Authority: High Court of Karnataka, Bengaluru

Order Date: 6 August 2026

Case Overview

  • Parties: Appellant‑Petitioner – JINDAL THERMAL POWER COMPANY LIMITED (now JSW ENERGY LIMITED); Respondents – Deputy Commissioner of Income Tax (TDS), Bangalore and Union of India, Ministry of Finance.
  • Contractual Background: On 20 September 1995 the appellant entered into offshore equipment‑supply and related services contracts with Raytheon Ebasco Overseas Ltd. (REOL), Badger Energy Inc. (BEI) and Energy Overseas International Inc. (EOI).
  • Tax Deduction & Assessments: On 31 March 1996 the appellant deducted TDS of Rs 20,18,071. Subsequent assessments were raised for AY 1996‑97 (demand Rs 1,64,89,026) and AY 1997‑98 (demand Rs 15,22,95,395). The orders were later rectified to Rs 1,86,32,311 and other amounts.
  • Initial Appeals: Appeals under Section 260A were filed in ITA Nos 3022/2005, 3023/2005 and 3025/2005. The ITAT order dated 18 May 2005 dismissed the appeals, holding that fees for technical services were taxable under Section 9(1)(vii) of the Income‑Tax Act and DTAA Article 12(4)(b).
  • Supreme Court Precedent: Ishikawajima‑Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai (2007) required both (i) services rendered in India and (ii) services utilised in India for taxability under Section 9(1)(vii).
  • Legislative Amendments: Finance Act 2007 (effective 1 June 2007) added an explanatory clause to Section 9(2) stating that income deemed to accrue in India shall be included in the non‑resident’s total income “whether or not the non‑resident has a residence or place of business or business connection in India.”
  • Further Amendment: Finance Act 2010 (effective retrospectively from 1 June 1976) expanded the explanation to also state that inclusion applies “whether or not … the non‑resident has rendered services in India.”
  • Writ Petition: W.P. 192/2011 was filed under Article 226 challenging the constitutionality and retrospective effect of the Finance Act 2010 amendment.
  • Contentions: The appellant argued that the amendments are merely clarificatory, should be read prospectively, and cannot overturn the Ishikawajima ratio. It also contended that retrospective tax liability violates constitutional principles and vested rights.
  • Respondent’s Position: The Income‑Tax Department argued that the amendment changes the scope of Section 9, making the appellant liable to deduct tax on the total income of the non‑resident and that the earlier judgment should be reviewed.

Statutory Provisions Discussed

  • Section 4 – Charge of income‑tax.
  • Section 5 – Scope of total income for residents and non‑residents.
  • Section 9(1)(vii) – Fees for technical services deemed to accrue or arise in India.
  • Section 9(2) – Explanatory clause added by Finance Acts 2007 and 2010.
  • Section 195 – Deduction of tax at source.
  • DTAA Article 12 – Royalties and fees for technical services.

Final Outcome

  • The coordinate bench of Justices D K Singh and T M Nadaf allowed all three ITA appeals and the writ petition.
  • It held that the Finance Act 2010 amendment to Section 9(2) must be interpreted prospectively; its retrospective operation from 1 June 1976 is unconstitutional.
  • The appellant‑petitioner is entitled to a refund of tax deducted on the payments made to REOL for technical services.
  • The ITAT orders are restored to the court’s file; the Department’s Review Petitions (R.P. 317‑319/2010) are dismissed.
  • All pending interlocutory applications, if any, are disposed of.

Topics: Tax Law; Retrospective Legislation; Income‑Tax Appeals