TaxTMI 
TaxTMI 
2008 (8) TMI 2
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.... providing project consultancy services. Further, Himachal Pradesh Road and Other Infrastructure Development Corporation Ltd.(in short HPRIDC) has awarded a contract to the applicant, to provide Consultancy services for Phase I & Phase II for the development of seven tunnels in Shimla as well as in other areas of Himachal Pradesh to carry out the implementation of the aforesaid work. The scope of work to be done by the applicant is set out in schedule III of the said agreement. The applicant, as per the averment, renders almost all the services from Austria and in order to coordinate with other members of the joint venture, an engineer has been deputed who undertakes periodical site visits. The applicant states that it has neither a 'fixed place of business nor an office' in India. It does not also perform any substantial activities in India. The employees are also not deputed in India for a considerable length of time. The applicant, as contended, does not have a 'permanent establishment'(P.E.) in India within the meaning of Article 5 of Double Taxation Avoidance Agreement (DTAA) between India and Austria. The applicant, however, submits that the inco....
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.... the services provided by the JV partners to the client, HPRIDC, are in the nature of consultancy services. It has also been stated that as per the provisions of section 9(1)(vii) of the Act, the term "fees for technical services" has been defined as including "any lump sum consideration for the rendering of any managerial, technical or consultancy services". Since the services provided by the applicant are in the nature of 'consultancy services' as well as 'technical services', income arising to the applicant, therefrom, are deemed to accrue or arise in India and is also subject to tax therein. Since the applicant is a resident of Austria, it would, however, be entitled to the benefits of the provisions of DTAA between India and Austria. Article 12(4) of the DTAA, defines the term "fees for technical services" meaning "payments of any amount to any person other than payments to an employee of a person making payments, in consideration for the services of a managerial, technical or consultancy nature including the provisions of the services of technical or other personnel". The consultancy services provided by the applicant to HPRIDC may fall within the scop....
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....performed by the JV for HPRIDC, it is evident that the work to be performed by the applicant constitutes the major part of the contract and is an integral part of the same. This is also borne out by the fact that the applicant is to receive one half of the total fees to be paid by HPRIDC and the other half is to be shared by the other two JV partners. 8. Summing up, the jurisdictional Commissioner has concluded that the applicant has a PE in India and the fees received by HPRIDC are attributable to such PE and is thus taxable in India as "profits & gains of business or profession" under Article 7 read with sec. 44DA of the Act as per the rates in force. 9. Before the case was taken up for hearing on merits under section 245R(4) of the Act on 20.10.2007, through a letter dated 15.10.2007, the Director of Income-tax(International Taxation),Mumbai, submitted that the 'J.V.', which has received the contract from the HPRIDC is, in fact, assessable as an 'Association of Persons' (AOP) under the provisions of the Income-tax Act. In other words, the jurisdictional Commissioner has emphasized that the entire income received by the joint venture from HPRIDC for the pe....
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....cialists and social impact specialists. The learned counsel for the revenue has emphasized the fact that the members of the J.V. are jointly and severally responsible (Ref. Clause 12.1 of the Service Agreement) and if a member delays or fails to fulfill its obligations, he shall be deemed to be in default and shall indemnify the other Member in respect of the consequences. (Ref.: Clause 12.2). The revenue has also drawn attention to Para I of Schedule '3' of the Agreement which also lays down that all the parties shall be jointly and severally liable for the satisfactory and successful execution / completion of the work in all respects. 14. The revenue has further tried to drive the point home that the detailed allocation of the work, as given in the service agreement (Annexure I to Schedule 4), amply establishes the fact that the members of the J.V., in various areas of the work, share various work responsibilities amongst themselves. To be specific, the prime responsibility of Rites Ltd. is in respect of economic and financial analysis, traffic engineering analysis, environmental servicing, surveys etc. Besides, Geoconsult, does primary work relating to collecti....
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....rned counsel for the Revenue has also placed reliance on the decisions of the Apex Court in the case of C.I.T. vs. Indira Balkrishna, 39 I.T.R. 546 (SC), and in the case of Mohd. Noorullah vs. C.I.T., 42 I.T.R. 115 (SC) followed in the Murugesan vs. C.I.T. 88 I.T.R.432(SC) wherein it has been held that in order to constitute an A.O.P., persons must join in for common purpose or action or common mechanism and the object of the association must be to produce income. In the instant case, as contended, all the criteria laid down in the above judgments stand satisfied. 18. Summing up, the learned counsel for the revenue has contended that the entity to be assessed in India on the receipts from HPRIDC is the J.V. in the status of an A.O.P., based on the decision of the Supreme Court in the case of I.T.O. vs. Atchaiah, 218 I.T.R. 239 (SC). It has thus conclusively been argued that the A.O.P. should be taxed @ 41% on the net basis, inclusive of the applicant's share. 19. Countering the contentions raised by the revenue, the learned counsel for the applicant has strongly contended that the J.V.(GC-Rites-Secon) can not be regarded as an A.O.P., primarily because of th....
