$ 11 & 12 * IN HIGH COURT OF DELHI AT NEW DELHI Decided on : 10.02.2015 + ITA NO.444/2014 COMMISSIONER OF INCOME TAX-XIII .Appellant Versus M/S. ORIENTAL STRUCTURAL ENGINEERS PRIVATE LIMITED AND KMC CONSTRUCTION PVT. LTD. JV .Respondent + ITA NO.445/2014 COMMISSIONER OF INCOME TAX-XIII .Appellant Versus M/S. ORIENTAL STRUCTURAL ENGINEERS PRIVATE LIMITED AND GAMMON INDIA LTD. JV .Respondent Through: Sh. Rohit Madan, Sr. Standing Counsel, for Revenue in both appeals. Sh. Rajat Navet, Advocate, for assessees in both appeals. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % ITA 444/2014 & ITA 445/2014 Page 1 1. question of law which revenue seeks to urge in these two appeals, being ITA Nos. 444-445/2014, which involve common questions of fact arising from common order of Income Tax Appellate Tribunal (ITAT) in ITA Nos. 2691-92/Del/2012 dated 07-02- 2014 is as follows: Whether proportion of project receipts, commensurate with risks/performance obligations, should be attributed to assessee JV to whom tender had been awarded for project and undertook significant risks and responsibilities for completion of project and whether it is allowable for assessee to divert entire receipts to its JV partners by designing sub-contract to that effect? 2. assessee in ITA No. 444/2014 is joint venture (JV) between M/s Oriental Structural Engineers P. Ltd, New Delhi and M/s KMC Construction Ltd. Hyderabad, which was formed to undertake projects awarded by NHAI. assessee reported NIL income for relevant years and claimed refunds. case was processed under Section 143(1) of Income Tax Act, 1961 (hereafter Act ) and later on selected for scrutiny under compulsory scrutiny norms. Therefore, statutory notices were issued to assessee and served. From Profit and Loss Account, it was noticed that assessee received gross receipt of `92,31,33,229/-. Against this receipt, assessee debited amount of ` 90,46,70,560/- towards payment to sub- contractors, i.e. JV partners itself. Apart from this, JV paid work contract tax of ` 1,84,62,669/- apart from other small expenses like bank charges, professional fees etc. payment made to sub-contractors was ITA 444/2014 & ITA 445/2014 Page 2 97.99% of total receipts. balance was utilized to make payment for work contract tax, professional fees, audit fees etc. 3. Similarly, assessee in ITA No. 445/2014 is joint venture (JV) between M/s Oriental Structural Engineers P. Ltd, New Delhi and M/s Gammon India Ltd., Mumbai, formed to undertake projects awarded by NHAI. assessee in said appeal reported NIL income for relevant years and claimed refunds. case was processed under Section 143(1) of Act, and later on selected for scrutiny under compulsory scrutiny norms. Statutory notices were issued to assessee and served. From Profit and Loss Account, it was noticed that assessee received gross receipt of ` 9,98,86,286/-. Against this receipt, assessee debited amount of ` 9,88,52,617/- towards payment to sub-contractors, i.e. JV partners itself. Apart from this, JV paid VAT/Sales Tax of ` 8,30,907/- apart from other small expenses like bank charges, professional fees etc. payment made to sub-contractors was 98.96% of total receipts. balance was utilized to make payment for VAT/Sales Tax, audit fees etc. 4. AO, on basis of his evaluation of risk and responsibilities undertaken by assessee JV, liabilities it undertook while accepting contract awarded to it by NHAI, sub-contracting of said award to its partners and other such related factors, formed view that JV partners had, "for their own purposes and benefits, not declared income/profits in hand of assessee JV, which is separate taxable entity as far as Income Tax Act, 1961, is concerned and have deliberately included such income/profits in their books in ITA 444/2014 & ITA 445/2014 Page 3 order that exact profits are not distinguishable easily in complexities involved in their books, given wide range of their respective business activities and operations. AO considered it "reasonable and appropriate to assessee (sic) income in hands of assessee JV at 5% of gross contractual receipts." 5. AO's decisions were challenged before Commissioner (Appeals) - i.e. CIT (A). latter, by his order, reversed findings of AO and held inter alia, after analyzing contents of MOU of assessee, as follows: "The constituent of this JV are separate legal entities distinct from JV. It is fact that JV constituents are already taxed at maximum marginal rate. Taxing AOP would tantamount to double taxation. assessing officer has applied ad hoc estimated rate of profit to gross receipts without rejecting books of accounts of appellant." 6. ITAT dismissed appeals of revenue for AY 2009-10 by relying upon its own order in case of assessee for AYs 2006-07 to 2008-09. In that order, ITAT had held that issue raised in appeals was decided by this Court in assessee's favour for AYs 2004-05 & 2005-06 and Supreme Court had dismissed Special Leave Petition filed by revenue. 7. It is argued on behalf of revenue that careful analysis of agreement constituting JV showed that it was meant to operate as separate entity and not merely to facilitate JV partners to successfully bid for contract. It, therefore, results in situation where proportion of ITA 444/2014 & ITA 445/2014 Page 4 project receipts, commensurate with risks/performance obligations, should be attributed to assessee to whom tender had been awarded for project and undertook significant risks and responsibilities for completion of project and it is not allowable for assessee JV to divert entire receipts to its JV partners by designing sub-contract to that effect. 