I. Introduction

International tax treaties represent one of the most significant mechanisms for facilitating cross-border trade and investment. By allocating taxing rights between contracting jurisdictions and providing relief from double taxation, these agreements seek to ensure that international commerce is not impeded by overlapping fiscal claims.

The increasing use of partnerships, limited liability partnerships ("LLPs"), investment funds and other hybrid entities, however, has introduced a complex dimension to treaty interpretation. While many jurisdictions treat such entities as fiscally transparent and tax their income directly in the hands of the partners or investors, other jurisdictions regard the same entities as separate taxable persons. These divergent domestic classifications often create uncertainty regarding treaty entitlement.

The issue is no longer confined to academic debate. Global professional firms, private equity funds, multinational investment structures and cross-border partnerships increasingly operate through fiscally transparent entities. Consequently, determining the person entitled to invoke treaty protection has become a question of considerable commercial importance.

Recent judicial developments in India, culminating in the decision of the Delhi Income-tax Appellate Tribunal in Herbert Smith Freehills LLP, have further expanded this debate by examining whether partner-specific treaty entitlement may extend across multiple bilateral tax treaties.

II. Evolution of International Tax Treaties

A. Why Do Double Taxation Avoidance Agreements Exist?

Every sovereign State possesses an inherent right to levy tax. In the international context, this right is generally exercised on the basis of two recognised principles:

• the source principle, under which income arising within a jurisdiction is taxed by that jurisdiction; and
• the residence principle, under which a State taxes the worldwide income of its residents.

In the absence of bilateral coordination, the same income may become subject to taxation in both jurisdictions, thereby resulting in juridical double taxation. Such overlapping taxation increases the cost of cross-border commerce, discourages international investment and creates uncertainty for taxpayers.

To mitigate these concerns, countries negotiate bilateral tax treaties based largely on the OECD Model Convention and the UN Model Convention. These treaties allocate taxing rights between the Contracting States, provide mechanisms for the elimination of double taxation, and facilitate cross-border trade and investment by enhancing certainty for taxpayers.

The international treaty framework has, however, undergone a significant transformation following the OECD/G20 BEPS Project and the coming into force of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI modifies the application of numerous existing bilateral tax treaties by incorporating internationally agreed minimum standards and anti-abuse measures without requiring individual renegotiation of each treaty.

Accordingly, although each DTAA differs in wording, and many have now been modified through the MLI, virtually every modern treaty pursues the following principal objectives:

• elimination of double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance;
• prevention of treaty abuse, fiscal evasion and tax avoidance, including treaty shopping arrangements;
• allocation of taxing rights in a manner consistent with internationally accepted BEPS standards; and
• promotion of genuine cross-border investment, trade and economic cooperation.

Accordingly, treaty benefits represent an integral component of international tax policy rather than a concession granted by one State to another. Post-MLI, however, such benefits are intended to be available only where they are consistent with the object and purpose of the treaty and are not obtained through arrangements whose principal purpose is to secure unintended treaty advantages.

B. Who Can Claim Treaty Benefits?

Not every foreign person is entitled to invoke a DTAA. Treaty eligibility depends upon satisfying the conditions prescribed by the treaty itself. Under the OECD Model Convention, the analysis proceeds sequentially.

First, Article 1 restricts the application of the Convention to persons who are residents of one or both Contracting States.

Secondly, Article 3 defines the expression "person", generally including:

• individuals;
• companies; and
• any other body of persons.

The OECD Commentary adopts a broad interpretation of this expression and recognises that partnerships and other collective investment arrangements may constitute "persons", depending upon the wording of the relevant treaty.

Finally, Article 4 requires such person to be a resident of a Contracting State by virtue of being liable to tax therein by reason of domicile, residence, place of management, place of incorporation or another connecting factor of a similar nature.

Accordingly, treaty entitlement depends not merely upon legal existence but upon the existence of a sufficient fiscal nexus with the relevant Contracting State.

C. Why Does the Issue Become Complex?

For ordinary companies, treaty entitlement rarely presents difficulty. Consider an Indian company receiving royalty from the United Kingdom. The company is a legal person, is liable to tax in India by reason of residence and therefore ordinarily qualifies to invoke the India–United Kingdom DTAA.

The position becomes considerably more complex where the entity itself is not subject to tax. In many jurisdictions, partnerships and LLPs do not pay income tax at the entity level. Instead, the entity computes its taxable income, allocates that income amongst its partners and the partners are taxed individually in their respective jurisdictions of residence.

This raises a fundamental question:

Can an entity that is fiscally transparent under domestic law nevertheless qualify as a "resident" entitled to claim treaty benefits?

