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TMI Blog2012 (3) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... to come together to take up the work as a Consortium. With that in view, on 3.3.2008, the applicant and Samsung entered into a Memorandum of Understanding for the purpose of bidding for and taking up the work. This was followed up by an „Internal Consortium Agreement" dated 14.3.2008 between the applicant and Samsung. On 20.3.2008, the Consortium submitted its response to the tender notice. It also submitted its price bid on 28.7.2008. The tender submitted by the Consortium was accepted and on 23.12.2008, the work was awarded to the Consortium. The issuance of notification of Award was on 23.12.2008. 23.12.2008 was to be the effective date. 2. On 10.2.2009, OPAL and the Consortium consisting of the applicant and Samsung entered into a formal agreement. The agreement reiterated that OPAL, described as the company, was desirous of „carrying work of all activities and services required for the design, engineering, procurement, construction, installation, commissioning and handing over of the plant on a lump sum turnkey basis in accordance with the Bidding Documents‟ and that the contractor, meaning the Consortium, had represented that it had expertise and technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... times and in the manner described in the agreement. It is recited that the advance payment will be received by the Consortium and the right to suspend or terminate the contract is given to the Consortium. In this agreement, there is no individual role assigned to the members of the Consortium and the agreement is between OPAL and the Consortium and rights and obligations are conferred on OPAL and the Consortium for the tendered work as a whole. The agreement annexes the General conditions of contract as amended, Technical documents, Agreed clarifications, contract price schedule, construction schedule, Project instructions, Milestone payment formula, Notification of award, Letter of acknowledgement of notification of award from the Consortium, Integrity pact and Memorandum of Understanding concluded between the Consortium members. In case of conflict, the agreement had priority followed by the others in the order of priority as cited therein. The Memorandum of Understanding between the consortium members was annexed as the last document and the subsequent agreement between the applicant and Samsung dated 14.3.2008 is not referred to or annexed. 5. According to the applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the answer to (iv) is in the affirmative, to what extent are the profits from supply of plant an equipment taxable in India? (vi) Whether in terms of the Contract, consideration for onshore services comprising supervision of installation, testing, commissioning and construction, management/supervision is liable to tax on the profits of the PE, as may be deemed to exist in India, in terms of Section 44DA of the Act read with the provision of the DTAA. (vii) If the answer to question No. (vi) is in the affirmative, whether for the purpose of determining the profits of the PE in India, the actual expenditure incurred by head office exclusively and specifically in relation to onshore activities of the PE (not being general administrative/executive expenses) and reimbursed to it, are allowable in full and not subject to limits in Section 44C of the Income-tax Act, 1961? 7. It is argued on behalf of the application that going by the decision in Ishikawajama - Harima Heavy Industries Limited v. DIT [288 ITR 408 (SC)], the contract can be and has to be spilt into separate parts and that part dealing with the obligations of the applicant has to be considered independent of the obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation should not be resorted to and the approach must be to understand the nature and the object of the contract on looking at the transaction. 10. We also feel that a contract for sale of goods differs from a contract for erection and commissioning of a plant which also takes in delivering of design and machinery. To read such a contract as one for sale of goods independent of the contract as a whole and separately from the obligation undertaken thereunder to erect, commission and deliver a plant (the object of the contract), would be adopting a dissecting approach to that contract. The situs of the erection contract has to be determined on the basis of the site where the plant is to be erected. The contract in this case was also signed in India. According to the applicant, the design and machinery was to be supplied from outside the country or off-shore. In a composite contract as the one in question, that alone cannot determine the situs of the contract. That fact has to be weighed with the other relevant facts and the purpose of the contract itself. The work contracted to be done cannot be ignored. 11. We may also notice that though the Memorandum of Understanding between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement (Consortium Agreement) in order to execute the CONTRACT." Thus, it is seen that the MOU was entered into only for the purpose of preparing and entering a bid. Post acceptance of bid, it at best is only executory and is only to form a basis for a Consortium agreement. The MOU provides for participation and allocation of responsibilities in case the work is allotted to the Consortium. It provides that the Consortium shall constitute an un-incorporated arrangement established for the limited purpose of representations and dealings with ONGC/OPAL with independent and separate scope of work as setforth therein. The parties shall be liable jointly and severally vis-à-vis ONGC/OPAL for the obligations of the PROJECT in accordance with the terms and conditions of the Tender document. 