GVK INDUSTRIES LTD. &ANR. versus THE INCOME TAX OFFICER & ANR.
[2015] 3 S.C.R. 321, Supreme Court of India, 2015
Outcome: Dismissed (Dismissed)
Segment: Ratio
(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 could 
prepare a scheme for raising requisite finances and tie-
up loans for the power projects. As the company did 
not find any professional in India, it had approached the 
consultant NRC located in Switzerland, who offered their F 
services. Their services rendered 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 agencies world-wide and obtaining G 
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 project in a H
324 
SUPREME COURT REPORTS 
[2015] 3 S.C.R. 
A coordinated and expeditious manner. The letter 
addressed by the NRC and the resolution passed by the 
Board clearly stated that the obligation of the NRC was 
to: (I) Develop comprehensive financial model to tie-up 
the rupee and foreign currency loan requirements of the 
B project. (ii) Assist expert credit agencies world-wide and 
obtain commercial bank support on the most 
competitive terms. (iii) Assist the appellant company in 
loan negotiations and documentation with the lenders. 
C Pursuant to the said exercises carried out by the NRC, 
the company was successful in availing loan/financial 
assistance in India from the IDBI which acted as a lead 
financier for the rupee loan requirement. For foreign 
currency loan requirement, the appellant approached 
o International Finance Corporation, Washington D.C., USA 
and was successful. [Paras 28 - 32] [345-8-H; 347-A-D; 
348-8] 
4. The word 'consultation' has been defined as 
E an act of asking the advice or opinion of someone (such 
as a lawyer). It means a meeting in which a party consults 
or confers and eventually it results in human interaction 
that leads to rendering of advice. In the instant case, the 
NRC had acted as a consultant. It had the skill, acumen 
F and knowledge in the specialized field i.e. preparation 
of a scheme for required finances and to tie-up required 
loans. The nature of service referred by the NRC, can 
be said with certainty would come within
the ambit and 
sweep of the term 'consultancy service' and, therefore, 
G 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 which is payable is paid the grant of 'No Objection 
H Certificate' was not legally permissible. [Paras 36 and
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
OFFICER &ANR. 
37) [349-F-H; 350-A-C] 
Electrical Corporation of/ndia Ltd. LC.I. T. (1990) 
183 ITR 43 (SC):(1989) Supp. 2 sec 642; C.I. T. v. 
Aggarwal and Company (1965) 5G ITR 20; C.I. T. II. 
TRC (1987) 166 ITR 1993; Birendra Prasad Rai II. 
ITC (1981) 129 ITR 295; In Re. P.No. 28 of 1999 
(1999) 242 ITR 280; C.I. T. V. Bharti Cellular Limited 
and Ors. (2009) 319 ITR 139 - rreferred to. 
League of Nations, report on Double Taxation 
by Bruins, Einaudi, Saligman and Sir Josiah Stan 
(1923); K/ans vogel, World-wide V. source Taxation 
of Income - Review and Revision of Arguments 
(1988); The Introduction in Klaus Vogel on Double 
Taxation Convction, South Asean, Reprint Edition • 
2007 - referred to. 
Case Law Reference 
(1989) Supp. 2 sec 642 
Referred to. 
Para 13 
(1965) 56 ITR 20 
Referred to. 
Para 19 
(1987) 166 ITR 1993 
Referred to. 
Para 19 
(1981) 129 ITR 295 
Referred to. 
Para 19 
(1999) 242 ITR 280 
Referred to. 
Para 34 
(2009) 319 ITR 139 
Referred to. 
Para 35 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 
7796 of 1997. 
From the Judgment and Order dated 02.05.1997 of the 
High Court at Hyderabad in Writ Petition No. 6866 of 1995. 
325 
A 
B 
c 
c 
E 
F 
G 
H
326 
SUPREME COURT REPORTS 
[2015] 3 S.C.R. 
A 
U. A. Rana, Mrinal Elkar Majumdar, Himanshu Mehta, 
B 
Gagrat & Co. for the Appellants. 
Arijit Prasad, Rupesh Kumar, Tanushree Sinha, Gargi 
Khanna, Anil Katiyar, Sushma Suri for the Respondents. 
The Judgment of the Court was delivered by 
DIPAK MISRA, J. 1. The appellant No. 1 is a company 
incorporated under the Companies Act, 1956 f9r the purpose 
C 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. 
D 
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 
E into an agreement with ABB - Projects & Trade Finance 
International Ltd., Zurich, Switzerland, (hereinafter referred to 
as "Non-Resident Company/NRG"). The NRG, having regard 
to the requirements of the appellant-company offered its 
services as financial advisor to its projectfrom July 08, 1993. 
F 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 
G documentation with lenders and structuring, negotiating and 
closing the financing for the project in a coordinated and 
expeditious manner. For its services the NRG was to be paid, 
what is termed as, "success fee" at the rate of 0.75% of the 
H total debt financing. The said proposal was placed before the
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
327 
OFFICER &ANR. [DIPAK MISRA, J.] 
