LLC Incorporated in USA and Recognized as Separate Existence From Its Members Is Eligible for Treaty Benefit | ITAT

Case Details: General Motors Company USA vs. ACIT - [2024] 166 taxmann.com 170 (Delhi-Trib.)

Judiciary and Counsel Details

• Dr. B.R.R. Kumar, Accountant Member & Anubhav Sharma, Judicial Member
• Ajay Vohra, Sr. Adv., Vishal Kalra, Adv., S.S. Tomar, Adv. & Sumeet Hemkar, CA for the Appellant.
• Vizay B. Vasanta, CIT-DR for the Respondent.

Facts of the Case

The assessee, a Limited Liability Company (LLC) incorporated in the USA, obtained a Tax Residency Certificate (TRC) from the US Internal Revenue Service in accordance with section 90 of the Act. During the assessment proceedings, the Assessing Officer (AO) denied the assessee the benefit of lower withholding tax rate available under the India-USA DTAA.

The AO contended that as per Article 4 of the India-USA DTAA, only the persons or entities liable to tax in their country under the laws of their country are considered residents for the purpose of DTAA. Since the assessee was not liable to tax in the USA, the benefit of DTAA was denied. The matter reached the Delhi Tribunal.

ITAT Held

The Tribunal held that the AO considered the status of the assessee as an LLC and a fiscally transparent entity according to US Tax laws. The treaty benefit was denied because the assessee was not considered a person liable to tax in the USA. For the purpose of Paragraph 1(b) of Article 4 of India-USA DTAA, the AO concluded that the LLC did not come under the special clauses for partnerships and trusts and holding specifically that the assessee was a corporation (LLC) in the eyes of US tax laws.

It is pertinent to note that under US federal income tax law, an LLC with a single owner is disregarded as separate from its owner unless the LLC elects to be treated as a corporation for US federal income tax purposes. The ability of the LLC to elect its tax classification under US federal income tax law also supports the legal situation or aspect of the LLC being liable to tax.

Thus, the assessee being a resident under Article 4 of the Indo-US Tax Treaty by virtue of incorporation and its recognition as a separate existence from its Members qualifies as a ‘person’. The assessee is liable to tax in the resident State by virtue of US Income-tax Law as an LLC is given the option to either be taxed as a corporation or be taxed as a disregarded entity or partnership (depending on the number of members) wherein the income of the LLC is clubbed in the hands of its owner who merely discharges the tax that is assessable in the case of the LLC.

Therefore, the assessee is liable to tax under the authority of the US Income-tax law. The intent of the Indo-US Treaty has to be given precedence wherein the concept of fiscally transparent entity is the recognized way of recognizing the phrase ‘liable to tax.’

Thus, the assessee was eligible to claim the benefits of the India-US tax treaty as it satisfied all the conditions for the eligibility at benefits of the India- US tax treaty and that the assessee was eligible to claim a beneficial rate of DTAA.

List of Cases Referred to

• Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373/263 ITR 706 (SC) (para 3.1)
• Linklaters LLP v. ITO [2010] 40 SOT 51 (Mumbai) (para 3.1)
• General Electric Pension Trust, In re [2006] 150 Taxman 545/280 ITR 425 (AAR) (para 4.8).