Applicability of the CBDT Circular on formation of AOP vis-à-vis the EPC contracts/ turnkey projects in case of associate enterprise being a member of the consortium
The term ‘Association of Persons’ (AOP) has not been defined in the Act. The issue as to what constitutes AOP was considered by the Supreme Court in certain cases. The Supreme Court has observed that there is no formula of the universal application so as to conclusively decide the existence of an AOP and it would rather depend upon the particular facts and circumstances of each case. With a view to avoid tax disputes and to have consistency in approach while handling these cases, CBDT issued a Circular No. 7 of 2016, dated 7 March 2016 clarifying that a consortium arrangement for executing EPC/turnkey contracts which have the specified attributes may not be treated as an AOP. The CBDT also clarified that there may be other additional factors also which may justify that a consortium is not an AOP, and the same shall depend upon the specific facts and circumstances of a particular case, which needs to be taken into consideration while taking a view in the matter.
However, the Circular states that it shall not apply where all or some of the members of the consortium are Associated Enterprises (AE) under Section 92A of the Act. In such cases the AO shall decide whether an AOP is formed or not, keeping in view the relevant provisions of the Act and judicial precedents on the issue.
It is suggested that the benefit of this Circular should also be extended to AE situations where such AEs are members of the consortium for executing EPC/turnkey contracts.