Brief of the Case
Delhi High Court in the case of CIT vs. M/s Oriental Structural Engineers Pvt. Ltd. held that the Joint Venture was not an Association of Persons and could not be taxed on that basis, where the JV was formed only to secure the contract, in terms of which the scope of each JV partner’s task was distinctly outlined.
.Facts of the Case
The assessee is a joint venture (JV) which was formed to undertake projects awarded by NHAI. The assessee reported NIL income for the relevant years and claimed refunds. The case was processed under Section 143(1) and later on selected for scrutiny under compulsory scrutiny norms. Therefore, statutory notices were issued to the assessee and served. From the Profit and Loss Account, it was noticed that the assessee received gross receipt of Rs. 92,31,33,229/-. Against this receipt, the assessee debited an amount of Rs. 90,46,70,560/- towards payment to subcontractors, i.e. the JV partners itself. Apart from this, the JV paid work contract tax of Rs. 1,84,62,669/- apart from other small expenses like bank charges, professional fees etc. Similarly, the assessee in another connected case is a joint venture (JV) and the facts are almost similar as mentioned above.
Contention of the Assessee
The assessee was created as a joint venture for obtaining works from the National Highways Authority of India without there being any requirement or necessity of the joint venture to carry out any activity itself. In fact, all the activities were to be carried out by the aforesaid two members of the joint venture and for which they were to be remunerated.
Contention of the Revenue The revenue contended that a careful analysis of the agreement constituting the JV showed that it was meant to operate as a separate entity and not merely to facilitate the JV partners to successfully bid for the contract. It, therefore, results in a situation where a proportion of the project receipts, commensurate with the risks/performance obligations, should be attributed to the assessee to whom tender had been awarded for the project and undertook significant risks and responsibilities for the completion of the project and it is not allowable for the assessee JV to divert the entire receipts to its JV partners by designing a sub-contract to that effect. According to AO the JV partners for their own purposes and benefits, not declared the income/profits in the hand of the assessee JV, which is a separate taxable entity.
Held by the ITAT
The Hon’ble Tribunal upheld the decision of CIT(A) by relying on the contract executed. Also, the Hon’ble ITAT confirmed that the JV was formed only to secure the contract, in terms of which the scope of each JV partner’s task was distinctly outlined. Further, the entire work was split between the two JV partners; they completed the task, through sub-contracts and were responsible for the satisfaction of the NHAI.
Held by the CIT(A)
According to CIT(A) the constituent of this JV are separate legal entities distinct from the JV. It is a fact that the JV constituents are already taxed at maximum marginal rate. Taxing the AOP would tantamount to double taxation. The assessing officer has applied ad hoc estimated rate of profit to the gross receipts without rejecting the books of accounts of the appellant.
Held by the Hon’ble High court
The Hon’ble High Court in the present case while affirming the order of ITAT held that the Joint Venture was not an Association of Persons and could not be taxed on that basis. The Hon’ble High Court relied on Hon’ble Supreme Court Judgments in which it was observed that an association can be considered as a separate taxable entity (i.e. an Association of Persons),only (i)when it is constituted by two or more persons for a common purpose with a common management (ii) the cooperation and association amongst the constituent members must not be perfunctory and/or merely in form. The association amongst members must be real and substantial which is sufficient to treat the association as a separate homogenous taxable entity. In the present case, the JV was formed only to secure the contract, in terms of which the scope of each JV partner’s task was distinctly outlined. Further, the entire work was split between the two JV partners; they completed the task, through sub-contracts and were responsible for the satisfaction of the NHAI.