The answer depends upon the interaction between domestic tax law, treaty interpretation and judicial precedent, and remains one of the most debated issues in contemporary international taxation.

III. Understanding Fiscal Transparency

A. Meaning of Fiscal Transparency

A fiscally transparent entity is one that is recognised under commercial law but disregarded for income-tax purposes. Rather than taxing the entity itself, domestic law attributes its income directly to the persons having an ownership interest in that entity.

The OECD Commentary describes fiscal transparency as a situation in which the income of an entity is treated, wholly or partly, as the income of its partners, members or beneficiaries for tax purposes. Consequently, the entity functions as a legal and commercial vehicle, while the tax liability rests with its owners.

Although the concept appears straightforward, significant complexity arises where the source State and the residence State adopt different tax characterisations of the same entity.

B. Illustrative Example

Under United Kingdom law:

• the LLP is not subject to income tax at the entity level;
• profits are allocated amongst the partners; and
• each partner is taxed individually in his or her jurisdiction of residence.

India, however, generally treats LLPs as separate taxable entities. Where India taxes the LLP while the United Kingdom taxes only the UK-resident partner and Australia taxes the Australian-resident partner, differences in domestic tax characterisation may expose the same income to double taxation unless appropriate treaty relief or foreign tax credit mechanisms are available. The central treaty question therefore becomes:

Who is entitled to invoke the applicable DTAA : the LLP, the individual partners, or neither?

This question lies at the heart of international disputes involving fiscally transparent entities.

C. Why Classification Differences Matter

Conflicts arise because different jurisdictions may assign different tax characterisations to the same legal entity. In a typical cross-border arrangement:

• the residence jurisdiction treats the partnership as fiscally transparent;
• the source jurisdiction treats the partnership as a separate taxable person; and
• treaty benefits may be denied if the partnership itself is considered not to satisfy the residence requirement under Article 4.

Such classification mismatches can result in either double taxation or, in certain cases, double non-taxation, depending upon the interaction of domestic tax laws and treaty provisions.

These issues explain why fiscally transparent entities continue to occupy one of the most technically challenging areas of international tax law.

IV. OECD Framework on Treaty Entitlement of Fiscally Transparent Entities

The increasing use of partnerships, limited liability partnerships, investment funds and hybrid entities exposed a significant limitation in traditional tax treaty drafting. Most bilateral tax treaties were negotiated on the assumption that the recipient of income would either be an individual or a company that was itself subject to tax in its State of residence. The emergence of fiscally transparent entities challenged this assumption by creating situations where the entity receiving the income was not the person ultimately liable to tax.

Differences in domestic tax characterisation frequently produced conflicting results. While one jurisdiction regarded the partnership as a taxable person, another treated the same entity merely as a conduit through which income passed to the partners. Consequently, identical income could either suffer double taxation or, in certain circumstances, escape taxation altogether.

Recognising these concerns, the OECD progressively developed an international framework intended to reconcile divergent domestic approaches while preserving the fundamental objectives of tax treaties.

A. The 1999 OECD Partnership Report

The first comprehensive international study on the treaty treatment of fiscally transparent entities was the Report on the Application of the OECD Model Convention to Partnerships, published in 1999.

Rather than prescribing a universal solution, the Report examined numerous situations in which the source State and the residence State characterised the same partnership differently. The Report recognised that domestic tax classifications should not, by themselves, determine treaty entitlement. Instead, the enquiry should focus upon whether the income is ultimately taxed in the hands of persons who are residents of a Contracting State.

The Report emphasised two fundamental principles.

First, treaty benefits should not ordinarily be denied merely because one Contracting State treats a partnership as fiscally transparent while the other regards it as a separate taxable entity. Such differences in domestic law should not frustrate the principal objective of tax treaties, namely, the elimination of double taxation.

Secondly, where income derived through a fiscally transparent partnership is taxed directly in the hands of its partners, the income may, in appropriate circumstances, be regarded as income of those partners for treaty purposes. This concept subsequently became known as the partner look-through approach.

Although highly influential, the Partnership Report did not constitute binding law. It represented interpretative guidance and was not uniformly accepted by OECD members or non-member jurisdictions. Consequently, considerable divergence continued to exist in State practice.

B. Evolution through the OECD Commentary

Following publication of the Partnership Report, the OECD gradually incorporated many of its principles into the Commentary accompanying the OECD Model Convention.

Successive revisions to the Commentary recognised that treaty entitlement should not depend exclusively upon the legal form of an entity. Instead, attention should be directed towards the manner in which income is treated for tax purposes within the residence jurisdiction.

