We paid a Swiss adviser a success fee for tying up the loans for our power project. He has no office here and did all the work abroad. Do we still have to deduct before we remit?
Yes, on these facts. The Supreme Court held that the success fee paid to a non-resident consultant for structuring and tying up the finance for an Indian power project was fees for technical services, in the consultancy limb, and that tax should have been deducted, so the no-objection certificate for remittance was rightly refused. Section 9(1)(vii)(b) charges the fee where the payer is a resident and lays down what is known as the source rule - the recipient's income is chargeable in the country where the source of payment is located - and requires the services to be utilised in India. The clause carves out an exception in its latter part, for services utilised in a business or profession carried on outside India or for making or earning income from a source outside India; the Court set that exception out but did not rule on it in terms, deciding the case instead on the definition of fees for technical services.
Decided by the Supreme Court (Supreme Court of India - Dipak Misra and Sudhansu Jyoti Mukhopadhaya, JJ., Civil Appeal No. 7796 of 1997) on 2015-02-18, reported as (2015) 11 SCC 734; Civil Appeal No. 7796 of 1997. It bears on section 9(1)(i), section 9(1)(vii), section 9(1)(vii)(b), section 195, section 393(2) (Act of 2025) of the Income Tax Act 1961, in TDS Defaults and How Tax Law Is Read matters.
Arrangement fees, success fees and placement fees on cross-border borrowing are routinely remitted on the view that the adviser did everything abroad and has nothing here, so nothing is chargeable and nothing need be deducted. This decision closes that route for a resident payer. The charge under section 9(1)(vii)(b) follows the payer, not the adviser's footprint, and the only way out is the exception in the latter part of the clause - which needs a business or profession carried on outside India, or an income source outside India, that the services were for. The Court did not rule on that exception here, so it has to be made out on the facts of the case in hand. The second thing it settles is the breadth of consultancy: advisory work in a specialised field is caught even where nothing is designed, built or transferred, so a financing adviser is in the same position as an engineer. For the payer the practical consequence is that a no-objection certificate cannot issue once the amount is held chargeable.
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The appellant company was set up to construct and operate a 235 MW gas-based power project at Jegurupadu, near Rajahmundry in Andhra Pradesh. To raise the finance it engaged ABB-Projects and Trade Finance (International) Ltd., Zurich, Switzerland, described in the judgment as the non-resident company or NRC. By a letter dated 8 July 1993 the NRC proposed its scope of services, which the company's board approved on 21 August 1993, and the Court reduced the obligation to three heads: develop a comprehensive financial model to tie up the rupee and foreign currency loan requirements of the project; assess export credit agencies worldwide and obtain commercial bank support on the most competitive terms; and assist the company in loan negotiations and documentation with the lenders. The fee was to be a success fee of 0.75 per cent of the total debt, payable at financial closing. The company succeeded in obtaining financial assistance, and paid the NRC a success fee of US $17,15,476.16, about Rs. 5.4 crores. It sought a no-objection certificate so that it could remit the amount without deduction. That was refused, and the company challenged the refusal in Writ Petition No. 6866 of 1995 before the High Court of Andhra Pradesh. By judgment dated 2 May 1997, reported at [1997] 228 ITR 564, the High Court held that a business connection between the company and the NRC had not been established, so section 9(1)(i) was not attracted, but that the success fee fell within section 9(1)(vii)(b) as fees for technical services, and dismissed the petition. The company appealed. The appeal raised questions about the reach of Article 245 of the Constitution over extra-territorial aspects, which were referred to and answered by a Constitution Bench on 1 March 2011, reported at (2011) 4 SCC 36, after which the appeal itself came back for decision.
