NEW DELHI, FEB 18, 2015: THE issues before the Bench are - Whether success fee paid to non-resident company for preparing scheme for required finances and to tie up required loans by the Indian power generation company falls within the ambit of fees for technical services as consultancy service and Whether such remittances attract the provisions of Section 195 of the Income tax Act. And the verdict goes against the assessee.
Facts of the case
The assessee, GVK Industries Ltd, was incorporated to set up a 235 MW Gas-based Power Project at Jegurupadu, Andhra Pradesh at an estimated cost of Rs 839 Crore. The main business of the assessee was to generate and selll electricity. It hired services of ABB-Projects & Trade Fiannce International Ltd, Zurich, Switzerland, to act as its financial advisor. Their services to be rendered included 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 assessee in 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. Its appointment was confirmed for the proposed public issue of share.
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. After successful rendering of services the NRC sent invoice to the assessee for payment of success fee amount i.e., USD 17,15,476.16 (Rs 5.4 Crores). On receipt of invoice, the assessee approached the Revenue 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 for the NRC. It was also stated as the NRC had no business connection Section 9(1)(i) was not attracted and further as NRC had rendered no technical services Section 9(1)(vii) was also no attracted. The Revenue declined to issue NOC.
On appeal, the CIT allowed the assessee 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'.
The assessee opted for the writ route before the High Court. In its affidavit the Revenue submitted that the NRC was very actively associated not only in arranging loan but also in providing various services which fell within the ambit of both managerial as well as consultancy services.
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" conveyed. It observed that expression "business connection" was too wide to admit of any precise definition though it had some well known attributes; that whether there was a business connection between an Indian company and a non-resident company was a mixed question of fact and law which was to be determined on the facts and circumstances of each case; that the essence of "business connection" was existence of close, real, intimate relationship and commonness of interest between the NRC and the Indian person; that in a case where there was 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 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". And it finally dismissed the writ.
On appeal, the Apex Court held that,
++ 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, C.I.T. V. TRC and Birendra Prasad Rai V. ITC. That being the position, the singular question that remains to be answered is whether the payment or receipt paid by the assessee 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;
++ 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 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;
++ 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;
++ 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;
++ 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;
++ 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.
| S. 260A: Entire law on condonation of delay explained |
(i) Having considered the rival submissions, the issue which falls for our consideration is whether the applicant has shown sufficient cause so as to become entitled for condonation of delay of five years in preferring the appeal against the order dated 31.10.2008 passed by the Tribunal. Admittedly at the relevant time the applicant had accepted the orders passed by the Tribunal on the ground that three Authorities have decided against it. The applicant was completely conscious of the fact that there was no decision of the Jurisdictional High Court in regard to the said issue. This was more a reason for the applicant to pursue the proceedings. The applicant, however, accepted the orders passed by the Tribunal and decided not to pursue the proceedings. In the meantime this Court had decided the same in favour of the applicant in the case of "Sind Cooperative Housing Society Ltd." 317 ITR 47 and "Mittal Co-operative Society Ltd." 320 ITR 414. The Tribunal applying the law laid down in these decisions decided in favour of the applicant by an order dated 11.1.2013 passed for the Assessment Year 2007-08. In our opinion the Tribunal deciding in favour of the applicant for the subsequent years, applying the decisions of this Court, would not enure to the benefit of the applicant to reopen the issue concluded by the Orders dated 31.10.2008 passed by the Tribunal and accepted by the applicant. The delay is inordinate.
(ii) We are of the opinion that the reasons as shown by the applicant cannot fall within the parameters of sufficient cause so as to confer a benefit of condonation to the applicant. This is for the reason that the applicant had taken a well considered decision not to move further proceedings against the order dated 31.10.2008. Applying the test of a prudent litigant it cannot be held that once the applicant by his own volition had decided to accept a judicial order, the applicant can at any time assail the same may be for the reason that subsequently new decisions are rendered on that issue. Section 5 of the Limitation Act cannot be stretched to bring about a situation of unsettling judicial decisions which stood accepted by the parties. If the contention of the applicant is accepted, it would create a situation of chaos and unsettling various orders passed from time to time by the Tribunal as accepted by the parties. The legislative mandate in stipulating a limitation to file an appeal within the prescribed limitation cannot be permitted to be defeated when a litigant has taken a decision not to pursue further proceedings. A new ruling is no ground for reviewing a previous judgment. If this is permitted, the inevitable consequence is confusion, chaos, uncertainty and inconvenience as then no orders can ever attain finality though accepted by parties.
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