In Re WorleyParsons Services Pty. Ltd (AAR)

Ishikawajima Harima (SC) doubted / distinguished

Where the assessee, an Australian company, entered into an agreement with Reliance and it was agreed that the consideration thereof constituted “royalty” but the assessee claimed (i) that the said royalty was “effectively connected” with a permanent establishment (PE) and consequently assessable as business profits, (ii) that the portion of such “profits” as was not “attributable” to the PE was not assessable to tax in India and (iii) that even otherwise the royalty was not assessable to tax in view of Ishikawakima 288 ITR 408 (SC) where it was held that fees for technical services (and royalty) was not assessable to tax u/s 9(1)(vii) (9(1)(vi)) if it was not rendered and utilized in India, HELD:

(i) In order to be “effectively connected”, the PE should be engaged in the performance of royalty generating services. There must be a real and intimate connection and clear co-relation between the services giving rise to royalty and the PE. A connection between the PE and the contract is not enough;

(ii) On facts, as the bulk of the work was done outside India, the royalty was not “effectively connected” with the PE so as to qualify as business income. The fact that the said work was done based on inputs from India and the end-product was delivered and utilized in India was not relevant as that was pursuant to a different agreement;

(iii) Ishikawajima cannot be read to mean that the mere existence of a PE is enough to trigger the exclusion clause and cause royalty income to be assessed as business income. It does, however, imply that there may be situations where though the royalty may be “effectively connected” with the PE, still it may not be “attributable” to the PE;

(iv) It is not clear why in Ishikawajima reference has been made to s. 9(1) (vii) (c) instead of s. 9 (1) (vii) (b) even though the two deal with different situations and why it was stated that s. 9 (1)(vii) (c) requires that the services have to be rendered as well as utilized in India in order to be taxable in India even though the word “rendered” is not to be found even in the inapplicable clause (c). Though it is difficult to find an answer, the dicta has to be respected without invoking the doctrine of per incuriam as far as possible;

(v) Further, though in Ishikawajima it was observed that “the legal fiction created by s.9 should be construed having regard to the object which it seeks to achieve”, it was not indicated as to what is the object of the said provision that deters the legal fiction being carried to the extent specifically provided by the language of the section. The object of s. 9(1) is to deem certain incomes as accruing or arising in India so as to widen the net of taxation and this object will not be defeated if the legal fiction enacted by s. 9 is taken to its logical extent (other judgements of SC referred to where it was held that a fiction has to be given full effect);

(vi) Though in Ishikawajima it was held that the location of the source of income within India would not render sufficient nexus to tax the income from that source, this cannot be construed to mean that the age-old test of source of income should be eschewed altogether while considering territorial nexus (other judgements of SC on territorial nexus referred to);

(vii) There is a doubt why Ishikawajima proceeded on the basis that the offshore services performed by the contractor executing a turn key project as a step-in-aid to the execution of the project and deploying those services in India had no real connection to the Indian territory even though it gave rise to a ‘live link’ with the Indian territory and why it was felt that the income arising therefrom did not accrue or arise in India, not to speak of deemed accrual;

(viii) A decision not expressed and accompanied by reasons and not proceeded on a conscious consideration of issue cannot be deemed to be a law having binding effect as is contemplated under Art.141 of the Constitution. That which has escaped in the judgment is not the ratio decidendi;

(ix) Though the AAR has to give full effect to the law laid down in Ishikawajima vis-à-vis s. 9 (1) (vii) and territorial nexus, on facts, there was territorial nexus and a “live link” because a part of the services were rendered in India. The extent and magnitude of services is not decisive.

See Also: Clifford Chance (Bom), Siemens AG (Bom) and Taxability of royalties and fees.