A recent Mumbai ITAT ruling on a US limited partnership is a reminder for Indian founders and investors: a US entity’s American tax treatment and its Indian tax treatment are answered by two separate rulebooks — and getting that wrong can cost you real money.
Setting up a US entity used to be the hard part. Now it’s a form you fill out online in an afternoon — pick Delaware, pick a structure, pay the fee, done. The hard part has quietly moved downstream, to the point where an Indian tax officer looks at that entity years later and asks: what, exactly, is this?
A Mumbai Income-tax Appellate Tribunal ruling handed down this year is a good occasion to sit with that question before it gets asked of you.
A Filing Deadline Turns Into a Classification Dispute
The case is Pabrai Investment Fund IV, L.P. v. ADIT (ITA No. 637/Mum/2025). The taxpayer was a Delaware limited partnership. The dispute that reached the Tribunal wasn’t about the fund’s investment strategy or its income at all — it was about a filing deadline.
The Indian tax department had classified the LP as a “firm.” That classification determines which return-filing due date applies. The department’s view was that the fund missed it. A late return, in turn, cost the fund its right to carry forward a short-term capital loss — an outcome with real economic consequences, triggered entirely by a label.
The Tribunal didn’t accept the label at face value in either direction. It didn’t rule that every Delaware LP is now an Indian company, and it didn’t rubber-stamp the “firm” classification either. Instead, it sent the matter back for a closer look: is this LP, under Delaware law and under actual US tax treatment, functioning as a body corporate or a separately taxed entity? If so, the India-US tax treaty may point toward company treatment rather than firm treatment — and the filing deadline, and the loss, would follow from that.
The lesson generalizes well beyond one fund’s short-term capital loss. The name on the certificate of formation is not the end of the analysis. It’s barely the beginning.
Why US Entities Are Genuinely Hard to Classify From Outside the US
Part of what makes this messy is that the US tax system deliberately doesn’t attach one fixed outcome to one entity type.
A conventional corporation is the closest thing to intuitive: it’s taxed as its own person, distributions to shareholders are a separate event, and an Indian owner can reason about it the way they’d reason about any operating company.
An LLC is where things get genuinely unpredictable. Its legal form under state law does not fix its federal tax treatment. A multi-member LLC is treated as a partnership by default. A single-member LLC is disregarded by default — the IRS looks straight through it to the owner. Either can instead elect corporate treatment on Form 8832. That means two businesses that both call themselves “a Delaware LLC” can sit in entirely different places on the US tax map, and nothing about the name tells you which. (A separate, commonly misunderstood point: S-corporation status generally isn’t available to a business with a non-resident alien shareholder, so an India-based founder can’t reach for it just because they’d prefer pass-through treatment.)
A partnership, meanwhile, typically doesn’t pay US federal income tax at all. It files an information return; the tax liability passes through to the partners, who report their share of the income directly.
Put those three together and the cross-border question writes itself: if the US is taxing the people behind the entity rather than the entity itself, what is India supposed to tax — and as what?
India Reads Its Own Dictionary, Not America’s
India doesn’t import the US label. Under the Income-tax Act, 2025 — in force from 1 April 2026 — a “company” includes a body corporate incorporated under a foreign country’s laws. A “firm” is defined by reference to the Indian Partnership Act, 1932, extended to cover LLPs under India’s own LLP legislation. Neither definition asks what the entity calls itself in Delaware.
The India-US tax treaty layers a third framework on top. Article 3 treats an entity as a “company” if it’s a body corporate, or if it’s treated as one for tax purposes. Article 4 deals specifically with partnerships, estates, and trusts: their income only gets treaty residence to the extent that income is actually taxed as a resident’s income in the US — whether in the entity’s own hands or in the hands of its partners or beneficiaries.
Answering the classification question properly, then, means answering four separate questions, not one: What is the entity under the law of the state where it’s formed? How has it elected to be treated under US federal tax rules? Who is actually paying tax on its income? And how does that combination map onto Indian domestic law and the treaty? A certificate that says “LLC” or “LP” answers none of these on its own.
