Suhas C. Sen, J. (Chairman).:— The applicant, Van Oord A'CZ, BV (VOACZ), is a company incorporated in the Netherlands, having its registered office at 2, Jan Blankenweg, 4207, HN Gorinchem, P.O Box No. 458, 4200 AL Gorinchem, the Netherlands. The applicant is engaged in the business of dredging and marine contractors. The board of directors manages the business of the applicant. All the board members are non-resident foreign nationals. The control and management of the affairs of the company is situated wholly outside India,

2. In the year 1996, Chennai Port Trust floated a tender for the Breakwater Construction at Ennore Port, the contract known as Ennore Coal Port Project-ECPP/C4. VOACZ possesses technical knowledge and capabilities to perform a part of the work. It participated in the said contract in joint venture with an Indian company known as Hindustan Construction Company Ltd. (HCC). The purpose of the agreement as stated in clause 1.1 is that VOACZ and H.C.C would associate themselves in an unincorporated joint venture in the form of consortium, the sole object of which was to fulfil the obligations of the contract. Article 23 defines the relationship of the parties as “the relationship of the parties shall be that of an unincorporated association formed for the purposes of collaborating in respect of the contract. Each of the parties expressly agrees that it is not their intention through the joint venture to carry on business in common with the other parties with a view to profit and that it is their intention to utilise the joint venture safely for the better co-operation of their relationships with the employer and the division of the works and gross income arising under the contract. Each party shall bear its own losses and retain all profits arising from the performance of its requisite works package. Nothing in this agreement shall be deemed to give rise to a partnership between the parties or to any contract for services between the parties and each of the parties undertakes to use all reasonable endeavours not to do any act or thing which would cause such a relationship to arise.” Thus, the joint venture agreement specifically provides that each party shall bear its own losses and retain all profits. Therefore, there would be no sharing of the profits between the two parties. Both the parties have decided the work each party shall carry out. The total price of the contract is Rs. 2,62,01,03,120 out of which the applicant's share of work is for Rs. 44,52,78,920, which is about 17 per cent, of the total price. It is submitted on behalf of the applicant that the association was not incorporated to earn profit but the main objective was to co-ordinate for the completion of the contract.

3. The contract was awarded on August 22, 1997. The contract work is expected to be completed in July 2000. The scope of works as per the contract is stated in clauses 1201.1(iv) and 1201.2 The works to be executed under this contract form part of the Ennore Coal Port Project in the State of Tamil Nadu, India. The proposed port is situated on the Coramandel coast, approximately 20 kilometers north of Madras, immediately north of the North Madras Thermal Power Station (NMTPS), which is on the site of the former Ennore village. The primary purpose of the new port is for the importation of coal for the NMTPS and other power stations within Tamil Nadu.

4. The project comprises a number of construction contracts, including:

(iv) Breakwater Construction (Contract ECPP/C4), construction of two main port breakwater of rubble mound type with concrete armour units.

5. Clause 1201.2 Scope of works:

The works to be executed under this contract comprise:

“(i) construction of two rubble mound type breakwaters of approximate total length 4 km. in water depths up to 12 m CD, partly with accro-pode armouring units including;

(ii) dredging and disposal offshore of loose sand and soft clay material beneath of the area on which the breakwaters are to be constructed, to depths between—15 and 16 m CD;

(iii) replacement of dredged material with sand dredged from a marine borrow area, including compaction of sand;

(iv) dumping and placing rock of various grades, supplied by the Madras Port Trust to a rock-stock-pile area within the port site, in the breakwaters using waterborne and land based equipment;

(v) casting (in mass concrete) and placing on the breakwaters accro-pode armour units up to 15 tonnes in weight;

(vi) casting (in mass and reinforced concrete) an access road on the area of the breakwaters;

(vii) dredging and disposal offshore of loose sand and soft to medium stiff clay material to a depth of—15 m CD beneath part of the area in which a coal wharf is to be constructed by others;

(viii) construction of slope protection on filled and dredged slopes to depths of—15m CD within the port basin, using rock supplied by the Madras Port Trust to a rock stock-pile area within the port site;

(ix) provision and maintenance of site offices for the engineer.”

