Independent foreign consortium not an AOP; offshore income taxable in India only to the extent attributable to Indian operations.

A consortium of two foreign companies was held not to be an Association of Persons because the arrangement showed separate scopes of work, independent risk and cost bearing, separate invoicing, and no pooling of resources, profits or common management; mere contract coordination and joint liability to the project owner were insufficient. On offshore receipts, income from supply of equipment, materials and spares completed outside India is taxable only to the extent attributable to operations in India, and offshore design and engineering services are not automatically fees for technical services where they are integral to offshore supply. The existing record was found insufficient for final determination of the offshore income issue, and the matter was remitted for fresh consideration.

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Issues: (i) Whether the consortium formed by the two foreign companies constituted an Association of Persons under the Income-tax Act, 1961. (ii) Whether the income from offshore supply of equipment, materials and spares and from offshore design and engineering services was taxable in India under the Act or the applicable double taxation agreement.

Issue (i): Whether the consortium formed by the two foreign companies constituted an Association of Persons under the Income-tax Act, 1961.

Analysis: An Association of Persons requires members to join in a common purpose or common action with sufficient joint participation and some scheme of common management. Mere cooperation to secure a contract, joint and several liability to the project owner, or a limited coordination structure does not by itself establish a taxable association if each participant has a separate and independent scope of work, bears its own risks and costs, raises separate invoices, and retains its own profits and losses. The contractual arrangements showed independent execution of separate portions of work without pooling of resources or profits.

Conclusion: The consortium did not constitute an Association of Persons.

Issue (ii): Whether the income from offshore supply of equipment, materials and spares and from offshore design and engineering services was taxable in India under the Act or the applicable double taxation agreement.

Analysis: For a non-resident, only income received in India or accruing or deemed to accrue in India can be taxed under the Act. Where a contract involves separable offshore and onshore components, the principle of territorial nexus and apportionment applies, and only income attributable to operations in India can be taxed. Offshore supply completed outside India, with transfer of title abroad, does not by itself create Indian taxability. Offshore services are not taxable as fees for technical services if they are inextricably linked with offshore supply and form an integral part of it; otherwise, their taxability depends on the Act and the treaty provisions, including attribution to a permanent establishment where relevant.

Conclusion: The issue could not be finally determined on the existing record and required fresh consideration by the Authority.

Final Conclusion: The impugned ruling was set aside and the matter was remitted for fresh decision in accordance with the legal principles stated.

Ratio Decidendi: A consortium of independent foreign entities is not an Association of Persons unless the arrangement reflects real joint enterprise, common management and joint action beyond mere contract coordination, and income from offshore operations can be taxed in India only to the extent it is attributable to operations within India.

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