Board meeting of the company on August 21, 1993 and the A 
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 
B 
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 C 
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). 
D 
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 
E 
outthat 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 
lncome-taxAct,
1961 (forbrevity, 'theAct')bytheNRC. ltwas F 
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 G 
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 H
328 
SUPREME COURT REPORTS 
[2015) 3 S.C.R. 
A 
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 
B 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 
Certifi<?ate'. Thus, the order passed by the first respondent 
C was affirmed and resultantly the revision petition was 
dismissed. 
4. The non-success in revision compelled the company 
to approach the High Court in W.P. No. 6866of1995 for issue 
0 
of writ of certiorari for quashing of the orders passed by the 
Income-tax officer and that of by the revisional authority. In the 
writ petition, the stand and stance put forth before the authorities 
were reiterated. 
5. On behalf of the revenue a counter affidavit was filed 
E contending, inter alia, that the NRC was very actively 
associated not only in arranging loan but also in providing 
various services which fall within the ambit of both managerial 
as well as consultancy services. 
F 
6. A reference was made to the letter dated July 8, 1993 
wherefrom it is evident that NRC is a financial advisor with a 
worldwide experience and has been engaged in India and 
requested that it be appointed as
"financial consultant" for the 
G project. The company responded by appointing the NRC as 
the financial advisor vi de its letter dated 2 .8 .1994. On behalf 
of the revenue, the proceedings of the Board of Directors 
meeting was highlighted stating that they disclosed that the 
NRC was appointed not only to arrange for the loan but also to 
H render several other financial and general services and also
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
329 
OFFICER &ANR. [DIPAK MISRA, J.] 
to involve itself in the public issue of the company and on that A 
bedrock it was urged that it squarely falls within the ambit of 
Section 9(1)(vii)(b) of the Act. It was also averred that NRC is 
a financial segment of the ABB which is participating in the 
equity of the appellant company besides IFC, Washington. The 
further stand of the revenue was that Section 5(2) read with 
B 
Section 9(1 )(i)(vii)(b) will apply to the remittance to be made 
by the company to the NRC as the income would be deemed 
to have accrued or arisen in India and hence, the Indian 
company was liable to deduct tax at the prescribed rate before C 
remitting any money to the NRC. The order passed by the 
authorities below were supported on the foundation that there 
is a business connection between the NRC with the company 
in India and the voluminous correspondence between the two 
wings discloses the said connection. It was also contended D 
that the services rendered by the NRC were not a one time 
affair as alleged, for the company itself had acted on behalf of 
the NRC for processing, negotiating and obtaining loans from 
IDBI India and IFC, Washington. Emphasis was laid on the 
fact that the company had contracted the NRC not only forthe E 
limited purpose of getting loan but also for the further 
participation in its business activity which was evincible from 
the correspondence made between the two and,
therefore, 
the income will accrue or deemed to have accrued or arisen 
to the NRC in India within the provisions of the Act. Justifying 
F 
the order of revocation by the Commissioner of Income-tax, it 
was set forth that order dated 21.03.1995 was only an interim 
order and the final order came to be passed on 25.10.1995 
by which the revision was dismissed. It was asserted by the G 
revenue that the services of the NRC, as demonstrable from 
the material brought on record, was rendered within India and, 
therefore, the company is obliged in law to deduct income-tax 
before remitting "success fee" to the NRC. On this premise, 
the denial of 'No Objection Certificate' (NOC) was sought to H
330 
SUPREME COURT REPORTS 
(2015] 3 S.C.R. 
A 
be justified. 
7. A rejoinder affidavit was filed by the appellant 
company asseverating that the NRC is an independent unit 
and is, in a way, subsidiarised by ABB. That apart, merely 
B because expert advice was obtained, it could not be said that 
it pursued the application for loan/financial assistance on behalf 
of NRC and further the advisory services were rendered from 
outside India. The stand of the revenue thatthere has been an 
admission by the company to the effect that there was business 
C connection with the NRC by the company, was controverted. It 
was put forth that the company was always the principal directly 
concerned with the making of application for financial 
assistance for the project and pursuing the same; that the NRC 
0 
did not have any office or establishment in India at any relevant 
point of time; that it operated from Zurich; that there was no 
business connection between the company and the NRC; and 
that the success fee did not accrue or arise to the NRC in 
India and hence, no income is deemed to have accrued or 
E arisen to NRC in India. In addition to the aforesaid it was urged 
Section 9( 1 )(i) and Section 9( 1 )(vii) have to be read together 
and in that case the stand of the revenue was absolutely 
unjustified and assuming Section 9(1)(vii) of the Act is read in 
isolation, the plain interpretation could not be applicable regard 
F 
being had to the nature of service rendered by NRC.
