AI Drafter 
TaxTMI 
TaxTMI 
2024 (1) TMI 268
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....be referred to as Appellant No.1 or 'Deepali Design' and the appellant in ITA No.412/Del/2022 shall be referred to as Appellant No.2 or 'Pico Deepali'. 2. A brief background of litigation so far as picked from the records and submission made is that earlier the Appellant No.1 had filed ITA No.5161/Del/2017 on behalf of itself as alleged member of consortium and also filed another appeal ITA No.4929/Del/2018 in the name of consortium and claiming itself to be an alleged member of AOP. The Tribunal vide order dated 19.02.2018 dismissed ITA No.5161/Del/2017 and allowed the appeal in ITA No.4929/Del/2018 with a direction to the AO to first decide whether Deepali Designs Exhibits (P) Ltd., i.e., Appellant No.1 is a member of AOP or not. The Tribunal had also directed that if it is held that it is a member, then, Deepali be given proper opportunity of hearing on the merits of the various additions made. This order was upheld by the Hon'ble High Court vide order dated 30.07.2019 in ITA No.327 of 2019. Thereafter, a Miscellaneous Application No.792/Del/2019 in ITA No.4929/Del/2018 was filed by the Appellant seeking clarification and modification of the order dated 19.02.2018 which was d....
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....contract. Common Wealth Games Organizing Committee (referred further as 'CWGOC') vide its Request for Proposal invited bids for the Appointment of Overlays Providers on Turnkey Rental basis for supply, installation, testing, commissioning, operation, maintenance, de-commissioning & removal of Games Overlays for Delhi 2010 Common Wealth Games to be held in Delhi. The Consortium submitted its Bid for the aforesaid RFP for Cluster I & VI whereby the consortium represented that it had the required experience and resources. Turnkey Agreement dated 2 June 2010 was entered between the CWGOC and the M/s Pico Deepali Overlays Consortium. The consortium through PHK, drew up accounts for the contract. The audited accounts were signed by Mr. Chung Chec Keong. The consortium through PHK, filed return in the status of AOP through appellant no.2. The assessment for the assessment year 2011-12 was concluded by the assessing officer vide order dated 27 January 2022 in the status of AOP. 5. The case of Pico Deepali appellant no 2 through PHK is that the consortium was the contracting party vis-a-vis CWGOC for the overlays contract and appellant no 1 is also part of consortium and the AOP. Ld. Sr.....
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.... consortium under the care of JV / consortium manager. The consortium had employed following personnel: a. Mr. Rajeev Aggarwal (Accountant) & b. Mr. Niranjan Sethi (Executive Accountant) 5.3 Appellant no 2 claims that CWGOC had withheld payments due to the consortium for execution of the overlays contract. The consortium had accordingly invoked the arbitration clause in the contract and had filed its statement of claim before the Arbitral Tribunal. Deepali Design had filed an application before the Arbitral Tribunal for impleadment as co-claimant. The Arbitral Tribunal had vide order dated 3 December 2015 directed CWGOC, inter alia, to release payments to the consortium. 6. Ld. Sr. Counsel has submitted that notwithstanding changes in the arrangement between the parties inter se vide the addendum dated 01.06.2010 (here in after refered as 'addendum') Deepali Designs was and continued to be member of the consortium and thus has to be regarded as member of the AOP for the following reasons: 1. The three parties had formed the consortium as an unincorporated JV to jointly bid and execute (if awarded) the overlays contract for the GWG; 2. The b....
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....er its own signatures on its behalf. PHK agrees to indemnify and hold good Deepali against all losses, actions, damages etc. that may arise through any gross negligence or willful misconduct by PHK. The Common Representative shall share with Deepali all details including all communications, discussions etc held with CWGOC Delhi or anybody else in relation to the work assigned to Deepali under this agreement. (2) Manage all financial matters of the JV, including opening, operating and closing of JV's bank account. Deepali shall procure to expedite the opening of the bank accounts for the JV but without prejudice to PHK or PEMTs right to do the same. Deepali hereby gives exclusive rights to PHK to operate the bank accounts of the Consortium under the signatures of its authorized representatives. PHK, however, agrees to indemnify and hold good Deepali against all losses, actions, damages etc. that may arise due to willful misconduct in relation to the said bank accounts of the Consortium by PHK. (3) It is agreed that all the statutory tax obligations of the JV in relation to the Project, including but not limited to deduction of taxes, maintenance of records, eff....
