Mumbai, Jan 08: A foreign law firm cannot be taxed for the fees it has received for a project on Indian soil if it has rendered services outside the country, Bombay High Court has said in a recent decision.
Clifford Chance, a UK-based legal firm, had filed an
appeal against Income Tax Appellate Tribunal's (ITAT) decision
to tax its entire income arisen from service it had rendered
for four power projects in India.
Clifford was appointed as legal advisor for four projects
-- Bhadravati power project, Vizag power project, Ravva oil
and gas fields project and the Vemagiri power project in
1996-97.
Only the Bhadravati project had an Indian firm-- Ispat
Industries which was the JV partner for construction of the
power plant. The partners for the other projects were "not
resident" in the country.
Clifford was paid, on hourly basis, by its clients
outside India. It filed returns for the relevant period,
claiming that it earned Rs 5.08 crore from service rendered
in India.
However, Income Tax department took the view that its
entire income, arising out of its consultancy for the four
projects, was taxable. This income came to Rs 17.26 crore.
The company filed an appeal, but ITAT upheld the
department's stand.
In the High Court, Clifford's lawyer Harish Salve argued
that the firm had given the details of hourly consultancy,
provided to its clients, to the IT department. It showed the
places where this service was provided.
Salve argued that though the place where the legal advice
was used was India-- projects being in India-- this fact was
not relevant.
What was relevant for the purpose of income tax, he said,
was where the service (of consultancy) was provided.
If most consultancy was done in United Kingdom-- as the
documents showed-- then income from it can not be taxed in
India, he said.
The division bench of Justices S Radhakrishnan and V C
Daga held in the order last month that Clifford's stand was
correct, in view of the Double Taxation Avoidance Agreement
between India and UK, and the Income Tax Act.
Bureau Report