Joint Venture is taxable @ 41 per cent as Association of persons: Advance Ruling

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Joint Venture is taxable @ 41 per cent as Association of persons: Advance Ruling

AIT News Network

NEW DELHI. Authority for Advance Rulings vide a recent ruling AIT-2008-260-AAR affecting tax liability of Joint Ventures has ruled that when all the partners of Joint Venture have joined in for common purpose on their own volition to produce income which is shared in certain ratio; the Joint Venture has to be treated as an association of persons (A.O.P.) in consonance with section 2(31)(v) read with the Explanation to section 2 and liable to be assessed as such under the Income-tax Act. The Joint Venture is to be taxed in the status of an association of persons @ 41% net basis.

The applicant, M/s. Geoconsult ZT GMBH , a company, incorporated in Austria, having its registered office at Austria, formed a joint venture (in short J.V.) with two Indian companies namely (a) M/s Rites Ltd. India, registered in Delhi and (b)M/s. Secon Pvt. Ltd.India, registered at Bangalore. This joint venture is specialized in providing project consultancy services. Further, Himachal Pradesh Road and Other Infrastructure Development Corporation Ltd.(in short HPRIDC) has awarded a contract to the applicant, to provide Consultancy services for Phase I & Phase II for the development of seven tunnels in Shimla as well as in other areas of Himachal Pradesh to carry out the implementation of the aforesaid work. The applicant, as per the averment, renders almost all the services from Austria and in order to coordinate with other members of the joint venture, an engineer has been deputed who undertakes periodical site visits. The applicant states that it has neither a ‘fixed place of business nor an office’ in India. It does not also perform any substantial activities in India. The employees are also not deputed in India for a considerable length of time. The applicant, as contended, does not have a ‘permanent establishment’(P.E.) in India within the meaning of Article 5 of Double Taxation Avoidance Agreement (DTAA) between India and Austria. The income received by the J.V. for the services performed in connection with the agreement fall within the term ‘fees for technical services’ and is, therefore, subject to tax in India in accordance with Article 12 of the DTAA between India and Austria.

The advance ruling was given on the question as follows:-

(i) Whether, in the factual as well as the legal matrix, the Joint Venture can be treated as an association of persons (A.O.P.) in consonance with section 2(31)(v) read with the Explanation to section 2 of the Act and liable to be assessed as such under the Income-tax Act?

Authority held that the crystallized Judicial view is that the essentials of an association of persons (AOP) are the following :

i) Two or more persons

ii) Voluntary combinations

iii) A common purpose or common action with object to produce profit or gains¹. However, the object to produce profit or gain is no longer a sine qua non with the insertion of the Explanation as discussed above.

iv) Combination in Joint Enterprise

v) Some kind of scheme for common management

All the partners of J.V. have joined in for common purpose on their own volition to produce income which is shared in certain ratio. The applicant’s plea that the payments from the client get credited in the respective Bank accounts of the J.V. members will not be of much help to the applicant, because it is the J.V. which earns the income in the wake of contract.

The J.V. constitutes an ‘association of persons’ in consonance with section 2(31)(v) read with Explanation thereto. The J.V. is to be taxed in the status of an association of persons @ 41% net basis.

( Click here for full text of Ruling AIT-2008-260-AAR )

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