Part C : Tribunal & AAR International Tax Decisions
21 Linklaters LLP v. ITO
2010 TII 80 ITAT Mum.-Intl.
Article 5 & 7, India-UK DTAA
Partnership firms, though assessed as fiscally transparent entities1 in the country of residence, are eligible to claim treaty benefits under the India-UK DTAA.
A Service PE is a deemed PE and, therefore, does not need to satisfy requirement of Basic PE rule. The presence of personnel in excess of the specified time-threshold, triggers service PE in India.
By providing for coverage ‘profits indirectly attributable to permanent establishment’ Article 7 of India-UK DTAA incorporates Force of Attraction (FOA) rule. Profits relating to services rendered outside India in respect of Indian projects are also taxable in India.
Facts :
The taxpayer, was a UK-based limited liability partnership, engaged in law practice. It did not have a branch or any other similar form of presence in India, but rendered legal services to certain clients whose operations extended to India. These services were rendered partly from the UK and at times, by partners and staff visiting India. During the financial year under consideration, the taxpayer’s partners/staff were present in India for more than 90 days.
The taxpayer disclosed ‘nil’ taxable income in Indian tax return by claiming treaty benefit and by contending that it has no PE presence (including service PE) in India.
Without prejudice, the taxpayer also claimed that as per DTAA, profits of PE were to be computed having regard to the market conditions in India. Arm’s-length income of PE is based on fiction of independence and is required to be calculated having regard to the rates that would have been charged by Indian lawyers/professionals for similar services.
The Tax Department rejected the taxpayer’s arguments and concluded that the taxpayer had a service PE in India. Entire income in relation to Indian projects (including services rendered from the UK office) was taxed on the ground that no details about overseas work was furnished.
On appeal, the CIT(A) agreed with the AO on the applicability of service PE Rule, but restricted taxation only to the extent of services rendered in India.
Held :
Treaty eligibility to the overseas firm assessed as flow through entity in home country :
The ITAT raised the issue about eligibility of the UK firm to claim treaty benefit. The issue was raised on account of ‘reverse hybrid situation’ and ‘asymmetrical taxation’ scenario arising from the UK firm being taxed in India at an entity level, whereas in the UK, the assessment is as a pass through/transparent entity in the name of the members of the firm. The ITAT rejected primary contention of the taxpayer challenging right of the tribunal to consider the issue for the first time. The ITAT was convinced that the legal issue could be examined by it after providing reasonable opportunity of hearing to the parties if the tribunal finding did not enlarge the quantum of income as assessed by the lower authorities.
Having proceeded to answer the issue, the ITAT held :
The UK legal firm is a person under the treaty definition of the term.
The difference in taxation system applicable to the partnership firm in the source jurisdiction [(India) and residence country (UK)] results in economic double taxation though not juridical double taxation. The philosophy of DTAA which supports merits of avoiding juridical double taxation should equally be applicable to a situation of economic double taxation.
The decision of Canadian Court in the case of TD securities (USA) LLC v. Her Majesty the Queen, (2010 TCC 186) supports that the treaty benefit can be given even in a situation involving asymmetrical taxation. In this case, single-member LLC of the USA was given the benefit of USA-Canada treaty despite the fact that in Canada, assessment was in the names of LLC whereas in the USA, due to the option exercised, the assessment was in the name of the member of the LLC. The decision also supports that the treaties need to be interpreted on a contextual basis rather than based on strict principles of interpretation as applicable to tax laws. The treaty interpretation is not subjected to literal interpretation in isolation with the objects and the purpose for which the treaty provisions are made.
The treaty benefit is available to a person who is a treaty resident of the other country. In terms of the treaty, an entity is resident of the UK if it attracts tax liability in the UK on account of criteria such as domicile, residence, place of management. Though the modalities or mechanism of taxation may vary, facts of taxation need to be decided in an objective and uniform manner.
Other issues :