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Petitioner: G.V.K. INDUSTRIES LIMITED and another VS Respondent: INCOME-TAX OFFICER and another
Court Name: Andhra Paradesh High Court Judge(s): B. S. Raikote, Syed Shah Mohammad Quadri Title: G.V.K. INDUSTRIES LIMITED and another vs INCOME-TAX OFFICER and another Case No.: Writ Petition No,6866 of 1995 Date of Judgment:1997-05-02 Reported As: 1999 PTD 2655 Result: Petition dismissed
JUDGMENT
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
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NRC was to be paid, what is termed as, "success fee" at the rate of 0.75 per cent. 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(1)(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)(i) 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-
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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)(i) 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)(i) 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 subsidized 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 I 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.
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' 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(1)(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 nonresident, 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
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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 subsection (1); they may be extracted here: "9. Income deemed to accrue or arise in India.---(1) The following incomes shall be deemed to accrue or arise in India---
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(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 of India 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 utilized 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 utilized 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 nonresident. ' The import of that expression has been explained in various judicial pronouncements.
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' 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…
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