TMI Blog1997 (5) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... icity. For this purpose, it constructed and erected a power generating station with a capacity of 235 MW designed to operate using natural gas as fuel near Rajahmundry of East Godavari District of Andhra Pradesh. The petitioner-company intended to utilise the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finances and tie up the required loan. Being unable to find such a professional in India, it had to seek the services of a consultant outside India, the NRC referred to above. The NRC, having regard to the requirements of the petitioner-company, offered its services as financial adviser to the petitioner-company's project on July 8, 1993. Those services 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 an assessment of export credit agencies world-wide and obtaining commercial bank support on the most competitive terms, assisting the petitioner-company in loan negotiations and documentation with lenders and structuring, negotiating and closing the financing for the project in a co-ordinated and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but on October 25, 1995, the second respondent cancelled the earlier order and directed the petitioner-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 confirming the order of the first respondent and dismissed the revision petition by order dated March 21, 1995 (sic). Challenging the correctness of the said order the petitioner-company filed this petition praying for a writ of certiorari to call for the records from the respondents and to quash the order of the second respondent head quarters 1140/22 of 1994-95 dated, March 21, 1995 (sic), confirming the order of the first respondent letter No. G-130, dated September 27, 1994. For the respondents the first respondent filed a counter-affidavit. It is stated that the NRC has been very actively associating in not only arranging the present loan but also in providing various services which fall within the ambit of both managerial as well as consultancy services. In its letter dated July 8, 1993, it is noted that the NRC is a financial adviser with world-wide experience and has been engaged in India and requested that it be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im order and that the final order was passed on March 21, 1995 (sic). The contention of the petitioner-company that a portion of the services was rendered by the NRC within India shows that it has accepted that the services were rendered by the NRC within India and that the provision of proportionate tax deduction at source will be attracted. The petitioner-company is obliged in law to deduct income-tax before remitting the success fee to the NRC, so the petitioner-company is not entitled to the " no objection certificate ". The petitioner-company has filed a reply affidavit denying the averments in the counter-affidavit adverse to the interests of the petitioner-company and reiterated the facts and the contentions raised in its original affidavit. It added that the NRC is not the financial segment of ABB. It is submitted that the NRC is an independent unit and is in no way subsidised by ABB. It is also submitted that merely because expert advice was obtained by the petitioner-company, it cannot be said that it pursued the application for loan/financial assistance on behalf of the NRC and it is contended that the advisory services were rendered by the NRC to the petitioner-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrued or arisen in India, the success fee is liable to be taxed having regard to the provisions of section 9(1)(i) and 9(1)(vii) of the Act ; that section 9(1)(i) and section 9(1)(vii) cannot be read together. He has also contended that the NRC has participated in equity. The points that arise for consideration are : (1) Whether the " success fee " payable by the petitioner-company to the NRC or any portion thereof is chargeable under the provisions of the Act ; and (2) Whether the petitioner-company is entitled to a " no objection certificate ". Since the first point arises in the context of the application under section 195 of the Act filed by the petitioner-company, it would be useful to read the relevant provisions of that section here : " 195. Other sums.---(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head ' Salaries ') shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of this Act (not being income chargeable under the head " Salaries ",--- has to deduct income-tax thereon at source at the rate in force at the time of credit of such income to the account of the recipient or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. It may be pointed out here that the obligation imposed on every payer under section 195(1) of the Act to deduct income-tax at source from the sum payable by him to a non-resident or the foreign company arises only when such sum is chargeable as income of the recipient under the provisions of the Act but not otherwise. Sub-section (2) says that if in the opinion of the payer the whole of such sum would not be income chargeable in the case of the recipient, the payer may make an application to the Assessing Officer to determine the appropriate proportion of such sum so chargeable and upon such determination, tax can be deducted under sub-section (1) only on that proportion of the sum. Sub-sections (3) to (5) deal with grant of certificate by the Assessing Officer and matters connected thereto. Sub-sections (3) and (4) enable the recipient of the sum referred to in sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts of this case, however, the second point will have to abide by the answer to the first point. Now, we shall advert to the first point-whether the " success fee " payable by the petitioner-company to the NRC or any portion thereof is chargeable under the provisions of the Act. Sub-section (2) of section 5 of the Act provides that the total income of a non-resident of any previous year shall, subject to the provisions of the Act, include all income, from whatever source derived, which (a) is received or deemed to be received in India by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India, during such year. We are concerned here with clause (b) of sub-section (2) of section 5. The expression " accrues or arises or deemed to accrue or arise in India " employed in clause (b) of sub-section (2) is defined in section 9 of the Act. The relevant provisions of section 9, which need our attention, are clauses (i) and (vii) of sub-section (1) ; they may be extracted here : " 9. Income deemed to accrue or arise in India.