G.V.K. INDUSTRIES LIMITED VS INCOME-TAX OFFICER
1999 P T D 2655
[228 I T R 564]
[Andhra Pradesh High Court (India)]
Before Syed Shah Mohammed Quadri and B. S. Raikote, JJ
G.V.K. INDUSTRIES LIMITED and another
Versus
INCOME-TAX OFFICER and another
Writ Petition No.6866 of 1995, decided on 02/05/1997.
Income-tax---
----Non-resident---Income deemed to accrue or arise in India---Scope of S.9, Indian Income Tax Act, 1961---Fees for technical services---Business connection---Company formed for generation and sale of electricity-- Agreement with non-resident company in Zurich for help in raising finances---Non-resident company giving advice regarding processing of loans---Success fees paid to non-resident---No business connection between Indian company and non-resident---However, success fee constituted fees for technical services---Success fees, therefore, assessable under S.9(1)(vii)(b)-- Indian Income Tax Act, 1961, S.9.
A plain reading of section 9(1) of the Income Tax Act, 1961, makes it clear that it enumerated various categories of income under subsection (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, it will lead to anomalous and absurd results and this obviously cannot be done.
Clause (i) of subsection (1) of section 9 brings within its fold "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." The following principles are applicable with regard to "business connection": (i) whether there is a business connection between an Indian company and a non-resident company is a mixed question of fact and law, which has to be determined on the facts and circumstances of each case; (ii) the expression "business connection" is too wide to admit of any precise definition; however, it has some well known attributes; (iiii) the essence of "business connection" is the existence of close, real, intimate relationship and commonness of interest between the non -resident company and the Indian person; (iv) where there is control of management or finances or substantial holding of equity shares or sharing of profits by the-non-resident company of the Indian person, the requirement of principle; (iii) is fulfilled; and (v) to constitute "business connection" there must be continuity of activity or operation of the non-resident company with the Indian party and that a stray or isolated transaction is not enough to establish a business connection.
Clause (vii)(b) of section 9(1) 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 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". Thus, from a combined reading of clause (vii)(b) and 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 income by way of fees for technical service and would, therefore, be within the ambit of "income deemed to accrue or arise in India".
The main object of the petitioner-company was to generate and sell electricity. 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. 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 non-resident company offered its services as financial adviser to the petitioner's project. 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 coordinated and expeditious manner. For its services, the non-resident company was to be paid, what was termed as "success fee" at the rate of 0.75 percent of the total debt financing. This proposal was placed before the board meeting of the petitioner-company held on August 21,1993. The board of directors approved the appointment of the non-resident company and advised that it be involved in the proposed public issue of shares by the petitioner-company. The non-resident company rendered professional service from Zurich; Switzerland; by correspondence, as to how to execute the documents for sanction of loan by the financial institutions within and outside the country. On the advice of the non-resident, company, the petitioner-company approached the Indian financial institutions, with the IDBI acting as the lead Financier for its rupee loan requirement, and for a part of its foreign currency loan requirement, it approached the International Finance Corporation, USA. After successful rendering of services the non -resident company sent an invoice to the petitioner-company for payment of the success fee amount of US $ 17,15,476.16 (Rs.5.4 crores). The petitioner-company then approached the Income-tax Officer for issuing a "no objection certificate" to remit; he said sum, duly pointing out that the non -resident company had no place of business in India and that all the services rendered by it were from outside India, and that no part of the 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 by the non-resident company. The Income-tax Officer refused to issue the certificate and this was upheld by the Commissioner of Income-tax on revision. On a writ petition challenging the order of the Commissioner:
Held, (i) that the scope of service/work undertaken by the non -resident company was merely to draw up a scheme, advise on the terms and methods of negotiation and for documentation with the tender, evaluate the pros and cons of various lending alternatives, both for the local and the foreign borrowings, prepare a preliminary information memorandum to be used as the basis for placing the foreign and local debt, and that the responsibility of entering into correspondence as per the advice of the non -resident company and pursuing the matter was that of the petitioner-company itself, and not that of the non-resident company. Hence, the office of the petitioner could not be treated as the place of business of the non-resident company. While accepting the terms of the non-resident company, the board of directors of the petitioner-company merely advised that the non-resident company should also be involved in the public issue of the petitioner company. This advice was directed to the petitioner-company itself. There was no material to show that the proposal to involve the non-resident company in the public issue of the petitioner-company was in fact put to the non-resident company and that it had accepted the same and pursuant thereto it did involve itself in the public issue of the petitioner. Hence, the business connection between the petitioner-company and the non-resident company had not been established.
