three-judge Bench in ECIL case, larger Bench considered validity of requirement of relationship to or nexus with territory of India as limitation on powers of Parliament to enact laws pursuant to clause (1) of article 245 of Constitution. court adverted to ratio in ECIL, took note of propositions of learned Attorney General and principles relating to interpretation of Constitution, textual analysis of article 245, analysed constitutional topological space of article 245 and wider structural analysis of article 245 in context of article 260 and came to hold thus: "It would appear that concerns of learned Attorney General may have been more with whether ratio in ECIL could lead to reading down of legislative powers granted to Parliament by article 245. thorough textual analysis, combined with wider analysis of constitutional topology, structure, values and scheme has revealed much more intricately provisioned set of powers to Parliament. Indeed, when all powers necessary for organ of State to perform its role completely and to effectuate constitutional mandate, can be gathered from text of Constitution, properly analysed and understood in 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 risk of importing meanings and possibilities unsupportable by entire text and structure of Constitution. Invariably such demands are made in seeking to deal with external affairs, or with some claimed demands are made in seeking to deal with external affairs, or with some claimed grave danger or 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." Thereafter, court reiterated two questions it had set out in beginning. 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: (a) territory of India, or any part of India; or Page 165 of 332 ITR. Page 166 of 332 ITR. (b) interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?" Answering same, court observed: "The answer to 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 like-that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in social, political, economic, cultural, biological, environmental or physical spheres outside territory of India, and seek to control, modulate, mitigate or transform 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) territory of India, or any part of India; or (b) interests of, welfare of, well-being of, or security of inhabitants of India, and Indians." And thereafter: "Whether particular law enacted by Parliament does show such real connection, or expected real connection, between extra-territorial aspect or cause and something in India or related to India and Indians, in terms of impact, effect or consequence, would be mixed matter of facts and of law. Obviously, where Parliament itself posits degree of such relationship, beyond constitutional requirement that it be real and not fanciful, then courts would have to enforce such requirement in operation of law as matter of that law itself, and not of Constitution." second question that was posed by Constitution Bench is as follows: "(2) Does Parliament have powers to legislate'for' any territory, other than territory of India or any part of it?" aforesaid question was answered thus: "The answer to 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 territory of India, and also with respect to extra-territorial aspects or Page 166 of 332 ITR. Page 167 of 332 ITR. causes that have impact on or nexus with India as explained above in answer to Question 1 above. Such laws would fall within meaning, purport and ambit of grant of powers to Parliament to make laws'for whole or any part of territory of India', and they may not be invalidated on 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 No. 1 above, and would be laws made'for' foreign territory." After reference was answered, matter was directed to be listed before appropriate Bench. We have heard Mr. U. A. Rana, learned counsel for appellants and Mr. Arijit Prasad, learned counsel for respondents. At very outset, it is necessary to mention as challenge to constitutional validity of provision has been withdrawn, and same, accordingly, has not been gone into by Constitution Bench, there is no necessity to dwell upon same. crux of matter is whether, in obtaining factual matrix, High Court was justified in concurring with view expressed by revisional authority that assessee-company was not entitled to "no-objection certificate" under Act as it was under obligation to deduct tax at source pertaining to payment to NRC as character of success fee was substantiated by Revenue to put in ambit and sweep of section 9(1)(vii)(b) of Act. At this juncture, it is demonstrable that NRC is non-resident company and it does not have place of business in India. Revenue has not advanced case that income had actually arisen or received by NRC in India. High Court has recorded payment or receipt paid by appellant to NRC as success fee would not be taxable under section 9(1)(i) of Act as transaction/activity did not have any business connection. conclusion of High Court in this regard is absolutely defensible in view of principles stated in CIT v. R. D. Aggarwal and Co., CIT v. T. I. and M. Sales Ltd. and Barendra Prasad Ray v. ITO. That being position, singular question that remains to be answered is whether payment or receipt paid by appellant to NRC as success fee would be deemed to be taxable in India under section 9(1)(vii) of Act. As factual matrix would show, appellant has not invoked [1965] 56 ITR 20 (SC). [1987] 166 ITR 93 (SC). [1981] 129 ITR 295 (SC). Double Taxation Avoidance Agreement between India and Switzerland. That being not there, we are only concerned whether "success fee" as termed by assessee is "fee for technical service" as enjoined under section 9(1)(vii) of Act. said provision reads as follows: "9. Income deemed to accrue or arise in India.-(1) following income shall be deemed to accrue or arise in India-... (vii) income by way of fees for technical services payable by- (a) Government; or (b) person who is resident, except where fees are payable in respect of services utilised in business or profession carried on by such person outside India or for purposes of making or earning any income from any source outside India; or (c) person who is non-resident, where fees are payable in respect of services utilised in business or profession carried on by such person in India or for 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 agreement made before 1st day of April, 1976, and approved by Central Government. Explanation 1.-For purposes of foregoing proviso, agreement made on or after 1st day of April, 1976, shall be deemed to have been made before that date if agreement is made in accordance with proposals approved by Central Government before that date. Explanation 2.