TMI Blog2024 (1) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... are maintainable. Idea of Consortium as Association of Persons for being treated as assessee - Whether the appellant No.1 is a member of Association of Persons (AOP) i.e Pico Deepali Overlays Consortium and the consortium has been rightly assessed as an Association of Persons ? - We here in these appeals, at this stage, are concerned with the tax liabilities of the appellant no 1 as member of AOP and not in the individual capacity and also not concerned with any other civil consequences that flow out of the agreement dated 09.12.2008 or the addendum dated 01.06.2010. The responsibility given by appellant no. 1 to PHK and PEMI to Manage all financial matters of the JV and for maintenance of records, effecting payment of taxes, filing of returns, etc.,. must have been with intention that as for assessment and tax liability, consortium shall be a unit and assessed as a unit, which can only be by way of the consortium being treated as AOP and all the members of consortium being member of the AOP. Thus this arrangement is completely out of scope of clause 3(d) of the Circular no 7/2016 of which appellant seeks benefit. There is unified control and management of the consort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... li Designs are not left to be exclusive to Deepali Designs. Certainly Deepali Designs is not getting any share of proceeds of the work assigned to PHK, but PHK is not disputing the existence of AOP so question of PHK not getting share of profit from Deepali Designs is not material. When we apply the idea of Consortium as Association of Persons for being treated as assessee under the Act we find that consortium came into existence for accomplishing the project as a whole and the participation of the consortium members in the tender process, the submission of bids, execution of contracts, nomination of consortium leader or Project Board, payments and receipts of considerations, the extent of joint and several liability accepted by the consortium members, the risks and cost of any defect or damage on the consortium, insurance in the names of consortium all indicate that there was lot of commonality of interest and mutuality of liabilities to form AOP. Thus, we are of the considered view that consortium as AOP fails to fulfill the requirement of clause (a) of Clause 3, clause (b) and clause (d) of the Circular No.7 of 2016 and there is no error in the findings of the ld. AO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a member, then, Deepali be given proper opportunity of hearing on the merits of the various additions made. This order was upheld by the Hon ble High Court vide order dated 30.07.2019 in ITA No.327 of 2019. Thereafter, a Miscellaneous Application No.792/Del/2019 in ITA No.4929/Del/2018 was filed by the Appellant seeking clarification and modification of the order dated 19.02.2018 which was disposed of by order dated 11.01.2021 and, at this stage, the consortium now appearing as Appellant No.2, filed a Miscellaneous Application No.792/Del/2019 and it was also allowed directing the AO to give opportunity of hearing to Pico Hong Kong Ltd., also in the remand proceedings. Thereafter, the ld. AO has passed the assessment order holding Appellant No.1 to be a member of the consortium which has been upheld by the DRP and, therefore, the two factions: one Deepali Designs and Exhibits (P) Ltd. (hereinafter referred to as Deepali Designs) which is before us as Appellant No.1 and other is M/s Pico Deepali Overlays Consortium which is before us as Appellant No.2. 3. At the time of hearing on 30.11.2023 a conflict of interest among the two appellants came up and it was pointed out by Ld. AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP through appellant no.2. The assessment for the assessment year 2011-12 was concluded by the assessing officer vide order dated 27 January 2022 in the status of AOP. 5. The case of Pico Deepali appellant no 2 through PHK is that the consortium was the contracting party vis-a-vis CWGOC for the overlays contract and appellant no 1 is also part of consortium and the AOP. Ld. Sr. Counsel has relied the following facts to support this contention; In terms of the agreement dated 19.12.2009, Performance Security had to be provided by the Consortium in the form of Performance Bank Guarantee; In consideration of the execution and completion of the works, CWGOC had to pay the contract value to the Consortium; Technical specifications and scope of work along with the rates and total quantities were specified in the said contract to the Consortium; On behalf of the Consortium the said agreement was signed by Mr. Ang Swee Meng, Director and Mr. Vinay Mittal, Managing Director of M/s Deepali Designs Exhibits (P) Ltd. In consideration of the payment by the CWGOC to the Overlays Provider in accordance with the terms and conditions of