Karnataka High Court
Jindal Thermal Power Company Limited vs Dy Commissioner Of Income Tax (Tds) … on 6 August, 2026
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ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 6TH DAY OF AUGUST, 2026
PRESENT
THE HON'BLE MR. JUSTICE D K SINGH
AND
THE HON'BLE MR. JUSTICE T.M.NADAF
INCOME TAX APPEAL NO. 3025 OF 2005
C/W
®
INCOME TAX APPEAL NO. 3022 OF 2005,
INCOME TAX APPEAL NO. 3023 OF 2005 &
WRIT PETITION NO. 192 OF 2011 (T-IT)
IN ITA NO. 3025/2005
BETWEEN:
1. JINDAL THERMAL POWER COMPANY LIMITED
(EARLIER KNOWN AS JINDAL TRACTEBEL
POWER COMPANY LTD.), 707
BARTON CENTRE, M.G.ROAD, BANGALORE
ALSO AT: 'RAHEJA TOWERS', EAST WING
6TH FLOOR, 26-27, M.G.ROAD
Digitally BANGALORE-560 001
signed by
VASANTHA ...APPELLANT
KUMARY B K
Location: (BY SRI SUHAIL DUTT, SENIOR ADVOCATE FOR
HIGH SRI T S VENKATESH, ADVOCATE ALONG WITH
COURT OF SRI R S MITTAL & SRI M S SEEHA BANSAL, ADVOCATES)
KARNATAKA
AND:
1. DY. COMMISSIONER OF INCOME TAX
(TDS), BANGALORE
...RESPONDENT
(BY SRI E I SANMATHI, SENIOR STANDING COUNSEL
A/W SRI NIRMAL MATHEW, STANDING COUNSEL)
-2-
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
THIS ITA IS FILED U/S 260A OF THE INCOME TAX ACT,
1961 PRAYING TO SET ASIDE THE JUDGMENT AND ORDER
DATED 18.05.2005 OF THE ITAT, BANGALORE, PASSED IN ITA
NO.245/BANG/1999 FOR THE ASSESSMENT YEAR 1996-97 AND
ETC.
IN ITA NO.3022/2005
1. JINDAL THERMAL POWER COMPANY LIMITED
(EARLIER KNOWN AS JINDAL TRACTEBEL
POWER COMPANY LTD.), 707
BARTON CENTRE, M.G.ROAD, BANGALORE
ALSO AT: 'RAHEJA TOWERS', EAST WING
6TH FLOOR, 26-27, M.G.ROAD
BANGALORE-560 001
...APPELLANT
(BY SRI SUHAIL DUTT, SENIOR ADVOCATE FOR
SRI T S VENKATESH, ADVOCATE ALONG WITH
SRI R S MITTAL & SRI M S SEEHA BANSAL, ADVOCATES)
AND:
1. DY. COMMISSIONER OF INCOME TAX
(TDS), BANGALORE
...RESPONDENT
(BY SRI E I SANMATHI, SENIOR STANDING COUNSEL
A/W SRI NIRMAL MATHEW, STANDING COUNSEL)
THIS ITA IS FILED U/S 260A OF THE INCOME TAX
ACT, 1961 PRAYING TO SET ASIDE THE JUDGMENT AND
ORDER DATED 18.05.2005 OF THE ITAT, BANGALORE,
PASSED IN ITA NO.238/BANG/1999 FOR THE ASSESSMENT
YEAR 1996-97 AND ETC.
-3-
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
IN ITA NO. 3023/2005
BETWEEN:
1. JINDAL THERMAL POWER COMPANY LIMITED
(EARLIER KNOWN AS JINDAL TRACTEBEL
POWER COMPANY LTD.), 707
BARTON CENTRE, M.G.ROAD, BANGALORE
ALSO AT: 'RAHEJA TOWERS'
EAST WING, 6TH FLOOR, 26-27, M.G.ROAD
BANGALORE-560 001
...APPELLANT
(BY SRI SUHAIL DUTT, SENIOR ADVOCATE FOR
SRI T S VENKATESH, ADVOCATE ALONG WITH
SRI R S MITTAL & SRI M S SEEHA BANSAL, ADVOCATES)
AND:
1. DY. COMMISSIONER OF INCOME TAX
(TDS), BANGALORE
...RESPONDENT
(BY SRI E I SANMATHI, SENIOR STANDING COUNSEL
A/W SRI NIRMAL MATHEW, STANDING COUNSEL)
THIS ITA IS FILED UNDER SECTION 260A OF THE
INCOME TAX ACT, 1961, PRAYING TO SET ASIDE THE
JUDGMENT AND ORDER DATED 18.05.2005 OF THE ITAT,
BANGALORE, PASSED IN ITA NO.247/BANG/1999 FOR THE
ASSESSMENT YEAR 1998-99 AND ETC.
IN WP NO. 192/2011
BETWEEN:
1. M/S JSW ENERGY LIMITED
(FORMERLY KNOWN AS JINDAL TRACTEBEL
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ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
POWER COMPANY LIMITED, ERSTWHILE KNOWN
AS JINDAL THERMAL POWER COMPANY LIMITED)
HAVING ITS OFFICE AT 707, BARTON CENTRE
M G ROAD, BANGALORE
ALSO AT "RAHEJA TOWERS", EAST WING
6TH FLOOR, 26-27, M G ROAD
BANGALORE-560 001
REPRESENTED BY ITS PRESIDENT AND GROUP
GENERAL COUNSEL SRI RAJINDER SHARMA
...PETITIONER
(BY SRI SUHAIL DUTT, SENIOR ADVOCATE FOR
SRI T S VENKATESH, ADVOCATE ALONG WITH
SRI R S MITTAL & SRI M S SEEHA BANSAL, ADVOCATES)
AND:
1. UNION OF INDIA
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
THROUGH THE SECRETARY
DEPARTMENT OF REVENUE
NORTH BLOCK
NEW DELHI-110 001
2. DEPUTY COMMISSIONER OF
INCOME TAX (TDS)
INCOME TAX DEPARTMENT
BANGALORE
...RESPONDENTS
(BY SMT. K S ANASUYA DEVI, ADVOCATE FOR R-1;
SRI E I SANMATHI, SENIOR STANDING COUNSEL
A/W SRI NIRMAL MATHEW, STANDING COUNSEL FOR R-2)
THIS WRIT PETITION IS FILED UNDER ARTICLE 226
OF THE CONSTITUTION OF INDIA, PRAYING TO QUASH
THE AMENDMENT BROUGHT IN SECTION 9(1)(vii) OF THE
INCOME TAX ACT, 1961 TO EXPLANATION BY WAY OF
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ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
FINANCE ACT, 2010 AND/OR ITS RETROSPECTIVE
OPERATION AND ETC.
THE ITAs AND WRIT PETITION HAVING BEEN HEARD
AND RESERVED FOR JUDGMENT ON 29.06.2026, COMING
ON FOR PRONOUNCEMENT THIS DAY, HON'BLE
MR.JUSTICE D K SINGH PRONOUNCED THE FOLLOWING:
CORAM: HON'BLE MR. JUSTICE D K SINGH
and
HON'BLE MR. JUSTICE T.M.NADAF
CAV JUDGMENT
(PER: HON’BLE MR. JUSTICE D K SINGH)
1. The appellants in ITA Nos.3022/2005, 3023/3005, and
3025/2005 and the Petitioner in W.P.No.192/2011 are the
common parties and shall be referred to as Appellant-
Petitioner.
