It is quite common these days that foreign companies take up turnkey projects in India in association with other companies. For this purpose, quite frequently, foreign companies enter into a joint venture (JV) or a consortium agreement.
The Income-tax Department generally considers that such joint venture or consortium agreements result in formation of an association of persons (AOP) in India. Further, since the management and control of such AOP cannot be said to be entirely situated outside India, therefore, the AOP is regarded as ‘resident’ for tax purposes in terms of section 6 of the Income-tax Act.
Needless to mention that when a joint venture / consortium is considered as a resident AOP, it is subjected to the highest rate of tax. Credit for tax paid by AOP in India may also not be available in a foreign country. In such a case, even the offshore supplies become liable to tax in India despite the Supreme Court decision in case of Ishikawajima Harima Heavy Industry, 288 ITR 408.
Earlier, the interpretation of Income-tax law in India has been that if the joint venture or consortium agreements properly define the scope of work of each member and if the amount payable to each member is also clearly indicated, and the amount is directly paid to each member against the invoices raised by the member, the income-tax liability of each member to the agreement will be determined separately and individually.
This view prevailed on the basis of the principle laid down by Hon’ble Apex Court in case of Continental Construction Limited [195 ITR 81] wherein it was held that “it was the duty of the Revenue, and the right of the appellant, to see that the consideration paid under the contract legitimately attributable to such information and services was apportioned and the appellant given the benefit of the deduction available under the section to the extent of such consideration;”
However, in the case of Geoconsult ZT GMBH 304 ITR 283, the Authority for Advance Ruling (AAR) has completely upset the legal interpretation of consortium agreements.
The AAR observed that “the essential features and stipulations in the two agreements coupled with the background in which the joint venture was formed overwhelmingly point out the existence of ‘association of persons’ as it is understood in law and in ordinary parlance.
Common purpose and common action pursued towards the ultimate end of earning income/profits is writ large on the face of the agreements…………the J V is to be taxed in the status of an association of persons @ 41% net basis.”
It may incidentally be mentioned that the case of Continental Construction (supra) which is the leading parent case on interpretation of a consolidated agreement was not brought to the notice of AAR. Had the Hon’ble Apex Court decision been considered by the AAR, perhaps their decision would have been different.
After Geoconsult case (Supra), the Hon’ble AAR has taken different views in different cases. For example, in case of M/s Hyundai Rotem Co., Korea 323 ITR 277, it has been held that the consortium agreement between the parties can not be treated as AOP under the Act.
Similarly, in case of CTCI Overseas Corporation Limited in AAR No 854 of 2009 dated 01.02.2012, the AAR ignored the consortium between the parties and held that offshore supplies are not taxable in India. But in a very recent case of Linde AG in AAR No 962 of 2010 dated 20.03.2012, the AAR has taken a view that consortium agreement will result in formation of an AOP for tax purposes in India.
It is unfortunate that for and against cases decided by AAR have created a big confusion. One is not sure, in case of joint venture or consortium agreement, whether the arrangement will be treated as AOP or not.
It is, therefore, strongly felt that the AAR should clarify, as soon as possible and in the very next case before it, the circumstances under which AOP will be formed and circumstances where AOP will not be formed.
It may also be observed that giving contradictory decisions does not help anybody. The Authority has itself departed from its earlier decisions consciously, and in case of Cyril Eugena Perrira [239 ITR 650] has observed that “there should be no hesitation in correcting the earlier ruling keeping in view the precedents in the matter.”
The Authority quoted from the case of Distributors “Baroda” P Ltd [155 ITR 120] :“To perpetuate an error is no heroism. To rectify it, is the compulsion of judicial conscience.”
H.P. Agrawal The author is a Sr. Partner in S.S. Kothari Mehta & Co.mail: email@example.com