The appeal was dismissed as devoid of merit, with no order as to costs; the High Court's judgment was described as absolutely impregnable. Clause (b) of section 9(1)(vii) is the principal provision and it lays down the source rule, under which the income of the recipient is chargeable in the country where the source of payment, that is the payer, is located; the clause further requires that the services should be utilised in India. The exception carved out in the latter part of the clause applies where the fee is payable in respect of services utilised for a business or profession carried on by the Indian payer outside India, or for the purpose of making or earning any income from a source outside India; the Court set that exception out and did not rule on it in terms. What it held, in the words of the judgment, is that the payment falls within fees for technical services as defined by Explanation 2 to section 9(1)(vii), and that in the case at hand the said exceptions - the exclusions in that Explanation for construction, assembling, mining or like projects, and for amounts taxable under the head salaries - are not attracted. On the nature of the service, the NRC had acted as a consultant, having the skill, acumen and knowledge in the specialised field of preparing a scheme for the required finances and tying up the required loans, which comes within the ambit and sweep of consultancy service; tax at source should therefore have been deducted, and once the tax was payable the grant of a no-objection certificate was not legally permissible.
The Court read section 9(1)(vii)(b) as a source rule and worked out what that means before applying it. The clause charges the fee where the payer is a resident, subject to the exception in its latter part. That exception has two limbs - services utilised in a business or profession carried on by the Indian payer outside India, and services for the purpose of making or earning any income from a source outside India. On a scrutiny of the clause the Court held that it lays down the principle known as the source rule, that the income of the recipient is charged in the country where the source of payment is located, and that the clause further requires the services to be utilised in India. It then set that provision in its international context at some length, distinguishing residence-based taxation, which gives primacy to the country of residence and taxes world-wide income, from source-based taxation, which confers the right to tax on the State where the source of the income is located and is transaction specific. Source taxation is the nexus theory applied, does not fall foul of the doctrine of extra-territorial operation, and is described as the country where the income or wealth is physically or economically produced - which, as a corollary, includes the country where the commercial need for the product originated, for example where the consultancy is utilised. The Court noted that the source rule is accepted in the United Nations and OECD commentaries, and that what international taxation law prohibits is the imposition of a sovereign act of a State on sovereign territory, so that deduction of tax at source must be applied without violating that principle. Against that frame it turned to the facts. It tested the payment against Explanation 2 to section 9(1)(vii) and held that the exclusions there - construction, assembling, mining or like projects, and amounts taxable as salaries - were not attracted. The services were bought to put together the finance for a project in India; the rupee assistance the NRC's work produced was availed from the Industrial Development Bank of India and the foreign currency from the International Finance Corporation. The company's arguments that the NRC had no office or establishment here, operated from Zurich, and that there was no business connection did not answer the clause, because clause (b) does not depend on business connection - which is the province of section 9(1)(i), on which the High Court had already found for the company. On characterisation, the Court noted that the expressions managerial, technical and consultancy service are not defined in the Act and have to be understood as they are used and understood in common parlance. Consultancy in this context means advisory services; a consultant is a person who gives professional advice or services in a specialised field; and consultation is the act of asking the advice or opinion of someone, resulting in human interaction that leads to the rendering of advice. The NRC's work - the financial model, the assessment of export credit agencies, the loan negotiation and documentation - fell squarely inside that.
it lays down the principle what is basically known as the 'source rule', that is, income of the recipient to be charged or chargeable in the country where the source of payment is located
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Handle my notice → Ask a CA on WhatsAppYes, on these facts. The Supreme Court held that the success fee paid to a non-resident consultant for structuring and tying up the finance for an Indian power project was fees for technical services, in the consultancy limb, and that tax should have been deducted, so the no-objection certificate for remittance was rightly refused. Section 9(1)(vii)(b) charges the fee where the payer is a resident and lays down what is known as the source rule - the recipient's income is chargeable in the country where the source of payment is located - and requires the services to be utilised in India. The clause carves out an exception in its latter part, for services utilised in a business or profession carried on outside India or for making or earning income from a source outside India; the Court set that exception out but did not rule on it in terms, deciding the case instead on the definition of fees for technical services. This was decided by the Supreme Court (Supreme Court of India - Dipak Misra and Sudhansu Jyoti Mukhopadhaya, JJ., Civil Appeal No. 7796 of 1997) and bears on section 9(1)(i), section 9(1)(vii), section 9(1)(vii)(b), section 195, section 393(2) (Act of 2025) of the Income Tax Act 1961. It is reported as (2015) 11 SCC 734; Civil Appeal No. 7796 of 1997. Arrangement fees, success fees and placement fees on cross-border borrowing are routinely remitted on the view that the adviser did everything abroad and has nothing here, so nothing is chargeable and nothing need be deducted. This decision closes that route for a resident payer. The charge under section 9(1)(vii)(b) follows the payer, not the adviser's footprint, and the only way out is the exception in the latter part of the clause - which needs a business or profession carried on outside India, or an income source outside India, that the services were for. The Court did not rule on that exception here, so it has to be made out on the facts of the case in hand. The second thing it settles is the breadth of consultancy: advisory work in a specialised field is caught even where nothing is designed, built or transferred, so a financing adviser is in the same position as an engineer. For the payer the practical consequence is that a no-objection certificate cannot issue once the amount is held chargeable. If it applies to you, the first step is this: Identify the source before you argue about where the work was done. The clause turns on the payer being a resident and on the services being utilised in India; the consultant sitting in Zurich and never setting foot here did not help the payer in this case.