I BRIEF FACTS:
2. The brief facts leading to the present appeals and the writ
petition are as under:
The Appellant entered into contracts with Raytheon
Ebasco Overseas Ltd. (REOL), Badger Energy Inc. (BEI), and
Energy Overseas International Inc. (EOI) dated 20.09.1995 for
-6-
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHEROffshore Equipment Supply and Related Services, Engineering
Transportaion and Erection Services, along with Construction
Materials and Erection related services respectively.
3. On 31.03.1996, the Appellant deducted base tax of
Rs.20,18,071/- while crediting a part of the payments to REOL.
Subsequently, the Assistant Commissioner of Income-Tax
(TDS)-I, Bangalore passed an order u/s 201(1) of the Income
Tax Act, 1961 for Assessment Year 1996-97 dated 23.01.1998,
raising a demand of Rs.1,64,89,026/- and for Assessment Year
1997-98 dated 17.02.1998, raising a demand of
Rs.15,22,95,395. The order dated 23.01.1998 was rectified by
the Assistant Commissioner of Income-Tax (TDS) vide order
dated 25.03.1998 passed u/s 154 of the Act, revising the
demand to Rs.1,86,32,311/-. The order dated 17.02.1998 was
rectified vide order dated 19.05.1998 passed u/s 154 of the
Income Tax Act.
4. The Appellant filed an appeal on 21.09.1998 before the
Commissioner of Income-Tax (Appeals) IV, Bangalore,
challenging the orders of the ACIT-TDS dated 25.03.1998 and
19.05.1998 for Assessment Years 1996-97 and 1997-98. The
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ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
Commissioner of Income-Tax (Appeals) passed a common
order dated 21.01.1999, dismissing both the appeals and
confirmed the orders of the ACIT-TDS. The Commissioner held
that Section 195 of the Act does not provide scope to the
Appellant-Petitioner to decide to deduct tax at source or not.
The Commissioner relied on CBDT Circular No. 152 dated
27.11.1974 F.No.284/31/74-FTD and Circular No. 685 dated
17.06.1994 to hold that the Appellant-Petitioner was under a
statutory obligation to deduct income-tax at source on payment
to a non-resident, and failure to do so will attract interest and
penalty including penalty u/s 271C of the Act, along with
prosecution. The Commissioner also held that since the services
rendered by REOL were utilized in a business or profession
carried on in India, the fees for technical services earned would
be income deemed to accrued or arisen in India, and thus
taxable in India as per Section 9(1)(vii) of the Act, regardless
of the fact that there is no business connection between the
REOL and Appellant-Petitioner. The Commissioner held that on
a combined reading of Section 9(1)(vii) of the Act and Article
12(4)(b) of the India-USA DTAA, the place that is relevant is
the place where services are actually utilized and not rendered,
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ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
and since the services were utilized in India, the income is
chargeable to tax and that tax was required to be deducted by
the Appellant-Petitioner as per Section 195 r/w 200 r/w Section
201 of the Act, along with Articles 12(1), 12(2), and 12(4) of
the DTAA.
5. Aggrieved by the order dated 21.01.1999, the Appellant
filed an appeal before the ITAT, Bangalore dated 03.02.2005
for Assessment Years 1996-97, 1997-98, and 1998-99. Vide
common impugned order dated 18.05.2005, the ITAT
Bangalore, dismissed all the appeals. The ITAT held that the
payment was towards ‘fees for technical services’ and is
chargeable to tax under Section 9(1)(vii) of the Act and under
Article 12(4) of the DTAA as it is arising from India and utilized
such services in a business carried on in India.
6. Aggrieved by the impugned order dated 18.05.2005, the
Appellant filed the present appeals.
7. On 04.01.2007, the Supreme Court in ISHIKAWAJIMA-
HARIMA HEAVY INDUSTRIES LTD. V. DIRECTOR OF
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ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
INCOME TAX, MUMBAI1 interpreted Section 9 of the Income
Tax Act, 1961 and held that for income to be chargeable to tax
in India, two conditions need to be fulfilled: i.e., services, which
are source of income sought to be taxed in India must be (i)
utilized in India and (ii) rendered in India.
8. During the pendency of the appeals, the Ministry of Finance
enacted the Finance Act, 2007, which came into effect from
01.06.2007. As per the Finance Act, Section 9 of the Income
Tax Act, 1961 was amended and was given effect to from
01.06.1976, thereby giving retrospective application.
Prior to Finance Act, 2007
“9. (2) Notwithstanding anything contained in
sub-section (1), any pension payable outside
India to a person residing permanently outside
India shall not be deemed to accrue or arise in
India, if the pension is payable to a person
referred to in article 314 of the Constitution or
to a person who, having been appointed before
the 15th day of August, 1947, to be a Judge of
the Federal Court or of a High Court within the
meaning of the Government of India Act, 1935,
continues to serve on or after the
commencement of the Constitution as a Judge
in India.”
1
[2007] 288 ITR 408 (SC), (2007) 3 SCC 481
– 10 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
After Finance Act, 2007
“9. (2) Notwithstanding anything contained in
sub-section (1), any pension payable outside
India to a person residing permanently outside
India shall not be deemed to accrue or arise in
India, if the pension is payable to a person
referred to in article 314 of the Constitution or
to a person who, having been appointed before
the 15th day of August, 1947, to be a Judge of
the Federal Court or of a High Court within the
meaning of the Government of India Act, 1935,
continues to serve on or after the
commencement of the Constitution as a Judge
in India.
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 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.”
9. A Coordinate Bench of this Court vide judgment and order
dated 16.03.2009 in ITA No.3022, 3023 and 3025/2025 along
with ITA No.3021/2005 partly allowed the appeals to the extent
that the Appellant-Petitioner was entitled to a refund of tax in
respect of the payment made to REOL for technical services.
The Coordinate Bench interpreted Section 9(1)(vii) and
Explanation to Section 9(2), holding that although the Finance
– 11 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
Act, 2007 removed the condition of the non-resident having a
place of business or business connection, the criteria of
rendering service in India and the utilization of the service in
India laid down by the Supreme Court in ISHIKAWAJIMA-
HARIMA HEAVY INDUSTRIES LTD. (SUPRA) to attract tax
liability u/s 9(1)(vii) remained untouched and unaffected by the
Explanation to Section 9(2) of the Act, thereby granting partial
relief to the Appellant-Petitioner to the extent of the refund of
tax in respect of payment made to REOL. Being aggrieved by
the order dated 16.03.2009, the Appellant-Petitioner
challenged the said order before the Supreme Court in SLP
No.25295/2009.
10. During the pendency of the Special Leave Petition, the
Legislature passed the Finance Act, 2010 on 08.05.2010, which
further amended Section 9 of the Income Tax Act, 1961 with
retrospective effect from 01.06.1976. Vide orders dated
12.07.2010 and 26.07.2010, the Supreme Court disposed of
the SLP, granting liberty to the Department to move the High
Court by way of review petition in light of the retrospective
amendments made by the Finance Act, 2010. The amended
provision is as follows:
– 12 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
“9. (2) Notwithstanding anything contained in
sub-section (1), any pension payable outside
India to a person residing permanently outside
India shall not be deemed to accrue or arise in
India, if the pension is payable to a person
referred to in article 314 of the Constitution or
to a person who, having been appointed before
the 15th day of August, 1947, to be a Judge of
the Federal Court or of a High Court within the
meaning of the Government of India Act, 1935,
continues to serve on or after the
commencement of the Constitution as a Judge
in India.
