TMI Blog2010 (3) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... t’) 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 - 798-799 of 2008 - - - Dated:- 23-3-2010 - Mr.Justice P.V.Reddi and Mr.J.Khosla, JJ. Present for the applicant: Mr. N. Venkatraman, Sr. Advocate, Mr. Satish Aggarwal, CA, Mr. Vikrant Suri, CA, Mr. Atul Awasthi, CA Present for the Department : Mr. Sushil Kumar, Mr. Ashish Kumar. RULING These applications are filed by two members of a Consortium which was formed to bid and execute a project for Delhi Metro Rail Corporation (for short 'DMRC'). DMRC issued tender inviting bids under the International Competitive Bidding for Mass Rapid Transport System-Phase II Contract/Tender RS3 for design, manufacture, supply, testing, commissioning, training and transfer of technology of 156 Standard Gauge Electrical Multiple Units ('EMUs'). 2. For the purpose of bidding for the Contract RS3, Mitsubishi Corporation, Japan (MC), Hyundai Rotem Company [For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for supplying equipments/materials to BEML. Accordingly, BEML would raise invoice on DMRC for supply of EMUs while MC/Rotem/ MELCO would raise invoices on BEML for supplies made to it. For collecting payments from DMRC on behalf of BEML, MC is responsible and the amount so collected is distributed among the consortium members in the pre-agreed ratio. Further, Rotem has established a Project Office ('PO') at New Delhi to execute the contract RS3. 6. On the basis of the above facts, the following question is raised for seeking advance ruling: 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. 7. According to the applicant, the Consortium of MC, Rotem, MELCO and BEML formed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collectively referred to as the 'contractor'. All the members signed the Agreement. They are jointly and severally liable for the undertaking of the contract. The obligations of the 'contractor' are specified to be to perform efficiently all the work to design, manufacture, supply, testing, commissioning, training and transfer of technology of 156 (revised to 192) standard gauge electrical multiple units (passenger rolling stock) and to supply spares, O M manual and to supply or provide all equipment, materials, labour and other facilities requisite for the successful completion of the works. The lump sum consideration payable in Indian rupees and Japanese yen are specified. The other terms such as key dates for completion of works, price variation etc. are also incorporated in the contract document. The detailed terms and conditions of the contract are to be found in the tender documents, General conditions of contract etc. 10. The question is whether a collaborative effort on the part of two or more parties who combine themselves to form a joint venture or a consortium to undertake contract works or other commercial activities would give rise in law to an 'association of person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have agreed to share the total contract price payable as per specified milestones in agreed ratio and they are not concerned with each other's profits or losses. It is submitted by the learned Senior Counsel for the applicant that the sharing of profits, not merely gross receipts, is essential even in the case of AOP; as otherwise, it would lead to certain anomalies and give rise to practical difficulties in accounting and filing returns. Further, it is pointed out that the decision of the Supreme Court in N.V. Shanmugham and Co. vs CIT [81 ITR 310 (SC)] (relied on by this Authroity in GeoConsult case) did not lay down a clear proposition that there need not be a division of profits among the members of AOP. The factual context in which certain observations were made therein has to be appreciated before applying the ratio of the said decision. The contention of the counsel for the applicant is not without force. However, without deviating from the view taken in GeoConsult that division of profits and losses as in the case of partnership is not necessary to infer an AOP, we shall consider the question whether on taking stock of the other features and terms of the contract, the conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant's counsel, it was not an across the board discount or reduction. Each member worked out its own independent percentage of discount as a result of which the bid amount got reduced. The Revenue relied on the fact that the performance guarantee was given by MRMB Consortium. Though it is so, the fact remains that DMRC insisted on a separate guarantee and undertaking from the parent company of each member [as seen from clause 4.2.3 of GCC]. Above all, there is a specific declaration in SCA that "nothing in the agreement is intended or shall be construed as creating a partnership, joint venture or any other legal entity among the parties". These are all features apart from the profits and losses being borne by the individual members themselves and common expenditure not being incurred by them. The joint and several liabilities towards the employer has been apparently introduced as a safeguard to DMRC to have better hold over the Consortium members. What exactly is the scope and effect of such a clause on the non-defaulting member who cannot oversee the work of the other is not free from doubt. 16. On an overall consideration and adopting a holistic approach, we are unable to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed by each member is qualitatively different and each member has distinct skills. The access to the work carried on by others or providing assistance to another does not arise here. The question of substitution of the other JV member in place of an insolvent member does not also arise in the present case. One more distinction is that joint and several responsibility inter se among the JV partners was contemplated therein. In this context, reference may be made to paragraph 16 of the ruling of Chairman, which is extracted below: "The integral connection between the JV Members and their joint accountability to the client as well as their inter se accountability is further discernible from clause 12 which bears the caption "Member in default". Cl. 12.1 provides that in the event of insolvency of a member, the other members are irrecovably appointed to act for that member in the matter of performance of the agreement "being jointly and severely responsible on his behalf". The obligation of a member to indemnify the other member in case of delay or failure to fulfil its obligations (vide cl. 12.2) and the stipulation inCl. 12.7 to the effect that the sums received by JV towards pay ..... X X X X Extracts X X X X X X X X Extracts X X X X
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