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....9 and formed a consortium with the trade name 'Pico Deepali Overlays Consortium' to bid for the overlays tender. 12. Deepali Designs admits that the salient features of the agreement are: (a) Parties shall incorporate a company and the company shall enter into the final contract with CWGOC; (b) The company will fulfill the contract by means of subcontracting the work under the contract to the parties or third parties as appropriate; (c) After all the contracts have been fulfilled, the company will be liquidated and its remaining assets, if any, will be distributed to the parties in proportion to their shareholding; (d) The participation percentage of the party were the following: Pico Hong Kong (lead party) 60%; Pico India 20%; and DEEPALI DESIGNS 20%. (e) Parties agreed to a commonality of control and management in the management of the company. 13. Ld. Counsel of Deepali Designs has submitted that Consortium's bid was accepted only for cluster I & VI on the basis of the revised prices and at this stage at the end of March 2010, disputes and differences arose between Deepali Designs on the one side, and Pico Hong Kong and Pico Ind....
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.... (c) Deepali Designs was responsible for independently executing its scope of work. Accordingly, Deepali Designs was to earn profit (or loss) based on the performance of the contract falling within its scope of work. Men and materials used for any area of work were under the risk and control of the respective members. There was no commonality of control and management. Deepali Designs was divested of control and management. Ld. Counsel of appellant no. 1 relied Clause 2.1 and 2.2 (3) of the addendum for the same. (d) As per Clause 2.2 (2), Pico Hong Kong shall provide CWGOC with the requisite guarantees. On the other hand, Deepali Designs shall deliver in favour of Pico Hong Kong a corporate guarantee and personal guarantee guaranteeing its separate scope of work. (e) Deepali Designs was under an obligation to pay 23% of its receivable from its scope of work to Pico Hong Kong on account of the fact that Deepali had walked out of the earlier agreement. Ld. Counsel of appellant no. 1 relied Clause 2.1 (3) of the addendum for the same. (f) The unincorporated consortium with a trade name, was under the complete control and management of Pico Hong Kong and ....
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..... In Form No. 36, Deepali Designs described itself as an alleged member of the AOP M/s Pico Deepali Overlays Consortium. A specific ground of appeal was taken that "That on the facts and circumstances of the case and in the Law the assessment as framed under the status of an Association of Persons (AOP) with Deepali Designs & Exhibits Pvt, Ltd. as an alleged member of AOP is bad in law since Deepali Designs & Exhibits Pvt. Ltd was functioning in the capacity of an independent contractor and not as an alleged member of AOP." Accordingly, the order dated 03.01,2018 by the Tribunal was passed and a remand has now been made by the AO. 17. Thus the claim of appellant no 1 is that (i) PDOC is not an 'association of persons' consisting of Deepali Designs, Pico Hong Kong and Pico India; (ii) Deepali Designs is not a member of any association of persons; (iii) the receipts and receivables from CWGOC with respect to Deepali Designs's scope of work is solely and exclusively the income of Deepali Designs, and that Deepali Designs has proprietary interests and overriding titles over such receipts and receivables. Deepali Designs has worked independently for execution of its scope of work wit....
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....for any correction in PAN data at any subsequent stage, with respect to change in membership. e) Please provide all the supporting documents/evidence in respect of the (a) to (d) above. f) Necessary details with head wise and month wise bifurcation and amount in respect of work executed by Deepali Design and Exhibits Pvt. Ltd. as Member of M/s Pico Deepali Overlays Consortium(AOP) during the period when M/s Deepali Design & Exhibits Pvt. Ltd. was member of such AOP. g) Necessary details with head wise & period wise bifurcation and amount in respect of claims filed by M/s Deepali Design & Exhibits Pvt. Ltd. before Hon'ble Delhi High Court seeking decree in its favour out of arbitration amount awarded to M/s Pico Deepali Overlays Consortium by the arbitration tribunal and upheld by Hon'ble Supreme Court. h) Please refer to the various addition made on various issues in the assessment order for A.Y. 2011-12 in the case of M/s Pico Deepali Overlays Consortium in respect of addition made us 69A & disallowances u/s 37 of the Act and further upheld by Ld. CIT(A)]. You are hereby allowed an opportunity to explain as to why these additions be not ....
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....d by CBDT on 07th of March, 2016 which states as under: "3. "The matter has been examined. With a view to avoid tax-disputes and to have consistency in approach while handling these cases, the Board has decided that a consortium arrangement for executing EPC/Turnkey contracts which has the following attributes may not be treated as an AOP: a. each member is independently responsible for executing its part of work through its own resources and also bears the risk of its scope of work i.e. there is a clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work; b. each member earns profit or incurs losses, based on performance of the contract falling strictly within its scope of work. However, consortium members may share contract price at gross level only to facilitate convenience in billing; c. the men and materials used for any area of work are under the risk and control of respective consortium members' d. the control and management of the consortium is not unified and common management is only for the inter-se coordination between the consortium member....
