TaxTMI 
TaxTMI 
2026 (8) TMI 567
X X X X Extracts X X X X
X X X X Extracts X X X X
....t appeals and the writ petition are as under: The Appellant entered into contracts with Raytheon Ebasco Overseas Ltd. (REOL), Badger Energy Inc. (BEI), and Energy Overseas International Inc. (EOI) dated 20.09.1995 for Offshore Equipment Supply and Related Services, Engineering Transportation and Erection Services, along with Construction Materials and Erection related services respectively. 3. On 31.03.1996, the Appellant deducted base tax of Rs.20,18,071/- while crediting a part of the payments to REOL. Subsequently, the Assistant Commissioner of Income-Tax (TDS)-I, Bangalore passed an order u/s 201(1) of the Income Tax Act, 1961 for Assessment Year 1996-97 dated 23.01.1998, raising a demand of Rs.1,64,89,026/- and for Assessment Year 1997-98 dated 17.02.1998, raising a demand of Rs.15,22,95,395. The order dated 23.01.1998 was rectified by the Assistant Commissioner of Income-Tax (TDS) vide order dated 25.03.1998 passed u/s 154 of the Act, revising the demand to Rs.1,86,32,311/-. The order dated 17.02.1998 was rectified vide order dated 19.05.1998 passed u/s 154 of the Income Tax Act. 4. The Appellant filed an appeal on 21.09.1998 before the Commissioner of Income-T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....OME TAX, MUMBAI [[2007] 288 ITR 408 (SC), (2007) 3 SCC 481] interpreted Section 9 of the Income Tax Act, 1961 and held that for income to be chargeable to tax in India, two conditions need to be fulfilled: i.e., services, which are source of income sought to be taxed in India must be (i) utilized in India and (ii) rendered in India. 8. During the pendency of the appeals, the Ministry of Finance enacted the Finance Act, 2007, which came into effect from 01.06.2007. As per the Finance Act, Section 9 of the Income Tax Act, 1961 was amended and was given effect to from 01.06.1976, thereby giving retrospective application. Prior to Finance Act, 2007 "9. (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the comme....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Supreme Court disposed of the SLP, granting liberty to the Department to move the High Court by way of review petition in light of the retrospective amendments made by the Finance Act, 2010. The amended provision is as follows: "9. (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India. Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident has a residence or place of business or busin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ior Counsel further placed reliance on the judgment in GVK INDUSTRIES LTD. V. ITO (2011) 4 SCC 36 wherein it was held that any law needs to have sufficient nexus with India. In the present case, such nexus needs to be present, between the services rendered offshore to be taxable in India, and the income deemed to have been accrued in India. Thus, the judgment laid down by the Coordinate Bench is not liable to be reviewed. It was further submitted that in light of the judgment in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. (SUPRA), the amended Explanation does not in any manner address the ratio in the said judgment that there is no sufficient nexus between the offshore services rendered and the fees paid for such services rendered outside India, with the utilization of those services in India, so as to render the same as taxable. It was further submitted that since the Finance Act, 2010 does not seek to confer any nexus in Section 9(1)(vii) between the fees paid for offshore services and utilization of the services in India, the judgment in the case of ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. (SUPRA) still holds good and thus, the judgment dated 16.03.2009 is valid and binding. 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1. UNION OF INDIA V. MARTIN LOTTERY AGENCIES LTD. (2009) 12 SCC 209 2. SREE SANKARACHARYA UNIVERSITY OF SANSKRIT AND OTHERS V. DR. MANU AND ANOTHER 2023 SCC OnLine SC 640 (B) Retrospective liability: 14.6 Learned Senior Counsel further submitted that it is well settled law that the Assessee cannot be fastened with the liability to deduct tax on account of subsequent retrospective amendment, as the Assessee did not have the benefit of such change or clarification brought by the retrospective amendment. It was submitted that the liability to deduct tax depends on the law as it existed at the relevant time or the point of time when the subject payments were made. The liability to withhold tax for payment to non-residents, as set out in Section 195, accrues only as per the rates of income-tax as in force at that point of time. Since the Appellant-Petitioner was not subject to any rates in force at the time of making payments or at the time of credit of such income to the non-resident, the order of the Coordinate Bench dated 16.03.2009 stands valid. 14.7 It was further submitted that the Assessee cannot be compelled to perform an impossible task, relying upon the m....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and 786 dated 07.02.2000, which clarified on the taxation of non-residents u/s 9, does not allow for retrospective withdrawal of the benefits conferred by the said circulars. The CBDT withdrew the said circulars vide Circular No. 7/2009 dated 22.10.2009, and the said action cannot result in the levy of tax on remittances to non-residents retrospectively. 