The Supreme Court has decided to look into whether the fee charged by the foreign law firms for advising non-resident companies on various projects in India was taxable.
The issue has been raised for the first time by the income tax department alleging that London-based law firm Clifford Chance was liable to pay tax on the payments received by it for giving legal advice on various power projects in India.
A Bench headed by Justice SH Kapadia had sought reply from Clifford Chance on why it should not pay tax on Rs 9.16 crore that it received for giving advice to various non-resident companies on three projects in India?Bhadravati Power Project, Vizag Power Project and Ravva Oil & Gas Fields project.
The department represented by attorney general GE Vahanvati said the law firm had failed to furnish agreements and relevant information in respect to two projects executed in India and also to prove that it had rendered services outside India.
?The assessee has not provided any detail regarding services rendered outside India. The services provided were on an ongoing basis and are inextricably linked to the presence of its personnel in India. Therefore, it cannot be said to be independent of the presence in India,? the petition said.
According to the I-T department, the Bombay High Court, which gave relief to the law firm, while following the apex court’s decision in the case of Ishkawajima Harima Heavy Industries versus I-T director, had ignored the explanation inserted by the Finance Act 2007 in Section 9 of the Income Tax Act 1961, which reaffirmed that irrespective of the situs of the services, the situs of the payer and utilisation of service would determine the tax jurisdiction.
Opposing the department’s appeal, Clifford Chance said that it had accepted that all the fees charged by it, when its partners or associates were present in India, would undoubtedly be taxable in India.
The issue has been upheld by the high court and the question of applicability of tax treaty becomes academic now, as it had not challenged the same, the law firm said in its reply.
According to the foreign law firm, while the verdict in Ishikawajma-Harima Heavy Industries vs department of income tax was later amended with retrospective effect in accordance with Finance Act 2007, no changes had been made to the section and thus the general principles of territorial nexus continue to apply.
The UK firm was appointed legal advisor for the three projects in 1995-96. While Bhadravati power project was a venture between Ispat Industries and non-resident companies GEC Alsthom group and Electricite de France, Vizag Power Project was a joint venture between two non-resident companies National Power PLC and Machen Development Corporation. Ravva Oil and Gas Fields project was developed by Chase Manhattan (Australia) Ltd.
The I-T department said while the assessee had filed income tax returns in March 1998 declaring nil income, it had claimed refund of Rs 88.64 lakh as the tax deducted at source by Mumbai-based Ispat Industries on fee amounting to more than Rs 2.46 crore remitted to the firm. However, the firm had not filed any income tax returns for 1997.