UK based law firm Linklaters has just ended a 15 year old case at the Mumbai Income Tax Appellate Tribunal or ITAT. The Mumbai ITAT's verdict says that Linklaters is liable to pay tax of over 3.3 million pounds, or over Rs 23 crore on its India-related services. But this is not just about Linklaters. The ruling lays down important principles for all foreign professional service providers in India, reports Media.
 
Why was such a substantial tax liability imposed upon Linklaters? Two key points were being debated before the tribunal. The first one was whether Linklaters is or isnt a tax resident of the United Kingdom and therefore is it eligible for the benefits of the Indo-UK double tax avoidance agreement or DTAA.

On this point the Mumbai income tax tribunal ruled that although Linklaters as an entity is not liable to tax in the UK, its partners are liable to tax. Although there is no juridical double taxation involved, there is economic double taxation and hence Linklaters is a tax resident of the United Kingdom, meaning it can be eligible for treaty benefits.

This is one aspect of the ruling which is good news for foreign professional service providers operating in India. However the second part of the ruling could be more problematic. The second issue before the ITAT was whether Linklaters has its service as a permanent establishment or PE in India and if it does how much income is attributable to that permanent establishment.

Under the Indo-UK double tax agreement if someone spends more than 90 days in India, they are thought to have a service PE in India and therefore taxed on the services rendered in India during that period of time. This tax ruling has taken that further and said that all India related services whether or not delivered in these 90 days spent in India, will be liable to tax in India.

This may be very bad news for foreign consulting firms, foreign law firms even who do a substantial part of their work in India.

Commenting on the impact this ruling has, Sunil Shah, Partner, Deloitte who consulted Linklaters on this matter said, For taxpayers who spend more than 90 days in India, they will have to be careful because then what will happen is the income for work done in India as well as outside India will become taxable in their hands in India. They may have to take recourse to tax credit provisions in their home countries to get relief from double taxation.

The big question is what really will be counted as an India related service. Services rendered to Indian companies even when the firm is abroad may be counted as India related services. Services rendered to foreign firms for India related projects may be also counted. It is likely however that this ruling will open up a whole lot of debate and litigation on what really counts as India related service.