8. Both ITAT and CIT (A) took note of salient aspects of JV agreement. relevant discussions in order of CIT (A) are extracted below: "d) Sub contract agreement with lead J.V. Partner M/s Oriental Structural Engineers Pvt. Ltd. Based on above role of Joint Venture Partners, Sub- contract Agreement dated 07.02.2005 was entered between Joint Venture and its lead partner as sub-contractor, wherein it is clearly stated: - Para 2 Scope of Works to be performed by sub-contractors Para 2.1 That Sub-Contractor shall execute all items of work contained in Bills of quantities as per Annexure to extent of 50% (Approximately) value of contract amount entered into Joint Venture with employer Para 4 PAYMENT/ DISBURSEMENT Para 4.1: All payments for executed items in sub-contractor bill of quantities and those received by Joint Venture from employer in connection with main contract shall be passed on to sub-contractor subject to deduction of income tax on sub contractor payment received within 1 day after receipt of payment by joint venture from employer . Copy of Sub- contract Agreement Copy filed placed on record. e) Sub contract agreement with J.V. Partner M/s KMC Constructions Ltd. ITA 444/2014 & ITA 445/2014 Page 5 Based on above role of Joint Venture Partners, Sub- contract Agreement (MOU for Division of Contract Work) dated 15.03.2005 was entered between Joint Venture and its partner as sub-contractor, wherein it is clearly stated:- Para - 2 SCOPE OF WORKS TO BE PERFORMED BY PARTIES OF SECOND (M/s KMC Constructions Ltd.) AND THIRD PARTS (M/s Oriental Structural Engineers Pvt. Ltd.) Para 2.1 That party of second part shall execute all items of work contained in bill of quantities as per Annexure . Para 2.2 That party of third part shall execute all items of work contained in Bill of Quantities as per Annexure B . Para 2.3 That work is divided among parties of second and third parts on promise assumption or understanding that each of parties are executing 50% of project and shall receive 50% of contract amount. Para 4 PAYMENT/DISTRIBUTION Para 4.1 All payment for executed item in bills of quantities parties of second and third parts and those received by JV from Employer in connection with Main contract shall be passed on to parties of second and third parts within one day after receipt of payment by JV from Employer. 3. OPERATION OF CONTRACT WORK AWARDED TO JV Based on these conditions of JV agreements and sub contract agreements all works were executed by JV partners at rate at which work was awarded to JV and paid to JV Partners as sub-contractors by J.V. On account of this JV will not have any income as contracts were being executed by JV partners as sub-contractors on behalf of JV. Joint Venture ITA 444/2014 & ITA 445/2014 Page 6 does not have any staff, plant & machinery, financial resources or any other set up to execute work; partners have not invested any money in Joint Venture. Joint Venture is basically arrangement for participating in bidding process to take place for work as one of JV, partner OSE Pvt. Ltd. was having expertise in construction of Roads/ Highways and other JV partner, KMC Constructions Ltd. was having expertise in construction of bridges, culverts and related works. work was done by JV partners themselves & they billed to JV at rates at which JV was awarded contract by NHAI and JV acting as conduit to raise bill on NHAI for same amount and passes on to respective JV partners as soon as it was received from NHAI. 9. In assessee's case for assessment year 2004-05, this court had occasion to consider issue in ITA No. 146/2010 decided on 11.02.2010. relevant extracts from said judgment are as reproduced below: "The Tribunal returned clear finding of fact indicating that payments made by joint venture / assessee to its partners was not excessive and, therefore, Section 40A(2) of said Act would not come into play. Tribunal held as fact that arrangement between parties was clear that after receipt of contract from National Highways Authority of India, work was to be executed by joint venture members directly and no effort was to be made by assessee/ joint venture itself in execution of contract. It was, therefore, found by Tribunal that assessee was created as joint venture for obtaining works from National Highways Authority of India without there being any requirement or necessity of joint venture to carry out any activity itself. In fact, all activities were to be carried out by aforesaid two members of joint venture and for which they were to be remunerated." 10. At outset, this court notices that issue sought to be argued on behalf of revenue stands covered by decision of Division Bench, ITA 444/2014 & ITA 445/2014 Page 7 which made references to several other judgments, including those of Supreme Court when "person" is said to exist as association of persons. In that decision, i.e. Linde AG, Linde Engineering Division and Anr. v. Deputy Director of Income Tax W.P. (C) No. 3914/2012 & CM No. 8187/2012, reported in [2014] 365 ITR 1 (Delhi), first, Court considered definition of Association of Persons (Section 2 (31)) and then analyzed it in following terms: (31) person includes (i) individual, (ii) Hindu undivided family, (iii) company, (iv) firm, (v) association of persons or body of individuals, whether incorporated or not, (vi) local authority, and (vii) every artificial juridical person, not falling within any of preceding sub-clauses; Explanation. For purposes of this clause, association of persons or body of individuals or local authority or artificial juridical person shall be deemed to be person, whether or not such person or body or authority or juridical person was formed or established or incorporated with object of deriving income, profits or gains; 27. Section 3(42) of General Clauses Act, 1897 defines person to include any company or association or body of individuals, whether incorporated or not . XXXXXX XXXXXX XXXXXX 29. Supreme Court in case of G. Murugesan and Brothers v. Commissioner of Income Tax, Madras: (1973) 4 SCC 211 made following observations:- ITA 444/2014 & ITA 445/2014 Page 8 For forming Association of Persons , members of