(ii) However, the success fees fell within the ambit of section 9(1)(vii)(b). For purposes of clause (vii)(b) of section 9(1), the business of the petitioner-company could not be divided into water-tight compartments, like finance, generation of power, plant and machinery, management, etc., to hold that managerial, technical and consultancy services related to management, generation of power and plant and machinery but not to finance. Advice given to procure loan to strengthen finances would be as much a technical or consultancy service, as it would be with regard to management, generation of power or plant and machinery. The success fee was chargeable under the provisions of the Income-tax Act, and, therefore, the petitioners were not entitled to a "no objection certificate".
Barendra Prasad Ray v. ITO (1981) 129 ITR 295 (SC); British Columbia Electric Railway Co. Ltd. v. King (1946) AC 527; Carborandum Co. v. CIT (1977) 108 ITR 335 (SC); CIT v. Hindustan Shipyard Ltd. (1977) 109 ITR 158 (AP); CIT (Addl.) v. New Consolidated Gold Fields Ltd. (London) (1983) 143 ITR 599 (Pat.); CIT v. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC); Electronics Corporation of India Ltd. v. CIT (1990) 183 ITR 44 (AP); Electronics Corporation of India Ltd. v. CIT (1990) 183 ITR 43 (SC) and Queen v. Melford Developments 82 DTC 6281 (Supreme Court of Canada) ref.
D.R. Dhanuka far, C.V. Rajiv Reddy and C. Kodandaram for Petitioners.
J.V. Prasad for Respondents.
JUDGMENT
SYED SHAH MOHAMMED QUADRI, J.---This writ petition arises out of the application filed by the first petitioner, G.V.K. Industries Ltd. (hereinafter referred to as the "petitioner-company"), under section 195 of the Income Tax Act, 1961 (for short the "Act"), for a "no objection certificate" for making remittance of Rs.5.4 crores to ABB--Projects and Trade Finance (International) Ltd., Zurich, Switzerland (hereinafter referred to as "non-resident company/NRC").
There are two petitioners in this writ petition. On June 18, 1992, the first petitioner was incorporated as a public limited company, registered under the Companies Act, 1956. The second petitioner is the director of the first petitioner. The main object of the petitioner-company is to generate and sell electricity. 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 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 percent of the total debt financing. This proposal was placed before the board meeting of the petitioner-company held on August 21, 1993. The board of directors approved the appointment of the NRC and advised that it be involved in the proposed public issue of shares by the petitioner-company. However, it is the case of the petitioners that as on the date of the application for the "no objection certificate" the petitioner-company has not gone into the public issue, so the NRC had no connection with the public issue. The NRC rendered professional service from Zurich by correspondence as to how to execute the documents for sanction of loan by the financial institutions within and outside the country. On the advice of the NRC, the petitioner-company approached the Indian financial institutions with the IDBI acting as the lead financier for its rupee loan requirement and for a part of its foreign currency loan requirement, it approached the International Finance Corporation (IFC), Washington DC., USA. After successful rendering of services the NRC sent an invoice to the petitioner-company for payment of the success fee amount, US $ 17,15,476.16 (Rs.5.4 crores). The petitioner-company then approached the first respondent for issuing a "no objection certificate" to remit the said sum, duly pointing out that the NRC had no place of business in India and that all the services rendered by it were from outside India and that no part of the success fee could be said to arise or accrue or be deemed to arise or accrue in India attracting the liability under the Income-tax Act by the NRC. As the NRC has no business connection section 9(1)(i) is not attracted; the NRC has rendered no technical service so section 9(1)(vii) is also not attracted. However, the first respondent refused to issue the "no objection certificate" by his order, dated September 27, 1994. Dissatisfied with the said order of the first respondent, the petitioner-company filed a revision petition before the second respondent under section 264 of the Act. On March 21, 1995, the second respondent permitted the petitioner to remit the said sum to the NRC by furnishing a bank guarantee for the amount of the tax demanded. The petitioner-company took steps to comply with the said order 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 