1998 (6) TMI 566 - AT - Income Tax

Tribunal invalidates retrospective DTAA amendment, orders assessments under original provisions.

TATA IRON & STEEL CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX

TATA IRON & STEEL CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX - [1999] 69 ITD 292 (ITAT [Mum]) Issues Involved:1. Taxability of payments made by the assessee to German companies under the Double Taxation Avoidance Agreement (DTAA) between India and the Federal Republic of Germany (FRG).2. Validity of retrospective amendments to the DTAA.3. Application of the doctrine of promissory estoppel.4. Authority of the Income Tax Appellate Tribunal (ITAT) to review the vires of notifications issued under the DTAA.Issue-wise Detailed Analysis:1. Taxability of Payments under DTAA:The assessee-company, a major private sector entity in India dealing in Iron and Steel, entered into agreements with German companies for technical know-how and engineering services. Payments were made to these companies during the financial years 1984-85 and 1985-86. The Assessing Officer taxed these payments under Explanation to section 9(1)(vi) and section 115A of the IT Act, read with Article VIII-A of the DTAA between India and FRG. The CIT (Appeals) upheld this view, leading to the assessee's appeal.2. Validity of Retrospective Amendments to the DTAA:The central issue was the amendment to the DTAA notified on 26-8-1985, which retrospectively altered the taxability of fees for technical services from 1-4-1984. The assessee argued that the retrospective amendment was invalid and beyond the delegated power of the Central Government. The Tribunal noted that treaties are acts of sovereign powers and their terms must be strictly followed. The notification dated 26-8-1985, which attempted to impose tax retrospectively, was deemed invalid as it adversely affected the rights of the assessee.3. Application of Promissory Estoppel:The assessee contended that the doctrine of promissory estoppel applied, arguing that the payments made under the agreements were covered by the provisions of the DTAA before the amendment. The Tribunal agreed, stating that the assessee was under a bona fide impression that certain incomes were exempt based on the 1959 protocol. The retrospective amendment violated the promise given to the assessee, thus invoking promissory estoppel.4. Authority of ITAT to Review Vires of Notifications:The Tribunal addressed whether it had the jurisdiction to review the vires of the notification issued by the Central Government. Citing the decision in Mahindra & Mahindra Ltd. v. ITO, the Tribunal held that it had the authority to determine whether the notification was within the powers of the Central Government. It concluded that the notification dated 26-8-1985 was beyond the powers conferred by the DTAA and the Income-tax Act, thus it could not impose a tax liability retrospectively from 1-4-1984.Conclusion:The Tribunal ruled in favor of the assessee, holding that the retrospective amendment to the DTAA was invalid and unenforceable. It directed that the assessment for the relevant years should be made under the provisions of the 1959 protocol, which exempted certain incomes from taxation. The appeals were allowed, and the assessments were ordered to be made in accordance with the original DTAA provisions prior to the amendment.Separate Judgments:The Tribunal's decision applied uniformly across all related appeals (ITA Nos. 1908, 1909, and 1910/Bom./1990), with consistent reasoning and conclusions in each case.