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 under clause
(v) or clause (vi) or clause (vii) of sub-section
(1) and shall be included in the total income of
the non-resident, whether or not,–
(i) the non-resident has a residence or place of
business or business connection in India; or
(ii) the non-resident has rendered services in
India.”
[
11. Pursuant to the orders dated 12.07.2010 and 26.07.2010,
the Department filed Review Petitions before this Court in
R.P.No.317 to 319/2010. Vide order dated 24.07.2015, a
Coordinate Bench of this Court allowed the Review Petitions
and restored the ITAs to the file of this court in the light of the
Judgment passed by the Supreme Court in GVK INDUSTRIES
– 13 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
LIMITED v. INCOME-TAX OFFICER reported in (2015)54
taxmann.com 347 (SC).
12. The Appellant-Petitioner filed W.P.No.192/2011 before this
Court challenging the constitutionality of the Finance Act, 2010
with regard to the retrospective effect of the amendment to
Section 9 of the Income Tax Act, 1961 vide Finance Act, 2010.
The writ petition is connected with the ITAs and is being
decided along with the ITAs.
13. Heard Sri Suhail Dutt, Learned Senior Counsel along with
Learned Counsel TS Venkatesh, Learned Counsel for the
Appellant-Petitioner and Sri E.I. Sanmathi, Learned Senior
Standing Counsel along with Sri Nirmal Mathew, Learned
Standing Counsel for the Respondent.
II CONTENTIONS OF THE APPELLANT-PETITIONER:
(A) Requirement of territorial nexus :
14. Learned Senior Counsel Sri Suhail Dutt submits that the
amendment brought about by Finance Act, 2010 to Section
9(1)(vii) and Section 9(2) of the Act, do not have any effect on
the judgment and order dated 16.03.2009. Reliance was placed
– 14 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
on the decision laid down in the case of ISHIKAWAJIMA-
HARIMA HEAVY INDUSTRIES LTD. (SUPRA) where the
Supreme Court laid down the twin conditions of the services
being (i) rendered in India and (ii) utilized in India to be
fulfilled, for the income to be chargeable to tax. It was further
submitted that since the services were rendered outside India
but utilized in India, hence the twin conditions were not
satisfied and the income is not chargeable to tax. The decision
in the case of ISHIKAWAJIMA-HARIMA HEAVY
INDUSTRIES LTD. (SUPRA) interpreted Section 9 with the
doctrine of territorial nexus i.e., there must be a nexus
between the income generated and the territory of India, and
noted that merely because the services were utilized in India,
when the same were rendered offshore, there was no sufficient
nexus towards payments made for such offshore services, to be
taxable in India.
14.1 Learned Senior Counsel further placed reliance on the
judgment in GVK INDUSTRIES LTD. V. ITO (2011) 4 SCC
36 wherein it was held that any law needs to have sufficient
nexus with India. In the present case, such nexus needs to be
present, between the services rendered offshore to be taxable
– 15 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
in India, and the income deemed to have been accrued in
India. Thus, the judgment laid down by the Coordinate Bench
is not liable to be reviewed. It was further submitted that in
light of the judgment in ISHIKAWAJIMA-HARIMA HEAVY
INDUSTRIES LTD. (SUPRA), the amended Explanation does
not in any manner address the ratio in the said judgment that
there is no sufficient nexus between the offshore services
rendered and the fees paid for such services rendered outside
India, with the utilization of those services in India, so as to
render the same as taxable. It was further submitted that since
the Finance Act, 2010 does not seek to confer any nexus in
Section 9(1)(vii) between the fees paid for offshore services
and utilization of the services in India, the judgment in the case
of ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD.
(SUPRA) still holds good and thus, the judgment dated
16.03.2009 is valid and binding.
14.2 It was further submitted that the Legislature does not
have the power to levy tax without there being sufficient nexus
with its fiscal jurisdiction. Instead of charging a portion of the
income to tax as attributable to the Indian territory, the
impugned amendment seeks to tax the total income of the non-
– 16 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
resident, without there being any territorial nexus. ‘Territorial
nexus’ as per Section 9 was interpreted in ISHIKAWAJIMA-
HARIMA HEAVY INDUSTRIES LTD. (SUPRA) as requiring
rendition and utilisation of services in India. Territorial
jurisdiction must be established with the territory of India in
order to subject the foreign income of a non-resident to tax.
The impugned amendment goes against the settled tax rule of
‘Source Rule.’
14.3 Learned Senior Counsel further submitted that mere
change in law cannot be a ground for review of a settled
judgment. Reliance was placed on the decision in BEGHAR
FOUNDATION V. K.S. PUTTASWAMY (2021) 3 SCC 1.
14.4 On the issue of retrospective application of the
amendment brought out by the Finance Act, 2010 to Section
9(1)(vii) and Section 9(2), Learned Senior Counsel submitted
that the application of the amendment to Section 9 by the
Finance Act, 2010 cannot be made retrospective. It was
submitted that even though the explanation states that it is for
the removal of doubts, but in effect it alters or broadens the
scope of the taxing statute, it has to be read prospectively and
– 17 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
cannot be read retrospectively. Reliance was placed on
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE (P)
LTD. V. CIT (2022) 3 SCC 321 to contend that the liability to
deduct tax cannot be made retrospective for the past period as
nobody can be expected to perform an impossibility, even if it
is a retrospective amendment in a tax statute. Further reliance
was placed on the decision in M.M. AQUA TECHNOLOGIES
LTD. V. COMMISSIONER OF INCOME TAX, DELHI-III
(2021 SCC ONLINE SC 575), wherein the Supreme Court
refused to read the explanation added to the Section with
retrospective effect, while inter alia holding that a retrospective
provision in Tax Law, which is for removal of doubts, cannot be
presumed to be retrospective, even when such language is
used, if it alters or changes the law as it stood earlier.
14.5 On the question of interpretation of expression ‘removal
of doubts’, Learned Senior Counsel placed reliance on the
following decisions:
1. UNION OF INDIA V. MARTIN LOTTERY AGENCIES
LTD. (2009) 12 SCC 209
– 18 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
2. SREE SANKARACHARYA UNIVERSITY OF
SANSKRIT AND OTHERS V. DR. MANU AND
ANOTHER 2023 SCC OnLine SC 640
(B) Retrospective liability:
14.6 Learned Senior Counsel further submitted that it is
well settled law that the Assessee cannot be fastened with the
liability to deduct tax on account of subsequent retrospective
amendment, as the Assessee did not have the benefit of such
change or clarification brought by the retrospective
amendment. It was submitted that the liability to deduct tax
depends on the law as it existed at the relevant time or the
point of time when the subject payments were made. The
liability to withhold tax for payment to non-residents, as set out
in Section 195, accrues only as per the rates of income-tax as
in force at that point of time. Since the Appellant-Petitioner was
not subject to any rates in force at the time of making
payments or at the time of credit of such income to the non-
resident, the order of the Coordinate Bench dated 16.03.2009
stands valid.
14.7 It was further submitted that the Assessee cannot be
compelled to perform an impossible task, relying upon the
– 19 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
maxim ‘lex non cogit ad impossibilia’, and that there would be a
disability that would make it impossible to obey the law, relying
upon another maxim ‘impotentia excusat legem’. The Assessee
cannot be questioned or penalised for performing an impossible
task of deducting tax in accordance with the law which was
retrospectively brought into force.