the Agreement, each member was j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m ) Deepali Designs was and continued to be member of the consortium and thus has to be regarded as member of the AOP for the following reasons: 1. The three parties had formed the consortium as an unincorporated JV to jointly bid and execute (if awarded) the overlays contract for the GWG; 2. The bid was submitted in the name of the consortium; 3. The contract was awarded to the consortium; 4. The consortium was liable for due and timely execution of the contract with each member being jointly and severally liable to the contractee; 5. In the event of any loss caused to the consortium on account of negligence / unsatisfactory performance of the scope of work assigned to a particular member, the defaulting member was obliged to indemnify other members of the consortium for the loss occasioned to the consortium on account of default / unsatisfactory performance of the defaulting member. 7. It is submitted for appellant no 1 that that there was no change in the overall contractual arrangement of the consortium with CWGOC or between the members of the consortium, inter se. It was not that Deepali Designs was relieved from its obligations under the original agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise due to willful misconduct in relation to the said bank accounts of the Consortium by PHK. (3) It is agreed that all the statutory tax obligations of the JV in relation to the Project, including but not limited to deduction of taxes, maintenance of records, effecting payment of taxes, filing of returns, etc. shall be sole responsibility of PHK and PEMI, subject to Deepali providing any and all tax receipts, records, returns and the like requested by PHK and PEMI, relating to the works assigned to Deepali. (4) All amendments and deletions to the Earlier Agreement shall follow the above spirit and intent. 10. On behalf of appellant no 2 it is also submitted that with regard to invoking arbitration proceedings against CWGOC for non-payment of amounts withheld, M/s Deepali Designs had also filed a reply on behalf of the appellant during the course of Arbitration proceedings and Mr Vinay Mittal, director of Deepali Designs had written a letter dated 11th July 2011 to the executives of PICO Hong Kong Limited, and PICO Event Marketing (India) Private Limited, stating that arbitration cannot be initiated by the appellant and would necessarily have to involve Deepali Desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consortium s bid was accepted only for cluster I VI on the basis of the revised prices and at this stage at the end of March 2010, disputes and differences arose between Deepali Designs on the one side, and Pico Hong Kong and Pico India on the other side. The differences pertained to, among other things, furnishing of corporate guarantee, performance bank guarantee, and management of and capital contribution for the consortium. Accordingly in the first week of May 2010, Deepali Designs, Pico Hong Kong and Pico India modified the legal relationship that was agreed to be created vide the agreement dated 19.12.2009. The parties then began negotiating the terms and conditions of their new legal relationship which would be acted upon by the parties to execute the works and services for CWGOC. On account of the above, Deepali Designs, Pico Hong Kong and Pico India entered into an agreement dated 01.06.2010 by way of an addendum to the agreement dated 19.12.2009. 14. The case of appellant no 1 is that the parties thus modified the legal relationship that was agreed to be created vide the agreement dated 19.12.2009 and created a new legal relationship. It was this new legal relations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel of appellant no. 1 relied Clause 2.1 (3) of the addendum for the same. (f) The unincorporated consortium with a trade name, was under the complete control and management of Pico Hong Kong and same had full and sole authority over the consortium in all respects. Ld. Counsel for appellant no. 1 relied Clause 2.4 of the addendum for the same. (g) CWGOC was to make payments in the bank account in the name of consortium for administrative convenience. Pico Hong Kong controlled the bank account and was under the following obligation as per Clause 2.3 and 3.3: The invoiced amount shall be paid to the relevant JV member by the JV after each respective payment by Delhi 2010 and within ten (10) days after the aforementioned payment is effected by Delhi 2010 and deposited into the JV Bank Account. (h) All statutory tax obligations of the consortium in relation to the project including but not limited to deduction of taxes, maintenance of records, effecting payment of taxes, filing of returns, tax registrations etc. was the sole responsibility Pico Hong Kong and Pico India, subject to Deepali Designs providing any and all tax receipts, records, returns and the like reques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Designs has proprietary interests and overriding titles over such receipts and receivables. Deepali Designs has worked independently for execution of its scope of work with its own resources and man force. 