G.V.K. Industries Ltd. & Anr. v. Income Tax Officer & Anr., (2011) 4 SCC 36

Bench:

• Chief Justice S.H. Kapadia
• Justice B. Sudershan Reddy
• Justice K.S. Panicker Radhakrishnan
• Justice Surinder Singh Nijjar
• Justice Swatanter Kumar

Facts:

G.V.K. Industries Ltd. (GVK), an Indian company, sought to establish a gas-based power project in Andhra Pradesh. To facilitate financing, GVK entered into an agreement with M/s. NRDC, a non-resident company based in the USA, for consultancy services to secure loans from international financial institutions. Upon completion of the services, NRDC invoiced GVK for a “success fee.” GVK applied to the Income Tax Officer (ITO) for a ‘No Objection Certificate’ (NOC) to remit the payment without tax deduction at source, asserting that NRDC had no business connection in India under Section 9(1)(i) of the Income Tax Act, 1961, and that the services did not qualify as technical services under Section 9(1)(vii). The ITO rejected this application, leading GVK to appeal to the Commissioner of Income Tax, who initially granted the NOC but later revoked it, directing GVK to deduct tax at source. GVK challenged this order in the Andhra Pradesh High Court, which held that while Section 9(1)(i) was inapplicable, the payments fell under Section 9(1)(vii)(b) as fees for technical services, thereby requiring tax deduction at source. GVK subsequently appealed to the Supreme Court.

Issues:

1. Whether the Parliament has the authority under Article 245 of the Constitution to enact laws with extra-territorial application.
2. Whether the consultancy fees paid to NRDC by GVK are deemed to accrue or arise in India under Section 9(1)(vii) of the Income Tax Act, thereby necessitating tax deduction at source.

Arguments:

Petitioner’s (GVK) Arguments:

• The consultancy services provided by NRDC were rendered entirely outside India, and NRDC had no business connection within India. Therefore, the income did not accrue or arise in India under Section 9(1)(i) of the Income Tax Act.
• The services rendered were not in the nature of technical services as defined under Section 9(1)(vii) and its Explanation 2; thus, the payments should not be subject to tax deduction at source.

Respondent’s (Income Tax Department) Arguments:

• The consultancy services provided by NRDC fall within the definition of “fees for technical services” under Section 9(1)(vii) of the Income Tax Act.
• Parliament possesses the authority to legislate on extra-territorial aspects or causes that have a nexus with India, as per Article 245 of the Constitution.

Ratio Decidendi:

1. Parliament’s Legislative Competence: The Supreme Court held that Parliament has the authority to enact laws with extra-territorial application, provided there is a real and substantial nexus between the subject matter of the law and India. The Court clarified that laws lacking such nexus would be ultra vires.
2. Fees for Technical Services: The Court interpreted “fees for technical services” under Section 9(1)(vii) of the Income Tax Act to include consultancy services. Since NRDC provided consultancy services to GVK, the fees paid were deemed to accrue or arise in India, necessitating tax deduction at source.

Observations:

• The Court emphasized that while Parliament can legislate on extra-territorial matters, such legislation must serve the interest, welfare, or security of India.
• The term “fees for technical services” encompasses various services, including managerial, technical, or consultancy services, as defined in Explanation 2 to Section 9(1)(vii) of the Income Tax Act.

Decision:

The Supreme Court dismissed GVK’s appeal, upholding the Andhra Pradesh High Court’s decision that the consultancy fees paid to NRDC were subject to tax deduction at source under Section 9(1)(vii) of the Income Tax Act.

Important Terms:

1. Article 245 of the Constitution: Empowers Parliament to make laws for the whole or any part of India and allows for laws with extra-territorial operation, provided there is a nexus with India.
2. Section 9(1)(i) of the Income Tax Act: Specifies that income accruing or arising, directly or indirectly, through or from any business connection in India is deemed to accrue or arise in India.
3. Section 9(1)(vii) of the Income Tax Act: Pertains to income by way of fees for technical services payable by a resident, except where the fees are payable in respect of services utilized in a business or profession carried on outside India or for earning income from any source outside India.
4. Explanation 2 to Section 9(1)(vii): Defines “fees for technical services” to mean any consideration for the rendering of managerial, technical, or consultancy services, including the provision of services of technical or other personnel.
5. No Objection Certificate (NOC): A certificate issued by the Income Tax Department allowing remittance of funds abroad without deduction of tax at source.