Taxing Foreign Law Firms In India

Pathik sends us another interesting post on the recent ruling of the Bombay High Court in Clifford Chance v. DCIT.

The extent to which services provided by foreign law firms such as Clifford Chance are taxable for their services are taxable in India.

The Bombay High Court, in a recent decision (Clifford Chance v. DCIT) clarified the position by stating that the income earned by foreign firms from Indian clients shall be taxable only to the extent of their income earned from their operations in India. The Income-tax department sought to invoke Section 9 of the Income tax Act which defines the income “deemed to accrue or arise in India”. This position has been amended by the Finance Act, 2007, which added an explanation.

This particular provision (Section 9(1)) of the Income Tax Act has been the subject-matter in a plethora of disputes decided by the Supreme Court of India. Sinha and Bhandari JJ., in a recent decision in Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai, emphasizing on the need for territorial nexus clarified the issue concerning taxation of non-residents under Section 9(1) of the Income-Tax Act. The Hon’ble Supreme Court made it abundantly cleared that the following conditions need to be satisfied simultaneously: