Law column: Territorial nexus for services rendered by foreign law firms in India

In a recent ruling, the Hon’ble High Court of Bombay (HC), in case of Clifford Chance, UK (CC) ruled that the professional fees charged for the service provided by the foreign law firm is not taxable in India for the reason that neither the legal opinions were utilised nor rendered in India.

In this case, CC was appointed as English Law advisor to four joint venture projects for construction of power plants in India; every project involved at least one non-resident party (projects). For rendering legal advice on the projects, the partners/employees of CC visited India, for a period aggregating more than 90 days in the relevant financial year. On the basis of the billing hours spent in India, CC attributed a fixed share of the professional fee in relation to the projects, to be taxed in India. However, the contention of the Assessing Officer (AO) was that all the legal advices pertained to the projects situated in India and hence in terms of Section 9(1) of the Income Tax Act, 1961 (the Act), the entire sum of the professional fee is taxable in India. The findings of the AO were affirmed by the Commissioner of Income Tax (Appeals) and Mumbai Bench of the Hon’ble Income Tax Appellate Tribunal (ITAT).

Aggrieved by the order of ITAT, CC filed an appeal before HC, contending that in case of legal professional rendering advisory services, the services are only rendered at a place where the professional is personally present. Thus, the legal services provided by the partners of CC in the UK would classify to be rendered in the UK, falling outside the purview of tax chargeability in terms of Section 9(1)(vii) of the Act and only that portion of income which can be attributed to the service performed by it in India should be taxed in India. On the contrary, the Revenue submitted that the term ‘attributable to’ under Section 9 of the Act, is wider in meaning than the term ‘derived from’ and, therefore, the whole of the consideration received on account of services rendered relating to projects in India is taxable in India. It was also contended by the Revenue that Explanation 2 to Section 9 (1) makes the above transaction liable for tax in India.

The HC examined the relevant provisions of the Act dealing with territorial nexus and chargeability under the given facts of the transaction and was of the view the Section 9(1)(vii)(c) envisages twin conditions for the chargeability of tax ie services, which are source of income sought to be taxed in India must be (i) utilised in India and (ii) rendered in India.

The HC was of the view that the professional fees charged on account of the legal opinions given outside India, were neither utilised nor rendered in India, and thus not taxable under the Act. However, the HC did not examine the question of what qualifies as reasonable attribution when the ITAT gave a clear finding that as per the nature of work done in India, the entire income would be exigible to tax in India.

Beside this, it appears that as per the HC, the legal services are not ‘technical’ in nature and hence Explanation 2 to Section 9 was not considered to have any application in the given facts.

It is also interesting to note that as per the revised OECD Model Convention on Income and Capital 2008, the scope of Article 14 (pari material to Article 15 of the India-UK DTAA) has been removed and is now governed by Article 7 ie business profits, and resultantly there is no separate Article dealing with professional or independent activities like lawyers.

Aseem Chawla is partner, tax practice, & Ankita Srivastava is an associate at Amarchand Mangaldas.