Linklaters LLP operates a law firm that is based in the United Kingdom.
Although the assessee has other offices worldwide, it did not have any physical
presence or fixed base in India. Linklaters rendered legal advisory services to
clients in the U.K., whose operations extended to operations and projects
India, and the services were performed both from outside and from within India.
Sometimes its employees and partners were deployed to India for rendering such
services. This case was heard by the Mumbai bench of the Income Tax Appellate
The tribunal first looked at the domestic law and will consider the
treaty only when it is beneficial to the assessee2.
Under Indian domestic law, the consultancy services provided by the assessee
would constitute technical services under section 9(1)(vii). With the amendment
made to section 9(1)(vii) of the ITA through the Finance Act, 2010, technical
services are not required to provide within India but merely utilized in India,
there is no need to have any physical presence in India for the technical
services to be taxed. Therefore, the tribunal decided that the income derived
from all service performed that were utilized in India by Linklaters would be subjected
An LLP is fiscally transparent for tax purposes in the U.K. and its
income is taxed in the hands of its partners. Linkslaters filed no income in
its return as it contended that it was not taxable in India either under the
ITA or under the treaty. Even if
Linklaters LLP is fiscally transparent in the U.K. and its income of the firm
is taxed to its partners, it was liable to benefits of the India-U.K. treaty as
under article 4 resulting in double taxation. Furthermore, the activities of
the firm are viewed that the firm since constituted a service PE in India under
article 5(2)(k) because the firm rendered services in India for more than 90
days, the tribunal held that all income earned by the firm shall be taxable
under article 7.
In the India-U.K. treaty, article 7(1) includes the phrase “profit
directly or indirectly attributable,” the tribunal upheld that the term
“indirectly” triggered the force of attraction rule, thereby subjecting to tax
not just profits attributable to the PE, but also the entire earnings related
to the projects in India would be taxable regardless of whether the services
rendered outside or within India. As a result, the same principle as Indian
domestic law is applied through article 7 of the India-U.K. treaty. The
decision of Mumbai bench regarding article is debatable with respect to its
interpretation as analyzed in the following section.
Sriram P. (2013). The propriety of the force of attraction rule in
international tax jurisprudence. Tax Notes International, 70(9).
See Section 90(2), ITA. See also Union of India v. Azadi Bachao Andolan, 2003
263 ITR 706 (SC).