GVK INDUSTRIES LTD. &ANR.versusTHE INCOME TAX OFFICER & ANR.

                    (2015) 3 S.C.R. 321


              GVK INDUSTRIES LTD. &ANR.                          A

                              v.
           THE INCOME TAX OFFICER &ANR.

              (Civil Appeal No. 7796 of 1997)                    B

                   FEBRUARY 18, 2015
      [SUDHANSU JYOTI MUKHOPADHAYA AND
               DIPAK MISRA, JJ.]
                                                                 c
        Income Tax Act, 1961: s.9(1)(vii)(b) - Success fee
payable by appellant company to Non-Resident Company
(NRC) for rendering professional advice for procurement of
loan and for providing other financial and general services -
Whether success fee is chargeable under the Act and whether ·D
appellant-company is entitled to 'No-Objection Certificate' -
Held: The services rendered by NRC 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 E
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 F
project in a coordinated and expeditious manner - The
nature of service rendered by the NRC would come within
the ambit of the term 'consultancy service' and, therefore, the
tax at source should have been deducted as the fee paid
was taxable under the head 'fee for technical service' - Once G
the tax which is payable is paid the grant of 'No Objection
Certificate' was not legally permissible - Taxrraxation.

       Taxffaxation: Principles Situs of residence" and "Situs
of source of income" -Applicability of.                          H
                             321
322      SUPREME COURT REPORTS                 [2015] 3 S.C.R.



A         Words and phrases: word 'consultation' - Meaning of.

          Dismissing the appeal, the Court

         HELD: 1. The principal provision is Clause (b) of
  Section 9(1 )(vii) of the Income Tax Act. The said
8
  provision carves out an exception. The exception carved
  out in the latter part of clause (b) applies to a situation
  when fee is payable in respect of services utilized for
  business or profession carried out by an Indian payer
c outside India or for the purpose of making or earning of
  income by the Indian assessee i.e. the payer, for the
  purpose of making or earning any income from a source
  outside India. Clause (b) lays down the principle what is
  basically known as the "source rule", that is, income of
D the recipient to be charged or chargeable in the country
  where the source of payment is located, to clarify, where
  the payer is located. The Clause further mandates and
  requires that the services should be utilized in India. [Para
E 22) [342-8-D]

         2. 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
F 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 tf:1e
  natural or juridical person. The "Source State Taxation"
G 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 rul!? is transaction
  specific. The source State seeks to tax the transaction
  or capital within its territory even when the income
H benefits belongs to a non-residence person, that is, a
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX               323
                OFFICER &ANR.

person resident in another country. The two principles A
are also applied in domestic law in various countries.
[Paras 24 and 25] [343-B-F, H]

       3. Fee which has been named as "success fee"
by the assessee has been paid to the NRC. It is to be         B
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 lump sum or periodical in         C
rendering managerial, technical c;>r 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    D
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           E
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     F
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              G
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       H
324         SUPREME COURT REPORTS                [2015] 3 S.C.R.



A coordinated and expeditious manner. The letter
  addressed by the NRC and the resolution passed by the
  Board clearly stated 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
B 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.
C Pursuant to the said exercises carried out by the NRC,
  the company was successful in availing loan/financial
  assistance in India from the IDBI which acted as a lead
  financier for the rupee loan requirement. For foreign
  currency loan requirement, the appellant approached
o International Finance Corporation, Washington D.C., USA
  and was successful. [Paras 28 - 32] [345-8-H; 347-A-D;
  348-8]

              4. The word 'consultation' has been defined as
E     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. In the instant case, the
      NRC had acted as a consultant. It had the skill, acumen
F     and knowledge in the specialized field i.e. preparation
      of a scheme for required finances and to tie-up required
      loans. 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,
G     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 which is payable is paid the grant of 'No Objection
H     Certificate' was not legally permissible. [Paras 36 and
  GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                325
               OFFICER &ANR.

