Video transcript below (auto-transcription may cause some errors):
Okay. Hello and welcome. This is Abhinav. And, in this video, I am, trying to capture, my learnings from a very, very important judgment that has come, by the ITAT. And this is the ITAT Delhi bench.
Very recent judgment that is, like, 5th September 2024, where the ideally ITAT has, has said that, US LLC, is qualified qualifies as a US resident under the India US DTAA Article 4. So let us, examine that judgment. It’s a recent decision reported in, 2024 166 Taxmann. So, in this judgment, what were the facts? So first, understand let’s understand the facts of the case, what the tribunal held, and then some other thoughts and questions that I have on this judgment and its overall impact on the LLC type structures, across the world.
Right? So fact to the case were that the assessee company claimed to be a resident of USA. So just to make things clear that, under the India under the DTAA, there is an Article 4 where which defines resident. And according to that particular Article, the company, claimed itself to be a resident of the USA. Right?
Which the LLC, as a resident of the USN, offered to tax the income, which, that he that it got, on account of fees at a lower rate of 15%. So the normal tax rate as for the Indian tax low was 25%, and they claimed the lower rate claiming that they were, eligible to the tax benefits as per the India US DTAA. Right? So they claimed a lower rate of 15%. However, the assessing officer denied the treaty beneficial rate and charged the income at the normal provisions of the Indian Income Tax Act at the rate of 25%.
So now the assesses so I read the entire judgment, and the assessee’s main contentions were that the status of the assessee was a limited liability company LLC and being a fiscal fiscally transparent entity according to the US tax laws so LLC is a fiscally transparent entity so how basically the taxation of LLC works is that the income of the LLC is taxed in the hands of the owners Right? And it has an option to elect it as a corporation or the or being disregarded. Right? So the assessing officer’s point was that it is a, it is a fiscally transparent entity according to the US tax law. The income is not subject to tax in its own hands in the USA, and that’s why the assessing officer relied on Article 4 of the India US DTAA, the language of the Article 4, and concluded that the corporation, the LLC in this case, does not qualify as a resident of US in terms of Article 4, and only persons or entities that are liable to tax in their country, in this case, US, as per the tax laws of that country, that means the US tax law are considered as resident.
So, basically, assessing Moses’ point was that it is a pass through entity. It is a disregarded entity as per the US tax law. Right? And second thing was that it is not liable to tax in in US. Right?
And that’s why it should not be considered as a resident. It doesn’t fall in the four corners of the DTAA Article of resident. That’s why, since it doesn’t follow as a resident under Article 4, the benefits of the India US DTAAA cannot be, given to the, assessor. Now the AO in his, you know, in in their, contentions, they also relied on the guidance on the OECD model convention commentary with respect to partnerships, whereby the OECD model convention says that partnerships are fiscally transparent entities and, hence, are not do not qualify as residents. And taking cue of that, commentary on Article 4 OECD model commentary, it said that the LLC does not come under the special clause of partnerships and trust under Article 4.
So that that was their argument. Now let us dis let us discuss what the tribunal had. So the tribunal heard both the parties’ or assessee’s contentions as well as the assessing officer’s, contention, and the tribunal held that under the US tax law, an LLC with a single owner is disregarded as separate from the owner unless the LLC elects to be treated as a corporation. So this is a set understanding. Right?
Okay. Now ability of the LLC to elect its tax classification under the US federal income tax law supports the legal situation or aspect of the LLC being liable to tax. So the important thing what in this judgment the tribunal inferred is that the ability of that l l c to be classified as a corporate corporation. Right? This supports that legal situation of the LLC to be a separate standalone entity liable to tax.
Then, the tribunal said that where the LLC is disregarded as separate from the tax owner for US Federal income tax purposes, the tax owner of the LLC pays tax on the tax owner’s share of the taxable income attributed from the SSE. This further supports the legal situation of the LLC being liable to tax. Only the discharge of the tax is done by the owners of the LLC. So this is a very, very important point in case of such structures. So where what the basically, the tribunal said that that the LLC was liable to tax.
