Section 167B(1) of the Act – Where foreign company is a member of an AOP and share of profits of the members is indeterminate or unknown, income of AOP is subject to maximum marginal rate applicable to foreign company

11. TS-659-ITAT-2019 (Chny.) M/s. Herve Pomerleau International CCCL
Joint Venture vs. ACIT ITA Nos.: 1008/Chny/2017, 17, 18 &
19/Chny/2019 A.Ys.: 2010-11, 2011-12, 2012-13 &
2013-14 Date of order: 21^st October, 2019

Section 167B(1) of the Act – Where foreign
company is a member of an AOP and share of profits of the members is
indeterminate or unknown, income of AOP is subject to maximum marginal rate
applicable to foreign company

FACTS

The assessee was a
consortium between an Indian and a foreign company. It was taxable as an
Association of Persons (AOP) under the Act. The consortium was set up to
execute a contract in India. While the consortium agreement and the
profit-sharing agreement were silent about the profit-sharing ratio of members,
they mentioned that profit before tax on the project would be finally
determined after completion of the project and that the foreign company would
be paid a guaranteed profit share equivalent to 2% of the contract price. The
consortium agreement further mentioned that the obligation to pay the guaranteed
amount was not on the AOP but on the Indian company.

The assessee
contended that it was a ‘determinate’ AOP, hence it offered income for tax at
the maximum marginal rate (MMR) applicable to an Indian company.

But the AO held
that the assessee was an ‘indeterminate’ AOP. Hence, its income was to be taxed
at the MMR applicable to a foreign company. Therefore, he initiated
re-assessment proceedings under the Act.

The CIT(A)
dismissed the appeal of the assessee who filed an appeal before the Tribunal.

HELD

(a)   Admittedly, the consortium was assessed as an
AOP;

(b)   Section 167B(1) of the Act would apply if the
shares of the members of the AOP are indeterminate or unknown;

(c)   Perusal of the consortium and profit-sharing
agreements showed that the agreement was silent about the profit-sharing ratio
of its members. However, the foreign company was guaranteed 2% of the contract
price as its profit. The obligation to pay the guaranteed amount was not on the
AOP but on the Indian company;

(d)   The term ‘share of net profit’ implies a
‘share in the net profits’ which is an interest in the profits as profits,
which implies a participation in profits and losses;

(e)   In the facts of the case, the foreign company
was entitled to 2% of the project cost regardless of whether the AOP made
profits or losses. Thus, the minimum guarantee was a charge against the profits
of the AOP but not a share in the profits of the AOP. Therefore, the share of
the members in the profit of the AOP could not be said to be determinate or known;

(f)    Accordingly, the AOP was subject to section
167B(1) of the Act. Consequently, its income was subject to tax at the MMR
applicable to foreign companies.