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.
A tax authority has ruled in A.A.R. Nos 798-799 of 2008 that consortium members, which do not share profits or losses as a group and execute tasks requiring skills different from others, will be treated as separate entities.
Experts said the verdict is likely to help foreign firms avail of benefits under the double taxation avoidance agreement (DTAA). “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 (DMRC). Companies that undertake expenses and book profits or losses for their part of the job separately in a project, though working in a consortium, cannot be treated as Association of Persons (AOP), it said.
Experts said the ruling is likely to help foreign firms in a consortium to easily avail of benefits under DTAA, which 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 themselves and common expenditure not being incurred by them,” AAR said citing reasons as to why the consortium is not an AOP. The consortium of Mitsubishi (Japan), Hyundai Rotem (Korea), Mitsubishi Electric (Japan) and Bharat Earth Movers (India) is to manufacture and supply 192 standard gauge electrical multiple units (EMUs) to DMRC.
“It is ruled that MRMB Consortium cannot be treated as Association of Persons for the purposes of assessment … and the applicants can only be subjected to taxation on the basis that they are separate taxable entities,” AAR said.
KPMG executive director Vikas Vasal said the matter gains significance as there are issues involved in availing foreign tax credit under DTAA for an AOP, while it is easier when the members are considered as separate entities for taxation. “There could be different issues in respect of the foreign tax credit claim by the foreign parties in their home countries under the two scenarios. It is simpler when they are taxed independently rather than as an AOP,” Vasal said.
“This issue gains relevance especially where foreign parties are involved as different sources of income may be taxed at a lower rate by virtue of the provisions of DTAA in comparison with if it is taxed as income sourced in India under the Income-tax Act,” Vasal added. Hyundai Rotem and Mitsubishi had moved AAR seeking clarification on whether the consortium members would be taxed as independent companies or as an Association of Persons (AOP) under the Income-tax Act. The duo said the nature of work undertaken and capable of being executed by each party is different.
Rotem is concerned with mechanical portion of work, MELCO is concerned with electrical portion, BEML is responsible for the localisation works and Mitsubishi looks after project coordination.
On Friday, Delhi Metro flagged off the country’s first standard gauge line provided by the consortium. The DMRC has already procured 17 standard gauge trains from it.