Withdrawal of Circular no. 23 dated 23 July 1969 by CBDT is prospective in nature and will not apply to the pending cases

Recently, the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of DDIT Vs Siemens Aktiengesellschaft (ITA No. 6133/Mum/2002, ITA No. 7589/Mum/2003) held that the withdrawal of circular no. Circular no. 23 dated 23 July 1969 and Circular No. 786 dated 7 February 2000 by Central Board of Direct Taxes (CBDT) is effective from 22 October 2009 as made applicable vide Circular No. 7 dated 22 October 2009.

Accordingly, it was held that the circular which was operational in AY 1998- 99 cannot be held to be non operational simply because it has been withdrawn in the year 2009. The withdrawal of such circulars will be effective only after 22 October 2009 and it cannot be applied to the year in which it was in operation.

Facts of the case

• The taxpayer, a non-resident company entered into two contracts with Gujarat Power Gen Energy Corporation Limited for supply of material/ equipment, design and engineering of erection material / equipment for the consideration of Deutsche Mark (DM) 713 million and DM 32 millions respectively on 12 May 1994.

Please not The Deutsche Mark or German mark was the official currency of Germany until the adoption of the Euro in 2002.

• During AY 1998-99 the taxpayer received INR 9.85 billion from GPEC in respect of offshore supply of material/ equipment contract. The Assessing Officer (AO) based on the view taken in AY 1997- 98 held that since the taxpayer was executing many contracts in India, it has Permanent Establishment in India.

• Accordingly, the AO held that the income earned by the taxpayer from the ‘offshore supplies’ was taxable in India. However, the Commissioner of Income-tax (Appeals) allowed the appeal of the taxpayer.

Tribunal’s ruling

• The Tribunal observed that for AY 1997- 98 it itself in the taxpayer’s own case based on section 9 of the Act and CBDT Circular no. 23 and 786, held that the income relatable to offshore supplies cannot be said to be deemed to accrue or arise in India. However, the CBDT withdrew the above circulars with effect from 22 October 2009. Accordingly, the AO based on the withdrawal of above circulars held that the transaction of offshore supply of material / equipment contract was taxable in India.
• The Tribunal observed that it is very clear that the circular which was operational in AY 1998-99 cannot be held to be non operational simply because it has been withdrawn in the year 2009. The withdrawal of such circulars will be effective only after 22 October 2009 and it cannot be applied to the year in which it was in operation.
• The Tribunal relied on the decision of the Kerala High Court in the case of CIT v. B.M.Edwards, India Seafood [1979] 119 ITR 334 (Ker) wherein the High Court held that the circular, which was in operation from year 1944, withdrawn on 6 April 1972 will have prospective impact and therefore, the taxpayer was liable to take benefit of the circular till AY 1971-72.
• Thus, the Tribunal held that withdrawal of circular no. 23 will be operative only from 22 October 2009 and not prior to that date. Accordingly, based on circular 23 the income of the taxpayer cannot be held to be taxable in India.

Our Comments

The Mumbai Tribunal has held in the present case that the circular which was operational in AY 1998-99 cannot be held to be non operational simply because it has been withdrawn in the year 2009. The withdrawal of such circulars will be effective only after 22 October 2009 and it cannot be applied to the year in which it was in operation.

Withdrawal of circular no. 23 had raised a doubt whether it would apply on the pending cases of the earlier assessment years. The Mumbai Tribunal in the present case has provided a relief to all the taxpayers whose cases are pending and where circular 23 has been relied upon. It is pertinent to note that in the case of Harshendu Upendre Kaka Vs. ITO [2001] 249 ITR 612 (Bom) the Bombay High Court on the issue of whether communication in the year 2001 withdrawing the letter / Circular dated 11 October 1991 was retrospective or not, had held that the withdrawal of circulars cannot operate retrospectively.

NF