ORDER
B.R Baskaran, Accountant Member. - These two appeals filed by the revenue are directed against the orders passed by Ld CIT (A) Visakhapatnam and they relate to the assessment years 2005-06 and 2006-07. Since both the appeals relate to the assessee and since one of the issues agitated in these two appeals is identical in nature, we are disposing these two appeals by this common order, for the sake of convenience.
2. The common issue in both the appeals relates to the income estimated by the AO towards sub contract commission. In A.Y 2005-06, the AO also made addition made u/s 40(a)( ia) of the Act. Since the Ld CIT (A) deleted both the additions, the revenue has filed these appeals assailing the decision of Ld CIT(A) on both the issues.
3. The facts of the case are discussed in brief. The assessee herein is a "Joint venture" formed by a company and a proprietary concern. M/s UAN Raju Constructions Ltd. (herein after "UANRCL) is the company registered under the Companies Act and M/s Vijay Nirman Company (herein after "VNC") is the proprietary concern. The name of the proprietor was not are available on record. M/s UANRCL is in the business of design, engineering and construction with specialization in Highways and Bridges. Similarly M/s VNC is in the business of Engineering and Contracting with specialization in Road and Highway Construction. The joint venture was formed in order to combine their respective individual resources of experience, know how, labour, finance, plant and equipment, since it would enable to participate in the tender process which would ultimately help in getting major contract works. The name of the Joint Venture has been coined as "U.A.N. Raju Construction - Vijay Nirman (JV)". The agreement was entered into on 20-10-2003 with the title "Joint Venture Partners Agreement". The members of the Joint venture were called as "Joint Venturers". The Joint venture obtained following contract work from M/s Konkan Railway Corporation and the same is also mentioned in the agreement under the "Definitions" part under the heading "Contract".
"Construction of Road over bridges in lieu of existing level crossings at (a) Gate No.:30/B at KM. 323/35 - 37 between stations "Simultala" and "Jasidih" (b) Gate No. 38 near Pakur Station on Eastern Railway in Jharkhand State (Package - VI).
However, the said contract was not executed jointly by both the parties. Instead, the total contract was divided between the two parties in an agreed ratio. In the accounts of the "Joint Venture", the gross receipts of the relevant accounting year were credited to the Profit & Loss A/c. The value of works allotted to both the members, which was equal to the gross receipts, was debited to the Profit & Loss A/c. Thus, no income was shown in the hands of the "Joint Venture". The assessee filed returns of income for both the years in the status of "Association of Persons", declaring NIL income. However, the Assessing Officer was of the view that the assessee-AOP should be treated as the main contractor and the members to whom the work was allotted should be treated as sub contractors. Accordingly, the AO opined that the assessee-AOP should have collected "Sub contract commission" from the sub-contractors, i.e. from both the members of the Joint Venture. The relevant observations recorded by the AO, in the assessment order relating to the A.Y 2005-06, are extracted below:
"As seen from the return of income filed by the assessee, though the entire receipts were credited to its profit and loss account, no income was offered at lease by way of commission on account of sub-contracts given to its members. The peculiar circumstances prevailing in this case give scope to hold that the transaction involved in this case is nothing but a sub-contract. In such circumstances the assessee-AOP ought to have declared a reasonable profit, being a separate entity, which is absent here. It is a general practice in the line of contract business that when the main contractor enters sub-contract with others, the main contractor gets commission at a prescribed rate on sub-contract which is to be disclosed as income of the former in the shape of sub-contract commission. The same logic will also apply to the transaction involved in the assessee case irrespective of the fact that the contracts were given to its own members. Evidently and apparently, the assessee AOP has not disclosed such sub-contract commission rather it distributed the entire contract receipts".
During the assessment proceedings relating to the A.Y 2005-06, the AO also referred the matter to the Addl. CIT, Range-1, Visakhapatnam seeking his directions u/s 144A of the Act. The Addl. CIT agreed with the view of the AO that there existed Main contractor - sub Contractor relationship between the joint venture-AOP and its members. He further observed that the sub-contract commission is normally at 2% of the contract receipts. The Addl. CIT noticed that the partners of the joint venture had shown a profit in the range of 13.3% to 18.71% in their respective hands. Before the Addl. CIT the assessee expressed its consent to adopt a rate of 0.5% towards sub contract commission. Hence, on a totality of facts, the Addl. CIT directed the AO to assess income in the hands of the AOP at 1% of the contract receipts. Accordingly, the AO computed the income of the AOP by treating 1% of the gross receipts as the income of the assessee-AOP by way of sub contract commission in both the years under consideration. The assessee-AOP had deducted TDS @ 1% u/s 194C(2) of the Act on major portion of the value of contract allotted to its members. However, in the A.Y. 2005-06, TDS was not deducted on a contract amount equivalent to Rs. 31,54,425/-. Hence the AO disallowed the said amount by invoking the provisions of sec. 40(a)(ia ) of the Act in the assessment year 2005-06.
