Case Law Details
ADIT Vs Persys Punj Lloyd JV (ITAT Delhi)
The issue under consideration is whether the appellant was to be assessed in the capacity of an Association of Person (AOP) or the members of the AOP were assessable to tax separately in their individual capacity?
ITAT have examined the Joint venture agreement. On reading of some clauses of the agreement its is apparent that each of the members is responsible for its own part of the contract execution , will take away gross receipt and incurred expenditure for the execution of project relating to his part and earn profit or loss accordingly. The control and management of consortium rests with individual consortium members with respect to their work. Therefore, it satisfies all the four conditions mentioned in circular no. 7/2016 dated 07 March, 2016. Ld. DR could not point out any clause of the agreement, which does not satisfy any of the above four conditions of the circular. Further by the circular stated above revenue has also reiterated salient features of what would constitute and AOP and held that if the above four conditions are satisfied than the consortium arrangement shall not be treated as an AOP but individual members will be taxed separately.
FULL TEXT OF THE ITAT JUDGEMENT
1. These five appeals are filed by the revenue against the order dated 11.2011 of the ld CIT(A)-XXIX, New Delhi for the Assessment Year 2004-05 to 2008-09.
2. The revenue has raised identical grounds in all the assessment years, the grounds raised by the revenue for Assessment Year 2004-05 are as under:-
(i) Whether on the facts and circumstances of the case, the CIT(A) has erred in holding that the assessee was not liable to be assessed as AOP in respect of its contractual receipts from DMRC for “construction for rail corridor contract 3C21/ 22/ 23 and construction for elevated viaduct for line no. 3”, ignoring clause D of the preamble of pre bid JV agreement dated 17-12-2002.
(ii) Whether on the facts and circumstances of the case, the CIT(A) has erred in reversing the finding of the AO that the assessee was an AOP which was formed with the object of associating for the common purpose of deriving profits and gains from the execution of contract awarded by DMRC on the basis of a pre-bid agreement dated 17-12-2002 between M/ s Persys SON BHD, Malaysia and Punj Llyod Ltd for common purpose, common action and joint and several responsibility for successful completion of the contract as borne out by clauses D of the preamble, para 4.1, and para 11.2 of pre bid JV agreement dated 17-12-2002.
(iii) Whether on the facts and circumstances of the case the CIT (A) has erred in holding that there was no sharing of profit and loss, ignoring
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- para 11.2 of the pre-bid JV agreement dated 17-12-2002 which clearly mentions that all the loss damages and liabilities arising out of the project would be borne by the party in proportion to their participating interest and
- para 4.1 of pre-bid agreement dated 17-12-2002 which mentions ‘joint right and obligations” including in the share of net proceeds from the project, which established the most vital ingredient for existence of AOP as laid down by Apex Court in 39 ITR 546 (SC).
(iv) Whether on the facts and circumstances of the case the CIT(A) has erred in ignoring that none of the partners of the JV were individually eligible and competent for executing the project on their own and bid was submitted by them as an AOP for execution of a single contract based on pre-bid agreement dated 17-12-2002, and awarded on that basis and any subsequent agreement between the partners could not override the said pre-bid agreement on which basis the contract had been awarded.
(v) Whether on the facts and circumstances of the case the CIT (A) has erred in holding that there was no AOP when bid was submitted as an AOP, contract was awarded to AOP, payments were in the name of AOP and risks and costs by reasons of defect and damage were also cast on AOP and a Joint Venture Board was constituted to ensure smooth execution of the project.
(vi) Whether on the facts and circumstances of the case, the CIT(A) has erred in reversing the finding of the AO that the assessee was an AOP which was formed with the object of associating for the common purpose of deriving profits and gains from the execution of contract awarded by DMRC on the basis of a pre-bid agreement between M/s Persys SON BHD, Malaysia and Punj Llyod Ltd for common purpose, common action and joint and several responsibility for successful completion of the contract as borne out by clause D of the preamble, para 4, and para 2 of pre bid JV agreement dated 17-12-2002.
(vii) Whether on the facts and circumstances of the case, the CIT(A) has erred in reversing the finding of the AO that the assessee was an AOP ignoring that a Joint Venture Board was constituted to ensure smooth execution of the project and evaluation was not done by the DMRC separately in relation to each member but of the entity which was responsible for executing the contract awarded.
(viii) Whether on the facts and circumstances of the case, the CIT(A) has erred in reversing the finding of the AO that the assessee was an AOP.”
3. The appellant is an unincorporated Joint Venture (JV) between M/s Persys SDN BHD, Malaysia (hereinafter referred to as ‘Persys’) and M/s Punj Lloyd Ltd. (hereinafter referred to as ‘PLL’). Persys and PLL approached each other to enter into an Pre-Bid Agreement with the purpose of making a joint bid for the tender of Delhi Metro Rail Corporation Limited (DMRC) for the construction for Rail Corridor Contract 3 C 22-Construction of Elevated Viaduct for Line no. 3 (the contract). Persys was a designated as lead member of the JV. The Pre-Bid Agreement was executed in pursuance of clause 2,2.3 of Instructions to Tenderers’ documents issued by DMRC. The said agreement, inter-alia, spelt out the intent of the parties to execute their respective work packages and to be solely responsible individually for any income and tax thereon for their respective work packages. Based on the joint bid, the contract was awarded by DMRC vide letter dated 14.05.2003. Subsequently, Persys and PLL executed a Joint Venture Agreement (JV Agreement) on 10.10.2003, which superseded the Pre-Bid Agreement executed earlier. Based on the above arrangement assessee was of the view that it is not an AOP and it filed its return of income at “Nil” and accompanied by only balance sheet without any profit and loss account. It also attached various TDS certificates with the return of income and claimed the credit for the same. Therefore, the issue before ld. AO was whether the appellant was to be assessed in the capacity of an Association of Person (AOP) or the members of the AOP were assessable to tax separately in their individual capacity, on this issue, Ld. AO took a stand that the appellant is assessable in the capacity of an AOP .
