TaxTMI 
TaxTMI 
2015 (2) TMI 730
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.... requirements of the appellant-company offered its services as financial advisor to its project from July 08, 1993. 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 said proposal was placed before the Board meeting of the company on August 21, 1993 and the Board of Directors approved the appointment of the NRC and advised that it be involved in the proposed public issue of share by the company. 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. With advice of NRC the appellant-company approached the Indian Financial Institutions with the Industrial Development....
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....ted. 5. 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. 6. A reference was made to the letter dated July 8, 1993 wherefrom it is evident that NRC is a financial advisor with a worldwide experience and has been engaged in India and requested that it be appointed as "financial consultant" for the project. The company responded by appointing the NRC as the financial advisor vide its letter dated 2.8.1994. On behalf of the revenue, the proceedings of the Board of Directors meeting was highlighted stating that they disclosed that the NRC was appointed not only to arrange for the loan but also to render several other financial and general services and also to involve itself in the public issue of the company and on that bedrock it was urged that it squarely falls within the ambit of Section 9(1)(vii)(b) of the Act. It was also averred that NRC is a financial segment of the ABB which is participating in the equity of the appellant company besides IFC, Washington. The ....
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....f application for financial assistance for the project and pursuing the same; that the NRC did not have any office or establishment in India at any relevant point of time; that it operated from Zurich; that there was no business connection between the company and the NRC; and that the success fee did not accrue or arise to the NRC in India and hence, no income is deemed to have accrued or arisen to NRC in India. In addition to the aforesaid it was urged Section 9(1)(i) and Section 9(1)(vii) have to be read together and in that case the stand of the revenue was absolutely unjustified and assuming Section 9(1)(vii) of the Act is read in isolation, the plain interpretation could not be applicable regard being had to the nature of service rendered by NRC. It was also pleaded that merely because the amount of success fee was paid by the appellantcompany to NRC in India for the services rendered from outside India, the income of NRC would not deemed to have accrued or arisen in India. 8. The High Court framed the following two issues for consideration: "(1) Whether 'success fee' payable by the petitioner-company to the NRC or any portion thereof is chargeable under the provis....
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....th various agencies to secure loan for the petitioner-company, to negotiate the terms on which loan should be obtained or to draft document 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 worldwide 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 draw up a plan for the petitioner-company to reach the required 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 loan from Indian or foreign agencies. On the petitioner-company obtaining loan, the NRC becomes entitled to 'success fees'." 11. The High Court scanned the letters with due consideration and opined that the business connec....
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....o the "No Objection Certificate". 13. Be it stated, the constitutional validity of Section 9(1) (vii)(b) of the Act was challenged on the ground of legislative competence and violation of Article 14 of the Constitution. The Court referred to the earlier Division Bench decision in Electrical Corporation of India Ltd. V. C.I.T. rendered in W.P. No. 105/1987 on March 24, 1987 and also took note of the fact that the said case was quoted with approval in Electrical Corporation of India Ltd. V. C.I.T. (1990) 183 ITR 43 (SC); [(1989) Supp. 2 SCC 642] In the ultimate eventuate, High Court rejected all the contentions advanced by the assessee-company and dismissed the writ petition. 14. Being aggrieved, the petitioner company approached this Court. When the matter came up for consideration before a two-Judge Bench of this Court, which taking note of the far-reaching issues of constitutional purport and the fact that they were earlier referred to in the case of Electrical Corporation of India Ltd. (supra), which was ultimately withdrawn, it, by order dated 28.11.2000, referred the instant matter to a larger Bench. On 13.7.2010, the matter again came up for consideration before a three-....
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....tion, properly analysed and understood in the wider context in which it is located, why should such unnecessarily imprecise arrogation of powers be claimed? To give in to such demands, would be to run the risk of importing meanings and possibilities unsupportable by the entire text and structure of the Constitution. Invariably such demands are made in seeking to deal with external affairs, or with some claimed grave danger or a serious law and order problem, external or internal, to or in India. In such circumstances, it is even more important that courts be extra careful." 16. Thereafter, the Court reiterated the two questions it had set out in the beginning. The first question reads thus: "(1) Is Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians?" Answering the same, the Court observed: "The a....
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....and they may not be invalidated on the ground that they may require extra-territorial operation. Any laws enacted by Parliament with respect to extra-territorial aspects or causes that have no impact on or nexus with India would be ultra vires, as answered in response to Question 1 above, and would be laws made "for" a foreign territory." After the reference was answered, the matter was directed to be listed before the appropriate Bench. 18. We have heard Mr. U.A. Rana, learned counsel for the appellants and Mr. Arijit Prasad, learned counsel for the respondents. 19. At the very outset, it is necessary to mention as the challenge to the constitutional validity of the provision has been withdrawn, and the same accordingly has not been gone into by the Constitution Bench, there is no necessity to dwell upon the same. The crux of the matter is whether, in the obtaining factual matrix, the High Court was justified in concurring with the view expressed by the revisional authority that the assessee-company was not entitled to "No Objection Certificate" under the Act as it was under the obligation to deduct the tax at source pertaining to payment to the NRC as the character of su....
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....the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.] [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".] 21. 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 said Explanations read as under: " As amended by Finance Act, 2010 Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this ....
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....l emphasis to state that the said taxation principles are premised to promote international trade and to allocate taxation between the States. These rules help and further endeavour to curtail possibility of double taxation, tax discrimination and also to adjudicate resort to abusive tax avoidance or tax evasion practices. The nation States, in certain situations, resort to principle of "tax mitigation" and in order to protect their citizens, grant benefit of tax abroad under the domestic legislation under the bilateral agreements. 24. The two principles, namely, "Situs of residence" and "Situs of source of income" have witnessed divergence and difference in the field of international taxation. The principle "Residence State Taxation" gives primacy to the country of the residency of the assessee. This principle postulates taxation of world-wide income and world-wide capital in the country of residence of the natural or juridical person. The "Source State Taxation" rule confers primacy to right to tax to a particular income or transaction to the State/nation where the source of the said income is located. The second rule, as is understood, is transaction specific. To elaborate, t....
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.... 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. 28. 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 con....
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....TF. The success fee will be 0.75% of the total debt, payable at financial closing." 30. 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 ABBPTF'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." 31. 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 loa....