appointed as "financial consultant" for the project. The petitioner-company responded by appointing the NRC as financial adviser vide its letter, dated August 2, 1994 (sic). The board of directors of the petitioner-company approved the appointment of the NRC as financial adviser in its meeting held on August 21, 1993. The proceedings of the said meeting disclosed that the NRC was appointed not only to arrange for the particular loan but also to render several other financial and general services and also to involve itself in the public issue of the company. So, it squarely falls within the ambit of section 9(f)(vii)(b) of the Act. The NRC is a financial segment of the ABB, which is participating in the equity of the petitioner-company besides the IFC, Washington. It is submitted that section 5(2) read with section 9(1)(1) and 9(1)(vii)(b) apply to the remittance to be made by the petitioner-company to the NRC as the income will be deemed to have accrued or arisen in India. So, the petitioner-company is liable to deduct tax at the prescribed rate before remitting any money to the NRC. In view of this position the petitioner-company is not entitled to the "no objection certificate" applied for by it. It is submitted that what is relevant for purposes of section 9(1)(1) is whether there is a business connection of the NRC with the petitioner company in India and the voluminous correspondence between the two wings discloses the business connection between them. The services rendered by the NRC were not a one time affair as alleged. When the petitioner-company itself has acted on behalf of the NRC for processing, negotiating and obtaining loans from the IDBI, India, and the IFC, Washington, the contention that .the petitioner-company is not an agent' or that there is no business connection and no office of the NRC in India, is illogical and untenable. The petitioner-company, it is stated, contracted the NRC not only for the limited purpose of getting the loan but also for further participation in its business activity which is evident from the correspondence. As the remittance has to be made by the petitioner-company to the NRC form India, the income will accrue or deemed to have accrued or arisen in India to the NRC within the meaning of sections 9(1)(1) and 9(1)(vii)(b). It is submitted that the order of the second respondent, dated March 21, 1995, was only an interim 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 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-company from outside India. Section 5(2) read with the relevant part of section 9(1) would show that section 9 is not attracted. It is denied that the petitioner-Company has made any admission to the effect that there was or, is -a business connection between the NRC and the petitioner-company and that the NRC has rendered advisory service to the petitioner-company in India. It is denied that the petitioner-company was ever the agent of the NRC for the purpose of making the loan application to the financial institution or in respect of pursuing such, application as alleged or otherwise at all. The petitioner company was always the principal directly concerned with the making of application -for financial assistance for the project and pursuing the same. The NRC did not have any office or establishment in India at any relevant point of time and it operated from Zurich and there was no business connection between the petitioner-company and the NRC. The success fee did not accrue or arise to the NRC in India and no income is deemed to have accrued or arisen to the NRC in India.
M. D.R. Dhanuka, learned senior counsel appearing for the petitioners, submits that the impugned order suffers from an error apparent on the face of the record and that it is the result of misreading of the documents, the findings recorded are based on conjectures and surmises. The NRC did not carry on any business activity or operation in India at any point of time and that it rendered services to the petitioner-company from outside India and that the NRC did not have business connection in India; therefore, the requirements of section 9(1)(i) and section 9(1)(vii) which have to be read together, are not satisfied. Even if section 9(1)(vii) of the Act is read in isolation, construing it literally, the nature of the service rendered by the NRC does not fall within the ambit of the said provision. He also contends that merely because the amount of success fee is paid by the petitioner company to the NRC in India albeit for the services rendered from outside India, the income of the NRC cannot be deemed to have accrued or arisen in India.
