In the given case, memebrs of JV decided to form a JV only to secure the orders and execution of the orders was to be done by one of the constituents of the JV. JV was formed for the benefit of the individual members and a business was carried on for the benefit of the businessman. There was no sub-contract relationship existed between JV partners. Accordingly, the work executed by the AMRCL was not in sub-contract. Ground raised by revenue was dismissed.
FULL TEXT OF THE ITAT JUDGMENT
All these appeals are filed by assessee as well as revenue directed against orders of Commissioner (Appeals)-6, Hyderabad. As identical issues are involved in these appeals, they were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.
2. The Brief facts, as taken from KCL AMRCL JV for assessment year 2012-13, are that the assessee is an AOP comprising of two members, Viz., M/s Ketan Constructions Ltd. (KCL) and AMR Constructions Ltd. (AMRCL). It was formed as a Joint Venture for securing the contract of “widening to 2 lane and improvement from Km 50/0 to 84/2000 of Govindapalli-Balimela-Chitrakonda-Sileru Road (SH-47) in Malkarjini District under L.W.E. Scheme” tendered by the Chief Engineer (DPI & Roads), Govt. of Orissa. The return was filed on a total loss of Rs. 30,888. It claimed itself to be a ‘pass through entity’ that had been only formed to obtain the contract work.
2.1 During the Course of assessment proceedings, the assessing officer observed that an amount of Rs,9,90,37,026 received as payment from the contractee had been debited to the P&L A/c as payments made towards subcontracts. On being asked to furnish the details of TDS made and remitted to the Govt. A/c, it was stated by the assessee that the contract had been given to AMRCL on back to back basis. This fact was communicated to the contractee / employer and the contractee had been asked to deduct TDS in the name of AMRCL under rule 37B of the Income Tax Rules. The assessing officer rejected the claim of the assessee, as according to him, for any payments made to subcontractors, provision of section 194C was applicable and failure to do so warranted disallowance under section 40(a)(ia) of the Act. He accordingly disallowed the Sum of Rs. 9,90,37,030 under section 40(a)(ia) of the Act.
3. Aggrieved by the order of the assessing officer, the assessee preferred an appeal before the Commissioner (Appeals).
4. The Commissioner (Appeals) noted that the assessee reiterated the submissions made before the assessing officer and submitted that it was constituted by KCL & AMRCL (later called AMR India Ltd.) to make it eligible to procure contract work of high value. It had submitted bid for road widening on tender invited by the Chief Engineer (DPI & Roads), Govt. of India. The bid was accepted and the Work so obtained Was divided between the Constituents in the ratio of 51: 49 between KCL & AMRCL respectively for the purposes of smooth execution of work. As per the MoU between the JV members, it was mutually agreed that each Constituent would be responsible for its part of Work. Subsequently, KCL got its part of work executed by the other constituent i.e., AMRCL. Thus, the entire gross receipt of the JV for the assessment year under consideration amounting to Rs,9,90,37,026 was passed to AMRCL, without deduction of any tax at source. The assessee JV had not retained any commission/margin for itself. It was submitted that the said amount was duly offered as income in the return of income filed by AMRCL which had actually executed the work and paid taxes thereon. According to the assessee, a specific request had also been made to the employer, i.e. Chief Engineer (DPI & Roads) to transfer the credit of TDS made by them directly in favour of AMRCL that had actually executed the work in terms of Rule 37BA of the Income Tax Rules and therefore the assessee had not claimed credit for such TDS in its return. It was submitted that the relationship between the assessee – JV and its constituent members was not a contractor – subcontractor relationship and as such provisions of section 194C and Sec 40(a)(ia) were not applicable. And as the amount in question was paid to AMRCL before the year end and considered by it in the return of income filed by it and taxes were paid, no disallowance was warranted. In support of its contention that the entire amount was paid during the year and therefore section 40(a)(ia) was not applicable, it placed reliance on the decision of Special Bench of ITAT in the case ofMerilyn Shipping & Transport v. ACIT (2012) 146 TTJ 1) and submitted that as the entire sum was taken into account for computing total income by AMRCL and taxes were paid by it, disallowance under section 40(a)(ia) of the Act was not called for and the same should be deleted. It further stated that the relationship between the JV and its constituents was not in the nature of contractor-subcontractor relationship and therefore provision of section 194C were not applicable. For this, it placed reliance on the decision of jurisdictional ITAT in the case of Madhucon Sino – Hydro JV v. ACIT (ITA NO.701/H/2010 dated 27-11-2012) & DCIT v. Hindustan Ratna JV (ITA No.1575/Hyd/2014 dated 12-2-2015).
