ITO, NEW DELHI vs. M/S. ORIENTAL STRUCTURAL ENGINEERS PVT. LTD., NEW DELHI

Date of Hearing : 21-06-2016 Date of Order : 01-07-2016

ORDER PER H.S. SIDHU : JM The Revenue has filed these appeals against the impugned order dated 24/1/2014 & 22.1.2014 respectively passed by the Ld. Commissioner of Income Tax (Appeals- XXVIII), New Delhi relevant for the assessment year 2010-11.

Since the issues involved in both the appeals are common and identical, hence, were heard together and are being disposed of by this common order for the sake of convenience, by dealing under:-

“1. The Ld. CIT(A) erred in not considering the question of whether a proportion of the project receipts, commensurate with the risk/performance obligations, should be attributed to the Assessee JV which had been awarded the tender for the project -2027/Del/2014 A.Y. 2010-11 and undertook significant risks and responsibilities for the completion of the project and whether it is allowable for the Assessee JV to divert the entire receipts to its JV Partner's by designing a sub contract to that effect?

2. The Ld. CITCA) erred in relying upon the order

of the Hon'ble ITAT Delhi in the case of the Assessee,

Oriental Structural Engineers' Private Limited -

Gammon India Pvt. Ltd. JV for A.Y. 2004-05 and 2005-06 without appreciating that the issue involved in those Assessment years' related to disallowance u/s 40A(2)(b) of IT Act while the question under consideration in A.Y. 2010-11 was attribution of income in the hands of assessee JV in lieu of risks and responsibilities under taken by it is respect of the project.

3. The appellant craves leave to add, amend or modify

any/all the ground of appeal before or during the course of the appeal.”

3. The grounds raised in read as under:- -2027/Del/2014 A.Y. 2010-11

“1. The Ld. CIT(A) erred in not considering the question of whether a proportion of the project receipts, commensurate with the risk/performance obligations, should be attributed to the Assessee JV which had been awarded the tender for the project and undertook significant risks and responsibilities for the completion of the project and whether it is allowable for the Assessee JV to divert the entire receipts to its JV Partner's by designing a sub contract to that effect?

of the Hon'ble ITAT Delhi in the case of the Assessee,

Oriental Structural Engineers' Private Limited -

Gammon India Pvt. Ltd. JV for A.Y. 2004-05 and 2005-06 without appreciating that the issue involved in those Assessment years' related to disallowance u/s 40A(2)(b) of IT Act while the question under consideration in A.Y. 2010-11 was attribution of income in the hands of assessee JV in lieu of risks and responsibilities under taken by it is respect of the project.

-2027/Del/2014 A.Y. 2010-11

any/all the ground of appeal before or during the course of the appeal.”

7. On the contrary, Ld. A.R. of the assessee relied upon the order of the Ld. CIT(A) and stated that the Ld. CIT(A) has passed a well reasoned order which may be upheld. He further draw our attention by filing a copy of the Hon’ble High Court of Delhi decision in assessee’s own case for the assessment year 2009-10 title as CIT vs. (1) Oriental Structural Engineers P Ltd. and KMC Construction P. ltd. – JV & (2) Oriental Structural Engineers P. Ltd. and Common India Ltd. –JV (2015) 374 ITR 35 (Delhi) wherein, the similar issue has been decided by the Hon’ble High Court of Delhi in favour of the Assessee and against the Revenue.

“5.2 I have carefully considered the assessment order and submissions thereof. The facts of the case as per assessment order are that the assessee is a joint venture between M/s. Oriental Structural Engineers Pvt. Ltd and M/s. KMC Construction Ltd which was formed to undertake project awarded by NHAI. The assessee has shown gross receipt of Rs.77,80,36,999/- and has debited an amount of Rs.76,24,67,709/- towards payment. Apart from this the JV has paid works tax of Rs.1,55,69,289/- and other small expenses like audit fee, bank charges etc. The profit has been declared at NIL. The Assessing Officer issued a show cause to the assessee as to why a reasonable proportion of the gross receipt should not be held as attributable to the risk and responsibility incurred by it. The assessee replied as under:-.

-2027/Del/2014 A.Y. 2010-11

• The JV was formed by the partners as a special purpose vehicle for obtaining contracts from NHAl • The work carried out by each of the partner is clearly divided as per their field of expertise. • All resources and manpower for execution of the project is under taken by the partners. • Both the partners are taxpaying entities and profitable concerns and therefore assessment of income in their hands causes no loss to the revenue. • The assessee relied on the decision of the Hon'ble Delhi High Court in assessee's own case for A.Y. 2004-05 and 2005-06 which was upheld by the Apex Court. The Assessing Officer did not accept the claim of the assessee as ~ The contract was entered into by the NHAI with the JV ~ the obligation of performance of the contract and of any litigation was with the JV ~ The tender has been awarded to the JV and the TDS has been claimed by the JV ~ As per Clause B of the Sub-contract agreement the JV has complete control over the Managerial and Technical supervision in the matter of execution of the project. ~ The financial performance guarantee and the credit risk for execution of the contract is the responsibility of the JV. ~ The payment by the Government is made to the JV. -2027/Del/2014 A.Y. 2010-11 ~ All the obligations and responsibility of the JV are mentioned in the Clauses of the Bid document. (Para 11 of the assessment order ). The Assessing Officer concluded that the risk and reward are inter connected, the entire risk is of the JV, and the JV is a separate entity brought into existence by the respective partners, having its own PAN, Bank account, and separate taxable entity therefore, the JV must have earned income. The Assessing Officer on the basis of various judicial pronouncements cited in the order computed the profit of the assessee at 5% of the total contractual receipts.