18. The ld. counsel appearing for Appellant No.1 has heavily contested the observations made by the AO holding Appellant No.1 to be a member of AOP, in view of the Circular No.07/2016 dated 7th March, 2016 issued by the CBDT giving clarification regarding taxability of consortium members. In this context, it will be appropriate to reproduce below the relevant part in para 9 to 9.23 of the assessment order dated 27.01.2022, wherein relevant clauses of the Circular No 07/2016 are also mentioned; 9. In compliance to the directions of Hon'ble ITAT, Deepali Design Exhibits Pvt.Ltd. has been treated as member of AOP vide order sheet entry dated 04.04.2019 by the then AO, placed on records and for the sake of convenience, the same is reproduced as under:-. Sh. Gulshan Gaba, AR appeared. It is brought to the knowledge of the AR that the order dated 19.09.2018 of Hon'ble ITAT has not been accepted by the Department and accordingly with the approval of the compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act and further upheld by Ld. CIT(A)]. You are hereby allowed an opportunity to explain as to why these additions be not made again. Your reply/explanation should be supported by corroborative documents/evidences failing which it may be presumed, that you have no explanation to offer or the explanation offered by you are not satisfactory . 3. The reply/written submissions and the documents, filed by M/s Deepali Design Exhibits Pvt. Ltd. On various dates in response, have been considered together with following documents which are considered relevant on this issue:- (i) Written submissions dated 09.10.2012 filed during the course of assessment proceedings. (ii) written submissions dated 03.12.2012 filed during the course of assessment proceedings (iii) written submissions dated 19.12.2012 filed during the course of assessment proceedings (iv) agreement dated 19.12.2009 relaling to formation of M/s Pico Deepali Overlays Consortium, (v) addendum agreement dated 01.06.2010, (vi) Copy of PAN application dated 07.01.2010, signed by Sh. Vinay Mital, Director of Deepali Design Exhibits Pvt Ltd. (vii) Application of Form No. 49A dated. 19.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inter-se coordination between the consortium members for administrative convenience 9.2. On perusal of the Addendum to the Consortium Agreement dated 01.06.2010 with the Circular No. 07/2016 of CBDT. 9.2.1. Point no. 3 of sub clause 2.1 of clause 2 of the Addendum to the Consortium Agreement dated 01.06.2010, states Amounts received by the JV on contracts with the CWGOC Delhi 2010 in respect of work performed by Deepali, within the scope of work described in Appendix 2 (including any variations), minus 23% shall be paid to Deepali and the remainder shall belong to PHK . Whereas, Point No. 3(b) of Circular No. 07/2016 dated the 7th of March, 2016, says that each member earns profit or incurs losses, based on performance of the contract falling strictly within its scope of work. However, consortium members may share contract price at gross level only to facilitate convenience in billing . Hence, the said point in addendum does not show that the sharing of the contract price is only to facilitate convenience in billing and does not fulfill the condition specified above. 9.2.2. Similarly, Point no. 6 of sub clause 2.1 of clause 2 of the Addendum to the Consortium Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go 23% of its gross revenue to Pico Hong Kong Limited (Pico Hong Kong), which is expense of Deepali from its gross receipts and the exclusive income of Pico Hong Kong. There is no sharing of profits. (ii) Similarly, Deepali was not entitled to any profit from the scope of work of Pico Hong Kong and Pico Event Marketing India Pvt. Ltd. specified in Appendix III to the Addendum Agreement. (iii)AO has ignored clauses 1; 2.1 (1), (2) and (6) read with Annexure II; 2.2; 2.3; 2.4; 3.2 and 3.3 of the addendum agreement (Vol VI at 1508 Paperbook) ivi (iv)AO has also ignored deletion of clauses 4.1 and clause 7 of the Consortium Agreement (Vol VI at 1457 Paperbook) ii. Point No. 3(d) of the circular is not satisfied. For this AO has relied on clause 2.1 (6) of the Addendum Agreement (i) Clause 2.1(6), to the contrary, evidences that the common representative was only for inter-se coordination. Else each member was to carry its own work independently and separately. And this is also what has happened in reality. (ii) AO has ignored clauses 2.1 (1), 2.2(3); 2.4; 3.2 of the addendum agreement (Vol VI at 1508 Paperbook). