Linklaters in line for India tax bill after court ruling

Linklaters could be facing up to a major tax bill for its India-related work following a Mumbai Income Tax Appellate Tribunal (ITAT) decision to apply a retrospective amendment to its Income Tax Act, according to Legally India.

The ITAT upheld the original view of the tax assessing officer (AO) that all of the magic circle firm’s income relating to India dating back to 1995 should be taxable. Other firms could also be subject to the tribunal’s decision.

A Linklaters spokesperson said: “We are reviewing the tribunal’s decision and have no further comment at this stage.”

In the 1995-‘96 tax year, Linklaters claimed it had billed only £691,190 based in India, according to the ITAT ruling, making a profit of £468,419.

However, the AO held that Linklaters’ total taxable profit related to India should in fact be Rs 236,686,260 (£3.32m or Rs 23.7 crore), out of total amounts invoiced of Rs 25.8 crore (£3.62m).

According to the ruling, Linklaters had worked on 21 India-related matters in 1995-96, of which 15 mandates were for banks or financial institutions. Its instructions included GDR issues for Bajaj, Finolex, Sriram Enterprises and Usha Beltron, advising Dresdner Kleinwortbenson (as it was then known), Barclays Capital, HSBC Investment Bank and Lazard Brothers & Co respectively. The firm also advised Enron Power on an Indian power project and Denro Ispat on a Chandrapur coal project.

Permanent establishment under the Double Taxation Avoidance Agreement (DTAA) between India and the UK arises once services are rendered on the ground in India for at least 90 days, which the AO found Linklaters had done.

“It was submitted that the income of the PE [permanent establishment] is computed on the basis of actual man hours devoted in India to a particular client and charged at the rates would have been charged by the Indian lawyers for similar services,” said the ITAT but ruled that the actual fees charged by Linklaters should be the amount that is subject to tax.

The latest ruling follows Clifford Chance’s Bombay High Court victory last year, in which it decided that only the fees that the firm incurred directly in India should be taxable in India.

A Clifford Chance spokesperson told Legally India at the time: “The claim raises essentially the same issues as were raised in a case recently decided in our favour by the Bombay High Court. The Indian tax authorities are now appealing that decision but we have every expectation of prevailing.”