During appellate proceedings the appellant reiterated its submissions that the Joint Venture was incorporated not to earn profit but to co-ordinate for completion of the contract. Both the companies entering into the Joint Venture were independent and were separately paying taxes on their individual profits.

5.3 Joint Ventures are generally formed as major resources projects generally require particular skills sets, large scale coordination and - ideally - experience in -2027/Del/2014 A.Y. 2010-11 similar projects. Often, parties interested in a particular project will come together to form a joint venture. Joint ventures enable participants to configure a specialist project team with the requisite skills and technical expertise, and share costs, risks and financial capabilities, which they may not otherwise be able to offer separately.

A joint venture (JV} can structured in two ways - as an unincorporated joint venture (UJV) or - an incorporated joint venture (IJV).

The fundamental difference between the two is that an IJV creates a separate legal entity and the UJV does not. As an UJV does not create a separate legal entity, the participants try and govern their relationship using the terms of an unincorporated joint venture agreement. Joint ventures also try to distinguish their relationship from partnerships so as to avoid the application of the Partnership Acts. The main advantage of a JV over a partnership is that each partner is jointly and severally liable for the debts of the partnership and for the acts of other partners done in the course of the partnership, whereas joint venture participants will stipulate in their -2027/Del/2014 A.Y. 2010-11 agreement that their liability for the debts of the joint venture is several. Joint venture participants may however be subject to joint liability in some circumstances, including tortious liability to the public for acts or omissions by the manager of joint venture operations.

The various Partnership Acts define partnership as "the relationship which exists between persons carrying on a business in common with a view of profit". Participants seek to establish that their arrangements do not fall within this definition (or within the definition of partnership for the purposes of the Income Tax Act (a) not selling product or receiving income jointly, so that there is no joint profit and (b) otherwise carrying on business severally rather than jointly, such as engaging in separate tax and accounting treatment of their interest in the joint venture; stipulating that their liability to third parties is several rather than joint; and severally appointing the manager of the joint venture operations as agent. The participants will also not have rights to bind each other, as is the case with partners. -2027/Del/2014 A.Y. 2010-11 In the light of the above discussion it is seen that in the case of the appellant the following are the major points for consideration.

• The joint venture has complete control over management and technical supervision • The responsibility of the joint venture is clearly defined • The appellant has claimed that the responsibility of the joint venture is only on paper, however it cannot be disputed that as per the agreement the joint venture has right to carry out periodical review.

• The bank Guarantee is furnished by each joint venture partner for his share on behalf of the joint venture.

• The Joint Venture does not have any Staff, Plant & Machinery, Financial Resources or any other set up to execute the work but is paying works tax and service tax.

• The joint venture has the right to terminate the contract • Only the joint venture can communicate with the NHAI -2027/Del/2014 A.Y. 2010-11 • The bank account is operated by the joint venture .

• As per the sub contract agreement the financial responsibilities and participation of the two parties in the project is to the extent of 50% • The sub contractor is responsible for only the execution and timely completion of the project.

• The insurance cover is in the name of the JV, but the insurance premium is the liability of the sub contractor.

The JV is thus a separate tax entity which is responsible for all risk and responsibilities for execution of the contract. It has sub contracted the work to the two partners who are responsible for the execution of the contract. In this process the Assessing Officer has held that as a result of its contractual and legal liabilities it has to earn a reciprocal amount of income from the project.

In the case of the appellant it is to be seen as to whether it is a UJV, an unincorporated joint venture i.e. a type of business arrangement in which multiple entities come together using a contract as the basis for governing the collective relationship, but without creating some sort of corporation arrangement in order to pursue. The joint -2027/Del/2014 A.Y. 2010-11 venture. Or its relationship is more akin to partnership or is it an AOP wherein the joint assets have been deployed to earn profit. The issue under consideration is whether the appellant is to be assessed as an AOP i.e. is a separate taxable entity under section 2(31)(v) of the Income Tax Act. AOP is not defined under the Income Tax Act and whether or not a combination of persons or joint venture would give rise to AOP is to be determined by the facts of the case. In C.I.T. Vs. Indra Balakrishna (39)

I.T.R. 546 (Supreme Court) it was held that the word Associates means to come together for common purpose or common action. Association is one where there is an object to produce income or gains. When parties deployed their assets in joint enterprise with a view to make profit it constitutes an AOP. This ruling lays down the five requisites for an AOP, which are (a) there must be two or more persons, (b) they must voluntarily come together, (c) there must be a purpose of producing or earning income, (d) combination in joint venture; and (e) some kind of -2027/Del/2014 A.Y. 2010-11 Scheme for common management. However, explanation to Section 2(31) negates the object of deriving income, profits or gains as a requisites for being an AOP, The explanation to Section 2(31) is being reproduced below - Explanation.-For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains. Thus two entities would be deemed to be AOP even if they do not have a profit motive if other conditions are satisfied that is they come together for a common purpose or for a common action.

