Retrospective treaty notification cannot impose new tax on past payments where accrued exemption rights already existed.

A treaty-based notification implementing an amended India-FRG double taxation arrangement could not be applied retrospectively to impose tax on fees for technical services and related payments for periods before it came into force, because a delegated notification cannot create a new tax burden on accrued rights unless the treaty itself authorises retrospective effect; the earlier exemption position was also protected by promissory estoppel. The project study payment addition was likewise unsustainable on the reasoning already applied in connected matters, so the addition was deleted.

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Issues: (i) whether the notification giving effect to the amended India-FRG double taxation arrangement could validly operate retrospectively so as to tax fees for technical services and related payments for periods prior to the notification; and (ii) whether the addition made in respect of the project study payment was sustainable.

Issue (i): whether the notification giving effect to the amended India-FRG double taxation arrangement could validly operate retrospectively so as to tax fees for technical services and related payments for periods prior to the notification.

Analysis: The arrangement between the two sovereign States was treated as having statutory force only to the extent it was implemented through the enabling provision. The amendment inserted a new article making royalties and fees for technical services taxable, but the notification was issued later while giving effect from an earlier date. The Court held that a delegated notification could not, unless authorised by the treaty itself, fasten a new tax liability with retrospective effect so as to impair rights that had already accrued under the earlier protocol. The doctrine of promissory estoppel was also applied because the earlier treaty position had represented an exemption on which the assessee was entitled to rely. The notification was therefore required to be read down so as not to prejudice the assessee before the date on which the amended arrangement legally came into force.

Conclusion: The retrospective operation of the notification was invalid to the extent it sought to tax the assessee for the prior period, and the issue was decided in favour of the assessee.

Issue (ii): whether the addition made in respect of the project study payment was sustainable.

Analysis: The addition related to a payment treated as income in the hands of the foreign concern. The appeal record indicates that this ground was covered by the Tribunal's earlier order in connected matters, and the same reasoning was applied here. On that basis, the addition could not be sustained against the assessee.

Conclusion: The addition was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeals were allowed, and the assessments were required to be worked out without giving retrospective effect to the amended treaty notification so as to prejudice the assessee; the connected addition was also set aside.

Ratio Decidendi: A treaty-based notification issued under enabling tax provisions cannot be applied retrospectively to impose a new or enlarged tax burden on completed transactions unless the treaty arrangement itself authorises such retrospective effect; where earlier treaty terms conferred exemption, the later notification must be read down to protect accrued rights.

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