Consortium members not sharing profits are separate firms: AAR

A tax authority has ruled that consortium members that do not share profits or losses as a group and execute tasks requiring skills different from others will be treated as separate entities.

“Merely coming together and acting in cooperation with each other for the purpose of executing the work, while each member carries on its own scope of work independently, does not reasonably lead to the conclusion that an Association of Persons (AoP) has been formed,” Authority for Advance Rulings (AAR) said.

The ruling came in response to a query by foreign companies in a Mitsubishi-led consortium that is providing standard gauge metro train to Delhi Metro Rail Corp (DMRC).

Companies that undertook expenses and booked profits or losses for their part of the job separately in a project, though working in a consortium, could not be treated as AoP, it said.

Experts said the ruling was likely to help foreign companies in a consortium to easily avail of benefits under double-taxation avoidance agreements (DTAAs). This could be difficult in cases where their consortium is considered as AoPs.

The Revenue Department had contested that the consortium had all the attributes of an AoP, but the foreign companies maintained it was not so as there was no agreement to share profits and losses or to jointly incur any expenditure.

“These are all features apart from the profits and losses being borne by the individual members and common expenditure not being incurred by them,” AAR said, citing reasons why the consortium was not an AoP.