September 08, 2010 | By Keith Martin in Washington, DC

INDIA is taxing foreign law firms on their fees for legal advice to Indian clients, even if the work is done outside the country. 

Linklaters, a UK firm, lost a case in the Mumbai Income Tax Appellate Tribunal in mid-July. The firm did work in 1995 and 1996 from London and also had lawyers visit India during work for clients with operations or projects in India. The firm said that it was not subject to income tax on its fees for this work because it had no “permanent establishment” in India and, therefore, could not be taxed under the UK-India tax treaty.

The tax tribunal disagreed. It said that a May 2010 amendment to the Indian income tax laws clarified that fee income for technical services made by an Indian resident or used in India is taxable in India, regardless of whether the services are performed in India.

The tribunal said that an earlier decision in a similar case involving Clifford Chance, another UK firm, that held the firm did not have to pay tax on fees for services rendered outside the country is  longer good law. The latest case is Linklaters LLP v. Income Tax Officer.