HC relief for foreign law firms on tax payment [India]

In a significant order, a division bench of the Bombay high court has ruled that foreign law firms, even though working as solicitors for multinational corporations with operations in India, will pay tax only in those countries where they give legal advice and not in India.

The appelant before court was Clifford Chance, a top-notch legal firm from London which acted as solicitors for several multinational corporations interested in four major power projects in India. The clients included big names such as GEC Alsthom Group, and Electricite de France. Clifford Chance told court that it billed its clients on an hourly basis and maintained detailed "time sheets'' that showed whether the legal advice was given in India or abroad.

On that basis, the firm calculated that it had earned a little over Rs 5 crore from its India operations during 1996-97. Ispat Industries was the only Indian firm involved in one of the four power projects. On the contrary, the income tax department said that Clifford Chance had received more than Rs 17 crore in legal fee for acting as advisors on the four power projects and it was immaterial whether the advice was given in India, UK or any other country. It said that the whole income was taxable in India as the projects from which it was derived were in India. However, Salve argued that legal service given by a solicitor from his home country to a client who was overseas could be taxed only in the country of residence of the solicitor. Finally, justice S Radhakrishnan and V C Daga ruled that under statutory provisions, services which are to be taxed must be both "rendered in India'' and "utilized in India'' for them to fall under the income tax bracket. The court held that this was not the case with Clifford Chance's earnings which came from giving legal advice to its clients in other countries, even though the power projects were in India. Thus it said that tax could be levied only on Rs 5 crore that the solicitors had earned by giving legal advice to firms in India.