In a latest judgment, Supreme Court of India has ruled that ‘success fee’ payable to a non resident company acting as financial advisor for securing loan/financial assistance to an Indian company being in the nature of ‘consultancy services’ is liable for deduction of tax at source under the head fee for technical services.

Case Details:
Civil Appeal No. 7796 of 1997
GVK Industries Ltd. & Anr. ... Appellants Versus The Income Tax Officer & Anr. ... Respondents

Coram: J. Dipak Misra, Sudhanshu;  J.  Jyoti Mukhopadhaya

Date of the Order: 18-02-2015

Case Law References:
Electrical Corporation of India Ltd. V. C.I.T. rendered in W.P. No. 105/1987
C.I.T. V. Bharti Cellular Limited and others (2009) 319 ITR 139

Facts of the Case:
The appellant was an Indian company incorporated for the purpose of setting up a 235 MW Gas based power project at Jegurupadu, Rajahmundry, Andhra Pradesh. The company entered into an agreement with ABB Projects & Trade Finance International Ltd., Zurich, Switzerland (Non resident Company/NRC). The NRC offered its services as financial advisor which included services of financial structuring and security package to be offered to the lender, making an assessment of export credit agencies world-wide, obtaining commercial bank support on the most competitive terms, assisting the company loan negotiations and documentation with lenders, 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.

When the appellant company approached the income tax officer and later Commissioner of Income Tax u/s 264 through revision petition for issuing a ‘No Objection Certificate’ to remit the said success fee, the company was ultimately denied the certificate.

The income tax authorities stressed 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 and thus the company is obliged in law to deduct income-tax before remitting “success fee” to the NRC.

The company's contention before tax authorities was that NRC had no place of business in India and all the services rendered by it were from outside India. Thus 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 as the NRC had no business connection u/s 9(1)(i) and also NRC had not rendered any technical services u/s 9(1)(vii). The company also argue that merely because expert advice was obtained, it could not be said that it pursued the application for loan/financial assistance on behalf of NRC

Aggrieved by the order of the commissioner, the assessee company preferred an appeal before the High Court (WP 6866/1995) challenging the constitutional validity of Section 9(1) (vii)(b) of the Income Tax  Act, 1961 (The Act) on the ground of legislative competence and violation of Article 14 of the Constitution.

The High court observed that the expression “business connection” as used in section 163(1)(b) 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.”

The High Court referred to the letter dated July 8, 1993 addressed by the NRC stipulating the scope of services to be undertaken and held that once the NRC had prepared the scheme and given necessary advice and assistance to the petitioner-company for obtaining loan, the responsibility of the NRC was over. It was 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 was to become entitled to ‘success fees’.

However the High Court did not accept the contention of the assessee company that 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 Income Tax Act. The High Court further 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 and accordingly, the court opined that the assessee was not entitled to the “No Objection Certificate” and dismissed the writ petition.

Issue before the Supreme Court
It is notable that the issue of the constitutional validity of section 9(1)(vii) had already come before the Constitution Bench of the Supreme Court in Electric Corporation of India Ltd vs CIT (1990) 183 ITR 43 (SC); [(1989) Supp. 2 SCC 642] to consider whether the ingredients of the impugned provision i.e. Section 9(1)(vii) of the Income Tax Act (1961) read with Article 245 indicate that the law made by the Parliament should bear a nexus with India.

In the instant case, the issue before the Supreme Court was whether the payment made to a 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 Supreme Court, dismissed the appeal with the remark that the judgment and order passed by the High Court was absolutely impregnable.

Important excerpts from the Judgment of the Supreme Court:

“The said expression means any consideration, whether lumpsum or periodical in rendering managerial, technical or consultancy services.”

“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.”

“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.”

“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.”

“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, 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.”

In this context, a reference to the decision in C.I.T. V. Bharti Cellular Limited and others, 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.”

“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.”

“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.”

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