2010 (3) TMI 119 - AAR - Income Tax

Execution of project of DMRC Capacity AOP or independent companies - Consortium of Mitsubishi Corporation Japan Hyundai Rotem Company Korea Mitsubishi Electric Corporation Japan BEML Limited India - DMRC accepted the price proposal submitted by MRMB Consortium in relation to the Contract RS3 and awarded the same to the MRMB Consortium vide its Letter of Acceptance dated 30th August 2007 - The Consortium members entered into a Supplementary Consortium Agreement ( SCA ) on 6th June 2008. The role and the participation percentage of each member is separately defined in the SCA. - On the facts and in the circumstances of the case whether the consortium of Mitsubishi Corporation Japan (MC) Hyundai Rotem Company Korea (Rotem) Mitsubishi Electric Corporation Japan (MELCO) and BEML Limited India ( BEML ) referred to as MRMB 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. Held that MRMB Consortium cannot be treated as Association of Persons for the purposes of assessment under the Income-tax Act 1961 and the applicants can only be subjected to taxation on the basis that they are separate taxable entities

Summary

Issues Involved:
1. Whether the consortium of Mitsubishi Corporation, Hyundai Rotem Company, Mitsubishi Electric Corporation, and BEML Limited, for the purpose of bidding and executing the contract RS3 of Delhi Metro Rail Corporation, could be assessed as independent companies under section 2(31)(iii) of the Income-tax Act, 1961 in India or as an Association of Persons (AOP) under section 2(31)(v) of the Act.

Issue-wise Detailed Analysis:

1. Formation and Structure of the Consortium:
The consortium was formed by Mitsubishi Corporation (MC), Hyundai Rotem Company (Rotem), Mitsubishi Electric Corporation (MELCO), and BEML Limited (BEML) to bid for the Delhi Metro Rail Corporation (DMRC) project. The consortium agreement outlined the roles and responsibilities of each member, with MC appointed as the consortium leader responsible for project coordination, commercial management, and other administrative tasks. The consortium submitted a bid and was awarded the contract by DMRC.

2. Execution and Responsibilities:
The consortium agreement specified that Rotem would handle mechanical works, MELCO would manage electrical works, and BEML would be responsible for localization works. The contract RS3 was signed for the design, manufacture, supply, testing, commissioning, training, and transfer of technology of 156 Standard Gauge Electrical Multiple Units (EMUs), later increased to 192. The consortium members entered into a Supplementary Consortium Agreement (SCA) defining the participation percentages of each member.

3. Taxation Issue:
The primary question was whether the consortium should be assessed as independent companies or as an Association of Persons (AOP) under the Income-tax Act, 1961. The applicant argued that the consortium did not constitute an AOP because there was no agreement to share profits and losses or to jointly incur any expenditure. The Revenue contended that the consortium had all the attributes of an AOP.

4. Legal Precedents and Definitions:
The judgment referenced several legal precedents, including CIT v/s Indira Balakrishna and CIT vs. C. Karunakaran, which discussed the definition and characteristics of an AOP. The court noted that an AOP must have a common purpose and joint action to produce income, profits, or gains. The distinction between a partnership and an AOP was also discussed.

5. Analysis of Consortium Features:
The court analyzed the features of the consortium that supported the plea of an AOP, such as joint participation in the tender process, execution of a single contract, joint and several liability, and the provision of a bank guarantee. However, the court also noted several factors that ruled out the inference of an AOP, including the distinct and non-interchangeable nature of work undertaken by each member, separate evaluation by DMRC, and the specific declaration in the SCA that the agreement did not create a partnership or joint venture.

6. Comparison with Previous Cases:
The court compared the present case with previous rulings in Van Oord Acz BV and GeoConsult ZT GMBH. In Van Oord, the joint venture did not satisfy the criteria of an AOP, while in GeoConsult, the court concluded that an AOP existed. The court found that the present case was more in line with Van Oord, as the consortium members had distinct roles and responsibilities, and there was no joint control or interdependence in their work.

7. Conclusion:
The court concluded that the consortium could not be treated as an AOP for tax purposes. The factors that ruled out the inference of an AOP were more significant than those supporting it. The consortium members were to be assessed as separate taxable entities.

Ruling:
The MRMB Consortium cannot be treated as an Association of Persons for the purposes of assessment under the Income-tax Act, 1961. The applicants are to be subjected to taxation as separate taxable entities. The ruling was given and pronounced on the 23rd Day of March, 2010.