Linklaters LLP: Territorial Nexus and International Tax Regime

In Ashapur Minichen ITAT Mumbai had confirmed that Ishikawajima-Harima ([2007] 288 ITR 408) does not continue to be good law in light of the retrospective amendment brought about by the Finance act, 2010.


In another case Linklaters LLP v. ITO the Mumbai ITAT has reiterated that the amendment made by the Finance Act, 2010 has negated the judgment in Ishikawajima. The important point though is that the court in Linklaters has stated that rendering of service in India is no more an essential ingredient for taxability of service in India u/s 9 of the IT Act, 1961. In other words the service can be taxed in India even if it is only “utilized” in India. However some of the observations in Linklaters can also be possibly interpreted to mean that “no territorial nexus” is required at all. For instance the court observes as under:

“It is fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems”- Para. 17

“ ………in consonance with the school of thought discussed above and these amendment unambiguously negate the principle of territorial nexus which is the understructure of the line of reasoning adopted by the honorable courts above”- Para. 18

An interesting point that emerges is again with regard to India’s compliance with the international tax regime. In Ishikawajima Harima the court had noted that territorial nexus (utilized+ rendered) is a well accepted international tax principle. The court had further noted that “having regard to the internationally accepted principle and DTAA, no extended meaning can be given to the words ‘income deemed to accrue and arise’ in India. Considering this observation and the subsequent ruling in Linklaters where the court holds that Ishikawajima Harima is not good law, it is submitted that the impugned amendment in the Finance Act, 2010 is against well accepted international principles. However, this is subject to an investigation whether at the first place the concept of territorial nexus as suggested in Ishikawajima Harima (utilized+rendered) is indeed a well accepted international tax principle.
India’s compliance with the international tax regime has been a matter of previous discussion on this blog here. A further analysis of linklaters and Ashapur is available on the legal developments blog here and here.