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Consortiums find it easy to bid for projects. However, they need to be clear about the responsibilities and related taxation issues, says Satish Aggarwal, partner (infrastructure, real estate & government, tax and regulatory services) Ernst & Young

The past few years have witnessed substantial economic growth in India and progress towards infrastructure development, even though in the recent past, this sector like most others has been hard hit by the global economic slowdown.

Generally, infrastructure and industrial construction projects are awarded to engineering, procurement & construction (EPC) contractors. Due to multiple skills required in EPC contracts and high risk on account of size of projects, typically various EPC contractors collectively bid for a contract as a consortium.

A consortium is an association of two or more individuals, companies, organisations or governments (or any combination of these entities) with the objective of participating in a common activity for achieving a common goal.

The consortium appoints one of its members as the lead member who coordinates with the project owner, while other members execute the work they specialise in. However, there are certain issues mainly related to taxations that consortiums need to keep in mind that could arise in EPC contracts.

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How to get them

The tax authorities are now taking a view that such consortiums should be taxed as Association of Persons (AOP). In other words, income earned by consortium should be taxed in its hands and not in hands of each member individually. The term AOP is not defined under tax law. However, as per judicial precedents, mainly three conditions need to be met for a consortium to be considered an AOP and they are:

1. Common scope of work,
2. Profit sharing
3. Joint and several liabilities

The Authority for Advance Ruling (AAR) considered the matter in case of Van Oord Acz, BV [(2001) 248 ITR 399] and concluded that the consortium could not be considered as an AOP.

The AAR relied on the Consortium Agreement as primary evidence and observed that there was no intention to carry on business in common with a view to earn profits. The parties formed the consortium solely for coordination in executing the contract. Sharing of profits or losses was not an objective of the consortium.

On the other hand, in a recent case of Geo Consult ZT Gmbh [AAR No. 745/2007], the AAR has held that the consortium results in an AOP even though consortium members were sharing revenue and not profits.

AAR emphasized that the preamble of Consortium Agreement shows that the intention of the parties was to collaborate for all project work. This project work is to be managed on joint basis and members are to assist each other in completion of the work.

It should be noted, that unlike court orders, rulings given by the AAR do not set a precedent. These are binding only on the applicant which has applied to the AAR in respect of the transaction covered in the application. These are also binding on the tax authorities as regards the transaction covered in the said application. However, rulings given by the AAR do have a persuasive value in other similar cases, during the course of a tax assessment.

In order to determine whether a consortium constitutes an AOP, the tax authorities typically scrutinise the manner in which the consortium operates with the project owner. The emphasis is on the extent of coordination between members such as whether one member provides overall guarantee for the project, whether the scope of work of members overlap and so on.

An important aspect which merits attention is business arrangement between consortium members. It is important to analyse whether overall coordination is only for providing single output, overall guarantee by one member is backed by counter guarantees from other members, etc. To make a fair assessment of whether a consortium should be taxed as AOP, detailed analysis is required on the above mentioned aspects.

This issue merits significance as an AOP is considered to be a tax resident of India, unless, its control and management is situated wholly outside India. In case of an EPC contract, an AOP would typically be considered to be a resident of India as partial control and management of an AOP would be in India.