4.1 After considering the submissions of the assessee, the Commissioner (Appeals) elaborately discussed the issue about the scheme of AOP and analysing the issue with various case laws, summarized her decision as under:
“I. The assessee is an AOP.
II. It was the contractor in the business of road construction even though the work was done through its members.
III. It is liable to compute the profit arising from the contract work and pay tax on the same.
IV. The members were not its ‘sub-contractors’ and, hence, there was no requirement of TDS on the amounts credited/paid by it to them. Consequently, the disallowance under section 40(a)(ia) of the Income Tax Act made by the assessing officer is deleted.
V. The remuneration paid by it to the members, i.e. the surplus over the expenditure incurred by them for the purpose of its business, is liable to be disallowed in view of the express provision of section 40(ba) of the Income Tax Act.
The assessee’s net profit is estimated to be 8% of its gross turnover. That would be net of all allowances as well as the disallowances, including the one under section 40(ba) of the Income Tax Act.
VI. The assessing officer is directed to re-compute the assessee’s total income accordingly and compute tax thereon at the maximum marginal rate in view of the provision of section 167B(2) of the Act.”
5. Aggrieved by the order of Commissioner (Appeals), the assessee and the revenue are in appeal before us:
6.1 Assessees’ grounds of appeal, which are common in all the appeals under consideration:
“1. On the facts and in the circumstances of the case, the order of the learned Commissioner (Appeals) allowing the appeal only in part is erroneous, illegal and unsustainable in law. The Commissioner (Appeals) ought to have allowed the appeal in entirety.
2. The Commissioner (Appeals) erred in holding that the Appellant is liable for the work done in spite of the fact that the contract work was done by its constituents. The Commissioner (Appeals) failed to appreciate that the term of Joint Venture evidently states that the Appellant JV was only for the purpose of securing contract and in view of the said understanding the finding of the Commissioner (Appeals) is erroneous and unsustainable in law.
3. The Commissioner (Appeals) erred in holding that the income of the Appellant has to be estimated at 8% of the gross turnover. The Commissioner (Appeals) having noticed that the Appellant has not executed the works and was formed only for securing contract, ought not to have estimated the income in the hands of the Appellant.
4. The Commissioner (Appeals) erred in not following the binding decisions of the Hon’ble jurisdictional Tribunal in the case ofMadhucon SinoHydro JV v. ACIT (ITA.No.701/H/2010, dt.27-11-2012)& DCIT v. Hindustan Ratna JV (ITA 1575/H/2014, dt.12-2-2015), in entirety.
5. Without prejudice to the above grounds, the rate of profit at 8% is quite absurd when the Commissioner (Appeals) herself observed that no work was performed by the Appellant.
For these and other grounds that may be urged at the time of hearing, it is prayed that the Hon’ble Tribunal may be pleased to allow the appeal.”
6.2 The grounds of appeal of the revenue, which are common in both the appeals, are as under:
“i) The learned Commissioner (Appeals) erred both on facts and in law.
ii) The learned Commissioner (Appeals) erred in holding that the members of AOP are not sub-contracts and hence there is no requirement to deduct TDS as per provisions of section 194C of the Act, 1961 and consequently no amount is disallowable under section 40((a)(ia) of the Act.”
7. The learned Authorised Representative submitted that KCL and AMRCL formed JV in order tor secure the contract of “widening to 2 lane and improvement from Km 50/0 to 84/2000 of Govindapalli-Balimela-Chitrakonda-Sileru Road (SH-47) in Malkarjini District under L.W.E. Scheme” tendered by the Chief Engineer (DPI & Roads), Govt. of Orissa. It is mutually agreed with the JV partners that PO/WO will be executed by one of the constituent that is AMRCL/KCL on back to back basis. All the work orders were executed by AMRCL during this period and the same was declared as its revenue. He submitted that Courts have held that contract executed by one of the constituents of JV are not sub-contracts. He relied on the decision in the case ofMadhucon Sino-Hydro JV v. ACIT (ITA No. 701/Hyd/2010, dtd. 27-11-2012) and DCIT v. Hindustan Ratna JV (ITA No. 1575/Hyd/2014, dt. 12-2-2015)
7.1 learned Authorised Representative submitted that though Commissioner (Appeals) has deleted the addition made by the assessing officer, but, her finding that remuneration was paid by the assessee to the individual member for the work done by it, is not sustainable, as the Assessee on its own, is not in a position to pay remuneration to any of the member. He also submitted that estimating the profit of the business @ 8%as well as making disallowance under section 40(ba) also is not proper. According to him, the provisions of section 40(ba) are also not applicable to the assessee’s case as business has not generated any profit to make any such payment to the members of the JV.
