The Income Tax department has sought the dismissal of a plea filed by tea producer McLeod Russelagainst state's powers to tax transactions retrospectively.

The department maintains that the state has powers to tax with retrospective effect and the amendments introduced in the Finance Bill 2012 were clarifications, and not arbitrary.

McLeod Russel is pleading for dismissal of 36-crore tax claim for its purchase of Borelli Tea Holding fromWilliamson Tea Holdings in 2005. The department maintains that McLeod should have deducted tax.

The tax department in its reply filed with the Calcutta HC said that the amendments were done to clarify the government's position after the Supreme Court ruled against the Tax Department in its $2 billion tax claims on mobile phone operator Vodafone for purchasing the Indian unit of Hong Kong's Hutchison for $11 billion.

'A clarificatory amendment of this nature will have retrospective effect and therefore, the amending Act also will be part of the existing law,'' the department said in its affidavit. "Legislature is only exercising its inherent constituent power to clarify as to what it always meant and what it always intended.''

The department's argument in the context of Finance Minister P. Chidambaram appointing a panel headed by Parthasarathi Shome raises doubts about which was the government will swing. In 2005, the transaction was valued at around 165 crore and the tax department issued a show cause notice for alleged failure to deduct tax at source, which was followed by a tax demand.

"Section 195 of income-tax requires any person to deduct tax at source before making payments to a non-resident if the income of such non-resident is chargeable to tax in India." the department said in its reply.

"A non-resident person is also required to deduct tax at source before making payments to another non-resident, if the payment represents income of the payee non-resident, chargeable to tax in India." (Economic Times)