(i) On facts, lump-sum turn-key contract was a composite indivisible contract; and hence, the consortium was to be taxed as an AOP. (ii) As two consortium members had come together for gain, composite contract was awarded to the consortium (and not to individual members), an AOP was formed and mere internal division of responsibility or separate payment cannot undo the AOP. (iii) Work done outside India and supply of equipment and spares outside India were inextricably linked with the work of c<

Work done outside India and supply of equipment and spares outside India were inextricably linked with the work of consortium. Since the contract was indivisible and awarded to an AOP, payment receivable therefore was taxable in India.

ONGC issued a tender for supply of a plant on lumpsum turn-key basis. The bidders were required to provide services for design, engineering, procurement, construction, installation, commissioning and handing over of the plant on turn-key basis. Two foreign companies entered into an MOU to bid jointly as a consortium. Thereafter, they also executed an ‘Internal Consortium Agreement’. The bid of the consortium was accepted by ONGC. Pursuant to the bid, ONGC entered into contract with the consortium. In terms of contract, the consortium had various rights and was subject to various obligations. The contract did not assign any individual role to the members of the consortium and the payments were also to be made to the consortium.

• The applicant contended as follows. The agreement entered into by the members was a divisible contract and the respective scope of work, obligations and consideration of each member were clearly identified.

• he obligations of the applicant were divisible in three parts: (i) supply of design, engineering of equipment, materials; (ii) fabrication, procurement and supply of equipment and material outside India; and (iii) supervision of installation, testing and commissioning of the equipment, materials at site in India.

•  The offshore activities are not taxable in India.

• In terms of Article 5(2)(i) of India-Germany DTAA, PE would come into existence only after the equipment reached site in India.

• Relying on Ishikawajima-Harima Heavy Industries v. Director of IT, (2007) 288 ITR 408 (SC), the contract should be split into separate parts and obligations of each consortium member should be considered independent from that of the other consortium member. Further, in terms of CIT v. Hyundai Heavy Industries Co. Ltd., (2007) 291 ITR 482 (SC), income from offshore active were not taxable in India. The tax authority contended as follows.

•  When the rights and obligations under the contract were that of the consortium, splitting up of a lump-sum turn-key contract only for taxation purpose would be artificial, particularly, if Explanation 2 to section 9(2) of Income-tax Act (which was inserted with retrospective effect) is considered.

• The responsibility for establishing the project was that of the consortium. The consortium remained liable even after commissioning. Accordingly, consortium should be treated as an AOP.

• The contract does not mention offshore or onshore supply of services, nor does it specify that title to the machinery shall pass on high seas or in the country of origin. The consortium’s risk continued until commissioning, testing, etc. Accordingly, the title to the machinery does not pass offshore. Ruling: The AAR observed and held as follows.

As regards divisibility of contract:

• In Vodafone International Holdings B. V. v. Union of India, (2012) 341 ITR 1 (SC), the Supreme Court held that section 9(1)(i) of the Income-tax Act is not a ‘look through’ provision and the Revenue/ Court should ‘look at’ the transaction as a whole and should not adopt a dissecting approach to ascertain the legal nature of the transaction.

• A contract for sale of goods is different from that for erection and commissioning of plant since the latter also involves designing and engineering.

•  The situs of an erection contract should be the place where the plant is to be erected.

• Internal consortium agreement is only an internal arrangement between the members and the MOU cannot supersede or override the contract.

• On holistic reading of the contract, it is an indivisible contract containing rights and obligations of ONGC and the consortium. As regards taxability of consortium as AOP:

• This was a case of two co-adventures coming together for promotion of a joint enterprise with a view to make a gain. Composite contract was awarded to the consortium (and not to individual members) for the whole work and payment was to also be made only to the consortium. Hence, the consortium was to be taxed as an AOP.

• The internal division of responsibility by the members, recognition of such division by ONGC or making of separate payments by ONGC to the two members cannot undo the formation of AOP. As regards taxability of work done outside India:

• The contract is an indivisible whole. Even if a significant part of design and engineering work is done outside India, it cannot be viewed in isolation and apart from the contract since it is inextricably linked with the work of erection and commissioning undertaken by the consortium. Having regard to an indivisible contract and existence of an AOP, amount receivable in respect of design and engineering is liable to be taxed in India. As regards taxability of supply of equipment and spares outside India:

•  Since the contract is indivisible and the consortium is to be taxed as an AOP, amount receivable in respect of supply of equipment, material and spares outside India is liable to be taxed in India.