The Commentary also acknowledged that determining treaty entitlement involves two distinct enquiries :

• First concerns whether the claimant qualifies as a "person" under Article 3.
• Second concerns whether that person satisfies the residence requirement contained in Article 4.

In practice, disputes involving fiscally transparent entities generally arise not because partnerships fail to constitute "persons", but because uncertainty exists regarding whether a fiscally transparent entity can be regarded as a resident that is "liable to tax".

Key Principle

The question is not whether the entity actually pays tax, but whether the relevant treaty recognises sufficient fiscal attachment between the income and the Contracting State to justify treaty residence.

C. Article 1(2) of the OECD Model Convention (2017)

The OECD's evolving approach ultimately culminated in the introduction of Article 1(2) into the 2017 OECD Model Convention.

The provision states:

"Income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State, but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State."

The significance of Article 1(2) lies in its recognition that treaty entitlement may, in appropriate circumstances, be determined by reference to the residence of the persons ultimately taxed on the income rather than the tax status of the entity through which the income is derived.

The phrase "to the extent" assumes particular importance. It limits treaty entitlement to that portion of the income which is actually treated as income of a resident of the relevant Contracting State. Consequently, where only a part of the partnership income is taxed in the hands of resident partners, treaty benefits extend only to that corresponding portion.

Article 1(2) therefore attempts to balance two competing objectives. It seeks to preserve treaty relief where genuine double taxation would otherwise arise while simultaneously preventing treaty benefits from extending to income that is not taxed in either jurisdiction.

It is important to appreciate, however, that Article 1(2) does not itself determine the substantive allocation of taxing rights. Once treaty entitlement is established, the taxpayer must still satisfy the requirements of the relevant distributive provision, whether relating to business profits, dividends, interest, royalties or fees for technical services.

D. Relationship with BEPS Action 2

The introduction of Article 1(2) cannot be viewed in isolation from the OECD/G20 Base Erosion and Profit Shifting ("BEPS") Project.

BEPS Action 2 addressed hybrid mismatch arrangements arising from differences in the tax treatment of entities or financial instruments across jurisdictions. Such mismatches could produce outcomes involving either double deductions or deductions without corresponding inclusion of income.

Although fiscally transparent entities were not the sole focus of Action 2, many hybrid mismatch arrangements involved entities that were regarded as transparent in one jurisdiction and opaque in another.

Article 1(2) complements the broader objectives of BEPS Action 2 by ensuring that treaty benefits are aligned with the residence State's treatment of the income. In doing so, it reduces opportunities for taxpayers to exploit differences in domestic tax classifications while preserving relief from genuine double taxation.

E. Continuing Challenges – Triangular Cases

Despite these developments, certain situations continue to present significant interpretative challenges.

One such category involves triangular cases, where:

• a fiscally transparent entity is established in one jurisdiction;
• its partners are resident in multiple jurisdictions; and
• the income arises in a third jurisdiction.

For example, consider a United Kingdom LLP comprising partners resident in the United Kingdom, Australia and France that earns professional fees from India. The United Kingdom regards the LLP as fiscally transparent. India treats the LLP as the recipient of income. Australia and France tax only the shares attributable to their respective resident partners. In such circumstances, several questions arises :

• Should treaty entitlement be determined solely by reference to the United Kingdom because the LLP is established there?
• Should each partner invoke the DTAA between India and his respective country of residence?
• Or should treaty protection be denied because the LLP itself is not taxed?

Article 1(2) provides only a partial answer. While it recognises income derived through fiscally transparent entities, it does not expressly address situations involving partners resident in multiple jurisdictions. Consequently, considerable reliance continues to be placed upon domestic judicial interpretation and treaty-specific wording.

As discussed later in this article, this issue assumes particular significance in light of the recent decision of the Delhi Income-tax Appellate Tribunal in Herbert Smith Freehills LLP.

V. India's Treaty Policy towards Fiscally Transparent Entities

India's approach to fiscally transparent entities differs in several respects from the OECD's evolving position.

Unlike many OECD jurisdictions, India has traditionally adopted an entity-based approach to partnership taxation. Under the Income-tax Act, 1961, partnership firms and limited liability partnerships are generally recognised as separate taxable persons. Consequently, the concept of fiscal transparency has not historically formed part of India's domestic taxation framework. This domestic legislative policy has significantly influenced India's treaty practice.

Although India actively participated in the OECD/G20 BEPS Project, it has consistently exercised caution before recognising partner-level treaty entitlement as a general principle. This cautious approach appears to be driven by three principal considerations.