14.8 Learned Senior Counsel placed reliance on the
following decisions:
1. ENGINEERING ANALYSIS CENTRE OF EXCELLENCE
(P) LTD. V. CIT (2022) 3 SCC 321
2. KRISHNASWAMY S. PD. V. UNION OF INDIA (2006)
3 SCC 286
3. CIT V. REVATHI EQUIPMENT LIMITED (2008) 298
ITR 6714.9 Learned Senior Counsel submitted that the impugned
amendment vide Finance Act 2010 is arbitrary and
unreasonable. The impugned amendment, applicable
retrospectively, must be reasonable and not excessive or harsh.
It was also submitted that the assessment of tax must be made
with reference to the law which is in existence at the relevant
– 20 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
time, and the mere fact that the assessments were pending
cannot be a cogent reason to retrospectively apply the
amendment to pending cases of the Assessee. Reliance was
placed on RAI RAMAKRISHNA V. STATE OF BIHAR, AIR
1963 SC 1667.
14.10 The impugned amendment takes away the vested
rights of the Appellant-Petitioner and imposes a liability for a
period when the law was not in effect. An Explanation cannot
take away a statutory right with which any person under the
statute has been clothed or set at naught the working of an Act
by becoming an hindrance in the interpretation of the same. A
statute should not be given retrospective operation so as to
effect, alter, or destroy an existing right or create a new
liability or obligation. Reliance was placed on the following
cases:
4. BIMLA DEVI V. FIRST ADJ, AIR 1984 SC 1376
5. TATA MOTORS LTD. V. STATE OF MAHARASHTRA,
AIR 2004 SC 3618
6. UNION OF INDIA V. PRAMOD GUPTA, (2005) 12 SCC 1
– 21 –
ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
7. STATE OF GUJARAT V. RAMAN LAL KESHAV LAL
SONI, AIR 1984 SC 161
8. K.C. ARORA V. STATE OF HARYANA, AIR 1987 SC
1858
9. HARIBANS MISRA V. RLY. BOARD, AIR 1989 SC 696
10. UNION OF INDIA V. TUSHAR RANJAN MOHANTY,
(1994) 5 SCC 450
11. CHAIRMAN, RLY. BOARD V. C.R. RANGADHAMAIAH,
AIR 1997 SC 3828
14.11 It was further contended that the withdrawal of the
Board Circulars No. 23 dated 23.07.1969 and 786 dated
07.02.2000,, which clarified on the taxation of non-residents
u/s 9, does not allow for retrospective withdrawal of the
benefits conferred by the said circulars. The CBDT withdrew the
said circulars vide Circular No. 7/2009 dated 22.10.2009, and
the said action cannot result in the levy of tax on remittances
to non-residents retrospectively.
14.12 It was further submitted that the impugned
amendment, in the garb of a clarification, is not merely
clarificatory in nature, but it brings a substantive change in the
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ITA No. 3025 of 2005
C/W ITA No. 3022 of 2005
ITA No. 3023 of 2005
AND 1 OTHER
existing law. An Explanation cannot enlarge the scope of the
original section, but only makes the meaning clear beyond
dispute. Reliance was placed on M.P. CEMENT
MANUFACTURERS’ ASSN. . STATE OF MP, (2004) 2 SCC
249.
III CONTENTIONS OF THE RESPONDENT:
15. Per contra, Sri E.I. Sanmathi, Learned Senior Standing
Counsel for the Respondent submitted that the order dated
16.03.2009 passed by this Court is to be reviewed and revised
in light of the amendment brought in Section 9 by the Finance
Act, 2010. The Learned Senior Standing Counsel further
submitted that the decision laid down by the Supreme Court in
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE (P)
LTD. (SUPRA) cannot be referred to or relied upon as the
same is under review by the Supreme Court pursuant to a
Review Petition filed by the Tax Department. It was contended
that the hearing in the present appeals be deferred till the
review is decided by the Supreme Court.
15.1 Learned Senior Standing Counsel submitted that the
Appellant-Petitioner was liable to deduct tax on the total
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income of the non-resident as per Sections 4, 5, 9, and 195 of
the Act. Section 5(2) of the Act read with Article 12(4)(b) of the
DTAA provides that the total income of a non-resident includes
all incomes from whatever source derived which accrues or
arises or deemed to accrue or arise in India.
15.2 Learned Senior Standing Counsel further submitted
that the Appellant-Petitioner’s reliance on the decision in
ENGINEERING ANALYSIS CENTRE OF EXCELLENCE (P)
LTD. V. CIT (SUPRA) is not applicable to the present case in
light of the decision in GVK INDUSTRIES LTD. V. ITO
(SUPRA) which, having similar facts to the present case,
interpreted ‘Source Rule’, thereby holding that when a non-
resident company offered services outside India for the
purposes of business carried in India, and payments were made
by Indian Company, then No-Objection certificate for non-
deduction of tax cannot be granted, and the Non-resident
Company is liable to pay tax by applying Source Rule. It was
further contended that the judgment of this Court dated
16.03.2009 was before the decision in GVK INDUSTRIES LTD.
V. ITO (SUPRA).
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15.3 The Learned Senior Standing Counsel submitted that
the judgment in ISHIKAWAJIMA-HARIMA HEAVY
INDUSTRIES LTD. (SUPRA) has been distinguished by the
Supreme Court in KANCHANGANGA SEA FOODS LTD. V.
COMMISSIONER OF INCOME TAX & ANOTHER (2010) 325
ITR 0540. It was further submitted that as it is a case of
‘technical services’, it falls under Article 12(4)(b) of the DTAA,
which does not require a permanent establishment, and the
respondent can levy tax as it is chargeable to income tax in
India as per Section 4 r/s 5, 9, and 195 of the Act.
(A) NO RETROSPECTIVE APPLICATION-MERELY
CLARIFICATORY:
15.4 On the issue of the retrospective application of the
amendment brought in Section 9 by the Finance Act, Learned
Senior Standing Counsel contended that the Appellant-
Petitioner has no locus standi to challenge the same as the tax
is payable by the non-resident and not the Appellant-Petitioner.
Since Appellant-Petitioner’s rights are not violated directly or
substantially by the impugned amendment, the writ petition is
liable to be dismissed. Reliance was placed on SEDCO FOREX
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INTERNATIONAL DRILL INC. V. CIT (2005) TAXMAN 352
(SC) where it was held that Explanation to a statutory
provision may clear the ambiguity in the main provision or can
add to and widen the scope of the main section. But if it
changes the law, it is not presumed to be retrospective,
irrespective of the fact that the phrase used is ‘it is declared’ or
‘for the removal of doubts’. It was submitted that in the present
case, no such change was made to law but only clarified the
position that the ‘source rule’ applies in the main provision.
15.5 Learned Senior Standing Counsel submitted that the
charge was created u/s 9(1) of the Act r/s. 4 and 5. The charge
u/s 9(1)(vii) was always present and was never altered. The
conditions in the Explanation in Impugned Amendment do not
apply when giving effect to the charging provision of Section
9(1)(vii). It was contended that the provision in its original
sense did not impose the twin conditions as set out in
ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD.
(SUPRA).
15.6 Learned Senior Standing Counsel placed reliance on
GVK INDUSTRIES LTD. V. ITO (SUPRA) to contend that the
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Indian Legislature has the power and competence with respect
to extra-territorial aspects or causes that have a nexus with
India.
16. Heard the Learned Counsels for the parties. On
considering the submissions of the Learned Counsels, the
following issues arise for consideration:
(a) Whether the judgment dated 16.03.2009 passed by this
Court is liable to be reversed/modified in light of the
amendment to Section 9 vide the Finance Act, 2010?
