India Opens Its Doors to Foreign Consultancy Firms

India looms large on the horizon as the next territory for increased expansion by law firms. A recent court ruling holding that India may tax a foreign law firm only for work actually performed in India, coupled with the enactment of a law permitting businesses to operate as limited liability partnerships, pave the way for these firms to enter the Indian market.

The Clifford Chance Case

In a recent case involving the issue of taxation by India of fees earned in connection with legal services provided by a London-based law firm, the Bombay High Court has ruled that taxable income should be measured by the number of billed hours of work actually performed in India.

This ruling is significant for multinational law firms that provide services to Indian clients where all or part of the related legal work may be performed in another country.

Clifford Chance is an international firm of solicitors based out of the United Kingdom, with no office in India. Clifford Chance excluded on its tax return receipts related to work performed outside of India on matters contracted in India. In 2001, India's Income Tax Appellate Tribunal held that the determining factors for taxation are: 1) the place where the services are utilized by the clients and 2) where the services are performed or rendered to the clients. The Tribunal held that these services were taxable in full in India.

On appeal from that decision, Clifford Chance argued to the Bombay High Court that in the case of a legal professional rendering advisory services, such services are only rendered in the place where the professional is present. Therefore, any services performed by a professional from a foreign jurisdiction outside of India cannot be taxed in a state other than that of the professional's residence. Clifford Chance had documentation to prove that the services rendered by a legal professional to the client were not performed in India.

The Bombay High Court relied on the India-United Kingdom Tax Treaty (which contains a provision addressing Independent Personal Services), and Ishikawajima Harima Heavy Industries Ltd. to rule 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.”

It is uncertain whether this decision will be appealed to the Supreme Court of India.

The LLP Statute

India has enacted legislation permitting a business to operate as a limited liability partnership (“LLP”). Effective Jan. 9, 2009, the Limited Liability Partnership Act, 2008 (No. 6 of 2009) (“the Act”), enables a foreign law firm wishing to conduct a consultancy business in India to do so.

The Act permits the establishment of LLPs to register and provide consulting services in India. Although a foreign law firm may not practice law in India, under the new LLP statute a firm may provide consulting services without obtaining permission. It is anticipated that the Central Government will prescribe rules governing the conduct of business by foreign LLPs.

Every LLP shall have at least two designated partners. Any individual or “body corporate” can be a partner in an Indian LLP. A body corporate has been defined to include an LLP (Indian or foreign) and a foreign company, but specifically excludes a co-operative society. At least one of the designated partners must be a resident in India, i.e., a person who has stayed in India for a period of not less than 182 days during the immediately preceding one year. The second designated partner may be a non-resident of India.

There are several requirements with respect to keeping the LLP's books and filing obligations, including having its accounts audited and preparing a statement of accounts and solvency to be filed with the Registrar of Companies (“ROC”) after authentication by the designated partners. The LLP must also file an Annual Return with the ROC within 60 days of the end of the financial year.

A firm may convert to an LLP, provided all the partners of the firm become partners of the LLP. On registration as an LLP, the assets and liabilities of the firm shall be transferred to, and vest with, the LLP, and the firm shall be deemed to be dissolved, and if registered under the Indian Partnership Act, 1932, removed from the records maintained under the Indian Partnership Act.

The Act is silent on the taxability of an LLP. Our colleagues in PricewaterhouseCoopers India have advised that the Income-tax Act, 1961 will need to be amended to provide guidance. The legal case in India to determine the distinction between consulting services and the practice of law has yet to be decided. The case was remanded by the Indian Supreme Court to the Bombay High Court.

Stanley Kolodziejczak, a member of this newsletter's Board of Editors, is Co-Chair of the Law Firm Services group of PricewaterhouseCoopers LLP and has more than 25 years of business, tax, and accounting experience. He can be reached at 646-471-3160 and [email protected]. Nancy Regan is a Director in the Law Firm Services group of PricewaterhouseCoopers, with nine years' experience as an attorney in and around global law firms. She can be reached at 646-471-6104 and at [email protected].