---(1) The following incomes shall be deemed to accrue or arise in India--- (i) all income accruing or arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices ' 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 ' . . ." Clause (i) of sub-section (1) of section 9, extracted above, brings within the fold of the said 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 or from any asset or source of income in India, or through the transfer of a capital asset situate in India." Here the contention of Mr. Dhanuka that the NRC had no " business connection " requires examination. The expression " business connection " is also used in section 163(1)(b) which regards every person in India, who has any " business connection " with the non-resident, as an " agent " of that non-resident. The import of that expression has been explained in various judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the income of a non resident under the deeming provision of section 42(1) of the 1922 Act it must be shown by the Department that some of the operations were carried out in India in respect of which the income is sought to be assessed. In CIT v. Hindustan Shipyard Ltd. [1977] 109 ITR 158 (AP), the respondent-company entered into an agreement with a Polish company for the purchase of diesel engines with accessories. The agreement provided that the Polish company would render services for the effective fulfilment of the contract of sale, which included organising of a training course in Poland for technical employees of Hindustan Shipyard at the expense of the Polish company. In the context of the question referred to this court under section 256(1) of the Act, the Division Bench which dealt with the case, considered the scope of the expression " business connection " within the meaning of sections 9(1)(i) and 163(1)(b) of the Act and held that to conform to the requirements of that expression it is necessary that the common thread of mutual interest must run through the fabric of the trading activities carried on outside and inside the taxable territory which has been describ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even if the assessee-company was to be treated as an agent within the meaning of section 163(1), there was no " business connection " within the meaning of section 9(1) of the Act so the income accruing to the non-resident foreign company could not be assessed through its agent. That order was affirmed by the Income-tax Appellate Tribunal. On a reference to the High Court of Patna, it was held that the sum of pound 7,000 was not the income which the foreign-company had received in India or an income which had accrued to the foreign company within the meaning of section 5(2) of the Act and that the sum paid to the foreign company at London for technical advice given from London could not be attributed to the operation carried on in India. It was further held that there was no continuity between the business of the non-resident and the activity in the taxable territories in respect of the income and, therefore, there was no " business connection " between the foreign company and the assessee-company and the income could not be deemed to accrue or arise to the foreign company in India within the meaning of section 9(1) as such, the said sum paid to the foreign company at London was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices which the NRC has undertaken under the agreement. The letter addressed by the NRC on July 8, 1993, describes the nature and extent of services which the NRC would perform. The relevant portion of the letter reads as under : " 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 local and foreign borrowings ; Developing a comprehensive financial model to evaluate the project and to perform various sensitivity 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 and obtaining commercial bank support on the most comprehensive terms ; Assisting GVK in loan negotiations and documentation with lenders ; and Structuring, negotiating and closing the financing for this project in a co-ordinated and expeditious manner. We propose a compensation structure based only on success. As an exception, ABB-PTF does not propose either any re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t documents 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 drawing 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 the loans from Indian or foreign agencies. On the petitioner-company obtaining the loan, the NRC becomes entitled to " success fees ". We have perused the copies of the letters referred to in the order of the Income-tax Officer which are contained in Volumes II and III of the material papers filed by the petitioners. Volume II contains the corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correspondence is brought to our notice by learned standing counsel to show that the proposal to involve the NRC in the public issue of the petitioner company was in fact put to the NRC and that it had accepted the same and pursuant thereto it did involve itself in the public issue of the petitioner-company. For the above reasons, we are of the view that a " business connection " between the petitioner-company and the NRC has not been established. What remains to be considered is whether the " success fee " falls within clause (vii)(b) of section 9(1) extracted above. That clause says that income by way of fees for technical service payable by 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, shall be income deemed to accrue or arise in India. Explanation 2 defines the expression " fees for technical services " to mean any consideration (including any lump sum consideration) for the rendering of any technical or consultancy services (including the provision of services of technical or o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbit of section 9(1)(vii)(b). That this would be so was not seriously disputed by learned senior counsel but he argued : " should that be the interpretation of the said clause, it would be unconstitutional for want of legislative competence and violation of article 14 of the Constitution ". He referred to the following passage in Kanga and Palkhivala's " The Law and Practice of Income-Tax " : " If the scope and validity of these clauses are questioned before a court of law, the alternatives before the court would be either to strike down the provisions as ultra vires the legislative powers of the Indian Parliament or to read down the provisions so as to restrict their scope only to those cases where on the facts a sufficient nexus exists between India and the foreigner's income accruing and received abroad . . ." There is no doubt that the learned authors are very critical of those provisions when they remarked on page 269 : " But clauses (v)(b), (vi)(b) and (vii)(b) seek to charge a foreigner in respect of his income outside India only because the payment is made by an Indian resident, even where the income arises under a contract which is made and performed entirely outsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign companies and other such arrangements for the better development of industry and commerce in India. In view of the great public importance of the question, we think it desirable to refer these cases to a Constitution Bench and we do so order." It is then contended that section 9(1)(vii) cannot be read in isolation and that it has to be read along with the other clauses. A plain reading of section 9(1), extracted above, makes it clear that it enumerates various categories of income under sub-section (1) and directs that income falling under each of the clauses and sub-clauses shall be deemed to accrue or arise in India. The income dealt with in each clause is distinct and independent of the other and the requirements to bring income within each clause, are separately noted, as such it is not necessary that income falling in one category under any one of the sub-clauses should also satisfy the requirements of the other sub-clauses to bring it within the ambit of the expression " income deemed to accrue or arise in India ". If the clauses are so interpreted as to read the requirements of one into the other, as contended, it will lead to anomalous and absurd results and this obv ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