37) [349-F-H; 350-A-C]                                        A

      Electrical Corporation of/ndia Ltd. LC.I. T. (1990)
  183 ITR 43 (SC):(1989) Supp. 2 sec 642; C.I. T. v.
  Aggarwal and Company (1965) 5G ITR 20; C.I. T. II.
  TRC (1987) 166 ITR 1993; Birendra Prasad Rai II.           B
  ITC (1981) 129 ITR 295; In Re. P.No. 28 of 1999
  (1999) 242 ITR 280; C.I. T. V. Bharti Cellular Limited
  and Ors. (2009) 319 ITR 139 - rreferred to.

      League of Nations, report on Double Taxation           c
  by Bruins, Einaudi, Saligman and Sir Josiah Stan
  (1923); K/ans vogel, World-wide V. source Taxation
  of Income - Review and Revision of Arguments
  (1988); The Introduction in Klaus Vogel on Double
  Taxation Convction, South Asean, Reprint Edition •         c
  2007 - referred to.

                  Case Law Reference

  (1989) Supp. 2 sec 642        Referred to.    Para 13      E
  (1965) 56 ITR 20              Referred to.    Para 19

  (1987) 166 ITR 1993           Referred to.    Para 19

  (1981) 129 ITR 295            Referred to.    Para 19      F

  (1999) 242 ITR 280            Referred to.    Para 34

  (2009) 319 ITR 139            Referred to.    Para 35

      CIVIL APPELLATE JURISDICTION: Civil Appeal No.         G
7796 of 1997.

      From the Judgment and Order dated 02.05.1997 of the
High Court at Hyderabad in Writ Petition No. 6866 of 1995.
                                                             H
326        SUPREME COURT REPORTS                  [2015] 3 S.C.R.


A           U. A. Rana, Mrinal Elkar Majumdar, Himanshu Mehta,
      Gagrat & Co. for the Appellants.

           Arijit Prasad, Rupesh Kumar, Tanushree Sinha, Gargi
      Khanna, Anil Katiyar, Sushma Suri for the Respondents.
B
             The Judgment of the Court was delivered by

            DIPAK MISRA, J. 1. The appellant No. 1 is a company
  incorporated under the Companies Act, 1956 f9r the purpose
C of setting up a 235 MW Gas based power project at
  Jegurupadu, Rajahmundry, Andhra Pradesh at an estimated
  cost of Rs.839 crores and the appellant No. 2 is a director of
  the company. The main object of the appellant company is to
  generate and sell electricity.
D
           2. With the intention to utilize the expert services of
  qualified and experienced professionals who could prepare a
  scheme for raising the required finance and tie up the required
  loan, it sought services of a consultant and eventually entered
E into an agreement with ABB - Projects & Trade Finance
  International Ltd., Zurich, Switzerland, (hereinafter referred to
  as "Non-Resident Company/NRG"). The NRG, having regard
  to the requirements of the appellant-company offered its
  services as financial advisor to its projectfrom July 08, 1993.
F 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
G documentation with lenders and structuring, negotiating and
  closing the financing for the project in a coordinated and
  expeditious manner. For its services the NRG was to be paid,
  what is termed as, "success fee" at the rate of 0.75% of the
H total debt financing. The said proposal was placed before the
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                        327
          OFFICER &ANR. [DIPAK MISRA, J.]

Board meeting of the company on August 21, 1993 and the A
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 B
and outside the country. With advice of NRC the appellant-
company approached the Indian Financial Institutions with the
Industrial Development Bank of India (IDBI) acting as the Lead
Financier for its Rupee loan requirement and for a part of its C
foreign currency loan requirement it approached International
Finance Corporation (IFC), Washington DC, USA. 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).                                 D

         3. As the facts would unfurl 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         E
outthat the 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
lncome-taxAct, 1961 (forbrevity, 'theAct')bytheNRC. ltwas              F
also stated as the NRC had no business connection Section
9(1 )(i) is not attracted and further as NRC had rendered no
technical services Section 9(1)(vii) is also no attracted. The
first respondent scanning the application filed by the company
refused to issue 'No Objection Certificate' by his order dated        G
September 27, 1994. 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, the second respondent herein, under            H
328          SUPREME COURT REPORTS                     [2015) 3 S.C.R.


