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Delhi High Court pronounces significant ruling on taxability of consortium performing turnkey EPC projects
The Delhi High Court (HC) has pronounced an important ruling in the case of Linde AG, holding that a consortium formed by non-residents to undertake a turnkey project does not constitute an Association of Persons (AOP) as there is no ‘real and substantial co-ordination /association’ among the consortium participants. Taxand India provides the background to this ruling and why it should be of particular interest to the global construction services industry.
ONGC Petro Additions Limited (OPAL) floated a tender inviting bids for executing work and handing over of plant for the Dual Feed Cracker and Associated Units of Dahej Petrochemical Complex on a turnkey basis. Linde AG, along with Samsung Engineering Company entered into a Memorandum of Understanding (MoU) to bid for the said tender as a consortium. The MoU was followed by an Internal Consortium Agreement (ICA) executed between Linde AG and Samsung spelling out the inter se responsibility of each member. The proposal submitted by Linde AG and Samsung was accepted by OPAL pursuant to which the Consortium entered into a definitive agreement with OPAL. Linde AG filed an application before the Authority for Advance Rulngs seeking a ruling on whether they, with Samsung, could be taxed as an AOP and also regarding their taxability in India in relation to offshore services and onshore services provided by Linde AG.
The AAR observed that notification of award by OPAL was in the name of the Consortium and that Linde AG and Samsung had joint and several liability towards OPAL. In view of the same the AAR held that Linde AG and Samsung constituted an AOP. In relation to consideration receivable by Linde AG for offshore supply services, the AAR concluded that the same was liable to tax in India citing indivisibility of contract and existence of AOP. Aggrieved by ruling of the AAR, Linde AG filed a writ petition before the HC.
AOP is constituted when 2 or more persons join together for common purpose /action and there is a joint management /action by such persons. However in absence of sufficient joint participation in the common enterprise, mere co-operation between 2 or more persons may not result in an AOP. The HC held that facts of this case do not indicate existence of sufficient degree of joint action between Linde AG and Samsung either in execution or in management of the project and therefore Linde AG and Samsung do not constitute an AOP. In terms of Linde AG's taxability in India, HC held that Linde AG had a PE in India at the time when offshore services were rendered and if such services were attributable to the PE, the same shall be taxed in India.
Also published in Thomson Reuters' Taxnet Pro, 05 June 2014
The HC ruling comes as a huge reprieve for construction services industry, especially to those contractors and project owners who have been constrained in the past while bidding as consortium due to overhang of AOP risk and tax inefficiencies resulting from such determination. Conflicting rulings of the AAR in the past on identical questions raised before the HC in the present case, had only worsened the situation. The ruling of the HC is very detailed and will serve as a useful precedent in determination of taxability of turnkey contract to be bid by foreign contractors, especially in cases where the bid is submitted by a consortium of more than one contractor. It will be interesting to watch whether the Revenue would challenge the HC ruling before the Apex Court.