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....ium members also." 19. The ld. counsel for the assessee has argued contesting the aforesaid observations of the ld. AO on the basis of the following written submissions:- "WRITTEN SUBMISSIONS OF THE APPELLANT ON THE ISSUE OF AOP - GROUNDS 1 AND 2 1. In the impugned assessment order, AO's reasoning is in para 9.2 (Vol X at page 19). The reasoning is contrary to facts and law. Serial No. AO's reasoning Error committed by the AO i. Point No. 3(b) of the CDBT Circular No. 7 of 2016 (CBDT Circular) is not satisfied. For this AO has relied on clause 2.1(3) of the Addendum Agreement (i) Clause 2.1 (3) is not sharing of contract price. Parties amended the consortium agreement such that Deepali Designs and Exhibits Private Limited (Deepali) was no longer entitled to any profits of the consortium; instead Deepali would earn profit based on performance of the contract falling strictly within its scope of work via. Appendix 2 (Clause 2.1 and 2.2. of the Addendum Agreement). For such an amendment of the legal relationship, Deepali agreed to forego 23% of its gross revenue to Pico Hong Kong Limited (Pico Hong Kong), which is expense of Deepali from its gross r....
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.... Pico The Turnkey contract was also separately executed by Deepali. (Vol I page 98 Paperbook) 3. During the first round of ITAT appellate proceedings, Hon'ble ITAT had directed vide order dated 03.01.2018 a remand and directed the AO to "Now in order to determine, whether the assessee is a member of AOP or not, the AO is directed to submit a remand report categorically giving the finding as to whether the assessee is a member of AOP or not and if he is a member, then what is the determinate share of the assessee in the AOP." -Page 1108 at Vol IV Paperbook. Even in the impugned order, AO has failed to specify the determinate share of Deepali. This is not accidental since Deepali has no share in the profits or loss of the AOP. The return of income of PDOC is at page 2095 at Volume VIII Paperbook wherein Deepali's share is zero per cent. 4. AO has completely ignored the material fact that revenue from Deepali's scope of work has been brought to tax in the hands of Deepali in a regular assessment and Deepali has paid the income tax on the same. - page 2172 of Vol VIII Paperbook. Deepali has been taxed at the maximum marginal rate and there is therefore no loss to the ....
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....tium, the works in the new contract equivalent to 20% in value minus 23% to be paid to PHK shall be awarded to Deepali only after this has been mutually agreed by the parties, having regard to the capacity and capability of the respective Members to fulfill the scope of the new contracts. The net amount after deduction of the 23% is inclusive of the 10.3%) service tax but excludes any tax deducted at source. Deepali shall provide PHK on demand any tax certified reasonably required by PHK (including but ort limited to anything related to the 10.3%o service tax) 20.2 It was submitted that from the perusal of the above, it is clearly seen that Deepali Designs continues to be entitled for any new contract equivalent to 20% in value awarded by CWGOC. Thus even for speculation, if the contention of assessee is accepted that they are no longer a part of AOP then it is really baffling to understand why the consortium/AOP will award 20% of the future contracts to Deepali Designs. This condition for getting a share in future contracts in itself proves that M/s DDEPL continues to be a part of the consortium/AOP. This shows there continues to be unified and common management for controlling....
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....y tax deducted at source. Deepali shall provide PHK on demand any tax certificates reasonably required by PHK (including but not limited to anything related to the 10.3% Service Tax). 20.5 In context to aforesaid clause of the agreement Ld. DR submitted that, though the above condition gives a specified share of M/s DDEPL but it also makes responsible for providing tax certificates required by M/s Pico Hongkong. This condition cannot be there only to facilitate convenience in billing , as this also shows that all the money from the CWGOC is received only by consortium/AOP and then further distribution takes place and close coordination between members of AOP. The assessee does not fulfill the condition as mentioned in para 3a of the circular. 20.6 Ld. DR submitted that also Deepali Designs says that they no longer remain part of AOP because they have 0 % share as per clause 2.1 of addendum agreement. However clause 2.1 has to be read in conjunction with clause 2.3 & 2.4 wherein the share of profit is clearly mentioned. Further clause 2.1 talks of residual profit and as M/s Pico Hong Kong was made responsible for common representation, accordingly this residual profit clause d....
