2010 IT Act Amendment Bringing Overseas Technical Services Into Tax Net Cannot Apply Retrospectively: Karnataka HC
The Karnataka High Court has recently held that a 2010 amendment to the Income Tax Act, which widened the scope of taxation of fees for technical services paid to non-residents, cannot be applied retrospectively to create a tax liability on past transactions.
The court found that the amendment did more than clarify the existing law, as it widened the charging provision by removing the requirement that the technical services must have been rendered in India.
“The impugned Amendment Act—Finance Act 2010 – is to be read down as prospectively applicable and not retrospectively applicable from 01.06.1976.”, It, therefore, ruled.
A Division Bench of Justice D.K. Singh and Justice T.M. Nadaf was dealing with income tax appeals filed by Jindal Thermal Power Company Limited, earlier known as Jindal Tractebel Power Company Limited, along with a connected writ petition challenging the retrospective operation of the Finance Act, 2010 amendment to Section 9 of the Income Tax Act, 1961.
The dispute concerned payments made by the company to Raytheon Ebasco Overseas Ltd. (REOL), Badger Energy Inc. and Energy Overseas International Inc. under contracts dated September 20, 1995. The contracts covered offshore equipment supply and related services, engineering, transportation and erection services, as well as construction materials and erection-related services.
The services were rendered outside India but were utilized in India. Jindal Thermal Power had deducted tax while crediting part of the payments to REOL.
The Assistant Commissioner of Income Tax (TDS), Bangalore, subsequently raised demands for assessment years 1996-97 and 1997-98. The demand for assessment year 1996-97 was initially Rs. 1.64 crore and was later revised to Rs. 1.86 crore, while the demand for assessment year 1997-98 was Rs. 15.22 crore.
The assessee challenged the demands before the Commissioner of Income Tax (Appeals). It contended that the services had been rendered outside India and that the payments were therefore not taxable in India under the law applicable when the payments were made.
The CIT(A) rejected the contention. It held that the services rendered by REOL were utilised in a business carried on in India and that the fees for technical services were therefore taxable in India.
The Income Tax Appellate Tribunal also dismissed the assessee's appeals. It held that the payments were towards fees for technical services and were taxable under Section 9(1)(vii) of the Income Tax Act and Article 12(4) of the India-US Double Taxation Avoidance Agreement.
The High Court noted that the Supreme Court, in Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai, had held that two conditions had to be satisfied for technical service income of a non-resident to be taxable under Section 9(1)(vii). The services had to be both rendered in India and utilised in India.
During the pendency of the proceedings, Parliament enacted the Finance Act, 2007, and amended Section 9 with retrospective effect from June 1, 1976.
The Karnataka High Court subsequently considered the effect of that amendment and held that it did not affect the interpretation of Section 9 laid down in Ishikawajima-Harima.
Parliament subsequently enacted the Finance Act, 2010. The amendment to Section 9 was given retrospective effect from June 1, 1976. It provided that income covered by Section 9(1)(v), (vi) and (vii) would be deemed to accrue or arise in India irrespective of whether the non-resident had a residence, place of business, or business connection in India.
The amendment further provided that this would apply irrespective of whether the non-resident had rendered the services in India. This effectively removed the requirement of rendition of services in India for the purpose of the provision.
The Revenue sought reconsideration of the earlier decision in light of the amendment. Jindal Thermal Power challenged the retrospective operation of the amendment before the High Court.
The assessee argued that the amendment did not merely clarify the existing law. It contended that the amendment widened the charging provision by removing the requirement that technical services must have been rendered in India.
The Revenue, on the other hand, argued that the amendment was merely clarificatory. According to the Department, the tax charge already existed, and the amendment only clarified that rendering the services in India was not a necessary condition.
The High Court examined whether the amendment merely clarified the existing law or altered its scope.
The Bench noted that an Explanation can clarify an ambiguity in the main provision. However, where an amendment changes the law, it cannot be presumed to operate retrospectively merely because Parliament has used expressions such as “it is declared” or “for the removal of doubts”.
The Court relied on the Supreme Court's decision in Sedco Forex International Drill Inc. v. CIT, among other judgments, for this principle. It noted that a provision described as clarificatory must be read prospectively when it alters or broadens the scope of a taxing statute.
The Court found that the Finance Act, 2010 amendment widened the scope of the charging provision. It brought within the taxing umbrella nonresidents who did not render services in India and is therefore contrary to the settled law.
"Subsequently, vide the impugned Amendment Act, the taxing umbrella was widened to include non-residents who do not render services in India. This widening of the scope of the charging provision is virtually creating a charge on the taxpayers. By altering the scope of the charging provision i.e., Section 9(1)(vii) r/s. 4 and 5, the impugned amendment is creating a fresh levy of tax liability on the assessee with retrospective effect, which is contrary to the settled principles of law.”
The bench observed, “A provision of law added by an amendment under the garb of a clarification cannot create a fresh charge of tax and impose tax liability on an assessee whose transaction was not covered by the said amendment.”
The court held that the amendment therefore did more than clarify the existing law. By widening the charging provision, it created a fresh levy of tax liability when applied retrospectively.
The Bench also considered Article 12(4) of the India-US DTAA. It noted that the provision concerns “fees for included services” and payments made in consideration of rendering technical or consultancy services.
The Court held that where there is a possibility of two interpretations of domestic law vis-à-vis a tax treaty, the interpretation more beneficial to the assessee must be adopted. It consequently held that the amendment widening the scope of taxability was contrary to the India-US DTAA.
The Court also considered the withdrawal of CBDT Circular Nos. 23 of 1969 and 786 of 2000. The assessee had relied on the benefit under those circulars and claimed a refund of the tax deducted. The circulars were subsequently withdrawn through Circular No. 7/2009 dated October 22, 2009.
The Bench held that the withdrawal of the circulars could not take away the benefit that had accrued to the assessee. It held that the withdrawal was oppressive in effect and therefore had to operate prospectively.
The Court ultimately held that the retrospective operation of the 2010 amendment would widen the charging provision and impose a fresh tax liability on the assessee.
It further held that altering the scope of Section 9(1)(vii) read with Sections 4 and 5 amounted to creating a fresh levy of tax liability with retrospective effect.
The High Court, therefore, read down the Finance Act, 2010 amendment as prospective. It held that the amendment could not operate retrospectively from June 1, 1976.
Accordingly, the High Court allowed all the appeals as well as the connected writ petition
For Appellant: Suhail Dutt, Senior Advocate for T S Venkatesh, Advocate along with R S Mittal and M S Seeha Bansal, Advocates
For Respondent: E I Sanmathi, Senior Standing Counsel along with Nirmal Mathew, Standing Counsel