First, extending treaty benefits directly to partners may create administrative complexity where partnerships comprise residents of multiple jurisdictions.

Secondly, tax authorities may face practical difficulties in verifying the residence, taxability and treaty eligibility of every partner.

Thirdly, an unrestricted partner look-through approach could increase opportunities for treaty shopping through carefully structured partnership arrangements.

These policy concerns are reflected both in India's reservations to OECD guidance and in its approach to implementing the Multilateral Instrument.

A. India's Position on the OECD Partnership Report

When the OECD issued its Partnership Report in 1999, India did not accept the recommended partner look-through approach as a universal principle.

India recorded a reservation stating, in substance, that partners of a fiscally transparent entity should not automatically become entitled to treaty benefits merely because the partnership itself is treated as transparent under the domestic law of another jurisdiction.

Instead, India preferred that any extension of treaty benefits to partners should arise through express bilateral treaty provisions negotiated between Contracting States.

This reservation demonstrates that India's position has never been directed against fiscally transparent entities per se. Rather, India has consistently favoured treaty-specific solutions over the adoption of a multilateral default rule.

B. Reservation to Article 3 of the Multilateral Instrument

India reaffirmed this policy during implementation of the Multilateral Instrument ("MLI"). Article 3 of the MLI substantially reproduces the principle embodied in Article 1(2) of the OECD Model Convention by recognising income derived through fiscally transparent entities.

India, however, entered a reservation against the entire provision. Consequently, Article 3 does not modify India's Covered Tax Agreements unless the relevant bilateral treaty independently contains comparable language.

The reservation should not be understood as rejecting every form of partner-level treaty entitlement. Rather, it reflects India's preference that such rules should emerge through bilateral negotiations or judicial interpretation of individual treaties instead of automatic multilateral incorporation.

VI. Judicial Evolution in India: From Entity-Level Recognition to Partner-Specific Treaty Entitlement

Indian jurisprudence concerning fiscally transparent entities has evolved incrementally over the past two decades. Rather than adopting a single judicial approach, courts and tribunals have addressed different aspects of treaty entitlement in successive decisions, though punctuated by occasional divergent rulings, has progressively built a framework for determining the treaty status of fiscally transparent entities.

The evolution may broadly be understood in five distinct phases. The early decisions primarily addressed whether a foreign partnership could qualify as a "person" under the applicable DTAA. Subsequent decisions shifted the focus towards the interpretation of the expression "liable to tax", while the most recent authorities have begun examining the considerably more complex question of partner-specific treaty entitlement across multiple jurisdictions.

A. Phase I – Recognition of Partnership as a "Person" under the DTAA: P & O Nedlloyd Ltd. & Ors. [TS-682-HC-2014(CAL)]

One of the earliest and most significant judicial pronouncements in this area is the decision of the Calcutta High Court in P & O Nedlloyd Ltd. & Ors. v. Assistant Director of Income-tax (International Taxation).

The dispute arose in the context of a partnership formed between a United Kingdom company and a Dutch company carrying on international shipping operations. The Revenue initiated reassessment proceedings on the ground that the partnership itself was not entitled to claim the benefits of the India–United Kingdom DTAA because partnerships were not regarded as taxable entities under United Kingdom domestic law and therefore could not qualify as a "person" under the treaty.

The Calcutta High Court rejected this contention. The Court examined Article 3 of the India–United Kingdom DTAA together with Sections 2(23) and 2(31) of the Income-tax Act, 1961 and held that although the partnership was not treated as a taxable unit under United Kingdom law, it nevertheless constituted a "firm" under Indian tax law and consequently fell within the definition of "person" under the Income-tax Act. Once the Revenue sought to assess the partnership as a taxable person under the Act, it could not simultaneously deny its status as a "person" for treaty purposes.

The Court also observed that Article 3(2) of the India–United Kingdom DTAA specifically contemplates that a partnership treated as a taxable unit under the Income-tax Act shall be regarded as a "person" for treaty purposes. Since the Revenue itself sought to assess the partnership as an assessee, its contention that the partnership was outside the treaty framework was held to be legally unsustainable. Accordingly, the reassessment notices were quashed.

Significance - Although P & O Nedlloyd did not directly decide the broader question of treaty residence under Article 4, it resolved an important threshold issue. The decision establishes that, under the India–United Kingdom DTAA, a foreign partnership cannot be denied treaty protection merely on the ground that it is fiscally transparent in its jurisdiction of establishment if, under Indian law, it is recognised as a taxable person. The judgment therefore provides the conceptual foundation upon which subsequent Indian decisions concerning treaty entitlement have developed.

