After 12 years, the Supreme Court has admitted the appeal of the Income Tax Department from the Bombay High Court and has issued notice to Clifford Chance (CC) on the question of double taxation for advisory work on India-related projects. The IT department appears to be taking the dispute very seriously and has engaged Attorney General Goolam E. Vahanvati to appear before the Supreme Court. Arguing before the Bench comprising Justice Kapadia, the AG raised the question of why no details had been provided by CC regarding services rendered outside India.

CC had, in 1996 and 1997, advised foreign investors on English Law for the execution of certain power projects in India. The projects included the Bhadravathi Power Project, promoted by the Ispat Group, Electric de France and Alstom; Vizag Power Project promoted by the Machen Development and National Power; Ravva Oil Fields promoted by Cairn and Chase Manhattan and the Vemagiri Power Project promoted by GMR with investment from Avondale (Projects). The advisory work was undertaken by attorneys located outside India, and consequently, Clifford Chance's bills were raised and paid outside India.

For the tax assessment year 1996-97, several partners of CC were stationed in India for more than 90 days. As a regular process, when CC declared its annual income generated out of providing legal advice in India, it declared an annual income of Rs.5,08,87,950/- (£ 871,369). The figure was arrived at on the basis of the income of CC, which was attributable to its operations in India in respect of the above four projects. There were several other issues on which CC was advising the four project companies.

However, in 2000 the Assessing Officer of the Income Tax Department (IT Department) reasoned that the fee earned by CC for the Projects - irrespective of whether the work was done in India or not- should be taken on the whole and taxable in India. Therefore the IT department slapped a income tax notice for an income of Rs. 18 crores (£ 3,111,727 at the then conversion rate) instead of Rs.5,08,87,950 (£ 871,369).

CC appealed to the Commissioner of Income Tax, the appellate authority, which reiterated the Assessing Officer's position. CC, evidently unhappy with the order of the CIT, appealed to the Income Tax Appellate Tribunal (ITAT). CC's arguments covered Income Tax Act provisions and also the double taxation agreement (DTA) with the United Kingdom. CC argued about the details and processes of client billing. Clients were billed, and payments were made, in the United Kingdom and in this connection, CC drew a pointed reference to the time-sheets which showed the services rendered by Partners and employees, in India and outside India.

In 2001, the ITAT accepted that Article 15 of the DTA with the UK was applicable but held that since the work of CC related to general advice in relation to the entire project in India and the nature of their work and other details were not available to ITAT, the entire income received by CC from the projects was taxable in India.

CC approached the Bombay High Court challenging the order of the ITAT. Bombay-based Srivastava & Co. and Amarchand Mangaldas joined to support CC's brief before the High Court. Senior Counsel Harish Salve argued the matter at length and discussed various aspects of double taxation agreement, accrual of income etc. on behalf of CC.  In December 2008 the High Court ruled in favour of CC and held that that "the assessee (CC) has charged on hourly basis in India and utilized in India and shall only be chargeable to Income-Tax Act as disclosed in the return of Income."

When contacted, SK Srivastav of Srivastav & Co. told Bar & Bench, "We were handling the dispute till the High Court. I am no longer the counsel for Clifford Chance. I have got to know that KPMG is now handling the matter for Clifford Chance."

It will be interesting to see whether CC will be represented by their recently-acquired best friends, AZB & Partners, now that the Counsels who represented them before the High Court are no longer engaged.