It was 
also pleaded that merely because the amount of success fee 
was paid by the appellant-company to NRC in India for the 
services rendered from outside India, the income of NRC would 
not deemed to have accrued or arisen in India. 
G 
8. The High Court framed the following two issues for 
consideration: 
• 
"(1) Whether 'success fee' payable by the petitioner-
H 
company to the NRC or any portion thereof is chargeable
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
331 
OFFICER &ANR. [DIPAK MISRA, J.] 
under the provisions the Act; and 
A 
(2) Whether the petitioner-company is entitled to 'No 
Objection Certificate'." 
9. The High Court referred to clause (b) of sub-section 
B 
2 of Section 5 and Section 9 of the Act and adverted to the 
expression all income accruing or arising, whether directly or 
indirectiy, through or from any business connection in India, or 
through or from any property in India, or through from any asset 
or source of income in India or through the transfer of a capital c 
asset situate in India and thereafter referred to Section 
163(1)(b) which uses the expression "business connection" 
and thereafter referring to various authorities, culled out the 
principles as to what the expression "business connection" 
conveys. It observed that expression "business connection" D 
is too wide to admit of any precise definition though it has 
some well known attributes; that whether there is a business 
connection between an Indian company and a non-resident 
company is a mixed question of fact and law which is to be 
determined on the facts and circumstances of each case; that E 
the essence of "business connection" is existence of close, 
real, intimate relationship and commonness of interest 
between the NRC and the Indian person; that in a case where 
there is control of management or finances or substantial F 
holding of equity shares or sharing of profits by the NRC of
the 
Indian company/person, the existence of close/intimate 
relationship stand substantiated; and to constitute business 
connection, there must be continuity of activity or operation of 
the NRC with the Indian company/person and a stray or an G 
isolated transaction is not enough to establish a business 
connection. 
10. After culling out the principles, the High Court 
referred to the contents of the correspondence, the nature and 
H
332 
SUPREME COURT REPORTS 
(2015] 3 S.C.R. 
A extent of services which the NRC had undertaken under the 
agreement, the resolution passed by the Board of Directors 
which had perused the letter dated July 8, 1993 addressed by 
the NRC stipulating the scope of services to be undertaken by 
NRC; the decisions of the Board to pay a fee to NRC arid 
B came to hold thus: 
c 
D 
E 
F 
G 
H 
"On a careful reading of the letter of proposal of the NRC 
and the extract of resolution of the Board of Directors of 
the petitioner-company, it is clear to us that it was no part 
of the services to be provided by the NRC to manage 
public issue in India to correspond with various agencies 
to secure loan forthe petitioner-company, to negotiate 
the terms on which loan should be obtained or to draft 
document for it. The NRC has only to develop a 
comprehensive financial model, tie up the rupee/foreign 
currency loan requirements of the project, assess export 
credit agencies worldwide and obtain commercial bank 
support, assist the petitioner-company in loan 
negotiations and documentation with the lender. It 
appears to us that the service to be rendered by the NRC 
is analogous to draw up a plan forthe petitioner-company 
to reach the required destination indicating roads and 
highways, the curves and the turns; it does not 
contemplate taking the petitioner-company to the 
destination by the NRC. Once the NRC has prepared 
the scheme and given necessary advice and assistance 
to the
petitioner-company for obtaining loan, the 
responsibility of the NRC is over. It is forthe petitioner-
company to proceed on the suggested lines and obtain 
loan from Indian or foreign agencies. On the petitioner-
company obtaining loan, the NRC becomes entitled to 
'success fees'."
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
333 
OFFICER &ANR. [DIPAK MISRA, J.] 
11. The High Court scanned the letters with due A 
consideration and opined that the business connection 
between the petitioner company and the NRC had not been 
established. Thereafter, the writ court adverted to the 
proposition whether success fee could fall within clause (vii)(b) 
of Section 9(1) of the Act. Interpreting the said provision, the B 
High Court opined that: 
"Thus from a combined reading of clause (vii) (b) 
Explanation (2) it becomes clear that any consideration, 
whether lump sum 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 the income by way of fees for technical service and 
would, therefore, be within the ambit of"income deemed 
to accrue or arise in India". If this be the net of taxation 
under Section 9 (1) (vii) (b), then 'success fee', which is 
payable by the petitioner-company to the NRC as fee 
for technical service would be chargeable to income tax 
thereunder. The Income-tax officer, in the impugned 
order, held that the services offered by the NRC fell within 
the ambit of both managerial and consultancy services. 
