MUMBAI.  Giving a jolt to back door entry of foreign law firms in India and also to Indian Law Firms signing Best Friend MOUs with Foreign Law Firms; Bombay High Court has ruled that non-litigation Practice by Foreign Law Firms is illegal.

Bombay High Court has decided the issues: firstly, whether the permissions granted by the Reserve Bank of India to the respondent Nos.12 to 14 foreign law firms to establish their place of business in India (liaison office) under Section 29 of the Foreign Exchange Regulation Act, 1973 are legal and valid? Secondly, assuming such permissions are valid, whether these foreign law firms could carry on their liaison activities in India only on being enrolled as advocates under the Advocates Act, 1961 ? To be specific, the question is, whether practising in non litigious matters amounts to ‘practising the profession of law’ under section 29 of the Advocates Act, 1961?

The petitioner Lawyers Collective sought declaration that the permission granted by RBI to the respondents No.12 to 14 (Foreign Law Firms White & Case,a firm of lawyers having its head office at 1155 Avenue of the Americans, New York, New York 10036, United States of America and with offices at the Nirmal Building, Nariman Point, Mumbai , Chadbourne & Parke,a law firm having its head office at Rockefeller Plaza, New York, New York 11012-0127, United States of America and with offices at Hotel Maurya Sheraton, new Delhi and/or at A-168, Anand Niketan, New Delhi – 110 021, 14. Ashurst Morris Crisp having its principal office at Broadwalla House) , is bad in law and that the respondents No.12 to 14 cannot be permitted to carry on their activities in India unless they are enrolled as advocates under the 1961 Act.

Respondents No.12 to 14, were the foreign law firms practising the profession of law in U.K. / U.S.A. and having branch offices in different parts of the world had applied to the RBI during the period 1993 to 1995 seeking permission to open their liaison offices in India

The liaison activity inter alia included providing “office support services for lawyers of those offices working in India on India related matters” and also included drafting documents, reviewing and providing comments on documents, conducting negotiations and advising clients on international standards and customary practice relating to the client’s transaction etc. It was contended by the respondent No.12 to 14 that they never had and has no intention to practise the profession of law in India. Thus, from the affidavit in reply, it was evident that the liaison activities were nothing but practising the profession of law in non litigious matters.

HC held that when the Parliament has enacted the 1961 Act to regulate the persons practising the profession of law, it would not be correct to hold that the 1961 Act is restricted to the persons practising in litigious matters and that the said Act does not apply to persons practising in non litigious matters. There is no reason to hold that in India the practise in non litigious matters is unregulated.

HC held that the RBI was not justified in granting permission to the foreign law firms to open liaison offices in India under Section 29 of the 1973 Act. We further hold that the expressions ‘to practise the profession of law’ in section 29 of the 1961 Act is wide enough to cover the persons practising in litigious matters as well as persons practising in non litigious matters and, therefore, to practise in non litigious matters in India, the respondent Nos.12 to 14 were bound to follow the provisions contained in the 1961 Act.

(Source: Allindiantaxes)

MUMBAI. Experience of working as Partner in Law Firms has been a bad experience for many who were eyeing a share in the profit made by Law Firms. When Senior Manager of a Big 4 resigned and joined  a well-known Law Firm; he was promised moon by the Placement Agent who offered that the compensation of Rs 50 Lakh per annum was assured and as an Equity Partner; he can expect another 2 Crore per annum as his share of profit. But after working in Law Firm for 3 years he did not get a single penny as his share of profit. Though there was enough billing for expecting the profit; the expenses shown by the   firm in the Balance sheet were more than the income. Whether it was jugglery in accounting or were real expenses may be known only to the Auditor of the firm; but the firm itself had floated several firms and lot of money was being transferred from the firm’s account to other firms on account of expenses. The firm had also hired an ex-Income Tax Officer to take care of Income Tax issues.

  Even those Advocates who have passed out from NLS (National Law Schools) regret joining the Law Firms at one or the other stage as though they are squeezed for work but are not getting their “due” share of the profit or bonus which actually goes only to Founding Partners of the firms. Other Partners are merely Partners for using the term “Partner” in their visiting card or for inter-acting with the clients so that the clients have a feeling that they are inter-acting with senior people of the firm. An IRS Officer resigned and joined as Partner of a Law Firm on Package of Rs 30 Lakh plus bonus 3 and half year ago. He is still in the same bracket. While his counterpart who resigned and set up his own practice is making almost a Crore per annum in few years of practice.   

