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Thursday, August 30, 2012

Partnership Firms not eligible to Treaty Benefits- AAR


MUMBAI: Partnership firms are not eligible to treaty benefits, according to an order by the Authority for Advance Rulings (AAR) - the quasi judicial body for deciding tax disputes involving foreign companies. 

Though the AAR ruling was in relation to the India-Switzerland tax treaty, the principle can be applied to cases involving tax treaties with other countries as well.

In the concerned case, the AAR held that a partnership in Switzerland was not treated as a person or a body of persons in Switzerland, though the partners were taxed under Swiss laws. Since the partnership firm is not taxed in Switzerland, India has a right to tax the income received from India by the Swiss firm, said AAR. 

Even though the partners are taxed for the profit shared by them, a partnership firm is not taxed in most countries, including member countries of Organization for economic Co-operation and Development (OECD). Thus, the AAR order will have a bearing on similar cases involving tax treaties with other countries. 

The AAR accepted the tax department's argument that the income received by the partnership was for professional services rendered by it. The partnership was formed in Switzerland, and under Swiss law, it was not a taxable entity. 

"There is no definition of person in Swiss law corresponding to 8 Section 2(31) of the Income-tax Act, which confers the status of a erson on a partnership. If so, going by the inclusive definition in clause (d) of Article 3 of the DTAC, it cannot be held that the partnership is a taxable entity in Switzerland. I am, therefore, constrained to hold that the partnership which receives the income cannot claim the benefit of the DTAC between India and Switzerland," said the AAR bench. 

AAR orders have persuasive value on similar cases, though it is binding only on cases decided by it. 

The rulings can be cited by the assessing officers as well as the taxpayers, to press their line of argument. 

The AAR ruling was on an application filed by a Swiss Partnership 

firm Schellenberg Wittmer along with its partners, which raised an invoice on Siemens India, the Indian arm of its German parent. 

The invoice was about legal charges related to a case involving the Shapoorji Pallonji group and Siemens India. The issue that came up before the AAR was whether tax had to be withheld by Siemens India before remitting the fees to the Swiss partnership firm. 

Mahesh Shah, director (Income-tax) argued the case on behalf of the department while and Nishith Desai Associates for the partnership firm.

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