TaxTMI 
TaxTMI 
2024 (4) TMI 388
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....dian engagements (amounting to GBP 22,45,971) as 'Fees for Technical Services' under the provisions of section 9(1)(vii) of the Act for the subject assessment year. 3. The learned CIT(A) erred in affirming the learned AO's position that the Appellant is not eligible to be governed by the beneficial provisions of the Double Taxation Avoidance Agreement between India and the UK ("India-UK tax treaty"). 4. The Learned CIT(A) erred in not quashing the penalty proceedings initiated by the learned AO under section 271(1)(c) of the Act." 3. Briefly stated, the assessee, a Non-Resident LLP, is a firm of Solicitors registered in UK and is engaged in providing legal services to its clients worldwide. It provides legal services to clients (both resident as well as non-resident in India) who have utilized its services in business(es) undertaken by these clients in India and/or earning income from a source(es) in India ("Indian engagements"). During the AY 2014-15, it did not maintain any office in India and rendered these services through its members and employees, primarily from outside India (with only occasional visits to India). 3.1 The assessee filed its return for....
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....is a fiscally transparent entity, not liable to taxation in UK, and has been specifically excluded from the definition of a resident. Article 4.1 reads as follows:- "For the purposes of this Convention, the term resident of a contracting state means any person who, under the law of that state, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature," A Limited Liability Partnership (LLP) is not liable for taxation in UK, in its capacity as 'Limited Liability Partnership'. It is the partners of an LLP, in UK, which are taxable. Unless an entity is liable to taxation, it does not fall within the purview of a resident within the meaning of Article 4(1) of the India-UK DTAA and is therefore, not eligible for benefit of India-UK DTAA. The case of a Partnership Firm (which includes a Limited Liability Partnership), is opposite in India. In India, it is the entity ie. the Partnership Firm or the LLP which is taxed as an entity on a standalone basis. The partners themselves are not taxed with regard to their share of income in the Partnership Firm or in the LLP. 4.5 The ap....
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....under the India-UK Tax Treaty During the previous year relevant to the subject AY, the Appellant operated as a Limited Liability Partnership ("LLP") in the UK. As per Article 3(1)(1) of the India-UK Tax Treaty, the term 'person' is defined to include an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective countries. Purther, it specifically excludes partnerships other than a partnership which is treated as a taxable unit under the Act. Further, Article 3(1)(g) of India-UK Tax Treaty defines the term 'company' in a fairly exhaustive manner to cover the following: (a) Any body corporate; and (b) Any entity which is treated as a body corporate for tax purposes. Therefore, 'any' body corporate created under the law of 'any' country is a 'body corporate' under the India-UK Tax Treaty. LLPs incorporated in the UK qualify as a body corporate as per the provisions of Limited Liability Partnerships Act, 2000 ("UK LLP Act"), since: Section 1(2) of the UK LLP Act provides that an LLP is a "body corporate" wi....
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....or levy of tax on the taxable unit, being the LLP. As per the provisions of Article 4 of the India-UK Tax Treaty, what is relevant is the tax liability in the UK and not necessarily that the tax liability should actually be imposed on or discharged by the same entity. Even the Indian Income Tax Act contemplates situations where tax pass-through is allowed to various entities (including LLPs) established as Alternate investment funds / Business Trusts wherein specified nature of income(s) of such entity are not taxed at entity level, rather at the level of constituents investor/unit holders. One such example is the case of an LLP established in India as an investment fund registered as a Category I or a Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992. This principle has been duly affirmed by the Hon'ble Mumbai Income Tax Appellate Tribunal ("ITAT") in the case of Linklaters LLP vs ITO (132 TTJ 20), wherein the Hon'ble ITAT concluded that a UK LLP would be eligible for the benefits under th....