Mr. J.V. Prasad, learned standing counsel for income-tax, submits that the facts on record would establish business connection; further the financial consultancy is a technical consultancy, so the income of the NRC has accrued or arisen or deemed to have accrued or arisen in India, the success fee is liable to be taxed having regard to the provisions of sections 9(1)(i) and 9(l)(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 draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force...
(The proviso and the Explanation are not relevant for the present discussion, so they are not extracted).
(2) Where the person responsible for paying any such sum chargeable under this Act other than interest on securities, dividend and salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under subsection (1) only on that proportion of the sum which is so chargeable.
(3) Subject to rules made under subsection (5), any person entitled to receive any interest or other sum on which income-tax has to be deducted under subsection (1) may make an application in the prescribed form to the Assessing Officer for the grant of a certificate authorising him to receive such interest or other sum without deduction of tax under that subsection, and where any such certificate is granted, every person responsible for paying such interest or other sum to the person to whom such certificate is granted shall, so long as the certificate is in force, make payment of such interest or other sum without deducting tax thereon under subsection (1).
(4) A certificate granted under subsection (3) shall remain in force till the expiry of the period specified therein or, if it is cancelled by the Assessing Officer before the expiry of such period, till such cancellation.
(5) The Board may, having regard to the convenience of assessees and the interest of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under subsection (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith."
From a perusal of subsection (1) of section 195, extracted above, it is clear that any person (payer) responsible for paying (i) to a non-resident (not being a company); or (ii) to a foreign company (recipient),---
(a) any interest (not being interest on securities), or
(b) any other sum chargeable under the provisions 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.
Subsection (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 subsection (1) only on that proportion of the sum. Subsections (3) to (5) deal with-grant of certificate by the Assessing Officer and matters connected thereto. Subsections (3) and (4) enable the recipient of the sum referred to in subsection (1) to make an application in the prescribed form, to the Assessing Officer for the grant of a certificate authorising him to receive such sum without deduction of tax under that subsection (called- "no objection certificate") and where such a certificate is granted, every person responsible for paying such sum to the grantee of the certificate, can pay such sum without deducting the tax thereon so long as the certificate is in force; if the certificate is cancelled before the expiry of the period the payer can pay the amount without deducting tax till the cancellation of the certificate or till expiry of the period specified therein, whichever is earlier. The Central Board of Direct Taxes is authorised by subsection (5) to make rules for grant of certificate under subsection (3). In short, subsection (1) enjoins deduction of tax at source on the whole sum while subsection (2) provides deduction of tax at source only on that portion of the sum as determined by the Assessing Officer and subsection (3) directs that no tax shall be deducted on such sum if the recipient is granted a "no objection certificate" so long as the certificate remains in force. It may be noticed that the application to the assessing authority under subsection (2) for determination of portion of the sum chargeable to tax, has to be made by the payer of the sum but the application under subsection (3), for the grant of a "no objection certificate", has to be made by the recipient of such sum.
In this case the application for grant of the "no objection certificate" was made by the payer, the petitioner-company, the person who is responsible for payment of such sum as is referred to in subsection (1) but not by the NRC, the recipient of the sum. Inasmuch as no argument has been advanced as to the eligibility of the petitioner-company to obtain a "no objection certificate" under subsection (3) and the petitioners as well as the respondents proceeded on the assumption that if the "success fee" is not chargeable under the provisions of the Act, the petitioners will be entitled to the "no objection certificate", we do not propose to deal with the question as
to whether a person responsible for payment of such sum as is referred to in subsection (1), a payer, can be granted a "no objection certificate" under section 195(3) of the Act; we leave this question open. 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. Subsection (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 subsection (2) of section 5. The expression "accrues or arises or deemed to accrue or arise in India" employed in clause (b) of subsection (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. ---(I) The following incomes shall be deemed to accrue or arise in India---
(i) 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.
Explanation. ---For the purposes of this clause---
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;
(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export;
(c) in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India;
(d) in the case of a non-resident, being---
(1) an individual who is not a citizen of India; or
(2) a firm which does not have any partner who is a citizen of India or who is resident in India; or
(3) a company which does not have any shareholder who is a citizen ofIndia or who is resident in India,
no income shall be deemed to accrue or arise ,in India to such individual, firm or company through or from operations which are confined to the shooting of any cinematograph film 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 outside India or for the purposes of making or earning any income from any source outside India; or
(Proviso and the Explanation are not relevant for the present discussion, so they are not extracted).