Just the discharge of the tax, which was not in the hands of the LLC was done by the owners so it was more of a kind of a convenience provision in the tax law in the US tax law that the discharge of the tax liability of the LLC is done by the owner this doesn’t mean that the LLC doesn’t have a separate legal, position, legal, standing. Right? So the basically, the court said that the mere fact that the LLC has its own tax obligation, which then is discharged by the partners of the LLC, is basically supporting the fact that the LLC has a stand alone, perpetual standing. Then what the, basically, court did was the tribunal did was they relied on the wordings of the tax residency certificate that is received from the that is given by the Internal Revenue Service, in in the US. So they relied on the wordings of the TRC, and they said they actually, the in the judgment, it has been very clearly mentioned, the wordings, how the IRS issues the TRC, and it said that it fulfills all the requirements of legal recognition of the separate entity of the existence of the entity from its member and the perpetual existence which is distinct from its members.
Thus, the tribunal opined that the LLC, in this case, qualifies as a separate person liable to tax, and, hence so it’s a separate person from the wordings of the TRC, from the fact that, that, you know, it has a tax liability that arises, only discharges done by the person, and liable to tax. That means they said that it is liable to tax. They relied on the supreme court decisions in Azadi Bachao Andolan and all those things, and they said it’s liable to tax. It’s a separate person. Hence, it qualifies as a resident under Article 4 of the India US DTAA and can claim the reduced tax rate of 15%.
Right? So this is a very, very important judgment, and it will impact, and it will be kind of a favorite judgment for, like, Indian residents who hold, businesses who have overseas presence in terms of, LLCs in US. So in respect to the payments to those LLCs and all, but then I have certain thoughts and questions in this judgment. Now my point is that even though this judgment is there, this subject of Indian tax department ignoring the separate status of the LLC and disregarding that, status for the purpose of, giving the treaty benefits will be there even after this judgment. The there will it is this sub this particular area is always pruned litigation, and, and so that litigation risk will be there, and it remains to be seen whether the income tax department appeals against this judgment in the high court.
Now even in this case, see, their point was the income tax department point was that they relied on the OECD model convention with respect to the partnership, and they said that OECD model convention, the commentary, now that commentary cannot be, like, a it’s not a conclusive thing. Right? So in this case, what happened, they said it’s not a partnership. The court disregarded that particular point, and the court disregarded their reliance on the o c OECD model convention language by the ITAT. However, it may not be there in the other cases.
Right? So in this case, fortunately so it’s a lack of favorable judgment, as a for the professionals and for the people who are in tax practice, they can use this judgment. However, it’s still prone to debate. Now reliance was placed on a Linklaters LLP case. So what the tribunal did was it disregarded the, the assessor’s point on the OECD model convention on partnership, and it reliance it placed its reliance on the Linklaters LLP case.
Linklaters LLP case was based on a UK, related, taxation aspects, on PE. Right? So that judgment is, again, has come to light, and it it’s important for as CA professionals, we need to study that judgment in detail and take out any other favorable points which are not captured in this judgment, but can be taken from that judgment. So that judgment holds importance, the Linklaters LLP case. Azadi Bachao Andolan case was relied upon for the contention relating to liable to tax.
So now it’s like a kind of a settled position on liable to tax. Right? So that is, very, very clearly the tribunal said that the LLC is liable to tax. Only the discharge of the tax was done by the, by the members of that LLC. Now a question is whether this type or this judgment will apply to the LLC type structures in other jurisdictions.
Right? Maybe in other jurisdictions that have the similar structure where the LLC is disregarded and the , like, liability of the tax liabilities on the, individual peep members of the LLC. In other because here in this specific case was of US LLC where the LLC could opt for a election as a corporation or treat itself to be disregarded. However, in other type of a jurisdiction, whether that same benefit is not available if not available, then will this judgment hold good in that case? So that remains to be seen.
Now in one more important thing is that the ITAT, in this case, strongly relied on the wordings of the TRC. The wordings what the wordings that the, TRC are contained, so we, as, professionals, we also need to while we guide our clients, we also need to see study the wordings of the TRC issued by similar jurisdictions. So if you are taking up a case with respect to any other jurisdiction, a similar structure, so what is the TRC wordings if you can get from the client on such cases and then also study the wordings of the TRC because tribunals and courts can also, rely on the TRC wordings for the purpose of giving the judgment in such a case. So, these were some of my points. I hope they were useful in some way.
Do share your thoughts and feedbacks in the in the in the comment section. Thank you so much for watching this video thank you so much