DTAA benefits now extend to partnership companies
The Income-tax Department is not correct in its stand because the Indo-UK Double Tax Avoidance Agreement has been amended with effect from December 27, 2013.
Q: A partnership firm in the UK has entered into an agreement with an Indian company. The firm says it is entitled to claim relief under a beneficial provision of the Indo-UK Double Tax Avoidance Agreement. However, the tax department has not given this benefit. Are they justified?
- S.P. Misra, Doha
A: The Income-tax Department is not correct in its stand because the Indo-UK Double Tax Avoidance Agreement has been amended with effect from December 27, 2013. The amendment extends the definition of 'person' to include partnership firms, estate and trusts in the category of resident. Despite this amendment, some assessing officers have not extended the benefit of the DTAA to partnership firms. Therefore, the Central Board of Direct Taxes has issued a circular stating that a partnership firm would be treated as a resident under the DTAA. Hence, the benefit of this agreement should be made available to such resident.
Q: I work for an engineering firm which is affiliated to several other companies. My firm has formed a consortium with other companies to execute a project in India. The scope of our work is different from the work to be executed by other companies in the consortium. Tax authorities in India want to tax the income from the entire project in the hands of the consortium by treating all the companies as an association of persons. However, our firm believes it should be separately taxed on its profits. Will we be able to do so?
- R.P. Menon, Dubai
A: The question whether a consortium of firms would be treated as an association of persons under the tax law has been the subject matter of conflicting rulings of benches of the Income-tax Appellate Tribunal as well as high courts. A circular has now been issued pertaining to a consortium which is involved in executing engineering, procurement and construction contracts as well as turnkey projects. The circular states that such contracts would not be treated as an association of persons where each member is independently responsible for executing its part of the work by using its own resources and it bears the risk of its specified area of work. In order that each member of the consortium is separately taxed, the profits must be earned by such member strictly from its scope of work and the men and materials should be under the control of the individual member. Further, there should be no common management, except for coordination purposes.
Q: I am associated with a charitable trust in India. If the trust is to cease having its charitable objects, would there be any tax-related issue?
- S.R. Rao, Sharjah
A: If a charitable trust wants to convert itself to a non-charitable entity, the law is now proposed to be amended to levy an exit tax. The aggregate fair market value of the total assets minus the liabilities of such trust would be liable to tax. The rate of tax applicable to such income would be the maximum marginal rate which is 30 per cent. If the value of the net assets is more than Rs10 million, the rate of tax would be increased by a further surcharge of 10 per cent on such tax. The object of levying the tax is to undo the tax exemption which the trust or organisation enjoyed in the past.
The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policy.