A Section 264 of the Act. On March 21, 1995 the second
  respondent 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
B 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
  Certifi<?ate'. Thus, the order passed by the first respondent
C was affirmed and resultantly the revision petition was
  dismissed.

               4. The non-success in revision compelled the company
      to approach the High Court in W.P. No. 6866of1995 for issue
      of writ of certiorari for quashing of the orders passed by the
0
      Income-tax officer and that of by the revisional authority. In the
      writ petition, the stand and stance put forth before the authorities
      were reiterated.

          5. On behalf of the revenue a counter affidavit was filed
E 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.
F         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
G project. The company responded by appointing the NRC as
  the financial advisor vi de 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
H render several other financial and general services and also
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                      329
          OFFICER &ANR. [DIPAK MISRA, J.]

to involve itself in the public issue of the company and on that     A
 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
further stand of the revenue was that Section 5(2) read with         B
 Section 9(1 )(i)(vii)(b) will apply to the remittance to be made
 by the company to the NRC as the income would be deemed
 to have accrued or arisen in India and hence, the Indian
 company was liable to deduct tax at the prescribed rate before     C
 remitting any money to the NRC. The order passed by the
 authorities below were supported on the foundation 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         D
 that the services rendered by the NRC were not a one time
 affair as alleged, for the company itself had acted on behalf of
the NRC for processing, negotiating and obtaining loans from
 IDBI India and IFC, Washington. Emphasis was laid on the
fact that the company had contracted the NRC not only forthe        E
limited purpose of getting loan but also for the further
participation in its business activity which was evincible 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 Act. Justifying     F
the order of revocation by the Commissioner of Income-tax, it
was set forth that order dated 21.03.1995 was only an interim
order and the final order came to be passed on 25.10.1995
by which the revision was dismissed. It was asserted by the         G
revenue that the services of the NRC, as demonstrable from
the material brought on record, was rendered within India and,
therefore, the company is obliged in law to deduct income-tax
before remitting "success fee" to the NRC. On this premise,
the denial of 'No Objection Certificate' (NOC) was sought to        H
330          SUPREME COURT REPORTS                 (2015] 3 S.C.R.


A     be justified.

           7. A rejoinder affidavit was filed by the appellant
  company asseverating that the NRC is an independent unit
  and is, in a way, subsidiarised by ABB. That apart, merely
B because expert advice was obtained, it could not be said that
  it pursued the application for loan/financial assistance on behalf
  of NRC and further the advisory services were rendered from
  outside India. The stand of the revenue thatthere has been an
  admission by the company to the effect that there was business
C connection with the NRC by the company, was controverted. It
  was put forth that the company was always the principal directly
  concerned with the making of 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
0
  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
E 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
F 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 appellant-company 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.
G
           8. The High Court framed the following two issues for
  consideration:
        •
      "(1) Whether 'success fee' payable by the petitioner-
H     company to the NRC or any portion thereof is chargeable
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                       331
          OFFICER &ANR. [DIPAK MISRA, J.]

   under the provisions the Act; and                                  A

   (2) Whether the petitioner-company is entitled to 'No
   Objection Certificate'."

