Case Law Details
Issue before Court:
Whether a proportion of the project receipts, commensurate with the risks/performance obligations, should be attributed to the assessee JV to whom tender had been awarded for the project and undertook significant risks and responsibilities for the completion of the project and whether it is allowable for the assessee to divert the entire receipts to its JV partners by designing a sub-contract to that effect.
Brief facts:
- The assessee joint venture (JV) between M/s Oriental Structural Engineers P. Ltd, New Delhi and M/s KMC Construction Ltd. Hyderabad, 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.
- 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 90,46,70,560/- towards payment to subcontractors, i.e. the JV partners itself.
- Apart from this, the JV paid work contract tax of 1,84,62,669/- apart from other small expenses like bank charges, professional fees etc. The payment made to sub-contractors was 97.99% of the total receipts. The balance was utilized to make payment for work contract tax, professional fees, audit fees etc.
- The AO formed the view that the JV partners had not declared the income/profits in the hand of the assessee JV for their own benefits. AO considered it reasonable and appropriate to assessee the income in the hands of the assessee JV at 5% of the gross contractual receipts.
- CIT (A) reversed the finding of AO which was confirmed by ITAT later on.
Contention of the revenue:
- 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.
- Itresults in a situation where a proportion of the project receipts, commensurate with the risks/performance obligations, should be attributed to the assessee.
Contention of the assessee:
- Assessee paid receipts to its partners on the basis of sub-contracts between the JV and partners.
Held by the court:
- CIT (A) and ITAT were right in holding 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.
- 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.
- Applying the principles of the law declared in Linde AG, Linde Engineering division and Anr, it is held that the ITAT did not fall into error of law, in holding that the JV was not an association of persons and liable to be taxed on that basis.
Conclusion:
Hon’ble court in the case of Linde AG, Linde Engineering Division and Anr. v. Deputy Director of Income Tax W.P. (C) No. 3914/2012 & CM No. 8187/2012, reported in [2014] 365 ITR 1 (Delhi) considered the definition of associate of person according to the provision & explanation to the provision of section 2 (31) that For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains.