That order of Income-tax officer found favour by the 
Commissioner in revision. In the view we have 
expressed above, we are inclined to confirm the 
impugned order." 
c 
D 
E 
F 
12. At this juncture, it is necessary to note that a 
contention
was advanced before the High Court by the 
assessee that the NRC did not render any technical or G 
consultancy service to the company but only rendered advise 
in connection with payment of loan by it and hence, it would 
not amount to technical or consultancy service within the 
meaning of Section 9(1 )(vii)(b) of the Act. While not accepting 
H
334 
SUPREME COURT REPORTS 
[2015] 3 S.C.R. 
A 
the said submission, the High Court observed that for the 
purposes of attracting the said provision, the business of the 
company cannot be divided into water-tight compartments like 
fire, generation of power, plant and machinery, management, 
etc. and to hold that managerial and technical and consultancy 
B service relate to management, generation of power and plant 
and machinery, but not to finance. Elaborating further, the High 
Court observed that advice given to procure loan to strengthen 
finances may come within the compartment of technical or 
C consultancy service and "success fee" would thereby come 
within the scope of technical service within the ambit of Section 
9(1)(vii)(b) of the Act. Being of this view, the High Court opined 
the assessee was not entitled to the "No Objection Certificate". 
0 
13. Be it stated, the constitutional validity of Section 
9(1)(vii)(b) of the Act was challenged on the ground of 
legislative competence and violation of Article 14 of the 
Constitution. The Court referred to the earlier Division Bench 
decision in Electrical Corporation of India Ltd. II. C.I. T. 
E rendered in W.P. No. 105/1987 on March 24, 1987 and also 
took note of the fact that the said case was quoted with 
approval in Electrical Corporation of India Ltd. II. C.I. T. 1 In 
the ultimate eventuate, High Court rejected all the contentions 
advanced by the assessee-company and dismissed the writ 
F petition. 
14.
Being aggrieved, the petitioner company 
approached this Court. When the matter came up for 
consideration before a two-Judge Bench of this Court, which 
G taking note of the far-reaching issues of constitutional purport 
and the fact that they were earlier referred to in the case of 
Electrical Corporation of India Ltd. (supra), which was ultimately 
withdrawn, it, by order dated 28.11.2000, referred the instant 
matter to a larger Bench. On 13.7.2010, the matter again came 
H 1 (1990) 183 ITR 43 (SC); [(1989) Supp. 2 sec 642]
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
335 
OFFICER &ANR. [DIPAK MISRA, J.] 
up for consideration before a three-Judge Bench and vide its A 
order of the same date, the matter was referred to the 
Constitution Bench, which answered the reference as per 
decision on 1.3.2011 reported in (2011) 4 SCC 36. The issue 
before the Constitution Bench stated by the Court is thus: 
B 
"It is necessary for purposes of clarity that a brief 
recounting be undertaken at this stage itself as to what 
was conclusively decided in ECIL and what was referred 
to a Constitutional Bench. After conclusively determining 
that clauses (1) and (2) of Article 245, read together, 
impose a requirement that the laws made by Parliament 
should bear a nexus with India, the three-Judge Bench in 
ECIL asked that a Constitutional Bench be constituted 
to consider whether the ingredients of the impugned 
provision i.e. Section 9(1)(vi1) of the Income Tax Act 
(1961) indicate such a nexus." 
c 
D 
15. Before the Constitution Bench the appellant 
withdrew its challenge to the constitutional validity of Section 
9(1)(vii)(b) of the Act and elected to proceed on the factual E 
matrix as to the applicability of the said provision. However, 
as the learned Attorney General pressed upon for 
reconsideration, the decision. in three-Judge Bench in ECIL 
case, the larger Bench considered the validity of the F 
requirement of a relationship to or nexus with territory of India 
as a limitation on the powers of
Parliament to enact laws 
pursuant to clause (1) of Article 245 of the Constitution. The 
Court adverted to the ratio in ECIL, took note of propositions 
of the learned Attorney General and the principles relating to G 
interpretation of the Constitution, textual analysis of Article 245, 
analysed the constitutional topological space of Article 245 
and the wider structural analysis of Article 245 in the context of 
Article 260 and came to hold thus: 
H
336 
A 
B 
c 
D 
E 
SUPREME COURT REPORTS 
[2015] 3 S.C.R. 
"It would appear that the concerns of the learned Attorney 
General may have been more with whether the ratio in 
ECIL could lead to a reading down of the legislative 
powers granted to Parliament by Article 245. A thorough 
textual analysis, combined with wider analysis of 
constitutional topology, structure, values and scheme has 
revealed a much more intricately provisioned set of 
powers to Parliament. Indeed, when all the powers 
necessary for an organ of the State to perform its role 
completely and to effectuate the constitutional mandate, 
can be gathered from the text of the Constitution, properly 
analysed and understood in the wider context in which it 
is located, why should such unnecessarily imprecise 
arrogation of powers be claimed? To give in to such 
demands, would be to run the risk of importing meanings 
and possibilities unsupportable by the entire text and 
structure of the Constitution. Invariably such demands are 
made in seeking to deal with external affairs, or with some 
claimed grave danger or a serious law and order 
problem, external or internal, to or in India. In such 
circumstances, it is even more important that courts be 
extra careful." 