         9. The High Court referred to clause (b) of sub-section      B
2 of Section 5 and Section 9 of the Act and adverted to the
expression all income accruing or arising, whether directly or
 indirectiy, through or from any business connection in India, or
through or from any property in India, or through from any asset
 or source of income in India or through the transfer of a capital    c
 asset situate in India and thereafter referred to Section
 163(1)(b) which uses the expression "business connection"
 and thereafter referring to various authorities, culled out the
 principles as to what the expression "business connection"
conveys. It observed that expression "business connection"            D
 is too wide to admit of any precise definition though it has
 some well known attributes; that whether there is a business
connection between an Indian company and a non-resident
 company is a mixed question of fact and law which is to be
determined on the facts and circumstances of each case; that          E
the essence of "business connection" is existence of close,
real, intimate relationship and commonness of interest
between the NRC and the Indian person; that in a case where
there is control of management or finances or substantial             F
holding of equity shares or sharing of profits by the NRC of the
Indian company/person, the existence of close/intimate
relationship stand substantiated; and to constitute business
connection, there must be continuity of activity or operation of
the NRC with the Indian company/person and a stray or an             G
isolated transaction is not enough to establish a business
connection.

       10. After culling out the principles, the High Court
referred to the contents of the correspondence, the nature and H
332         SUPREME COURT REPORTS                     (2015] 3 S.C.R.



A     extent of services which the NRC had undertaken under the
      agreement, the resolution passed by the Board of Directors
      which had perused the letter dated July 8, 1993 addressed by
      the NRC stipulating the scope of services to be undertaken by
      NRC; the decisions of the Board to pay a fee to NRC arid
B     came to hold thus:

        "On a careful reading of the letter of proposal of the NRC
        and the extract of resolution of the Board of Directors of
        the petitioner-company, it is clear to us that it was no part
c       of the services to be provided by the NRC to manage
        public issue in India to correspond with various agencies
        to secure loan forthe 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
D
        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
E       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 forthe petitioner-company
        to reach the required destination indicating roads and
        highways, the curves and the turns; it does not
F       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 forthe petitioner-
G       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'."

H
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                   333
          OFFICER &ANR. [DIPAK MISRA, J.]

       11. The High Court scanned the letters with due A
consideration and opined that the business connection
between the petitioner company and the NRC had not been
established. Thereafter, the writ court adverted to the
proposition whether success fee could fall within clause (vii)(b)
of Section 9(1) of the Act. Interpreting the said provision, the B
High Court opined that:

  "Thus from a combined reading of clause (vii) (b)
  Explanation (2) it becomes clear that any consideration,
  whether lump sum or otherwise, paid by a person who            c
  is a resident in India to a non-resident for running any
  managerial or technical or consultancy service, would
  be the income by way of fees for technical service and
  would, therefore, be within the ambit of"income deemed
                                                                  D
  to accrue or arise in India". If this be the net of taxation
  under Section 9 (1) (vii) (b), then 'success fee', which is
  payable by the petitioner-company to the NRC as fee
  for technical service would be chargeable to income tax
  thereunder. The Income-tax officer, in the impugned            E
  order, held that the services offered by the NRC fell within
  the ambit of both managerial and consultancy services.
  That order of Income-tax officer found favour by the
  Commissioner in revision. In the view we have
  expressed above, we are inclined to confirm the                F
  impugned order."

       12. At this juncture, it is necessary to note that a
contention was advanced before the High Court by the
assessee that the NRC did not render any technical or G
consultancy service to the company but 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. While not accepting
                                                                 H
334          SUPREME COURT REPORTS                           [2015] 3 S.C.R.



A the said submission, the High Court observed that for the
  purposes of attracting the said provision, the business of the
  company cannot be divided into water-tight compartments like
  fire, generation of power, plant and machinery, management,
  etc. and to hold that managerial and technical and consultancy
B service relate to management, generation of power and plant
  and machinery, but not to finance. Elaborating further, the High
  Court observed that advice given to procure loan to strengthen
  finances may come within the compartment of technical or
C consultancy service and "success fee" would thereby come
  within the scope of technical service within the ambit of Section
  9(1)(vii)(b) of the Act. Being of this view, the High Court opined
  the assessee was not entitled to the "No Objection Certificate".

