April 8, 2010

Unincorporated joint venture not held to be a taxable unit

In the background of there being prolonged uncertainty and ambiguity on how unincorporated joint ventures and consortiums should be assessed under the Income Tax Act, 1961 (ITA), the Authority of Advance Rulings (AAR) has provided an instructive ruling in this regard in the case of M/s Hyundai Rotem Co., Korea and Anr. v/s DIT1. The ruling has provided the much sought guidance in terms of relevant factors that will ascertain the tax treatment of such entities and spelt out the circumstances when an unincorporated joint venture or a consortium should be treated as a separate taxable entity (i.e. association of persons (AoP)) under the provisions of the ITA.

In the instant case the AAR, whilst resolving the query of whether a collaborative effort on the part of two or more parties which have formed a joint venture or a consortium to undertake contract works or other commercial activities could lead to an AoP, noted that in the absence of a specific definition of the term ‘AoP’, no ‘hard and fast rule or clear cut definition’ could be applied and stressed that such determination would be completely contingent on the relevant facts and circumstances of each case.

Facts before the AAR

For the purpose of bidding in a tender floated by and executing a project for Delhi Metro Rail Corporation (‘DMRC’), a consortium agreement was entered into between Mitsubishi Corporation, Japan (‘MC’), Hyundai Rotem Company, Korea (‘Rotem’), Mitsubishi Electric Corporation, Japan (‘MELCO’) and BEML ‘Limited, India (‘BEML’).

The agreement provided for a ‘skill-set wise’ responsibility to each member and also appointed a consortium leader. Please refer to Figure 1 below for a diagrammatic representation

 

Whilst dealing with the query, as put forth by the applicants MC and Rotem, on whether the consortium constituted an AoP, the AAR reverted to the meaning of the term “associate” which means “to join in common purpose, or to join in an action” as had been recognized by the Supreme Court in its landmark decision of CIT v. Indira Balakrishna.

The AAR also referred its prior decisions on the point in the cases of GeoConsult ZT GmbH2 (on which the tax authorities relied upon to argue that an AoP was constituted) and Van Oord Acz BV3, on which the applicants relied to argue otherwise) and noted that a thorough analysis of the features of the entity, the work allocation, the arrangements and the agreements entered into and the facts and circumstances surrounding it, were essential in arriving at a conclusion as to the characterisation of an entity as an AoP. 

After analyzing the facts relevant to the applicant’s case and the contentions for and against the constitution of an AoP, the AAR ruled in the favour of the applicants and held that such a consortium arrangement would not constitute an AoP under the ITA for the following reasons:

1.       The consortium agreement was entered into only for the purpose of participating in the tender and clearly stated that the parties did not intend to constitute a joint venture or a partnership;

2.       Each consortium member would only share gross receipts, be responsible for its respective profits, losses and expenditures;

3.       Segregation of work between the members based on their respective skill-set, such work not being capable of being assigned to or being supervised by another consortium member in case of default by one of the members;

4.       Separate guarantee and undertakings were taken by the DMRC from the parent company of each consortium member for separate scope of work to be performed;

Analysis

It is interesting to note how the AAR has adopted a ‘features tests’ approach in arriving at an inference on the tax treatment of an unincorporated joint venture/ AoP, an undefined entity under the ITA. Further this ruling is likely to provide certainty and have an impact on industries involved in EPC (Engineering, Procurement and Construction), infrastructure, media, pharmaceutical, and similar sectors ,wherein similar arrangement are entered into.

This ruling by the AAR will serve to provide a clarificatory basis to parties that form consortiums and unincorporated joint ventures solely for the purposes of participating into tenders for projects; and will serve as a guidance note which will assist such consortiums to structure their agreements and arrangements to obtain the desired tax treatment.

 

_________________

1.  2010-TIOL-22-ARA-IT

2.  304 ITR 283

3.  248 ITR 399

 

 

-   Harshal Shah  &  Hanisha Amesur

 

 

You may direct your comments to Ramya Krishnan-AniL

+91 900465 0363

 

Management by Trust in a Democratic Enterprise: A Law Firm Shapes Organizational Behavior to Create Competitive Advantage, Global Business and Organizational Excellence, Sep 2009

NDA: A different approach by Shyamal Majumdar, Business Standard, July 23, 2009.

A law firm head spends his time studying organisational behavior.

Pacific Business Press: Winner of ‘Asian-Counsel’s Social Responsible Deals of the Year 2009’

Mr. Nishith Desai, Founder, has been voted ‘External Counsel of the Year 2009’ by Asian Counsel and Pacific Business Press

Ranked #1 in Tax, Investment Funds and TMT practices by Legal 500 (Asia Pacific)

>>>

 

Welcome to connect with us at interesting conferences, seminars and events.

>>>

 

Introducing NDA Dialawgue and Deal Destination.

Vikram Shroff on CNBC TV18: NASSCOM asks govt to relax E-visa norms on expats

Mr. Nishith Desai on ‘The Firm’- CNBC TV 18: Bombay HC ruling in the case of Lawyers Collective

>>>

 

Click here to view Hotline archives.

The Battle For Fame - Part I, April 1, 2010

Great Offshore Takeover Saga – Bharati Shipyard v/s ABG Shipyard, Dec 16, 2009

>>>

The verdict: India Budget Highlights 2010, BNA International, Shreyas Jhaveri & Radhika Iyer, March 2010

Trade Unions Act and State Laws Provide Legal Protections to Trade Unions in India, SHRM Legal Report, Vikram Shroff & Akshay Bhargav, March 2010

Doing Business in India

Venture Capital and Private Equity in India: A Primer and Select Research

Mergers & Acquisitions in India

Dispute Resolution in India

Intellectual Property in India

eCommerce Taxation in India

Special Economic Zones

BPO Report

India: Structural Strategy

Inversion - The Basic Facts

Venture Capital at Crossroads

 

Our email newsletters – Hotlines are very popular for their insights and analysis. Sign-up to receive Hotlines on the following – Tax, CorpSec, HR, Dispute Resolution and our regular updates such as M&A Labs, IP, Pharma, Media, Telecom Updates and Budget and Policy Analyses.

 

Please visit www.nishithdesai.com to access our Research online.

 

Unsubscribe

 

Feedback

Disclaimer: The contents of this hotline should not be construed as legal opinion. View detailed disclaimer.

This Hotline provides general information existing at the time of preparation. The Hotline is intended as a news update and Nishith Desai Associates neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this Hotline. It is recommended that professional advice be taken based on the specific facts and circumstances. This Hotline does not substitute the need to refer to the original pronouncements. 

This is not a Spam mail. You have received this mail because you have either requested for it or someone must have suggested your name. Since India has no anti-spamming law, we refer to the US directive, which states that a mail cannot be considered Spam if it contains the sender's contact information, which this mail does. In case this mail doesn't concern you, please unsubscribe from mailing list.