The Order of the ITAT (Chennai) in the case of – ‘CCCL’, the Consortium- ( CCCL for short), recently reported makes for a curiously interesting reading. That is seen to have unwittingly brought to surface certain not–so- obvious aspects; and not readily perceptible angles. These call for an independent reading and insightful understanding. That is why it has been chosen to be worth a critical and analytical study.
The point of dispute is very limited; in the sense that it has its epicenter on the implications of sec 167B, inserted in the IT Act by the Direct Tax Laws Amendment Act of 1989, w.e.f 1-4-1989. A special mention may have to be made of the fact that was the very same piece of singular legislation (a code by itself) through which a host of amendments came to be made; so also has given rise to a fresh spate of litigation on several fronts ; for a detailed account, if so inspired, suggest to look up the readymade compilation on the web - The 1989 Amendment ACT).
Indisputably, the point of dispute ( Issue) adjudicated upon by the ITAT is a mixed question of law and facts, - as opposed to a pure question of law. As such, that is an issue which required to/ could conceivably be adjudicated upon in proper light only by having due regard to, and after a proper appreciation of, the ‘facts and circumstances’ of the case; more so, in the nature of things, only in a case to case basis.
Even so, should one infer from the TEXT of the ITAT Order (the ORDER ) , all the requisite facts and circumstances, -which would have been of relevance for finally deciding the point of dispute, in the successive appeals - do not seem to have been brought on record at any stage. For instance, the contents (or even a gist) of the contract agreements stated to have been entered into by the parties find no mention; thus left unknown. As such, it is anybody’s guess whether (or not) at least the AO, as would have been expected of him, did ask for and had on his record all such material at any stage of the assessment or the reassessment proceedings, so as to frame a sustainable assessment.
Be that as it may, for the purpose of discussion herein, one has been obliged to proceed on certain assumptions, as indicated herein elsewhere.
2. It is noted from the ORDER that the two parties had to and joined together for carrying out the project work entrusted to them by the Airport Authority of India for an expansion of the Chennai Airport.
3. The conclusion reached by the AO based on his own findings is as under:
Q
The Assessing Officer taking notice of Article-5 of Consortium Agreement dated 30.11.2007 entered between TWO PARTNERS , wherein it is mentioned that net profits, assets and liabilities arising out of joint performance of contract shall be shared as mutually agreed upon and also taking note of PROFIT SHARING AGREEMENT dated 29.12.2008 entered between two parties had come to conclusion that profit were SHARED AMONG THE PARTNERS AND FOREIGN COMPANY WILL BE PAID GUARANTEED PROFIT SHARE OF 2% OF FINAL CONTRACT PRICE AND THEREFORE, held that tax should be levied under sub -section (1) of Section 167B of the Act and accordingly levied tax vide order dated 25.03.2015 u/s.143(3) r.w.s.147 of the Act.
UQ
Note: FONT supplied; that is to specially focus on the fact that AO has implicitly proceeded on his assumption, - in one’s view, wrongly so ,- that the consortium herein is no different from but is one and the same as a ‘partnership’ , in which the profits of the enterprise are firstly pooled and then shared between the partners.
4. 1. FACTUAL MATRIX
Contract Agreements – Observations
“.....long term agreement on 30.11.2007 which is placed at paper book page No.1. From the perusal of the agreement, it is clear that the agreement is silent on the profit sharing ratio of its members, in terms of MOU entered between the parties on 30.11.2007, Clause VII of the MOU provides that sum equivalent to 2% of the project cost shall be paid to HPI by CCCL. This agreement is also silent regarding sharing ratio of its members. Other document i.e. profit sharing agreement entered between the above parties on 29.12.2008 only says that profit before tax arising on the above project would be finally determined after completion of the project and it further provided that HPI shall be paid guaranteed profit share in the form of 2% of contract price. Clause 2 of the profit sharing agreement further provides for the mode of payment 2% guaranteed profit. Having regard to the above clauses of the three agreements, it is clear that as cumulative consideration of the terms of the three agreements, the parties have not agreed as to the shares of the profits of the AOP. More importantly, Consortium Agreement entered into between the parties is totally silent as to the shares of the profits of the AOP. In terms of MOU in clause VII entered between parties on 30.11.2007, there is clear obligation on the part of CCCL to pay a sum equivalent to 2% of the project cost to HPL, which would go to show that it is not the AOP which is under obligation to pay 2% of contract price to HPL but it is CCCL. The term ‘’share of net profit’’ implies a ‘’share in the net profits’’ which is an interest in the profits as profits, and implies a participation in the profits and losses. But in the present case, the member of the AOP i.e. HPL is entitled to 2% of the profit cost regardless of the fact whether AOP made profits or losses. (Para 14)
COMMENT: It is unclear whether the terms and conditions as agreed upon and set out in the three contract agreements have been fully noted and summed up.
Be that as it may, relying on common knowledge and going by anyone’s personal experience/exposure , it is believed that , in the case of any such Joint Venture, in the contract agreements, - provided been competently drafted, - by and large, are clearly set out,-
a) the total consideration (price) payable by the contractee ; and
b) portions of it payable to/ receivable by the respective parties to the joint venture, registered as a consortium.
