2015 (2) TMI 730 - SC - Income Tax

TDS u/s 194J - Nature of an amount term as success fee paid to Non Resident Company (NRC) at the rate of 0.75% of the total debt financing - consultancy service or not - whether chargeable under the provisions the Act? - Entitlement to No Objection Certificate by assessee - HC opined that the business connection between the petitioner company and the NRC had not been established - Held that - As the factual matrix in the case at hand, would 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 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 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. - Decided against assessee.

Summary

Issues Involved:
1. Whether the "success fee" payable by the appellant-company to the Non-Resident Company (NRC) is chargeable under the provisions of the Income-tax Act, 1961.
2. Whether the appellant-company is entitled to a "No Objection Certificate" (NOC) for remitting the success fee without deducting tax at source.

Detailed Analysis:

1. Chargeability of Success Fee under the Income-tax Act, 1961:

Background and Arguments:
The appellant-company, incorporated under the Companies Act, 1956, engaged a Non-Resident Company (NRC) for financial consultancy services to set up a power project. The NRC was to be paid a "success fee" of 0.75% of the total debt financing. The appellant argued that the NRC had no business connection in India, and all services were rendered from outside India, thus no income accrued or arose in India under Section 9 of the Income-tax Act.

Revenue's Stand:
The revenue contended that the NRC provided managerial and consultancy services, which fall within the ambit of Section 9(1)(vii)(b) of the Act. They asserted that the services rendered by the NRC were not one-time but involved continuous interaction, thus establishing a business connection.

High Court's Conclusion:
The High Court observed that the NRC's services were analogous to drawing up a financial plan rather than executing it. It concluded that the business connection between the appellant and NRC was not established. However, it held that the "success fee" fell within the ambit of "fees for technical services" under Section 9(1)(vii)(b) of the Act, making it chargeable to income tax.

Supreme Court's Analysis:
The Supreme Court noted that the NRC did not have a place of business in India, and the income did not actually arise or get received in India. The Court emphasized the "source rule," which taxes income where the payer is located. It held that the services rendered by the NRC were consultancy services, falling within the definition of "fees for technical services" under Section 9(1)(vii) of the Act. Thus, the success fee was deemed taxable in India.

2. Entitlement to No Objection Certificate (NOC):

Appellant's Argument:
The appellant sought a NOC to remit the success fee without tax deduction, arguing that the NRC's services were rendered outside India, and no income accrued or arose in India.

Revenue's Stand:
The revenue justified the denial of NOC, arguing that the services rendered by the NRC were managerial and consultancy services, and thus, the income was deemed to accrue in India, making tax deduction at source mandatory.

High Court's Conclusion:
The High Court held that the appellant was not entitled to a NOC as the success fee was chargeable to income tax in India under Section 9(1)(vii)(b) of the Act.

Supreme Court's Analysis:
The Supreme Court upheld the High Court's decision, stating that the nature of services rendered by the NRC amounted to consultancy services. Therefore, the appellant was obligated to deduct tax at source before remitting the success fee to the NRC. Consequently, the denial of the NOC was justified.

Conclusion:
The Supreme Court dismissed the appeal, affirming that the success fee paid to the NRC was taxable in India under Section 9(1)(vii) of the Income-tax Act, 1961, and the appellant was not entitled to a NOC for remitting the fee without tax deduction. The judgment emphasized the principles of "source rule" and the definition of "fees for technical services" under the Act.