Case Law Details
M/s. Herve Pomerleau International CCCL Joint Venture Vs ACIT (ITAT Chennai)
Assessee challenges the action of the lower authorities applying provisions of Section 167B(1) of the Act while computing tax liability. Admittedly, in the present case, assessee was assessed in the status of AOP. The provisions of Section 167B of the Act provides that where the individual shares of the members of the AOP in the whole or any part of the income of the AOP or indeterminate or unknown, tax shall be charged on the total income of the association at the maximum marginal rate of tax. Proviso to Section 167B(1) of the Act further provides that where total income of any member of the AOP is chargeable to tax at the rate which is higher than the maximum marginal rate, tax shall be levied on the total income of the AOP at such higher rate applicable to such members. In the present case, one of the member of AOP is an Non Resident i.e. HPI, a company registered in Canada and the income of this member is taxable at 42.23%. In order to determine the applicability of Section 167B(1) of the Act, it is essential to decide whether the shares of the members of the AOP are indeterminate or unknown. This issue can be decided that with reference to the terms of understanding the parties had. The parties had entered into long term agreement on 30.11.2007 which is placed at paper book page No.1. From the perusal of the agreement, it is clear that the agreement is silent on the profit sharing ratio of its members, in terms of MOU entered between the parties on 30.11.2007, Clause VII of the MOU provides that sum equivalent to 2% of the project cost shall be paid to HPI by CCCL. This agreement is also silent regarding sharing ratio of its members. Other document i.e. profit sharing agreement entered between the above parties on 29.12.2008 only says that profit before tax arising on the above project would be finally determined after completion of the project and it further provided that HPI shall be paid guaranteed profit share in the form of 2% of contract price. Clause 2 of the profit sharing agreement further provides for the mode of payment 2% guaranteed profit. Having regard to the above clauses of the three agreements, it is clear that as cumulative consideration of the terms of the three agreements, the parties have not agreed as to the shares of the profits of the AOP. More importantly, Consortium Agreement entered into between the parties is totally silent as to the shares of the profits of the AOP. In terms of MOU in clause VII entered between parties on 30.11.2007, there is clear obligation on the part of CCCL to pay a sum equivalent to 2% of the project cost to HPL, which would go to show that it is not the AOP which is under obligation to pay 2% of contract price to HPL but it is CCCL. The term ‘’share of net profit” implies a ‘’share in the net profits” which is an interest in the profits as profits, and implies a participation in the profits and losses. But in the present case, the member of the AOP i.e. HPL is entitled to 2% of the profit cost regardless of the fact whether AOP made profits or losses. This is only a charge against the profits of the assessee, AOP but not share in profits. Therefore, it cannot be said that the shares of the profit in AOP of members is determinate or known. Thus on cumulative consideration of all clause the three agreement entered into it is crystal clear that shares members of AOP are indeterminate and unknown, therefore the provisions of sub section (1) to Section 167B of the Act are squarely applicable and we do not find any reason to interfere with the orders of the lower authorities.
Also Read- Analysis of ITAT Chennai order on Applicability of Section 167B of Income Tax Act, 1961
FULL TEXT OF THE ITAT JUDGEMENT
These are appeals filed by the Assessee directed against different orders of the Commissioner of Income Tax (Appeals)-2, Chennai (‘CIT(A)’ for short) dated 28.02.2017 & 29.11.2018 for assessment years 2010-2011 2011-12, 2012-13 & 2013-14.
2. Since, the identical facts and issues are involved in these appeals, we proceed to dispose the same vide this common order.
3. For the sake of convenience and clarity, the facts relevant to the appeal in ITA No.1008/Chny/2017 for assessment year 2010-2011 are stated herein.
4. The Assessee raised the following grounds of appeal:
‘’1. The order of The Commissioner of Income Tax (Appeals) 2, Chennai dated 28.02.2017 in l.T.A.No.66/2015-16 for the Assessment Year 2010-11 is contrary to law, facts, and in the circumstances of the case.
2. Reopening the Assessment u/s 147 is not valid.
2.1 The CIT (A) is not justified in concluding that the re-opening o f assessment by issue of notice u/s 148 is valid
2.2 The CIT (Appeals) erred in considering the argument of Addl.CIT that merely because the Assessee makes submission to Assessing Officer does not automatically imply that an opinion is formed on the said issue, when the Learned Assessing Officer in his order u/s 143(3) has himself stated that all the details submitted by the Assessee were examined.
3. Shares of members of AOP are determinate only and not indeterminate as confirmed by The CIT (Appeals).
3.1 The CIT (Appeals) wrongly interpreted the submissions made by the Appellant and thereby concluded that there is an unguaranteed portion of final contract price to be paid to Herve Pomerleau International, being one of the members of the AOP.
