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Tax Breather For Foreign Law Firms!

Published on Wed, May 22,2013 | 17:21, Updated at Wed, May 22 at 17:21Source : 

Pawan Kumar, ED- Tax & Regulatory Services, PwC

In the today’s era everything is available at doorstep, so is the case with legal services. The investor groups often require legal services offered by foreign law firms in respect of their cross border transactions. Cross border transactions need to not only pass tests of local laws but also international and foreign country laws.

Foreign law firms are not permitted under Indian law to advice on India law or operate through any office in India.
To assist their clients, many times foreign law firm lawyers often visit India for advising on international and foreign laws. They also coordinate with Indian lawyers.

Tax department’s stand is that a foreign law firm is liable to be taxed in India for entire fee generated from professional advice in respect of Indian projects irrespective of whether services are rendered in India or not.

Way back in 2008, this controversy was settled by the Bombay High Court in case of Clifford Chance, a leading UK law firm wherein Court held that a foreign law firm is liable to tax in India only for time spent in India on hourly basis and not for time spent outside India even though the advice relates to Indian projects.

Post Bombay High Court decision, the Finance Act, 2010 amended law so far as taxation of technical services are concerned and stated the place of rendition of services is irrelevant. Though the amendment was in a different context, the Mumbai tribunal in case of Linklaters LLP, another UK law firm ruled against foreign law firms on taxability in India and re-ignited the controversy on foreign law firm taxability.

The controversy was whether foreign law firm is liable to tax in India for the entire income irrespective of rendition of such services in India or abroad post Finance Act, 2010.

Similarly, under the Indo-UK tax treaty, tribunal interpreted expression “indirectly attributable”, as wide enough to be considered as equivalent to “force of attraction” rule. “Force of Attraction” rule in simple terms provides that the entire receipts from India can be taxed in the hands of non-resident in India even though it pertains to another business conducted/projected executed outside India. The only necessary condition is execution of a project in India or doing business in India.

The Special (larger) Bench ruling Mumbai tribunal in case of Clifford Chance LLP has cleared the air for the foreign law firms so far as the above controversy is concerned. The ruling provides much awaited relief to foreign law firms.

It is held that amendment by Finance Act, 2010 is not relevant for the purpose of taxation of foreign law firms in India and law that prevailed earlier still holds good. What this means is that a foreign law firm is only liable for taxation of income earned from services rendered in India and it is not liable for income in relation to services rendered outside India.

The ruling has immense significance for foreign law firms providing or intending to provide professional services to Indian companies and they can be assured that even if execution of their work requires spending significant time in India for meetings, etc, their taxability in India will be restricted to income from work done in India.


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