Further references is drawn to other similar cases of Van Oord Acz. BV (2001 248 1TR 399 AAR), Geoconsult ZT GmbH (2008 304 1TR 283 AAR), Indira Balkrishna (supra) wherein, while in the case of Geoconsult, the decision went in favour of the Revenue in holding that there was an AOP, in the other two cases, the decisions were in favour of the applicants. -2027/Del/2014 A.Y. 2010-11 While in Van Oord case though income was received jointly, there was no intention to carry out common business and the job was to be carried out by the parties on the basis of individual skills and capability. The parties agreed to execute the job together for better co-operation in their relationship with the principal. Though there was an element of mutual benefit but the agreement clearly laid the intent of the parties was not to be associated for common business and they agreed to bear profits and losses arising from the performance of their requisite contracts, thus the parties were not held to be single assessable unit and liable to be taxed as an AOP. However in case of Geoconsult the parties were jointly and severally liable for the work undertaken and it became a single assessable unit because of the structure of the agreement and the intent conveyed. In a similar case of Hyosung Corporation (2009 314 ITR 343 AAR) though because of the overall responsibility assumed by Hyosung there was no involvement in the Indian parties contract but there was lack of commonality of purpose, hence it was not held to be an AOP. -2027/Del/2014 A.Y. 2010-11 In the present case the Parties are sharing gross receipts. The intent of the parties is clearly to gain mutual benefit out of the association. There is a commonality of purpose but it was ring fenced by each ones obligations and rights in the contract as a whole. The intent and the object of joint venture conveys commingling of interest in as far as completion of the project and earning maximum profit out of it is concerned. The sub contract agreement shows that if there is any reduction/increase in work value of the sub contractor then that would be payable by the joint venture at 7.5% margin on reduced or increase value of work. ( Clause 2.3) As per Clause 3.1 the shortfall/surplus if any between the market price and the price fixed by the JV would be debited/credited to the JV account based on the quantity in interim payment certificate. This fact is also apparent from the perusal of the bank account which shows that the entire amount received from the NHAI has not been distributed to the two partners and part of the amount has been retained in the bank account of the Joint Venture. -2027/Del/2014 A.Y. 2010-11 From this it is apparent that the intent f the joint venture is to earn profit.

However, the Hon'ble' ITAT in 2004-05 vide its order dated 06.03.2009 upheld the decision of Commissioner of Income Tax(A) deleting the decision of the Assessing Officer on the basis that the JV was never meant to undertake works of its own. It was only a pass through vehicle to bid for the project considering the highly technical and specialized nature of work involved. The nature of work involves the execution of the contract by the members of JV directly which fact is also known to NHAI in the bidding process itself, we find that the assessee JV is only an entity for name sake i.e. to bid for the project but ultimately it is to be executed by the member of the JV due to their own expertise in the field relating to the project. In the circumstances it can be held that since the assessee was not to undertake any work but the work was to be executed by the JV partners, the amount for work executed was reasonable having -2027/Del/2014 A.Y. 2010-11 regard to the Fair: Market Value. The appeal of the revenue against the decision of the Hon'ble ITAT has been dismissed by the Hon'ble high Court vide their Judgment dated 11.02.2010 and the SLP has also been rejected by the Supreme Court.

The appellant has claimed that the order for assessment year 2009-10 estimating the profit at 5% of the total receipts has also been dismissed by ITAT-E Bench on 17.12.2013 following the decision of the Coordinate Bench of the Tribunal and findings of the Ld. CIT(A) stand upheld.

Respectfully following the decision of the ITAT in the appellant own case, the addition made by the AO is deleted.”

“11. In the present case too, the court is of the opinion that the consistent and concurring opinions of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal were that the joint venture was formed only to secure the contract, in terms of which the scope of each joint venture partner’s task was distinctly outlined. Further the entire work was split between the two joint venture partners; they completed the task, through sub- contracts and were responsible for the satisfaction of the NHAI. Therefore, applying the principles of the law declared in Linde AG, Linde Engineering Division, it is held that the Income Tax Appellate Tribunal did not fall into error of law, in holding that the joint venture an association of persons and liable to be taxed on that basis. The question of law farmed is accordingly answered in favour of the assessee and against the Revenue.” 9.1 In the background of the aforesaid discussions and respectfully following the precedents, as aforesaid, we are of the considered opinion that Ld. CIT(A) has passed a well reasoned order which does not need any interference on our part, hence, we uphold the same. Accordingly, the grounds raised by the -2027/Del/2014 A.Y. 2010-11 Revenue are decided in favour of the Assessee and against the Revenue.

Order pronounced in the Open Court on 01/07/2016.