NON-RESIDENTS CONSORTIUM TO BE TAXED IN INDIA AS AOP: AARA consortium
formed by non-residents to bid for a turnkey project in India is liable
to be taxed in India as Association of Persons (AOP), according to
Authority for Advance Ruling (AAR). The AAR, a quasi judicial body for
deciding tax disputes involving foreign entities, held that the
consortium will be treated as AOP even if the members have divided the
responsibility of the business among themselves. An AOP is generally
understood as an
association of two or more entities formed for the
purpose of carrying out a particular task. An explanation furnished in
2002 for Section 2 (31) of the Income-tax Act says that AOP shall be
deemed to be a person, whether or not such a body was formed with the
object of deriving income, profit or gains. The consortium in this case
was floated in response to a tender floated by ONGC Petro Additions Ltd
(OPAL) for design, engineering, procurement, construction, installation,
commissioning and handing over of the plant for the dual-feed cracker
and associated units. The consortium, comprising the taxpayer
companyMunich-based Linde AG and Samsung Engineering Company, Seoul-won
the bid for this contract and entered into an agreement with OPAL for
handing over of the plant on a turnkey basis. The taxpayer company took
the position that it cannot be treated as AOP (which is a single entity )
since the contract of the consortium has to be split into many parts
and the consideration for work is payable by OPAL directly to each
member for the work done by it. In support of its argument, the taxpayer
company claimed that there was no sharing of expenses, costs, receipts,
assets, profits or losses between each member. There was also no common
employment of capital or resources. The company also argued that no
amount of tax is liable to be withheld in India since the work executed
as well as payments received were all off-shore. The assessing officer,
while rejecting the stand of the taxpayer, directed OPAL to withhold tax
on the amount payable. The taxpayer moved AAR for deciding two issues.
First, whether the consortium is an AOP or not, and secondly whether the
amount payable to taxpayer for the supply of equipment, material and
spares outside India is liable to tax in India or not. AAR, in its order
last March, pointed out that legal position of formation of AOP does
not alter even though the consortium members have divided the
responsibility among themselves or if they had received separate
payments by OPAL. The consortium, the body said, needs to be treated as
an AOP. That the consortium members had put in place an MOU first and
then agreed upon separating the area of operations, are not sufficient
grounds for not considering it as an AOP. Even payments were agreed to
be made separately, but those developments could not affect the status
of AOP they acquired when they came together to bid for the work, AAR
observed. – www.economictimes.indiatimes.com