Circular Funds via Benami Account Treated as Accommodation Entry | AAAR

Sheetal Bhatia – [2025] 177 taxmann.com 162 (Article)

A Routine Transaction—or So It Seemed

During the early days of my career as a tax advisor, I encountered a case that seemed, at first glance, to be a standard international transaction. An Indian company was making a consultancy payment to a U.S.-based Limited Liability Company (LLC). The documentation was in order, the remittance procedures were being followed meticulously, and all statutory compliance boxes appeared to be ticked. I was about to sign off on the advice when something made me pause—a quick cross-reference with the India–U.S. Double Taxation Avoidance Agreement (DTAA).

The DTAA Dilemma: Eligibility of the Recipient

What caught my attention was a seemingly simple question with complex implications: Can a U.S. LLC actually claim the benefits under the India–U.S. DTAA? While it’s natural to assume that any U.S.-based entity should be eligible for treaty relief, the structure of U.S. LLCs—particularly those that are fiscally transparent—introduces a significant layer of complexity. This single question took the transaction from “routine” to “revelatory,” and opened a new realm of tax consideration I had yet to fully appreciate.

 The Concept of Fiscally Transparent Entities (FTEs)

Fiscally Transparent Entities (FTEs) are business structures where the entity itself is not taxed; instead, tax liability passes through to the owners or members. In the U.S., many LLCs are treated as pass-through entities for federal tax purposes unless they elect to be taxed as corporations. Under Article 4 of the India–U.S. DTAA, treaty benefits are typically available only to “residents” of a contracting state. But an FTE, having no separate tax identity, may not qualify as a resident under the treaty—thus raising doubts about its eligibility for DTAA benefits altogether.

 The Real Challenge: Not the Tax Rate, But the Right to Apply It

This scenario underscored an essential principle in cross-border taxation: the real issue is often not the applicable tax rate, but the right to apply the rate in the first place. If the recipient of income cannot demonstrate treaty eligibility—due to a lack of residence or tax liability in the home country—the withholding tax must be applied under domestic law, not the treaty. For many practitioners, this is a blind spot that can result in incorrect tax advice and subsequent litigation or penalties for clients.

 A Turning Point in My Tax Advisory Approach

That experience was a turning point in how I approached international taxation. It taught me that when dealing with cross-border payments, especially to hybrid or fiscally transparent entities, it’s critical to look beyond surface-level compliance. Understanding the interplay between domestic tax law, treaty provisions, and the nature of the recipient entity is vital. Since then, I’ve viewed every cross-border structure through a new lens—one shaped not just by tax rates or remittance mechanics, but by deeper questions of entitlement, substance, and legal characterization.

Click Here To Read The Full Article