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2022 (10) TMI 903 - AT - Income TaxIncome deemed to accrue or arise in India - taxation of entire revenue received by the Appellant from provision of legal services on Indian engagements as 'Fees for Technical Services' under the provisions of section 9(1)(vii) of the Act for the subject assessment year - DTAA between India and the UK - HELD THAT - 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 in the case of Linklaters LLP 2019 (6) TMI 1502 - ITAT MUMBAI 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 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 2017and 2019 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 the year under consideration, is entirely incorrect and not in accordance with the judicial precedents. We find ourselves in agreement with the submission of assessee. We note that CIT DR has distinguished the decisions cited by suggesting that the decision was rendered prior to the protocol amendment and CIT DR is also suggesting that these decisions are not applicable. However, we find that no contrary decision has been produced by the Revenue. Hence, the canons of judicial discipline comes into play and the decision of ITAT on this issue cannot be ignored by mere claim of the Departmental Authorities and Representatives that these decisions are not applicable inasmuch as they have been rendered without considering the implication of the protocol amendment. We may recap that the assessee is a firm of solicitors having office in the United Kingdom and providing legal services to its clients worldwide i.e. non-residents and residents of India. Assessee is a UK based Limited Liability Partnership with a majority of its partners being tax residents of the UK. During the previous year under consideration, the assessee provided legal services to its clients in India/ Outside India relating to activities carried out by such clients in India. The Revenue s opinion was that assessee is not eligible for benefits of India-UK DTAA within the meaning of Article 4(1) of India-UK DTAA. Revenue s suggestion is that assessee is a Limited Liability Partnership and is not liable for taxation in UK in its capacity as Limited Liability Partnership and its partners of an LLP in UK are taxable. That 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 the benefit of India-UK DTAA. We find that ITAT was considering the same issue in the case of Linklaters LLP 2019 (6) TMI 1502 - ITAT MUMBAI and it has opined that assessee is entitled to the benefit of 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. The case is supported by the case laws referred of the assessee in the following judicial pronouncements that the eligibility of a fiscally transparent partnership firm to avail of the tax treaty benefits is affirmed on the basis that the income of the partnership firm has been taxed in the foreign state in the hands of its partners. Thus benefit of Article 4.1 is to be granted to the assessee in identical facts and circumstances of the case. Accordingly, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
Issues Involved:
1. Eligibility of the assessee for benefits under the India-UK Double Taxation Avoidance Agreement (DTAA). 2. Taxation of revenue received from legal services as 'Fees for Technical Services' under section 9(1)(vii) of the Income-tax Act, 1961. 3. Applicability of amendments introduced by the protocol to the India-UK DTAA. 4. Legitimacy of penalty proceedings initiated under section 271(1)(c) of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Eligibility of the assessee for benefits under the India-UK Double Taxation Avoidance Agreement (DTAA): The assessee, a UK-based Limited Liability Partnership (LLP) providing legal services, claimed benefits under the India-UK DTAA. The Assessing Officer (AO) denied these benefits, arguing that the LLP, being fiscally transparent and not liable to tax in the UK, did not qualify as a 'resident' under Article 4.1 of the DTAA. The Commissioner of Income-tax (Appeals) [CIT (A)] upheld this view, stating that the protocol amending the DTAA, effective from 27.12.2013, did not apply retrospectively. The Tribunal disagreed, citing the ITAT Mumbai Bench decision in Linklaters LLP, which allowed DTAA benefits to fiscally transparent entities if the income was taxed in the hands of the partners in the UK. This precedent was deemed applicable despite the protocol amendment, leading to the conclusion that the assessee was eligible for DTAA benefits. 2. Taxation of revenue received from legal services as 'Fees for Technical Services' under section 9(1)(vii) of the Income-tax Act, 1961: The AO classified the revenue from legal services provided by the assessee as 'Fees for Technical Services' (FTS) under section 9(1)(vii) of the Income-tax Act, 1961. The assessee argued that the services did not fall under FTS as defined in Article 13 of the India-UK DTAA, as they did not involve the transfer of technical knowledge, experience, skills, know-how, or processes. The Tribunal agreed with the assessee, noting that the legal services were business income and not FTS, and in the absence of a Permanent Establishment (PE) in India, the income was not taxable under the DTAA provisions. 3. Applicability of amendments introduced by the protocol to the India-UK DTAA: The CIT (A) and the Departmental Representative argued that the protocol amending the DTAA, effective from 27.12.2013, was prospective and did not apply to the assessment years in question (2012-13 and 2013-14). The Tribunal, however, referenced multiple judicial precedents, including the Linklaters LLP case, which applied the DTAA benefits to similar entities even after the protocol's introduction. The Tribunal concluded that the protocol did not alter the eligibility for DTAA benefits for the years under consideration, thus favoring the assessee. 4. Legitimacy of penalty proceedings initiated under section 271(1)(c) of the Income-tax Act, 1961: The CIT (A) upheld the initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961. However, the Tribunal's decision to allow the assessee's appeal on the primary issues effectively nullified the basis for the penalty. Since the additions to the taxable income were quashed, the penalty proceedings were rendered invalid. Conclusion: The Tribunal allowed the assessee's appeals for both assessment years, granting DTAA benefits and ruling that the revenue from legal services was not taxable as FTS. The protocol amendments were deemed not to affect the eligibility for DTAA benefits for the relevant years, and the penalty proceedings under section 271(1)(c) were invalidated.
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