B. Phase II – Recognition of Treaty Residence: Linklaters LLP v. ITO [2010] 40 SOT 51 (Mum.)

The next significant development came with the decision of the Mumbai Bench of the Income-tax Appellate Tribunal in Linklaters LLP. The assessee was a United Kingdom LLP providing legal services in India. Under United Kingdom law, the LLP itself was fiscally transparent and did not pay income tax. Instead, its profits were allocated amongst its partners, who were individually liable to tax.

The Revenue argued that since the LLP itself was not liable to tax in the United Kingdom, it could not satisfy the residence requirement contained in Article 4 of the India–United Kingdom DTAA.

Rejecting this argument, the Tribunal distinguished the concept of being "liable to tax" from the actual payment of tax. Relying upon the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan, OECD Commentary and the OECD Partnership Report, the Tribunal held that treaty residence depends upon whether the State possesses jurisdiction to tax the income by reason of residence or another connecting factor, rather than upon the manner in which tax is collected.

The Tribunal further observed that denying treaty protection both to the LLP and to its partners would produce precisely the double taxation that tax treaties are intended to eliminate.

Significance - Linklaters LLP transformed the Indian judicial approach from a formal entity-based analysis to a purposive interpretation centred upon fiscal attachment. The decision established that fiscal transparency, by itself, does not deprive an entity of treaty residence where the underlying income is ultimately taxed within the residence jurisdiction.

C. Phase III – Consolidation of the Judicial Approach

The reasoning adopted in Linklaters LLP was subsequently reaffirmed in a series of decisions, indicating that the Tribunal regarded the judgment as laying down a general principle of treaty interpretation rather than a rule confined to the India–United Kingdom DTAA.

A.P. Moller  [TS-555-ITAT-2013(Mum)]

The reasoning adopted in Linklaters LLP was subsequently reaffirmed in A.P. Moller, where the Tribunal considered the treaty entitlement of a Danish partnership. The Tribunal observed that Denmark taxed the partners rather than the partnership itself. Denying treaty protection merely because the partnership was fiscally transparent would result in double taxation, contrary to the object of the DTAA. Accordingly, the Tribunal recognised treaty entitlement despite the partnership's transparent status under Danish law.

ING Bewaar Maatschappij [TS-738-ITAT-2019(Mum)]

A similar approach was adopted in ING Bewaar Maatschappij, involving a Dutch investment vehicle. Although the fund itself was fiscally transparent, its investors were Dutch residents liable to tax on the underlying income. The Tribunal concluded that treaty protection could not be denied merely because taxation occurred at the investor level rather than at the level of the fund.

These decisions collectively reinforced the principle that treaty residence should be interpreted consistently with the object of relieving double taxation rather than by adopting an unduly formalistic interpretation of domestic tax classifications.

D. Phase IV – Divergent Judicial Approach:

Schellenberg Wittmer In re  [TS-649-AAR-2012-O]

A different approach emerged in the ruling of the Authority for Advance Rulings. The AAR in the Schellenberg Wittmer case denied treaty benefits to a fiscally transparent Swiss partnership. It argued that since the partnership was not liable to tax in Switzerland, the partners were not entitled to claim benefits under the India-Switzerland tax treaty. This ruling deviates from the principles set out in the Linklaters case, which focused on the taxation of income in the residence state.

ABC, In re [(2021) 434 ITR 441 (AAR)]

In ABC, In re, the AAR adopted a literal interpretation of Article 4 and concluded that the Dutch fiscally transparent entity was not itself liable to tax in the Netherlands. Consequently, it was held not to qualify as a resident under the applicable DTAA.

This reasoning attracted considerable academic criticism because it departed from the purposive interpretation adopted in Linklaters LLP. In particular, it was observed that the Revenue had accepted the reasoning in Linklaters LLP but nevertheless advanced a contrary argument before the AAR. The decision illustrates the tension between a strict textual interpretation of treaty residence and a purposive interpretation aimed at preventing double taxation.

E. Phase V – Expansion of Treaty Principles: General Motors  [TS-6612-ITAT-2024(Delhi)-O]

The Delhi Bench of the Tribunal revisited the controversy in General Motors. The case involved a fiscally transparent entity established in the United States. Reaffirming the reasoning in Linklaters LLP, the Tribunal held that treaty residence is not defeated merely because taxation occurs at the level of the owners rather than the entity itself.