association must join together for purpose of producing income. Association of Persons can be formed only when two or more individuals voluntarily combine together for certain purpose. Hence volition on part of member of association is essential ingredient. It is true that even minor can join Association of Persons if his lawful guardian gives his consent. In case of receiving dividends from shares, where there is no question of any management, it is difficult to draw inference that two more shareholders functioned as Association of Persons from mere fact that they jointly own one or more shares, and jointly receive dividends declared. Those circumstances do not by themselves go to show that they acted as Association of Persons ." (emphasis supplied) XXXXXX XXXXXX XXXXXX 34. It is, thus, essential that Association of Persons has trappings of partnership for conducting joint enterprise which makes it amenable to be treated as separate taxable entity. person carrying on business may in usual course cooperate with others for common purpose. In many instances, test of common purpose and common action, if literally applied, may also hold true. However, treating every instance of such cooperation between two or more persons as resulting in Association of Persons would militate against purpose of considering association as separate tax entity. Whether arrangement or collaborative exercise between two or more persons results in constituting Association of Persons as separate taxable entity would depend on facts of each case including nature and extent of collaboration between them. Supreme Court in Indira Balkrishna (supra) had also clarified that:- there is no formula of universal application as to what facts, how many of them and of what nature are necessary to come to conclusion that there is association of persons within meaning of Section 3. ITA 444/2014 & ITA 445/2014 Page 9 35. It is obvious that unless facts lead to conclusion that there is sufficient joint participation for common enterprise, it would not be appropriate to treat two or more persons as Association of Persons for purposes of assessing them as separate taxable entity. mere cooperation of one person with another in serving one s business objective would not be sufficient to constitute Association of Persons merely because business interests are common. common enterprise, which is managed through some degree of joint participation, is essential condition for constituting Association of Persons. 36. It follows from above discussions that before association can be considered as separate taxable entity (i.e. Association of Persons), same must exhibit following essential features: (i) must be constituted by two or more persons. (ii) constituent members must have come together for common purpose. (iii) association must move by common action and there must be some scheme of common management. (iv) cooperation and association amongst constituent members must not be perfunctory and/or merely in form. association amongst members must be real and substantial which is sufficient to treat association as separate homogenous taxable entity. XXXXXX XXXXXX XXXXXX 47. It is material to note that even, as per terms of Contract, scope of work to be executed by Linde and Samsung was separate and was accordingly specified in annexures to Contract. payments to be made for separate items of work were also specified. currency in which payments were to be made was also separately indicated. Thus, insofar as execution of work was concerned, even OPAL recognised that different items constituting Contract would be performed independently by Linde and Samsung. consideration for work performed was to be made directly to ITA 444/2014 & ITA 445/2014 Page 10 concerned member of Consortium in accordance with work performed by him. Annexure C of Contract specified payment schedule i.e. amount to be paid for supply of goods and services rendered by both members of consortium. Linde and Samsung were to be paid on basis of separate invoices raised by them respectively. There was no arrangement for sharing of profits and losses between Linde and Samsung. And, each of them would make profits or incur losses based on price as agreed by them and costs incurred by them for performance of contract falling within their independent scope of work. 48. It follows from above, that Linde and Samsung had joined together to (a) bid for contract; (b) present fa ade of consortium to OPAL for execution of contract and accept joint and several liability towards OPAL for due performance of contract and completion of project; and (c) put in place management structure for inter se coordination and execution of project. However, in all other respects, both Linde and Samsung were independent of each other and were responsible for their own deliverables under Contract, without reference to each other. 11. In present case too, Court is of opinion that consistent and concurring opinions of CIT (A) and ITAT were that JV was formed only to secure contract, in terms of which scope of each JV partner s task was distinctly outlined. Further, entire work was split between two JV partners; they completed task, through sub-contracts and were responsible for satisfaction of NHAI. Therefore, applying principles of law declared in Linde AG, Linde Engineering division and Anr, it is held that ITAT did not fall into error of law, in holding that JV was not association of persons and liable to be taxed on that basis. ITA 444/2014 & ITA 445/2014 Page 11 question of law framed is accordingly answered in favour of assessee and against revenue. 12. For foregoing reasons, appeal has to fail; it is dismissed. S. RAVINDRA BHAT (JUDGE) R.K. GAUBA (JUDGE) FEBRUARY 10, 2015 ITA 444/2014 & ITA 445/2014 Page 12 Commissioner of Income-tax-XIII v. M/s. Oriental Structural Engineers Private Limited And KMC Construction Pvt. Ltd