TaxTMI 
TaxTMI 
2024 (9) TMI 523
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....ts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant for the relevant AY as INR. 52,16,17,300 to be taxed at 25% as against the same income INR 52,16,17,300 to be taxed at 15% returned by the Appellant, denying the benefit of Double Taxation Avoidance Agreement between India and USA ("DTAA"). 2. That on the facts and circumstances of the case and in law, the AO has erred in initiating proceedings under section 148 of the Act, as no income chargeable to tax has escaped assessment. 3. That on the facts and circumstances of the case and in law, the assessment order is illegal and void ab initio since it has been passed without disposing off objections against the reasons for re-opening filed by the Appellant and without following the due process of law laid down by Hon'ble Supreme Court in GKN Drive Shafts (India) Ltd. vs ITO: [2003] 259 ITR 19 (SC). 4. That on the facts and circumstances of the case and in law, the AO/ DRP erred in disregarding the submissions and precedents relied by the Appellant and passing orders which are against trite settled position of law, by which Appellant is eligible to....
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....income tax law, an LLC is given an option to either be taxed as a corporation or be taxed as a disregarded entity or partnership (depending on its number of members) wherein the income of the LLC is clubbed in the hands of its owner who merely discharges the tax that is assessable in the case of the LLC. n this context, it is relevant to consider the meaning of the phrase liable to tax as is interpreted under the international commentaries and more particularly in Indian judicial precedents. In this regard, it is also relevant to consider some of the cases, where Courts/ Tribunal have, in similar facts, granted the benefit of treaty eligibility in situations where the income of an entity is clubbed with that of the member for purposes of payment of tax. While the phrase 'liable to tax' has not been defined or explained in India-US tax treaty, as per Article 4 of the Organization for Economic Cooperation and Development ("OECD') commentary 2017, a person is considered to be liable to comprehensive taxation even if a country does not in fact impose tax. Further, your goodselfs attention is drawn to the commentary of Professor Philip Baker which notes that "It seems c....
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....ls [2006] 6 SOT 329 (Mum) wherein it was observed that as long as a person has such locality related attachments to a Contracting State that attract residence type taxation, that person' is to be treated as resident and this status of being a 'resident' of the Contracting State is independent of the actual levy of tax on that person. Thus, it is submitted that being 'liable to tax' in the Contracting State does not necessarily imply that the person should actually be liable to tax in that Contracting State by virtue of an existing legal provision but would also cover cases where that other Contracting State has the right to tax such persons irrespective of whether or not such a right is exercised by the Contracting State. The relevant extracts of the ruling are reproduced as under:- "All that is necessary for this purpose is that the person should be 'liable to tax in the Contracting State by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature' which essentially refers to the fiscal domiçle of such a person. In other words, if fiscal domicile of a person is in a Contracting State....
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....oses for a single member LLC as a disregarded entity was introduced in 1996. Thus, at the time India-US tax treaty was executed (i.e. in 1989), LLC as a form of entity and the US federal income tax treatment on its income was not envisaged. The India-US tax treaty is based on 1981 US Model Convention which was formulated at a time, the US law did not recognize single member LLCs as disregarded entities for US federal income tax purposes. - In the technical explanation to the US Model Convention, it has been explained that this provision inter alia prevents the use of fiscally transparent entities to claim treaty benefits in circumstances where the person investing through such an entity is not subject to tax on the income in its state of residence. This suggests that ordinarily without the restriction on the extent of tax treaty being applicable, a fiscally transparent entity would be eligible to be treated as a resident eligible to tax treaty claim. - Your goodself will appreciate that in February 2016. the Us Treasury Department released an updated version of the US Model Convention. Amongst other changes, the phrase in the earlier versions "derived through an e....
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....ment or any other criterion of similar nature' is employed i.e., in the context of ascertaining fiscal domicile - as evident from the title of article as Fiscal domicile", it is sufficient that under the assignment or distributive rules of the treaty, the residence State has a right to tax income of the partnership firm irrespective of the fact the position whether or not such a right is actually exercised by the residence State. The undisputed objective of article 4 is to ascertain fiscal domicile of a person, and the heading of article 4, as we have reproduced earlier in this order, is "Fiscal domicile". It is a well known Latin legal maxim that "A rubro ad nigrum" which means, literally, from red to the black. In olden times, the title of a statute as well as headings of a provision in the statute, were written in red while its body text was written in black. This Latin maxim implies that in the process of interpreting a statute, one must start from the title and interpret the text of the provision with reference to its title. The same approach must holds good for interpretation of a tax treaty as well, because that is where contextual interpretation has an even greater role....
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....tax laws, i.e. their income is not subject to tax in their own hands in USA. Relying Article 4 of the India-USA DTAA, the AO concluded that such Corporation do not qualify as 'Residents' of USA in terms of Article 4 and only persons or entities that are liable to tax in their country under the laws of their country are considered resident for the purpose of DTAA. AO specifically observed that in treaty context, the term "laws of that State" means taxation laws of the State. AO further observed that Limited Liability Company also do not come under the special clause of partnerships and trusts laid down in paragraph 1(b) of Article 4 of the DTAA. Accordingly, AO concluded that in case of Limited Liability Company even if the share holders are residents of USA the Treaty benefits are not available to the Corporation. Accordingly, AO proposed to assess the assessee by charging 25%. 2.2 The Assessee had moved before the DRP and filed the objections. The submissions of assessee and DRP decision thereon are reproduced for convenience as under:- "3.1.1 Contesting the action of the AO, the assessee has submitted that the Assessee has obtained a tax residency certificate ("TRC") ....