-For purposes of this clause,'fees for technical services' means any consideration (including any lump sum consideration) for rendering of any managerial, technical or consultancy services (including provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by recipient or consideration which would be income of recipient chargeable under head'Salaries'." Explanation to section 9(2) was substituted by Finance Act, 2010, with retrospective effect from June 1, 1976. Prior to said substitution, another Explanation had been inserted by Finance Act, 2007, with retrospective effect from June 1, 1976. said Explanations read as under : "As amended by Finance Act, 2010 Explanation.- For removal of doubts, it is hereby declared that for purposes of this section, income of 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 total income of non-resident, whether or not,- (i) non-resident has residence or place of business or business connection in India; or (ii) non-resident has rendered services in India. As amended by Finance Act, 2007 Explanation.-For removal of doubts, it is hereby declared that for 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 total income of non-resident, whether or not non-resident has residence or place of business or business connection in India." principal provision is clause (b) of section 9(1)(vii) of Act. said provision carves out exception. exception carved out in latter part of clause (b) applies to situation when fee is payable in respect of services utilised for business or profession carried out by Indian payer outside India or for purpose of making or earning of income by Indian assessee, i.e., payer, for purpose of making or earning any income from source outside India. On studied scrutiny of said clause, it becomes clear that it lays down principle what is basically known as "source rule", that is, income of recipient to be charged or chargeable in country where source of payment is located, to clarify, where payer is located. clause further mandates and requires that services should be utilised in India. Having stated about "source rule", it is necessary to appropriately appreciate how concept has developed. At time of formation of "League of Nations" at end of 1920, it comprised only 27 countries dominated by European States and United States of America. United Nations that was formed after Second World War, initially had 51 members. Presently, it has 193 members. With efflux of time, there has been birth of nation States which enjoy political independence and that has led to crossborder and international trade. State trade eventually has culminated in formulation of principles pertaining to international taxation jurisdiction. It needs no special emphasis to state that said taxation principles are premised to promote international trade and to allocate taxation between 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. nation States, in certain situations, resort to principle of "tax mitigation" and in order to protect their citizens, grant benefit of tax abroad under domestic legislation under bilateral agreements. two principles, namely, "situs of residence" and "situs of source of income" have witnessed divergence and difference in field of international taxation. principle "residence State taxation" gives primacy to country of residency of assessee. This principle postulates taxation of world-wide income and world-wide capital in country of residence of natural or juridical person. "source State taxation" rule confers primacy to right to tax to particular income or transaction to State/nation where source of said income is located. second rule, as is understood, is transaction specific. To elaborate, source State seeks to tax transaction or capital within its territory even when income benefits belongs to non-residence person, that is, person resident in another country. aforesaid principle sometimes is given different name, that is, territorial principle. It is apt to state here that residence based taxation is perceived as benefiting developed or capital exporting countries whereas source based taxation protects and is regarded as more beneficial to capital importing countries, that is, developing nations. Here comes principle of nexus, for nexus of right to tax is in source rule. It is founded on right of country to tax income earned from source located in said State, irrespective of country of residence of recipient. It is well settled that source based taxation is accepted and applied in international taxation law. two principles that we have mentioned hereinabove are also applied in domestic law in various countries. source rule is in consonance with nexus theory and does not fall foul of said doctrine on ground of extra- territorial operation. doctrine of source rule has been explained as country where income or wealth is physically or economically produced (see League of Nations, Report on Double Taxation by Bruins, Einaudi, Saligman and Sir of Nations, Report on Double Taxation by Bruins, Einaudi, Saligman and Sir Josiah Stan (1923)). Appreciated on aforesaid principle, it would apply where business activity is wholly or partly performed is source State, as logical corollary, State concept would also justifiably include country where commercial need for product originated, that is, for example, where consultancy is utilised. From aforesaid, it is quite vivid that concept of income source is multifaceted and has potentiality to take different forms (See Klaus Vogel, World-wide V. Source Taxation of Income-Review and Revision of Arguments (1988)). said rule has been justified by Arvid A. Skaar in Permanent Establishment; Erosion of Tax Treaty Principle on ground that profits of business enterprise are mainly yield of activity, for capital is profitable to extent that it is actively utilised in profitable manner. To this extent, neither activity of business enterprise nor capital made, depends on residence. purpose of adverting to these aspects is only to highlight that source rule has been accepted by them in UN Commentaries and 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 State on sovereign territory. This principle of formal territoriality applies in particular, to acts intended to enforce internal legal provisions abroad (See 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. Coming to instant case, it is evident that fee which has been named as "success fee" by assessee has been paid to NRC. It is to be seen whether payment made to non-resident would be covered under expression "fee for technical service" as contained in Explanation 2 to section 9(1)(vii) of Act. said expression means any consideration, whether lump sum or periodical in rendering managerial, technical or consultancy services. It excludes consideration paid for any construction, assembling, mining or like projects undertaken by non-resident that is recipient or consideration which would be taxable in hands of non-recipient or non-resident under head "Salaries". In