GVK INDUSTRIES LTD. &ANR. versus THE INCOME TAX OFFICER & ANR.

Citation: [2015] 3 S.C.R. 321 · Decided: 18-02-2015 · Supreme Court of India · Bench: S. J. MUKHOPADHAYA · Disposal: Dismissed
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Judgment (excerpt)

(2015) 3 S.C.R. 321 
GVK INDUSTRIES LTD. &ANR. 
v. 
THE INCOME TAX OFFICER &ANR. 
(Civil Appeal No. 7796 of 1997) 
FEBRUARY 18, 2015 
[SUDHANSU JYOTI MUKHOPADHAYA AND 
DIPAK MISRA, JJ.] 
A 
B 
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 
8 Section 9(1 )(vii) of the Income Tax 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 
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 c
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