Wednesday 4 March 2015

Whether when the JV constituents are already taxed at maximum marginal rate, AOP would again be liable to be taxed - NO: HC

THE issue before the Bench is - Whether when the JV constituents are already taxed at maximum marginal rate, the AOP would again be liable to be taxed. NO is the answer.
Facts of the case

The
 assessee is a 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. The assessee reported NIL income for the relevant years and claimed refunds. From the Profit and Loss Account, it was noticed that the assessee received gross receipt of Rs.92,31,33,229/-. Against this receipt, the assessee debited an amount of Rs.90,46,70,560/- towards payment to subcontractors, i.e. the JV partners itself. Apart from this, the JV paid work contract tax of Rs.1,84,62,669/- apart from other small expenses like bank charges, professional fees etc. The payment made to sub-contractors was 97.99% of the total receipts. The balance was utilized to make payment for work contract tax, professional fees, audit fees etc.

The AO, on the basis of his evaluation of the risk and responsibilities undertaken by the assessee JV, the liabilities it undertook while accepting the contract awarded to it by NHAI, the sub-contracting of the said award to its partners and other such related factors, formed the view that the JV partners had for their own purposes and benefits, not declared the income/profits in the hand of the assessee JV, which is a separate taxable entity as far as Income Tax Act is concerned and have deliberately included such income/profits in their books in order that the exact profits are not distinguishable easily in the complexities involved in their books, given the wide range of their respective business activities and operations. The AO considered it reasonable and appropriate to assessee (sic) the income in the hands of the assessee JV at 5% of the gross contractual receipts.

The CIT (A) reversed the findings of the AO and held inter alia, after analyzing the contents of the MOU of the assessee, that the constituent of this JV are separate legal entities distinct from the JV. It is a fact that the JV constituents are already taxed at maximum marginal rate. Taxing the AOP would tantamount to double taxation. The AO has applied ad hoc estimated rate of profit to the gross receipts without rejecting the books of accounts of the appellant.

The ITAT dismissed the appeals of the revenue for AY 2009-10 by relying upon its own order in the case of the assessee for AYs 2006-07 to 2008-09. In that order, ITAT had held that the issue raised in the appeals was decided by this Court in the assessee's favour for the AYs 2004-05 & 2005-06 and the Supreme Court had dismissed the Special Leave Petition filed by the revenue.

On further appeal by the Revenue, the High Court held that,

++ in the assessee's case for assessment year 2004-05, this court had the occasion to consider the issue in ITA No. 146/2010 decided on 11.02.2010 - 2010-TIOL-150-HC-DEL-IT, wherein it was held that the Tribunal returned a clear finding of fact indicating that the payments made by the joint venture / assessee to its partners was not excessive and, therefore, Section 40A(2) of the said Act would not come into play. The Tribunal held as a fact that the arrangement between the parties was clear that after receipt of the contract from the National Highways Authority of India, the work was to be executed by the joint venture members directly and no effort was to be made by the assessee/joint venture itself in the execution of the contract. It was, therefore, found by the Tribunal that the assessee was created as a joint venture for obtaining works from the National Highways Authority of India without there being any requirement or necessity of the joint venture to carry out any activity itself. In fact, all the activities were to be carried out by the aforesaid two members of the joint venture and for which they were to be remunerated;

++ in the present case too, the Court is of opinion that the consistent and concurring opinions of CIT(A) and ITAT were that the JV was formed only to secure the contract, in terms of which the scope of each JV partner's task was distinctly outlined. Further, the entire work was split between the two JV partners; they completed the task, through sub-contracts and were responsible for the satisfaction of the NHAI. Therefore, it is held that the ITAT did not fall into error of law, in holding that the JV was not an association of persons and liable to be taxed on that basis. The question of law framed is accordingly answered in favour of the assessee and against revenue.

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