Linklaters LLP Vs Asst Vs CIT (IT)-3(1)(2) Mumbai (ITAT Mumbai)
ITAT Mumbai held that remuneration received for providing legal services doesn’t amount to ‘fees for technical services’, where the provisions of section 9(1)(vii) of the Act is not applicable. Accordingly, the same is not taxable.
Facts- The assessee is a LLP incorporated under the laws of United Kingdom, engaged in providing legal services. The assessee is registered with the Registrar of Companies for England and Wales under the Limited Partnership Act, 2000 of the UK.
The assessee provides legal services to its clients on projects undertaken which are related to matters like mergers, acquisitions, restructuring, financing and tax, etc. The services rendered by the assessee are for drafting of documents and legal due diligence based on non Indian laws.
The assessee company filed its ROI dated 22.09.2016, declaring total income at Rs. Nil. The assessee’s case was selected for scrutiny, wherein the A.O. passed the draft assessment order dated 28.12.2019 u/s. 144C of the Act for which the assessee had filed its objection for the proposed addition/disallowances with the Dispute Resolution Panel (DRP). Subsequent to this, the A.O. passed the final assessment order u/s.143(3) r.w.s. 144C(13) of the Act dated 29.04.2021 after the DRP made the proposed adjustment duly after disposing of the objections raised by the assessee. The A.O. determined the total income at Rs.2,17,92,596/- after making the impugned additions/disallowances.
Another issue to be adjudicated is whether the invoice amounting to Rs.2,29,39,575/- raised by the assessee is in the nature of ‘fees for technical services’ as defined under Article 13(4)(c) of India UK DTAA. The assessee contends that the A.O. has given a factually inaccurate finding that the co-ordinate bench in assessee’s case has held the impugned amount to be taxable in India as per the DTAA.
Conclusion- We are not in agreement with the view taken by the A.O. No doubt that the firm consists of Partners and the income of the firm are taxed in the hands of the partners, the assessee is also said to be incorporated and registered under the laws of UK. Other than the fact that the assessee has not paid tax, we have observed from the orders of the DRP and the A.O. that there is no detailed analysis as to why the said benefit is to be denied to the assessee. There has been no discussion neither in the DRP’s order nor in the assessment order explaining why the income of the assessee is to be taxed in India. In the absence of such analysis, we are inclined to follow the decision of the Tribunal in assessee’s case for earlier years which has held that the assessee was entitled to India – UK tax treaty benefits.
It is observed that the Tribunal in A.Y. 2013-14 and 2015-16 have dealt with this issue and has held that section 9 of the Act does not apply in the case of the assessee relating to ‘fees for technical services’ and that the assessee was entitled to the benefit of DTAA. The Tribunal also held that the Revenue has failed to prove otherwise that the same pertain to ‘fees for technical services’. The Tribunal also held that the provisions of India-UK DTAA would override the provisions of the Act, thereby holding the remuneration received by the assessee for providing legal services as not amounting to ‘fees for technical services’, where the provisions of section 9(1)(vii) of the Act is not applicable. The tribunal has also held that the revenue has failed to prove that the same would fall under the category of ‘fee for technical services’ as envisaged in Article 13 of the India-UK DTAA and thereby holding that the same cannot be brought to tax as ‘FTS’ as per section 90(2) of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
These appeals are filed by the assessee, challenging the order of the learned Assessing Officer (A.O. for short) passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (‘the Act’), pertaining to the Assessment Year (‘A.Y.’ for short) 2016-17.
2. As the facts are identical, we hereby proceed to pass a consolidated order by taking ITA No. 1256/Mum/2021 as a lead case. The assessee has challenged the assessment order dated 29.04.2021 on various grounds.