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are is zero per cent. 4. AO has completely ignored the material fact that revenue from Deepali s scope of work has been brought to tax in the hands of Deepali in a regular assessment and Deepali has paid the income tax on the same. - page 2172 of Vol VIII Paperbook. Deepali has been taxed at the maximum marginal rate and there is therefore no loss to the revenue. 5. AO completely ignored the material facts contained in submissions dated 03.04.2019. - page 266 of Vol I Paperbook. Briefly stated, the facts are: (i) In the return of income filed by Deepali for AY 2011-12 on 25.10.2011, Deepali has not shown any investments or capital balance of PDOC in Schedule E. (ii) Similarly, PDOC has also not shown capital account of Deepali at schedule no. 5 i.e., Capital Account of the members of PDOC in its audited financial statement for FY 2010-11. The capital account consists solely of Pico Hong Kong who is stated to 100% share in the consortium profits. - page 2140 of Vol VIII Paperbook. Further, Deepali is not a related party of Pico Hong Kong as per the audited financial statement of PDOC. page 2146 of Vol VIII PB. 20. The Ld. DR has filed written submission contendin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en it is really baffling to understand why the consortium/AOP will award 20% of the future contracts to Deepali Designs. This condition for getting a share in future contracts in itself proves that M/s DDEPL continues to be a part of the consortium/AOP. This shows there continues to be unified and common management for controlling the affairs of the AOP and against the condition no. 3d of circular no. 7/2016. (ii) Para 2(6) of the addendum talks of supervision of the contracts. Being pertinent the same is reproduced below:- 2(6) The parties intend that each Member shall carry out its own works peacefully, subject to the supervision and project management of Deepali by the Common Representative and his staff to ensure that the entire scope of works is delivered in good order to the CWGOC Delhi 2010. 20.3 Ld. DR submitted that the above para clearly specifies that M/s Deepali is responsible for supervising and managing the entire project and their role of supervision and managing the work is not confined to the work specifically allotted by the AOP/consortium m/s DDEPL. This again shows that there is unified and common management for controlling and managing the affairs/wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f addendum agreement. However clause 2.1 has to be read in conjunction with clause 2.3 2.4 wherein the share of profit is clearly mentioned. Further clause 2.1 talks of residual profit and as M/s Pico Hong Kong was made responsible for common representation, accordingly this residual profit clause doesn't in any way becomes the determining factor for treating DDEPL as a member of AOP or not. (v) M/s DDEPL continues to be a part of AOP and in fact the following amendment by addendum makes it amply clear that Deepali's representative will always remain on the board of the consortium/DOP. The article 9.1b was added to the addendum agreement which is reproduced below:- 3.7 Article 9.1(b): (a) Add: Deepali s representative on the Board may not be removed from the Board without Deepali's consent. To the end of the first sentence, which begins with The Board of the JV consists of: 20.7 As the board of AOP/consortium is responsible for taking all decisions related to the works awarded by the CWGOC, accordingly, Ld. DR submitted that as Deepali's representative continues to be on board even after the addendum agreement, this itself proves the fact that M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement, they were fully responsible and actively involved in managing and controlling the affairs of the consortium/AOP with regard to all the works awarded by CWGOC. The reliance of the assessee on the circular no. 7/2016 is also misplaced as discussed in detail in above noted paras. 21. Now as with regard to the first issue framed by us, it appeared that the two appellants or the Revenue were not in conflict and there was a consensus amongst them that two appeals are maintainable. In this context, the ld. counsel for the Appellant No.1 had relied on the following judgements where in the rights of persons affected by any adverse order of assessing officer giving rise to tax liability has been found to be eligible to file an appeal and that multiple appeals are maintainable in given set of circumstances:- (i) Gokuldas v Kikabhai Abdulali and Ors. [1958] 33 1TR 94 (Bom); (ii) Maersk BV v DDEIT [2014] 264 CTR 26 (Bom); (iii) CIT v Income Tax Appellate Tribunal and Anr. [1975] 99 ITR 552 (Delhi HC); (iv) CIT v Babu Ram Chandra Bhan [1969] 74 ITR 143 (All); and (v) CIT v N Ch. R Row Co [1983] 144 ITR 557 (Cal) 21.1 The ld. Sr. Counsel appearing for Appellant N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-clause (3) JV in relation to the project are