16. Thereafter, the Court reiterated the two questions it 
F had set out in the beginning. The first question reads thus: 
"( 1) Is Parliament constitutionally restricted from enacting 
legislation with respect to extra-territorial aspects or
causes that do not have, nor expected to have any, direct 
G 
or indirect, tangible or intangible impact(s) on oreffect(s) 
in or consequences for: 
(a) the territory of India, or any part of India; or 
H 
(b) the interests of, welfare of, well-being of, or security
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
337 
OFFICER &ANR. [DIPAK MISRA, J.] 
of inhabitants of India, and Indians?" 
A 
Answering the same, the Court observed: 
"The answer to the above would be yes. However, 
Parliament may exercise its legislative powers with 
respect to extra-territorial aspects or causes-events, 
things, phenomena (howsoever commonplace they may 
be), resources, actions or transactions, and the like-
that occur, arise or exist or may be expected to do so, 
naturally or on account of some human agency, in the 
social, political, economic, cultural, biological, 
environmental c~ physical spheres outside the territory 
of India, and seek to control, modulate, mitigate .or 
transform the effects of such extra-territorial aspects or 
causes, or in appropriate cases, eliminate or engender 
such extra-territorial aspects or causes, only when such 
extra-territorial aspects or causes have, or are expected 
to have, some impact on, or effect in, or consequences 
for: (a) the territory of India, or any part of India; or (b) the 
interests of, welfare of, well-being of, or security of 
inhabitants of India, and Indians." 
And thereafter: 
"Whether a particular law enacted by Parliament does 
show such a real connection, or expected real 
connection, between the extra-territorial aspect or cause 
and something in India or related to India and Indians, in 
terms of impact, effect or consequence, would be a mixed 
matter of facts and of law. Obviously, where
Parliament 
itself posits a degree of such relationship, beyond the 
constitutional requirement that it be real and not fanciful, 
then the courts would have to enforce such a requirement 
in the operation of the law as a matter of that law itself, 
B 
c 
D 
E 
F 
G 
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A 
and not of the Constitution." 
B 
c 
D 
E 
F 
G 
H 
17. The second question that was posed by the 
Constitution Bench is as follows: 
"(2) Does Parliament have the powers to legislate "for'' 
any territory, other than the territory of India or any part of 
it?" 
The aforesaid question was answered thus: 
"The answer to the above would be no. It is obvious that 
Parliament is empowered to make laws with respect to 
aspects or causes that occur, arise or exist, or may.be 
expected to do so, within the territory of India, and also 
with respect to extra-territorial aspects or causes that 
have an impact on or nexus with India as explained 
above in the answer to Question 1 above. Such laws 
would fall within the meaning, purport and ambit of the 
grant of powers to Parliament to make laws "for the 
whole or any part of the territory of India", and they may 
not be invalidated on the ground that they may require 
extra-territorial operation. Any laws enacted by 
Parliament with respect to extra-territorial aspects or 
causes that have no impact on or nexus with India would 
be ultra vires, as answered in response to Question 1 
above, and would be laws made "for'' a foreign territory." 
After the reference was answered, the matter was 
directed to be listed before the appropriate Bench. 
18. We have heard Mr. U.A. Rana, learned counsel for 
the appellants and Mr. Arijit Prasad, learned counsel for the 
respondents. 
19. At the very
outset, it is necessary to mention as the
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
339 
OFFICER &ANR. [DIPAK MISRA, J.] 
challenge to the constitutional validity of the provision has been A 
withdrawn, and the same accordingly has not been gone into 
by the Constitution Bench, there is no necessity to dwell upon 
the same. The crux of the matter is whether, in the obtaining 
factual matrix, the High Court was justified in concurring with 
the view expressed by the revisional authority that the B 
assessee-company was not entitled to "No Objection 
Certificate" under the Act as it was under the obligation to 
deduct the tax at source pertaining to payment to the NRC as 
the character of success fee was substantiated by the revenue C 
to put in the ambit and sweep of Section 9( 1 )(vii)(b) of the Act. 
20. At this juncture, it is demonstrable that NRC is a 
Non-Resident Company and it does not have a place of 
business in India. The revenue has not advanced a case that D 
the income had actually arisen or received by the NRC in India. 