(b) Whether the retrospective application of the amendment to
Section 9 vide the Finance Act, 2010 from 01.06.1976 is
unconstitutional and bad in law?
IV ANALYSIS AND CONCLUSION
17. Before we decide on the issues at hand, it is necessary to
extract Sections 4, 5, 9(1)(vii), Explanation to Section 9(2),
195 of the Act, Article 12 of the Indo-USA DTAA:
“Charge of income-tax.
4. (1) Where any Central Act enacts that
income-tax shall be charged for any
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assessment year at any rate or rates,
income-tax at that rate or those rates shall
be charged for that year in accordance with,
and subject to the provisions (including
provisions for the levy of additional income-
tax) of, this Act in respect of the total income
of the previous year of every person :
Provided that where by virtue of any
provision of this Act income-tax is to be
charged in respect of the income of a period
other than the previous year, income-tax
shall be charged accordingly.
(2) In respect of income chargeable under
sub-section (1), income-tax shall be deducted
at the source or paid in advance, where it is
so deductible or payable under any provision
of this Act.
Scope of total income.
5. (1) Subject to the provisions of this Act,
the total income of any previous year of a
person who is a resident includes all income
from whatever source derived which–
(a) is received or is deemed to be received in
India in such year by or on behalf of such
person ; or
(b) accrues or arises or is deemed to accrue
or arise to him in India during such year ; or
(c) accrues or arises to him outside India
during such year :
Provided that, in the case of a person not
ordinarily resident in India within the
meaning of sub-section (6) of section 6, the
income which accrues or arises to him outside
India shall not be so included unless it is
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derived from a business controlled in or a
profession set up in India.
(2) Subject to the provisions of this Act, the
total income of any previous year of a person
who is a non-resident includes all income
from whatever source derived which–
(a) is received or is deemed to be received in
India in such year by or on behalf of such
person ; or
(b) accrues or arises or is deemed to accrue
or arise to him in India during such year.
Income deemed to accrue or arise in
India.
9. (1) The following incomes shall be deemed
to accrue or arise in India :–
(vii) 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 or for 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
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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 accordance with
proposals approved by the Central
Government before that date.
Explanation 2.–For the purposes of this
clause, “fees 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) 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”;
(2) Notwithstanding anything contained in
sub-section (1), any pension payable outside
India to a person residing permanently
outside India shall not be deemed to accrue
or arise in India, if the pension is payable to a
person referred to in article 314 of the
Constitution or to a person who, having been
appointed before the 15th day of August,
1947, to be a Judge of the Federal Court or of
a High Court within the meaning of the
Government of India Act, 1935, continues to
serve on or after the commencement of the
Constitution as a Judge in India.
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 under
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clause (v) or clause (vi) or clause (vii) of sub-
section (1) and shall be included in the total
income of the non-resident, whether or not,–
(i) the non-resident has a residence or place
of business or business connection in India;
or
(ii) the non-resident has rendered services in
India.
Other sums.
195. (1) Any person responsible for paying to
a non-resident, not being a company, or to a
foreign company, any interest (not being
interest referred to in section
194LB or section 194LC) or section 194LD or
any other sum chargeable under the
provisions of this Act (not being income
chargeable under the head “Salaries”) shall,
at the time of credit of such income to the
account of the payee or at the time of
payment thereof in cash or by the issue of a
cheque or draft or by any other mode,
whichever is earlier, deduct income-tax
thereon at the rates in force…
Explanation 2.–For the removal of doubts, it
is hereby clarified that the obligation to
comply with sub-section (1) and to make
deduction thereunder applies and shall be
deemed to have always applied and extends
and shall be deemed to have always extended
to all persons, resident or non-resident,
whether or not the non-resident person has–
(i) a residence or place of business or
business connection in India; or
(ii) any other presence in any manner
whatsoever in India.
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ARTICLE 12 – Royalties and fees for
included services –
1. Royalties and fees for included services
arising in a Contracting State and paid to a
resident of the other Contracting State may
be taxed in that other State…
4. For purposes of this Article, “fees for
included services” means payments of any
kind to any person in consideration for the
rendering of any technical or consultancy
services (including through the provision of
services of technical or other personnel) if
such services :
(a) are ancillary and subsidiary to the
application or enjoyment of the right,
property or information for which a payment
described in paragraph 3 is received ; or
(b) make available technical knowledge,
experience, skill, know-how, or processes, or
consist of the development and transfer of a
technical plan or technical design.
18. It is well-settled law that a writ petition is maintainable
even when there are no direct or substantial violations of any
rights of the Petitioner, as long as the vires of a Statute are
challenged. In WHIRLPOOL CORPORATION VS. REGISTRAR
OF TRADE MARKS, MUMBAI AND ORS.2, the Court laid down
the three conditions where the writ petition under Article 226
would be maintainable before the High Court: (i) when the writ
2
MANU/SC/0664/1998, (1998) 8 SCC 1.
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is filed for enforcement of Fundamental Rights or (ii) where
there is a violation of principles of natural justice or (iii) where
the vires of an Act is challenged. This was followed in
HARBANSLAL SAHNIA V INDIAN OIL CORPN. LTD3. In the
present case, the vires of the impugned Finance Act, 2010 are
being challenged on the ground of being unconstitutional. The
Appellant-Petitioner is aggrieved by the impugned amendment
on the ground that the right vested in him prior to such
amendment is now taken away retrospectively, and instead, a
tax liability is placed. There are a plethora of cases on the same
issue, and following the same, we are of the view that the
present Writ Petition is maintainable.
19. Section 4 states that tax shall be deducted at source
where it is so deductible under the provisions of the Act.
Section 5 states that the total income of a non-resident shall
include income which is received or is deemed to be received in
India in such year by or on behalf of such person or accrues or
arises or is deemed to accrue or arise to him in India during
such year. Section 9 provides the incomes which shall be
deemed to accrue or arise in India. Sub-clause (c) of Clause
3
(2003) 2 SCC 107.
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(vii) of sub-section 2 provides for income by way of fees for
technical services payable by 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. Explanation to Section 9(2) provides that income of a
non-resident shall be deemed to accrue or arise in India under
clause (v) or clause (vi) or clause (vii) of sub-section (1) and
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, or the non-resident
has rendered services in India. Section 195 states that any
person responsible for paying to a non-resident, not being a
company, or to a foreign company shall, at the time of credit of
such income to the account of the payee or at the time of
payment thereof in cash or by the issue of a cheque or draft or
by any other mode, whichever is earlier, deduct income-tax
thereon at the rates in force. Article 12 of the India-USA DTAA
provides the taxing rights of payment of Royalties and Fees for
Technical Services (FTS) to the other Contracting State. Clause
(4) provides as to what constitutes ‘fees for technical services.’
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20. Section 9 as it stood unamended did not have clause (2)
on the date of the payment made by the Appellant-Petitioner to
REOL. On the date of payment, the Appellant-Petitioner
deducted tax u/s 195 of the Act. It was contended that the
same was not required to be deducted as there was an
exception granted vide Board Circulars No. 23 dated
23.07.1969 and 786 dated 07.02.2000, which provided that
Section 9 brings to tax net profits of the non-resident which can
be attributable to operations carried out in India, even when
there is a business connection. Taking the statutory benefit, the
Appellant-Petitioner claimed refund of the amount of tax
deducted. Subsequently, vide Circular No. 7/2009 dated
22.10.2009, the Board withdrew the said circulars, thereby
taking away the benefit of allowing tax exemption to the
Appellant-Petitioner.