          13. Be it stated, the constitutional validity of Section
0
  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. II. C.I. T.
E 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. II. C.I. T. 1 In
  the ultimate eventuate, High Court rejected all the contentions
  advanced by the assessee-company and dismissed the writ
F 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
G 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
H
      1 (1990) 183 ITR 43 (SC); [(1989) Supp. 2   sec 642]
  GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                   335
         OFFICER &ANR. [DIPAK MISRA, J.]

up for consideration before a three-Judge Bench and vide its A
order of the same date, the matter was referred to the
Constitution Bench, which answered the reference as per
decision on 1.3.2011 reported in (2011) 4 SCC 36. The issue
before the Constitution Bench stated by the Court is thus:
                                                                  B
  "It is necessary for purposes of clarity that a brief
  recounting be undertaken at this stage itself as to what
  was conclusively decided in ECIL and what was referred
  to a Constitutional Bench. After conclusively determining
  that clauses (1) and (2) of Article 245, read together,         c
  impose a requirement that the laws made by Parliament
  should bear a nexus with India, the three-Judge Bench in
  ECIL asked that a Constitutional Bench be constituted
  to consider whether the ingredients of the impugned
                                                                  D
  provision i.e. Section 9(1)(vi1) of the Income Tax Act
  (1961) indicate such a nexus."

        15. Before the Constitution Bench the appellant
withdrew its challenge to the constitutional validity of Section
9(1)(vii)(b) of the Act and elected to proceed on the factual E
matrix as to the applicability of the said provision. However,
as the learned Attorney General pressed upon for
reconsideration, the decision. in three-Judge Bench in ECIL
case, the larger Bench considered the validity of the F
requirement of a relationship to or nexus with territory of India
as a limitation on the powers of Parliament to enact laws
pursuant to clause (1) of Article 245 of the Constitution. The
Court adverted to the ratio in ECIL, took note of propositions
of the learned Attorney General and the principles relating to G
interpretation of the Constitution, textual analysis of Article 245,
analysed the constitutional topological space of Article 245
and the wider structural analysis of Article 245 in the context of
Article 260 and came to hold thus:
                                                                  H
336         SUPREME COURT REPORTS                       [2015] 3 S.C.R.


A       "It would appear that the concerns of the learned Attorney
        General may have been more with whether the ratio in
        ECIL could lead to a reading down of the legislative
        powers granted to Parliament by Article 245. A thorough
        textual analysis, combined with wider analysis of
B       constitutional topology, structure, values and scheme has
        revealed a much more intricately provisioned set of
        powers to Parliament. Indeed, when all the powers
        necessary for an organ of the State to perform its role
        completely and to effectuate the constitutional mandate,
c
        can be gathered from the text of the Constitution, 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
D       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
E       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
F     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
G       or indirect, tangible or intangible impact(s) on oreffect(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
H
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                         337
       OFFICER &ANR. [DIPAK MISRA, J.]

of inhabitants of India, and Indians?"                               A

Answering the same, the Court observed:

"The answer to the above would be yes. However,
Parliament may exercise its legislative powers with
                                                                     B
respect to extra-territorial aspects or causes-events,
things, phenomena (howsoever commonplace they may
be), resources, actions or transactions, and the like-
that occur, arise or exist or may be expected to do so,
naturally or on account of some human agency, in the                c
social, political, economic, cultural, biological,
environmental c~ physical spheres outside the territory
of India, and seek to control, modulate, mitigate .or
transform the effects of such extra-territorial aspects or
causes, or in appropriate cases, eliminate or engender              D
such extra-territorial aspects or causes, only when such
extra-territorial aspects or causes have, or are expected
to have, some impact on, or effect 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
                                                                     E
inhabitants of India, and Indians."

And thereafter:

"Whether a particular law enacted by Parliament does                 F
show such a real connection, or expected real
connection, between the extra-territorial aspect or cause
and something in India or related to India and Indians, in
terms of impact, effect or consequence, would be a mixed
matter of facts and of law. Obviously, where Parliament              G
itself posits a degree of such relationship, beyond the
constitutional requirement that it be real and not fanciful,
then the courts would have to enforce such a requirement
in the operation of the law as a matter of that law itself,
                                                                     H
338         SUPREME COURT REPORTS                        (2015] 3 S.C.R.



