TMI Blog2008 (8) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case. 3. The applicant, Geoconsult, has formed a joint venture (in short J.V.) with two Indian companies namely (a) M/s Rites Ltd. India, registered in Delhi and (b)M/s. Secon Pvt. Ltd.India, registered at Bangalore. This joint venture is specialized in 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his case. 6. In his comments dated 10.10.07, the Revenue, through the Jurisdictional Commissioner, i.e. Director of Income-tax (International Taxation), Mumbai, has, on the questions raised by the applicant, stated that 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 mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re only preparatory/auxiliary in nature and are, accordingly, excluded by Article 5(4)(e) of the DTAA. According to the Commissioner, looking at the activities to be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Pradesh with the input of technical/professional expertise through the deployment of technical personnel, environmental specialists 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 engineeri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equired is (a) common business purpose and (b) common management. 17. The learned 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-Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel has relied on the provisions of section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 106 I.T.R. 111, laid down the principles governing an A.O.P. as under:- "It is therefore clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ump 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 contract for said services was awarded to the JV on 10.8.2006. 2.0 Joint Venture : 2.1 The Members hereby establish a joint venture for an unincorporated association under the nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espects 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 3. 6. Within the framework of the manpower allocated, will perform all activities technical work as necessary as per the Scope of Services stipulated in the Contract. 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 crystallizes that their (GC-Rites-Secon) common goal/action or design is to prepare the feasibilities and detailed design of tunnels in Shimla and other parts of Himachal Pradesh. Thus, all the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. constitutes an 'association of persons' in consonance with section 2(31)(v) read with Explanation thereto. Further, the A.O.P. only is to be taxed in pursuance of the decision of the Apex Court in the case of I.T.O. vs. CH.ATCHAIH (Supra) wherein it has been hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 Supreme Court remarked that Costello J. "put the test in more forceful language". This is what Costello J. stated : " ..although these four persons did not constitute a body which was the same as partnership, it was in many respects similar to a partnership and was approximate to a partnership and it may well be that the intention of the legislature was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough. This interpretation of the expression "association of persons" flows from the meaning of the word "association". When the word "association" is replaced by the word "body", it must follow that the feature of common design or combined will so peculiar or distinctive to an associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties 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 being an unincorporated association under the name of Geoconsult - Rites - Secon J.V. for the purpose of entering into the Services Agreement with the Client and performing all the services to be undertaken for the project by virtue of that Agreement." Cl. 2.2 read with 3.2 provides for the appointment of a 'Leading Member' and further states that the representative of the Leading Member shall be the representative of the Joint Venture for the purpose of correspondence and discussion with the Client in regard to the interpretation of and alteration to the terms of the Services Agreement and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the details of distribution of fee between JV partners under two heads, 'remuneration' and 'reimbursable'. Approximately, the remuneration receivable by Geoconsult , Rites and Secon is in the proportion of 50%, 20% and 30% respectively. Para 2 of Schedule 4 states that each member shall bear its own costs and expenses incurred for promotion and 'proposal preparation' (i.e. at pre-contract stage). The manner of receiving payments from the client is set out in para (1) of Schedule 4. It is provided therein that Secon and Rites are responsible for invoicing to the Lead Partner for their services in accordance with the provisions of the contract. The Lead Partner shall prepare a consolidated invoice and submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure 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 of individual members. But, the fact remains that all the members of AOP are pursuing the common object of making profit or deriving income, by organizing themselves into a Joint Venture to carry out the work for valuable consideration. The ultimate division of profits amongst the members of the joint enterprise is not a relevant criterion, as seen from the observations of Supreme Court in the case of Shanmugham Co. (supra). It is also pertinent to notice para 8 of Schedule 4, according to which the investments required for the works shall be brought in by the Members as per mutual agreement. Thus, there is mutual understanding amongst the Members of the JV even in relation to investments in the venture. 18. Thus, the essential features and stipulations in the two agreements coupled with the background in which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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