The appellant company was set up to construct and operate a 235 MW gas-based power project at Jegurupadu, near Rajahmundry in Andhra Pradesh. To raise the finance it engaged ABB-Projects and Trade Finance (International) Ltd., Zurich, Switzerland, described in the judgment as the non-resident company or NRC. By a letter dated 8 July 1993 the NRC proposed its scope of services, which the company's board approved on 21 August 1993, and the Court reduced the obligation to three heads: develop a comprehensive financial model to tie up the rupee and foreign currency loan requirements of the project; assess export credit agencies worldwide and obtain commercial bank support on the most competitive terms; and assist the company in loan negotiations and documentation with the lenders. The fee was to be a success fee of 0.75 per cent of the total debt, payable at financial closing. The company succeeded in obtaining financial assistance, and paid the NRC a success fee of US $17,15,476.16, about Rs. 5.4 crores. It sought a no-objection certificate so that it could remit the amount without deduction. That was refused, and the company challenged the refusal in Writ Petition No. 6866 of 1995 before the High Court of Andhra Pradesh. By judgment dated 2 May 1997, reported at [1997] 228 ITR 564, the High Court held that a business connection between the company and the NRC had not been established, so section 9(1)(i) was not attracted, but that the success fee fell within section 9(1)(vii)(b) as fees for technical services, and dismissed the petition. The company appealed. The appeal raised questions about the reach of Article 245 of the Constitution over extra-territorial aspects, which were referred to and answered by a Constitution Bench on 1 March 2011, reported at (2011) 4 SCC 36, after which the appeal itself came back for decision. The matter was decided on 2015-02-18 by the Supreme Court (Supreme Court of India - Dipak Misra and Sudhansu Jyoti Mukhopadhaya, JJ., Civil Appeal No. 7796 of 1997). On those facts the Supreme Court held as follows. The appeal was dismissed as devoid of merit, with no order as to costs; the High Court's judgment was described as absolutely impregnable. Clause (b) of section 9(1)(vii) is the principal provision and it lays down the source rule, under which the income of the recipient is chargeable in the country where the source of payment, that is the payer, is located; the clause further requires that the services should be utilised in India. The exception carved out in the latter part of the clause applies where the fee is payable in respect of services utilised for a business or profession carried on by the Indian payer outside India, or for the purpose of making or earning any income from a source outside India; the Court set that exception out and did not rule on it in terms. What it held, in the words of the judgment, is that the payment falls within fees for technical services as defined by Explanation 2 to section 9(1)(vii), and that in the case at hand the said exceptions - the exclusions in that Explanation for construction, assembling, mining or like projects, and for amounts taxable under the head salaries - are not attracted. On the nature of the service, the NRC had acted as a consultant, having the skill, acumen and knowledge in the specialised field of preparing a scheme for the required finances and tying up the required loans, which comes within the ambit and sweep of consultancy service; tax at source should therefore have been deducted, and once the tax was payable the grant of a no-objection certificate was not legally permissible.