More importantly, the Tribunal examined treaty provisions restricting benefits "to the extent" that income is taxed in the residence jurisdiction. The Tribunal observed that such language presupposes the existence of treaty entitlement. It merely limits the extent of relief and does not determine whether treaty entitlement exists in the first place. This reasoning substantially strengthened the analytical foundation laid in Linklaters LLP and brought Indian jurisprudence closer to the principles reflected in Article 1(2) of the OECD Model Convention.

Evolution of Indian Jurisprudence

The above decisions collectively demonstrate that Indian jurisprudence has increasingly favoured a purposive interpretation of treaty residence, notwithstanding India's cautious treaty policy.

VII. Herbert Smith Freehills LLP : A New Frontier in International Tax Jurisprudence

The recent decision of the Delhi Bench of the Income-tax Appellate Tribunal in Herbert Smith Freehills LLP [TS-920-ITAT-2026(DEL)] represents the most significant Indian pronouncement on fiscally transparent entities since Linklaters LLP. While earlier decisions primarily addressed whether a fiscally transparent entity could itself qualify for treaty protection, Herbert Smith confronted a considerably more complex issue involving partners resident in multiple jurisdictions.

A. Facts of the Case

Herbert Smith Freehills LLP was a United Kingdom limited liability partnership engaged in providing legal services across several jurisdictions, including India. The partnership comprised partners resident in:

• the United Kingdom;
• Australia;
• France;
• Belgium;
• Germany;
• Japan; and
• China.

Under United Kingdom law, the LLP was fiscally transparent. Consequently, only the income attributable to United Kingdom resident partners was taxed in the United Kingdom, while the shares of non-United Kingdom partners were taxed in their respective jurisdictions of residence.

The LLP claimed treaty benefits in India by adopting a partner-specific approach. Income attributable to United Kingdom partners was claimed under the India–United Kingdom DTAA, whereas the shares attributable to partners resident in other jurisdictions were claimed under the respective bilateral tax treaties between India and those jurisdictions.

The Assessing Officer accepted the claim relating to the United Kingdom partners but denied treaty benefits corresponding to the non-United Kingdom partners (except Germany).

B. Tribunal's Decision

The Tribunal first held that the professional legal services rendered by the LLP did not constitute Fees for Technical Services under the applicable treaties. More importantly, while remanding the matter to the Assessing Officer for verification of the relevant factual aspects, the Tribunal accepted, in principle, that the treaty entitlement of each category of partners required examination with reference to the DTAA applicable to the partner's jurisdiction of residence.

Although the Tribunal did not finally grant treaty benefits to every partner, its reasoning recognised the possibility that partner-specific treaty analysis may be appropriate where the partnership itself is fiscally transparent.

A crucial historical and contextual nuance of the Herbert Smith Freehills LLP litigation is that the dispute spanned multiple assessment years i.e., AY 2015-18, AY 2018-19 and AY 2021-22 including periods that pre-date the subsequent operational mechanics of modern multilateral treaty updates. By invoking partner-level look-through principles for these historical periods, the Delhi ITAT effectively demonstrated that partner-specific treaty entitlement does not depend on contemporary treaty revisions or specific protocol overhauls. Instead, it stems from an inherent, purposive interpretation of the overarching treaty architecture. This closely mirrors the judicial rationale previously established by the Mumbai Tribunal in Linklaters LLP, confirming that even under older treaty configurations, a fiscally transparent entity cannot be used as a blunt instrument to deny legitimate treaty relief to its constituent partners who are otherwise fully subject to tax in their respective home jurisdictions.

C. Why the Decision is Significant

Unlike Linklaters LLP, where every partner was resident in the United Kingdom, Herbert Smith involved partners resident across several jurisdictions. Consequently, the Tribunal was required to address an issue that had not previously arisen before Indian courts:

Can a single fiscally transparent partnership derive treaty protection simultaneously under multiple bilateral tax treaties?

The Tribunal appears to answer this question in the affirmative, subject to verification of the relevant factual conditions. This represents a significant development because it shifts the analytical focus from identifying a single treaty residence for the partnership towards examining the treaty entitlement of the partners in proportion to their respective interests in the partnership income.

Key Takeaway

Herbert Smith Freehills LLP does not merely revisit the concept of treaty residence. It potentially redefines the manner in which treaty entitlement is analysed for multinational partnerships comprising partners resident in different jurisdictions.

D. Does Herbert Smith Conflict with India's Treaty Policy?

At first sight, the Tribunal's reasoning may appear inconsistent with India's reservations to the OECD Partnership Report and Article 3 of the Multilateral Instrument. A closer examination, however, suggests that the perceived conflict may be overstated.

