TMI Blog2015 (2) TMI 730X X X X Extracts X X X X X X X X Extracts X X X X ..... ertificate’ was not legally permissible. Ergo, the judgment and order passed by the High Court are absolutely impregnable. - Decided against assessee. - Civil Appeal No. 7796 of 1997 - - - Dated:- 18-2-2015 - Dipak Misra And Sudhansu Jyoti Mukhopadhaya,JJ. JUDGMENT 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.1995 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudied 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 crossborder 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 taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws: 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 pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 280, 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 (2009) 319 ITR 139, 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, conferr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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