TMI Blog2024 (4) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - Shri G.S. Pannu, Hon ble Vice President And Ms. Astha Chandra, Judicial Member For the Assessee : Shri Porus Kaka, Sr. Adv., Shri Manoj Sabharwal Shri Divesh Chawla, Advocate For the Department : Shri Vizay B. Vasanta, CIT-DR ORDER PER ASTHA CHANDRA, JM The appeal filed by the assessee is directed against the order dated 13.04.2017 of the Ld. Commissioner of Income Tax (Appeals)- 43, New Delhi ( CIT(A) ) pertaining to the Assessment Year ( AY ) 2014-15. 2. The assessee has raised the following grounds of appeal:- That on the facts and circumstances of the case and in law: 1. The order passed by the learned CIT(A) confirming the additions to the Appellant s taxable income made by the learned AO is erroneous and bad in law and liable to be quashed. 2. The learned CIT(A) erred in upholding the taxation of entire revenue received by the Appellant from provision of legal services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w.e.f. 01.06.1976. Thereafter, the Ld. AO negatived the assessee s claim of its eligibility for benefit of India-UK DTAA for the reason recorded in para 5 of the assessment order. Accordingly, the Ld. AO completed the assessment on 29.09.2016 under section 143(3) of the Act treating the impugned receipt of 22,45,971 GBP equivalent to Rs. 22,09,36,207/- as FTS. 4. Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) but without success. The Ld. CIT(A) relying upon his following observation and findings given in assessee s appeal No. 21/2015-16 dated 29.08.2016 pertaining to AY 2012-13 upheld the action of the Ld. AO. 4.4 In that appeal order, I had noted at paras 4.4 till 4.8 as follows: 4.4 I find that the AO's case is that the appellant is not eligible for benefit of India-UK DTAA. According to the AO, an entity, to be eligible for India-UK DTAA, needs to be 'resident of a contracting state', within the meaning of Article 4.1 of India-UK DTAA. In this case, according to the AO, the appellant was not a resident of UK. The AO holds that a Limited Liability Partnership incorporated as per the laws of UK, is a fiscally transparent entity, not liable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as a person for the purposes of this Convention. Further, the term 'resident' has been defined under Article 4 of the India-UK Tax Treaty as follows: Article 4: Fiscal Domicile (1) 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. (2)... Accordingly, based on a combined reading of Article 1, Article 3 and Article 4 of the India-UK Tax Treaty, following conditions need to be satisfied for a person to be eligible for the beneficial provisions of India-UK Tax Treaty: The entity should be covered within the meaning of the term person , as defined in Article 3 of the India-UK Tax Treaty; and Such person should qualify as a resident under the India-UK Tax Treaty. HSF qualifies as a 'person' under the India-UK Tax Treaty During the previous year relevant to the subject AY, the Appellant operated as a Limited Liability Partnership ( LLP ) in the UK. As per Article 3(1)(1) of the India-UK Tax Treaty, the term 'person' is defined to include an individua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard, Article 4(1) of the India-UK Tax Treaty provides that 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. In the context of taxation of LLPs in the UK, UK domestic tax laws require the LLPs to file their tax return in the UK, and the tax liability of the LLP is merely appropriated against the partners. The same is evident from the tax return form filed by UK LLPs, which has been enclosed as Annexure therewith. Therefore, it is evident that even under the UK domestic tax laws, LLPs are treated as a taxable unit and appropriation of tax liability amongst the partners is merely a mechanism for levy of tax on the taxable unit, being the LLP. As per the provisions of Article 4 of the India-UK Tax Treaty, what is relevant is the tax liability in the UK and not necessarily that the tax liability should actually be imposed on or discharged by the same entity. Even the Indian Income Tax Act contemplates situations where tax pass-through is allowed to various entities (including LLPs) established as Alternate i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e process of interpreting a statute, one must start from the title and interpret the text of the provision with reference to its title. 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. (Emphasis supplied) In addition to the above, the Hon'ble Mumbai ITAT in case of M/s A.P. Moller us ACIT (TS-155-ITAT- 2013) relying on its own decision in the case of Linklaters LLP (supra) concluded that the taxpayer (being a fiscally transparent partnership established under Danish law) is entitled to the benefit of the India-Denmark tax treaty once the income of the partnership is taxed in Denmark, irrespective of the fact that the same is taxed in the hands of the partners. The relevant observations from the ruling are reproduced below: 32. Thus, even though the partnership firm is a transparent entity but once its income and profit is taxed in the hands of the partners, the treaty benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration of clauses 1(f) and 2 of Article 3 of the convention. It is found the said partnership, partners of which are registered in the UK, is not a person treated as a taxable unit under the taxation laws in force in the UK. Under section 2(31) (iv) of the Income Tax Act, 1961, person includes a firm. Under section 2(23)(i) thereof a firm shall have the meaning assigned to it in the Indian Partnership Act, 1932 and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008. The provisions of the Indian Partnership Act, 1932, in particular sections 4 and 69 when applied for the purpose of determining whether the said partnership is a firm within the meaning of the said Act, leads this court to conclude in the affirmative. That obviates the necessity of applicability of the provisions of the Limited Liability Partnership Act, 2008. Once it is found the said partnership is a firm under section 2(23)(i) of the Income Tax Act, 1961, it becomes a person under section 2(31)(iv) of the said Act, attracting the operation of paragraph 2 of Article 3 of the said convention. Such conclusion is inescapable as the Revenue must bring a charge On income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 2. Where by reason of the provisions of paragraph 1 of this Article an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules: (a) he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests); (b) if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; (c) if he has an habitual abode in both Contracting 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement. 