IMPORTANT POINT
Fee for consultancy services are taxable.

Judgment

Dipak Misra, J.

The appellant No. 1 is a company incorporated under the Companies Act, 1956 for the purpose 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.

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 into an agreement with ABB – Projects & Trade Finance International Ltd., Zurich, Switzerland, (hereinafter referred to as “Non-Resident Company/NRC”). The NRC, having regard to the 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 Bank of India (IDBI) acting as the Lead Financier for its Rupee loan requirement and for a part of its 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).

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 out that 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 Income-tax Act, 1961 (for brevity, ‘the Act’) by the NRC. It was 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 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 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 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 Certificate’. Thus, the order passed by the first respondent