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....(supra) concluded that the taxpayer (being a fiscally transparent partnership established under Danish law) is entitled to the benefit of the India-Denmark tax treaty once the income of the partnership is taxed in Denmark, irrespective of the fact that the same is taxed in the hands of the partners. The relevant observations from the ruling are reproduced below: "32. Thus, even though the partnership firm is a transparent entity but once its income and profit is taxed in the hands of the partners, the treaty benefit should be extended to the partners. Accordingly, we respectfully following the reasoning and the conclusion drawn by the co-ordinate bench in Linklaters LLP (supra), we hold that the assessee firm is entitled for the treaty benefit and if any such income of the assessee is not liable for tax under the Articles of the treaty, the benefit has to be given. Once the resident State has a right to tax the income of the partnership firm irrespective of the fact that the same is being taxed from the partners, then it is suffice that it has to be treated as fiscal domicile of that State within Article-4." Accordingly, in light of the above, the taxing of income....
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.... applied for the purpose of determining whether the said partnership is a firm within the meaning of the said Act, leads this court to conclude in the affirmative. That obviates the necessity of applicability of the provisions of the Limited Liability Partnership Act, 2008. Once it is found the said partnership is a firm under section 2(23)(i) of the Income Tax Act, 1961, it becomes a person under section 2(31)(iv) of the said Act, attracting the operation of paragraph 2 of Article 3 of the said convention. Such conclusion is inescapable as the Revenue must bring a charge On income tax against a person under section 4 of the Income Tax Act, 1961. The Revenue in treating the said partnership as an assessee and seeking to assess income of it which had escaped assessment is for the purpose of charging tax on the income of the said partnership, treating it as a person liable to be charged with the levy of income tax under the said section. In doing so the revenue has to treat the said partnership as a person within the definition provided of person under section 2(31)(iv) of the said Act. Thus the Revenue's case the said partnership is not covered by the said convention fa....
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....manent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests); (b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; (c) if he has an habitual abode in both Contracting States or in either of them, he shall be deemed to be a resident of the Contracting State of which he is a national; (d) if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. 3. Where by reason of the provisions of paragraph 1 of this Article a person other than on individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated." The post-protocol (e. Amended) Article 4 of India-UK DTAA as follows: ....
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....treaty benefits begin to apply to income derived by a partnership firm to the extent such income is taxed in the UK in the hands of its partners. It is therefore, clear that this benefit is available to a UK entity (in this case the fiscally transparent LLP as is the appellant), only after the amendments consequent to Protocol coming into force. The protocol was concluded on 30.10.2012 and its entry into force was 27.12.2013. I note that none of the case laws relied upon by the appellant had the benefit of the implications of the Protocol having been entered into and its coming into force with effect from 27.12.2013, having been brought for discussion. The amendments introduced by the Protocol are not retrospective for even clarificatory). The amendments introduced by the Protocol are clearly prospective. There was no intention in the India-UK DTAA to allow benefit to such Fiscally Transparent entities. It is clear that before the Protocol having come into force, an Indian entity placed similarly would not have been allowed Treaty benefit by UK Tax Authorities. The benefit of Treaty as claimed by the appellant is thus, not available to it as it refers to a period ....
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....one through its partners. 9.2 HSF has filed the Indian income-tax returns for A Y s 2012-13 and 2013-14, wherein, for the purpose of determining its taxable income in India, HSF has claimed the benefits of the India-UK Double Taxation Avoidance Agreement (,India-UK DTAA') on the portion of its income from Indian engagements, which has been taxed in the UK in the hands of its UK tax resident partners. 9.3 Accordingly, as per the India-UK DTAA, income received by HSF from the provision of legal services under Indian engagements does not fall within the meaning of Fees for Technical Services ('FTS') (as defined in Article 13 of the India-UK DTAA) since the subject services do not make available inter-alia any technical knowledge, experience, skills, know-how or process. Therefore, the income received by HSF from the provision of legal services, being in the nature of business income for HSF, is not taxable in India in the absence of a Permanent Establishment ('PE') of HSF in India as per the provisions of Article 5 read with Article 7 of the UK-India Convention. 9.4 The balance portion of the income from Indian engagements (i.e., income t....