21. It is trite law that when a circular is issued by a tax
authority, it is to be seen whether it favours the assessee by
granting a benefit, or it favours the Revenue by withdrawing a
benefit. A beneficial circular is to be given retrospective effect,
while an oppressive circular is to be given prospective effect. In
SUCHITRA COMPONENTS LTD. V. CCE [2008] 12 STT 25,
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the Supreme Court upheld the same. This was furthered by the
Supreme Court in CCE V. MYSORE ELECTRICALS
INDUSTRIES LTD. 2007 TAXMANN.COM 1555. In the
present case, the Circular dated 22.10.2009 withdrawing the
exemption from tax is oppressive to the taxpayer as it widens
the scope of taxability to include previously exempted assesses,
thereby subjecting them to tax.
22. It is also settled that the Circular dated 22.10.2009 is to
be applied prospectively and not retrospectively. This was held
in a catena of decisions:
1. CIT V. GUJARAT RECLAIM & RUBBER PRODUCTS
LTD., (2016) 383 ITR 236
2. UNIT TRUST OF INDIA V. P.K. UNNY, (2001) 249
ITR 612
3. CIT V. ANGELIQUE INTERNATIONAL LTD., (2013)
359 ITR 9
4. SANJIV GUPTA V. DCIT [2011-TII-06-ITAT-LKW-
INTL]
5. SATELLITE TELEVISION ASIA REGION
ADVERTISING SALES BV V. ADIT, (2010 TII 58 ITAT
MUM.-INTL.)
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Thus, the withdrawal of the Circulars dated 23.07.1969 and
07.02.2000 do not take away the benefit conferred on the
Appellant-Petitioner.
23. In the case of ISHIKAWAJIMA-HARIMA HEAVY
INDUSTRIES LTD. (SUPRA), the issue before the court was
similar to the one in the present case: whether Section
9(1)(vii) requires a nexus between the services rendered by the
non-resident in India, and the income generated from such
services. The Court answered as follows:
90. Section 9(1)(vii)(c) of the Act states that:
“9. (1)(vii)(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:”
(emphasis supplied)
Reading the provision in its plain sense, it
can be seen that it requires two conditions
to be met–the services which are the
source of the income that is sought to be
taxed, has to be rendered in India, as well
as utilised in India, to be taxable in India.
In the present case, both these conditions have
not been satisfied simultaneously, therefore,
excluding this income from the ambit of
taxation in India. Thus, for a non-resident to
be taxed on income for services, such a
service needs to be rendered within India,
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and has to be a part of a business or
profession carried on by such person in
India. The petitioners in the present case have
provided services to persons resident in India,
and though the same have been used here, it
has not been rendered in India.
91. Section 9(1)(vii) of the Act whereupon
reliance has been placed by the learned
Additional Solicitor General, must be read with
Section 5 thereof, which takes within its
purview the territorial nexus on the basis
whereof tax is required to be levied, namely:
(a) resident; and (b) receipt or accrual of
income.
93. What is relevant is receipt or accrual of
income, as would be evident from a plain
reading of Section 5(2) of the Act. The legal
fiction created although in a given case may be
held to be of wide import, but it is trite that the
terms of a contract are required to be
construed having regard to the international
covenants and conventions. In a case of this
nature, interpretation with reference to the
nexus to tax territories will also assume
significance. Territorial nexus for the purpose
of determining the tax liability is an
internationally accepted principle. An
endeavour should, thus, be made to construe
the taxability of a non-resident in respect of
income derived by it. Having regard to the
internationally accepted principle and DTAA, it
may not be possible to give an extended
meaning to the words “income deemed to
accrue or arise in India” as expressed in
Section 9 of the Act. Section 9 incorporated
various heads of income on which tax is sought
to be levied by the Republic of India.
Whatever is payable by a resident to a
non-resident by way of fees for technical
services, thus, would not always come
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within the purview of Section 9(1)(vii) of
the Act. It must have sufficient territorial
nexus with India so as to furnish a basis
for imposition of tax. Whereas a resident
would come within the purview of Section
9(1)(vii) of the Act, a non-resident would not,
as services of a non-resident to a resident
utilised in India may not have much relevance
in determining whether the income of the non-
resident accrues or arises in India. It must
have a direct live link between the
services rendered in India, when such a
link is established, the same may again be
subjected to any relief under DTAA. A
distinction may also be made between rendition
of services and utilisation thereof.
94. Section 9(1)(vii)(c) clearly states “where
the fees are payable in respect of services
utilised in a business or profession carried on
by such person in India”. It is evident that
Section 9(1)(vii), read in its plain, same
envisages the fulfilment of two conditions:
services, which are source of income
sought to be taxed in India must be (i)
utilised in India, and (ii) rendered in
India. In the present case, both these
conditions have not been satisfied
simultaneously.
95. The provisions of Section 9(1)(vii) of the
Act are plain and capable of being given a
meaning. There, therefore, may not be any
reason not to give full effect thereto. However,
even in relation to such income, the provisions
of Article 7 of DTAA would be applicable, as
services rendered outside India would have
nothing to do with permanent establishment in
India. Thus, if any services have been rendered
by the head office of the appellant outside
India, only because they were connected with
permanent establishment (sic). Even in relation
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thereto, principle of apportionment shall
apply.”
24. Thus, as per the Supreme Court, Section 9(1)(vii)(c)
required the fulfillment of twin conditions in order for the
income to be chargeable to tax: the services must be (i)
rendered through a business or profession in India and (ii)
must be utilized in India. Upon fulfillment of these twin
conditions, the income will be chargeable to tax in the hands of
the non-resident as per Section 5 of the Act. If either of the
conditions are not fulfilled, then income is not chargeable to
tax.
25. Subsequent to the above decision, the Finance Act, 2007
was enacted on 01.06.2007, which amended Section 9 by
including an Explanation to Section 9(2) as follows:
“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 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.”
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26. The Judgment laid down the twin conditions of services
being rendered & utilized in India in order for income from such
services to be chargeable to tax. In other words, the Supreme
Court integrated the territorial nexus doctrine with the
provisions of the Act in light of the DTAA. Thus, for taxability
under Section 9(1)(vii), there should be a nexus between the
income generated, the services rendered, and the territory of
India. On a reading of the Explanation, it is evidently clear that
the Legislature intended to nullify the judgment and order
passed in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES
LTD. (SUPRA) to the extent that there need not be any
territorial nexus between the services rendered and the
territory of India. In other words, the amendment seeks to
clarify that for income to be chargeable to tax, the services
rendered need not be in the territory of India. The non-resident
is not required to have a place of business or a business
connection in India for the purposes of rendering services.
Therefore, the amendment vide Finance Act, 2007 seeks to tax
income as long as the services are utilized in India, irrespective
of the non-resident having a business connection or a place of
business in India.
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27. This Court in the impugned order dated 16.03.1999
interpreted the amendment brought by the Finance Act, 2007
and held as follows:
“The explanation incorporated in Section 9(2)
declares that ‘where the income is deemed to
accrue or arise in India under clauses
(v)(vi)(vii) of sub-section(1), such income shall
be included in the total income of the non-
resident; whether or not the non-resident has a
residence or business or business connection in
India.’ The plain reading of the said provision
suggests that criterion of residence, place of
business, or business connection of a non-
resident in India has been done away with for
fastening tax liability. However, the criteria of
rendering service in India and the utilization of
the service in India as laid down by the
Supreme Court in Ishikawajma’s case to attract
tax liability u/s 9(1)(vii) remains untouched
and unaffected by the explanation to Section
9(2).
