In a significant judgment on 19 December, a division bench of Bombay High Court in Clifford Chance v DCIT held that foreign law firms are not liable to pay tax in India, even if they act for multinational corporations with operations in India. Foreign law firms are only expected to pay taxes in those countries from which they operate. The court, while interpreting the taxability of foreign law firms as non-resident entities which charge fees for services rendered to Indian companies, strongly defended the doctrine of territorial nexus as an implicit constraint on the Indian government’s jurisdiction to tax non-resident income. The court decided that the payment of fees for services by a resident to a non-resident would not always come within the purview of section 9(1)(vii) of the Income Tax Act, 1961 (ITA).
The appellant, Clifford Chance in London, advised several multinational corporations interested in four major power projects in India. Their clients included GEC Alsthom Group and Électricité de France, as well as Ispat Industries, which was the only Indian company involved. Clifford Chance bills its clients for these services by ensuring that each partner and employee of the firm maintains detailed time sheets, recording their hours of work with clients. These time sheets separately show the time spent on work in India and outside India. The time is multiplied by the hourly billing rates applicable to each respective partner or employee, as specified in the terms of appointment between the appellant and the clients.
In the case of the Bhadravati Power Project and Vizag Power Project, the total fee calculated was divided among the different participants of the joint venture in proportion to their respective shares in the projects.
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The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@vsnl.com. Readers should not act on the basis of this information without seeking professional legal advice.
