Update on India for U.S. Law Firms

There have been several recent developments in India that impact U.S. law firms. Whether your firm is currently providing legal services to clients in India or has plans to target this developing market, you should be aware of these issues and the potential impact they will have on your operations.

Setback for Foreign Law Firms Hoping to Establish Operations in India

The Bombay High Court has ruled that the practice of law in India by U.S. and UK law firms is not allowed, unless foreign lawyers abide by the Advocates Act that governs the practice of the profession of law in India. This ruling is a major setback for U.S. and UK multinational law firms seeking to open offices in India for the practice of U.S. and UK law.

On Dec. 16, 2009, the court held that a decision by the Reserve Bank of India (“RBI”) allowing foreign law firms to open liaison offices in India was not justified. The court further interpreted the provisions of the Advocates Act, 1961, as being broad enough to cover lawyers practicing in litigious matters, as well as non-litigious matters. Thus, all lawyers performing non-litigious activities in India were bound to follow the provisions contained in the Advocates Act, 1961. As explained in the judgment, non-litigious activities include an attorney who presents herself as an expert in the field of law and renders legal assistance to another person by drafting documents, advising clients, and giving opinions. In effect, the court has held that non-Indian lawyers may not perform any legal work in India unless they meet certain bar requirements.

Three law firms ' two of them being U.S. multinationals headquartered in New York and one a UK multinational headquartered in London ' were given permission by the RBI to open liaison offices in India under Section 29 of the Foreign Exchange Regulation Act, 1973. The RBI permission was limited to conducting only liaison activities in India.

The U.S. and UK law firms claimed they had opened their liaison offices in India to act as a coordination and communications channel between the firms' head offices/branches and clients in and outside of India. The Bombay High Court rejected this notion, citing cases from the United States and India to support its holding that these liaison activities were, in fact, practicing law in non-litigious matters. Since the practice of law was held to be involved, the RBI's granting of permission to open liaison offices under Section 29 of the Act was found to be invalid. Moreover, the court held that foreign law firms could not carry on non-litigious activities unless their lawyers in India were enrolled as advocates under the Advocates Act, 1961. Under the Act, only a person with a law degree and enrolled with the state bar councils of India may practice law.

This case was on remand from the Supreme Court of India, which had sent the matter back to the Bombay High Court for reconsideration and a decision as to what practicing the profession of law in India means. It is not known whether the firms plan to appeal this decision. Attorneys and firms found to be in violation of the Advocates Act, 1961 may face civil penalties.

Until a final decision has been rendered in this matter, multinational law firms with clients in India will need to fall back on established practices for ensuring that they do not violate the Advocates Act, 1961, nor create a permanent establishment (“PE”) in India.

Under Article 15 of the U.S.-India Tax Treaty, no tax is due in India unless the U.S. law firm has either a permanent establishment in India, or personnel have been present in India on business for 90 days or more in the relevant taxable year (April 1 through March 31).

Firms should continue to control their partners' and associates' time in the country, and count the number of days in India so as to avoid violating the 90-day PE rule. Any time over 90 days in India risks the establishment of a PE, exposes the firm to taxation in India, and raises regulatory issues around the unauthorized practice of law. In the past, firms have entered into associations or secondment agreements with law firms in India. This trend will not only continue, but also will likely expand as firms continue to see opportunities in this emerging legal market.

India Imposes Requirement to Obtain a Permanent Account Number

Effective April 1, 2010, every non-resident who receives income from India is required to obtain a Permanent Account Number (“PAN”) from the Indian Income Tax Authorities and provide it to the Indian payor. In the absence of this tax identification number, the payor is required to withhold taxes at a minimum rate of 20% or the higher applicable rate. In extreme cases, the maximum tax withholding rate that may be applicable to a non-resident is 42.23%. The maximum rate that may be applied in the case of a U.S. law firm that is an LLP is 30.9% (33.99% if income exceeds INR 10 million), assuming all members of the firm/LLP are individuals. However, an application may be made to the Indian Tax Authorities by the payor or payee to determine in advance the appropriate withholding tax rate.

A payor's failure to withhold can result in disallowance of that expense on its tax return and exposes the payor to interest, penalties, and liability for the tax amount. Accordingly, Indian clients may take a more cautious route. It is expected that India payors will at least withhold 20% tax on all payments where a PAN is not provided by the non-resident payee.

If a client withholds and the firm believes that no tax is owed, it must file a tax return for a refund of the tax withheld.

Obtaining a PAN and providing it to the payor does not automatically make the recipient eligible to receive a payment without tax withholding. Even if a PAN is provided to a payor in India, there may still be a withholding obligation if the amount is chargeable to tax in India, as discussed above. If a firm establishes a permanent establishment or has personnel working in India for 90 days or more, income associated with this activity may be subject to tax in India.

Although the PAN is intended solely to create a taxpayer identification number, it is anticipated that by obtaining a PAN the firm will be entered into the database of Indian Tax Authorities and will be subject to increased monitoring. In light of this, firms that obtain a PAN should consider filing an income tax return in India. The statute of limitations for returns is seven years from the end of the year for which the return is filed. Accordingly, the tax authorities may open/reopen a case for the past seven years if they have reason to believe that certain income of the taxpayer has escaped assessment. To counter potential arguments that the firm either has a permanent establishment or has spent more than 90 days in-country, documentation such as records of time sheets for employees who travel to India for work, copies of invoices along with contracts entered with Indian clients, and copies of passports with entry and exit stamps meeting applicable requirements of Indian Tax Authorities should be maintained by the firm.

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. Currently, he works with law firms that are facing the challenges of growth in a changing global market. 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 14 years of experience as an attorney in and around global law firms. She can be reached at 646-471-6104 and at [email protected].