3.2 The CIT (Appeals) is not justified in concluding that the Appellant share of profit are indeterminate, while there is a specific profit sharing agreement entered between the members of AOP and without considering the detailed submission made by the Appellant on the sharing methodology adopted by the Appellant.
3.3 The CIT (Appeals) has failed to understand the intention o f insertion of section 167B of the Act and also erred in the interpretation of the sub-sections (1) & (2) of Section 167B of the Act., explained vide CBDT circular no.551 dated 23.01.1990, as per which subsection (1) of section 167B will be applicable, only in cases where the members of AOP having income taxable lower than the Maximum Marginal Rate or does not have taxable income. Hence the CIT (Appeals) ought to have accepted that sub section 2 of section 167B only will be applicable in the appellant’s case.
3.4 The CIT (Appeals) has also failed to consider the submissions made by the Appellant with respect to the amounts transferred to the members of the AOP over the years, wherein also the determinate share of profits of the members of the AOP are clearly established.
4. The Appellant craves leave to file additional grounds/arguments at the time of hearing’’.
5. The brief facts of the case are as under:
The appellant namely Herve Pomerleau International CCL Joint Venture is a company formed by two parties namely Consolidated Construction Consortium Limited ( hereinafter called as CCCL) and M/s.Herve Pomerleau International Inc. (hereinafter called as HPI) , a company registered in Canada. They formed a Joint Venture to execute a contract of Airport Authority of India for Chennai Airport expansion. The return of income for the AY 2010-2011 was filed on 30.09.2010 disclosing total income of Rs.20,79,54,470/-. Against the said return of income, the assessment was completed by the Assessing Officer vide order dated 21.02.2013 passed u/s. 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) accepting returned income. Subsequently, the Assessing Officer noted that taxes has been levied at maximum marginal rate on income attributable to Indian company i.e. CCCL instead of rate applicable to foreign companies at 42.23%. Therefore, the Assessing Officer issued notice u/s.148 of the Act. In response to the notice issued u/s.148 of the Act, assessee submitted that original return of income filed on 30.09.2010 be treated as return in response to notice issued u/s.148 of the Act. The Assessee also sought reason for reopening the assessment and filed objections which were disposed of by the Assessing Officer on 18.03.2015. The Assessing Officer taking notice of Article-5 of Consortium Agreement dated 30.11.2007 entered between two partners, wherein it is mentioned that net profits, assets and liabilities arising out of joint performance of contract shall be shared as mutually agreed upon and also taking note of profit sharing agreement dated 29.12.2008 entered between two parties had come to conclusion that profit were shared among the partners and foreign company will be paid guaranteed profit share of 2% of final contract price and therefore held that tax should be levied under sub section (1) of Section 167B of the Act and accordingly levied tax vide order dated 25.03.2015 u/s.143(3) r.w.s.147 of the Act.
6. Being aggrieved, an appeal was preferred before the Ld.CIT(A) challenging the very validity of the initiation of
reassessment proceedings on the ground that reassessment proceedings are prompted by mere change of opinion and there was no reason to disbelieve that tax escaped assessment and challenging the action of the Assessing Officer in levying taxes under sub section (1) of Section 167B of the Act. The ld. Commissioner of Income Tax (Appeals) considering the submissions made by the assessee and perusal of the relevant clauses of Consortium Agreement, profit sharing agreement etc dismissed the appeal of the assessee.
7. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us in the present appeal. Ld. Authorised Representative submitted that initiation of reassessment proceedings were bad in law and there was no reason to believe that tax escaped assessment. He further submitted that this issue was considered by the Assessing Officer during the original assessment proceedings and therefore reassessment are promoted by mere change of opinion. In support of this, he placed reliance on the following decisions.
01 CIT vs. Kelvinator of India Ltd, 320 ITR 561 (SC)
02 Tanmac India vs. DCIT, 78 taxmann.com 155 (Madras HC)
03 CIT vs. Orient Craft Ltd, 354 ITR 536, (Del HC)
04 Shivsu Canadian Clear Waters Ltd vs. DCIT, 90 taxmann.com 352, (Chennai ITAT)
05 Sun Pharmaceutical Industries Ltd vs. DICT, 381 ITR 387, (DEL HC)
06 PCIT vs. Shodiman Investments P. Ltd 93 taxmann.com 153 (Bom HC)
8. On the merits of the case, ld. Authorised Representative submitted that having regard to the clause of MOU entered into between parties on 30.11.2007 and profit sharing agreement entered between the parties on 29.12.2008, it is clear as cumulative consideration of the clauses of agreements that the profit sharing ratios of the members of the MOU are determined and therefore tax should be levied under sub section (2) of Section 167B of the Act.
9. On the other hand, the ld. CIT- Departmental Representative had vehemently contended that having regard to the clause of agreement entered between the parties, it cannot be said that profit sharing ratios of the members of the AOP are determined and tax should be levied only under sub section (1) of Section 167B of the Act.
