G V K INDUSTRIES LIMITED Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) 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").

(2.) There are two petitioners in this writ petition. On 18/06/1992, 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 8/07/1993. 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 co-ordinated and expeditious manner. For its services the 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 21/08/1993. 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 27/09/1994. 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 21/03/1995, 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 25/10/1995, 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 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 21/03/1995 (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, 21/03/1995 (sic), confirming the order of the first respondent letter No. G-130, dated 27/09/1994.

(3.) 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 8/07/1993, 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 2/08/1994 (sic). The board of directors of the petitioner-company approved the appointment of the NRC as financial adviser in its meeting held on 21/08/1993. 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-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 from India, the income will accrue or deemed to have accrued or arisen in India to the NRC within the meaning of section 9(1)(i) and 9(1)(vii)(b). It is submitted that the order of the second respondent dated 21/03/1995, was only an interim order and that the final order was passed on 21/03/1995 (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".