14.12 It was further submitted that the impugned amendment, in the garb of a clarification, is not merely clarificatory in nature, but it brings a substantive change in the existing law. An Explanation cannot enlarge the scope of the original section, but only makes the meaning clear beyond dispute. Reliance was placed on M.P. CEMENT MANUFACTURERS' ASSN. . STATE OF MP, (2004) 2 SCC 249. III CONTENTIONS OF THE RESPONDENT: 15. Per contra, Sri E.I. Sanmathi, Learned Senior Standing Counsel for the Respondent submitted that the order dated 16.03.2009 passed by this Court is to be reviewed and revised in light of the amendment brought in Section 9 by the Finance Act, 2010. The Learned Senior Standing Counsel further submitted that the decision laid down by the Supreme Court in ENGINEERING ANALYSIS CENTRE OF EXCELLENCE (P) LTD.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Petitioner. Since Appellant-Petitioner's rights are not violated directly or substantially by the impugned amendment, the writ petition is liable to be dismissed. Reliance was placed on SEDCO FOREX INTERNATIONAL DRILL INC. V. CIT (2005) TAXMAN 352 (SC) where it was held that Explanation to a statutory provision may clear the ambiguity in the main provision or can add to and widen the scope of the main section. But if it changes the law, it is not presumed to be retrospective, irrespective of the fact that the phrase used is 'it is declared' or 'for the removal of doubts'. It was submitted that in the present case, no such change was made to law but only clarified the position that the 'source rule' applies in the main provision. 15.5 Learned Senior Standing Counsel submitted that the charge was created u/s 9(1) of the Act r/s. 4 and 5. The charge u/s 9(1)(vii) was always present and was never altered. The conditions in the Explanation in Impugned Amendment do not apply when giving effect to the charging provision of Section 9(1)(vii). It was contended that the provision in its original sense did not impose the twin conditions as set out in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LT....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :- (vii) income by way of fees for technical services payable by- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 194LC) or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force... Explanation 2.-For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has- (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India. ARTICLE 12 - Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State... 4. For purposes of this Article, "fees for included services....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. Explanation to Section 9(2) provides that income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India, or the non-resident has rendered services in India. Section 195 states that any person responsible for paying to a non-resident, not being a company, or to a foreign company shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Article 12 of the India-USA DTAA provides the taxing rights of payment of Royalties and Fees for Technical Services (FTS) to the other Contracting State. Clause (4) provides as to what constitutes 'fees for technical services.' 20. Section 9 as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 9(1)(vii) requires a nexus between the services rendered by the non-resident in India, and the income generated from such services. The Court answered as follows: 90. Section 9(1)(vii)(c) of the Act states that: "9. (1)(vii)(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:" (emphasis supplied) Reading the provision in its plain sense, it can be seen that it requires two conditions to be met-the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilised in India, to be taxable in India. In the present case, both these conditions have not been satisfied simultaneously, therefore, excluding this income from the ambit of taxation in India. Thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be a part of a business or profession carried on by such person in India. The petitioners in the present case have provided services to persons resident i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... person in India". It is evident that Section 9(1)(vii), read in its plain, same envisages the fulfilment of two conditions: services, which are source of income sought to be taxed in India must be, (i) utilised in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously. 95. The provisions of Section 9(1)(vii) of the Act are plain and capable of being given a meaning. There, therefore, may not be any reason not to give full effect thereto. However, even in relation to such income, the provisions of Article 7 of DTAA would be applicable, as services rendered outside India would have nothing to do with permanent establishment in India. Thus, if any services have been rendered by the head office of the appellant outside India, only because they were connected with permanent establishment (sic). Even in relation thereto, principle of apportionment shall apply." 