India looms large on the horizon as the next territory for increased expansion by law firms. A recent court ruling holding that India may tax a foreign law firm only for work actually performed in India, coupled with the enactment of a law permitting businesses to operate as limited liability partnerships, pave the way for these firms to enter the Indian market.

The Clifford Chance Case

In a recent case involving the issue of taxation by India of fees earned in connection with legal services provided by a London-based law firm, the Bombay High Court has ruled that taxable income should be measured by the number of billed hours of work actually performed in India.

This ruling is significant for multinational law firms that provide services to Indian clients where all or part of the related legal work may be performed in another country.

Clifford Chance is an international firm of solicitors based out of the United Kingdom, with no office in India. Clifford Chance excluded on its tax return receipts related to work performed outside of India on matters contracted in India. In 2001, India's Income Tax Appellate Tribunal held that the determining factors for taxation are: 1) the place where the services are utilized by the clients and 2) where the services are performed or rendered to the clients. The Tribunal held that these services were taxable in full in India.

On appeal from that decision, Clifford Chance argued to the Bombay High Court that in the case of a legal professional rendering advisory services, such services are only rendered in the place where the professional is present. Therefore, any services performed by a professional from a foreign jurisdiction outside of India cannot be taxed in a state other than that of the professional's residence. Clifford Chance had documentation to prove that the services rendered by a legal professional to the client were not performed in India.

The Bombay High Court relied on the India-United Kingdom Tax Treaty (which contains a provision addressing Independent Personal Services), and Ishikawajima Harima Heavy Industries Ltd. to rule 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.”

It is uncertain whether this decision will be appealed to the Supreme Court of India.

The LLP Statute

India has enacted legislation permitting a business to operate as a limited liability partnership (“LLP”). Effective Jan. 9, 2009, the Limited Liability Partnership Act, 2008 (No. 6 of 2009) (“the Act”), enables a foreign law firm wishing to conduct a consultancy business in India to do so.

The Act permits the establishment of LLPs to register and provide consulting services in India. Although a foreign law firm may not practice law in India, under the new LLP statute a firm may provide consulting services without obtaining permission. It is anticipated that the Central Government will prescribe rules governing the conduct of business by foreign LLPs.

Every LLP shall have at least two designated partners. Any individual or “body corporate” can be a partner in an Indian LLP. A body corporate has been defined to include an LLP (Indian or foreign) and a foreign company, but specifically excludes a co-operative society. At least one of the designated partners must be a resident in India, i.e., a person who has stayed in India for a period of not less than 182 days during the immediately preceding one year. The second designated partner may be a non-resident of India.

There are several requirements with respect to keeping the LLP's books and filing obligations, including having its accounts audited and preparing a statement of accounts and solvency to be filed with the Registrar of Companies (“ROC”) after authentication by the designated partners. The LLP must also file an Annual Return with the ROC within 60 days of the end of the financial year.

A firm may convert to an LLP, provided all the partners of the firm become partners of the LLP. On registration as an LLP, the assets and liabilities of the firm shall be transferred to, and vest with, the LLP, and the firm shall be deemed to be dissolved, and if registered under the Indian Partnership Act, 1932, removed from the records maintained under the Indian Partnership Act.

The Act is silent on the taxability of an LLP. Our colleagues in PricewaterhouseCoopers India have advised that the Income-tax Act, 1961 will need to be amended to provide guidance. The legal case in India to determine the distinction between consulting services and the practice of law has yet to be decided. The case was remanded by the Indian Supreme Court to the Bombay High Court.

Stanley Kolodziejczak, a member of this newsletter's Board of Editors, is Co-Chair of the Law Firm Services group of PricewaterhouseCoopers LLP and has more than 25 years of business, tax, and accounting experience. He can be reached at 646-471-3160 and [email protected]. Nancy Regan is a Director in the Law Firm Services group of PricewaterhouseCoopers, with nine years' experience as an attorney in and around global law firms. She can be reached at 646-471-6104 and at [email protected].