13. A reading of the MOU as a whole indicates that its purpose was to bid for and secure the tender floated by OPAL and the Consortium was jointly and severally liable to OPAL to perform the obligations undertaken by the Consortium. The members also came to arrangement as to the work each one is to perform. 14. The performance guarantee annexed to the contract is given on behalf of the Conso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect of the terms of the tender notice and the contract in terms of it. We are satisfied that the terms of that unilateral agreement cannot alter the legal position emerging from the agreement as we have discussed above. How far an arrangement come to between the members of the Consortium can govern the contract, the Consortium has entered into with a third party, is a moot question. It remains an arrangement not binding on the person who has entered into a contract with the Consortium unless, it is permissible to acknowledge and accept its terms and they have actually been acknowledged and accepted. Suffice it to say that the terms of the Internal Consortium Agreement cannot alter the terms of the agreement with OPAL or modify its terms. 17. Applying the „look at‟ test and interpreting the terms of the contract as a whole, we are satisfied that the contract in this case is one and indivisible and it is not open to the applicant, a member of the Consortium, the contractor, to attempt to split up each component of the contract for the purpose of taxation. A dissecting approach is not warranted in this case. 18. Once we come to this conclusion, it is not open to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Consortium). Clause 1.2 sets out the requirements for execution of the works. After setting out the details in clauses 2 and 3 thereof, clause 4 deals with Financing and Accounting. Clause 4.1.2 reads: "Payment to the contractor of monthly invoice for respective members of Consortium as aforesaid shall not be deemed to affect in any manner, the contractor responsibility for carrying out the whole of the works in accordance with the requirements of the contract until certification of the completion of the whole of the works and acceptance thereof by the Company/Company‟s Representative." This also indicates that the obligation under the contract cannot be split up as sought for by the applicant and the decision rested on the theory that title to the goods passes off-shore. 22. The first question posed for our Ruling is whether the applicant and Samsung, are taxable in India as an Association of Persons (AOP). Section 2(31) of the Act while defining a „person‟, includes within that definition, under clause (v) "an association of persons or body of individuals whether incorporated or not". With effect from 1.4.2002, an explanation was added to clarify that an assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociation of persons within the meaning of Section 3 of the Income-tax Act, added the following words of caution. "There is no formula of universal application as to what facts, how many of them and of what nature, are necessary to come to a conclusion that there is an association of persons within the meaning of section 3, it must depend on the particular facts and circumstances of each case as to whether the conclusions can be drawn or not." 26. In NV Shanmugham & Co. V. CIT [81 ITR 310], the Supreme Court clarified that "The existence of specific or defined interest in the profits did not make the earning any the less, by an „association of persons‟. Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of profits." 27. In G. Muragesan and Brothers Vs. CIT [88 ITR 432], the Supreme Court, after quoting from Indira Balakrishna, added, "For forming an „association of persons‟ the members of the association must join together for the purpose of producing an income. An „association of persons‟ can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence, vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and even after commissioning. It was a joint liability. In this situation, an AOP was formed and the assessment has to be on that basis. 30. What we have to consider is whether the facts and circumstances available, bring about an AOP in the light of the principles indicated by the Supreme Court. We find that on a tender being floated for erection and commissioning of a Petro Chemical Complex, the applicant and Samsung came together to bid for the work. They are independent entities having their respective fields of expertise. There is no case pleaded that one of them by itself would have handled the whole work. The coming together to make a bid was obviously in furtherance of their respective independent businesses. It was with a common object. The coming together was with a view to earn an income. To borrow the words from B.N. Elias (3 ITR 408), it was a case of two co-adventures coming together for promotion of a joint enterprise. Clearly, it was with a view to make a gain. The contract was awarded to the Consortium and not to the two members individually. It was for the whole work and a composite contract. No two contracts were entered into with the Consortium members. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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