Article 9, India-Denmark DTAA – Fiscally transparent Danish partnership qualifies for benefits under India-Denmark DTAA; management of a business by a representative cannot lead to an inference that the income of the entity whose business is managed belongs to the representative.
Facts:
The Taxpayer is a partnership firm established under the laws of Denmark. The Taxpayer is “managing owner” of two shipping companies (FCos) incorporated under Danish law. The shipping business and the vessels belong to FCos, which are engaged in the shipping business in international traffic at the global level.
FCos were tax resident of Denmark and also had their place of effective management (POEM) in Denmark.
The Taxpayer managed the shipping business of FCos throughout the world, including India, and also filed corporate tax return on behalf of FCos in India (which had been merged), showing the gross receipts from the shipping income in India and claiming benefits under Article 9 of India-Denmark DTAA wherein profits derived from operation of ships in international traffic are taxable only in the country in which the POEM of the enterprise is situated.
The Tax Authority contended that income from shipping business is taxable in the hands of the Taxpayer as there is no difference between FCos and the Taxpayer, which was acting as the former’s beneficial owner. A person who is a resident of contracting State is entitled to treaty benefit of a DTAA if income of such a person is subjected to tax in the resident country. As per the tax laws of Denmark, the partnership firm is regarded as a fiscally transparent entity. It is not taxed at the entity level but its partners are taxed on the income earned by the partnership firm. Since the Taxpayer is a fiscally transparent entity, the India-Denmark DTAA benefits are not available to it.
Held:
On applicability of benefits of India-Denmark DTAA to a fiscally transparent entity:
• A person who is resident of a contracting state is entitled to treaty benefits if it is liable to tax in that state. As per Danish laws, the partnership firm, as such, is not taxable.
• However, the entire income of the partnership firm is taxed in the hands of its partners and, therefore, the entire income earned by the partnership firm can be said to be fully taxable in the resident state.
• As long as income of the partnership is taxed, albeit in the hands of the partners in the resident state, the India-Denmark DTAA benefits cannot be denied. The basic purpose is whether or not the entire income is taxable in the resident state. The mode of taxability, whether in the hands of partnership or the partners, cannot be given much credence so long as the income is fully taxed in the resident state.
• Reliance was placed on the Tribunal’s ruling in the case of Linklaters LLP, [2012] 132 TTJ (Mum.) 20, to conclude that, even though the partnership firm is a transparent entity, once its income and profit is taxed in the hands of the partners, the treaty benefits should be extended to the partnership firm.
On taxability of shipping income:
• As per the Articles of Association of FCos, the Taxpayer acts as a representative of FCo and, in that capacity, it acts and carries out obligations on behalf of FCo and also files corporate tax return in India on its behalf.
• The Taxpayer can be compared to a CEO of a company who is managing the affairs of the company and this does not lead to any inference that the income of the company belongs to the CEO.
• Thus, the shipping income belongs to FCo only and not to the Taxpayer. Accordingly, the exemption under Article 9 was available to FCo, being resident of Denmark.
