2024 (9) TMI 523 - AT - Income Tax

Taxability of Income under India-USA DTAA - 25% or 15% - denial of treaty benefits - status of assessee is a Limited Liability Company (LLC) and a fiscal transparent entities according to US tax laws -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 thus proposed to assess the assessee by charging 25% - what is the status of such corporations of the nature LLC for India-US DTAA? HELD THAT - Tax Residency Certificate as received from the United States Internal Revenue Service in accordance with the requirement of the law as applicable to the assessee, being an LLC, which is organized as body corporate as it fulfills all the requirements of a body corporate in the form of legal recognition of a separate existence of the entity from its Member and a perpetual existence distinct from its Members. Thus, the assessee being a resident under Article 4 of the Indo-US Tax Treaty by virtue of incorporation and its recognition as a separate existence from its Members qualifies as a person . Assessee is liable to tax in the resident State by virtue of US Income-tax Law as an LLC is given an option to either be taxed as a corporation or be taxed as a disregarded entity or partnership (depending on 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. Tax authorities below have fallen at both the counts by though considering the assessee to be a fiscally transparent entity has not considered to be not qualifying to be a person under Article 4 and, at the same time, have failed to appreciate that the phrase liable to tax has to be interpreted in the way that the assessee is liable to tax under the authority of the US Income-tax law. We are of the considered view that the intent of the Indo-US Treaty has to be given precedence wherein the concept of fiscally transparent entity is the recognized way of recognizing the phrase liable to tax. The fact that paragraph 1(b) of Article 4 of the Indo-US Tax Treaty recognizes partnership as a resident of the US for the purpose Indo-US Treaty to the extent that the income derived by such partnership is subject to tax in the US as the income either in the hands of the partnership or in the hands of its partners or beneficiaries. In this context, the judgement of the Mumbai Tribunal in the case of Linklaters LLP vs. ITO 2010 (7) TMI 535 - ITAT, MUMBAI can be relied. We also find force in the contention that this provision imposes a limitation on eligibility of a partnership to avail the benefits of India-US tax treaty as prescribed, i.e., it seeks to exclude from the eligibility of provisions of India-US tax treaty such income of the partnership which is not 'subject to tax' in the US (either in the hands of partnership or partners) An exclusion provision can only exclude something if it was included at the outset. Hence, a fiscally transparent partnership was already regarded as 'liable to tax' for the purposes of India-US tax treaty and this provision determines the scope of eligibility of such fiscally transparent partnership by excluding income which is not ultimately 'subject to tax' in the US. Thus, tax authorities have fallen in error in not extending the treaty benefit to the assessee. Resultantly the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Taxation rate applicability under the Double Taxation Avoidance Agreement (DTAA) between India and USA.
2. Initiation of proceedings under section 148 of the Act.
3. Legality of the assessment order without disposing of objections against reopening.
4. Eligibility for DTAA benefits.
5. Taxation of Limited Liability Companies (LLCs) under the DTAA.
6. Rate of tax applicable under the DTAA.
7. Computation of income.
8. Levy of interest under sections 234B and 234C of the Act.

Issue-wise Detailed Analysis:

1. Taxation Rate Applicability under DTAA:
The primary issue was whether the assessee's income should be taxed at 25% as per Section 115A of the Act or at 15% under Article 12 of the India-USA DTAA. The assessee argued that the income should be taxed at 15% as per the DTAA. The Assessing Officer (AO) reopened the case, contending that the income should be taxed at 25%, as the assessee, being a Limited Liability Company (LLC), was not liable to tax in the USA and thus not eligible for DTAA benefits. The tribunal concluded that the assessee, being an LLC, is eligible for the DTAA benefits and should be taxed at 15%.

2. Initiation of Proceedings under Section 148 of the Act:
The assessee contended that the AO erred in initiating proceedings under Section 148, as no income chargeable to tax had escaped assessment. The tribunal did not find it necessary to delve into this issue in detail, as the primary contention regarding the taxation rate was resolved in favor of the assessee.

3. Legality of the Assessment Order:
The assessee argued that the assessment order was illegal and void ab initio since it was passed without disposing of objections against the reopening, contrary to the due process of law laid down by the Hon'ble Supreme Court in GKN Drive Shafts (India) Ltd. vs ITO. The tribunal did not specifically address this issue, as the primary contention regarding the DTAA benefits was resolved.

4. Eligibility for DTAA Benefits:
The AO and Dispute Resolution Panel (DRP) contended that the assessee, being an LLC and fiscally transparent, was not liable to tax in the USA and thus not eligible for DTAA benefits. The tribunal, however, concluded that the assessee, as an LLC, qualifies as a resident under Article 4 of the India-USA DTAA. The tribunal emphasized that the term "liable to tax" should be interpreted to mean that the entity is subject to tax under the laws of the contracting state, irrespective of whether the tax is actually paid.

5. Taxation of LLCs under the DTAA:
The AO argued that LLCs, being fiscally transparent entities, do not qualify as residents of the USA under Article 4 of the DTAA. The tribunal disagreed, stating that the LLC, by virtue of its incorporation and recognition as a separate entity from its members, qualifies as a "person" under the DTAA. The tribunal also noted that the LLC is liable to tax under US income tax law, either as a corporation or as a disregarded entity, where the income is clubbed in the hands of its owner.

6. Rate of Tax Applicable under the DTAA:
The AO and DRP taxed the assessee's income at 25% under the Act, denying the 15% rate under the DTAA. The tribunal concluded that the assessee is eligible for the beneficial rate of 15% under the DTAA, as it qualifies as a resident of the USA and is liable to tax under US law.

7. Computation of Income:
The assessee argued that the AO erred in considering its income at INR 104,32,34,600 instead of INR 52,16,17,300. The tribunal did not specifically address this issue, as the primary contention regarding the DTAA benefits was resolved.

8. Levy of Interest under Sections 234B and 234C:
The assessee contended that the AO erred in levying interest under sections 234B and 234C. The tribunal did not specifically address this issue, as the primary contention regarding the DTAA benefits was resolved.

Conclusion:
The tribunal allowed the appeal of the assessee, concluding that the assessee, being an LLC, is eligible for the benefits of the India-USA DTAA and should be taxed at the beneficial rate of 15%. The tribunal emphasized the interpretation of the term "liable to tax" and the recognition of LLCs as separate entities under US law. The other grounds raised by the assessee were either not pressed or left academic.