The Court read section 9(1)(vii)(b) as a source rule and worked out what that means before applying it. The clause charges the fee where the payer is a resident, subject to the exception in its latter part. That exception has two limbs - services utilised in a business or profession carried on by the Indian payer outside India, and services for the purpose of making or earning any income from a source outside India. On a scrutiny of the clause the Court held that it lays down the principle known as the source rule, that the income of the recipient is charged in the country where the source of payment is located, and that the clause further requires the services to be utilised in India. It then set that provision in its international context at some length, distinguishing residence-based taxation, which gives primacy to the country of residence and taxes world-wide income, from source-based taxation, which confers the right to tax on the State where the source of the income is located and is transaction specific. Source taxation is the nexus theory applied, does not fall foul of the doctrine of extra-territorial operation, and is described as the country where the income or wealth is physically or economically produced - which, as a corollary, includes the country where the commercial need for the product originated, for example where the consultancy is utilised. The Court noted that the source rule is accepted in the United Nations and OECD commentaries, and that what international taxation law prohibits is the imposition of a sovereign act of a State on sovereign territory, so that deduction of tax at source must be applied without violating that principle. Against that frame it turned to the facts. It tested the payment against Explanation 2 to section 9(1)(vii) and held that the exclusions there - construction, assembling, mining or like projects, and amounts taxable as salaries - were not attracted. The services were bought to put together the finance for a project in India; the rupee assistance the NRC's work produced was availed from the Industrial Development Bank of India and the foreign currency from the International Finance Corporation. The company's arguments that the NRC had no office or establishment here, operated from Zurich, and that there was no business connection did not answer the clause, because clause (b) does not depend on business connection - which is the province of section 9(1)(i), on which the High Court had already found for the company. On characterisation, the Court noted that the expressions managerial, technical and consultancy service are not defined in the Act and have to be understood as they are used and understood in common parlance. Consultancy in this context means advisory services; a consultant is a person who gives professional advice or services in a specialised field; and consultation is the act of asking the advice or opinion of someone, resulting in human interaction that leads to the rendering of advice. The NRC's work - the financial model, the assessment of export credit agencies, the loan negotiation and documentation - fell squarely inside that. In the words reproduced by the source cited on this page: "it lays down the principle what is basically known as the 'source rule', that is, income of the recipient to be charged or chargeable in the country where the source of payment is located" The decision followed or applied G.V.K. Industries Limited v. Income-Tax Officer [1997] 228 ITR 564 (Andhra Pradesh High Court, 2 May 1997) - the judgment under appeal, upheld; GVK Industries Ltd v. Income Tax Officer (2011) 4 SCC 36 (Constitution Bench, 1 March 2011) - the reference in this same appeal on Article 245 and extra-territorial operation, answered before the appeal itself was decided.
It was decided by the Supreme Court on 2015-02-18 and is reported as (2015) 11 SCC 734; Civil Appeal No. 7796 of 1997. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 9(1)(i), section 9(1)(vii), section 9(1)(vii)(b), section 195, section 393(2) (Act of 2025), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed as devoid of merit, with no order as to costs; the High Court's judgment was described as absolutely impregnable. Clause (b) of section 9(1)(vii) is the principal provision and it lays down the source rule, under which the income of the recipient is chargeable in the country where the source of payment, that is the payer, is located; the clause further requires that the services should be utilised in India. The exception carved out in the latter part of the clause applies where the fee is payable in respect of services utilised for a business or profession carried on by the Indian payer outside India, or for the purpose of making or earning any income from a source outside India; the Court set that exception out and did not rule on it in terms. What it held, in the words of the judgment, is that the payment falls within fees for technical services as defined by Explanation 2 to section 9(1)(vii), and that in the case at hand the said exceptions - the exclusions in that Explanation for construction, assembling, mining or like projects, and for amounts taxable under the head salaries - are not attracted. On the nature of the service, the NRC had acted as a consultant, having the skill, acumen and knowledge in the specialised field of preparing a scheme for the required finances and tying up the required loans, which comes within the ambit and sweep of consultancy service; tax at source should therefore have been deducted, and once the tax was payable the grant of a no-objection certificate was not legally permissible. It arises in TDS Defaults and How Tax Law Is Read matters, on section 9(1)(i), section 9(1)(vii), section 9(1)(vii)(b), section 195, section 393(2) (Act of 2025) of the Income Tax Act 1961, and was decided by Supreme Court of India - Dipak Misra and Sudhansu Jyoti Mukhopadhaya, JJ., Civil Appeal No. 7796 of 1997. