In the next few posts, I intend to discuss several aspects of the ruling of the Mumbai Bench of the ITAT in Linklaters LLP v. ITO. In this post, I will look at the issues in relation to Section 9; and will look at the interpretation of the Indo-UK DTAA in subsequent posts. The questions before the Tribunal pertained essentially to the taxability of services rendered by Linklaters outside
, in respect of projects in India . India
The factual matrix is reminiscent of the decision of the Bombay High Court in Clifford Chance which was decided in favour of the assessee applying the Ishikawajima render + utilize formula. In Linklaters, on the basis of the retrospective amendment to Section 9, the issue was decided against the assessee. The reasoning is broadly similar to that adopted in the recent judgment in Ashapur Minichem v. ADIT. In an earlier post on Ashapur Minichem, I had submitted that while the holding of the Tribunal in correct, the specific observation that territorial nexus is relevant only for territorial systems required some more consideration. On a reading of Ashapur along with Linklaters, it would appear that the issue is perhaps merely one of terminology – the Tribunal seems to have in mind a narrower idea of territorial nexus, when it says that such form of nexus is relevant only in territorial systems. On the other hand, I was referring to a broader idea of nexus, and arguing that nexus is an essential even in source-based taxation as a matter of constitutional law. If it is the narrower, tight reading of nexus which is kept in mind, then the Tribunal’s observations are correct – as a matter of constitutional law, what matters is the existence and not the degree of nexus. Thus, if by nexus one means to a strict understanding of nexus, then that is not a prerequisite in non-territorial systems. Perhaps, it is this idea of nexus which the Tribunal in Ashapur had in mind.
In any event, coming back to the issue in Linklaters, as a matter of the text, the point is (to my mind at least) virtually unarguable – the retrospective amendment is as clear as it can be on the point that the Ishikawajima formula applied in Clifford Chance is no longer good law. The only argument might be on the basis of the constitutional validity of the amendment; but that was clearly not an argument which could be taken before the Tribunal. Perhaps because of this, counsel appearing on behalf of the assessee in Linklaters took the line of argument that Clifford Chance governed the issue insofar as the Tribunal was concerned; and the question of whether the decisions in Ishikawajima and Clifford Chance were nullified could only be gone into by the High Court. This argument is, of course, untenable as a matter of law; and the Tribunal correctly negated the argument. The Tribunal held, “the entire fees for professional services earned by the assessee, in connection with the projects in
and which is thus sourced from India , is taxable under the domestic law…” With Section 9 on the statute books as it stands at present (with the retrospective Explanations), there can hardly be any doubt about the correctness of the Tribunal’s reasoning on this point. In subsequent posts, we will look at the treaty-related aspects of the decision in Linklaters, where too the Tribunal has laid down some important propositions. India