No NOC: Success fee to non-resident deemed to accrue as fees for technical services under section 9(1)(vii)(b), taxable

The HC held that no NOC would be granted: the purported "business connection" between the Indian company and the non-resident consultant was not established, but the success fee payable to the non-resident constituted fees for technical/consultancy services within section 9(1)(vii)(b) and was therefore deemed to accrue or arise in India. Accordingly the success fee is chargeable to tax under the Act and the petitioners are not entitled to a no objection certificate.

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Issues Involved:
1. Whether the "success fee" payable by the petitioner-company to the NRC or any portion thereof is chargeable under the provisions of the Income-tax Act, 1961.
2. Whether the petitioner-company is entitled to a "no objection certificate."

Detailed Analysis:

Issue 1: Chargeability of "Success Fee" under the Income-tax Act, 1961

Relevant Provisions:
- Section 195: Obligates deduction of income-tax at source on payments to non-residents if the sum is chargeable under the Act.
- Section 5(2): Includes income received or deemed to be received in India or accruing or arising in India.
- Section 9(1)(i): Deems income to accrue or arise in India through any business connection, property, asset, or source of income in India.
- Section 9(1)(vii): Deems income to accrue or arise in India by way of fees for technical services payable by a resident, except where the services are utilized in a business or profession carried on outside India.

Arguments and Findings:
- Petitioner's Argument: The NRC did not carry on any business activity in India, and all services were rendered from outside India. Thus, no business connection exists, and the success fee does not fall within the ambit of Section 9(1)(i) or 9(1)(vii).
- Respondent's Argument: The NRC had a business connection with the petitioner-company, and the services rendered fall within the ambit of both managerial and consultancy services under Section 9(1)(vii)(b).
- Court's Analysis:
- Business Connection: The court examined whether there was a "business connection" between the petitioner-company and the NRC. It referred to various judicial pronouncements to define "business connection" as a real and intimate relationship contributing to the earning of income by the non-resident.
- The court concluded that the NRC's role was limited to advising and assisting the petitioner-company in obtaining loans, and there was no ongoing, intimate business relationship. Thus, no business connection was established.
- Technical Services: The court interpreted "fees for technical services" under Section 9(1)(vii)(b) to include managerial, technical, or consultancy services. The court found that the services provided by the NRC, such as developing a financial model and assisting in loan negotiations, fell within the scope of technical or consultancy services.
- Legislative Competence: The court upheld the validity of Section 9(1)(vii)(b) as it was previously upheld by a Division Bench and referred to a Constitution Bench by the Supreme Court.

Conclusion: The "success fee" payable to the NRC is chargeable under the provisions of the Income-tax Act, 1961, specifically under Section 9(1)(vii)(b).

Issue 2: Entitlement to a "No Objection Certificate"

Relevant Provisions:
- Section 195(3): Allows the recipient of the sum to apply for a certificate authorizing receipt without deduction of tax.
- Section 195(2): Allows the payer to apply for determination of the appropriate proportion of the sum chargeable to tax.

Arguments and Findings:
- Petitioner's Argument: The petitioner-company argued for a "no objection certificate" on the basis that the success fee was not chargeable to tax in India.
- Respondent's Argument: The respondents contended that the petitioner-company must deduct tax at source before remitting the success fee to the NRC.
- Court's Analysis: The court noted that the application for a "no objection certificate" was made by the payer (petitioner-company) and not the recipient (NRC). However, the court did not delve into the eligibility of the petitioner-company to obtain such a certificate and proceeded on the assumption that if the success fee was not chargeable, the petitioner would be entitled to the certificate.

Conclusion: Since the court found the success fee chargeable under the Act, the petitioner-company is not entitled to a "no objection certificate."

Final Judgment:
The writ petition is dismissed, and the petitioner-company is required to deduct tax at source on the success fee payable to the NRC. No order as to costs.

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