SKP Tax Alert
| Volume 8 Issue 29
CBDT clarifies that a consortium formed for executing EPC/turnkey contracts will not be assessed as AOP, provided that the consortium has certain specified attributes
 

Engineering, Procurement & Construction (EPC) and turnkey contracts are complicated and require sophisticated technical expertise. Due to the complexity in the nature of activities and the volume of work involved, it is difficult for an individual entity to carry out the whole contract. Thus, two or more entities with different skill sets form a consortium, come together and divide the scope of work amongst themselves. Typically, such consortiums consist of a foreign entity acting as the technical partner and an Indian entity as the execution partner. Usually, all the consortium members are jointly and severally liable for the contract and there is a clear demarcation in their scope of work, risk, responsibilities and liabilities.
 
One of the major tax disputes that arise in such cases is taxation of the consortium members by the tax authorities as a separate taxable entity in form of an Association of Persons (AOP). Once the consortium assumes the identity of an AOP, the income earned by such a consortium is then taxed at a maximum marginal tax rate. Apart from this, the AOP treatment results in numerous other tax consequences for consortium members such as: non-availability of set off of losses incurred by members, non-availability of treaty benefit for foreign members, difficulty for foreign members in getting tax credits in home countries, etc.
 
In this context, some of the Authority of Advance Ruling (AAR) and second level Appellate Authority i.e. Income Tax Appellate Authority have held that such consortiums are to treated as AOPs while others have held otherwise. In one of the rulings of the Delhi High Court recently in case of Linde AG, Linde Engineering Division vs DDIT
[1] it has been held that where there is an independent/separate scope of work for each member coupled with no profit/loss or risk sharing between the members, there should be no AOP under the Indian domestic law even if the members have entered into the contract jointly.
 
For consistency in handling such cases, the Central Board of Direct Taxes (CBDT) recently issued Circular No. 07/2016 dated 7 March 2016, wherein the CBDT specified scenarios where the consortium will not be treated as an AOP provided the consortium displays certain attributes. According to the circular, consortiums will not be treated as AOP if they display the following attributes:
  • Each member is independently responsible for executing its share of work;
  • There is a clear demarcation amongst the members in terms of work, risks, execution and cost to be incurred for the project;
  • Each member’s profitability from the project is solely based on the performance of the contract falling under its scope;
  • Resources utilised for execution are under the control of the respective members; and
  • Control and management of the consortium is not unified except for when the internal co-ordination is required for administrative convenience.
 
Furthermore, there could be additional factors which may justify that a consortium is not an AOP. It shall depend on the specific facts and circumstances of a particular case which need to be taken into account while considering the matter.
 
However, the above guidelines shall not be applicable in cases where all or some of the members are associated enterprises within the meaning of section 92A of Income Tax Act, 1961. In such cases, the tax officer will conclude whether or not the consortium should be treated as an AOP based on the relevant provisions and judicial jurisprudence on this issue.
 
[1] [2014] 44 taxmann.com 244 (Delhi)
SKP's comments
This circular provides clarity on the taxation issue of consortiums operating in the EPC sector. It is also in line with the government’s aim to promote infrastructure development in the country as the clarity in taxability provided by this circular will act as an impetus to contractors, especially to the foreign contractors who have the necessary expertise and technology to participate and execute large EPC contracts in India. The clarification from the government on its own is a laudable step which points out the government’s efforts towards the ease of doing business in India.
 
Thus, the above guidelines would help in bringing to an end the confusion around AOP in case of consortiums formed to operate EPC contracts
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SKP
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