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January 5, 2009 12:44 PM

LETTER FROM ASIA: Clifford Chance Wins Latest Round in India Tax Dispute

Posted by Ed Shanahan

By Anthony Lin in Hong Kong

Supporting an appeal by Clifford Chance, the Bombay High Court has ruled that a foreign law firm may only be taxed in India on work performed in the country.

London-based Clifford Chance had previously been ordered by India's Commissioner of Income Tax to pay taxes on all of the fees--around $3 million--that it earned on work performed on four energy infrastructure projects undertaken in India between 1996 and 1998.

The Magic Circle law firm primarily advised non-Indian participants on U.K. law aspects of the projects, and much of the work was handled outside of India. Clifford Chance challenged the assessment, arguing that only around $871,000 in fees actually billed in India should be taxable.

The Bombay High Court took up the case after India's Income Tax Appellate Tribunal ruled in September 2001 that the nature of the work should determine its taxability in India. In rejecting Clifford Chance's appeal, the tribunal determined that the "territorial nexus" between the firm's fees and the projects in India meant all of the fees, wherever billed, accrued or arose in India and were taxable nationally.

But in a decision dated December 19, the high court reasoned that "[i]ncome arising out of operations in more than one jurisdiction would have territorial nexus with each of the jurisdictions on actual basis. If that be so, it may not be correct to contend that the entire income 'accrues or arises' in each of the jurisdictions."

Clifford Chance's lawyer, former Indian solicitor general Harish Salve, argued that, in the case of a legal professional rendering advisory services, the services could only be considered to have been rendered at a place where the professional is personally present. Any other rule would create chaos and uncertainty, Salve maintained.

The high court agreed, ruling that "for a nonresident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India."

Decisions by the Bombay High Court and other Indian high courts are appealable to the Supreme Court of India.

The issue of taxation has been a sore point for international law firms targeting key developing markets like India and China. In both countries, authorities and local bar groups have occasionally floated broader taxation on work handled abroad but tied to matters or transactions within those countries' borders.

Anthony Lin is chief Asia correspondent for Incisive Media. Contact him at:

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