Karnataka High Court: Jindal Thermal Power Company Limited v. DCIT (TDS) [ITA No. 3025 of 2005]
The Appellant made payments to REOL, BEI, and EOI under 1995 contracts for offshore equipment supply and related services. The ACIT (TDS) raised demands under Section 201(1) for AYs 1996-97 and 1997-98 for failure to fully deduct tax, which were upheld by the CIT(A) and the ITAT (order dated 18.05.2005), holding that tax was deductible under Section 195 read with Section 9(1)(vii) and Article 12(4)(b) of the India-USA DTAA. During pendency of the appeals, the Supreme Court in Ishikawajima (2007) laid down the twin-condition test. The Finance Act, 2007 and, later, the Finance Act, 2010 amended the Explanation to Section 9(2) retrospectively from 01.06.1976, progressively removing the requirements of business connection and rendition of services in India. A Coordinate Bench’s order dated 16.03.2009 (partly allowing the appeals) was reopened via Review Petitions following the Finance Act, 2010 amendment, and the ITAs were restored. The Appellant also filed W.P. No. 192/2011 challenging the constitutionality of the retrospective operation of the Finance Act, 2010 amendment, heard along with the ITAs.
The Hon’ble Court held that although the Explanation introduced by the Finance Act, 2010 was described as clarificatory, it substantively enlarged the scope of the charging provision under Section 9(1)(vii) by dispensing with the requirement that services be rendered in India. Consequently, the Explanation could not be accorded retrospective effect merely on the strength of its being couched in the language “for the removal of doubts”. It further held that Article 12(4) of the India-USA DTAA, being more beneficial to the assessee under Section 90(2), would prevail even if the amendment were valid, as it ties taxability to rendition rather than mere utilisation of services. The withdrawal of CBDT Circulars No. 23 and 786 via Circular No. 7/2009 was held to be oppressive and thus not retrospectively applicable. The appeals and writ petition were allowed, the Finance Act, 2010 amendment was read down as prospective (not retrospective from 01.06.1976), and the Review Petitions (R.P. Nos. 317–319 of 2010) were dismissed.
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.
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.
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