Brief Facts of the case:
The appellant company is incorporated under the Companies Act, 1956 for the purpose of setting up a 235 MW Gas based power project at Jegurupadu, Rajahmundry,Andhra Pradesh at an estimated cost of Rs.839 crores The main object of the appellant company is to generate and sell electricity.
It entered into an agreement with ABB – Projects & Trade Finance International Ltd., Zurich, Switzerland,( “Non-Resident Company/NRC”) to avail the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie up the required loan.
Those services included, inter alia, 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 appellant 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.
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 appellant-company for payment of success fee amount i.e., US $.17, 15,476.16 (Rs.5.4 Crores).
After the receipt of the said invoice the appellant-company approached the concerned income tax officer, the first respondent herein, for issuing a ‘No Objection Certificate’ to remit the said sum duly pointing out that the following:
i) 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 under the Income-tax Act, 1961 by the NRC.
ii) It was also stated as the NRC had no business connection, thus, Section 9(1)(i) is not attracted .
iii) NRC had rendered no technical services, thus, Section 9(1)(vii) is also no attracted.
The Assessing Officer scanning the application filed by the company refused to issue ‘No
Objection Certificate’. Being dissatisfied with the said order passed by the first respondent the appellant-company preferred a revision petition before the commissioner of Income-tax, Hyderabad, under Section 264 of the Act. who permitted the appellant-company to remit the said sum to the NRC by furnishing a bank guarantee for the amount of tax. The company took steps to comply with the said order but afterwards on October 25, 1995 the revisional authority revoked the earlier order and directed the company to deduct tax and pay the same to the credit of the Central Government as a condition precedent for issuance of the ‘No Objection Certificate’. Thus, the order passed by the Assessing Officer was affirmed and resultantly the revision petition was dismissed.
Aggrieved by the order of Revisional Authority (CIT) the company filed writ petition before the Hon’ble Andhra Pradesh High Court for issue of writ of certiorari for quashing of the orders passed by the Income-tax officer and that of by the revisional authority. High Court decided the matter against the assessee.
Finally, assessee challenged the decision of High Court before the Hon’ble Supreme Court.
Contention of the Assessee:
The assessee contended that the tax is not required to be deducted because the income cannot be deemed to accrue or arise in India because of following reasons:
i) NRC had no place of business in India and 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 under the Income-tax Act, 1961 by the NRC.
ii) It was also stated as the NRC had no business connection, thus, Section 9(1)(i) is not attracted . It is why because the assessee company was always directly concerned with the making of application for financial assistance for the project and pursuing the same and NRC did not have any office or establishment in India at any relevant point of time , it operated from Zurich; and ,thus, there was no business connection between the company and the NRC;
iii) NRC had rendered no technical services, thus, Section 9(1) (vii) is also no attracted.
NRC only rendered advise in connection with payment of loan by it and hence,
it would not amount to technical or consultancy service within the meaning of Section 9(1)(vii)(b) of the Act.
Contention of the Revenue:
On behalf of the revenue a counter affidavit was filed contending, inter alia, that the NRC was very actively associated not only in arranging loan but also in providing various services which fall within the ambit of both managerial as well as consultancy services ,thus, It was urged that it squarely falls within the ambit of Section 9(1)(vii)(b) of the Act.
It was further contended by Revenue, that there is a business connection between the NRC with the company in India and the voluminous correspondence between the two wings discloses the said connection. It was also contended 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 could be envisaged 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 Sec 9(1) as the business connection has also established.
Thus, as per the Revenue the income in the hands of NRC is deemed to accrue or arise in India both as per Sec 9(1) and Sec 9(1) (vii)(b).
Decision of Hon’ble Supreme Court:
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, for rendering managerial, technical or consultancy services.
The agreement of the assessee company with the NRC make it very clear that the scope of services to provided shall cover the following :
(i) Develop comprehensive financial model to tie-up the rupee and foreign currency loan requirements of the project.
(ii) Assist expert credit agencies world-wide and obtain commercial bank support on the most competitive terms.
(iii) Assist the appellant company in loan negotiations and documentation with the lenders.
The nature of service referred by the NRC, would certainly 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 would be taxable under the head ‘fee for technical service’.
Thus, the remittance would be income be chargeable to tax in the hands of NRC as income deemed to accrue or arise in India as per Sec 9(1)(vii).
Therefore, the appeal of assessee is not allowed and the case decided in the favour of Revenue.