8. Learned Departmental Representative, on the other hand, relied on the order of assessing officer.
9. Considered the rival submissions and perused the material facts on record. The two entities, namely, KCL and AMRCL formed a JV for securing the contract of “widening to 2 lane and improvement from Km 50/0 to 84/2000 of Govindapalli-Balimela-Chitrakonda-Sileru Road (SH-47) in Malkarjini District under L.W.E. Scheme” tendered by the Chief Engineer (DPI & Roads), Govt. of Orissa. They formed this JV only to secure the orders and as per their mutual agreement the contract will be executed by one of the constituents i.e. AMRCL/KCL on back to back basis. As per the agreement, all the costs, liability and bank guarantees will be arranged by only AMRCL and KCL will only be a facilitator in procuring the orders. As per our view, JV is only an arrangement between two entities on mutual agreement, JV can be any type depending upon the mutual agreements and object of such agreement. The JV can be run on similar to partnership basis or mere an entity to secure the orders or may be just to execute the work orders. In the given case, members of JV decided to form a JV only to secure the orders and execution of the orders will be done by one of the constituents of the JV. JV is formed for the benefit of the individual members and a business is carried on for the benefit of the businessman.
9.1 As held by the coordinate bench of this Tribunal in the case of Hindustan Ratna JV v. DCIT and in other cases, there is no subcontract relationship existed between JV partners. Accordingly, the work executed by the AMRCL is not in sub-contract. Accordingly, ground raised by revenue is dismissed.
9.2 Coming to the findings of the Commissioner (Appeals) that in the case of assessee estimate of the profit of the business as well as disallowance under section 40(ba) is the only way out, the fact that JV is created only to secure the orders and nowhere on record, we find that the assessee has actually executed the work. JV is formed merely to secure the orders and not to execute the orders. When the assessee has not executed the order, there is no question of making any profit. As the assessee has not shown any profit in the business and the assessee being used as a Passover entity and set up only to secure the order, the assessing officer has the option of disallowing all the administrative expenses, if any. Since the assessee has not shown any profit nor paid any remuneration to any of the members, the provisions of section 40(ba) will not be attracted.
9.3 Coming to the execution of the contract awarded to the assessee, we have already adjudicated that it does not amount to sub-contract. The payment made to AMRCL will never be considered as remuneration, but, paid for execution of back to back work order. Assesse has already considered as revenue in case of AMRCL and offered for taxation. It shows that the full value of revenue is already offered for taxation, by following the golden rule that a source of income can be taxed only once. The source of income is a work contract given by the corporation and the same was offered to tax by AMRCL. Same source of income can never be subjected to tax twice, first by the assessee and followed by AMRCL. As far as revenue is concerned, that source is already taxed, in the hands of AMRCL, therefore, it need not be taxed again in the hands of assessee.
9.4 In view of the above discussion, the grounds raised by the assessee are allowed and grounds raised by the revenue are dismissed.
10. As the issue is identical in assessee’s (KCL-AMRCL JV) for assessment year 2013-14 inITA No. 793/H/17, in case of CCPL-AMRCL JV in ITA No. 792/H/17 for assessment year 2013-14, in case of PSR-AMRCL JV in ITA No. 791/H/17 for assessment year 2013-14 and revenue’s appeal in case of PSR-AMRCL JV in ITA No. 781/H/17 for assessment year 2013-14, to that of assessee’s case in KCL-AMRCL JV for assessment year 2012-13 and revenue’s case in ITA No. 1256/H/16 (in respect of KCL-AMRCL-JV) for assessment year 2012-13 (supra), following the decision therein, we allow the appeals of the assessees and dismiss the revenue appeal.
11. In the result, all the appeals of the assessees are allowed and the appeals of the revenue are dismissed.