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....ction 67A and section 86 of the Act and had argued that if the decision of the Apex Court in the case of Atchaiah (218 ITR 337) were literally followed, these provisions (sec. 67 A and Sec.86) would become redundant. It has also been contended that in the case of the applicant, gross revenue itself is directly paid to the each member, so there will be no taxable income earned by the A.O.P. 21. As regards the P.E., it has been argued by the learned counsel for the applicant that Dr. Prinzal's role is quite limited to co-ordination and 'liaisoning activity' and does not involve execution of the actual project itself. Since Dr. Prinzal is totally involved in another project called PIR PANJAL Project entered into by this very J.V., he does not get time for the HPRIDC Project. Incidentally, the learned counsel for the applicant, in course of the hearing, admitted that Pir Panjal Project of J.V. with the client is being assessed in the status of A.O.P. However, in the instant project, there is neither 'fixed place of business or office' nor any place of management, branch etc., as enumerated in Article 5 of the DTAA. Consequently, there is no PE in India, an....
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....s (M.M Ipoh vs. C.I.T. 67 I.T.R.116 SC). Evidently, the companies entering into a J.V. can also be an assessable unit as an A.O.P.(67 I.T.R. 771, Cal.) 24. In various judicial pronouncements, the courts have enunciated the essential ingredients which go into constituting 'an association of persons'. In fact, the word 'association of persons' has not been used in any technical sense but has to be construed in their plain ordinary meaning (Ref. In re Elias 3 I.T.R. 408, 415, Md. Abdul vs. C.I.T. 16 I.T.R. 426). Analysing its plain, ordinary meaning, the Supreme Court observed in the case of C.I.T. vs. Indira Balakrishna, 39 I.T.R. 546,:- "... the word 'associate' means according to Oxford Dictionary,' to join in common purpose, or to join in an action' ... Therefore, an 'association of persons', must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains." The Andhra Pradesh High court, after considering the previous decisions has, in the case of Deccan Wine and General Stores vs. C.I.T. 1....
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.... regard, it will be quite apt to extract the relevant clauses of the Contract Agreement as well as Joint Venture Agreement, which are as follows:- Contract for Consultant's Services (lump sum) between HPRIDC and Joint Venture Preamble to the Contract : JV will be jointly and severally liable to the client for all the Consultant's obligations under the contract. Clauses referred to by the respective Parties : 6) Payments to the Consultants : 6.1) Lump sum payment - The total payment due to the Consultant (JV) shall not exceed the contract price which is an all inclusive fixed lump sum covering all costs required to carry out the services described in Appendix 'A'. Except in so far as there is change in the taxes. 6.4) Payments will be made to the account of the Consultant and according to the payment schedule stated in the Spl. Conditions. Joint Venture Agreement between GC, Rites and Secon. Preamble : The three parties have agreed to collaborate for all work associated with the "consultancy services for feasibility & detailed design of road tunnels (project)". The Members have agreed to form a joint venture to provide the said professional engineering services. The c....
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.... Agreement or any other internal arrangement amongst themselves, all the parties shall be jointly and severally liable for the satisfactory execution and completion of the work in all respects as per the terms and conditions set forth by the client. Distribution of duties and responsibilities : Geo Consult : (Phase I & II) - General Tasks and Particular tasks A) GEOCONSULT ZT GmbH - AUSTRIA i) Phase I (Project Preparation): General Tasks: Project Management, Design Responsibility/ Support for particular tasks. ii) Phase II (Project Preparation): General Tasks: Project Management, Design Responsibility/ Support for particular tasks. Particular Tasks, Phase I and Phase II : 1. As the lead firm, managing the day-to-day activities of the Joint Venture including project coordination, reporting, approvals from appropriate authorities etc. 2. General and contract administration functions. 3. To arrange Bank Guarantee for his share of Euro part of the contract amount for advance (mobilization) payment. 4. To raise invoices and coordinate for payments from the Client. 5. Provide the appropriate man-months of professional service and key personnel, as indicated in Annexure....
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....services to the client for the development of seven tunnels in Shimla and other areas of Himachal Pradesh and the common act / objective of the J.V. Partners is to earn income in the wake of consultancy. The Preamble of the J.V. agreement clearly shows the intention of the J.V. partners to collaborate for all the work associated with the project which is to be managed on a Joint basis by all the members (clause 2.1, 3.1 of the J.V. agreement). The detailed allocation of work in schedule III as reproduced in the preceding paras amply points out the fact that in most of the cases the members of the J.V. assist each other in the completion of the work. The J.V.Partners are jointly and severally liable to the client (HPRIDC) for the obligations and the total payments are also to be made to the J.V. and the said payment is also linked to the increase and decrease in the cost as per the mutual agreement with the client. Simplistically speaking, the performance of these services to the client generates the J.V's income. As such, the inescapable inference is that the object of the J.V. is also to produce income. Even if we go by the work distribution amongst the J.V. Partners, it cry....
