Ashapur Minichem: The impact of the Finance Act, 2010 on Ishikawajima

The Supreme Court in Ishikawajima-Harima had held that for income to be taxed in India u/s 9(1)(vii) of the Income Tax Act, 1961, services had to be both rendered and utilised in India. The correctness of the proposition a a matter of principle had been doubted by the AAR (which nevertheless followed the Supreme Court); and the Finance Act, 2009 sought to legislatively nullify the decision. However, as the Bombay High Court held in Clifford Chance, Ishikawajima continued to be good law despite the 2009 Amendment. However, the Finance Act, 2010 finally laid rest to the questions over the applicability of Ishikawajima. Earlier posts on this issue have been discussed here, here, here, here, here.

In what appears to be the first decision on the 2010 amendment, the Mumbai Bench of the Income Tax Appellate Tribunal in Ashapur Minichem v. ADIT has confirmed that Ishikawajima and Clifford Chance are no longer good law. As a pure matter of interpretation of the 2010 Amendment, this is undoubtedly the correct position to take. As long as the retrospective amendment to the Explanation to Section 9 is unchallenged, judicial authorities will be bound to consider and apply the explanation. That explanation makes it abundantly clear that the render + utilise formula is no longer good law. The Tribunal decision (in paragraph 9) reaches this conclusion with clear reasoning. However, the Tribunal then goes ahead and makes some observations which appear to go beyond the basic interpretation of Section 9. In paragraph 10, for instance, the Tribunal held that “the concept of territorial nexus, for the purpose of determining tax liability, is relevant only for a territorial tax system in which taxability in a tax jurisdiction is confined to the income earner within its borders…” 

The Tribunal’s observations can be read as meaning that requirements for nexus are not necessary in every case; that nexus requirements are irrelevant in the case of source-based taxation. It is submitted that such a reading ought not to be preferred. Nexus stems as a matter of constitutional requirement – this can be confirmed by reference to Electronics Corporation. Of course, it cannot be denied that source rules can be used to fasten tax liability – however, even these source rules do have nexus requirements. For instance, income arising through the transfer of a capital asset situate in India is taxable u/s 9 – this is a source rule; the nexus is the situs of the capital asset. Every source rule under Section 9 can be traced to show some territorial nexus. While the Tribunal reached the correct conclusion on Section 9 that Ishikawajima is no longer good law (paragraph 9), its subsequent observations (paragraph 10) should not be taken to imply that there is no nexus requirement at all.