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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Is your team working on analysing the impact of this judgement? This is big news considering the amount of work that the foreign firms have done since the assessment year in question in this judgment (plus the work done since the retrospective effective date of the amendment). I would be delighted if you can please let us have some comments from a tax expert on the effect of this judgment on work done post the retrospective effective date of the amendment by foreign firms on india related matters?
Fellow lawyers, I would be delighted to know you comments as well.
Also, "rates [that] would have been charged by the Indian lawyers for similar services"-isn't this leaving a big loophole. Arguably, charges by Indian lawyers are at the lower end of the spectrum as compared to EP lawyers.
The young, educated and talented lot would rather suck up to goras than to hindus (familiarity - of color - breeding contempt)... at least the money is in dollar/pound whatever terms..
The BJP/RSS etc have driven the term "nationalist pride" to dirt... the Congress has amassed its own wealth and disillusioned the young.
Only when the gifted young ones get into politics and governance will such seemingly paradoxical questions become more comprehensible. Else, the motto remains the same: to each his own. Make money. This way or that.
Amen...
www.deccanherald.com/content/82369/centre-move-sc-over-entry.html
finally the government gets moving. the SC is likely to take less time than the high courts (at least not 15 years like the ashurst case!).
this is an interesting development that comes before cameron's visit. i had said earlier that my sources have told me that something big is going to happen this year.
On a serious yet profound note, the problem which many not so 'well bred' lawyers lack is the habit of reading a sentence more than once before releasing it. You should stick to the following rules:
1) Please read your email/drafts more than once;
2) Follow Geoffrey Boycott's rule - even his mum should be able to decipher what you are trying to say - goras call it 'grandmother's rule'; amd
3) Ensure that it reads well. You will get better with time provided a conscious effort is put into improving one's English. Remember Jetmalani can't speak the Queen's English but he earns more than the biggest corporate law firm in India which recruits good pedigree slave laborers.
And yes, please forgive my lack of using punctuation marks. You may use '"""".,;;'' wherever you want in this post.
The Rasta
Please see the below published earlier today:
www.legallyindia.com/201007201115/Tax/how-linklaters-tax-ruling-affects-foreign-professionals-wide-ramifications-questionable-more-litigation-certain
I agree that it LOOKS hypocritical. Now before I reply, I want to declare that I actually support the presence of foreign law firms in India (not unrestricted access but a structure that provides them access on a case by case basis).
I think that it is no coincidence that this ruling comes closely on the heels of the writ petitions that will be served to the 31 international law firms.
Those writ petitions were for firms which do India work by coming down to India and setting up back offices there. But how do the authorities go after those law firms which act on transactions involving Indian law but which DO NOT have a presence in India?
You tax whatever they earn from India.
However, it is not clear whether this ruling applies only to international law firms which advise on Indian law or whether it also applies to say international law firms advising Indian companies on aspects of foreign law.
Any answers to that one?
However, if theoretically a foreign law firm advised on Indian law, it would also be taxable under the ruling of course.
Best regards,
Kian
ROTFLMAO...what a joke the ruling is!! the sooner foreign law firms come in the better
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