India's reservations primarily reflect a policy decision against the automatic incorporation of a multilateral partner look-through rule. They do not necessarily prohibit courts from interpreting individual bilateral treaties in a manner that recognises partner-specific treaty entitlement where warranted by the treaty language and surrounding circumstances.

Accordingly, Herbert Smith should not be viewed as judicial rejection of India's treaty policy. Rather, it demonstrates that the absence of an express multilateral rule does not preclude treaty-specific judicial interpretation consistent with the object and purpose of the relevant DTAA.

Whether this reasoning will ultimately receive approval from the High Courts or the Supreme Court remains uncertain. Nevertheless, the decision is likely to play an influential role in future litigation involving multinational partnerships and other fiscally transparent entities.

VIII. Practical Considerations for Multinational Groups and Advisors

The increasing use of LLPs, partnerships, collective investment vehicles and other hybrid entities requires taxpayers to adopt a comprehensive approach when evaluating treaty entitlement. Recent judicial developments, particularly Herbert Smith Freehills LLP, demonstrate that treaty claims involving fiscally transparent entities are likely to receive close scrutiny from tax authorities. Accordingly, multinational groups should consider the following matters before claiming treaty benefits.

A. Examine the Relevant Treaty

The first step should always be an examination of the applicable DTAA. While many treaties define "person" broadly enough to include partnerships or other bodies of persons, others adopt narrower language. Similarly, the definition of "resident" and the interpretation of "liable to tax" may differ from one treaty to another. Accordingly, treaty entitlement should never be assumed solely because an entity is recognised as fiscally transparent in its jurisdiction of establishment.

B. Establish Treaty Residence

Taxpayers should maintain robust documentation establishing the residence status of every person claiming treaty benefits. Depending upon the facts of the case, relevant documentation may include:

• Tax Residency Certificates;
• partnership agreements;
• profit-sharing schedules;
• allocation statements;
• foreign tax returns;
• evidence of tax payment or assessment; and
• partner declarations confirming taxability in the residence jurisdiction.

The quality of documentary evidence is likely to become increasingly important where treaty entitlement is examined on a partner-by-partner basis.

C. Demonstrate Fiscal Transparency

Merely asserting that an entity is fiscally transparent is unlikely to suffice. Taxpayers should be prepared to establish:

• the legal characterisation of the entity under foreign law;
• the statutory provisions governing its taxation;
• the manner in which partnership income is allocated; and
• the persons ultimately liable to tax on such income.

Independent legal opinions regarding the foreign tax treatment of the entity may also assist in substantiating treaty claims.

D. Analyse Treaty Entitlement on a Partner-Specific Basis

Following Herbert Smith Freehills LLP, multinational partnerships comprising partners resident in different jurisdictions should evaluate whether treaty entitlement requires separate analysis under each applicable DTAA.

Although the Tribunal's decision remains subject to further judicial scrutiny, taxpayers should anticipate that future assessments may increasingly involve partner-specific verification rather than entity-level examination alone.

IX. Unresolved Issues

Despite significant judicial development, several important questions continue to remain unanswered.

1. Can One Partnership Simultaneously Invoke Multiple DTAAs?

The most significant question emerging from Herbert Smith Freehills LLP concerns whether a single partnership may simultaneously derive treaty benefits under several bilateral conventions corresponding to the residence of different partners. Although the Tribunal appears to recognise such a possibility, the precise legal basis for this approach remains to be developed.

2. How Should Treaty Residence Be Determined When Partners Change During the Year?

Partnerships frequently admit or retire partners during a financial year. Whether treaty entitlement should be determined on the basis of the composition of the partnership on the date of receipt of income, the allocation of profits or another criterion remains uncertain.

3. Interaction with Limitation-on-Benefits Clauses

Where only some partners satisfy limitation-on-benefits provisions, should treaty protection extend proportionately or should the entire claim fail? This issue assumes increasing significance as modern treaties incorporate increasingly sophisticated anti-abuse provisions.

4. Beneficial Ownership

Where dividends, interest or royalties are received through a fiscally transparent partnership, should beneficial ownership be examined at the level of the partnership or at the level of the partners? Neither the OECD Commentary nor Indian jurisprudence presently provides a definitive answer.

5. Administrative Verification

If partner-level treaty entitlement becomes the accepted approach, tax administrations may be required to verify:

• residence status;
• taxation;
• ownership interests; and
• treaty eligibility

of every individual partner. Such verification could significantly increase the administrative burden for both taxpayers and revenue authorities.

X. Recommendations

The growing prevalence of fiscally transparent entities in international commerce highlights the need for greater certainty in this area of treaty law.