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'.. "
Clause (i) of subsection (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 judicial pronouncements.
In CIT v. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC), the expression "business connection", as used in section 42 of the Indian Income-tax Act, 1922, fell for consideration of the Supreme Court. It is observed that the question whether there is business connection from or through which the income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case and it is pointed out that the expression "business connection" postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. "Business connection" contemplated by section 42 of the 1922 Act, it is explained, "involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains; there must be an element of continuity between the business of a non-resident and the activity in the taxable territories and a stray or isolated transaction is not to be regarded as "business connection".
In Carborandum Co. v. CIT (1977) 108 ITR 335 (SC), a foreign company entered into an agreement with an Indian company for rendering technical and know-how services to the Indian company. In lieu of those services, the foreign company was to receive from the Indian company an annual fee equal to three per cent. of the net sale proceeds of the products manufactured by the Indian company every year. The question was how much of the money received by the foreign company would be taxable under the provisions of the Act. The Indian company employed personnel made available by the foreign company, who worked under the direct control of the Indian company. The Supreme Court held that the services of the foreign company in making the employees available were rendered wholly outside India and that the activities of the foreign personnel lent or deputed by the foreign company did not amount to a business activity carried on by the foreign company in India. It was further held that the fee did not accrue or arise in India nor could it be deemed to have accrued or arisen in India and that to rope 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 op6rations 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(l)(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 described as a "real and intimate connection" and that there must be something more than a mere transaction of purchase and sale between principal and principal in order to bring the transaction within the purview of the expression.
In Barendra Prasad Ray v. ITO (1981) 129 ITR 295 (SC), a firm of solicitors at Calcutta was instructed by certain solicitors in London who were acting for a German Corporation. On their instructions the solicitors in India retained a Barrister of London in the suit pending before the Calcutta High Court. The Barrister argued the case for 15 days and went back to London without making any arrangement for payment of Indian income-tax on the fees earned by him. On the Income-tax Officer initiating proceedings to treat the firm of solicitors as the agent of the said Barrister, the firm of solicitors filed a writ petition challenging the said proceedings, which was dismissed by a learned Single Judge. An appeal against the judgment of the learned single Judge, was also dismissed taking the view that there was a "business connection" between the firm of solicitors and the Barrister. On further appeal to the Supreme Court it was held that there was connection between the Indian solicitor and the Barrister which was real and intimate and not a casual one and that the Barrister earned the fee arguing the case in India only due to that connection. E.S. Venkataramiah, J. (as he then was) speaking for the Supreme Court, observed that, in that case the test laid down by the Supreme Court in Aggarwal's case (1965) 56 ITR 20, was satisfied and in the "professional connection" there was a "business connection".
In Addl. CIT v. New Consolidated Gold Fields Ltd. (1983) 143 ITR 599 (Patna), the assessee-company and the foreign company entered into an agreement under which the foreign company was to be technical adviser of the assessee-company in the matter of exploration, mining and mineral dressing, operations. The foreign company was to be paid to a retainer's fee at the rate of 7,000 per annum in London. The Income-tax Officer treated the assessee-company as the agent of the foreign-company within the meaning of section 163 of the Income-tax Act and treated 7,000 payable by the assessee-company to the foreign company as its income accruing in the hands of the assessee-company. On appeal, the Appellate Assistant Commissioner held that 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 Apt 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 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 not assessable in the hands of the assessee-company even as agent of the foreign company.
From the above discussion the following principles emerged:
(i) whether, there is a business connection between an Indian company and a non-resident (company) is a mixed question of fact and law which has to be determined on the facts and circumstances of each case;
(ii) the expression 'business connection' is too wide to admit of any precise definition; however, it has some well known attributes;
(iii) the essence of "business connection" is the existence of close, real, intimate relationship and commonness of interest between the NRC and the Indian person;
(iv) where there is control of management or finances or substantial holding of equity shares or sharing of profits by the NRC of the Indian person, the requirement to principle (iii) is fulfilled;
(v) to constitute "business connection" there must be continuity of activity or operation of the NRC with the Indian party and a stray or isolated transaction is not enough to establish a business connection.