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....hould be charged in the hands of the AOP only and not individually. Ld. DR has relied the Hon'ble Supreme Court judgement in the case of ITO vs. Ch. Atchaiah 84 taxmann 630 (Supreme Court) submitted that wherein it is clearly held that for income of the AOP, only AOP has to be taxed and merely because some member of AOP has shown the income individually and also been taxed individually, this cannot prevent the AO to tax AOP with respect to that income which is part of AOP only. It is also submitted that in the financials/ ROI filed by the AOP, it has shown total receipts as well as total expenses from the contracts receipts from CWG and it also contains all expenses incurred on behalf of the AOP even by the individual members also. 20.9. Ld. DR has submitted that from the perusal of the above, it is absolutely clear that Deepali Designs continues to be a part of AOP and even after signing of addendum to the agreement, they were fully responsible and actively involved in managing and controlling the affairs of the consortium/AOP with regard to all the works awarded by CWGOC. The reliance of the assessee on the circular no. 7/2016 is also misplaced as discussed in detail in ab....
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....apacity and also not concerned with any other civil consequences that flow out of the agreement dated 09.12.2008 or the addendum dated 01.06.2010. This sub-clause (3) when read with sub-clause (2) which provides PHK shall "Manage all financial matters of the JV", makes it apparent that inter se JV members there was an obligation upon PHK and PEMI alone to fulfill the statutory liability of tax obligations and compliances in relation to the project. Now such inter se arrangement does not fetter the Assessing officer's power to determine the status of assessee as AOP. The Assessing officer was supposed to make assessment in accordance with law. The attempt of the parties by such an agreement of allowing the tax liability to be put upon an individual member of the joint venture would not bind the Revenue to limit its powers under the Act towards PHK and PEMI only while leaving Dipali Designs distanced away from the assessment. 25. Then these words in sub-clause (3) "JV in relation to the project" are of vital significance. The word 'JV' and 'project' here as per preamble and clauses 1.2 and 1.4 of original agreement means as follows; "1.2 Joint Venture or JV means the join....
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....due to absence of right to any profits of the consortium, the Appellant No.1 cannot be deemed to be a member of the AOP. Indeed, in the return filed, the share of Appellant No.1 is shown to be 0%. Indeed in the addendum, there is division of work, but, that is only a mode of completing the 'Project'. As far as sharing of profits is concerned Deepali Designs, who is Appellant No.1 before us, had agreed by virtue of sub-clause (3) of Clause 2 of the addendum, to forego 23% of its gross revenue to PHKL. Thus there is revenue sharing also from the works which had fallen in scope of work of Deepali Designs. Not only this but by virtue of sub-clause (4) of Clause 2 of the addendum if any new contract was to be allotted in share of Deepali Designs, again the new contract equivalent to 20% in value minus 23% were to be paid to PHK. Thus this arrangement is completely out of scope of clause 3(b) of the Circular no 7/2016 of which appellant no. 1 seeks benefit. 30. There is no force in the contention of Ld. Counsel of appellant no. 1 that this payment to PHK was merely on account of the fact that Deepali Designs had walked out of the earlier agreement. The original agreement and addendum ....
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....um, in the present case, makes the judgments relied distinguishable. 33. We have also taken into consideration all the relevant clauses of the original agreement and the addendum in to consideration and when we apply the idea of Consortium as Association of Persons for being treated as 'assessee' under the Act we find that consortium came into existence for accomplishing the 'project' as a whole and the participation of the consortium members in the tender process, the submission of bids, execution of contracts, nomination of consortium leader or Project Board, payments and receipts of considerations, the extent of joint and several liability accepted by the consortium members, the risks and cost of any defect or damage on the consortium, insurance in the names of consortium all indicate that there was lot of commonality of interest and mutuality of liabilities to form AOP. 34. It can be observed that although sub-clause (2) of clause 2 defining scope of work provided the assignment of work to each member as per Appendix II and Appendix III. There was scope of change in the scope of work assigned to Deepali by the mutual consent. Thus, there was not a strict distribution of w....
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....elf with all the activities of the consortium except to the extent of scope of work assigned. This further shows that the control and management of the consortium was unified. 35.1 It can be further appreciated that the original agreement provide that appointment of common representative of the JV which had power of general management of the project and coordination and general supervision of the quality control in the work site. The extent of powers given to the common representative further strengthens the observations of this Bench that the control and management of the consortium was unified and not merely for inter se coordination. 35.2 Further, the addendum provided by clause 3.12 for deletion and replacement of Article 11 and thereby the common representation was fully authorized to obtain insurance policies for the activities of the JV as defined by the contracts for as requested by CGWOC Delhi 2010. The Board of the JV was supposed to approve the terms and conditions of the insurance policies in advance and Deepali Designs had agreed to contribute to the JV the amount of the insurance premium paid by the JV in respect of Deepali's scope of work. 36. Ld. Counsel fo....