Clarification regarding taxability of consortium members
Circular No. 7/2016 was issued by the Central Board of Direct Taxes on 7 March 2016. Its subject is Clarification regarding taxability of consortium members.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Sets out when a consortium executing an EPC or turnkey contract need not be treated as an association of persons. A consortium may not be treated as an association of persons where each member is independently responsible for its own part of the work through its own resources and bears the risk of that scope, with a clear demarcation of work and costs and each member incurring expenditure only in its own area; each member earns profit or bears loss strictly on its own scope, with any sharing of contract price at gross level only for billing convenience; the men and material for each area of work are under the risk and control of the member concerned; and control and management are not unified, common management existing only for inter-se coordination for administrative convenience. Other factors may also justify the same conclusion on the facts of a case.
Tax authorities were treating such consortia as associations of persons while taxpayers said otherwise, and with several conflicting rulings on EPC and turnkey contracts the Board acted to avoid disputes and bring consistency of approach.
| Under the 1961 Act | Now |
|---|---|
| s.92A | s.162 |
Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes Circular No. 7/2016 North Block, New Delhi, the 11th of March, 2016 Subject: Clarification regarding taxability of consortium members- reg.- A consortium of contractors is often formed to implement large infrastructure projects, particularly in Engineering, Procurement and Construction ('EPC') contracts and Turnkey Projects, The tax authorities, in many cases have taken a position that such a consortium constitutes an Association of Persons (,AOP') i,e, a separate entity for charging tax, The claim of taxpayers, on the other hand, is contrary to this view, This has led to tax disputes particularly in those cases where each member of the consortium, although jointly and severally liable to the contractee, has a clear distinction and role in scope of work, responsibilities and liabilities of the consortium members. 2, The term AOP has not been specifically defined in the Income-tax Act, 1961 ('Act'). The issue as to what would constitute an AOP was considered by the Apex Court in some cases. Although certain guidelines were prescribed in this regard , the Court opined that there is no formula of universal application so as to conclusively decide the existence of an AOP and it would rather depend upon the particular facts and circumstances of a case. In the specific context of the EPC contracts/Turnkey projects, there are several contrary ruling of various Courts on what constitutes an AOP. 3. The matter has been examined. With a view to avoid tax-disputes and to have consistency in approach while handling these cases, the Board has decided that a consortium arrangement for executing EPC/Turnkey contracts which has the following attributes may not be treated as an AOP: a. each member is independently responsible for executing its part of work through its own resources and also bears the risk of its scope of work i.e. there is a clear demarcation in the work and costs between the consortium members and each member incurs expenditure only in its specified area of work; b. each member earns profit or incurs losses, based on performance of the contract falling strictly within its scope of work. However, consortium members may share contract price at gross level only to facilitate convenience in billing; c. the men and materials used for any area of work are under the risk and control of respective consortium members; d. the control and management of the consortium is not unified and common management is only for the inter-se coordination between the consortium members for administrative convenience; 4. There may be other additional factors also which may justify that consortium is not an AOP and the same shall depend upon the specific facts and circumstances of a particular case, which need to be taken into consideration while taking a view in the matter. 5. It is further clarified that this Circular shall not be applicable in cases where all or some of the members of the consortium are Associated Enterprises within the meaning of section 92A of the Act. In such cases , the Assessing Officer will decide whether an AOP is formed or not keeping in view the relevant provisions of the Act and judicial jurisprudence on this issue. 6. The above may be brought to the notice of all for necessary compliance. 7. Hindi version to follow. (F. No. 225/2/2016/ITA.II) Copy to: 1. Chairman, CBDT and all Members. CBDT 2. All Pc CCsIT/Pr. DsGIT 3. PPS to Revenue Secretary 4. All JSlCslT, CBDT (Rohit Garg) Deputy Secretary to the Government of India 5. CIT(MC&TP). CBDT with kind request for issuing suitable Press Release 6. ADG(PR,PP & Ol) with request for placing on official handle of the department 7. Add!. CIT, Data base Cell for uploading on Departmental Website 8. Web manager for uploading on incometaxindia.gov.in & placing in public domain 9. ITCC. Central Board of Direct Taxes (3 copies) 10. Guard file (Rohit Garg) Deputy Secretary to the Government of India
You meet it where an Assessing Officer proposes to assess a consortium as a separate association of persons on an EPC or turnkey contract, or in the withholding position on payments made to consortium members.
Two contractors take a turnkey power project, one supplying offshore equipment and the other doing onshore erection, each with its own scope, costs, men and materials, and each bearing its own profit or loss, with the contractee billed a single gross price for convenience. On these attributes the consortium may not be treated as an association of persons. If the two are associated enterprises under section 92A, the circular does not apply and the Assessing Officer decides the question independently.
It mentions. Circular No. 7/2016
Source: the Income Tax Department’s own published text — its page for this instrument.