2016 (4) TMI 526 - HC - Income Tax

Reopening of assessment against the partnership firm based in the UK - Indo-UK treaty - whether partners of the firm had fiscal domicile offshore - noticee to be a person covered by the treaty - Held that - Similar situation was dealt with in P & O Nedlloyd Ltd. & Ors. (2014 (11) TMI 564 - CALCUTTA HIGH COURT ) where this Court held the noticee to be a person covered by the treaty. Applying that decision to the facts of this case the noticee stands covered by the treaty as a person thereunder and being an enterprise of a Contracting State, taxable only in that State. This court is unable to take a different view than the one already taken P & O Nedlloyd Ltd. & Ors. (supra) on this issue as persuaded by the submissions made on behalf of the petitioners. Partnerships are not taxed in the UK, be it a partnership based there or here in India. Only partnerships established in the UK are required to file a return there as noted above. On the other hand, where a partnership based in the UK is treated as a person under domestic law as its income exigible to tax thereunder, it follows that paragraph 2 of Article 3 of the convention is to be given an interpretation so as to benefit such a partnership based in the UK which since not taxed under the laws there might be treated as liable to tax in India. Mr. Chakraborty had fairly submitted that there was a subsequent amendment made to the treaty and duly notified whereby similar issue would not arise in future against the noticee. Thus the noticee is a person covered under the treaty and being an enterprise of the UK, the same has fiscal domicile in the UK where it is based. Its income from operation of ships in international traffic is not exigible to tax under domestic law. Consequently the impugned notices are set aside and the writ petitions disposed of. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of notices issued under Section 148 of the Income Tax Act, 1961.
2. Application of the Double Taxation Avoidance Agreement (DTAA) between India and the UK/Netherlands.
3. Determination of fiscal domicile and tax liability of the partnership firm and its partners.

Issue-wise Detailed Analysis:

1. Validity of Notices Issued Under Section 148 of the Income Tax Act, 1961:
The court examined the issuance of notices under Section 148 related to assessment years 2005-2006 and 2006-2007. The petitioners challenged these notices, arguing that the income in question had already been assessed as nil in the hands of the partners, and thus, could not be taxed again in the hands of the partnership. The court noted that the assessment orders dated 31st October 2007 and 10th November 2008, which assessed the income tax payable as nil, were not under appeal before the Supreme Court, and thus, proceeded to hear the writ petitions.

2. Application of the Double Taxation Avoidance Agreement (DTAA) Between India and the UK/Netherlands:
The petitioners argued that under the DTAA, income from the operation of ships in international traffic is not liable to tax in India, as it was already assessed in the hands of the partners in their respective countries of residence. They relied on the Supreme Court's interpretation in 'Union of India vs. Azadi Bachao Andolan' which emphasized the importance of defining fiscal residence accurately and that liability to taxation is a legal situation, not necessarily tied to actual payment of tax. The court agreed with the petitioners, stating that the partnership, being an enterprise of the UK, was only taxable in that State under Article 9 of the DTAA.

3. Determination of Fiscal Domicile and Tax Liability of the Partnership Firm and Its Partners:
The Revenue contended that the partnership was fiscally transparent in the UK and thus outside the ambit of the treaty, making its income taxable in India under domestic law. However, the court found that the partnership was a person under the treaty and, as an enterprise of the UK, had fiscal domicile there. The court referred to the UK-India DTAA, which specifies that partnerships are not taxed in the UK, and thus, the income from the operation of ships in international traffic was not exigible to tax under Indian law.

Conclusion:
The court concluded that the partnership was covered under the treaty as a person and being an enterprise of the UK, had fiscal domicile in the UK. Consequently, its income from the operation of ships in international traffic was not taxable under Indian law. The impugned notices were set aside, and the writ petitions were disposed of. The court also noted that a subsequent amendment to the treaty would prevent similar issues in the future.