24. Thus, as per the Supreme Court, Section 9(1)(vii)(c) required the fulfillment of twin conditions in order for the income to be chargeable to tax: the services must be: (i) rendered through a business or profession in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... included in the total income of the non-resident; whether or not the non-resident has a residence or business or business connection in India.' The plain reading of the said provision suggests that criterion of residence, place of business, or business connection of a non-resident in India has been done away with for fastening tax liability. However, the criteria of rendering service in India and the utilization of the service in India as laid down by the Supreme Court in Ishikawajma's case to attract tax liability u/s 9(1)(vii) remains untouched and unaffected by the explanation to Section 9(2). When the purport of the explanation to Section 9(2) is plain in its meaning, it is unnecessary and impermissible to refer to the Memorandum explaining the Finance Bill 2007. Therefore, it is explicit from the reading of Section 9(1)(vii)(c) and explanation to Section 9(2) that the ratio laid down by the Supreme Court in Ishikawajma's case still holds the field." 28. It is contended by the Learned Senior Counsel for the Appellant-Petitioner that the decision in ISHIKAWAJIMAHARIMA HEAVY INDUSTRIES LTD. (SUPRA) is applicable to the facts in the present case in respect of income n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rst. 32. As rightly contended by the Counsel for Appellant-Petitioner, a clarificatory provision using the phrase 'for the removal of doubts' needs to be read prospectively, when in effect alters or broadens the scope of taxing statute. In M.M. AQUA TECHNOLOGIES LTD. V. CIT, (2021) 19 SCC 816, it was held as follows: "19.2. Second, a retrospective provision in a Tax Act which is "for the removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. This was stated in Sedco Forex International Drill. Inc. v. CIT [Sedco Forex International Drill. Inc. v. CIT, (2005) 12 SCC 717] as follows : (SCC pp. 724-25, paras 17-19) "17. As was affirmed by this Court in Goslino Mario [CIT v. Goslino Mario, (2000) 10 SCC 165] a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication. (See also Reliance Jute & Industries Ltd. v. CIT [Reliance Jute & Industries Ltd. v. CIT, (1980) 1 SCC 139: 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the pu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the retrospective application of a mere clarification. 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. It is well settled that retrospective amendments cannot impose a tax liability on the Assessee. In UNION OF INDIA V. MARTIN LOTTERY AGENCIES LTD. (2009) 12 SCC 209, the Supreme Court held that an Explanation clause, which appears to be a charging provision and widens the taxing net, cannot be held to be retrospective in operation on the premise that it is clarificatory or declaratory in nature. Relevant paragraphs are as follows: "33. The Explanation so read appears to be a charging provision. It states about taxing need. It can be termed to be a sui generis tax. If it is a different kind of tax, the same may be held to be running contrary to the ordinary concept of service tax. It may, thus, be held to be a stand alone clause. A constitutional question may have to be raised and answered as to whether the taxing power can be segregated. If by reason of the said Explanation, the taxing net has been widened, it can....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. The phrase 'business or profession carried on by such person in India' still holds the interpretation as laid down in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. (SUPRA) i.e., requiring the condition of the service to be rendered in India. The decision of this Court dated 16.03.2009 interpreted that the operation of the Finance Act, 2007 does not affect the interpretation of Section 9 as laid down in ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. (SUPRA), we do not have any hesitation to hold that the impugned amendment does not have any effect on the interpretation of Section 9 as per the ISHIKAWAJMA Case. 37. Even if it were to be construed that the impugned amendment is valid and alters the interpretation of Section 9, Article 12(4) of the India-USA DTAA provides that the fees for technical services is paid for the services rendered and not utilised. Following the settled principle of law as laid down in Section 90(2) of the Act, when there is a possibility of two interpretations of domestic law i.e., the Income Tax Act, 1961 vis-&....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt assessees. This fortuitous circumstance cannot take away the vested rights of the assessees at hand." 11. The reasoning of the Gauhati High Court was expressly affirmed by this Court in CIT v. Goslino Mario [(2000) 10 SCC 165 : (2000) 241 ITR 312] . These decisions are thus authorities for the proposition that the 1983 Explanation expressly introduced with effect from a particular date would not effect the earlier assessment years. 13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificatory or that it removed whatever ambiguity there was in Section 9(1)(ii) of the Act, it did not operate in respect of periods which were prior to 1-4-1979. It was held that since the Explanation came into force from 1-4-1979, it could not be relied on for any purpose for an anterior period. 17. As was affirmed by this Court in Goslino Mario [(2000) ....