(i) Composite contract for installation and commissioning project cannot be split into parts for the purpose of taxation. (ii) Several consortium members who had come together for earning income, and the composite contract was awarded to the consortium. Hence, the consortium was liable to be taxed as an AOP.

Several consortium members who had come together for earning income, and the composite contract was awarded to the consortium. Hence, the consortium was liable to be taxed as an AOP.

Bangalore Metro Rail Corporation Limited (‘BMRC’) floated a tender for design, manufacture, supply, installation, testing and commissioning of signalling/ train control and communication systems.

The applicant was a tax resident of France (‘FrenchCo’). FrenchCo, together with several other companies, entered into a consortium agreement, which was executed and registered in India. The agreement mentioned that the members were to: co-operate on an exclusive basis to submit a joint tender to BMRC; to negotiate with BMRC to secure the contract; not to take up any additional work in respect of the work for which the tender was floated; to be jointly and severally bound by the terms of the tender; and to be jointly and severally liable to BMRC for all obligations under the contract.

The obligations of FrenchCo under the contract pertained to off-shore supply of plant and spares and off-shore designing and training of operating and maintenance personnel. FrenchCo sought ruling of AAR on the issue whether, the amounts received by FrenchCo as a member of the consortium, for the supply of plant and off-shore services were chargeable to tax in India in terms of Income-tax Act and India-France DTAA.

Ruling:

• The AAR observed and held as follows.  A contract should be read as a whole in the context of the object sought to be achieved and it cannot be split into different parts for the purpose of taxation. The tender floated by BMRC was a composite tender, the bid submitted by the consortium was for the work tendered and the contract between BMRC and the consortium was for installation and commissioning of signaling and communication system. Such contract cannot be split into separate parts.
• 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 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. Thus, impliedly, the Supreme Court has disapproved/overruled the approach adopted in Ishikawajima-Harima Heavy Industries v. Director of IT, (2007) 288 ITR 408 (SC).
• The consortium members came together for executing the project, were jointly and severally liable for performance of the obligations and their common object and purpose for coming together was to earn income. Hence, the consortium was to be taxed as an AOP. The division of obligation amongst members could not alter the status that was acquired while entering into the contract since the legal rights and obligations arising out of and undertaken under the contract would determine the status of the consortium.
• Entire income under the contract was taxable in the hands of the consortium as on AOP.