Fiscally transparent Swiss partnership firm is not eligible to claim benefits of India–Switzerland DTAA either at the partnership level or at the level of its partners.

Fiscally transparent Swiss partnership firm is not eligible to claim benefits of India–Switzerland DTAA either at the partnership level or at the level of its partners.

The Applicant, a Switzerland-based partnership firm (Swiss firm) was engaged in the practice of law and carried out its activities only in Switzerland. All the partners of the firm are tax residents of Switzerland. An Indian Company (ICO) appointed the Swiss firm to represent ICO in the adjudication proceedings in Switzerland.

The work in relation to the adjudication proceedings was performed by the Swiss firm primarily in Switzerland and Germany, except for a site visit and an adjudication hearing which happened over a period of six days in India. The Applicant approached the AAR to determine whether the fees received for legal services would be chargeable to tax in India under the provisions of the DTAA.

AAR Ruling

 The AAR denied benefit of the treaty to the firm as also to the partners and held that the income was sourced from India so as trigger tax in India.

It held :

(1) The partnership can be said to be domiciled in Switzerland or having its place of residence in Switzerland.

(2) However, for claiming treaty benefits, one needs to determine whether the firm is a ‘person’ within the meaning of the DTAA. If the body of individuals or any other entity is not a taxable entity in the contracting State, it will not be a ‘person’ under the DTAA.

(3) There is no definition of person in Swiss tax law corresponding to the IT Act, which confers the status of a ‘person’ on a partnership. Considering that partnership is not a taxable entity under the Swiss laws, it cannot claim the benefit of the DTAA.

(4) Benefit of DTAA cannot even be claimed by the partners as they are not the recipients of income. Partners merely have right to share profits of the partnership.

(5) Reliance placed on the OECD Commentary to support treaty eligibility is not accepted, since India is not a member of the OECD and India has also expressed its reservations on that part of commentary conclusion .

(1) The source of the income received by the Swiss firm, for rendering professional services to the Indian company, is in India. The fact that the major part of the services are rendered outside India in respect of a dispute arising in India cannot alter the source of income. Income would, therefore, be chargeable in India irrespective of whether it is FTS or not.