  The same is the condition of Associates who are overburdened with work and keep on expecting lollypop of bonus on the eve of Diwali and New Year. A Deputy General Manager of MNC left and joined a law firm on same compensation as he was assured by Placement Agent that he can expect Bonus equal to compensation. He was also told that since he will not be an employee in law firm; he will be subject to lower TDS at the rate of 10 per cent as Professional while as an employee of MNC he was subject to 30 per cent TDS. He was excited to get the offer but even after working very hard for 2 years he is yet to get any bonus. When he was in MNC he was not required to give minute by minute account of working to the Company; but in the Law Firm he is also required to give account for each and every minute so that the firm may bill its clients for the time spent by him.

  But thought of leaving Law firms or a Consulting Company and starting their own practice is also not rosy for Partners/Directors of the firms as when some of those who left and started their own found that when in the firm their charges for the clients were Rs 20000/- Per Hour; there was no work for them even at the rate of Rs 1000/- Per Hour. They were in a mistaken belief that they can still quote such hourly charges and get work. The clients were not paying for their name; they were paying for the name of the Company for which they were working.  That is why when a Partner of a firm or even a Big 4 is not comfortable in the Company; he tries to negotiate employment in other rival firm as he knows that what is his worth in a firm may not remain the same when he stands outside on his own.

  Moreover, once you are liable to pay EMI for home loan and luxury car; you cannot think of starting from a scratch. Those passing out from Law Schools and joining a Law firm may be gainers in short term as they are offered handsome packages but are losers in long term as they are unable to leave a secured job at a later stage and continue in the same status and the sword of firing is always hanging on their head. Those who start on their own since the beginning struggle in initial years but once they cross the phase of struggle; they command their own price and make much more money than Partners of firms. Thus they are real gainers in long term who never retire and leave their platform for generations. But it requires a lot of patience for someone passing out from a Law School as everyone prefers to become a “Corporate Lawyer” from day one. They should better read “The Associate” by John Grisham before taking a decision which is critical for their future. The choice is yours. Whether you want to earn for yourself or for others.

(Source: Allindiantaxes)

RS Sharma Advocate

Though many service providers are claiming exemption from service tax on the ground that the payment for the service in question has been received in foreign currency but it does not mean that they are entitled for exemption from service tax on this ground alone.

“Payment for such service is received by the service provider in convertible foreign exchange” is only one of the conditions for claiming exemption from service tax under Rule 3 of Export of Services Rules 2005 while other conditions stipulated therein are also required to be fulfilled for eligibility to exemption from service tax.

Rule 4 of Export of Services Rules 2005 provides that any service, which is taxable under clause (105) of section 65 of the Act, may be exported without payment of service tax.  

But the service is treated as ‘Export of Service” only when the conditions under Rule 4 of Export of Services 2005 as cited under are fulfilled

“(1) Export of taxable services shall, in relation to taxable services.–

(i) specified in sub-clauses (d), (p), (q), (v), (zzq), (zzza), (zzzb), (zzzc), (zzzh) , (zzzr), (zzzy), (zzzz) and (zzzza) of clause (105) of section 65 of the Act, be provision of such services as are provided in relation to an immovable property situated outside India;

(ii) specified in sub-clauses (a), (f), (h), (i), (j), (l), (m), (n), (o), (s), (t), (u), (w), (x), (y), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv),(zw), (zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzl), (zzm), (zzn), (zzo), (zzp), (zzs), (zzt), (zzv), (zzw), (zzx), (zzy), (zzzd), (zzze), (zzzf), (zzzp), (zzzzg), (zzzzh) and (zzzzi) of clause (105) of section 65 of the Act, be provision of such services as are performed outside India:

Provided that where such taxable service is partly performed outside India, it shall be treated as performed outside India;

Provided further that where the taxable services referred to in sub-clauses (zzg), (zzh) and (zzi) of clause (105) of section 65 of the Act, are provided in relation to any goods or material or any immovable property, as the case may be, situated outside India at the time of provision of service, through internet or an electronic network including a computer network or any other means, then such taxable service, whether or not performed outside India, shall be treated as the taxable service performed outside India.