The Mismatch Gets Expensive Once Money Starts Moving
Take a single-member Delaware LLC set up by an Indian founder. For US federal purposes it’s disregarded by default — the IRS looks through it straight to the founder. It’s tempting to assume India will do the same. That assumption deserves testing, not adoption. Delaware law treats the LLC as a distinct legal entity in its own right; Indian tax law runs its own separate test for what counts as a company, a firm, or something else. Two countries can end up looking at the same structure through two different lenses — one seeing a pass-through, the other seeing a separate taxable person. That’s what practitioners call an entity-classification mismatch, and it’s rarely just a paperwork inconvenience.
It shows up hardest when income doesn’t equal cash received. Say a US structure earns $500,000 in a year but distributes only $100,000 to its Indian owner. If the US side is transparent, the owner may face US tax on the full allocated share, not just the $100,000 actually received. India then has to work out, independently, what the entity is, whose income the $500,000 represents, what the $100,000 payment actually is, and how any US tax already paid factors in. Differences in who’s taxed, when, and on what character of income complicate foreign-tax-credit claims and the treatment of every distribution that follows. Withholding outcomes shift too, depending on whether a given payment reads as a dividend, partnership income, interest, or royalty. None of this is visible at incorporation. All of it is visible the first time real money crosses the border.
Transparency Doesn’t Automatically Cost You Treaty Benefits — But You Still Have to Prove It
A related question reached the Delhi ITAT in GE Engine Services LLC. The tax department argued that because the LLC was fiscally transparent under US rules, it wasn’t itself “liable to tax” and so shouldn’t get India-US treaty protection. The Tribunal rejected that argument on the facts before it, giving weight to the LLC’s US tax-residency documentation and to how its income was actually taxed through its owner. The useful principle here: actually paying tax and being liable to tax aren’t the same thing for treaty purposes.
That’s not a blanket rule that every US LLC gets every treaty benefit automatically. It’s a reminder that ownership structure, tax elections, residency documentation, and the specific income in question all still have to be worked out — the ruling rewards entities that can show their work, not entities that assume the outcome.
Two More Layers: FEMA and Where the Decisions Actually Get Made
Tax isn’t the only lens. Under India’s Overseas Investment rules, a “foreign entity” is broadly any entity formed outside India with limited liability — RBI’s own explanation points to structures like LLCs and LLPs as examples. That means the same US vehicle needs a separate FEMA/ODI check before an Indian resident remits capital into it, independent of how clean its tax position looks.
And incorporating in Delaware doesn’t end India’s interest in where the business is actually run. Under section 6(10) of the Income-tax Act, 2025, a foreign company can still be tax-resident in India if its place of effective management — where the real strategic and commercial calls get made — sits in India. For a founder-led US entity where every meaningful decision is still made from Delhi, Bangalore or Mumbai, that’s not a hypothetical risk. It’s a question worth answering before the entity is formed, not after a return gets scrutinized.
Pick the Structure, Then Ask What It Costs You in Both Countries
None of this argues against LLCs, LPs, or US corporations as such. A corporation is often the cleanest answer. An LLC’s flexibility is genuinely valuable in the right situation. An LP is frequently the right vehicle for an investment fund. What none of them should be is a default, copied from another founder’s cap table or recommended by an incorporation website that has never seen an Indian tax return.
Before committing to a structure, the questions worth running through are: What is it under US state law? How is it classified for US federal tax? How will India classify it, both domestically and under the treaty? What does the ownership and distribution model look like once money actually moves? How do foreign tax credits work through it? Does it clear FEMA’s ODI test? And where, in substance, will the business actually be managed?
The Pabrai ruling didn’t hand down a universal formula for every LP, LLC, or corporation an Indian founder might set up. What it did was put the right question back on the table: don’t ask what your US entity is called. Ask what it legally is, how the US taxes it, how India will classify it, and what happens the moment income actually crosses between the two. That analysis belongs before incorporation — not after the first year it produces a mismatch nobody planned for.
Samir Mahajan is a Chartered Accountant and Partner at Surinder Mahajan & Associates (SMA), advising on cross-border structuring, NRI taxation, and international tax matters. For entity-structuring or cross-border tax queries, reach out at samir@surindermahajan.com.