In other words, that is a very fundamental and essential feature commonly come across in case of any joint venture of the kind herein. Importantly so, as otherwise payment / remittance by contractee, of such portion of the total price as due to the respective parties would be impossible.
For a narration/account of the other actual facts and circumstances, - though apparently incomplete, suggest looking through the ORDER.
4.2. To supplement, as indicated earlier herein before, the following assumptions have been made:
i) The other party to CCCL – that is other than ‘HPI’ is a domestic (Indian) company.
ii) The contract agreements have been entered into and concluded, as might have been lawfully required/ mandated, with the tacit approval of the government (s) / its authorities-mainly, FIPB (as then) and RBI.
iii) Remittances of the price (out of the total contract price) payable to ‘HPI’ have been made under RBI approval, after compliance with the attendant formalities - including those under the tax and other applicable law (s).
For a narration/account of the other actual facts and circumstances, - though apparently incomplete, suggest looking through the ORDER.
5. PROVISION(s) OF THE IT ACT (of relevance herein)
“Charge of tax WHERE SHARES OF MEMBERS IN ASSOCIATION OF PERSONS ... unknown, etc.
Sec 167 B (1)
(1) WHERE THE INDIVIDUAL SHARES OF THE MEMBERS of an association of persons or .... in the whole or any part of the income of such association ..... ARE INDETERMINATE OR UNKNOWN, tax shall be charged on the total income of the association or body at the maximum marginal rate.
Provided that, where the total income of any member of such association or body is CHARGEABLE TO TAX at a rate which is higher than the maximum marginal rate, tax shall be charged on the total income of the association or body at such higher rate.
To add, the adverse view of the AO, has been upheld by the CIT (A) and also by the ITAT.
(FONT for special focus on- for an independent application of mind)
In the opinion of an Advocate, the author of the Article posted @ https://taxguru.in/income-tax/taxtreatment-share-company-income-aop.html
Sec 167 B could, in its terms, conceivably have no application to an AOP in which its constituent- members are ‘companies’. For the grounds and reasoning on which he has founded his opinion, if so interested, suggest to usefully go through that Article.
6. Own Additional Observations and Independent View Points:
A.) In terms of Sec 167 B (1), that has no application to a consortium of the kind in the instant case (CCCL) so as to be caught with its mischief, for more than one reason (in addition to those covered in the above referred lawyer’s Article) :
What is envisaged by the provision, - in order that to be invoked, - is that there must firstly be a pooling of profits, and then, a sharing of such profits.
In the case of a consortium of the type herein, income /profits accrue, even at the first instance, in the name/ favour of its individual constituents; also is/ are received by the individual constituents.
For a better appreciation of the above point, comparison of a partnership firm is a must; should help.
B. According to the legal opinion referred to herein- before, in the case of a consortium constituted by companies, sec 167 B has no application; therefore, cannot be invoked.
Premised so, and on a stronger footing, it could be urged that the provision cannot be rightly invoked in CCCL’s case, in which one of its constituent members is a foreign company.
To dilate: By reason of additionally invoking the Proviso to sec 167 B, - in own view wrongly so, the total income of the consortium gets taxed, in entirety, again wrongly, at the rate of tax applicable to the foreign company. Obviously that is an unintended and strongly objectionable/ perverse consequence; in that, not only the foreign company’s but also the income /profits of the domestic company have to suffer tax at the otherwise inapplicable higher rate of tax.
C. India has a comprehensive tax treaty (DTAA) with Canada , in force
( TEXT > INDO- CANADA TREATY)
The implications thereof, in general, are or relevance ; in particular, of the following Articles:
ARTICLE 7
BUSINESS PROFITS
ARTICLE 12
(ROYALTIES AND FEES FOR TECHNICAL SERVICES)
ARTICLE 23
ELIMINATION OF DOUBLE TAXATION
ARTICLE 24
NON-DISCRIMINATION
In this context, a reference has to be made to a connected provision in the IT Act. Reference is to the Explanation 1 under sec 90A lately inserted. Attention needs to be drawn also to the fact that in the case of Chohung Bank vs Deputy Director of Income-tax ( Report here > https://indiankanoon.org/doc/1675721/) the plea against the levy of tax on a foreign company at a higher ‘rate of tax’ than that applicable to a domestic company , on the ground of ‘discrimination’ came to be turned down. So far there seems to be no update in the matter.
EPILOGUE
1. The stakes involved in CCCL case are quite substantial. Further, on the stated premise that the dispute has been decided by the authorities not in proper light as expected of, there is every possibility of the dispute being taken up in further proceedings.
So far as one is aware, there has been no similar instance, same as CCCL case, in which related issues have been taken on and judicially / judiciously decided. If so, in the assessment and appeal proceedings in other similar cases, if were pending at any stage or otherwise, the Input supplied herein above, may be of useful guidance.
2. The rest of the related points of issue/ of contention, etc., arising out of the ORDER (in re. CCCl case) but not covered herein will require a separate study
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