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UK Law Firm Stung By Indian Tax Ruling

by Mary Swire,, Hong Kong

21 July 2010

A ruling by the Mumbai bench of Income-Tax Appellate Tribunal is likely to have serious tax implications for foreign law firms and other professionals providing services in India.

The London-based law firm Linklaters LLP has been ordered to pay back tax for the tax year 1995-96 on its income of over INR237m (USD4.9m) and will be similarly assessed on other years' income.

The arguments which led to the ITAT ruling hinged on the wording of Articles 5, 7 and 13 of the India-UK double taxation avoidance treaty, and differences from the OECD and UN standard wordings. Linklater’s contention that it should not be taxed because it had no permanent establishment in India was thrown out and tax was deemed payable on profits “indirectly attributed to the Indian operation” as mentioned in the treaty.

Although much of the work was done in London, it was acknowledged that Linklaters representatives had spent at least 90 days of the year in India; all profits arising from Indian operations, whether executed in London or India, were therefore taxable according to the ruling. The 90 days presence was sufficient, according to the ruling, to infer a permanent establishment as a result of the tax treaty provisions.

The ruling applied retrospectively an amendment of the Finance Act 2010 to section 9 of the Income Tax Act 1961, which eliminated the requirement for a physical presence in India for services to be considered taxable in India.

TAGS: court | tax | double tax agreement (DTA) | India | law | corporation tax | United Kingdom | professionals

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