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Mundachalil Padmakshan to me M Padmakshan A 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 even if the consortium members have divided the responsibility of the business among themselves, the consortium will be treated as an AOP, a single entity. An AOP is generally understood 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 states 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 the 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 company, Munich based Linde A G and Samsung Engineering Company Ltd, Seoul, won the bid for this contract and pursuant to it 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 had directed OPAL to withhold tax on the amount payable to the Applicant. 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 they received separate payments by OPAL. Therefore, the consortium 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 ground 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. . The AAR also cited the Supreme Court judgment in the Vodafone case in which the apex court observed that a transaction should be viewed in its entirety to understand its purpose. . AAR further held that the design and engineering work prepared outside India was a part of the indivisible contract between the consortium and OPAL. Even though this was done outside India, the activities formed a significant part of the contract. Therefore, in view of an indivisible contract, the payment received in respect of design and engineering is taxable in India.