4. On Appeal before CIT (A) he decided this issue in favour of the appellant holding that facts of the present case is similar to the facts of following cases namely:‑
a. Van OORD ACZ BV 248 ITR 399 (AAR
b. Geo Consultants V DIT 304 ITR 283
c. Hyundai Rotem Co 323 ITR 277 (AAR)
Based on the above three decision Ld. CIT (A) held that there was no intention between the parties to create a partnership hence the sharing of profit of the partnership firm as risk and reward of the business of partnership is missing in this agreement. Each party of the Joint venture agreement are responsible for carrying out the work in respect of its specified area bearing its own expenses for carrying on that work and receive consideration for that and resultant profit accruing on that. Hence it is apparent that there is no sharing of profit or loss of the work but to come together to execute specific work. Therefore he held that there is a valid agreement between the parties of joint venture, there is no profit sharing and hence each of the member shall be assessed separately and consortium cannot be assessed as and AOP in that capacity. Against this, the revenue is in appeal before us in all these five appeals raising same grounds of appeal .
5. Before us at the time of hearing Ld. AR submitted that now CBDT has come out with a circulars no 07/2016 dated 7th March 2016 by which these appeal are now covered in favor of the assessee.
6. We have perused the circular issued by CBDT which is as under
“CIRCULAR NO.7/2016
[F.N0.225/2/2016/ITA.11],
DATED 7-3-2016
A consortium of contractors is often formed to implement large infrastructure projects, particularly in Engineering Procurement and Construction (‘EPC’) contracts and Turnkey Projects. The tax authorities, in many cases have taken a position that such a consortium constitutes an Association of Persons (‘AOP’) i.e. a separate entity for charging tax. The claim of taxpayers, on the other hand, is contrary to this view. This has led to tax disputes particularly in those cases where each member of the consortium, although jointly and severally liable to the contractee, has a clear distinction and role in scope of work, responsibilities and liabilities of the consortium members.
2. The term AOP has not been specifically defined in the Income-tax Act, 1961 (‘Act’) the issue as to what would constitute an AOP was considered by the Apex Court in some cases. Although certain guidelines were prescribed in this regard, the Court opined that there is no formula of universal application to conclusively decide the existence of an AOP and it would rather depend upon the particular facts and circumstances of a In the specific context of the EPC contracts/Turnkey projects, there are several contrary ruling of various Courts on what constitutes an AOP.
3. The matter has been examined. With a view to avoid tax-disputes and to have consistency in approach while handling these cases, the Board has decided that a consortium arrangement for executing EPC/Turnkey contracts which has the following attributes may not be treated as an AOP.
i. each member is independently responsible for executing its part of work through its own resources and also bears the risk of its scope of work e. there is a clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work.
ii. each member earns profit or incurs losses, based on performance of the contract falling strictly within its scope of work. However, consortium members may share contract price at gross level only to facilitate convenience in billing.
iii. the men and materials used for any area of work are under the risk and control of respective consortium members;
iv. the control and management of the consortium is not unified and common management is only for the inter-se co-ordination between the consortium members for administrative convenience.
4. There may be other additional factors also which may justify that consortium is not an AOP and the same shall depend upon the Specific facts and circumstances of a particular case, which need to be taken into consideration while taking a view in the matter.
5. It is further clarified that this Circular shall not be applicable in cases where all or some of the members of the consortium are Associated Enterprises within the meaning of section 92A of the Act in such cases, the Assessing Officer will decide whether an AOP is formed or not keeping in view the relevant provisions of the Act and judicial jurisprudence on this issue.
6. The above may be brought to the notice of all for necessary compliance.”
7. We have noted that ld. CIT (A) has also passed the order considering all the above material issues determining whether the consortium is to be taxed as an AOP or Individual members are to be taxed separately . Based on the above circular we have requested the parties to appraise that how the issue is different in this case than dealt with by the circular.
8. We have heard the rival contentions. We have examined the Joint venture agreement dated 17th December 2002. On reading of clause no .4 5,8,10,11,16 especially and on conjoint reading of other clauses of the agreement its is apparent that each of the members is responsible for its own part of the contract execution , will take away gross receipt and incurred expenditure for the execution of project relating to his part and earn profit or loss accordingly. The control and management of consortium rests with individual consortium members with respect to their work and for the coordination purposes one Lead party Persys SDN. BHD. Is nominated for coordination with DMRC. Therefore, it satisfies all the four conditions mentioned in para no 3 of the above circular. Ld. DR could not point out any clause of the agreement, which does not satisfy any of the above four conditions of the circular. Further by the circular stated above revenue has also reiterated salient features of what would constitute and AOP and held that if the above four conditions are satisfied than the consortium arrangement shall not be treated as an AOP but individual members will be taxed separately.
9. In view of above facts, we are of the view that the terms and conditions between the parties are squarely falling within the conditions specified in para no 3 of the above circular . Therefore, we confirm the finding of the CIT (A) that income arising from the DMRC contract was not assessable to tax in the hands of AOP but each member of the AOP shall be separately assessable to income tax in their own capacity.
10. In the result appeal of the revenue in ITA no 1270 to 1274/Del/2012 for AY 2004-05 to 2008-09 are dismissed.
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