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you want the exception, you have to point to a business or profession carried on outside India, or to an income source outside India, that the services were for. Do not cite this case as having rejected that exception, because the Court did not rule on it; build the point on your own facts, and expect to have to show the business or the source rather than merely that some of the money came from abroad. Do not rely on the absence of a business connection. The High Court accepted there was none, and the payment was still caught, because section 9(1)(vii) works independently of section 9(1)(i). Test the service against the ordinary meaning of consultancy - advisory services given by someone with skill, acumen and knowledge in a specialised field, involving human interaction leading to advice. Preparing a financing scheme and negotiating loans was held to be exactly that. Where the remittance has not yet gone out, make the section 195 application on the footing that the fee is chargeable, and take the treaty point separately if there is one; the refusal of a no-objection certificate follows automatically once the amount is held taxable. For a remittance to a non-resident on or after 1 April 2026, the deduction provision is section 393(2) of the Income-tax Act, 2025, at serial number 17 of its Table.
Still good law. Applied since and not doubted. In Shriram Capital Ltd v Director of Income Tax, decided 13 March 2020, the Madras High Court took this decision as settling the construction of section 9(1)(vii)(b), reproducing the passage on the exception in the latter part of the clause and on the source rule, and printing the citation (2015) 11 SCC 734. The Andhra Pradesh High Court's judgment under appeal, reported at [1997] 228 ITR 564, supplies the facts and the finding on business connection in its own words. Two things fix the reach of the decision. The first is that it construes a provision whose surrounding law had already been altered around it. The judgment sets out the Explanation to section 9(2) as it stood after the Finance Act 2010, with retrospective effect from 1 June 1976, under which income of the kinds described in clauses (v), (vi) and (vii) is deemed to accrue or arise in India whether or not the non-resident has a residence, place of business or business connection in India, and whether or not it has rendered services in India. The holding sits on top of that, which is why the absence of any presence here did not assist the payer. The second is that this is a decision on the Act and not on a treaty. Nothing in it decides what a double taxation avoidance agreement with a make-available requirement would do to the same payment, and that question has to be taken separately. On the years still governed. The Income-tax Act, 1961 was repealed on 1 April 2026 by section 536(1) of the Income-tax Act, 2025, and section 536(2)(c) continues it for proceedings pending, and proceedings initiated on or after that date, in respect of any tax year beginning before 1 April 2026, so remittance and deduction proceedings for those years turn on this decision. For a payment to a non-resident on or after 1 April 2026 the deduction provision is section 393(2) of the 2025 Act at serial number 17 of its Table. No successor is offered for section 9(1)(vii) itself, because that correspondence has not been established on the departmental material. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
There are two Supreme Court decisions in this litigation and they are not interchangeable. This record describes the second one: GVK Industries Limited v Income Tax Officer, Civil Appeal No. 7796 of 1997, decided on 18 February 2015 by Dipak Misra and Sudhansu Jyoti Mukhopadhaya, JJ., reported at (2015) 11 SCC 734, which decides the appeal itself on section 9(1)(vii)(b) and on whether the success fee was fees for technical services. The other is the Constitution Bench decision of 1 March 2011, reported at (2011) 4 SCC 36, which answered the questions referred in this same appeal about Parliament's competence under Article 245 of the Constitution to make laws with respect to extra-territorial aspects or causes. The 2011 decision is constitutional law and says nothing about the success fee; the 2015 decision is the tax holding. A citation of GVK Industries without a year or a report reference is ambiguous and should be pinned down before it is relied on. On the report. The 2015 judgment is divided into numbered paragraphs running to 