A        and not of the Constitution."

             17. The second question that was posed by the
      Constitution Bench is as follows:

          "(2) Does Parliament have the powers to legislate "for''
B
         any territory, other than the territory of India or any part of
         it?"

        The aforesaid question was answered thus:
c       "The answer to the above would be no. It is obvious that
        Parliament is empowered to make laws with respect to
        aspects or causes that occur, arise or exist, or may.be
        expected to do so, within the territory of India, and also
        with respect to extra-territorial aspects or causes that
D       have an impact on or nexus with India as explained
        above in the answer to Question 1 above. Such laws
        would fall within the meaning, purport and ambit of the
        grant of powers to Parliament to make laws "for the
E       whole or any part of the territory of India", 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
F       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.
G
            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
H
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                       339
          OFFICER &ANR. [DIPAK MISRA, J.]

challenge to the constitutional validity of the provision has been A
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 B
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 success fee was substantiated by the revenue C
to put in the ambit and sweep of Section 9( 1)(vii)(b) of the Act.

        20. At this juncture, it is demonstrable that NRC is a
 Non-Resident Company and it does not have a place of
business in India. The revenue has not advanced a case that          D
the income had actually arisen or received by the NRC in India.
The High Court has recorded the payment or receipt paid by
the appellant to the NRC as success fee would not be taxable
 under Section 9(1 )(i) of the Act as the transaction/activity did
 not have any business connection. The conclusion of the High        E
Court in this regard is absolutely defensible in view of the
principles stated in C./. T. v. Aggarwal and Company, C.I. T.
 v. TRC3 and Birendra Prasad Rai v. ITC4. That being the
position, the singular question thc:it remains to be answered is
whether the payment or receipt paid by the appellantfo NRC           F
as success fee would be deemed to be taxable in India under
Section 9(1 )(vii) of the Act. As the factual matrix would show,
the appellant has not invoked Double Taxation Avoidance
Agreement between India and Switzerland. That being not
there, we are only concerned whether the "success fee" as            G
termed by the assessee is "Fee for technical service" as
enjoined under Section 9( 1)(vii) of the Act. The said provision
reads as follows:
2 (1965) 56 ITR 20                                                   H
340          SUPREME COURT REPORTS                    [2015] 3 S.C.R.


A     3 (1987) 166 ITR 1993
      4 (1981) 129 ITR 295

         "9. Income deemed to accrue or arise in India - (1)
         The following income shall be deemed to accrue or arise
B        in India-

         (vit) income by way of fees for technical services payable
         by-     "

            (a) the Government; or
c
            (b) a person who is a resident, except where the fees
            are payable in respect of services utilised in a business
            or profession carried on by such person outside India
            orfor the purposes of making or earning any income
D           from any source outside India ; or

            (c) a person who is a non-resident, where the fees
            are payable in respect of services utilised in a business
            or profession carried on by such person in India or for
E           the purposes of making or earning any income from
            any source in India :

            [Provided that nothing contained in this clause shall
            apply in relation to any income by way of fees for
F           technical services payable in pursuance of an
            agreement made before the 1st day of April, 1976,
            and approved by the Central Government.]

        [Explanation 1.-For the purposes of the foregoing
G       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 ac;cordance with
        proposals approved by the Central Government before
        that date.]
H
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                     341
                                                                         .,
          OFFICER &ANR. [DIPAK MISRA, J.]
                                                                         ••
  [Explanation 2.]-Forthe purposes of this clause, ''fees           A    •
  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,          B
  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      c
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:
                                                                    D
  "As amended by Finance Act. 2010

   Explanation.- For the removal of doubts, it is hereby
  declared that for the purposes of this section; income of
  a non-resident shall be deemed to accrue or arise in India        E
  under clause (v) or clause (v1) or clause (vii) of sub-
  section (1) and shall be included in the total income of
  the non-resident, whether or not,-

   (1) the non-resident has a residence or place of business        F
  or business connection in India; or

  (i1) the non-resident has rendered services in India.]

