The Indian Authority for Advance Rulings (AAR) delivered a ruling dated 31 July 2008 in the case of Geoconsult ZT GMBH (2008-TIOL-11-ARA-IT) on whether a joint venture (JV) comprising a foreign company and two Indian companies was to be taxed in India as an "Association of Persons" (AOP) in respect of income from a contract (the Contract) with an Indian client.
(a) Facts. The Applicant (i.e. Geoconsult ZT GMBH), which was a company incorporated in Austria, was awarded the Contract by an Indian client to provide consultancy services for the development of certain tunnels in India. The Applicant signed a Memorandum of Understanding (MOU) to form a JV with two Indian companies in order to provide project consultancy services.
(b) Issue. The issue before the AAR was whether income arising from the Contract was to be taxed in the hands of the Applicant or in the hands of the JV as an AOP. (Note. The definition of "person" under Sec. 2(31) of the Indian Income Tax Act 1961, which includes an AOP, has been amended to provide that an AOP shall be deemed to be a person whether or not it was formed or established or incorporated with the objective of deriving income, profits or gains.)
(c) Ruling. The AAR ruled that the Applicant was to be assessed to tax in India as an AOP along with the two Indian companies, i.e. the income from the Contract would be taxed in the hands of the AOP and not in the hands of individual members of the consortium.
The AAR observed that the essential conditions for an arrangement to constitute an AOP would be as follows:
| - | it should be a voluntary combination between two or more persons; |
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| - | it should have a common purpose or common action with object to produce profit or gains. However, the object to produce profit or gain is no longer a sine qua non following the amendment in the definition of "persons " as of 1 April 2002 (see Note above); |
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| - | it should be a combination in "Joint Enterprise"; and |
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| - | there should be some kind of scheme for common management |
The AAR further observed that the JV partners associated themselves with a "common purpose" of providing consultancy services to the client, and that the common act and objective of the JV partners was to earn income from consultancy. The JV partners were jointly and severally liable to the client for the obligations under the Contract which points to the existence of an AOP for tax purpose.
The AAR also observed that the JV agreement was prefaced by a recital that"the three parties have agreed to collaborate for all work associated with the consultancy services". Thus, the Applicant, who was the recipient of the major part of the Contract's consideration/revenue, managed the JV and coordinated with all concerned parties for a smooth execution of the Contract within the stipulated time frame. The formation of the AOP with a common object and unified management was thus evident. Thus, the essential features and stipulations in the two agreements coupled with the background in which the JV was formed pointed out the existence of an AOP as it is understood in law and in ordinary parlance. The Contract was between the JV partners and the client and thus any income earned by the JV would be taxed as income of the JV (AOP) and not income in the individual hands of the JV partners. The JV partners were jointly and severally liable to the client for the obligations and the total Contract consideration was to be paid to the JV. Therefore, the performance of these services to the client generated income of the JV. The common purpose and common action pursued towards the ultimate end of earning income/profits would lead to the conclusion that the three entities indeed formed a JV (and hence, an AOP) for executing the Contract. This AOP will be a taxable unit for the purpose of tax assessment of income from the Contract.
The AAR also held that the AOP would be taxed in India at the rate of 41% on net income basis.