(iii) specified in clause (105) of section 65 of the Act, but excluding.–

(a) sub-clauses (zzzo) and (zzzv);

(b) those specified in clause (i) of this rule except when the provision of taxable services specified in sub-clauses (d), (zzzc) and (zzzr) does not relate to immovable property; and

(c) those specified in clause (ii) of this rule, when provided in relation to business or commerce, be provision of such services to a recipient located outside India and when provided otherwise, be provision of such services to a recipient located outside India at the time of provision of such service:

Provided that where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located outside India.

Provided further that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is provided to a recipient located outside India, then such taxable service shall be treated as export of taxable service subject to the condition that the tangible goods supplied for use are located outside India during the period of use of such tangible goods by such recipient.

(2) The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:-

(a) such service is provided from India and used outside India; and

(b) payment for such service is received by the service provider in convertible foreign exchange.

Explanation.-For the purposes of this rule “India” includes the installations, structures and vessels in the continental shelf of India and the exclusive economic zone of India”

Thus the condition that the service is used outside India is equally important. Though many companies are claiming exemption on service provided by them on the ground that they are receiving payment in foreign currency based on opinion of their Consultants who might have charged them Rs 1 lakh for Opinion but they may be in for a shock when the Service Tax Audit department visits them for audit of their records. At a subsequent stage when the demand is issued; they may not be in a position to recover from their clients and they may be required to pay interest at the rate of 13 per cent and penalty equal to service tax involved from their pocket. It is in their interest to seek a second or third opinion from another Advocate as opinion of even the best Consultant can be wrong when the issue is highly debatable.

CESTAT in a recent ruling in case of AIT-2009-360-CESTAT has ruled as under:

“place of performance of service is decisive for determining event of taxability as well as incidence of tax. The appellant appears to have performed service in India for ultimate consumption thereof in India by its clients/customers in India. The service is destined to exhaust in India and extinct soon after performance thereof. Post performance liability only remains to be discharged by foreign principal through the appellant in India. Thus the beneficiaries of services were located in India for ultimate consumption of the service provided in India.

the services provided by the appellant were only to benefit the consumers of Indian Territory and that was provided for and on behalf of the holding company in USA as well as the subsidiary in Singapore. The end user of service being located in India and need of such consumers being met by the appellant for and on behalf of its foreign principal, such services appear to have been provided in India and there appears no export of service. The foreign principal acted through its appellant Agent. The principal was not the beneficiary. A service provider acting directly or indirectly through its agent is not the beneficiary of service so provided while providing of service is its contractual obligation under terms of contract with clients/customers. Therefore in the present case of the appellant no service has occasioned to move out of India to a place out side India following well tested meaning of the term “export” under Section 2(18) of the Customs Act, 1962.

business auxiliary service provided by a service provider in terms of Section 65(105)(zzb) of Finance Act, 1994 is taxable for the rationale that the principal to whom the marketing support is given by the service provider, ultimately makes available of goods or services to the consumers in India. Similarly marketing support provided to the foreign principal as agent thereof also results with either ultimate supply of goods or provision of services to the consumers of India only and service reaches its destination in India to the intended consumer of the goods or services. Therefore whether service is directly provided by a foreign Principal in India or foreign principal providing service in India through its agents in India makes no difference under service tax law when service tax is a VAT and that too destination based consumption tax as per Apex Court Judgment in All India Fedn. of Tax Practitioners (supra). Had the service been provided to the foreign principal not resulting with ultimate supply of goods or provision of service to the consumer in India, such services might have assumed the character or nature of export of service following tested principles of customs law in India” 

Early identification of issue is more important for service providers rather than pushing the issue below the carpet. Several MNCs are already sitting on a Bomb claiming exemption from service tax based on the opinion of their Consultants. But how long the bomb will take in exploding is just a matter of time as service tax department has decided to ask for the agreements under which exemption is being claimed. Audit of all major service providers is already in offing. The lesson is never rely on opinion of a sole Consultant. Though many Consultants may boast of drafting of agreement on how to save service tax and may charge Rs 5 Lakh for drafting such agreement; when the service tax department calls for the copies of these agreements; these very Consultants ask the client not to submit the copy of agreement to the department knowing well that their agreement will not pass the test of exemption. 