  As amended by Finance Act. 2007
                                                                   G
  Explanation.-For the removal of doubts, it is hereby
  declared that for the purposes of this section, where
  income is ·deemed to accrue or arise in India under
  clauses (v), (vi) and (vii) of sub-section (1), such income
                                                                    H
342       SUPREME COURTREPORTS                     [2015] 3 S.C.R.


A      shall be included in the total income of the non-resident,
       whether or not the non-resident has a residence or place
       of business or business connection in India."

           22. The principal provision is Clause (b) of Section
B 9(1 )(vii) of the Act. The said provision carves out an exception.
  The exception carved out in the latter part of clause (b) applies
  to a situation when fee is payable in respect of services utilized
  for business or profession carried out by an Indian payer
  outside India or for the purpose of making or earning of income
C by the Indian assessee i.e. the payer, for the purpose of making
  or earning any income from a source outside India. On a
  studied scrutiny of the said Clause, it becomes clear that it
  lays down the principle what is basically known as the "source
  rule", that is, income of the recipient to be charged or
0
  chargeable in the country where the source of payment is
  located, to clarify, where the payer is located. The Clause further
  mandates and requires that the services should be utilized in
  India.
E         23. Having stated about the "source rule", it is necessary
  to appropriately appreciate hciw the concept has developed.
  At the time of formation of "League of Nations" at the end of
   1920, it comprised of only 27 countries dominated by the
F European States and the United States of America. The United
  Nations that was formed after the Second World War, initially
   had 51 members. Presently, it has 193 members. With the
  efflux of time, there has been birth of nation States which enjoy
  political independence and that has led to cross-border and
G international trade. The State trade eventually has culminated
  in formulation of principles pertaining to international taxation
  jurisdiction. It needs no special emphasis to state that the
  said taxation principles are premised to promote international
  trade and to allocate taxation between the States. These rules
H
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                           343
          OFFICER &ANR. [DIPAK MISRA, J.]

help and further endeavour to curtail possibility of double               A
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.            B

        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            C
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            D
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, the source State seeks
to tax the transaction or capital within its territory even when
the income benefits belongs to a non-residence person, that               E
is, a person resident in another country. The aforesaid principle
 sometimes is given a different name, that is, the territorial
principle. It is apt to state here that the residence based
taxation is perceived as benefiting the developed or capital
exporting countries whereas the source based taxation                     F
protects and is regarded as more beneficial to capital
importing countries, that is, developing nations. Here comes
the principle of nexus, for the nexus of the right to tax is in the
source rule. It is founded on the right of a country to tax the
income earned from a source located in the said State,                   G
irres'pective of the country of the residence of the ·recipient. It
is well settled that the source based taxation is accepted and
applied in international taxation law.

                                                                          H
344        SUPREME COURT REPORTS                     [2015] 3 S.C.R.


A          25. The two principles that we have mentioned
  hereinabove, are also applied in domestic law in various
  countries. The source rule is in consonance with the nexus
  theory and does not fall foul of the said doctrine on the ground
  of extra-territorial operation. The doctrine of source rule has
B been explained as a country where the income or wealth is
  physically or economically produced. [See League of
  Nations, Report on Double Taxation by Bruins, Einaudi,
  Saligman and Sir Josiah Stan (1923)]. Appreciated on the
C aforesaid principle, it would apply where business activity is
  wholly or partly performed is a source State, as a logical
  corollary, the State concept would also justifiably include the
  country where the commercial need for the product originated,
  that is, for example, where the consultancy is utilized.
D
          26. From the aforesaid, it is quite vivid thatthe concept
  of income source is multifaceted and has the potentiality to
  take different forms [See Klans Vogel, World-wide V.
  Source Taxation of Income - Review and Revision of
E Arguments (1988)). The said rule has been justified byArvid
  A. Skaar in Permanent Establishment; Erosion of Tax Treaty
  Principle on the ground that profits of business enterprise are
  mainly the yield of an activity, for capital is profitable to the
  extent that it is actively utilised in a profitable manner. To this
F extent, neither the activity of business enterprise nor the capital
  made, depends on residence.