4. In the appeal preferred by the assessee, the Ld CIT (A) deleted the income estimated towards sub contract commission, with following observations:
"The appellant joint venture is an assessable entity as found by the assessing officer. However, this assessable entity has not earned any income since entire work obtained by it has actually been executed by the two constituent members and they have earned the income. The question may arise as to the usefulness or existence of a assessable entity if it does not earn income and merely becomes a conduit for earning of income by others. The fact is that the purpose of this appellant joint venture coming into existence is only to win contracts and not to make any profit in this status. Profit motive was enshrined in the activities of the constituent members. The appellant joint venture was actually the de jure contractor and the constituent members were the de facto contractors who actually executed the works and undertook the responsibility of timely execution of the works. The appellant joint venture entrusted the contracted job to the constituent members in its entity for execution and therefore, the same cannot be termed as a sub-contract. In fact, the relationship between the appellant joint venture and the constituent members cannot be a contractor/sub-contractor relationship or principal to principal relationship, but has to be a relationship which could be termed as "principal to agent relationship". This being the factual position, the income has to be assessed in the hands of the person who has earned it i.e. the de facto contractor. In the instant case, since both the constituent members were assessed to tax on the entire contractual receipts, the question of further assessing the same in the hands of the appellant is not correct as it amounts to double taxation in the hands of the appellant joint venture as well as the constituent members."
Coming to the case laws, it is noted that the Hon'ble Calcutta High Court in the case reported in 247 ITR, 737 (supra) held that when two firms join together for a joint venture, a single assessment as an AoP or BoI is not possible especially where the individual partners had offered their share income of such joint venture in their individual hands and paid tax thereon. It observed that a joint venture is not unusual form of business or a distinct identity, so as to assessable as AoP/BoI in every case of joint venture. In the instant case, the ratio of the above decision clearly applies as the constituent members had offered the income on the entire contractual receipts in their individual hands. No contractual receipts have gone untaxed. The Hon'ble Madras High Court in the case of Commissioner Of Income-Tax v. Nayan Engineering Works reported in 248 ITR, 596 observed that it was not necessary to disturb the assessments in the hands of the members. This was a case where the Department attempted to tax the AoP disregarding the fact that share of profits had already been offered to tax by the members and the same have already been assessed long time ago".
5. The Ld CIT(A) also deleted the addition made under Sec.40(a)( ia) of the Act in the A.Y. 2005-06 with the following observations.
"Coming to the second ground of appeal, it may be noted that already a finding has been given that the relationship between the appellant joint venture and the constituent members was not that of contractor-sub contractor but was of principal agent. In the instant case, the appellant AOP which is a joint venture between a private limited company and an individual is only a facilitating entity for the procurement of the work and the real execution of the work was undertaken by the members of the appellant AOP. The financial statement of the appellant AOP clearly and categorically show the transfer of the entire turnover and expenses and also the profit thereon. The Hon'ble Punjab & Haryana High Court in the case of M/s. Esskay Construction Company reported in 267 ITR, 618 observed that the provisions of Sec. 194C(2) were not applicable where the entire contract was handed over to the members of the AoP. It was held in the said case that "once a finding has been recorded, that there was no contract between the assessee and its sister concerns, there shall be no applicability of Sec.194C(2). Further, the assessee did not charge any commission from its alleged sub-contractors and whatever tax was payable has since been paid by the main concern". The mere fact that deduction of 1% TDS made by the appellant joint venture from the payments released to the constituent members, do not itself create a contractor-sub-contractor relationship, which was possibly made as a measure of abundant precaution. Since, the relationship between the appellant joint venture and the constituent members is not that of a contractor and sub-contractor, it is concluded that the appellant joint venture was not required to make the TDS u/s 194C(2) of the Act for the payments released by the appellant joint venture to the constituent members. Hence, the provisions of Sec.40(a)( ia) would not be applicable in the instant case".
6. We have heard the parties and carefully perused the record. We have also gone through the "Joint venture partners Agreement" entered into by the parties on 20-10-2003 and also the codicil entered between them. The main dispute is with regard to the assessability of income, if any, in the hands of the assessee- AOP. The case of the AO is that the "Joint Venture" and its members should be treated as separate persons and hence the contract allocated to the members should be treated as "Sub-contracting". However, the case of the assessee is that the Joint Venture has come into existence only to procure and win the contracts and since the contracts were allocated between the members and further they were executed separately by each of the members, no income can be said to have arisen in the hands of the assessee-AOP.