(Writer is an Advocate based in Delhi. He is advising several MNCs, PSUs and Indian Corporates on service tax, excise and customs matters. He can be mailed at rssharma@gmail.com

(Source: Allindiantaxes)

NEW DELHI. Allowing Ved Jain, S.C. Tiwari, Rakesh Gupta, Anoop Sharma, Salil Kapoor,  Y.K. Kapoor, K.C. Singhal, M.V.R. Prasad, T.N. Chopra, Prakash Narain and  Keshav Prasad, all ex-members of ITAT , to appear before ITAT; Special Bench of ITAT vide AIT-2009-359-ITAT has ruled that:

“No doubt the Ministry, as it were, built a nice palace so that all of us in the ITAT could lead a happy and blissful life hereafter, used strong bricks, good cement and ISI marked steel but they built, in our view, on a loose soil or sandy bed or say without taking ecological clearance. The palace so built, although of strong structural components, is likely to crumble. The same is true here.”

Rule 13E, which was the bone of contention, was inserted by the Notification G.S.R. 389(E) dated 3-6-2009 issued by the Ministry of Law and Justice and reads as under:

“13E. The President, the Senior Vice-President, the Vice- President and the Member of the Tribunal shall not practice before the Tribunal after retirement from the service of the Tribunal.” 

The Special Bench, was constituted to answer the following questions:

“1.     Whether, the said Notification applies to the Members who have retired prior to the date of publication of the Notification?

2.      Whether, the said Notification applies only to the Members who retired from the Tribunal on and from the date of publication of this Notification?

3.      Whether, the said Notification applies to those Members who are recruited before but retire after the date of Notification?

4.      Whether, the said Notification applies to the Members who retire, if otherwise are qualified to practice u/s 288 of the Income Tax Act, should still be debarred to appear and argue before the Tribunal?

5.      Whether, the said Notification applies to the Members who resigned from services before the date of Notification, without any retirement benefits?”

6.      Whether the said Notification applies to the Members who are appointed on temporary basis and resign from service without being confirmed during the probation period, either before or after the date of Notification, without any retirement benefits?

Special Bench decided that matter as under:

(1)     In our view it does not apply to Members who have retired prior to the date of publication of notification.

(2)     In our view the question no. 2 is answered to the effect that it applies to the Members who retired from the Tribunal on or after the date of the publication of this Notification.

(3)     That once the Member reties after the date of Notification, it certainly applies. It does not matter when the Members were recruited. Even it applies to the Members who are recruited prior to the date of Notification. Crucial date must be the date of retirement. If it is after 3rd June, 2009, it applies.

(4)     Question no. 4 is answered that the Members who retire on or after 3-6-2009, even if otherwise qualified to practice u/s 288 of the Act, would still be debarred to appear and argue before the Tribunal, in the light of Rule 13E of the ITAT Members (Recruitment and Conditions of Service ) Rules, 1963.

(5)     Persons who have resigned from service prior to the date of Notification, without any retirement benefits would not be covered by this Notification because it applies to those persons who have retired after the date of Notification.

(6)     As regards question no. (6), we say the notification does not apply to members who are appointed on a temporary basis and resign from service without being confirmed during probationary period.  

Special Bench also hit at the Bar Associations by observing that “the President had sent two representations received from ITAT Bar association Mumbai and ITAT Bar Association Rajasthan for consideration of the same as per law. They stated in the said representations that they support the notification by the Ministry in the light of the decision of P.C. Jain’s case. We would have certainly appreciated their personal appearance and arguments. We must say that no legal issue can be decided on the basis of some perception of the matter in one quarter of the society. We have to go by the judicial interpretation that the law enacted by the Parliament/ Rule making Authority has received. In the light of the discussions made, we feel that we have done it. After all no law can be interpreted in a manner that pleases one section or to achieve the objects which they feel is right unless the legislature wants it that way in the expressed legislation.”

Thus the interpretation of Bar Associations and Media was found to be patently wrong by Special Bench. Bar Associations have also lost their credibility by jumping on a misleading conclusion on such a sensitive issue comprising their own members. It is strange how it happened when several Office Bearers of Bar Associations are considered to be Legal Experts or a section of them could not digest sudden success of some ex-ITAT Members and were facing stiff competition. Whether there was a hidden agenda or a game-plan to keep a section out of the match by declaring them injured and not fit to play?  Whether the action by Bar Associations will lead to another parallel Bar Association comprising of Ex-ITAT Members-only the time will tell. But Bar Associations must go for a soul searching to contain the damage to their credibility. The resignations by office bearers may be first step in such direction.

Only Allindiantaxes opined that the restriction does not apply to Ex-Members of ITAT who had already retired before the issue of Notification and the restriction will apply only in case of existing members after their retirement. Refer to AIT Report on the link below for details.

(Source: Allindiantaxes)