of vital significance. The word JV and project here as per preamble and clauses 1.2 and 1.4 of original agreement means as follows; 1.2 Joint Venture or JV means the joint venture formed among the parties which will be established on the basis of the terms of this agreement. Project means the total of the operations, works, supplies, constructions and services required for the full and in due time completion of the object of the Contracts as described in details therein as well as any other addition, modification or amendment requested by Delhi 2010 26. This sub-clause (3) firmly establishes that the addendum stipulated that tax liability of the consortium shall be determined for the project as a whole. So assignment of works within the project to the members of consortium was irrelevant as far as the statutory tax obligations were concerned. The members of consortium had agreed that when it comes to statutory tax obligations the same shall be determined on project basis and not on the basis of works independently assigned to each member. 27 The responsibility given by appellant no. 1 to PHK and PE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. There is no force in the contention of Ld. Counsel of appellant no. 1 that this payment to PHK was merely on account of the fact that Deepali Designs had walked out of the earlier agreement. The original agreement and addendum both together lay out the terms of the JV and what addendum has done is that only the stage of the sharing of profits out of the project and the mode of calculating the profit is changed. Else PHK and Deepali Designs both are getting benefits out of the proceeds of the work assigned to Deepali Designs and that amounts to sharing profits and profits of the work assigned to Deepali Designs are not left to be exclusive to Deepali Designs. Certainly Deepali Designs is not getting any share of proceeds of the work assigned to PHK, but PHK is not disputing the existence of AOP so question of PHK not getting share of profit from Deepali Designs is not material. 31. Ld. Counsel of appellant no.1 has relied on following judgments to bring forth as to what are necessary ingredients of constituting a taxable AOP:- (i) In Re Van Oord Acz Bv, [2001] 248 ITR 399 (AAR) (ii) In Re Hyundai Rotem Co. [2010] 323 ITR 277 (AAR) (iii) Linde AG v DDIT, [2014] 365 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndix III. There was scope of change in the scope of work assigned to Deepali by the mutual consent. Thus, there was not a strict distribution of work standards by CWGOC, Delhi 2010. It can be further appreciated that clause 6.1 and 6.2 of the original agreement when read with sub-clause (3) of the clause 2.2 of the addendum, the members of the consortium had agreed that the joint venture shall be jointly and severally liable against Delhi 2010 in respect to the fulfillment of the requirement of the project as well as in respect to any contractual or legal obligation of joint venture. Even after the scope of work assigned to respective they were not independently responsible for executing this part of work with regard to the risk of its scope. In this context, clause 3.2 of the addendum is relevant and worthy to be reproduced: 3.2 Article 7 : delete in its entirety and replace with The risks and liabilities of each party shall be as per the scope of work to be undertaken and the participation of each party as contained in the Addendum. In the event the risks and liabilities that materialize are general in nature and cannot be determined to be attached to any individual scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed to contribute to the JV the amount of the insurance premium paid by the JV in respect of Deepali s scope of work. 36. Ld. Counsel for appellant no.1 had submitted that bench is required to examine the question of appellant no. 1 being part of AOP only on the reasons given by the assessing officer and not expand the scope. However, we are of considered opinion that while discussing the applicability of the in Circular NO. 7/2016 on the facts and circumstances of the case arising out of interpretation and construction of various clauses of agreement and the addendum a wholesome conclusion has to be drawn and same cannot be restricted as to how and to what extent the Ld. AO referred to various clauses of the agreement and the addendum. 37. Thus, we are of the considered view that consortium as AOP fails to fulfill the requirement of clause (a) of Clause 3, clause (b) and clause (d) of the Circular No.7 of 2016 and there is no error in the findings of the ld. AO in treating Appellant No.1 as member of the consortium and to assess the consortium as AOP. The issue no. 2 is decided against the appellant no. 1. 38. In the result, it is held that appellant no. 1 Deepali Desi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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