The High Court has recorded the payment or receipt paid by 
the appellant to the NRC as success fee would not be taxable 
under Section 9(1 )(i) of the Act as the transaction/activity did 
not have any business connection. The conclusion of the High E 
Court in this regard is absolutely defensible in view of the 
principles stated in C./. T. v. Aggarwal and Company, C.I. T. 
v. TRC3 and Birendra Prasad Rai v. ITC4. That being the 
position, the singular question thc:it remains to be
answered is 
whether the payment or receipt paid by the appellantfo NRC F 
as success fee would be deemed to be taxable in India under 
Section 9(1 )(vii) of the Act. As the factual matrix would show, 
the appellant has not invoked Double Taxation Avoidance 
Agreement between India and Switzerland. That being not 
there, we are only concerned whether the "success fee" as G 
termed by the assessee is "Fee for technical service" as 
enjoined under Section 9( 1 )(vii) of the Act. The said provision 
reads as follows: 
2 (1965) 56 ITR 20 
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A 
3 (1987) 166 ITR 1993 
4 (1981) 129 ITR 295 
"9. Income deemed to accrue or arise in India - (1) 
The following income shall be deemed to accrue or arise 
B 
in India-
c 
D 
E 
F 
G 
H 
( vit) income by way of fees for technical services payable 
by-
" 
(a) the Government; or 
(b) 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 
orfor the purposes of making or earning any income 
from any source outside India ; or 
(c) a person who is a non-resident, where the fees 
are payable in respect of services utilised in a business 
or profession carried on by such person in India or for 
the purposes of making or earning any income from 
any source in India : 
[Provided that nothing contained in this clause shall 
apply in relation to any income by way of fees for 
technical services payable in pursuance of an 
agreement made before the 1st day of April, 1976, 
and approved by the Central Government.] 
[Explanation 1.-For the purposes of the foregoing 
proviso, an agreement made on or after the 1st day of 
April, 1976, shall be deemed to have been made before 
that date if the agreement is made in ac;cordance with 
proposals approved by the Central Government before 
that date.]
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
341 
OFFICER &ANR. [DIPAK MISRA, J.] 
. , • • 
[Explanation 2.]-Forthe purposes of this clause, ''fees 
A 
• 
for technical services" means any consideration (including 
any lump sum consideration) for the rendering of any 
managerial, technical or consultancy services (including 
the provision of services of technical or other personnel) 
B 
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".] 
21. Explanation to the Section 9(2) was substituted by c 
the Finance Act 2010 with retrospective effect from 1.6.1976. 
Prior to the said substitution, another Explanation had been 
inserted by the Finance Act, 2007 with retrospective effect from 
1.6.1976. The said Explanations read as under: 
D 
"As amended by Finance Act. 2010 
Explanation.- For the removal of doubts, it is hereby 
declared that for the purposes of this section; income of 
a non-resident shall be deemed to accrue or arise in India 
E 
under clause (v) or clause (v1) or clause (vii) of sub-
section (1) and shall be included in the total income of 
the non-resident, whether or not,-
(1) the non-resident has a residence or place of business 
F 
or business connection in India; or 
(i1) the non-resident has rendered services in India.] 
As amended by Finance Act. 2007 
G 
Explanation.-For the removal of doubts,
it is hereby 
declared that for the purposes of this section, where 
income is ·deemed to accrue or arise in India under 
clauses (v), (vi) and (vii) of sub-section (1), such income 
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A 
shall be included in the total income of the non-resident, 
whether or not the non-resident has a residence or place 
of business or business connection in India." 
22. The principal provision is Clause (b) of Section 
B 9(1 )(vii) of the 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 
outside India or for the purpose of making or earning of income 
C by the Indian assessee i.e. the payer, for the purpose of making 
or earning any income from a source outside India. On a 
studied scrutiny of the said Clause, it becomes clear that it 
lays down the principle what is basically known as the "source 
0 
rule", that is, income of 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. 
E 
23. Having stated about the "source rule", it is necessary 
to appropriately appreciate hciw the concept has developed. 
At the time of formation of "League of Nations" at the end of 
1920, it comprised of only 27 countries dominated by the 
F 
European States and the United States of America. The United 
Nations that was formed after the Second World War, initially 
had 51 members.
Presently, it has 193 members. With the 
efflux of time, there has been birth of nation States which enjoy 
political independence and that has led to cross-border and 
G international trade. The State trade eventually has culminated 
in formulation of principles pertaining to international taxation 
jurisdiction. It needs no special emphasis to state that the 
said taxation principles are premised to promote international 
trade and to allocate taxation between the States. These rules 
H
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
343 
OFFICER &ANR. [DIPAK MISRA, J.] 
help and further endeavour to curtail possibility of double A 
taxation, tax discrimination and also to adjudicate resort to 
abusive tax avoidance or tax evasion practices. The nation 
States, in certain situations, resort to principle of "tax mitigation" 
and in order to protect their citizens, grant benefit of tax abroad 
under the domestic legislation under the bilateral agreements. 