A. Recommendations for Policymakers

India may consider:

• issuing comprehensive CBDT guidance on treaty entitlement of fiscally transparent entities;
• prescribing a uniform administrative framework for verifying partner-level taxation;
• incorporating express provisions dealing with fiscally transparent entities during future treaty negotiations;
• clarifying the interaction between Section 90 of the Income-tax Act, 1961 i.e., Sec. 159 under Income Tax Act 2025, the definition of "liable to tax" introduced by the Finance Act, 2021, and treaty residence under Article 4; and
• issuing guidance regarding the evidentiary requirements applicable to partner-specific treaty claims.

Such measures would significantly reduce uncertainty while ensuring consistency in tax administration.

B. Recommendations for Taxpayers

Taxpayers should:

• review partnership structures before commencing cross-border operations;
• maintain contemporaneous documentation supporting fiscal transparency;
• maintain evidence demonstrating taxation in the residence jurisdiction;
• periodically review treaty positions in light of evolving judicial developments; and
• obtain tax residency certificates for all relevant partners.

Given the increasing complexity of international tax jurisprudence, treaty entitlement should be evaluated as part of overall tax governance rather than merely at the stage of tax return filing.

XI. Conclusion

The jurisprudence governing treaty entitlement of fiscally transparent entities has undergone remarkable development over the past two decades. What was once viewed as a narrow question concerning the interpretation of the expression "liable to tax" has evolved into a broader inquiry concerning fiscal attachment, economic ownership and the allocation of taxing rights under bilateral tax treaties.

Internationally, the OECD has progressively refined its approach through the 1999 Partnership Report, subsequent revisions to the OECD Commentary, the BEPS Project and Article 1(2) of the OECD Model Convention. These developments reflect an emerging consensus that differences in domestic tax characterisation should not, in themselves, frustrate the fundamental objective of tax treaties.

India, however, has consciously adopted a more measured approach. Through its reservations to the OECD Partnership Report and Article 3 of the Multilateral Instrument, India has demonstrated a preference for treaty-specific bilateral solutions rather than the automatic adoption of a multilateral partner look-through rule. At the same time, Indian jurisprudence has evolved independently through various judicial precedents discussed above each recognising that fiscal transparency alone should not determine treaty entitlement.

Against this backdrop, the decision of the Delhi Income-tax Appellate Tribunal in Herbert Smith Freehills LLP represents an important development in Indian international tax law. Although the Tribunal stopped short of conclusively granting treaty benefits to all categories of partners, it accepted, in principle, that treaty entitlement may require partner-specific examination under the respective bilateral tax treaties applicable to the partners' jurisdictions of residence. If affirmed by higher judicial forums, this reasoning may significantly reshape the analysis of treaty entitlement for multinational partnerships and other fiscally transparent entities.

Whether Herbert Smith Freehills LLP ultimately marks the beginning of a new chapter in Indian treaty jurisprudence remains to be seen. Nevertheless, the decision has undoubtedly expanded the debate beyond the traditional entity-versus-partner dichotomy and has highlighted the need for a coherent legislative and administrative framework governing fiscally transparent entities.

As international business structures continue to evolve, the challenge for policymakers, courts and tax administrations will be to reconcile commercial reality with treaty text while preserving the central objective of every tax treaty—the elimination of double taxation without creating opportunities for treaty abuse or double non-taxation.

Bibliography

Primary Sources

• Income-tax Act, 1961.
• Income-tax Act, 2025.
• OECD, The Application of the OECD Model Tax Convention to Partnerships (1999).
• OECD Model Tax Convention on Income and on Capital (2017).
• OECD/G20 BEPS Action 2 Final Report.
• Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
• India–United Kingdom DTAA.
• India–China DTAA (2019 Protocol).
• OECD Commentaries on Articles 1 to 4 of the OECD Model Convention.

Judicial Decisions

• Union of India v. Azadi Bachao Andolan  [TS-5-SC-2003]
• P & O Nedlloyd Ltd. & Ors. [TS-682-HC-2014(CAL)]
• Linklaters LLP v. ITO. [2010] 40 SOT 51 (Mum.)
• A.P. Moller. [TS-555-ITAT-2013(Mum)]
• ING Bewaar Maatschappij [TS-738-ITAT-2019(Mum)]
• Schellenberg Whitmer In re [TS-649-AAR-2012-O]
• ABC, In re [(2021) 434 ITR 441 (AAR)]
• General Motors [2024] [TS-6612-ITAT-2024(Delhi)-O]
• Herbert Smith Freehills LLP  [TS-920-ITAT-2026(DEL)]