Taxability of Consortium Members (Joint Ventures in case of EPC & Turnkey Projects)

Clarification on Taxability of Consortium Members (Joint Ventures in the case of EPC contracts and Turnkey Projects)

Recently the CBDT has issued a circular to clarify the taxability in the case of Consortium Members. Development in the area of infrastructure has caused a steep increase in the number of big projects in India. A consortium of contractors is often formed to implement large infrastructure projects, particularly in Engineering, Procurement and construction (“EPC”) contracts and Turnkey Projects due to the requirement of expertise, and specialised resources in each specific area to represent a single point of contact for the client.

Taxability before issuance of the Circular:

In these consortiums, each member can be jointly and severally liable to the client despite having a clear distinction in role, scope of work, responsibilities and liabilities inter se the consortium members. The tax authorities, in many cases have taken a position that such a consortium constitutes an association of person (‘AOP’) i.e. a separate entity for charging tax. The claim of taxpayers, on the other hand, is contrary to this view.

In number of cases, these EPC contracts involves various entities across the globe as well. This has caused more hardship to these consortiums. The consortium AoP i.e. the joint venture, to be treated as a person ‘resident in India’ in which case global income of such joint venture would be taxed as its ‘business income’ in India, in certain cases at the rate applicable to a non-resident entity, i.e. 40% (plus applicable surcharge and cess). This results in higher tax incidence on the income of the consortium and its resident and non-resident members. No treaty benefit reduces this tax incidence.  

The term AOP has not been specially defined in the Income-tax Act, 1961 (‘Act’). The issue as to what would constitute an AOP was considered by the Apex Court in some cases. Although certain guide lines were prescribed in this regard, the court opined that there is no formula of universalapplication so as to conclusively decide the existence of an AOP and it would rather depend upon the particular facts and circumstances of a case. In the specific context of the EPC contracts/Turnkey projects, there are several contrary ruling of various courts on what constitutes an AOP.

Taxability after Circular issued by the CBDT to clarify the position:

The matter has been examined with a view to avoid tax-disputes and to have consistent approach while handling these cases, the board has decided that a consortium arrangement for executing EPC/Turnkey contracts which has the following attributes may not be treated as an AOP:

A. Clear demarcation of scope of work and associated costs: Each member of the consortium is independently responsible for executing its part of the work through its own resources. The consortium members should also bear the risk  and expenses related only to such specified scope of work i.e. a clear demarcation in the work and costs between the consortium members;

B. Profits/loss based on scope of work: Each member earns profits/ incurs losses based on performance of the contract strictly falling within its scope of work, the consortium members may however share a contract price for the purpose of facilitating convenience in billing;

C. Risk and control of resources: The labour and materials used for any area of work are under the risk and control of the respective consortium members;

D. No unified control and management of the consortium: The control and management of the consortium is not unified and common management is only for coordination between the consortium members for administrative convenience.

It is further clarified by the CBDT that, the Circular will not apply to consortiums where all or some members are ‘Associated Enterprises’ (AE).  AE, for this purpose, would be the same as that under transfer pricing regulations. The Circular also recognises that there may be additional attributes which may demonstrate that the consortium is not an AoP, depending on the specific facts and circumstances.

This clarification is very important for all the infrastructure companies as it will serve a guidance to the Income Tax Authorities in dealing with the large EPC contracts which has been dealt by consortium of contractors and thus reduce the inconsistency in the approach adopted by them while evaluating consortium structures.