ITAT Deletes Addition Against UK LLP Holding Legal Services by Foreign Law Firm Not Taxable as FTS

The Income Tax Appellate Tribunal (ITAT), Delhi, held that income earned by a UK tax-transparent partnership firm from legal and professional services cannot be treated as Fees for Technical Services under Section 9(1)(vii) merely because the services relate to Indian engagements.

The assessee, Herbert Smith Freehills LLP, is a UK-based international law firm that provides legal services globally. For the relevant assessment years, the assessee earned revenue from Indian legal commitments and claimed exemption under the India-UK DTAA to the extent attributable to UK-resident partners. In respect of income attributable to partners resident in other countries, the assessee claimed treaty protection under the respective DTAAs between India and those countries.

The AO accepted the treaty claim relating to UK-resident partners and also accepted taxation of the German partners’ share as offered by the assessee. However, he treated the income attributable to partners resident in Australia, France, Belgium, China and Japan as Fees for Technical Services under Section 9(1)(vii) and made additions accordingly.

The Tribunal observed that UK LLPs are tax-transparent entities and the income of the partnership is taxed in the hands of the partners according to their residential status. Therefore, while non-UK resident partners cannot claim benefits under the India-UK DTAA, their entitlement to treaty protection must be examined under the DTAAs applicable to their respective countries of residence. The Tribunal further held that legal and professional services constitute a category other than managerial, technical or consultancy services.

It was also observed that Article 13 of the India-UK DTAA specifically excludes professional services provided by lawyers and similar professionals from the definition of FTS. So, payments received by the assessee for legal services could not be taxed as FTS merely because they arose from Indian engagements.

Accordingly, the Tribunal held that the additions made by the AO under Section 9(1)(vii) were unsustainable and deleted the same. However, it restored the matter to the AO for examining the taxability of income attributable to non-UK partners under the respective DTAAs applicable to their countries of residence.