There have been several recent developments in India that impact U.S. law firms. Whether your firm is currently providing legal services to clients in India or has plans to target this developing market, you should be aware of these issues and the potential impact they will have on your operations.

Setback for Foreign Law Firms Hoping to Establish Operations in India

The Bombay High Court has ruled that the practice of law in India by U.S. and UK law firms is not allowed, unless foreign lawyers abide by the Advocates Act that governs the practice of the profession of law in India. This ruling is a major setback for U.S. and UK multinational law firms seeking to open offices in India for the practice of U.S. and UK law.

On Dec. 16, 2009, the court held that a decision by the Reserve Bank of India (“RBI”) allowing foreign law firms to open liaison offices in India was not justified. The court further interpreted the provisions of the Advocates Act, 1961, as being broad enough to cover lawyers practicing in litigious matters, as well as non-litigious matters. Thus, all lawyers performing non-litigious activities in India were bound to follow the provisions contained in the Advocates Act, 1961. As explained in the judgment, non-litigious activities include an attorney who presents herself as an expert in the field of law and renders legal assistance to another person by drafting documents, advising clients, and giving opinions. In effect, the court has held that non-Indian lawyers may not perform any legal work in India unless they meet certain bar requirements.

Three law firms ' two of them being U.S. multinationals headquartered in New York and one a UK multinational headquartered in London ' were given permission by the RBI to open liaison offices in India under Section 29 of the Foreign Exchange Regulation Act, 1973. The RBI permission was limited to conducting only liaison activities in India.

The U.S. and UK law firms claimed they had opened their liaison offices in India to act as a coordination and communications channel between the firms' head offices/branches and clients in and outside of India. The Bombay High Court rejected this notion, citing cases from the United States and India to support its holding that these liaison activities were, in fact, practicing law in non-litigious matters. Since the practice of law was held to be involved, the RBI's granting of permission to open liaison offices under Section 29 of the Act was found to be invalid. Moreover, the court held that foreign law firms could not carry on non-litigious activities unless their lawyers in India were enrolled as advocates under the Advocates Act, 1961. Under the Act, only a person with a law degree and enrolled with the state bar councils of India may practice law.

This case was on remand from the Supreme Court of India, which had sent the matter back to the Bombay High Court for reconsideration and a decision as to what practicing the profession of law in India means. It is not known whether the firms plan to appeal this decision. Attorneys and firms found to be in violation of the Advocates Act, 1961 may face civil penalties.

Until a final decision has been rendered in this matter, multinational law firms with clients in India will need to fall back on established practices for ensuring that they do not violate the Advocates Act, 1961, nor create a permanent establishment (“PE”) in India.

Under Article 15 of the U.S.-India Tax Treaty, no tax is due in India unless the U.S. law firm has either a permanent establishment in India, or personnel have been present in India on business for 90 days or more in the relevant taxable year (April 1 through March 31).

Firms should continue to control their partners' and associates' time in the country, and count the number of days in India so as to avoid violating the 90-day PE rule. Any time over 90 days in India risks the establishment of a PE, exposes the firm to taxation in India, and raises regulatory issues around the unauthorized practice of law. In the past, firms have entered into associations or secondment agreements with law firms in India. This trend will not only continue, but also will likely expand as firms continue to see opportunities in this emerging legal market.

India Imposes Requirement to Obtain a Permanent Account Number

Effective April 1, 2010, every non-resident who receives income from India is required to obtain a Permanent Account Number (“PAN”) from the Indian Income Tax Authorities and provide it to the Indian payor. In the absence of this tax identification number, the payor is required to withhold taxes at a minimum rate of 20% or the higher applicable rate. In extreme cases, the maximum tax withholding rate that may be applicable to a non-resident is 42.23%. The maximum rate that may be applied in the case of a U.S. law firm that is an LLP is 30.9% (33.99% if income exceeds INR 10 million), assuming all members of the firm/LLP are individuals. However, an application may be made to the Indian Tax Authorities by the payor or payee to determine in advance the appropriate withholding tax rate.

A payor's failure to withhold can result in disallowance of that expense on its tax return and exposes the payor to interest, penalties, and liability for the tax amount. Accordingly, Indian clients may take a more cautious route. It is expected that India payors will at least withhold 20% tax on all payments where a PAN is not provided by the non-resident payee.

If a client withholds and the firm believes that no tax is owed, it must file a tax return for a refund of the tax withheld.

Obtaining a PAN and providing it to the payor does not automatically make the recipient eligible to receive a payment without tax withholding. Even if a PAN is provided to a payor in India, there may still be a withholding obligation if the amount is chargeable to tax in India, as discussed above. If a firm establishes a permanent establishment or has personnel working in India for 90 days or more, income associated with this activity may be subject to tax in India.

Although the PAN is intended solely to create a taxpayer identification number, it is anticipated that by obtaining a PAN the firm will be entered into the database of Indian Tax Authorities and will be subject to increased monitoring. In light of this, firms that obtain a PAN should consider filing an income tax return in India. The statute of limitations for returns is seven years from the end of the year for which the return is filed. Accordingly, the tax authorities may open/reopen a case for the past seven years if they have reason to believe that certain income of the taxpayer has escaped assessment. To counter potential arguments that the firm either has a permanent establishment or has spent more than 90 days in-country, documentation such as records of time sheets for employees who travel to India for work, copies of invoices along with contracts entered with Indian clients, and copies of passports with entry and exit stamps meeting applicable requirements of Indian Tax Authorities should be maintained by the firm.

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. Currently, he works with law firms that are facing the challenges of growth in a changing global market. 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 14 years of experience as an attorney in and around global law firms. She can be reached at 646-471-6104 and at [email protected].