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....ending on its number of members) wherein the income of the LLC is clubbed in the hands of its owner who merely discharges the tax that is assessable in the case of the LLC. In this context, the meaning of the phrase 'liable to tax' as is interpreted under the international commentaries and more particularly in Indian judicial precedents. It is submitted that being liable to tax' in the Contracting State does not necessarily imply that the person should actually be liable to tax in that Contracting State by virtue of an existing legal provision but would also cover cases where that other Contracting State has the right to tax such persons - irrespective of whether or not such a right is exercised by the Contracting State. Accordingly, it was submitted that the Assessee, being a US LLC, qualifies as a company' for the purpose of the India-US tax treaty. While the phrase 'liable to tax' has not been defined or explained in India-US tax treaty, as per Article 4 of the Organization for Economic Cooperation and Development ("OECD") commentary 2017, a person is considered to be liable to comprehensive taxation even if a country does not in fact impose tax. Further, you....
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..... Prashant Kumar Gulati vs ITO [2014| 50 taxmann.com 415 (Pune) In view of the above, it was submitted that the Assessee is eligible to claim the benefits-of India US tax treaty as it satisfies all the conditions for the eligibility at benefits of the India- US tax treaty and that the Assessee, therefore, is eligible to claim a beneficial rate of 15 percent for FIS instead of the rate provided under the Act (which is 25 percent plus applicable surcharge and cess). 3.1.2 The Panel has considered the submission. The AO has noted that the assessee' s own filings before the income tax authorities make it abundantly clear that the assessee is a "Limited Liability Company (LLC)" incorporated on 29.5.2009 in the state of Delaware in USA. Forms 15CA submitted by the remitters also mention the assessee as a LLC. He, accordingly, held that LLCs are fiscally transparent entities according to the US tax law, i.e., their income is not subject to tax in their own hands in the USA and such corporations, therefore, do not qualify as residents of USA in terms of the Article 4 of the India-USA DTAA. The AO relied in this regard on Article l of the India-US DTAA, which states th....
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....erisation of LLP for Tax and Treaty Purposes - Indian Perspective.pdf > accessed on 22 June 2022. 3.14 Thus, the Panel is of the considered opinion that the assessee cannot be considered a resident of USA in view of the recent work of the OECD in this regard, reflecting the international law on the point. The Panel, accordingly, upholds the action of the AO and dismisses the all objections of the assessee on this count. As for the providing copy of disposal order of the assessee's objections to notice under section 148, the Panel directs the AO to provide a copy of the order to the assessee in this regard, along with the final order." 3. Arguments were heard and record has been perused. 3.1 Ld. Sr. Counsel has primarily asserted all the arguments in regard ground no. 4 to 6 only, as initially made before the AO and then submitted to DRP. Apart from that a reference was made to the relevant clauses of Publication No. 3402 of the Department of Treasury, Internal Revenue Service, USA with regard to taxation of Limited Liability Company available at pages 1- 7 of PB, Regulation 301 7701-3 of the Indian Revenue Service, USA available at pages 8-17 of PB; Instructions ....
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....g a fiscally transparent entity, assessee was alleged to be not a person liable to tax in US and the conclusion drawn by the AO is that "it will beyond doubt and is a matter of fact that LLCs are not liable to tax in USA". Further, for the purpose of Paragraph 1(b) of Article 4 of India-US DTAA, the AO concluded that the LLC also do not come under the special clauses for partnerships and trusts and holding specifically that assessee is a corporation (LLC) in the eyes of US tax laws. 4.1 Thus, what is required to be ascertained is what is the status of such corporations of the nature LLC for India-US DTAA and for that purpose the Publication 3402 of the Department of the Treasury, International Revenue Service of the Government of USA on Taxation of Limited Liability Company as relied by the Sr. Counsel is a great help. The said document provides that Limited Liability Company is a business entity recognized by the United States under State law. An LLC may be classified for federal income tax purposes as a partnership, corporation or an entity disregarded as separate from its owner. Further, it is provided that an LLC with at least two members is classified as a partnership for f....
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....4 The aforesaid discussion further establishes that under US federal income tax law, an LLC with a single owner is disregarded as separate from its owner unless the LLC elects to be treated as a corporation for US federal income tax purposes. The ability of the LLC to elect its tax classification under US federal income tax law also supports the legal situation or aspect of the LLC being liable to tax. Further, where a LLC is disregarded as separate from its tax owner for US federal income tax purposes, the tax owner of the LLC pays tax on the tax owner's share of the taxable income attributed from the LLC. This further supports the legal situation of a LLC being liable to tax, i.e., the LLC is essentially 'liable to tax' but the income is attributed to its tax owner and such tax is imposed and paid by its respective tax owner, like US consolidated group rules where all affiliated US corporations file a single US federal income tax return. 4.5 After taking into consideration the aforesaid discussion, we are of the considered view that the Tax Residency Certificate as received from the United States Internal Revenue Service in accordance with the requirement of the la....