Finally, a clearer picture for the domestic venture capital / private equity trusts and joint ventures, joint distributions and other combinations (prevalent, for instance, in the pharmaceutical, film and other industries) which are treated as Association of Persons ("AOP") or Body of Individuals (“BOI”) for Indian tax purposes.
The Government of India recently took steps towards clarifying as to who would be able to take the benefit of the tax deducted at source in situations, such as the above cases, wherein the income is assessable in the hands of a person other than the deductee.
For instance, let's examine the case where a consultancy business is being carried on by two companies and such business is treated as an AOP for the Indian income tax purposes. Such AOP receives payments and the payer, while making such payments, deducts the requisite amount and issues the certificate for the tax deducted at source (“TDS”) in the name of the AOP. However, the income tax is actually assessable in the hands of and is paid by the members of the AOP (as illustrated in the graphics).
Until now, there was an ambiguity as to whether the such persons (the members of the AOP is the above instance) would be able to get a credit for the TDS on the income earned by them, since the TDS certificate was not in their name and did not indicate the details of the proportionate shares of the members of the AOP in the TDS.
While there was a substantive provision (Section 199) under the Indian Income Tax Act, 1961 (“ITA”), no rules had been made by the Government of India prescribing the procedure for the same. However, with their recent notification, the Central Board of Direct Taxes (“CBDT”) has now clarified that in a case, similar to that illustrated above the TDS credit should go to the members of AOP.
Situations with regard to the joint owners of shares, property and deposits have also been clarified to the extent that the TDS credit would be available and in proportion of their ownership of the asset. Other circumstances where the deductee is partner in a partnership firm or karta of a Hindu Undivided Family (“HUF”) and the income is assessable as the income of firms or the HUF, as the case maybe, therein too, the TDS credit may be availed by the partnership firm/HUF, as the case may be.
Given that most of the Indian venture capital / private equity funds are set up as trusts, the mechanism proposed for TDS credit in case of a trust may require a special mention here. While the CBDT has clarified that in situations where the deductee is a trust and the income is assessable in the hands of trustees, the TDS credit should be granted to the trustee, they have not discussed the situation wherein the tax is being paid by the beneficiaries while the TDS certificate is in the name of the trust/trustee.
Having said that, the intention of the CBDT appears to be that a person who is ultimately liable to pay the tax should be eligible and allowed to take the TDS credit and thus, it may be possible for the beneficiaries to avail the TDS credit.
All-in-all, this latest notification on availing TDS credit, brings with it certainty and respite to the tax payers by clarifying the situation and the procedure for availing TDS credit by persons other than the deductees. It also puts an end to the divergent views being taken by the income tax authorities in various similar cases and minimizes unnecessary litigation.
(This article is not to be construed as a legal opinion, and is only meant for information purposes. This article is republished with permission from Nishith Desai & Associates, a Mumbai-based law firm. The authors can be reached on firstname.lastname@example.org and email@example.com).