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.... Linklaters LLP vs DCIT 97 taxmann.com 464 (Mumbai - Trib.) (Page 174 of the legal paperbook) (iii) Income-tax Officer, (International Taxation)-3 (I) vs Linklaters & Paines 49 taxmann.com 66 (Mumbai - Trib.) (Page 183 of the legal paperbook) 12. Thereafter, he referred and drew support from the interpretation to term 'liable to tax' from the decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan 263 ITR 706. He further submitted that in addition to the above, in the following judicial pronouncements, the eligibility of a fiscally transparent partnership firm to avail of the tax treaty benefits has been affirmed on the basis that the income of the partnership firm has been taxed in the foreign state in the hands of its partners: (i) Dy. DIT (IT) v. A. P Moller [2013] 39 taxmann.com 27/{2014] 67 SOT 147 (URO)/158 TTJ 537 (Mum.) (Page 197 of the Paperbook) (ii) P & O Nedlloyd Ltd & Ors vs Asstt. DIT-IT [2014] 52 taxmann.com 468/[2015] 228 Taxman 90/[2014] 369 ITR 282 (Cal.)(Page 190 of the Paperbook) (iii) Maersk Line U.K. Ltd vs Dy. DIT [2016] 68 taxmann.com 173 (Cal.) (Page 237 of the Paperbook) (iv) T D Securitie....
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....force. The protocol was concluded on 30.12.2012 and its entry into force was 27.12.2013." 13.1 Referring to the above, ld. CIT DR further contended as under :- "Most humbly, it is submitted that none of the case laws relied upon by the appellant had the benefit of the implications of the Protocol having been entered into and its coming into force with effect from 27.12.2013, having been brought for discussion. The amendments introduced by the protocol are not retrospective or even clarificatory The amendments introduced by the protocol are clearly prospective. Prior to the entering into of the Protocol by the competent authorities of the respective states, the benefit of DTAA between India and the UK was not available to the persons, more specifically the fiscally transparent entities which do not fall under the definition of the tem "persons" under the DT AA. Thus, it is evident that prior to the Protocol there was no intention in the India -UK DTAA to allow benefit to such fiscally Transparent entities. It is clear that before the Protocol having come into force, an Indian entity placed similarly would have also not been allowed Treaty benefit ....
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....share in the firm. Partnership firms are treated as 'pass through entities' or 'fiscally transparent' for the purpose of taxation. UK Partnership firms were not in a position to unequivocally claim treaty benefits as they were not considered 'resident' under the India-UK DTAA. Even after amendment of the India-Us, DTAA through a Protocol between India and UK dated October 30, 2012, (notified vide Notification No 20/2014 dated February 10, 2014, with retrospective effect from December 27, 2013), the definition of person under Article 3(1)(f) still does not specifically include partnership firms. Therefore, "(i) a circular may be issued by CBDT to clarify that UK partnership firms, including LLPs, are eligible for the treaty benefits to the extent that the partners are taxable in UK; or (ii) another protocol may be entered into with UK to specifically include partnership firms and LLPs within the term 'person' as defined in Article 3 (similar to the India-USA Treaty" In the status, CBDT clarified that Circular No.02/2016 dated 25th February 2016 has been issued on the lines as recommended by the HLC. The Circular issued by the CB....
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....14. Upon careful consideration, we note that the claim of the assessee in this case is that the issue is squarely covered in favour of the assessee by the decision of ITAT Mumbai Bench in the case of Linklaters LLP (2010) 40 SOT 51 (Mum.). Further, this has been countered by the Revenue by suggesting that the decision did not have the benefit of implication of the protocol amendment which, according to the Revenue, came into force from 27.12.2013, hence this decision is not applicable. Per contra, ld. Counsel of the assessee stated that this claim of the Revenue is not correct inasmuch as ITAT Mumbai Bench in the case of Linklaters LLP on the same issue of tax treaty eligibility was dealing with AYs 2011-12, 2012-13 & 2013-14 and the ITAT pronounced the rulings in the year 2017 (79 taxmann.com 12), 2018 (97 taxmann.com 464) and 2019 (111 taxmann.com 198) respectively. Hence it is the submission of the assessee's counsel that Departmental authorities as well as the Departmental Representative's submission that the Protocol, which provides for an extension of India- UK DTAA applicability to a UK based partnership, is effective only from AY 2015-16 and onwards and shall not apply to t....