Section 9(1)(vii) Finance Act 2010 Amendment Held Prospective, Not Retrospective - Upholds Territorial-Nexus Rule & Allows Refund for Offshore Technical Services : Karnataka HC

The Karnataka High Court has clarified that the Finance Act 2010 amendment to Section 9(1)(vii) of the Income-Tax Act cannot be applied retrospectively, thereby upholding the Supreme Court’s territorial-nexus test for fees for technical services and restoring the appellant-petitioner’s claim for tax refund.

Background & Facts

The Dispute

The appellant-petitioner, Jindal Thermal Power Company Limited (formerly Jindal Tractebel Power Company Ltd.), entered into three offshore contracts with Raytheon Ebasco Overseas Ltd. (REOL), Badger Energy Inc. (BEI) and Energy Overseas International Inc. (EOI) on 20 September 1995 for supply, engineering, transportation and erection services. The payments were for technical services rendered outside India but utilised by the appellant in India.

Key Facts

• 31 March 1996: The appellant deducted base tax of Rs 20,18,071 while crediting part of the payments to REOL.
• 23 January 1998: Assistant Commissioner of Income-Tax (TDS) raised a demand of Rs 1,64,89,026 for AY 1996-97 under Section 201(1).
• 17 February 1998: Separate demand of Rs 15,22,95,395 for AY 1997-98.
• 25 March 1998: The demand for AY 1996-97 was rectified to Rs 1,86,32,311 under Section 154.
• 19 May 1998: The demand for AY 1997-98 was rectified under Section 154.
• 21 September 1998: Appeal filed before the Commissioner of Income-Tax (Appeals) challenging both orders.
• 21 January 1999: CAIT dismissed the appeal, holding that Section 195 obliges tax deduction on payments to non-residents.
• 3 February 2005: ITAT Bangalore heard the appeals for AY 1996-97, 1997-98 and 1998-99.
• 18 May 2005: ITAT dismissed all appeals, holding the fees were chargeable under Section 9(1)(vii) and the India-USA DTAA.
• 16 March 2009: A coordinate bench of this Court partially allowed the appeals, granting a refund of tax on the payment to REOL and interpreting Section 9(1)(vii) in line with the Supreme Court’s Ishikawajima-Harima decision.
• 1 June 2007: Finance Act 2007 amended Section 9, adding Explanation 2 and giving it retrospective effect from 1 June 1976.
• 8 May 2010: Finance Act 2010 further amended Section 9(1)(vii) and Explanation 2, again with retrospective effect from 1 June 1976.
• 22 October 2009: CBDT circulars (No 23 dated 23 July 1969 and No 786 dated 7 February 2000) were withdrawn by Circular 7/2009.
• 12 July 2010 and 26 July 2010: Supreme Court disposed of SLP No. 25295/2009, allowing the Department to move a review petition.
• 24 July 2015: This Court allowed review petitions (R.P. 317-319/2010) and restored the ITAs to its file.
• 29 June 2026: The matter was heard and reserved for judgment.
• 6 August 2026: Judgment pronounced.

Procedural History

• 21 September 1998: Appeal filed before CAIT.
• 21 January 1999: CAIT dismissed the appeal.
• 3 February 2005: ITAT Bangalore heard the appeals.
• 18 May 2005: ITAT order dismissing the appeals.
• 16 March 2009: Coordinate bench of Karnataka HC partially allowed the appeals, granting tax refund.
• 12 July 2010 & 26 July 2010: Supreme Court orders in related SLP.
• 24 July 2015: Review petitions (R.P. 317-319/2010) allowed by this Court.
• 29 June 2026: Matter heard and reserved.
• 6 August 2026: Present judgment delivered.

The Parties' Positions

• Appellant-Petitioner (Jindal Thermal Power Co.) argued that the Finance Act 2010 amendment is merely clarificatory, cannot be applied retrospectively, and that the Supreme Court’s twin-condition test (services rendered and utilised in India) remains controlling. Consequently, the tax demand should be set aside and a refund granted.
• Respondent (Deputy Commissioner of Income Tax, Bangalore and Union of India) contended that the amendment creates a fresh taxing charge, is retrospective, and therefore the appellant-petitioner is liable to deduct tax under Section 195 for the payments made.

Relief Sought

The appellant-petitioner sought a declaration that the Finance Act 2010 amendment to Section 9(1)(vii) is prospective, setting aside the ITAT order dated 18 May 2005 and restoring the refund of tax deducted on the REOL payment. The respondent sought confirmation of the tax demand and dismissal of the refund claim.

The Legal Issue

Whether the amendment to Section 9(1)(vii) of the Income-Tax Act introduced by the Finance Act 2010 can be given retrospective effect to assessment years 1996-97, 1997-98 and 1998-99, thereby overturning the Supreme Court’s Ishikawajima-Harima territorial-nexus doctrine.