6. The applicant opened a temporary project office in India to execute their part of work and obtained permission from the Reserve Bank of India, Chennai, to open a project office. The applicant has deployed from abroad dredgers, survey equipment, boats, computers, technical people and other relevant plant and machinery required for the execution of the contract. The applicant has made his own arrangement for the execution of work independent from that of HCC. There is no control and connection between the work done by the applicant and HCC. Each party will have to bear its losses and retain its profits.

7. The case of the applicant is that no association of persons came into existence by the joint venture. Therefore, in view of these facts, income of each party shall be assessed separately, and no assessment can be made in the status of “association of persons”. The applicant should be assessed to Income-Tax in respect of profit earned from work done only by it separately and, independent of income/loss of HCC.

8. The applicant has applied for an advance ruling from this Authority on the following questions:

“1. Whether, on the facts and in the circumstances of the case, the joint venture constitutes an association of persons within the meaning of section 2(31)(v) so as to become liable to tax under the Income-Tax Act, 1961, or each party of the joint venture is liable to tax on its own profits?

2. Having regard to the terms of the joint venture agreement and scope of work to be carried out by each party to the joint venture and the mode of remuneration charged, whether profit earned by the applicant will be assessed in its hands under section 28 or excluded from its total income under section 86 read with section 167B?

3. Whether depreciation allowance for the assessment year 1998-2000 will be granted on dredgers, boats, equipment, computers and other plant and machinery deployed for the execution of the contract, on the basis of cost of acquisition, since the said assets were not put to use in India any time before and no depreciation is ‘actually allowed’ under the Income-Tax Act, 1961?

4. Whether repairs and maintenance expenses incurred before commencement of the contract and to be incurred immediately after completion of the contract on dry docking, etc., but relating to the execution of the contract, shall be allowed as deduction or could be capitalised on the cost of equipment, if depreciation is held allowable?

5. Whether standing charges for the assets specifically taken on hire/lease for the Indian contract/sub-contract will be allowed as deduction in computing taxable income payable for the period, though the assets are required to be kept or remain idle, though ready for use, during the execution of the contract?

6. Whether writing off of obsolete assets shall be allowed as deduction?

7. Will the applicant get credit for the tax deducted at source if any, in the year of completion of contract when full profits, if taxable, will be offered for tax under section 199, without treating the tax deducted earlier as liable to tax as income received under section 198.

8. Without prejudice to the above whether on the facts and in the circumstances, the rationale behind the provisions of section 44BBB would be applicable in the case of the applicant and a sum equal to ten per cent, of the contract amount as and when paid shall be deemed to be the profits and gains chargeable under the head ‘Profits and gains of business or profession’?

9. Without prejudice to the above, whether on the facts and in the circumstances, the amount of taxable profit could be determined by AAR at a fixed percentage of the gross receipts based on the applicant's past profitability statements and other relevant factors, either assessable in the year of completion of the contract or yearwise?”

9. So far as questions Nos. 1 and 2 are concerned the parties have specifically ruled out constitution of any partnership between them. There is no sharing of profits or loss. They have specifically provided in the agreement that each party will bear its own loss and retain its profits as and when such profits or loss arise. Having regard to the agreement, we are of the view that the applicant cannot be treated as a partnership which can only be created by an agreement. Nor can it be treated as an association of persons. In order to constitute an association of persons there will have to be a common purpose or common action and the object of the association must be to produce income jointly. It is not enough that the persons receive the income jointly.