Keeping the above principles in mind, we shall now examine whether there is "business connection" between the petitioner-company and the NRC. The Income-tax Officer referred to the correspondence in 27 letters and concluded that the nature of the services that the NRC was required to provide to the petitioner-company was not a one-time affair but "this is only the beginning of the close and intimate business relationship that the assessee-company is going to have with the ABB-PTF for many years to come", especially when the assessee-company had engaged them to manage the public issue also in India. Other reasons to support that conclusion are: ABB is the parent company of the NRC which is participating in the equity of the petitioner-company and also IFC, Washington; the NRC is a financial agent of A BB; the petitioner-company is an agent and it had acted on behalf of the NRC for processing and obtaining loans from the IDBI, India, and the IFC, Washington.
On revision, the Commissioner of Income-tax agreed with the reasoning and conclusions of the Income-tax Officer and passed the impugned order on March 21, 1995 (sic).
For ascertaining whether there is "business connection" between the petitioner-company and the NRC, it would be necessary to notice the nature and extent of the services, 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 best 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 coordinated and expenditious 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 percent of the total debt, payable at financial closing....
That letter was placed before the board of directors of the petitioner company in its meeting held on August 21, 1993. The relevant portion of the resolution may be extracted here:
"It was explained to the directors that ABB-PTF's scope of services for the project include: developing a comprehensive financial model;
tying up the rupee/foreign currency loan requirements of the project; assessing export credit agencies world-wide and obtaining commercial banks' support of the most competitive terms;
assisting GVK in loan negotiations and documentation with lenders.
For the above scope of services ABB-PTF would be paid a fee of 0.75 percent 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."
These two documents clearly bring out the services, which the NRC is obliged to render to the petitioner-company.
From the excerpts of the resolution, referred to above, it is clear that the services of the NRC, which were brought to the notice of the board of directors of the petitioner-company include:
(i)developing a comprehensive financial model;
(ii) tying up the rupee/foreign currency loan requirements of the project;
(iii) assessing exports credit agencies world-wide and obtaining commercial banks support on the most competitive terms:
(iv) assisting the petitioner-company and documentation with lenders,
and for those services the board agreed to pay a fee of 0.75 per cent of the loan amount which is payable only on successful financial closing. From the above terms, it is evident that the NRC did not undertake to secure loan of a defined sum from both foreign as well as Indian agencies. 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 the loan should be obtained or to draft 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 world-wide 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 requirement 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 correspondence between the petitioner-company and the IDBI company arid volume III contains the correspondence of the petitioner-company with the International Financial Corporation, Washington. It is no doubt true that all indicate that the petitioner-company was itself handling the processing of the loan and this position is evident from three letters, dated January 21, 1994, March 21, 1994, and July 9, 1994. From these letters it cannot be inferred that the petitioner-company was processing and/or writing for and on behalf of the NRC. In this view of the matter, it cannot be accepted that the office of the petitioner-company was the place of business of the NRC. The Income-tax Officer and the Commissioner proceeded on the footing that the NRC was required to secure the loan from the foreign as well as Indian credit agencies for the petitioner-company by taking all necessary steps including making applications and doing correspondence and, thus, approached the question on a wholly erroneous premise and came to the conclusion on examination of the correspondence between the petitioner-company and the NRC that the petitioner-company entered into the correspondence for and on behalf of the NRC and even though the NRC itself did not have any place of its own in India the office of the petitioner-company would be the office of the NRC which was taken as a ground for coming to the conclusion that there was a "business connection" between the petitioner-company and the NRC. We have already observed that the scope of the service/work undertaken by the NRC was merely to draw up a scheme, advise on the terms and methods of negotiation and for documentation with the lender, evaluate the pros and cons of various lending alternatives, both for the local and the foreign borrowings, prepare a preliminary information memorandum to be used as the basis for placing the foreign and local debt and that the responsibility of entering into correspondence as per the advice of the NRC and pursuing the matter was that of the petitioner-company itself and not that of the NRC.
