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ITAT rejects tax department use of retrospective amendments in case of royalties
May, 31st 2012

In what is among the first of many legal battles over the controversial retrospective amendments to the income tax act, the Income Tax Appellate Tribunal has refused to accept the tax department's reliance on the restrospective amendments in the case of royalties.

The ITAT, in a judgement given on May 28 th, in a case involving B4U international Holdings, said that the reliance on the retrospective amendments did not apply, as the case was also covered by the tax treaty between India and the US. In such a case, the provisions which were beneficial to the taxpayer (the tax treaty) would have to be applied.

The case involved payments made to PanamSat USA for hiring of a transponder by the Mauritius-based assessee, who had an indian representative. The tax department claimed that the Mauritius company had a 'permanent establishment' in india and was thus subject to tax here. It also went on to argue that hire charges were royalties and tax should have been deducted on them at source before being paid to PanamSat USA.

Following earlier judgements which went against the tax department in other similar cases, the government amended the law on taxation of royalties earlier this year to nullify the adverse judgements, doing so retrospectively from 1976.

Following the amendments, the tax department used the changes to argue that B4U was in fact subject to tax. The ITAT argued that given the fact that PanamSat was a US-based company, the provisions of the Indo-US tax treaty were applicable.

It said, "Coming to the argument of [tax department] that the amendment to the Finance Act, 2012 changes the position, we find that there is no change in the DTAA between India and USA. Thus, the amendments have no affect on our decision." Under the income tax act, if DTAA provisions apply to the taxpayer and are more favourable, they supersede the IT Act.

The ITAT also said that since "payment [was] made from one non-resident to another non-resident outside India on the basis of contract executed outside India," the IT act could not apply because of the SC judgement in the Vodafone case.

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