The Karnataka High Court has allowed a batch of income-tax appeals and a connected writ petition concerning the taxability of payments made to non-resident entities for technical services rendered outside India. 

The Bench of Justice D.K. Singh and Justice T.M. Nadaf held that the retrospective operation of the Finance Act, 2010 amendment to Section 9 of the Income Tax Act, 1961 could not be used to create a fresh tax liability for past transactions that were not taxable under the law as it stood when the payments were made.

The assessee had entered into contracts dated September 20, 1995 with Raytheon Ebasco Overseas Ltd. (REOL), Badger Energy Inc. (BEI) and Energy Overseas International Inc. for various offshore and engineering-related services. On March 31, 1996, tax of Rs.20,18,071 was deducted while crediting part of the payments to REOL.

Buy Now: 80+ Income Tax Judgments | E-Magazine July 2026

The Income Tax Department subsequently treated the payments as taxable fees for technical services and raised substantial demands under Section 201(1) of the Income Tax Act. For Assessment Year 1996-97, the original demand of Rs.1,64,89,026 was later rectified to Rs.1,86,32,311. For Assessment Year 1997-98, a demand of Rs.15,22,95,395 was raised, followed by rectification proceedings.

The Commissioner of Income Tax (Appeals) dismissed the assessee’s challenge and held that Section 195 imposed an obligation to deduct tax on payments to a non-resident. The appellate authority also concluded that because the services were utilised in India, the fees for technical services were deemed to accrue or arise in India under Section 9(1)(vii).

The Income Tax Appellate Tribunal, Bangalore, subsequently dismissed the appeals and held that the payments represented fees for technical services taxable under Section 9(1)(vii) as well as Article 12(4) of the India-USA DTAA.

A major development occurred while the appeals were pending. In Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income Tax, the Supreme Court interpreted Section 9 and held that, for fees for technical services to be taxable in India, the services giving rise to the income had to be both rendered in India and utilised in India.

Applying that principle, a Coordinate Bench of the Karnataka High Court on March 16, 2009 partly allowed the assessee’s appeals and held that the assessee was entitled to a refund of tax relating to payments made to REOL for technical services. The Court held that the twin requirements concerning rendition and utilisation of services continued to apply despite the Finance Act, 2007 amendment.

The Department challenged the decision before the Supreme Court. During the pendency of the proceedings, Parliament enacted the Finance Act, 2010, further amending Section 9 with retrospective effect from June 1, 1976. The Supreme Court disposed of the Special Leave Petition while granting liberty to the Department to seek review before the High Court in view of the retrospective amendments.

The Finance Act, 2010 inserted an Explanation to Section 9(2), declaring that income of a non-resident would be deemed to accrue or arise in India under Section 9(1)(v), (vi) or (vii), irrespective of whether the non-resident had a residence, place of business or business connection in India, or whether the non-resident had rendered services in India.

The High Court noted that the amendment effectively sought to expand the tax net so that technical-service income could become taxable on the basis of utilisation in India even when the underlying services were performed outside India. According to the Court’s analysis, the amendment sought to neutralise the requirement of rendition of services in India that had formed part of the Supreme Court’s Ishikawajima-Harima interpretation.

The central questions before the High Court were whether its earlier judgment of March 16, 2009 was liable to be reversed or modified because of the Finance Act, 2010 amendment, and whether retrospective application of that amendment from June 1, 1976 was unconstitutional and legally sustainable.

The assessee argued that the amendment could not retrospectively impose a withholding obligation for a period when the law, as interpreted by the Supreme Court, required both rendition and utilisation of services in India. It was also argued that a subsequent amendment could not compel an assessee to perform an impossible obligation or retrospectively create a TDS liability that did not exist when the payments were made.

The Department, on the other hand, maintained that the charge under Section 9(1)(vii) had always existed and that the Finance Act, 2010 merely clarified the existing law. It relied, among other things, on the source rule and the Supreme Court’s decision in GVK Industries Ltd. v. ITO to contend that payments made by an Indian company for services performed outside India could nevertheless have a sufficient nexus with India.

The Division Bench rejected the attempt to treat the amendment as a mere clarification for retrospective purposes.

The Court relied on the Supreme Court’s decisions in M.M. Aqua Technologies Ltd. v. CIT and Sedco Forex International Drill Inc. v. CIT, which establish that an Explanation described as being for the “removal of doubts” cannot automatically be treated as retrospective if it changes or enlarges the law as it previously stood.

The High Court held that although the Finance Act, 2010 amendment was expressly stated to operate from June 1, 1976, its retrospective operation could not be sustained where it effectively broadened the scope of the taxing provision.

Significantly, the Court observed that the benefits available to the assessee under the law prevailing before the amendment could not be taken away retrospectively through what was described as a clarification. A provision introduced under the guise of clarification could not create a fresh charge of tax or impose a new tax liability on a transaction that was not covered by the provision at the relevant time.

The Court went further and held that the legislative amendments had the effect of creating fresh charges on non-residents under Section 9(1)(vii), thereby going against the interpretation adopted in Ishikawajima-Harima and the Karnataka High Court’s earlier decision dated March 16, 2009.

According to the Bench, the original Section 9(1)(vii) could not be widened through an Explanation retrospectively. The Court noted that the relevant statutory language continued to require interpretation in accordance with the principles laid down in Ishikawajima-Harima. It therefore held that the Finance Act, 2010 amendment did not retrospectively alter that interpretation.

The Court also noted that the Finance Act, 2007 had already expanded the tax net by removing the requirement of a residence, place of business or business connection in India. The Finance Act, 2010 went further by seeking to cover non-residents who did not render the services in India. The Bench viewed this as a further widening of the charging provision and, consequently, a fresh levy rather than a simple clarification.

The High Court additionally examined Article 12(4) of the India-USA DTAA. It held that even assuming the amendment were valid and altered the domestic-law position, the treaty provisions and Section 90(2) required the interpretation more beneficial to the assessee to be followed where two interpretations were possible.

The Court concluded that the impugned amendment, insofar as it widened the scope of taxability beyond the treaty framework, was contrary to the India-USA DTAA and settled principles governing treaty interpretation.

The Court relied on Sedco Forex for the proposition that an amendment cannot retrospectively affect vested rights merely because the assessment remained pending when the amendment came into force.

The Bench therefore distinguished between a genuinely clarificatory amendment, which may explain an existing ambiguity, and an amendment that substantively enlarges the scope of taxation. In the latter situation, merely describing the provision as declaratory or as being enacted “for removal of doubts” does not justify retrospective application.

The Karnataka High Court allowed all the income-tax appeals as well as the connected writ petition. The Court read down the Finance Act, 2010 amendment so that it would operate prospectively rather than retrospectively from June 1, 1976. 

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Erection Services Were Not Liable To Service Tax Prior To 10 September 2004: CESTAT