case at hand, said exceptions are not attracted. What is required to be scrutinised is that appellant had intended and desired to utilise expert services of qualified and experience professional who could prepare scheme for raising requisite finances and tie up loans for power projects. As company did not find any professional in India, it had approached consultant NRC located in Switzerland, who offered their services. Their services rendered included, inter alia, financial structure and security package to be offered to lender, study of various lending alternatives for local and foreign borrowings, making assessment of expert credit agencies world-wide and obtaining commercial bank support on most competitive terms, assisting appellant company in loan negotiations and documentations with lenders, structuring, negotiating and closing financing for project in co-ordinated and expeditious manner. In this context, it would be appropriate to reproduce letter dated July 8, 1993, addressed by NRC. It reads as follows: "We propose following scope of services to be performed by ABB PTF: Assisting GVK Industries Ltd. ('GVK') in putting together financial structure and security package to be offered to lenders; Evaluating pros and cons of various lending alternatives, both for local and foreign borrowings; Developing comprehensive financial model to evaluate project and to perform various sensivity studies; Preparing preliminary information memorandum to be used as basis for placing foreign and local debt; Accessing export credit agencies world wide obtaining commercial bank support on most comprehensive terms; Assisting GVK in loan negotiations and documentation with lendors; and Structuring, negotiating and closing financing for this project in co- ordinated and expeditious manner. We propose compensation structure based only on success. As exception, ABB PTF does not propose either any retainers or any reimbursement for travel and other expenses incurred by ABB PTF. success fee will be 0.75 per cent. of total debt, payable at financial closing." said letter was placed before board of directors of appellantcompany in its meeting held on August 21, 1993. relevant part of resolution passed by board is extracted hereinbelow: "... It was explained to directors that ABBPTF's scope of service for project include: Developing comprehensive financial model; Tying up rupee/foreign currency loan requirements of project; Assessing export credit agencies world wide and obtaining commercial banks support on most competitive terms; Assisting GVK in loan negotiations and documentation with lenders. For above scope of service ABB PTF would be paid fee of 0.75 per cent. of loan amount which is payable only on successful financial closing. directors while approving this arrangement, advised that ABB-PTF should also be involved in public issue of company." From aforesaid two documents, it is clear as crystal that obligation of NRC was to: (i) Develop comprehensive financial model to tie-up rupee and foreign currency loan requirements of project. (ii) Assist expert credit agencies world-wide and obtain commercial bank support on most competitive terms. (iii) Assist appellant company in loan negotiations and documentation with lenders. Pursuant to aforesaid exercises carried out by NRC, company was successful in availing loan/financial assistance in India from Industrial Development Bank of India (IDBI) which acted as lead financier for rupee loan requirement. For foreign currency loan requirement, 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 NRC. In this factual score, expression, managerial, technical or consultancy service, are to be appreciated. said expressions have not been defined in Act, and, therefore, it is obligatory on our part to examine how said expressions are used and understood by persons engaged in business. general and common usage of said words has to be understood at common parlance. In case at hand, we are concerned with expression "consultancy services". In this regard, reference to decision by Authority for Advance Rulings in P. No. 28 of 1999, In re, would be applicable. 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. categories of technical and consultancy services are to some extent overlapping because consultancy service could also be technical service. However, category of consultancy services also includes advisory service, whether or not expertise in technology is required to perform it." [2000] 242 ITR 208, 215 (AAR). In this context, reference to decision in CIT v. Bharti Cellular Ltd., would be apposite. In said case, while dealing with concept of consultancy services , High Court of Delhi has observed thus: Similarly, word consultancy has been defined in said Dictionary as work or position of consultant; department of consultants. Consultant itself has been defined, inter alia, as person who gives professional advice or services in specialized field . It is obvious that word consultant is derivative of word consult which entails deliberations, consideration, conferring with someone, conferring about or upon matter. Consult has also been defined in said Dictionary as ask advice for, seek counsel or professional opinion from; refer to (a source of information); seek permission or approval from for proposed action . It is obvious that service of consultancy also necessarily entails human intervention. consultant, who provides consultancy service, has to be human being. machine cannot be regarded as consultant. In this context, we may fruitfully refer to dictionary meaning of consultation in Black s Law Dictionary, Eighth Edition. word consultation has been defined as act of asking advice or opinion of someone (such as lawyer). It means meeting in which party consults or confers and eventually it results in human interaction that leads to rendering of advice. As factual matrix in case at hand, would exposit NRC had acted as consultant. It had skill, acumen and knowledge in specialised field, i.e., preparation of scheme for required finances and to tieup required loans. nature of activities undertaken by NRC has earlier been referred to by us. nature of service referred to by NRC, can be said with certainty would come within ambit and sweep of term consultancy service and, therefore, it has been rightly held that tax at source should have been deducted as amount paid as fee could be taxable under head Fee for technical service . Once tax is payable paid grant of no-objection certificate was not legally permissible. Ergo, judgment and order passed by High Court are absolutely impregnable. Consequently, appeal, being devoid of merit, stands dismissed. However, in facts and circumstances of case, there shall be no order as to costs. [2009] 319 ITR 139, 147 (Delhi). *** GVK Industries Ltd. v. Income-tax Officer
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