In a landmark ruling, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that a UK law firm delivering services to clients in India is taxable.
But in what comes as a big relief to UK partnership firms, ITAT has ruled that UK partnership firms are entitled to benefits of the India-UK tax treaty. The ruling was delivered in the case of Linklaters LLP by a two-member bench of Pramod Kumar and RS Padvekar.
Key excerpts from the ITAT ruling in Linklaters LLP case:
1. "The very conceptual foundation of Honble Bombay High Court's decision in the case of Clifford Chance (supra) ceases to hold good in law."
2. "We are of the considered view that the entire fees for professional services earned by the assessee in connection with the projects in India and which is thus sourced from India is taxable in India under the domestic law."
3. "It does not, therefore, seem to be beyond the fundamental objectives of a tax treaty to relive the economic double taxation of an income a situation in which such economic double taxation arises due to asymmetrical tax treatment of a business entity."
4."It is fact of taxability of income in the residence state, rather than modality of such taxation, which must have greater relevance, and that the tax treaties ought to be interpreted on a contextual basis rather than on the basis of strict principles of interpretation of tax laws."
5. "In effect, thus, even when a partnership firm is taxable in respect of its profits not in its own right but in the hands of the partners, as long as entire income of the partnership firm is taxed in the residence country, treaty benefits cannot be declined."
6. "Having said that, we are alive to the fact that this line of reasoning is diametrically opposed to the stand taken by the OECD in the matter, but, having carefully considered the stand of the OECD on this issue, we are not persuaded by the OECD stand on the matter, nor the Indian judicial precedents support that position."
7. "A plain reading of Article 5(2) of India UK tax treaty, in the light of the above discussions, clearly shows Article 5(2) of India UK tax treaty is a mixture of what is usually contained in Article 5(2) and Article 5(3) in all major model conventions i.e. UN Model Convention, OECD Model Convention an UN Model Convention."
8. "The expression rendering and furnishing are somewhat interchangeable in normal course of business, and it will be too pedantic and hyper technical an approach to narrow down the meaning of the expression furnishing to exclude rendering of professional services.
A treaty, as we have see in detailed analysis of principles of interpretation of tax treaties earlier in this order, is to be interpreted in good faith on the basis of general expectations of the parties and in accordance with the ordinary meaning given to the treaty in the context and in the light of its objects and purpose. The interpretation canvassed by the learned counsel does not fit into this approach to treaty interpretation."