ITA No. 1256/Mum/2021
3. The brief facts are that the assessee is a limited liability partnership incorporated under the laws of United Kingdom, engaged in providing legal services. The assessee is registered with the Registrar of Companies for England and Wales under the Limited Partnership Act, 2000 of the UK. The assessee provides legal services to its clients on projects undertaken which are related to matters like mergers, acquisitions, restructuring, financing and tax, etc. The services rendered by the assessee are for drafting of documents and legal due diligence based on non Indian laws. The assessee company filed its return of income dated 22.09.2016, declaring total income at Rs. Nil. The assessee’s case was selected for scrutiny, wherein the A.O. passed the draft assessment order dated 28.12.2019 u/s. 144C of the Act for which the assessee had filed its objection for the proposed addition/disallowances with the Dispute Resolution Panel (DRP for short). Subsequent to this, the A.O. passed the final assessment order u/s.143(3) r.w.s. 144C(13) of the Act dated 29.04.2021 after the DRP made the proposed adjustment duly after disposing of the objections raised by the assessee. The A.O. determined the total income at Rs.2,17,92,596/- after making the impugned additions/disallowances.
4. The assessee is in appeal before us, challenging the impugned assessment order on various grounds.
5. During the appellate proceedings, the ld. Sr. Counsel Shri Niraj Sheth appeared for the assessee and submitted that out of about 47 grounds raised by the assessee in the present appeal, ground nos. 12, 20, 27, 28 and 38 are the only grounds that requires to be adjudicated and that the remaining grounds will be dealt with along with the observation of the above mentioned grounds.
6. The ld. Authorised Representative (ld. AR for short) for the assessee proceeded to argue on the above grounds. The issues that are to be adjudicated in the present appeal are as below:
i. Whether the assessee was entitled to the benefit of India – UK double taxation avoidance agreement (DTAA for short)
ii. Whether the income of the assessee is in the nature of ‘fees for technical services’ as defined under Article 14(4)(c) of the DTAA
iii. Whether the assessee had a permanent establishment in India, which is determined from the fact that whether the assessee has furnished services in India exceeding 90 days.
iv. In the absence of permanent establishment in India, whether the assessee’s income was taxable in India as per Article 7(1) of DTAA.
v. Whether the assessee was liable to be taxed in India as per Article 15 of India-UK DTAA, which was only applicable to individuals and not in the case of the assessee.
7. The above mentioned issues are to be adjudicated in this present appeal. The first issue pertains to denying benefit of India – UK DTAA to the assessee by the A.O. The assessee contends that as per Article 4(1)(a) of the India – UK tax treaty, the assessee was liable to the taxed in the UK by reason of incorporation, domicile or place of management or on other conditions. The assessee claims to have been incorporated in UK and the taxes are paid by its partners and not by the firm per se. The assessee further contends that being a resident of UK, the assessee was entitled to the benefit of India-UK tax treaty. The assessee further submits that the assessee computes profits as per the provisions of UK tax law and allocated such profits amongst its members which are subject to tax in UK. The assessee relied on the decision of the Hon’ble Apex Court in the case of Union of India vs. Azadi Bacho Andolan [2003] 263 ITR 706 (SC), wherein it was held that the Hon’ble Apex Court has distinguished ‘liable to taxation’ and ‘pays tax’ and has also relied mainly on the OECD Model Tax Convention on Income and On Capital. The assessee relied on the said decision which had guidelines about double tax convention and contended that the assessee was not liable to be taxed in India. The assessee also relied on the decision of the co-ordinate bench in the case of Green Emirate Shipping & Travels [2005] 100 ITD 203 which held that the assessee need not be paying taxes in home country to get the benefit of Tax Treaty.
8. The ld. AR for the assessee contended that the assessee was entitled to the benefits under the DTAA between India and UK and placed reliance on the decision of the assessee’s case for A.Y. 2011-12 on similar issue.
9. The learned Departmental Representative (ld. DR for short) for the Revenue controverted the same and relied on the assessment order, wherein it was held that the Tribunal’s decision in assessee’s case was appealed before the Hon’ble Jurisdictional High Court and should not be placed reliance for the reason that it has not attained finality.
