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Foreign firms to pay Indian Income Tax on work done outside India, ITAT tells Linklaters

A Mumbai Income Tax Appellate Tribunal (ITAT) has found that Linklaters should pay income tax in India on all India-related profits after applying a retrospective Finance Bill 2010 amendment to section 9(1) of the Income Tax Act, going against the latest decision in the Clifford Chance tax battle that is currently in the Indian Supreme Court.

The ITAT overruled an earlier tax tribunal's decision and upheld the original tax Assessing Officer's (AO) view that all of Linklaters' incomes related to India should be taxable resulting in 1995-1996 tax bill of Rs 2.12 crores to Linklaters, although all previous India-billings of Linklaters or other firms would also be subject to this decision.

A Linklaters spokesperson told Legally India: "We are reviewing the tribunal's decision and have no further comment at this stage."

Referring to the Ishikawajima Harima Heavy Industries Ltd. vs. DIT (288 ITR 408) case, the ITAT ruled:

"It is thus unambiguous that the judgment of Hon’ble Bombay High Court rests on the legal premises that, under section 9(1)(vii), “services, which are source of income sought to be taxed in India, must be (i) utilized in India; and (ii) rendered in India” and the conceptual premises that “territorial nexus for the purpose of determining the tax liability is an internationally accepted principle”.

"These legal premises, however, do no longer hold good in view of retrospective amendment w.e.f. 1st June 1976 in section 9 brought out by the Finance Act, 2010 […]"

"The conclusions arrived at by Their Lordships were thus entirely based on their reading of the scope of Section 9(1) of the Income Tax Act, but in view of the retrospective amendment in Explanation to Section 9(1), the scope of this provision does no longer permit the interpretation adopted by Their Lordships. The very conceptual foundation of Hon’ble Bombay High Court’s decision in the case of Clifford Chance (supra) ceases to hold good in law.  When the legal provisions considered in the judicial precedent, vis?à?vis the legal provisions prevalent when that precedent is sought to be applied, are not in pari materia, the judicial precedent cannot have precedence value.

"18. It is, therefore, free from any doubt that Hon’ble Bombay High Court’s judgment in the case of Clifford Chance is no longer good law, as there have been amendments in law in consonance with the school of thought discussed above and these amendment unambiguously negate the principle of territorial nexus which is the understructure of line of reasoning adopted by the Hon’ble Courts above.  It is no longer necessary that, in order to invite taxability under section 9(1)(vii) of the Act, the services must be rendered in the Indian tax jurisdiction  

"19. In view of the above discussions, we are of the considered view that the entire fees for professional services earned by the assessee, in connection with the projects in India and which is thus sourced from India, is taxable in India under the domestic law."

In the 1995-1996 tax year, Linklaters claimed it had billed only £691,190 based in India, according to the ITAT ruling, making a profit of £468,419.

However, the AO held that Linklaters' total taxable profit related to India should in fact be Rs 236,686,260 (£3.32m or Rs 23.7 crore), out of total amounts invoiced of Rs 25.8 crore (£3.62m).

According to the ruling, Linklaters had worked on 21 India-related matters in 1995-96, of which 15 mandates were for banks or financial institutions. Its instructions included GDR issues for Bajaj, Finolex, Sriram Enterprises and Usha Beltron, advising Dresdner Kleinwortbenson (as it was then known), Barclays Capital, HSBC Investment Bank and Lazard Brothers & Co respectively. The firm also advised Enron Power on an Indian power project and Denro Ispat on a Chandrapur coal project.

Permanent establishment under the Double Taxation Avoidance Agreement (DTAA) between India and the UK arises once services are rendered on the ground in India for at least 90 days, which the AO found Linklaters had done.

"It was submitted that the income of the PE [permanent establishment] is computed on the basis of actual man hours devoted in India to a particular client and charged at the rates would have been charged by the Indian lawyers for similar services," said the ITAT but ruled that the actual fees charged by Linklaters should be the amount that is subject to tax.

The latest ruling follows Clifford Chance's Bombay High Court decision last year, in which it decided that only the fees that the firm incurred directly in India should be taxable in India.

The Clifford Chance case is currently in the Supreme Court, which has requested the firm to supply more than 10-year-old billings to the court.

A Clifford Chance spokesperson told Legally India at the time: "The claim raises essentially the same issues as were raised in a case recently decided in our favour by the Bombay High Court. The Indian tax authorities are now appealing that decision but we have every expectation of prevailing."

Read Legally India's full analysis of the case by leading tax lawyers.

The case was first reported by ITAT Online and the ITAT ruling can be downloaded here.
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