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TMI Blog2024 (9) TMI 523X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing 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 protection / benefits of the DTAA. 5. That on the facts and circumstances of the case and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers) 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 clear that a person does not have to be actually paying tax to be liable to tax' otherwise a person who had deductible losses or allowances, which reduced his tax bill t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 domi le of such a person. In other words, if fiscal domicile of a person is in a Contracting State, irrespective of whether or not that person is actually liable to pay tax in that country, he is to be treated as resident of that Contracting State. The expression liable to tax is not to read in isolation but in conjunction with the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 entity that is fiscally transparent has been replaced by derived by or through an entity that is treated as wholly or partially fiscally transparent. - Thus, it is submitted that the intent of the Contracting States is to grant the benefits of the India-US tax treaty to a fiscally transparent entity itself to the extent the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 to play. Viewed thus, the purpose of article 4 is ascertainment of fiscal domicile of a person, and a fiscal domicile is a factual aspect which cannot oscillate due to peripheral variations in the scheme tax laws of that jurisdiction. It is only elementary that no man can be without a domicile. The same is true for an enterprise, and for a fiscal domicile, as well. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly 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 ) from the United States Internal Revenue Service under the Act, in accordance with section 90. Further, in accordance with section 90, the Assessee has also maintained Form 10F with the prescribed information. Given these facts, the Assessee is eligible to avail the benefits of the India-US tax treaty from the perspective of the Act. Further, in terms of the provisions of the India-US tax tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, your honour's attention is drawn to the commentary of Professor Philip Baker which notes that It seems clear that a person does not have to be actually paying tax to be liable to tax'- otherwise a person who had deductible losses or allowances, which reduced his tax bill to zero, would find himself unable to enjoy benefits of the convention. It also seems clear that a person would otherwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 that the treaty is applicable to residents of one or both of the Contracting States Article 4 of the DTAA defines the term resident of a Contracting State Article 4 of the treaty further makes it clear that 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, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. He, accordingly, in view of the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for Form 8802 issued by Department of the Treasury, Internal Revenue Service, USA available at pages 18-33 of the PB; US tax residency rules in compliance with the OECD Common Reporting Standard (CRS) available at pages 34-37 of the PB; Article 1 and 3 of the US Model Convention (v. 2006) available at pages 38-41 of the PB; Article 1 and 3 of US Model Convention (v. 2016) available at pages 42-47; Relevant extract of the technical explanation to the US Model Tax Convention (v. 2006) available at pages 48-53 of the PB; Relevant extract of the OECD Model Tax Convention (v.2017) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 federal income tax purposes. An LLC with only one member is treated as an entity i.e. disregarded as separate from its owner for income tax purposes, (but as a separate entity for purposes of employment tax and certain excise taxes). Further it is provided that if an LLC has only one member and is classified as an entity disregarded as separate from its owner, its income, deductions, gains, losses and credits are reported on the owner s income tax return. 4.2. Further, as we take cognizance of the Instruction for Form 8802 which is for applying for a Residency Certification, the same provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 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 . 4.6 Further, the 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 corp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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