(2011) 332 ITR 130 (SC)
Income deemed to accrue or arise in India
Parliament may legislate in respect of extra-territorial acts provided there is a real connection with India. A success fee for advisory services used in an Indian project has such a connection and is taxable as fees for technical services.
Can Parliament tax income of a non-resident arising from services rendered entirely outside India, and does a success fee for arranging foreign finance fall within the charge?
The assessee, an Indian company setting up a power project, engaged a non-resident financial adviser to assist in structuring and arranging the finance required for the project, including loans from foreign lenders. The adviser worked from outside India, and on successful completion of the financing the assessee paid it a success fee. The assessee applied for a no-deduction certificate, contending that the adviser had rendered no services in India and that the payment was not chargeable. The Revenue held the fee to be fees for technical services deemed to arise in India.
The High Court decided against the assessee. On appeal, a Constitution Bench of the Supreme Court first addressed the question of legislative competence to tax extra-territorial acts, and a subsequent Bench then applied that framework to the facts.
For the assessee
The adviser had no presence in India and performed all its work abroad. Taxing income arising from acts performed wholly outside the country exceeds Parliament's competence, which is confined to the territory of India, and in any event the services were not utilised in a business carried on outside India so as to fall within the charge.
For the Revenue
The advisory services were commissioned by an Indian company, related to a project situated in India, were used to raise finance deployed in India, and were paid for out of Indian resources. The connection with India is substantial, and the deeming provision applies to fees for services utilised in a business carried on in India.
The Constitution Bench held that Parliament is not disabled from legislating in respect of extra-territorial aspects or causes, provided those aspects or causes have a real and not illusory connection with India and are expected to have an impact on or effect in the country. Purely extra-territorial legislation lacking any nexus with India would be beyond competence, but a provision that reaches foreign acts having a genuine Indian connection is valid. Applying that framework, the Court examined the character of the success fee. The adviser had been engaged by an Indian company for the specific purpose of arranging finance for a project to be established in India, and its advice was used in a business carried on in India. The consideration was therefore for services utilised in India in the relevant sense, and the fee answered the description of fees for technical services within the deeming provision. The Court distinguished payments made for earning income from a source outside India, which the provision expressly excludes. The success fee was accordingly held chargeable and subject to withholding.
The constitutional foundation for India's deeming provisions, now in Section 9 of the IT Act 2025, and the authority relied on whenever the reach of those provisions over foreign activity is challenged. It applies directly to advisory, arranging and structuring fees paid to non-residents, and should be read with Ishikawajima-Harima and the subsequent amendment concerning services rendered outside India, as well as any applicable treaty definition.