10. We heard the rival submissions and perused the material on record.
11. Admittedly, assessee before us was assessed in the status of AOP. Provisions of Section 167 of the Act provides that in case where individual shares of the members of AOP is indeterminate tax should be charged on such AOP at maximum marginal rate.
12. Grounds of appeal No.1 & 4 are general in nature therefore, does not require any adjudication.
13. Ground No. 2, challenges the validity of the reassessment proceedings. The contention of the assessee that reassessment proceedings are prompted by mere change of opinion cannot be accepted for reasons that in the original assessment proceedings, there is nothing to show that Assessing Officer had examined the issue, whether the shares of members of AOP are determined or not. Therefore, it cannot be said that reassessment proceedings are promoted by mere change of opinion. Hence the ratio of the decision of Hon’ble Supreme Court in the case of Kelvinator India Ltd (supra) cannot be applied to the facts of the present case. We do not find any merits in the contention challenging the validity of reassessment proceedings. In the result, grounds of appeal No.2 of the assessee stands dismissed.
14. In ground No.3, assessee challenges the action of the lower authorities applying provisions of Section 167B(1) of the Act while computing tax liability. Admittedly, in the present case, assessee was assessed in the status of AOP. The provisions of Section 167B of the Act provides that where the individual shares of the members of the AOP in the whole or any part of the income of the AOP or indeterminate or unknown, tax shall be charged on the total income of the association at the maximum marginal rate of tax. Proviso to Section 167B(1) of the Act further provides that where total income of any member of the AOP is chargeable to tax at the rate which is higher than the maximum marginal rate, tax shall be levied on the total income of the AOP at such higher rate applicable to such members. In the present case, one of the member of AOP is an Non Resident i.e. HPI, a company registered in Canada and the income of this member is taxable at 42.23%. In order to determine the applicability of Section 167B(1) of the Act, it is essential to decide whether the shares of the members of the AOP are indeterminate or unknown. This issue can be decided that with reference to the terms of understanding the parties had. The parties had entered into long term agreement on 30.11.2007 which is placed at paper book page No.1. From the perusal of the agreement, it is clear that the agreement is silent on the profit sharing ratio of its members, in terms of MOU entered between the parties on 30.11.2007, Clause VII of the MOU provides that sum equivalent to 2% of the project cost shall be paid to HPI by CCCL. This agreement is also silent regarding sharing ratio of its members. Other document i.e. profit sharing agreement entered between the above parties on 29.12.2008 only says that profit before tax arising on the above project would be finally determined after completion of the project and it further provided that HPI shall be paid guaranteed profit share in the form of 2% of contract price. Clause 2 of the profit sharing agreement further provides for the mode of payment 2% guaranteed profit. Having regard to the above clauses of the three agreements, it is clear that as cumulative consideration of the terms of the three agreements, the parties have not agreed as to the shares of the profits of the AOP. More importantly, Consortium Agreement entered into between the parties is totally silent as to the shares of the profits of the AOP. In terms of MOU in clause VII entered between parties on 30.11.2007, there is clear obligation on the part of CCCL to pay a sum equivalent to 2% of the project cost to HPL, which would go to show that it is not the AOP which is under obligation to pay 2% of contract price to HPL but it is CCCL. The term ‘’share of net profit” implies a ‘’share in the net profits” which is an interest in the profits as profits, and implies a participation in the profits and losses. But in the present case, the member of the AOP i.e. HPL is entitled to 2% of the profit cost regardless of the fact whether AOP made profits or losses. This is only a charge against the profits of the assessee, AOP but not share in profits. Therefore, it cannot be said that the shares of the profit in AO of members is determinate or known. Thus on cumulative consideration of all clause the three agreement entered into it is crystal clear that shares members of AOP are indeterminate and unknown, therefore the provisions of sub section (1) to Section 167B of the Act are squarely applicable and we do not find any reason to interfere with the orders of the lower authorities. Thus, grounds of appeal No.3 raised by the assessee stands dismissed.
15. In the result, the ITA No. 1008/CHNY/2017 for assessment year 2010-2011 filed by the assessee stand dismissed.
ITA Nos.17, 18 & 19/CHNY/ 2019 for assessment years 2011-12, 2012-13 & 2013-14
16. Since, the facts in the present appeals are identical to the facts in ITA No.1008/Chny/2017 for assessment year 2010-2011, for the reasons mentioned therein, we dismiss the appeals in the same lines indicated in appeal ITA No.1008/Chny/2017 supra. Hence, the above captioned appeals filed by the assessee stand dismissed.
17. To summarize the result, the appeals filed by the assessee in ITA Nos. 1008/CHNY/2017, ITA Nos. 17, 18 & 19/CHNY/2019 for assessment years 2010-11, 2011-12, 2012-13 & 2013-14 stand dismissed.
Order pronounced on 21st day of October, 2019, at Chennai.