B 
24. 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 primacy to the country of the C 
residency of the assessee. This principle postulates taxation 
of world-wide income and world-wide capital in the country of 
residence of the natural or juridical person. The "Source State 
Taxation" rule confers primacy to right to tax to a particular D 
income or transaction to the State/nation where the source of 
the said income is located. The second rule, as is understood, 
is transaction specific. To elaborate, the source State seeks 
to tax the transaction or capital within its territory even when 
the income benefits belongs to a non-residence person, that E 
is, a person resident in another country. The aforesaid principle 
sometimes is given a different name, that is, the territorial 
principle. It is apt to state here that the residence based
taxation is perceived as benefiting the developed or capital 
exporting countries whereas the source based taxation 
F 
protects and is regarded as more beneficial to capital 
importing countries, that is, developing nations. Here comes 
the principle of nexus, for the nexus of the right to tax is in the 
source rule. It is founded on the right of a country to tax the 
income earned from a source located in the said State, G 
irres'pective of the country of the residence of the ·recipient. It 
is well settled that the source based taxation is accepted and 
applied in international taxation law. 
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A 
25. The two principles that we have mentioned 
hereinabove, are also applied in domestic law in various 
countries. The source rule is in consonance with the nexus 
theory and does not fall foul of the said doctrine on the ground 
of extra-territorial operation. The doctrine of source rule has 
B been explained as a country where the income or wealth is 
physically or economically produced. [See League of 
Nations, Report on Double Taxation by Bruins, Einaudi, 
Saligman and Sir Josiah Stan (1923)]. Appreciated on the 
C aforesaid principle, it would apply where business activity is 
wholly or partly performed is a source State, as a logical 
corollary, the State concept would also justifiably include the 
country where the commercial need for the product originated, 
that is, for example, where the consultancy is utilized. 
D 
26. From the aforesaid, it is quite vivid thatthe concept 
of income source is multifaceted and has the potentiality to 
take different forms [See Klans Vogel, World-wide V. 
Source Taxation of Income - Review and Revision of 
E Arguments (1988)). The said rule has been justified byArvid 
A. Skaar in Permanent Establishment; Erosion of Tax Treaty 
Principle on the ground that profits of business enterprise are 
mainly the yield of an activity, for capital is profitable to the 
extent that it is actively utilised in a profitable manner. To this 
F extent, neither the activity of business enterprise nor the
capital 
made, depends on residence. 
27. The purpose of adverting to these aspects is only 
to highlight that the source rule has been accepted by them in 
G the UN Commentaries and the Organisation of Economic 
Corporation and Development (OECD) Commentaries. It is 
well known that what is prohibited by international taxation law 
is imposition of sovereign act of a State on a sovereign territory. 
This principle of formal territoriality applies in particular, to acts 
H
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
345 
OFFICER &ANR. [DIPAK MISRA, J.) 
intended to enforce internal legal provisions abroad. [See the A 
Introduction in Klaus Vogel on Double Taxation 
Convention, South Asean, Reprint Edition (2007)]. 
Therefore, deduction of tax at source when made applicable, 
it has to be ensured that this principle is not violated. 
B 
28. Coming to the instant case, it is evident that fee 
which has been named as "success fee" by the assessee has 
been paid to the NRC. It is to be seen whether the payment 
made to the non-resident would be covered under the 
expression "fee for technical service" as contained in C 
Explanation (2) to Section 9(1 )(vii) of the Act. The said 
expression means any consideration, whether lumpsum or 
periodical in rendering managerial, technical or consultancy 
services. It excludes consideration paid for any construction, 
D 
assembling, mining or like projects undertaken by the non-
resident that is the recipient or consideration which 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 E 
appellant had intended and desired to utilize expert services 
of qualified and experience professional who could prepare a 
scheme for raising requisite finances and tie-up loans for the 
power projects. As the company did not find any professional 
in India, it had
approached the consultant NRC located in 
F 
Switzerland, who offered their services. Their services 
rendered 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 agencies world-wide and G 
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 project in a coordinated and 
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(2015] 3 S.C.R. 
A 
expeditious manner. 
B 
c 
29. In this context, it would be appropriate to reproduce 
the letter dated 8 7.1993 addressed by the NRC. It reads as 
follows: 
"We propose the following scope of services to be 
performed by ABB PTF: 
Assisting GVK Industries Limited ("GVK") in putting 
together the financial structure and security package to 
be offered to the lenders; 
Evaluating the pros and cons of various lending 
alternatives, both for the local and the foreign borrowings; 
D 
Developing a comprehensive financial model to evaluate 
the project and to perform various sensivity studies; 
E 
F 
Preparing a preliminary information Memorandum to be 
used as the basis for placing the foreign and local debt; 
Accessing Export Credit Agencies world wide obtaining 
commercial bank support on the most comprehensive 
terms; 
Assisting GVK in loan negotiations and documentation 
with lendors; and 
Structuring, negotiating and closing the financing for this 
project in a coordinated and expeditious manner. 
G 
We propose a compensation structure based only on 
success. As an exception, ABB PTF does not propose 
either any retainers or any reimbursement for travel and 
other expenses incurred by ABB PTF. 
