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TMI Blog2024 (4) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... cal 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 AY 2014-15 on 30.09.2014 declaring income of Rs. 1,40,59,840/- and claiming refund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appellant submitted, among other things, at page 6 till page 15 of their write up dated 26.08.2016, as follows:- "At the outset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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" with personality distinct from that of its members. Section 2 of the UK LLP Act provides for incorporation of an LLP. A LLP has to be registered with the Registrar of Companies and a Certificate of Incorporation has to be issued. Further, the features such as independent legal and perpetual existence, separate pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntities (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 the India-UK Tax Treaty as long as profits of the partnership firms are taxed in the UK, whether in the hands of the partnership firm or in the hands of the partner(s) directly. Towards the same, the Mumbai Income-tax Appellate Tribunal has categorically held that: "From a country perspective, what really matters is whether the income, in respect of which treaty protection is being s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in the hands of partners is only a mode of recovery of tax an, an LLP shall not cease to be a tax resident due to the same. In light of the aforesaid, it is submitted that the entity liable to tax and therefore, resident in the UK, is HSF (.e., the Appellant) and as a mechanism of taxation, the income of HSF is taxed in the hands of the partners/ members of HSF UK. In the case of T.D Securities (2010 TCC 186; Decision dated April 8, 2010), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 fails. In as much as in the facts and circumstances aforesaid it would be unjust to compel the said partnership or the petitioners to submit themselves to the assessment sought by the impugned notice, the writ petition succeeds. The impugned notice dated 25th March 2004 issued under section 148 of the Income Tax Act, 1961 to P&O Nedlloyd (partnership) is set aside and quashed. There will, however, be no order as to costs." (Emphasis supplied) Accordingly, in view of the aforesaid, and g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting 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: "1. For the purposes of this Convention, the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that: (a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State, and (b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 prior to the Protocol coming into force. 4.8 In light of the above analysis, I uphold the action of the AO. Ground nos. 2 till 5 are decided against the appellant." 4.5 1 find that the protocol as referred above came into force with effect from 27.12.2013, and was to be acted upon with effect from 01.04.2014. Accordingly, basing myself upon my own adjudication in appellant's own case in appeal for AY 2012- 13, as detailed above, ground nos. 2 and 3 are adjudicated against the appellant." 5. Dissatisfied, the assessee is in appeal before the Tribunal and ground No. 1 to 3 relate thereto. 6. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia-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 to the extent of profit share relating to partners who are tax residents of countries other than the UK, i.e., non-UK tax resident partners) has been offered to tax under the provisions of section 9(l)(vii) of the Income Tax Act, 1961 ('the Act') as FTS in India. 10. Thereafter, ld. Counsel of the assessee submitted that aforesaid issue is squarely covered by the ruling of ITAT in the case of Linklaters LLP (2010) 40 SOT 51 (Mum.). He further submitted that the assessee was a UK Partnership (similar to the Appellant), a fiscally transparent entity in the UK. The Hon'ble Mumbai ITAT has held that as long as the entity's income is taxed in the concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 Securities (USA) LLC v. The Queen 20 I 0 TCC 186; Decision dated April 8, 2010), the Tax Court of Canada (Page 263 of the Paperbook) 12.1 Further, the Hon'ble Mumbai Tribunal, in the case of Linklaters LLP, on the same issue of tax treaty eligibility, was dealing with AYs 2011-12, 2012-13 and 2013-14. The Hon'ble Tribunal pronounced the rulings in the year 2017 (79 taxmann.com 12), 2018 (97 taxmann.com 464) and 2019 (111 taxmann.com 198(Mum.) respectively, clearly after the protocol amendment came into effect. Hence, the Department Representative's submissions 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by UK Tax Authorities. In the circumstances, the interpretations laid down by various courts in the decisions cited by the Ld AR during the course of arguments, was not correct and therefore, the decisions rendered by various courts and relied upon by the appellant in so far as they relate to the period prior to the amendment of DTAA between India and UK are decisions in Personam and not decisions in rem and therefore have no binding force and cannot be applied to the facts of the case of the assessee which evidently relate to the period prior to the amendment of DTAA between India and UK." 13.2 Thereafter, ld. CIT DR referred to the interpretation of clauses of DTAA on the basis of observation of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra). 13.3 She further referred to the decision of K.P. Varghes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship 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 CBDT reads as under: CBDT Circular No 2 of 2016 "Benefits of the India United Kingdom (UK) Double Taxation Avoidance Agreement to UK Partnership firms An Amending Protocol to the India UK Double Taxation A voidance Agreement (DTAA) was notified vide Notification No 10/2014 dated 10TH February 2014 with effect from 2th ITA No.5760/Del./2016 ITA No.3993/Del./2017 14 December 2013. As a result of the aforesaid protocol, interalia, the earlier definition of the term person in article 3(1)(f) of the DTAA was amended to delete the exclusion of UK partnership firms and in addition, it has been provided in Article 4 of the DTAA that in case of a partnership, estate or trust the term "resident of contracting state" applies only to the extent that the income derived by such partnership, estate or trust is subject to tax in that state as the income of a resident, either in its hands or in the hands of its partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the ld. Counsel of the assessee. We note that ld. CIT DR has distinguished the decisions cited by suggesting that the decision was rendered prior to the protocol amendment and ld. 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. 15. 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 res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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