Arguments Presented

For the Appellant-Petitioner

• The amendment is a clarificatory explanation (the phrase “for removal of doubts”) and, as per M.M. Aqua Technologies Ltd. v. CIT and Sedco Forex International Drill Inc. v. CIT, a clarificatory provision cannot be read retrospectively if it alters the scope of the taxing provision.
• The Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. laid down the twin-condition test: services must be rendered in India and utilised in India. The offshore services in the present case were not rendered in India; therefore, the income is not chargeable.
• The Finance Act 2007 amendment, which added Explanation 2, did not disturb the twin-condition test; the coordinate bench’s 2009 decision remains valid.
• The appellant-petitioner is entitled to a refund of tax deducted under Section 195, as the demand was based on an erroneous interpretation of Section 9.

For the Respondent

• The Finance Act 2010 amendment expands the definition of taxable income under Section 9(1)(vii) and, being retrospective, can be applied to pending assessments.
• The amendment removes the requirement of a place of business or business connection, thereby justifying tax liability on the payments made.
• The Supreme Court’s Ishikawajima-Harima decision is distinguishable in view of the later amendment and the GVK Industries Ltd. v. ITO judgment, which broadened the source-rule analysis.
• The appellant-petitioner cannot claim a refund because the tax was lawfully deducted under Section 195 at the time of payment.

The Court's Analysis

The Court began by extracting the relevant statutory provisions - Sections 4, 5, 9(1)(vii), the Explanation to Section 9(2) and Section 195 - and the pertinent treaty provisions under Article 12 of the India-USA DTAA. It noted that the twin-condition test articulated in Ishikawajima-Harima requires that the services be both rendered and utilised in India for the income to be deemed to accrue or arise in India.

"Section 9(1)(vii)(c) clearly states ‘where the fees are payable in respect of services utilised in a business or profession carried on by such person in India’. Reading the provision in its plain sense, it can be seen that it requires two conditions - the services which are the source of the income that is sought to be taxed in India must be (i) rendered in India, and (ii) utilised in India."

The Court examined the legislative history. The Finance Act 2007 added Explanation 2, stating that income deemed to accrue or arise in India under clauses (v)-(vii) shall be included in the total income of the non-resident whether or not the non-resident has a residence or business connection in India. The Court held that this amendment did not abrogate the requirement that the services be rendered in India, as the coordinate bench’s 2009 decision expressly affirmed that the twin-condition test remained untouched.

Turning to the Finance Act 2010, the Court observed that the amendment introduced an additional clause in the Explanation, now requiring that the rendering of services also be considered. However, the Court emphasized that an explanation that adds a new condition is a charging provision, not a mere clarification. Following M.M. Aqua Technologies and Sedco Forex, the Court held that such a charging provision cannot be given retrospective effect merely because it is described as “for removal of doubts”.

The Court further relied on the principle that tax law applicable to a particular assessment year is the law in force at that time (Goslino Mario). Since the payments were made in 1995-96, the amendment of 2010 could not be applied to those assessment years. The Court also rejected the respondent’s reliance on GVK Industries as that case dealt with a different factual matrix involving a permanent establishment, which was not present here.

Consequently, the Court concluded that the Finance Act 2010 amendment must be read prospectively from 1 June 1976 and cannot be used to reopen or modify the settled judgments of the Supreme Court and the coordinate bench. The tax demands based on the pre-amendment law were therefore invalid, and the appellant-petitioner was entitled to a refund of the tax deducted.

The Verdict

All the appeals and the writ petition were allowed. The Court set aside the ITAT order dated 18 May 2005 and held that the Finance Act 2010 amendment to Section 9(1)(vii) is to be applied prospectively, not retrospectively. Accordingly, the appellant-petitioner’s right to a refund of tax deducted on the payment to REOL was restored, and the review petitions (R.P. 317-319/2010) were dismissed.

What This Means For Similar Cases

Retrospective Tax Amendments Must Be Prospective

• A legislative amendment that adds a new condition to a taxing provision is a charging provision and cannot be given retrospective effect merely because it is described as “for removal of doubts”.
• Practitioners must examine the effective date of the amendment and ensure that it does not prejudice assessments made under the earlier law.

Territorial Nexus Remains Controlling

• The Supreme Court’s twin-condition test (services rendered and utilised in India) continues to govern the taxability of fees for technical services under Section 9(1)(vii).
• Payments for services rendered outside India but merely utilised in India will not attract tax unless the legislature expressly removes the rendering-in-India requirement, which it has not done here.

Clarificatory Explanations Cannot Create New Liability

• Courts will treat explanations that expand the scope of a provision as prospective, preserving the vested rights of taxpayers.

• Tax advisors should advise clients that beneficial circulars enjoy retrospective effect, whereas oppressive circulars or explanatory amendments do not.

• Actionable takeaways:

  • Verify the date of amendment before relying on it for pending assessments.
  • Cite Ishikawajima-Harima when arguing the necessity of a rendering-in-India condition.
  • Distinguish between genuine clarifications and substantive changes to avoid adverse retrospective tax exposure.