H
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
347 
OFFICER &ANR. [DIPAK MISRA, J.] 
The success fee will be 0.75% of the total debt, payable 
A 
at financial closing." 
30. The said letter was placed before the Board of 
Directors of the appellant company in its meeting held on 
August 21, 1993. The relevant part of the resolution passed B 
by the Board is extracted herein below: 
" ..... It was explained to the Directors that ABB-PTF's 
scope of service for the project include: 
Developing a comprehensive financial model; 
Tying up the rupee/foreign currency loan requirements of 
the project; 
c 
Assessing Export Credit Agencies worldwide and 
D 
obtaining commercial banks support on the most 
competitive terms; 
Assisting GVK in loan negotiations and documentation 
with lenders. 
E 
For the above scope of service ABB PTF would be paid 
a fee of 0.75% of the loan amount which is payable only 
on successful financial closing. The Directors while 
approving this arrangement, advised that ABB-PTF 
F 
should also be involved in the public issue of the 
company." 
31. From the aforesaid two documents, it is clear as 
crystal that the obligation of the N RC was to: 
G 
(i) Develop comprehensive financial model to tie-up the rupee 
and foreign currency loan requirements of the project. 
(ii) Assist expert credit agencies world-wide and obtain H
348 
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[2015] 3 S.C.R. 
A 
commercial bank support on the most competitive terms. 
(iii) Assist the appellant company in loan negotiations and 
documentation with the lenders. 
B 
32. Pursuant to the aforesaid exercises carried out by 
the NRC, the company wcis successf1,1I in availing loan/financial 
assistance in India from the Industrial Development Bank of 
India (IDBI) which acted as a lead financier for the rupee loan 
requirement. 
For foreign currency loan requirement, the 
c appellant approached International Finance Corporation, 
Washington D.C., USA and was successful. In this backdrop, 
"success fee" of Rs.5.4 crores was paid to the NRC. 
33. In this factual score, the expression, managerial, 
D technical or consultancy service, are to be appreciated. The 
said expressions have not been defined in the Act, and, 
therefore, it is obligatory on our part to examine how the said 
expressions are used and understood by the persons engaged 
in business. The general and common usage of the said words 
E has to be understood at common parlance. 
34. In the case at hand, we are concerned with the 
expression "consultancy services". In this regard, a reference 
to the decision by the authority for advance ruling In Re. P.No. 
F 28 of19995, would be applicable. The observations therein 
read as follows: 
"By technical services, we mean in this context services 
requiring expertise in technology. By consultancy 
G 
services, we mean in this context
advisory services. The 
category of technical and consultancy services are to 
some extent overlapping because a consultancy service · 
could also be technical service. However, the category 
of consultancy services also includes an advisory 
H 
5 (1999) 242 JTR 280
GVK INDUSTRIES LTD. &ANR. v. THE INCOME TAX 
349 
OFFICER &ANR. [DIPAK MISRA, J.] 
service, whether or not expertise in technology is required 
A 
to perform it." 
35. In this context, a reference to the decision in C./. T. 
If. Bharti Cellular Limited and others6, would be apposite. 
In the said case, while dealing with the concept of "consultancy B 
services", the High Court of Delhi has observed thus: 
"Similarly, the word "consultancy" has been defined in 
the said Dictionary as "the work or position of a 
consultant; a department of consultants." "Consultant" 
itself has been defined, inter alia, as "a person who gives 
professional advice or services in a specialized field." It 
is obvious that the word "consultant" is a derivative of the 
word "consult" which entails deliberations, consideration, 
conferring with someone, conferring about or upon a 
matter. Consult has also been defined in the said 
Dictionary as "ask advice for, seek counsel or a 
professional opinion from; refer to (a source of 
information); seek permission or approval from for a 
proposed action". It is obvious that the service of 
consultancy also necessarily entails human intervention. 
The consultant, who provides the consultancy service, 
has to be a human being. A machine cannot be regarded 
as a consultant." 
36. In this context, we may fruitfully refer to the dictionary 
meaning of 'consultation' in Black's Law Dictionary, Eighth 
Edition. The word 'consultation' has been defined as an act
c 
D 
E 
F 
of asking the advice or opinion of someone (such as a lawyer). 
G 
ft means a meeting in wilich a party consults or confers and 
eventually it results in human interaction that leads to rendering 
of advice. 
37. As the factual matrix in the case at hand, would 
H 
6 (2009) 319 ITR 139

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[2015] 3 S.C.R. 
A 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 has earlier been 
referred to by us. The nature of service referred by the NRC, 
B 
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 
C 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. 
38. Consequently, the appeal, being devoid of merit, 
D stands dismissed. However, in the facts and circumstances 
of the case there shall be no order as to costs. 
Devika Gujral 
Appeal. dismissed. 
E 
F 
G 
H