TMI Blog2011 (5) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... d from their respective share of contract works in their hands. In this kind of situation no merit in the presumption made by the AO that the Joint Venture is the "Main Contractor" and the members are the "Sub-contractors". Once this presumption has been found to be wrong, then the question of estimation of income by way of Sub-contract commission does not arise. So also the question of deduction of tax u/s 194C(2) and the disallowance u/s 40(a)(ia) does not arise - in favour of assessee. - IT APPEAL NOS. 344 (VIZAG.) OF 2009 and 77 (VIZAG.) OF 2010 - - - Dated:- 13-5-2011 - SUNIL KUMAR YADAV, B.R. BASKARAN, JJ. G.S.S. Gopinath for the Appellant. T.V.B.S. Kishore Babu for the Respondent. ORDER B.R Baskaran, Accountant Member. These two appeals filed by the revenue are directed against the orders passed by Ld CIT (A) Visakhapatnam and they relate to the assessment years 2005-06 and 2006-07. Since both the appeals relate to the assessee and since one of the issues agitated in these two appeals is identical in nature, we are disposing these two appeals by this common order, for the sake of convenience. 2. The common issue in both the appeals relates to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the status of "Association of Persons", declaring NIL income. However, the Assessing Officer was of the view that the assessee-AOP should be treated as the main contractor and the members to whom the work was allotted should be treated as sub contractors. Accordingly, the AO opined that the assessee-AOP should have collected "Sub contract commission" from the sub-contractors, i.e. from both the members of the Joint Venture. The relevant observations recorded by the AO, in the assessment order relating to the A.Y 2005-06, are extracted below: "As seen from the return of income filed by the assessee, though the entire receipts were credited to its profit and loss account, no income was offered at lease by way of commission on account of sub-contracts given to its members. The peculiar circumstances prevailing in this case give scope to hold that the transaction involved in this case is nothing but a sub-contract. In such circumstances the assessee-AOP ought to have declared a reasonable profit, being a separate entity, which is absent here. It is a general practice in the line of contract business that when the main contractor enters sub-contract with others, the main contractor ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... others. The fact is that the purpose of this appellant joint venture coming into existence is only to win contracts and not to make any profit in this status. Profit motive was enshrined in the activities of the constituent members. The appellant joint venture was actually the de jure contractor and the constituent members were the de facto contractors who actually executed the works and undertook the responsibility of timely execution of the works. The appellant joint venture entrusted the contracted job to the constituent members in its entity for execution and therefore, the same cannot be termed as a sub-contract. In fact, the relationship between the appellant joint venture and the constituent members cannot be a contractor/sub-contractor relationship or principal to principal relationship, but has to be a relationship which could be termed as "principal to agent relationship". This being the factual position, the income has to be assessed in the hands of the person who has earned it i.e. the de facto contractor. In the instant case, since both the constituent members were assessed to tax on the entire contractual receipts, the question of further assessing the same in the ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d case that "once a finding has been recorded, that there was no contract between the assessee and its sister concerns, there shall be no applicability of Sec.194C(2). Further, the assessee did not charge any commission from its alleged sub-contractors and whatever tax was payable has since been paid by the main concern". The mere fact that deduction of 1% TDS made by the appellant joint venture from the payments released to the constituent members, do not itself create a contractor-sub-contractor relationship, which was possibly made as a measure of abundant precaution. Since, the relationship between the appellant joint venture and the constituent members is not that of a contractor and sub-contractor, it is concluded that the appellant joint venture was not required to make the TDS u/s 194C(2) of the Act for the payments released by the appellant joint venture to the constituent members. Hence, the provisions of Sec.40(a)(ia) would not be applicable in the instant case". 6. We have heard the parties and carefully perused the record. We have also gone through the "Joint venture partners Agreement" entered into by the parties on 20-10-2003 and also the codicil entered between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. [Black's Law Dictionary; Sixth Edition, p.839]. According to Words and Phrases, Permanent Edition, a joint venture is an association of two or more persons to carry out a single business enterprise for profit [P.117, Vol. 23]." The following definition of 'joint venture' occurring in American Jurisprudence [2nd Edition, Vol.46 pages 19, 22 and 23] is relevant: "A joint venture is frequently defined as an association of two or more persons formed to carry out a single business enterprise for profit. More specifically, it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd knowledge.... Among the acts or conduct which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are: (1) joint ownership and control of property; (2) sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings; (3) community of control over, and active participation in, management and direction of business enterprise; (4) intention of parties, express or implied; and (5) fixing of salaries by joint agreement." Black's Law Dictionary (7th Edition, page 843) defines 'joint venture' thus "Joint Venture: A business undertaking by two or more persons engaged in a single defined project. The necessary elements are: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member's equal voice in controlling the project." 9. On a careful reading of the order of the Hon'ble Supreme Court, we notice the following essential ingredients of a "Joint Venture". (a) It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Income Tax Act. It is pertinent to note that this decision was rendered prior to 1.4.2002, i.e. prior to the insertion of the Explanation to section 2(31). (b) Geo Consult ZT GMBH (304 ITR 283) = (2008-TII-11-ARA-INTL): In this case, though the work was allotted to each of the members and each member has to bear its own costs and expenses, yet it was noticed that the agreement stated that the members will collaborate for all the work associated with the project which is to be managed on a joint basis by all the members. Further the agreement provided that the members are jointly and severally responsible for execution of project. The AAR has expressed opinion, by placing reliance on the decision of Hon'ble Supreme Court in the case of N.V. Shanmugam and Co. v. CIT [1971] 81 ITR 301 = (2002-TII-43-SC-INTL), that the ultimate division of profits amongst members of the joint enterprise is not a relevant criterion. Finally it was held that the Joint venture is assessable as "AOP". (c) M/s Hyundau Rotem Co., Korea and M/s Mitsubishi Co., Japan (AAR Nos. 798-799 of 2008 dt. 23-03-2010 = (2010-TII-22-ARA-INTL). In this case, the AAR has held that the Consortium formed by four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h deals with the "Resources" specifically states that each joint venturer shall provide plant and equipment required for the execution of their portion of contract and such plant and machinery shall not become asset of the joint venture. Thus there is no clear provision in the Joint Venture which provides for joint execution of the project and joint realization of profit. 11.2 Clause-4 deals with the relationship between the members of the joint ventures. Sub-clauses (c) and (d) are relevant. "(c) This Agreement shall not be construed by either Joint Venturer hereto as constituting each of them the agent of the other nor the Joint Venture as the agent for either of them. "(e) The Joint Venturers agree that this Agreement shall not constitute a partnership and any liabilities of any sort whatsoever which one Joint Venturer may incur towards or on behalf of the other Joint Venturers shall be in accordance with this Agreement and be thereto limited" As per the concept of the Joint Venture, each joint venturer shall stand in the relation of a principal as well as an agent of the other. However clause 4(c) of the agreement specifically states that the members do not constitute t ..... 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