When the purport of the explanation to Section
9(2) is plain in its meaning, it is unnecessary
and impermissible to refer to the Memorandum
explaining the Finance Bill 2007. Therefore, it is
explicit from the reading of Section 9(1)(vii)(c)
and explanation to Section 9(2) that the ratio
laid down by the Supreme Court in
Ishikawajma’s case still holds the field.”
28. It is contended by the Learned Senior Counsel for the
Appellant-Petitioner that the decision in ISHIKAWAJIMA-
HARIMA HEAVY INDUSTRIES LTD. (SUPRA) is applicable to
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the facts in the present case in respect of income not being
chargeable to tax.
29. Subsequent to the passing of the impugned order, the
Finance Act, 2010 was passed to include the following
explanation after Section 9(2) with retrospective application
from 01.06.1976:
“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 under
clause (v) or clause (vi) or clause ( vii) of
sub-section (1) and shall be included in the
total income of the non-resident, whether or
not,–
(i) the non-resident has a residence or place
of business or business connection in India;
or
(ii) the non-resident has rendered services in
India.”
30. On a reading of the same, it can be noticed that another
criteria has been added to the Explanation: the rendering of
services. As a result of this amendment, the income from
technical services is chargeable to tax when the services are
utilized in India. This amendment virtually neutralized one of
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the criteria to be fulfilled as laid down in ISHIKAWAJIMA-
HARIMA HEAVY INDUSTRIES LTD. (SUPRA). In other
words, the condition of the services to be rendered in India is
done away with, and as long as the services are rendered in
India, income from such services is liable to be taxed.
31. It is well settled law that a mere change of law is not a
sufficient reason for the court to re-open and review matters
which are already decided. In BEGHAR FOUNDATION V. K.S.
PUTTASWAMY (AADHAAR REVIEW-5 J.), (2021) 3 SCC 1,
a 5-Judge Bench of the Supreme Court held that change in the
law or subsequent decision/judgment of a coordinate or larger
Bench by itself cannot be regarded as a ground for review. In
K. VASUDEVAN, IN RE, 1943 SCC ONLINE MAD 277, the
Madras High Court held that the passing of the Amending Act,
even though it changed the law with retrospective effect, was
not a sufficient reason for re-opening matters which were
already decided on the basis of the law as it stood before the
amendment. In the present case, it is rightly contended by the
Learned Counsel for the Appellant-Petitioner that the change in
law vide the amendments in Finance Acts 2007 and 2010 are
not sufficient grounds for this Court to sit in review. However,
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since these amendments concern retrospective application of
the same, we shall decide the issue of such retrospective
application first.
32. As rightly contended by the Counsel for Appellant-
Petitioner, a clarificatory provision using the phrase ‘for the
removal of doubts’ needs to be read prospectively, when in
effect alters or broadens the scope of taxing statute. In M.M.
AQUA TECHNOLOGIES LTD. V. CIT, (2021) 19 SCC 816, it
was held as follows:
“19.2. Second, a retrospective provision in a
Tax Act which is “for the removal of doubts”
cannot be presumed to be retrospective, even
where such language is used, if it alters or
changes the law as it earlier stood. This was
stated in Sedco Forex International Drill.
Inc. v. CIT [Sedco Forex International Drill.
Inc. v. CIT, (2005) 12 SCC 717] as follows :
(SCC pp. 724-25, paras 17-19)
“17. As was affirmed by this Court
in Goslino Mario [CIT v. Goslino Mario,
(2000) 10 SCC 165] a cardinal principle
of the tax law is that the law to be
applied is that which is in force in the
relevant assessment year unless
otherwise provided expressly or by
necessary implication. (See also Reliance
Jute & Industries Ltd. v. CIT [Reliance
Jute & Industries Ltd. v. CIT, (1980) 1
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SCC 139 : 1980 SCC (Tax) 67] .) An
Explanation to a statutory provision
may fulfil the purpose of clearing up
an ambiguity in the main provision or
an Explanation can add to and widen
the scope of the main section
[See Sonia Bhatia v. State of U.P.,
(1981) 2 SCC 585 at p. 598] . If it is in
its nature clarificatory then the
Explanation must be read into the
main provision with effect from the
time that the main provision came
into force [See Shyam Sunder v. Ram
Kumar, (2001) 8 SCC 24, para 44; Brij
Mohan Das Laxman Das v. CIT, (1997) 1
SCC 352 at p. 354; CIT v. Podar Cement
(P) Ltd., (1997) 5 SCC 482 at p. 506] .
But if it changes the law it is not
presumed to be retrospective,
irrespective of the fact that the
phrases used are “it is declared” or
“for the removal of doubts”.
18. There was and is no ambiguity in the
main provision of Section 9(1)(ii). It
includes salaries in the total income of an
assessee if the assessee has earned it in
India. The word “earned” had been
judicially defined in S.G.
Pgnatale [CIT v. S.G. Pgnatale, 1980 SCC
OnLine Guj 138 : (1980) 124 ITR 391] by
the High Court of Gujarat, in our view,
correctly, to mean as income “arising or
accruing in India”. The amendment to the
section by way of an Explanation in 1983
effected a change in the scope of that
judicial definition so as to include with
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effect from 1979, ‘income payable for
service rendered in India’.
19. When the Explanation seeks to give an
artificial meaning to “earned in India” and
brings about a change effectively in the
existing law and in addition is stated to
come into force with effect from a future
date, there is no principle of interpretation
which would justify reading the
Explanation as operating retrospectively.”
This being the case, Explanation 3-C is
clarificatory — it explains Section 43-B(d) as it
originally stood and does not purport to add a
new condition retrospectively, as has wrongly
been held [CIT v. M.M. Aqua Technologies Ltd.,
2015 SCC OnLine Del 9537] by the High
Court.”
33. In the present case, the phrase ‘for the removal of
doubts’ in Explanation to Section 9(2) of the Act added by the
impugned Amendment is applicable from 01.06.1976. Such
retrospective application of the amendment, which is
admittedly a mere clarification by the Legislature, is to be
interpreted in a prospective manner. The benefits accrued to
the Appellant-Petitioner from such provision prior to the
impugned Amendment cannot be taken away by the
retrospective application of a mere clarification. A provision of
law added by an amendment under the garb of a clarification
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cannot create a fresh charge of tax and impose tax liability on
an assessee whose transaction was not covered by the said
amendment. It is well settled that retrospective amendments
cannot impose a tax liability on the Assessee. In UNION OF
INDIA V. MARTIN LOTTERY AGENCIES LTD. (2009) 12
SCC 209, the Supreme Court held that an Explanation clause,
which appears to be a charging provision and widens the taxing
net, cannot be held to be retrospective in operation on the
premise that it is clarificatory or declaratory in nature.
Relevant paragraphs are as follows:
“33. The Explanation so read appears to be a
charging provision. It states about taxing need.
It can be termed to be a sui generis tax. If it is
a different kind of tax, the same may be held
to be running contrary to the ordinary concept
of service tax. It may, thus, be held to be a
stand alone clause. A constitutional question
may have to be raised and answered as to
whether the taxing power can be segregated.
If by reason of the said Explanation, the
taxing net has been widened, it cannot be
held to be retrospective in operation.
34. No doubt, the Explanation begins with
the words “for removal of doubts”. Does it
mean that it is conclusive in nature? In
law, it is not. It is not a case where by
reason of a judgment of a court, the law
was found to be vague or ambiguous.
