2012 (6) TMI 186 - AAR - Income Tax

Tax Ruling: Consortium's Offshore Income Taxable in India under AOP; Influenced by Vodafone Case

The Authority held that the contract between the Consortium and BMRC was indivisible, and the entire income from the contract, including offshore ... DTAA between India and France - Consortium Contract - taxability of amount receivable under project by appellant (foreign company) - contract awarded by Bangalore Metro Rail Corporation Limited to implement the design, manufacture, supply, installation, testing and commissioning of signaling/ train-control and communication system – assessee contended it to be divisible, off shore contract of sale and services - Held that:- Purpose for which the tender was invited by BMRC was for installing the signaling and communication system for the metro rail. It was not for supply of offshore equipments independently of the installation and commissioning. Nor was it for independent installation and commissioning, divorced from the design and supply of the equipments necessary. The consortium parties agreed to be jointly and severally liable to BMRC for the performance of all obligations under the contract. Such a contract has necessarily to be read as a whole and is not capable of being split up. Status as AOP - The contract was for performing the entire work at the joint responsibility of the four Members of the Consortium who came together to perform the contract. Members of the Consortium were all in business and they came together in pursuance of an intention to promote their businesses. There was a common purpose and there was concerted action. Thus, applicant, along-with the other members of the Consortium, formed an Association of Persons liable to be taxed as such. Hence, Contract the Consortium of which the applicant is a member, cannot be split up to treat a part of it as confined to offshore supply of equipment not capable of being taxed in India, and that the income from it is taxable as a whole both under both Income-tax Act and under the Double Taxation Avoidance Convention relied upon. Issues Involved:1. Taxability of amounts received by the applicant under the BMRC contract under the Income-tax Act, 1961 and the India-France tax treaty.2. Taxability of amounts received by the applicant for offshore services under the BMRC contract under the Income-tax Act, 1961 and the India-France tax treaty.3. Whether the members of the Consortium formed an Association of Persons (AOP) and are liable to be taxed as such.Issue-wise Detailed Analysis:1. Taxability of amounts received by the applicant under the BMRC contract under the Income-tax Act, 1961 and the India-France tax treaty:The applicant contended that the design and supply of equipment occurred outside India, making it an offshore transaction not chargeable to tax in India. They argued that the title to the goods passed outside India, and payments were received outside India, thus no income arose or could be deemed to arise in India.The Revenue argued that the contract was indivisible and could not be split into offshore and onshore components. The contract was for the comprehensive design, manufacture, supply, installation, testing, and commissioning of a system in India, and thus, the entire income from the contract was chargeable to tax in India. The Revenue also contended that the members of the Consortium formed an Association of Persons (AOP) under section 2(31) of the Income-tax Act, making them liable to be assessed as such.The Authority concluded that the contract was a composite one for the installation and commissioning of a signaling and communication system and could not be split into separate parts for taxation purposes. The Authority relied on the Supreme Court's decision in Vodafone International Holdings BV v. UOI, which emphasized looking at the transaction as a whole rather than adopting a dissecting approach. Thus, the income from the contract was taxable in India.2. Taxability of amounts received by the applicant for offshore services under the BMRC contract under the Income-tax Act, 1961 and the India-France tax treaty:The applicant argued that the offshore services, including the supply of spare parts and training of personnel, were not taxable in India as they were performed outside India.The Authority reiterated that the contract was a composite one and could not be dissected into offshore and onshore components. The income from the offshore services was part of the overall contract for the installation and commissioning of the system in India. Therefore, the amounts received for offshore services were also chargeable to tax in India under the Income-tax Act and the India-France tax treaty.3. Whether the members of the Consortium formed an Association of Persons (AOP) and are liable to be taxed as such:The Revenue argued that the members of the Consortium formed an AOP as they came together with a common purpose and intention to earn profits from the contract. The members acted in concert in furtherance of their respective businesses, and two of the Consortium members were subsidiaries of the applicant.The Authority found considerable force in the Revenue's argument and concluded that the members of the Consortium formed an AOP. The Authority noted that the members came together to bid for the work tendered, jointly prepared the bid, and executed the project jointly. There was a common object and concerted action among the members, forming a combination of persons for a joint enterprise. The Authority relied on previous rulings and decisions, including the Calcutta High Court's decision in B.N. Elias & others, In re, to support its conclusion.The Authority rejected the applicant's argument that the inter se relationship among the members and the division of obligations should prevent them from being considered an AOP. The Authority emphasized that the joint and several liability to the tenderer and the common purpose of performing the contract and earning income from it made the members an AOP liable to be taxed in India.Conclusion:The Authority ruled that the contract between the Consortium and BMRC could not be split into offshore and onshore components, and the entire income from the contract was taxable in India. The amounts received for offshore services were also chargeable to tax in India. Additionally, the members of the Consortium formed an Association of Persons (AOP) and were liable to be taxed as such in India.