10. We have heard the rival submissions and perused the materials on record on this issue. It is observed that the assessee’s case for A.Y. 2011-12, the co-ordinate bench has held that the assessee is entitled to the benefits of India – UK DTAA by following the previous year’s decision of the Tribunal in the case of Linklaters LLP vs. DCIT (International Taxation)-3(1)(2), Mumbai [2017] 79 com 12 (Mumbai-Trib.). The relevant extract of the said decision is cited hereunder for ease of reference:
9. We have gone through the orders passed by the AO as well as DRP and also the submissions made before us and also the orders passed by the Tribunal in case of M/s. Linklaters for earlier years. With the assistance of both the parties, it was noted that this issue has cropped up in various earlier years in case of M/s. Linklaters i.e. A.Ys 1995-96, 1997- 98, 1998-99, 19992000 and 2001-02 wherein, the Tribunal has decided this issue in favour of Linklaters by holding that it is eligible for the benefits of India -UK DTAA. Our attention has been drawn upon the orders passed by the Tribunal for all these years. In A.Y.1995-96, the Tribunal vide its order reported in 132 TTJ 20 made elaborate discussion at paras 21 to 28 before arriving at the conclusion at paragraph 79 as under:-
“In view of the above discussions, as also bearing in mind the entirety of the case, we hold that the assessee was indeed eligible to the benefits of India-UK tax treaty, as long as entire profits and the partnership firm are taxed in UK – whether in the hands of the partnership firm though the taxable income is determined in relation to the personal characteristics of the partners, or in the hands of the partners directly. To that extent, I.T.A. No.1690/Mum/2015 objection taken by the learned Departmental Representative, on the question of admissibility of India-UK tax treaty benefits, is held as maintainable but rejected on merits”.
10. Similarly, in other years, the Tribunal has followed its earlier order and held that M/s. Linklaters is eligible for the benefits of India-UK DTAA so long as entire profits of the partnership firm are taxed in UK, whether in the taxable income is determined in relation to personal characteristics of the partners or in the hands of the firm directly. In the year before us, there is no dispute on facts that ultimately tax has been paid either by the said firm or by its partners in UK. No distinction has been pointed out by the Ld. CIT-DR on facts or law. Under these circumstances, respectfully following the orders of the Tribunal in Linklaters’s case for earlier years, we hold that the assessee is entitled to claim benefits of India UK- DTAA. Therefore, Grounds 8 to 8.4 are allowed.
11. From the above observation, it is evident that this issue being a recurring one, has been dealt with by the Tribunal since A.Ys. 1995 – 1996 in various years and has held that the assessee is entitled to the benefit of India-UK tax treaty. The AO has rejected the assessee’s contention for the reason that the provisions of Article 4(1) read with Article 1(1) which states that unless the assessee can be said to be a resident of UK, the assessee cannot claim treaty benefits and unless the assessee is liable to tax in UK, the assessee cannot fulfill the requirement of being the resident in UK. The AO also stated that the assessee is not taxable unit with regard to the income of the LLP and the term ‘liable to tax’ cannot include a person who is not taxable in the home country. The AO further denied the assessee’s claim by stating that since the assessee was not taxed, the assessee will not be covered under the expression ‘liable to tax’, thereby not treating the assessee as a resident of UK and denied the benefits of the said treaty.
12. The A.O. has held that as per UK laws, LLP is not a taxable entity and since the assessee is not liable to tax and only its partners are assessed to tax, the assessee cannot be given the benefit of the Tax Treaty. We are not in agreement with the view taken by the A.O. No doubt that the firm consists of Partners and the income of the firm are taxed in the hands of the partners, the assessee is also said to be incorporated and registered under the laws of UK. Other than the fact that the assessee has not paid tax, we have observed from the orders of the DRP and the A.O. that there is no detailed analysis as to why the said benefit is to be denied to the assessee. There has been no discussion neither in the DRP’s order nor in the assessment order explaining why the income of the assessee is to be taxed in India. In the absence of such analysis, we are inclined to follow the decision of the Tribunal in assessee’s case for earlier years which has held that the assessee was entitled to India – UK tax treaty benefits. In holding so, we allow ground nos. 12 to 14 raised by the assessee.
13. The second issue to be adjudicated is whether the invoice amounting to Rs.2,29,39,575/- raised by the assessee is in the nature of ‘fees for technical services’ as defined under Article 13(4)(c) of India UK DTAA. The assessee contends that the A.O. has given a factually inaccurate finding that the co-ordinate bench in assessee’s case has held the impugned amount to be taxable in India as per the DTAA. The AO observed that the assessee has received the following receipts during the impugned year, which are summarized as under:
