By Ashok Dhere, Jagdish D. Shah, Chartered Accountants
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20 Geoconsult Zt GmbH (2008)
TIOL 11 AAR IT
Explanation to S. 2(31) of the Act
Article 5 and 12 of India-Austria DTAA
Dated : 31-7-2008
Issue :
Joining together with common purpose gives rise to emergence
of AOP, which is assessable as such, even when the members share gross
consideration.
Explanation to S. 2(31)(v) makes AOP an assessable person
even when formed without the object of deriving income.
Facts :
The applicant GZT, a company incorporated in Austria (Ausco),
was specialised in providing consultancy services.
Ausco entered into joint venture with other two Indian
companies by name Rites and Secon.
Under MOU signed in April, 06, Ausco, Rites and Secon agreed
to collaborate together in a joint venture for providing consultancy services to
Himachal Pradesh Road and Infrastructure Development Corporation Ltd. (HPRIDC).
The joint venture executed service agreement with HPRIDC in August 2006, wherein
the JV was service provider / consultant to HPRIDC being the client. The
services were to be rendered by the JV to HPRIDC for HPRIDC’s project of
development of seven tunnels in Shimla. JV was responsible only for consultancy
services and to carry out implementation of said services. The service contract
was a fixed price contract. Ausco was the lead member. In terms of the
agreement, each of the joint venture members was jointly and severally liable to
HPRIDC for performance of the contract.
As a sequel to the service contract signed with HPRIDC,
formal joint venture agreement was executed between three parties viz.
Ausco, Rites & and Secon in September 2006. The AAR took note of the following
features of the joint venture agreement :
(1) The preamble read that the three parties had agreed to
‘collaborate’ for performing all works associated with the consultancy
services to be rendered to HPRIDC.
(2) Each of the members had joint and several liability to
the client, though Ausco was a leading member and one of the employees of
Ausco present in India was designated to be the team leader.
(3) Certain of the tasks were entrusted to each of the
members. The agreement however clarified that while each member had primary
responsibility in respect of task allotted to it, the other parties were bound
to render assistance to the other members.
(4) Each of the members had unrestricted access to the work
carried out by the other members in connection with the project.
(5) In the event of default/insolvency of one of the
members, other members were irrevocably appointed to step in and perform the
work of the defaulting member in view of joint and several liability of the
parties. Also, in the event of default by one, the work was assigned to the
others.
(6) The total consideration received from the client was
distributed at gross level with Ausco receiving approximately 50% of the
amount, while the other parties received 20% and 30% of the amount. The amount
was directly paid to the respective party pursuant to common bill on the
client being raised by HPRIDC. The agreement also clarified that each party
was responsible for meeting its own cost and expenses and was responsible for
maintenance of accounts concerning its own affairs.
The applicant Ausco primarily sought ruling of the AAR on tax
implications of the amount which fell to Ausco’s share. It was the claim of
Ausco that consultancy services which Auso was liable to render viz. the
services of carrying out geological and technical investigation, undertaking
field survey, collecting seismological data, surveying topographical conditions,
etc. were primarily rendered from outside India. And, in absence of PE or long
duration presence in India in connection with the project, the amount was not
chargeable as business income. The applicant however conceded that the amount
was fees for technical services chargeable as such at 10% on gross basis
u/s.9(1)(vii) of the Act read with Article 12 of India-Austria treaty.
During the course of hearing, the department representative
contended that the joint venture of Ausco with Rites and Secon constituted an
AOP, particularly in terms of Explanation to S. 2(31) of the Act.
It was agreed by the parties that the issue of presence or
absence of emergence of AOP was crucial to determine the tax implications of
Ausco and the questions raised before the AAR would be influenced by conclusion
on this basic issue.
Before the AAR, the applicant relied on the AAR’s ruling in
the case of Van Oord ACZBV, 248 ITR 399 (AAR). It was claimed by the applicant
that there was no emergence of AOP as :
- Each of the members was responsible for identified task allocated and that
consortium or joint venture was only for convenience of execution.
- The agreement was clear that the task of each individual member was identified
and the cooperation amongst them was only for co-ordination and satisfactory
completion of the project.
- The joint venture was clear that each of the parties to the contract merely
shared gross revenue and there was no sharing of profit/loss.
- All in all, each individual member was executing a standalone and independent
portion of the overall contract and was receiving revenue for the work done by
the member and each member alone was responsible for meeting its part of the
cost.
