The issue for considera-tion is whether the inc-ome received by a non-resi-dent for services performed outside India is taxable in India or not.
In this context the Supreme Court in case of ISHIKAWAJIMA (288 ITR 408) observed that territorial nexus for the purpose of determining the tax liability is an internationally accepted principle.
Inviting attention to international covenants and conventions, the apex court it was held that sufficient territorial nexus between rend-ition of services and territ-ory of India is necessary to make the income taxable in India. In an earlier case of Electronic Corporation also the Hon’ble Supreme Court had observed “It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India”.
The Court in ISHIKAWAJIMA’s case held that for taxing non-resident for the services rendered by it, the plain position in law is that “it requires two conditions to be met – the services which are the source of the income that is sought to be taxed has to be rendered in India, as well as utilized in India, to be taxable in India”.
Recently, in Worley Parsons case pronounced by the Authority for Advance Ruling on 30th March,2009 the said issue was considered at length.
In this case the Australian company entered into agreements with Reliance for providing services which were primarily and to the extent of about 80 per cent carried out in Australia.
The Australian company contended that the payment to be received by it, if taken as royalty, would not be liable to tax in India because the royalty was payable for services rendered outside India. Therefore, following the principle laid down in ISHIKAWAJIMA’s case, there will be no tax on such royalty income.
If the ratio laid down by Hon’ble Supreme Court was followed in Worley’s case, the activities rendered outside
India could not be brought to tax in India. Although, the Authority itself had observed that “we are by duty bound to give effect to the law -- be it the ratio decidendi of the judgment or the obiter dicta of the Supreme Court.” However, surprisingly, the Authority instead of accepting the plain and simple mandate of Supreme Court went on to find extremely delicate technical distinctions.
The Authority held that “we are unable to hold that the territorial nexus is lacking in the present case just as in the case of ISHIKAWAJIMA. This is not a case where the entirety of source services were perfor-med in a foreign country which was the base of the contractor. Even on the showing of the applicant, about 20 per cent of the services were performed in India”. The Authority found that in this case the territorial nexus is real and identifiable.
If the logic and rationale of the Authority is to be accepted, then even preliminary activities in India would establish the required territorial nexus of all overseas activities.
With utmost respect, it is submitted that the effect of ISHIKAWAJIMA’s case has been seriously mellowed down by the Authority. It is very difficult to comprehend that when any foreign company takes up a contract in India, there will be no activities in India at all. If even a minor or preliminary activity in India would establish territorial nexus with India, the principle laid down in ISHIKAWAJIMA’s case will be rendered otiose.
Such decisions as given in Worley’s case are bound to send wrong signals to the foreign investors in India. The interpretation given by the Authority may be considered as an exceptionally brilliant technical exercise to bypass the ratio laid down by Supreme Court, but whom does it help? As the Hon’ble apex court had observed in Azadi Bachao’s case (263 ITR 706), tax concessions are allowed in bilateral treaties to encourage mutual trade and investment, and this aspect of the matter cannot be lost sight of while interpreting the law.
The author is a Partner in S S Kothari Mehta & Co email@example.com