Indian home buyers can initiate insolvency proceedings against defaulting builders

dubai - Home buyers are now put on par with other financial creditors

Q: Home buyers have had a raw deal when some builders do not stick to the terms of the agreement. Have any measures been taken to protect the interest of home buyers? My wife is facing problems as she booked an apartment and there has been a delay in handing over possession.

A: The Real Estate Regulation Act has to a great extent given protection to interests of home buyers. The project which a builder is undertaking should be registered under this law and stringent penalties are provided for various types of defaults, including delays in giving possession of the constructed property. There have been cases where builders have stopped construction due to paucity of funds or diversion of funds to other projects.

An ordinance has been promulgated in June whereby a home buyer is treated as a financial creditor under the Insolvency & Bankruptcy Code. Home buyers are now put on par with other financial creditors. Home buyers can therefore initiate insolvency proceedings against builders who have defaulted by filing an application in the National Company Law Tribunal. The committee of creditors has been empowered to give the status of either secured or unsecured creditor to home buyers who have filed the application in the NCLT.

Q: I work for a non-profit organisation set up in Europe and having branches in the UAE, India and other countries. This body carries on activities like organising events, conducting environmental studies and promotes market research. The members of the organisation contribute every year by way of subscription fee to the parent body. We have several members in India who contribute the annual fees. I want to know whether such fees will be taxable in India in the hands of the overseas parent organisation?

A: From the facts which you have stated, it appears that the overseas parent organisation collects subscriptions from its members to cover the expenses incurred in rendering services. Further, it is a non-profit organisation. Therefore, though it may have a branch in India, it would not be treated as a permanent establishment if no business is carried on in India. Organising events for disseminating information would not result in a permanent establishment in India.

Further, the organisation would be governed by the principle of mutuality as all members are merely contributing by way of annual fees towards the expenditure incurred by the parent company. No tax would, therefore, be chargeable in India. To avoid any litigation, the parent organisation may obtain a ruling from the Authority for Advance Rulings which has binding effect.

Q: I am setting up a hotel in India along with my friends and relatives. It is proposed to enter into an agreement with an international chain which will provide support services, including operations and technology support, as well as provide sales and marketing services. Advisory services in connection with maintenance and refurbishing of the hotel property will also be given. Would the fees payable be taxable in India in the hands of the foreign company?

A: If the foreign company sets up an office in India out of which services mentioned in your question would be provided, it would constitute a fixed place of business in India and, hence, the foreign company would be deemed to have a permanent establishment in India. In such a case, the remuneration earned by the foreign company would be taxable as business income. All expenses incurred in India would be allowed as a deduction in computing the business profits.
In similar circumstances, courts have held that tax would be payable in India because the foreign enterprise would in substance be running the hotel. Different agreements may be entered into defining different functions. However, the composite act of operating and managing the hotel in India would result in the foreign company being treated as carrying on a business in India. Therefore, there is no doubt that the foreign company would be liable to pay tax on its profits earned from various sources of income under different agreements.

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.