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....wn in section 67A of the Act. Thus, section 86 it is also referable to section 67A of the Act. The relevance of this section (sec.67A) has been considered in leading textbooks. The following passage in Sampath Iyengar's commentary (10th Edition, revised by S.Rajaratnam) may be usefully quoted:- "Assessment of an A.O.P. mandatory Section 67A has lost its relevance after the decision of the Supreme Court in I.T.O. vs. Atchaih, 218, I.T.R. 239, which has held that there is no option either for the revenue or the assessee for assessing the members directly, as was possible under the Income Tax Act 1922. Such option is not available under the I.T.Act, 1961. Where the Association of person is assessed directly, it is entitled to special deduction under section 80M on its income from dividends (CIT vs. Puja Investments(P) Ltd. 272 I.T.R. 606, P&H). It is also entitled to carry forward and set off its losses (Ref. Birla Tyres Ltd. vs. C.I.T. 267 I.T.R.(A.T.) 1 Cal.)" Thus, the reliance on section 67A and section 86 by the applicant's counsel seems to be misplaced. 30. Placed in the backdrop of the above discussion, I am of the opinion that the J.V. co....
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.....e. the J.V. is to be assessed to tax as an 'association of persons' only. Consequentially, the other three questions, as contained in para 4 above, do not merit rulings. Per P.V. Reddi, J. I have perused the well-considered ruling of learned Member. While I am in agreement with the conclusion reached by him, I felt that in view of the importance of the question, I should supplement to his opinion, may be at the risk of repetition here and there. 2. The term 'association of persons' is not a term of art (vide Murugesan vs. CIT). It has to be understood in its ordinary sense*. In CIT vs. Indira Balkrishna** which is an oft quoted decision, the Supreme Court approvingly referred to what Beaumont C.J said in CIT vs. Laxmidas***: "an association of persons must be one in which two or more persons join in a common purpose or common action and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains". 3. The Supreme Court then referred to the apt observations of Costello J. in his separate but concurrent opinion in In re Elias****. The Supre....
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....in a common purpose and they acted jointly. The profits were earned on behalf of the persons who had a common interest created by the order of the Court and 'were on that account an association of persons'. The existence of specific or defined interest in the profits did not make the earning any the less of an 'association of persons'. Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of the profits." 8. The dicta in the case of Deccan Wine & General Stores v. C.I.T (A.P.)# is very instructive. Chinnappa Reddy, J. speaking for a Division Bench of the A.P. High Court, brought forth the distinction between AOP and body of individuals in the following words: "It is, therefore, clear that an association of persons does not mean any and every combination of persons. It is only when they associate themselves in an income-producing activity that they become an association of persons. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds, so to speak. In ....
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....rtium" of three Companies, and it looks to that joint enterprise for the due execution of work and the contract price is stipulated to be made to the JV as a unit. The contract between HPRIDC and JV gives sufficient indication of a combination of three entities into one with the common purpose of executing the work entrusted to the JV. That each member is made jointly and severally liable for performance of work is another important stipulation which points to the existence of AOP. 12. Now, we come to the "JV Agreement" between the three entities executed on 22-9-2006. Obviously, it is a sequel to the Agreement with HPRIDC. I shall refer to the relevant terms thereof which have bearing on the disputed question. 13. The JV Agreement is prefaced by a recital that "the three parties have agreed to collaborate for all work associated with the consultancy services.......". The Preamble discloses that under the terms of MOU dated 12/4/2006, the Members have agreed to form a Joint Venture to provide professional engineering services under the contract with HPRIDC. Cl. 2.1 expressly states : "The Members hereby establish a Joint Venture....
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....nce in this context is cl. 8.3 which says that each member shall have unrestricted access to any work carried out by the members in connection with the Project. One more provision that is relevant is cl. 12.4. It provides for reassignment of work by the other members in case a member committed substantial breach of its obligations. All these provisions reveal unity of action, common management and planned coordination among the JV partners. Cl. 7.1 to which attention has been drawn by the applicant's counsel, does not support his case. Cl. 7.1 says that no member shall have authority to bind or to make any commitment on behalf of the joint venture or any other member unless such authority is expressed in writing. It is a safeguard against the unauthorized acts of the individual member or members of the joint venture and does not in any way impinge on the functional unity of JV. 15. Coming to the financial aspects of the transaction, cl. 16.3 says that the payments to the Members shall be made in accordance with Schedule 4 and the financial policy of the joint venture as set out in that Schedule. Annexure 2 to Schedule 4 gives th....
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....ervices Agreement. 17. The applicant's counsel laid great stress on the fact that there is no sharing of profit or loss and each member of JV makes its own investment and maintains its own accounts. That is where, according to the learned counsel, the unity breaks down and the requisite ingredient of profit-making objective remains unfulfilled. It is difficult to uphold this contention. AOP is not the same as partnership, though it closely resembles partnership. It has been said so in many cases. The attributes of partnership ought not to be imported in toto for the purpose of ascertaining the existence of AOP. The agreement to make investments in a certain manner and to share the profits in definite proportions and the maintenance of accounts of receipts and expenditure which are all the special features of a partnership need not be present in AOP. It is enough if the overall common objective of the joint enterprise is to earn income through collective effort. The members of JV sharing the gross remuneration in the agreed proportion is equally consistent with the existence of AOP. The profits or losses may be the concern ....