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.
In this context, it would be appropriate to reproduce the letter dated 8.7.1993 addressed by the NRC. It reads as follows:
“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 the local and the foreign borrowings;
Developing a comprehensive financial model to evaluate the project and to perform various sensivity 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 obtaining commercial bank support on the most comprehensive terms;
Assisting GVK in loan negotiations and documentation with lendors; and
Structuring, negotiating and closing the financing for this project in a coordinated and expeditious 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% of the total debt, payable at financial closing.”
The said letter was placed before the Board of Directors of the appellant company in its meeting held on August 21, 1993. The relevant part of the resolution passed by the Board is extracted hereinbelow:
“ It was explained to the Directors that ABB PTF’s scope of service for the project include:
Developing a comprehensive financial model;
Tying up the rupee/foreign currency loan requirements of the project;
Assessing Export Credit Agencies worldwide and obtaining commercial banks support on the most competitive terms;
Assisting GVK in loan negotiations and documentation with lenders.
For the above scope of service ABB PTF would be paid a fee of 0.75% 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.”
From the aforesaid two documents, it is clear as crystal that the obligation of the NRC was to:
(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.
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 (1999) 242 ITR 280, 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 (2009) 319 ITR 139, 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.