10. In the instant case, each of the two parties has agreed to bear its own loss or retain its own profit separately. Both have agreed to execute the job together for better co-operation in their relationship with the Chennai Port Trust. The intention was not to carry out any business in common, only a part of the job will be done by VOACZ according to its technical skill and, capability. The other part of the contract will be executed by the HCC. The total value of the contract was Rs. 2,62,01,03,120. The applicant's share of work was valued at Rs. 44,52,78,920 (17% of the total value). The association with the HCC was not with the object of earning this income but for coordination in executing the contract so that the HCC could also make its own profit. The HCC's work and income arising therefrom was quite separate and independent of the applicant's work and income. If the costs incurred by the HCC or the applicant were more than their income, each party will have to bear its loss without any adjustment from the other party. The association of the petitioner-company with the HCC was undoubtedly for mutual benefit but such association will not make them a single assessable unit and liable to tax as an association of persons. For example, a building contractor may associate with a plumber and an electrician to execute a building project. All these persons are driven by profit-making motive. But that by itself will not make the three persons liable to be taxed as an association of persons if each one has a designated and independent role to play in the building project. In the instant case, the applicant has stated that the applicant has made its own arrangement for execution of work independent from that of the HCC. There is no control or connection between the work done by the applicant and the HCC.

11. On the facts as stated hereinabove, the applicant and the HCC cannot be treated as an association of persons for the purpose of levy of Income-Tax. The applicant will be liable to be taxed as a separate and independent entity. Question No. 1 is answered accordingly.

12. In view of the answer given to question No. 1, the second question has become academic and need not be answered at all.

13. Questions Nos. 3 to 9 raise issues which have been discussed and substantially answered in the case of N.V Jan De Nul v. CIT, [1999] 236 ITR 489 (AAR) (A.A.R No. 427 of 1998). Dredgers, boats, equipment, computers and other plant and machinery deployed by the applicant for the first time in India and on which no depreciation has been “actually allowed” under the Income-Tax Act, 1961, will prima facie be entitled to depreciation allowance. However, it is not necessary to answer this question and the other questions raised separately and independently. The crucial question raised is question No. 8. On similar facts, the case of N.V Jan De Nul v. CIT, [1999] 236 ITR 489 (AAR), was examined by this Authority at length. This Authority took the view that the assessment should be done in a case like this taking resort to the principle underlying section 44BBB which provides:

“44BBB. Notwithstanding anything to the contrary contained in sections 28 to 44AA, in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf and financed under any international aid programme, a sum equal to ten per cent, of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head ‘Profits and gains of business or profession’.”

14. This section literally applies only to a foreign company engaged in construction and other specified businesses in connection with a power project financed under an international aid programme. A sum equal to ten per cent, of the amount payable to the assessee is treated as its profits and gains of business assessable under section 28 of the Income-Tax Act. In other words, the assessee is taxed on ten per cent, of the entire amount received by it under the contract without any deduction or allowance permissible under Chapter IV-D of the Income-Tax Act as provided by section 29. It will not have to go through the procedure of assessment of business income under sections 30 to 43D. This procedure is of advantage also to the Department. Ten per cent, of the amount payable to the assessee whether in India or abroad is straightaway taken as its deemed profit. No deduction or allowance or exemption from this income is allowable at all. Having regard to the facts and circumstances of the case, we are of the view that the applicant should be taxed in accordance with the principle embedded in section 44BBB and ten per cent, of the amount receivable by it under the contract whether in India or elsewhere should be taken as its profits and gains of business under section 28 without any deduction or allowance or exemption. Therefore, in view of the discussions hereinabove, we answer the questions raised in the following manner:

Question No. 1 is answered by saying that the applicant is liable to be assessed on its own profits separately and not as an association of persons.

Question No. 2: In view of the answer given in question No. 1, question No. 2 need not be answered.

Question No. 8 is answered in the affirmative and in favour of the applicant.

15. In view of the answer given to question No. 8, questions Nos. 3 to 7 and 9 need not be answered separately and specifically.