The Karnataka High Court (Bengaluru Bench) has held that the Finance Act, 2010 amendment to Section 9 of the Income Tax Act, though framed as a clarification, effectively creates a fresh charge of tax on non-residents by eliminating the requirement that services be rendered in India. Applying the settled principle that an Explanation which widens the taxing net cannot be presumed retrospective merely because it uses the phrase “for removal of doubts,” the Court read down the amendment as prospectively applicable and not retrospective from June 01, 1976. The Court further held that the amendment is contrary to Article 12(4) of the India-USA DTAA, and under Section 90(2), the interpretation more beneficial to the assessee must prevail.
The Division Bench comprising Justice D K Singh and Justice T.M. Nadaf observed that Section 9(1)(vii)(c) of the Income Tax Act, in its plain reading, requires the fulfilment of twin conditions for income to be chargeable to tax, i.e., the services must be rendered in India and must be utilized in India. The Court noted that the Finance Act, 2007 only removed the requirement of the non-resident having a residence, place of business, or business connection in India, but did not affect the twin conditions laid down by the Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai [(2007) 3 SCC 481].
The Court further observed that the Finance Act, 2010 went a step further by adding that income shall be included in the total income of the non-resident whether or not the non-resident has rendered services in India, thereby effectively neutralizing one of the twin conditions. The Court emphasized that a mere change in law is not a sufficient ground for a court to reopen and review matters already decided, citing the Supreme Court’s decision in Beghar Foundation v. K.S. Puttaswamy [(2021) 3 SCC 1]. The Court also observed that a clarificatory provision using the phrase “for the removal of doubts” must be read prospectively when it alters or broadens the scope of a taxing statute, and that retrospective amendments cannot impose a fresh tax liability on an assessee whose transactions were not covered by such amendment at the relevant time.
The Court noted that the withdrawal of the beneficial Board Circulars No. 23 dated July 23, 1969 and 786 dated Feb 07, 2000 by Circular No. 7/2009 dated Oct 22, 2009 was oppressive to the taxpayer and could not be applied retrospectively. The Court further observed that Article 12(4) of the India-USA DTAA provides that fees for technical services are paid for services rendered and not merely utilized, and that under Section 90(2) of the Act, when there are two possible interpretations of domestic law vis-à-vis a tax treaty, the one more beneficial to the assessee must be adopted.
Briefly, the case involves Jindal Thermal Power Company Limited (now known as JSW Energy Limited), which had entered into contracts in 1995 with three foreign entities, Raytheon Ebasco Overseas Ltd. (REOL), Badger Energy Inc., and Energy Overseas International Inc., for offshore equipment supply, engineering, transportation, erection services, and construction materials. In March 1996, the company deducted base tax of Rs. 20.18 lakhs while crediting payments to REOL. The Assistant Commissioner of Income Tax (TDS) subsequently passed orders under Section 201(1) of the Income Tax Act, raising demands of Rs. 1.64 crores for A.Y 1996-97 and Rs. 15.22 crores for A.Y 1997-98, which were later rectified under Section 154.
On appeal, the Commissioner of Income Tax (Appeals) held that Section 195 imposed a statutory obligation to deduct tax at source on payments to non-residents, and that since the services were utilized in India, the fees for technical services were taxable under Section 9(1)(vii) read with Article 12(4)(b) of the India-USA DTAA. During the pendency of the appeals, the Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai [(2007) 3 SCC 481] laid down the twin conditions that for income to be chargeable to tax in India, services must be both rendered in India and utilized in India. Subsequently, the Finance Act, 2007 amended Section 9 with retrospective effect from June 01, 1976, and a Coordinate Bench of the Karnataka High Court by its order dated March 16, 2009 held that the twin conditions laid down in Ishikawajima-Harima remained unaffected. The Finance Act, 2010 further amended Section 9 with retrospective effect from June 01, 1976, adding that income shall be deemed to accrue or arise in India whether or not the non-resident has rendered services in India.