          27. The purpose of adverting to these aspects is only
  to highlight that the source rule has been accepted by them in
G 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
H
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                       345
          OFFICER &ANR. [DIPAK MISRA, J.)

intended to enforce internal legal provisions abroad. [See the A
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.
                                                                      B
         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                C
 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,        D
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   E
 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             F
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                  G
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           H
346         SUPREME COURT REPORTS                    (2015] 3 S.C.R.


A     expeditious manner.

              29. In this context, it would be appropriate to reproduce
      the letter dated 8 7.1993 addressed by the NRC. It reads as
      follows:
B
        "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
c       be offered to the lenders;

        Evaluating the pros and cons of various lending
        alternatives, both for the local and the foreign borrowings;

D       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;
E
        Accessing Export Credit Agencies world wide obtaining
        commercial bank support on the most comprehensive
        terms;

        Assisting GVK in loan negotiations and documentation
F
        with lendors; and

        Structuring, negotiating and closing the financing for this
        project in a coordinated and expeditious manner.

G       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.

H
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                  347
          OFFICER &ANR. [DIPAK MISRA, J.]

  The success fee will be 0.75% of the total debt, payable       A
  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 B
by the Board is extracted herein below:

  "..... It was explained to the Directors that ABB-PTF's
  scope of service for the project include:

   Developing a comprehensive financial model;
                                                                c
  Tying up the rupee/foreign currency loan requirements of
  the project;

  Assessing Export Credit Agencies worldwide and                 D
  obtaining commercial banks support on the most
  competitive terms;

  Assisting GVK in loan negotiations and documentation
  with lenders.                                                 E

  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               F
  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:               G

(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         H
348          SUPREME COURT REPORTS                   [2015] 3 S.C.R.



A     commercial bank support on the most competitive terms.

      (iii) Assist the appellant company in loan negotiations and
      documentation with the lenders.

B             32. Pursuant to the aforesaid exercises carried out by
      the NRC, the company wcis successf1,1I 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
c     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.

              33. In this factual score, the expression, managerial,
D     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
E     has to be understood at common parlance.

              34. 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.
F     28 of19995, would be applicable. The observations therein
      read as follows:

         "By technical services, we mean in this context services
         requiring expertise in technology. By consultancy
G        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
H
      5 (1999) 242 JTR 280
   GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX                        349
          OFFICER &ANR. [DIPAK MISRA, J.]

   service, whether or not expertise in technology is required         A
   to perform it."

        35. In this context, a reference to the decision in C./. T.
If. Bharti Cellular Limited and others6 , would be apposite.
In the said case, while dealing with the concept of "consultancy      B
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"             c
   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                 D
   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
                                                                      E
   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."
                                                                       F
        36. 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). G
ft means a meeting in wilich a party consults or confers and
eventually it results in human interaction that leads to rendering
of advice.

       37. As the factual matrix in the case at hand, would            H
6 (2009) 319 ITR 139
350          SUPREME COURT REPORTS                  [2015] 3 S.C.R.


A     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,
B     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
C     the head 'fee for technical service'. Once the tax is payable
      paid the grant of 'No Objection Certificate' was not legally
      permissible. Ergo, the judgment and order passed by the High
      Court are absolutely impregnable.

          38. Consequently, the appeal, being devoid of merit,
D stands dismissed. However, in the facts and circumstances
  of the case there shall be no order as to costs.

      Devika Gujral                                  Appeal. dismissed.

E




F




G




H