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TMI Blog2012 (8) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... d on July 28, 2008. The tender submitted by the consortium was accepted and on December 23, 2008, the work was awarded to the consortium. The issuance of notification of award was on December 23, 2008. December 23, 2008, was to be the effective date. 2. On February 10, 2009, X and the consortium consisting of the applicant and E entered into a formal agreement. The agreement reiterated that X, 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 know-how in respect of the said work and had submitted its offer for the work and the work had been awarded to it on December 23, 2008, treating that date as the effective date. It records that the contractor, the consortium, has covenanted with the company X to perform the work in conformity with the provisions of the contract which is said to constitute the entire agreement between the company and the contractor. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 acknowledgment 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 "E" dated March 14, 2008, is not referred to or annexed. 5. According to the applicant, this contract with X, the consortium consisting of itself and E has entered into, is a divisible contract and its obligations under the contract are well defined. The respective scope of work and obligations of each are clearly identified. The consideration payable to it was also identifiable and the payment to it under the contract by X was direct payment for the work done by it. The part of the contract relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 permanent establishment in India, the actual expenditure incurred by head office exclusively and specifically in relation to onshore activities of the permanent establishment (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 applicant that going by the decision in Ishikawajimaƒ_"Harima Heavy Industries Limited v. DIT [2007] 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 obligations of E, the other consortium member. Income from offshore activities of the applicant cannot be taxed in India, going by the decision in CIT v. Hyundai Heavy Industries Ltd. [2007] 291 ITR 482 (SC). Under the contract, it was evident from the scope of work and situs of the work that the consideration in respect of operations outside India was distinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 offshore. In a composite con- tract 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 members of the consortium dated March 3, 2008, is annexed as the last of the documents to the agreement as forming its part, the internal consortium agreement dated March 14, 2008, is not annexed to the agreement, the terms of which has precedence over the other annexures if there is a conflict. We, therefore, feel that it is not per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortium agreement. The memorandum of understanding provides for participation and allocation of responsibilities in case the work is allotted to the consortium. It provides that the consortium shall constitute an unincorporated arrangement established for the limited purpose of representations and dealings with "X' with independent and separate scope of work as set forth therein. The parties shall be liable jointly and severally vis-a-vis "X' for the obligations of the project in accordance with the terms and conditions of the tender document. 13. A reading of the memorandum of understanding as a whole indicates that its purpose was to bid for and secure the tender floated by "X' and the consortium was jointly and severally liable to "X' 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 consortium. The contract price schedule splits up the payment towards imported component and Indian component in terms of foreign currency and Indian rupee and the split up payment for each item of supply and work. It also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 'X' 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 con- tractor, 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 applicant to plead that the sale of machinery and designing of the project and equipment must be treated as offshore transactions and taxing them is beyond the jurisdiction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting. Clause 4.1.2 reads : "Payment to the contractor of monthly invoice for respective members of the 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 offshore. 22. The first question posed for our ruling is whether the applicant and "E", 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 April 1, 2002, an Explanation was added to clarify that an association of persons shall be deemed to be a person whether or not such person was formed, with the object of deriving income, profits or gains. There is no definiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 N. V. Shanmugham and Co. v. CIT [1971] 81 ITR 310 (SC), 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. Murugesan and Brothers v. CIT [1973] 88 ITR 432 (SC), the Supreme Court, after quoting from Indira Balkrishna [1960] 39 ITR 546 (SC) 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, volition on the part of the members of the association is an essential ingredient". It was thus emphasized that volition to come together was essential. 28. Three rulin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tallation and even after commissioning. It was a joint liability. In this situation, an association of persons was formed and the assessment has to be on that basis. 30. What we have to consider is whether the facts and circumstances avail- able, bring about an association of persons 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 'E' 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 [1935] 3 ITR 408 (Cal), 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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