Jindal Thermal Power Company Limited Vs DCIT (Karnataka High Court)
Karnataka HC Reads Down Retrospective Amendment to Section 9: Finance Act, 2010 Cannot Retrospectively Tax Offshore Technical Services
The Karnataka High Court delivered an important ruling concerning taxability of offshore technical services under Section 9(1)(vii), TDS under Section 195 and the retrospective amendment introduced by the Finance Act, 2010. The assessee had entered into contracts with foreign entities for offshore equipment supply, engineering and related services. The Department treated payments for technical services as taxable in India and consequently raised demands under Section 201 for alleged failure to deduct appropriate tax under Section 195.
The controversy arose because the Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. had held that, for such income to be taxable under Section 9, the services were required to be both rendered and utilised in India. Thereafter, Parliament amended Section 9, ultimately through the Finance Act, 2010, to provide that income could be deemed to accrue in India whether or not the non-resident had rendered the services in India, with the amendment stated to operate retrospectively from 1 June 1976.
The High Court held that the 2010 amendment materially widened the scope of the charging provision by bringing within the tax net non-residents who had not rendered services in India. Such widening effectively created a fresh tax liability and could not be retrospectively imposed merely by describing the amendment as being “for removal of doubts” or clarificatory.
The Court reiterated the principle that tax liability must ordinarily be determined according to the law prevailing during the relevant assessment year. An Explanation which merely clarifies an existing ambiguity may operate retrospectively; however, where the Explanation changes the law or expands the tax base, retrospectivity cannot be presumed merely because the Legislature labels it declaratory or clarificatory.
The Court also found support in the India-USA DTAA. It observed that even assuming the amendment altered the domestic-law position, Section 90(2) requires the more beneficial treaty provision to prevail. The Court held that the amendment widening the scope of taxability could not override the beneficial position available under Article 12(4) of the India-USA DTAA.
Significantly, the Court held that the Finance Act, 2010 amendment, by expanding Section 9(1)(vii) to cover services not rendered in India, amounted to an enlargement of the charging provision and therefore could not create a fresh levy retrospectively.
Accordingly, the Karnataka High Court allowed all the income-tax appeals as well as the writ petition and read down the Finance Act, 2010 amendment as operating prospectively rather than retrospectively from 1 June 1976. The Revenue’s review petitions were consequently dismissed.
Key takeaway: A subsequent amendment which widens the tax net and creates a substantive tax liability cannot be retrospectively fastened upon an assessee merely by labelling the amendment “clarificatory” or “for removal of doubts.”
Cases Discussed
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- Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai (SC), [2007] 288 ITR 408 (SC), (2007) 3 SCC 481
- Kanchanganga Sea Foods Ltd. v. Commissioner of Income Tax & Another (SC), (2010) 325 ITR 0540
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- Sanjiv Gupta v. DCIT, [2011-TII-06-ITAT-LKW-INTL)
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FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