There is also nothing to show that it was found
to be vague or ambiguous by the executive. In
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fact, the Board circular shows that invocation of
sub-clause (ii) had never been in contemplation
of the taxing authorities.
34. From a combined reading of the decision of
ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD.
(SUPRA), the amendment brought in by the Finance Act,
2007, the decision of this Court dated 16.03.2009, and the
impugned amendment, it can be observed that the Legislature,
under the garb of issuing clarificatory amendments, is creating
fresh charges on the non-residents under Section 9(1)(vii),
thereby going against the decision and interpretation as laid
down in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES
LTD. (SUPRA). The effect of the impugned amendment is to
nullify the judgment in ISHIKAWAJIMA-HARIMA HEAVY
INDUSTRIES LTD. (SUPRA) as well as the decision of this
Court dated 16.03.2009.
35. The Learned Senior Standing Counsel contended that the
decision in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES
LTD. (SUPRA) which laid down the twin conditions of the
services ‘not only being rendered but also utilised in India’, is
not the true intention of the Legislature. Reliance was placed on
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the Explanatory notes to the Provisions of Finance Act, 2010,
whereby it was clarified that the intention of the legislature to
use the source rule was to tax the income deemed to accrue or
arise in India on the basis of the place of utilisation of such
service and not the place of rendition of such service. Thus,
from the combined reading of Sections 4, 5, 9(1)(vii) and
Explanation to 9(2) of the Act, the charge was always there,
and the impugned amendment is a mere clarification.
36. At the cost of repetition, it is already discussed that the
charging section cannot be widened or altered in its scope
under the garb of a clarification which applies retrospectively. It
then effectively becomes a charging provision. However, the
language of Section 9(1)(vii) is not altered. Clause (c) provides
that 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. The phrase ‘business or profession carried on by such
person in India’ still holds the interpretation as laid down in
ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD.
(SUPRA) i.e., requiring the condition of the service to be
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rendered in India. The decision of this Court dated 16.03.2009
interpreted that the operation of the Finance Act, 2007 does
not affect the interpretation of Section 9 as laid down in
ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD.
(SUPRA), we do not have any hesitation to hold that the
impugned amendment does not have any effect on the
interpretation of Section 9 as per the ISHIKAWAJMA Case.
37. Even if it were to be construed that the impugned
amendment is valid and alters the interpretation of Section 9,
Article 12(4) of the India-USA DTAA provides that the fees for
technical services is paid for the services rendered and not
utilised. Following the settled principle of law as laid down in
Section 90(2) of the Act, when there is a possibility of two
interpretations of domestic law i.e., the Income Tax Act, 1961
vis-à-vis a tax treaty, the one more beneficial to the Assessee
must be taken. In the present case, we are inclined to follow
the same and hold that the impugned amendment widening the
scope of taxability is contrary to the India-USA DTAA and
settled principles of law.
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38. The Learned Senior Standing Counsel further relied upon
the decision laid down by the Supreme Court in SEDCO
FOREX INTERNATIONAL DRILL INC. V. CIT (SUPRA) to
contend that the Explanation clause added by the impugned
Amendment is not changing the law by widening the scope of
the main section, unlike the facts in the case relied upon.
However, the decision goes contrary to the stand of the
Respondent and instead favours the Appellant-Petitioner. The
Explanation introduced by the impugned Amendment adds
more people under the taxing umbrella. Vide the Finance Act
2007, the taxing umbrella widened to include non-residents
who do not have a residence or place of business or business
connection in India. 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.
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39. The Supreme Court in SEDCO FOREX INTERNATIONAL
DRILL INC. V. CIT (SUPRA) held as follows:
“10. In our view the 1999 Explanation could
not apply to assessment years for the simple
reason that it had not come into effect then.
Prior to introducing the 1999 Explanation, the
decision in CIT v. S.G. Pgnatale [(1980) 124
ITR 391 (Guj)] was followed in 1989 by a
Division Bench of the Gauhati High Court
in CIT v. Goslino Mario [(2000) 241 ITR 314
(Gau)] . It found that the 1983 Explanation
had been given effect from 1-4-1979 whereas
the year in question in that case was 1976-77
and said: (ITR p. 318)
“[I]t is settled law that assessment
has to be made with reference to the
law which is in existence at the
relevant time. The mere fact that the
assessments in question has (sic)
somehow remained pending on 1-4-
1979, cannot be cogent reason to
make the Explanation applicable to
the cases of the present assessees.
This fortuitous circumstance cannot
take away the vested rights of the
assessees at hand.”
11. The reasoning of the Gauhati High Court
was expressly affirmed by this Court
in CIT v. Goslino Mario [(2000) 10 SCC 165 :
(2000) 241 ITR 312] . These decisions are
thus authorities for the proposition that the
1983 Explanation expressly introduced with
effect from a particular date would not effect
the earlier assessment years.
13. The Explanation as introduced in 1983
was construed by the Kerala High Court
in CIT v. S.R. Patton [(1992) 193 ITR 49
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(Ker)] while following the Gujarat High Court’s
decision in S.G. Pgnatale [(1980) 124 ITR 391
(Guj)] to hold that the Explanation was not
declaratory but widened the scope of Section
9(1)(ii). It was further held that even if it were
assumed to be clarificatory or that it removed
whatever ambiguity there was in Section
9(1)(ii) of the Act, it did not operate in respect
of periods which were prior to 1-4-1979. It
was held that since the Explanation came into
force from 1-4-1979, it could not be relied on
for any purpose for an anterior period.
17. As was affirmed by this Court
in Goslino Mario [(2000) 10 SCC 165 :
(2000) 241 ITR 312] a cardinal principle
of the tax law is that the law to be
applied is that which is in force in the
relevant assessment year unless
otherwise provided expressly or by
necessary implication. (See also Reliance
Jute and Industries Ltd. v. CIT [(1980) 1
SCC 139 : 1980 SCC (Tax) 67] .) An
Explanation to a statutory provision may
fulfil the purpose of clearing up an
ambiguity in the main provision or an
Explanation can add to and widen the
scope of the main section [See Sonia
Bhatia v. State of U.P., (1981) 2 SCC 585,
598 : AIR 1981 SC 1274, 1282 para 24] .
If it is in its nature clarificatory then the
Explanation must be read into the main
provision with effect from the time that
the main provision came into force [See
Shyam Sunder v. Ram Kumar, (2001) 8
SCC 24 (para 44); Brij Mohan Das Laxman
Das v. CIT, (1997) 1 SCC 352,
354; CIT v. Podar Cement (P) Ltd., (1997)
5 SCC 482, 506] . But if it changes the
law it is not presumed to be
retrospective, irrespective of the fact that
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the phrases used are “it is declared” or
“for the removal of doubts”.
19. When the Explanation seeks to give an
artificial meaning to “earned in India” and
brings about a change effectively in the
existing law and in addition is stated to come
into force with effect from a future date, there
is no principle of interpretation which would
justify reading the Explanation as operating
retrospectively.
40. Accordingly, all the appeals as also the writ petition are
allowed. The impugned Amendment Act – Finance Act 2010 – is
to be read down as prospectively applicable and not
retrospectively applicable from 01.06.1976. The Review
Petitions in R.P.Nos.317 to 319/2010 stand dismissed.
Pending interlocutory applications, if any, do not survive
for consideration and accordingly, they stand disposed of.
Sd/-
(D K SINGH)
JUDGE
Sd/-
(T.M.NADAF)
JUDGE
BKV
CT:SN