38. The construction of clause (b) and the statement of the source rule are in paragraph 22, which is the paragraph reproduced in the later High Court judgment used as the cross-check; the sentence that in the case at hand the said exceptions are not attracted is in paragraph 28, and it is about the exclusions in Explanation 2 to section 9(1)(vii) - construction, assembling, mining or like projects, and amounts taxable as salaries - not about the exception in the latter part of clause (b); the conclusion on consultancy service and on the no-objection certificate is in paragraph 37, and the order in paragraph 38. Paragraphs 23 to 27 are the Court's account of residence-based and source-based taxation and of the nexus theory, drawing on the League of Nations report of 1923 and on writing by Klaus Vogel and Arvid Skaar; they are reasoning rather than decoration, because they are what the Court uses to say that a source rule is not an extra-territorial one. Identities, since the abbreviations do the work in the judgment. The NRC is ABB-Projects and Trade Finance (International) Ltd., Zurich. The project is the 235 MW gas-based station at Jegurupadu near Rajahmundry. The fee was 0.75 per cent of the total debt, payable at financial closing, and came to US $17,15,476.16, about Rs. 5.4 crores. The writ petition below was No. 6866 of 1995 and the Andhra Pradesh High Court decided it on 2 May 1997. One point of use. The finding that there was no business connection was in the company's favour and it survived; it simply did not save the payment, because clause (b) of section 9(1)(vii) does not depend on one. The judgment decides the charge under the Act and does not reach the treaty. It records that the appellant did not invoke the Double Taxation Avoidance Agreement between India and Switzerland, and decides nothing under it; it says nothing about any make-available condition, so a payer with a treaty argument gets no help and no obstacle from this judgment. It does not decide the rate at which deduction should have been made, or the consequences for the payer beyond the refusal of the no-objection certificate - no question of interest or of an assessee in default was before the Court. It does not separate the managerial and technical limbs from the consultancy limb; having found consultancy, it did not need to. On the exception in the latter part of clause (b), the Court set it out and did not rule on it in terms, so what counts as a business carried on outside India, or as a source of income outside India, for this clause remains to be decided case by case; the words in the judgment that in the case at hand the said exceptions are not attracted are about the exclusions in Explanation 2 to section 9(1)(vii), not about that exception. And the High Court's finding that there was no business connection was not disturbed or examined, so the judgment adds nothing to the law on section 9(1)(i). This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed as devoid of merit, with no order as to costs; the High Court's judgment was described as absolutely impregnable. Clause (b) of section 9(1)(vii) is the principal provision and it lays down the source rule, under which the income of the recipient is chargeable in the country where the source of payment, that is the payer, is located; the clause further requires that the services should be utilised in India. The exception carved out in the latter part of the clause applies where the fee is payable in respect of services utilised for a business or profession carried on by the Indian payer outside India, or for the purpose of making or earning any income from a source outside India; the Court set that exception out and did not rule on it in terms. What it held, in the words of the judgment, is that the payment falls within fees for technical services as defined by Explanation 2 to section 9(1)(vii), and that in the case at hand the said exceptions - the exclusions in that Explanation for construction, assembling, mining or like projects, and for amounts taxable under the head salaries - are not attracted. On the nature of the service, the NRC had acted as a consultant, having the skill, acumen and knowledge in the specialised field of preparing a scheme for the required finances and tying up the required loans, which comes within the ambit and sweep of consultancy service; tax at source should therefore have been deducted, and once the tax was payable the grant of a no-objection certificate was not legally permissible.
TaxSphere, “GVK Industries Ltd v ITO”, https://taxnotice.vittsphere.com/caselaw/case/gvk-industries-v-ito-9-1-vii-b-success-fee-source-rule/ (validity last checked 2026-09-23)
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Our French engineering group will build a turnkey plant in India, with some work done here and a great deal done abroad. Can India tax the work done abroad, and are the payments royalties, technical fees or business profits?
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Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
My UK firm advised on Indian projects, partly from London and partly on visits to India, and our partners were here more than 90 days. Is the whole fee taxable in India?