Before concluding this aspect, we may note that while accepting the terms of the NRC, the, board of directors of the petitioner-company merely advised that the NRC should also be involved in the public issue of the petitioner-company. This advice was directed to the petitioner-company itself.' Nothing in the 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(l) extracted above. That clause says that income by way of fee 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 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". Thus, from a combined reading of clause (vii)(b) and 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 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 the "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 the Income tax Officer found favour with the Commissioner in revision. In the view we have expressed above, we are inclined to confirm the impugned order.
However, learned senior counsel for the petitioners contends that the NRC did not render any technical or consultancy service to the petitioner company and that it merely rendered advice in connection with the procurement of loans by it, which does not amount to rendering technical or consultancy service within the contemplation of the said clause and that the technical or consultancy service should relate to the core of the business of the petitioner-company. We are not persuaded to accede to this contention of learned senior counsel. For purposes of clause (vii)(b) of section 9(1), the business of the petitioner-company cannot be divided into water-tight compartments, like finance, generation of power, plant and machinery, management, etc., to hold that managerial, technical and consultancy services relate to management, generation of power, plant and machinery, but not to finance. In our view advice given to procure loan to strengthen finances would be as much as technical or consultancy service as it would be with regard to management, generation of power or plant and machinery. From the above discussion it follows that "success fees" fall in line with any other technical services within the ambit 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" 3 Vol. I. p.270.
"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 outside India and neither the income nor the contract has any connection with India .... If the Indian Parliament can cast the net wide enough to collect tax in such cases where the foreigner's income has no nexus with India, only because the income is derived from a transaction with an Indian, it can equally levy a tax on a hotel in a foreign country where an Indian goes to stay or dine, or on a foreign store where an Indian buys shirts or grocery, or on a foreign physician whose services are sought by at1 Indian while abroad. Not only are these clauses contrary to the well-settled international norms of taxation on a foreigner in respect of his income accruing, arising and received outside the taxing State, but they are against the letter and the spirit of the various tax treaties entered into by India with foreign countries, though they do not, and cannot, supersede those treaties. (See Queen v. Melford Developments 82 DTC 6281 (Supreme Court of Canada). Further, it is difficult to conceive of more powerful fiscal deterrents to keep away foreign collaborators."
Having regard to the present liberalisation policy it is for the Government to take steps to have clause (vii)(b) either repealed or amended so as to make the income by way of fees for technical services charge able when territorial nexus exists. Be that as it may, the validity of section 9(1)(vii)(b) was upheld by' a Division Bench of this Court in Electronics Corporation of India Ltd. v. CIT (1990) 183 ITR 44 (W.P. No. 105 of 1987, dated March 24, 1987). On appeal to the Supreme Court the principle laid down by the Privy Council in regard to legislation having extra-territorial operation in British Columbia Electric Railway Co. Ltd. v. King (1946) AC 527, 542 (PC):
"A Legislature which passes a law having extra-territorial operation may find that what it has enacted cannot be directly enforced, but the Act is not invalid on that account, and the Courts of its country must enforce the law with the machinery available to them'."
was quoted with approval in Electronics Corporation of India Ltd. v. CIT (1990) 183 ITR 43 (SC) and the case was referred to a Constitution Bench observing (page 55):
"The only question then is whether the ingredients, in terms of the impugned provisions, indicate a nexus. The question is one of substantial importance, specially as it concerns collaboration agreements with foreign 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 alongwith the other clauses. A plain reading of section 9(1), extracted above, makes it clear that it enumerates various categories of income under subsection (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 obviously cannot be done.
For the aforementioned reasons, we are of the view that the "success fee" is chargeable under the provisions of the Income Tax Act, 1961, and, therefore, the petitioners are not entitled to a "no objection certificate."
In the result, the writ petition fails and it is accordingly dismissed, but, in the circumstances of the case, we make no order as to costs.
M.B.A./3016/FC Petition dismissed.