- The Delhi Metro Rail Corporation (DMRC) invited bids for design, manufacture, supply, testing, commissioning, training and transfer of technology of 156 Standard Gauge Electrical Multiple Units (EMUs).
- Mitsubishi Corporation (MC) and Hyundai Rotem Company, Korea (Rotem) along with other two members entered into a consortium (MRMB) to participate in the bidding process.
- Each member?s responsibilities along with the participation percentage between the consortium members were prescribed in consortium agreement.
- DRMC awarded the contract to MRMB.
- Later, MRMB entered into a supplementary consortium agreement („SPA?) where the role and participation percentage was revised. The said SPA was also approved by DMRC.
- MC and Rotem (the applicants) sought ruling from Authority for Advance Rulings (AAR) as to whether MRMB would be taxable as an Association of Persons (AOP) or each member would be chargeable to tax in their individual capacity.
Ruling of the AAR
- The AAR analysed the present facts with facts in its earlier rulings in the case of Van Oord Acz BV Citation: 248 ITR 399 and Geo Consult ZT GMBH Citation: 304 ITR 283.
- In the former case, AAR held that joint venture did not satisfy the criteria of AOP while in the later case it distinguished the Van Oord case and held the consortium as an AOP.
- Relying on its earlier ruling in the case of Geo Consult, the AAR held that sharing of profits is not an essential requisite for AOP. It is enough if the parties share gross receipts in an agreed percentage.
- AAR set out the points which are in favor of and another set of points that are against of forming of an AOP. These are outlined below:
|Points to support AOP||Points against AOP|
|Joint participation of members in bidding process||Nature of work undertaken by each member is qualitatively different and each member has distinct skills.|
|Bid submitted by consortium and execution of single contract||Work assigned to one party cannot be undertaken or relocated to another member even in case of insolvency of a member|
|Constitution of project Board involving each member for overall planning, organizing and controlling the execution of the project||Evaluation done by DMRC separately in relation to each member|
|Payments in the name of consortium||Each member does not act as an agent of the other|
|Joint and several liability towards the DMRC||The percentage of discount to DMRC was made by each member separately and was not across the board|
|Risk and cost by reason of defect or damage cast on consortium and not on individual members||Specific declaration in SCA that the members do not intend or shall be construed as creating partnership, joint venture or any other legal entity among the parties|
|Insurance in the joint name of DMRC and consortium||Profit & losses borne by individual members themselves and common expenditure not being incurred by them|
- The joint and several liabilities towards the employer is a safeguard to DMRC to have better hold over the consortium members.
- The factors which rule out the inference that the consortium cannot be treated as an AOP are more glaring and conspicuous than the factors which support the inference.
- The present case is more in line with Van Oord than Geo Consult. The MRMB Consortium cannot be treated as an AOP and the applicants can only be subject to taxation on the basis that they are separate taxable 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 AOP has been formed.
Source: Hyundai Rotem Co., Korea & Mitsubishi Co., Japan, AAR No’s. 798- 799/2008 (Authority for Advance Ruling) dated 23 March 2010