Success fee is payable by Indian companies to NRI consultants
H P Ranina
There are several domestic and overseas financial institutions which provide advisory services to Indian corporates for raising funds abroad either by way of institutional or commercial borrowings or equity issues through the Global Depository Receipts (GDRs) route.Fees are payable by Indian companies to non-resident consultants. The taxability of this amount was recently considered by the Andhra Pradesh High Court in G.V.K. Industries Limited v. Income-tax officer (228 I.T.R. 564)The facts of this case were that the company was set up with the object of generating 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. 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 NRI company offered its services as financial adviser to the petitioner's project. 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 in 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 non-resident company was to be paid, what was 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 August 21, 1993. The Board of Directors approved the appointment of the non-resident company and advised that it be involved in the proposed public issue
of shares by the petitioner-company. The non-resident company rendered professional service from Zurich, Switzerland, 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 non-resident company, 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, USA. After successful rendering of services, the non-resident company sent an invoice to the petitioner-company for payment of the success fee amount of $ 1,715,476.16 (Rs. 5.4 crore). The petitioner-company then approached the Income-tax officer for issuing a "No-objection Certificate" to remit the said sum, duly pointing out that the non-resident company 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 non-resident company. The Income-tax officer refused to issue the Certificate and this was upheld by the Commissioner of Income-tax on revision. On a reference, the Andhra Pradesh High Court observed that a plain reading of section 9(1) of the Income-tax Act, 1961, makes it clear that it enumerates various categories of income under sub-section (1) and directs that income falling under each of the clauses and sub-clauses shall be deemed to accrue or arise in India. The income dealt with in each clause is distinct and independent of the other and the requirements to bring income within each clause, are separately noted. As such it is not necessary that income falling in one category under any one of the sub-clauses should also satisfy the requirements of the other sub-clauses to bring it within the ambit of the expression "Income deemed to accrue or
arise in India". If the clauses are so interpreted as to read the requirements of one into the other, it will lead to anomalous and absurd results and this obviously cannot be done. Section 9(1)(i) brings within its fold "all income accruing or arising whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India". The following principles are applicable with regard to "business connection" (i) Whether there is a business connection between an Indian company and a non-resident company is a mixed question of fact and law, which has to be determined on the facts and circumstances of each case; (ii) the expression "business connection" is too wide to admit of any precise definition; however, it has some well known attributes; (iii) the essence of "business connection" is the existence of close, real, intimate relationlship and
commonness of interest between the non-resident company and the Indian enterprise; (iv) where there is control of management or finances or substantial holding of equity shares by the non-resident company in the Indian enterprise, the requirement of principle (iii) is fulfilled; and (v) to constitute "business connection" there must be continuity of activity or operation of the non-resident company with the Indian party and that a stray or isolated transaction is not enough to establish a business connection. Section 9(1)(vii) (b) states that income by way of fees for technical services payable by 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 or for the purposes of making or earning any income from any source outside India, shall be income deemed to accrue or arise in India. Explanation 2 defines the expression "fees for technical services" to mean any consideration (including any lumpsum
consideration) for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel), but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries". Thus, from a combined reading of clause (vii) (b) and Explanation 2 it becomes clear that any consideration, whether lumpsum or otherwise, paid by a person who is a resident in India to a non-resident for running any managerial or technical or consultancy service, would be income by way of fees for technical services and would, therefore, be within the ambit of "income deemed to accrue or arise in India." Turning to the facts in the case of G.V.K. Industries Ltd., the Court held that the scope of service/work undertaken by the non-resident company was merely to draw up a scheme, advise on the terms and methods of negotiation and for documentation with
the lender, evaluate the pros and cons of various lending alternatives, both for the local and foreign borrowings, prepare a preliminary information memorandum to be used as the basis for placing the foreign and local debt, and that the responsibility of entering into correspondence as per the advice of the non-resident company and pursuing the matter was that of the petitioner- company itself, and not that of the non-resident company. According to the Court, the success fees fell within the ambit of section 9(1) (vii) (b). For the purposes of clause (vii)(b) of section 9(1), thebusiness of the petitioner-company could not be divided into water-tight compartments, like finance, generation of power, plant and machinery, management, etc, to hold that managerial, technical and consultancy services related to management, generation of power and plant and machinery, but not to finance. Advice given to procure loan to strengthen finances would be as much a technical or consultancy service, as it would be with
regard to management, generation of power or plant and machinery. Therefore, the Court concluded that the success fee was chargeable under the provisions of the Income-tax Act, and, hence, the petitioners were not entitled to the "No-objection Certificate". The aforesaid decision of the Andhra Pradesh High Court certainly leaves some room for doubt as to its correctness. A financial service involving advisory assignments and fees for tying up funds from an international agency does not seems to fall under the head "fees for technical services" , though this expression has been given an extended meaning under Explanation 2 to section 9(1) (vii). In any event, after the coming into force of the Agreement for Avoidance for Double Taxaation between India and the Swiss Federation, the taxability of such fees would be governed by the provisions of this Agreement. Under Article 12 of this Agreement, the definition of this expression is different from the one given under section 9(1) (vii) of the Act.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
|