3. Where by reason of the provisions of paragraph 1 of this Article a person other than an 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 4.7 The effect of the protocol is that it modifies Article 4 of the India-UK DTAA, which specifically deals with partnerships. Under the modified Article, the tax treaty benefits begin to apply to income derived by a partnership firm to the extent such income is taxed in the UK in the hands of its partners. It is therefore, clear that this benefit is available to a UK entity (in this case the fiscally transparent LLP as is the appellant), only after the amendments consequent to Protocol coming into force. The protocol was concluded on 30.10.2012 and its entry into force was 27.12.2013. I note that none of the case laws relied upon by the appellant had the benefit of the implications of the Protocol having been entered into and its coming into force with effect from 27.12.2013, having been brought for discussion. The amendments introduced by the Protocol are not retrospective for even clarificatory). The amendmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respectively. For this, ld. AR referred to page 44 of the factual paperbook. 9.1 As per the UK domestic tax laws, the Appellant files its income tax returns in the UK. The Partnership firms are required to file the return of income and are covered by the taxation laws of the UK. The firm is liable to tax on its profits in the UK and the recovery of tax is done through its partners. 9.2 HSF has filed the Indian income-tax returns for A Y s 2012-13 and 2013-14, wherein, for the purpose of determining its taxable income in India, HSF has claimed the benefits of the India-UK Double Taxation Avoidance Agreement (,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. 9.3 Accordingly, as per the India-UK DTAA, income received by HSF from the provision of legal services under Indian engagements does not fall within the meaning of Fees for Technical Services ('FTS') (as defined in Article 13 of the India-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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 11. Ld. Counsel of the assessee further submitted that subsequently, the decision of Linklaters LLP (supra) has been followed in the below mentioned decisions :- (i) Linklaters LLP vs DCIT 79 taxmann.com 12 (Mumbai - Trib.) (Page 153 of the legal paperbook) (ii) Linklaters LLP vs DCIT 97 taxmann.com 464 (Mumbai - Trib.) (Page 174 of the legal paperbook) (iii) Income-tax Officer, (International Taxation)-3 (I) vs Linklaters Paines 49 taxmann.com 66 (Mumbai - Trib.) (Page 183 of the legal paperbook) 12. Thereafter, he referred and drew support from the interpretation to term liable to tax from the decision of Hon ble Supreme Court in the case of Azadi Bachao Andolan 263 ITR 706. He further submitted that in addition to the above, in the following judicial pronouncements, the eligibility of a fiscally transparent partnership firm to avail of the tax treaty benefits has been affirmed on the basis that the income of the partnership firm has been taxed in the foreign state 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 tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable to a UK entity (in the case the fiscally transparent LLP as is the appellant), only after the amendments consequent to protocol coming into force. The protocol was concluded on 30.12.2012 and its entry into force was 27.12.2013. 13.1 Referring to the above, ld. CIT DR further contended as under :- Most humbly, it is submitted that none of the case laws relied upon by the appellant had the benefit of the implications of the Protocol having been entered into and its coming into force with effect from 27.12.2013, having been brought for discussion. The amendments introduced by the protocol are not retrospective or even clarificatory The amendments introduced by the protocol are clearly prospective. Prior to the entering into of the Protocol by the competent authorities of the respective states, the benefit of DTAA between India and the UK was not available to the persons, more specifically the fiscally transparent entities which 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 Protoco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners, as per their share in the firm. Partnership firms are treated as 'pass through entities' or fiscally transparent' for the purpose of taxation. UK Partnership firms were not in a position to unequivocally claim treaty benefits as they were not considered 'resident' under the India-UK DTAA. Even after amendment of the India-Us, DTAA through a Protocol between India and UK dated October 30, 2012, (notified vide Notification No 20/2014 dated February 10, 2014, with retrospective effect from December 27, 2013), the definition of person under Article 3(1)(f) still does not specifically include partnership firms. Therefore, (i) a circular may be issued by CBDT to clarify that UK partnership firms, including LLPs, are eligible for the treaty benefits to the extent that the partners are taxable in UK; or (ii) another protocol may be entered into with UK to specifically include partnership 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 read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the issue is squarely covered in favour of the assessee by the decision of ITAT Mumbai Bench in the case of Linklaters LLP (2010) 40 SOT 51 (Mum.). 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 ITAT Mumbai Bench 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 2017 (79 taxmann.com 12), 2018 (97 taxmann.com 464) and 2019 (111 taxmann.com 198) 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of its partners :- (i) DDIT vs A. P Moller 67 SOT 147 (Page 197 of the Paperbook) (ii) P O Nedlloyd Ltd Ors vs ADIT-IT 369 ITR 282 (Page 190 of the Paperbook) (iii) Maersk Line U.K. Ltd vs DDIT 68 taxmann.com 173 (Page 237 of the Paperbook) (iv) T D Securities (20 I 0 TCC 186; Decision dated April 8, 2010), the Tax Court of Canada (Page 263 of the Paperbook) 17. Thus, we note that the above case laws as well as ITAT Mumbai Bench decision in the case of Linklaters LLP (supra) has opined that 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. 18. Our above order applies mutatis mutandis to the appeal for AY 2013-14. 19. In the result, both the assessee s appeals stand allowed. 9. Respectfully following the decision (supra) of the ITAT, we decide ground No. 1 to 3 of the assessee in its favour. 10. Ground No. 4 regarding penalty under section 271(1)(c) of the Act cannot be considered in quantum appeal. It is a matter to be considered in separate penalty proceedings. 11. In the result, the appeal of the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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