Income Tax Appellate Tribunal, Delhi (‘Appellate Tribunal’), in the case of General Motors Company USA v. ACIT, Circle International Taxation 1(3)(1)[i], discussed the provisions of India-USA Double Taxation Avoidance Agreement (‘DTAA’) and analysed whether the assessee can claim beneficial rate of tax as available under the head of fees for technical services (‘FTS’).
Facts
The General Motors Company (‘assessee’) claimed residency in the USA and offered income tax at 15% under the FTS provision of the DTAA. A show cause notice was issued to the assessee seeking submissions as to why it should not be taxed at 25%.
The assessee submitted that the phrase ‘liable to tax’ is not defined or explained in the DTAA. However, according to the commentary of the Organisation for Economic Co-operation and Development, a person may be liable to be taxed in a country even if that country does not impose the tax. The assessee further submitted that a person does not have to pay the tax to be considered liable for tax. Thus, tax residency is independent of the actual levy on the person.
The assessing officer (‘AO’) rejected the assessee's submissions on the grounds that the limited liability company (‘LLC’) is a fiscally transparent entity, its income is taxable in India, and it is not a tax resident of the USA. Therefore, the benefits under DTAA should not be available to the assessee.
The debt resolution panel upheld the AO's order. Thus, an appeal was preferred to the Appellate Tribunal.
Held
The Appellate Tribunal decided the appeal in favour of the assessee and held that the DTAA benefits should be available to the assessee company since the LLC is a tax resident of the USA; thus, the DTAA benefits should be allowed to the assessee.
Reliance was placed on the residency certification forms for availing DTAA benefits issued by the government of the USA, as well as the tax residency certificate issued to the assessee in the USA. It was noted that the tax laws of the USA recognize that the LLC with a single owner is to be disregarded as an entity separate from its owner unless it chooses to be regarded as a corporation for the purposes of taxation in the USA. The tax residency certificate provided that the assessee company is a resident in the USA for purposes of USA taxation.
Thus, it was decided that the assessee company is a resident of the USA and liable to be taxed in the USA under the provisions of the DTAA, as it has been incorporated in the USA, and its separation from its members qualifies the assessee as a person.
The interpretation of the phrase ‘liable to tax’ was discussed. It was held that this phrase should be interpreted as liable to tax under the authority of US Income-tax law. It was further observed that the DTAA provides for the exclusion of income that is not ‘subject to tax’ in the USA for partnerships, and the exclusion can only apply if there was intent to include the income at the outset. Therefore, it can be concluded that fiscally transparent entities, such as partnerships or LLCs, can be recognised as liable to tax for the purposes of the DTAA, provided their income is subject to tax in the USA.
Our Analysis
In this decision, the Appellate Tribunal analysed the provisions of the DTAA and discussed whether the benefits are available to LLCs. It noted that LLCs are fiscally transparent in nature; however, they can choose to be treated as separate entities for taxation purposes. If LLCs opt to be regarded as separate legal entities and are liable to tax in the USA, they are allowed to avail themselves of DTAA benefits.
The phrase liable to tax was analysed and interpreted, concluding that if an entity is liable to pay tax in the USA, it may avail itself of DTAA benefits. This decision reinforces that tax residency can exist independently of actual tax payment, setting a precedent for fiscally transparent entities seeking DTAA benefits.
End Note
[i] [2024] 166 taxmann.com 170 (Delhi - Trib.) dated 05.09.2024.
Authored by Rosy Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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