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Thursday, February 19, 2015

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 (for brevity, 'the Act') by the NRC. = "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 others[6], 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 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' 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.

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.
      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 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; 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 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 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 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  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
      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 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  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'."


      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 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  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 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   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:


           (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 [pic]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 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.
    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 Court
    in this regard is absolutely  defensible  in  view  of  the  principles
    stated in C.I.T. V. Aggarwal  and  Company[2],  C.I.T.  V.  TRC[3]  and
    Birendra Prasad Rai V. ITC[4].  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 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 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 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 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  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  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.
    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
    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.
    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.


           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.
    (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 to the decision by
    the authority for advance ruling In Re. P.No. 28 of 1999[5],  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 others[6], 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 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'  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.
                                 [DIPAK MISRA]


                 .........................................................J.
                                   [SUDHANSU JYOTI MUKHOPADHAYA]
NEW DELHI
FEBRUARY 18, 2015.

-----------------------
[1]  (1990) 183 ITR 43 (SC); [(1989) Supp. 2 SCC 642]
[2]  (1965) 56 ITR 20
[3]  (1987) 166 ITR 1993
[4]  (1981) 129 ITR 295
[5]  (1999) 242 ITR 280
[6]  (2009) 319 ITR 139

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