The Authority for Advance Ruling (AAR) has reiterated that sharing of profits and not income would be the determining factor in finding the existence of an Association of Persons (AOR) for the purpose of taxation, while holding that a consortium cannot be treated as an AOR.

The decision in the case of Hyundai Rotem and Mitsubishi Co will benefit consortium members in structuring their bids for infrastructure projects.

Further, existing consortiums would need to review their fact pattern to evaluate any potential AOP exposure after this ruling.

Economic Laws Practice partner Pranay Bhatia told Legally India: "An AOP is regarded as an Indian tax resident where even a part of the control and management of its affairs is situated in India.

"Whereas foreign companies are regarded as tax residents of India only where the whole of the control and management of its affairs is situated in India. Given that an Indian tax resident is taxable on its worldwide profits the foreign company’s part of AOP would be taxable in India even in respect of off-shore supply, which would not otherwise be taxable if they were taxed independently."

Facts:
A Mitsubishi Corporation-led consortium was formed to bid and execute a project for Delhi Metro Rail Corporation under an International Competitive Bidding for Mass Rapid Transport System Phase II Contract/Tender RS3.

The consortium agreement signed by a number of project companies provided for the constitution of a board comprising of directors from each member for the execution of the project and delineated responsibilities for each.

The role and participation percentage of each member was also laid down in the agreement and consideration amount under the tender was collected and distributed amongst the members in the pre-agreed ratio.

The following question was raised when seeking advance ruling:

"On the facts and in the circumstances of the case, whether the consortium […], for the purpose of bidding and executing the contract RS3 of Delhi Metro Rail Corporation ('DMRC'), could be assessed as independent companies under section 2(31)(iii) of the Income-tax Act, 1961 ('the Act') in India or as an Association of Persons ('AOP') under section 2(31)(v) of the Act"

The applicants argued that the consortium which was formed for the purpose of bidding and executing the contract did not constitute an AOP for the purposes of the Income Tax Act as there was no agreement to share profits and losses or to jointly incur any expenditure.

It was also highlighted that sharing of the profits - not merely gross receipts - was essential for constituting an AOP, which otherwise considered would lead to anomalies in accounting and filing tax returns.


The tax authorities on the other hand contended that formation of the consortium, joint participation of the members in the tender process and execution of a single contract made them liable as AOR.

They relied on other factors like the consortium bearing upon itself risks and costs by defect or damage, lump sum consideration paid in the name of consortium leader and performance guarantee provided by the consortium.

Decision

• The nature of the work undertaken is capable of being executed by each party is different and the scope of work assigned to one party cannot be undertaken or relocated to another.
• The members of the consortium have different skill sets and inter changeability or re-assignment of work and overseeing each other’s work is not possible.
• The members do not act as an agent of each other.
• The agreement provided that nothing should be intended or construed as creating a partnership, joint venture or any other legal entity among the parties.
• When the original bid amount was reduced, the participation ratio has been varied with each party agreeing for a certain percentage of its own discount.
• Apart from the above, profits and losses being borne by the individual members themselves and common expenditure not being incurred by them.
• In addition to the performance guarantee provided by the consortium, DMRC had taken guarantee from the parent entity of each company of the consortium.

Based on the above, the AAR held that the consortium cannot be regarded as AOP and be assessed to tax on the basis that they are separate taxable entities.