A Bench headed by Justice S H Kapadia sought reply from Clifford Chance A Partnership on why it should not pay tax on Rs 9.16 crore that it received for giving legal advice to various non-resident companies on three projects in India-- Bhadravati Power Project, Vizag Power Project and Ravva Oil & Gas Fields project. According to Attorney General G E Vahanvati, Clifford Chance had failed to furnish agreements and relevant information in respect to two projects executed in India and also to prove that it had rendered services outside India.

"The assessee has not provided any detail regarding services rendered outside India. The services provided were on an ongoing basis and are inextricably linked to the presence of its personnel in India. Therefore, it cannot be said to be independent of the presence in India," the petition said. According to the IT department, the Bombay High Court, which gave relief to the law firm, had followed the apex court's decision in the case of Ishkawajima Harima Heavy Industries Vs Director of Income Tax.

The court had ignored the explanation inserted by the Finance Act 2007 in Section 9 of the Income Tax Act 1961 which reaffirmed that irrespective of the situs of the services, the situs of the payer and utilisation of service would determine the tax jurisdiction. The UK firm was appointed legal advisor for the three projects in 1995-96. While Bhadravati power project was a venture between Ispat Industries and non-resident companies GEC Alsthom group and Electricite de France, Vizag Power Project was a joint venture between two non-resident companies National Power PLC and Machen Development Corporation. Ravva Oil and Gas Fields project was developed by Chase Manhattan (Australia) Ltd.

The IT department said while the assessee had filed income tax returns in March 1998 declaring nil income, it had claimed refund of Rs 88.64 lakh as the tax deducted at source by Mumbai-based Ispat Industries on fee amounting to more than Rs 2.46 crore remitted to the firm. However, the firm had not filed any income tax returns for 1997. Clifford had claimed that since the cumulative number of days during which one or more partners were in India was less than 90 days, thus total income of Rs 1.64 crore was not to be taxed as per the 1961 Act read with Article 15 of the Double Taxation Avoidance Agreement between India and the UK.

However, the assessing officer in March 1999 had held that the total fee of Rs 9.16 crore received by the firm, whether the work was done in India or abroad but for the three Indian projects, was liable to be taxed in India. Both the Commissioner of Income Tax and the Income Tax Appellate Tribunal had dismissed the law firm's plea by holding that the assessee was present in India for a period aggregating 90 days in the relevant fiscal year and everything was structured in India and, therefore, it can very well be presumed that the main services were rendered in India only. However, the Bombay High Court, on appeal, held in Clifford's favour.