In a significant order, a division bench of the Bombay high court has ruled that foreign law firms, even though working as solicitors for multinational corporations with operations in India, will pay tax only in those countries where they give legal advice and not in india .

Bombay HC held that:

Territorial nexus for the purpose of determining the tax liability is an internationaly accepted principle. An endeavour should, thus, be made to construe the tax-ability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and DTA, no extended meaning can be given to the words "income deemed to accrue or arise in India" as expressed in section 9 of the Act.

Section 9(1)(vii)(c)  requires two conditions to be met the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus, for a non-resident 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.

The place of utilization of service is not relevant but the place of performance of service is what would be determinative of the matter.

For full text of the Judgment – Visit - 2009 -TMI - 31936 - HIGH COURT OF BOMBAY

Territorial nexus: services taxable only where performed; both rendering and utilization in the jurisdiction are required for taxability. Services are taxable only where they meet a territorial nexus: they must be both rendered in India and utilized in India simultaneously; the place of performance, not incidental utilization, determines taxability, and non residents are taxable only in the jurisdiction where the legal advice is performed, consistent with internationally accepted principles and double taxation considerations.