7. In our country, the implementation of infrastructure projects is taking place on a massive scale. In this connection, global tenders are invited. Hence two or more business enterprises are joining hands by forming a consortium of Joint Venture in order to get qualified for participating in tender process. They regulate themselves, by entering into an agreement, the methodology to be adopted for executing the contract obtained. Before going into the main issues, we feel that it is imperative to discuss about the status and legal position of "Joint Venture" vis-a-vis Income tax Act. The Joint Ventures are not be governed by the provisions of the "Indian Partnership Act, 1932. It is also a known fact that there is no statute which governs a Joint Venture. Hence the issue regarding the relationship between the members and also between the members and the Joint venture has to be decided on the basis of the terms of agreement entered between the parties. Though the "Joint Venture Agreements" generally fall in the category of "Association of Persons" (AOP) under the Income tax Act, yet their assessability in the status of "AOP" was not free from doubt and we notice that the authorities have decided this issue on the basis of facts and circumstances of each case.
8. The Hon'ble Supreme Court has made a detailed discussion on the concept of "Joint Venture" in the case of Faqir Chand Gulati v. Uppal Agencies (P.) Ltd. [2008] 10 SCC 345. The relevant observations are extracted below:-
"17. This Court had occasion to consider the nature of `jointventure' in New Horizons Ltd. v. Union of India [1995] (1) SCC 478. This Court held :
"The expression "joint venture" is more frequently used in the United States. It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. [Black's Law Dictionary; Sixth Edition, p.839]. According to Words and Phrases, Permanent Edition, a joint venture is an association of two or more persons to carry out a single business enterprise for profit [P.117, Vol. 23]." The following definition of 'joint venture' occurring in American Jurisprudence [2nd Edition, Vol.46 pages 19, 22 and 23] is relevant:
"A joint venture is frequently defined as an association of two or more persons formed to carry out a single business enterprise for profit. More specifically, it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership, a corporation or other business entity, pursuant to an agreement that there shall be a community of interest among the parties as to the purpose of the undertaking, and that each joint venture must stand in the relation of principal, as well as agent, as to each of the other covertures within the general scope of the enterprise. Joint ventures are, in general, governed by the same rules as partnerships. The relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that their rights, duties, and liabilities are generally tested by rules which are closely analogous to and substantially the same, if not exactly the same as those which govern partnerships. Since the legal consequences of a joint venture are equivalent to those of a partnership, the courts freely apply partnership law to joint ventures when appropriate. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does not apply to the other. Thus, the liability for torts of parties to a joint venture agreement is governed by the law applicable to partnerships."
"A joint venture is to be distinguished from a relationship of independent contractor, the latter being one who, exercising an independent employment, contracts to do work according to his own methods and without being subject to the control of his employer except as to the result of the work, while a joint venture is a special combination of two or more persons where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation."
To the same effect is the definition in Corpus Juris Secundum (Vol. 48A pages 314-315):
"Joint venture," a term used interchangeably and synonymous with joint adventure', or coventure, has been defined as a special combination of two or more persons wherein some specific venture for profit is jointly sought without any actual partnership or corporate designation, or as an association of two or more persons to carry out a single business enterprise for profit or a special combination of persons undertaking jointly some specific adventure for profit, for which purpose they combine their property, money, effects, skill, and knowledge.... Among the acts or conduct which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are: (1) joint ownership and control of property; (2) sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings; (3) community of control over, and active participation in, management and direction of business enterprise; (4) intention of parties, express or implied; and (5) fixing of salaries by joint agreement."
Black's Law Dictionary (7th Edition, page 843) defines 'joint venture' thus
"Joint Venture: A business undertaking by two or more persons engaged in a single defined project. The necessary elements are: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member's equal voice in controlling the project."
9. On a careful reading of the order of the Hon'ble Supreme Court, we notice the following essential ingredients of a "Joint Venture".
(a)
It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit. (or)
(b)
it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership. (or)
(c)
a special combination of two or more persons wherein some specific venture for profit is jointly sought without any actual partnership or corporate designation, or as an association of two or more persons to carry out a single business enterprise for profit.
(d)
that each joint venturer must stand in the relation of principal, as well as agent, as to each of the other covertures within the general scope of the enterprise.
(e)
Among the acts or conduct which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are:
(1)
joint ownership and control of property;
(2)
sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings;
(3)
community of control over, and active participation in, management and direction of business enterprise;
(4)
intention of parties, express or implied; and
(5)
fixing of salaries by joint agreement."
10. As stated earlier, in order to participate in the global tender process, some of the foreign companies have established joint ventures with the Indian Companies. With regard to the issue of the assessability of Joint ventures, the foreign companies have approached the Authority for Advance Ruling (AAR). We discuss below the decision rendered by AAR in brief.
(a)
Van Oord ACZ BV ( 248 ITR 399 ) = (2002-TII-32-ARA-INTL): In this case the parties therein had specifically provided in the agreement that each party will bear its own loss and retain the profits separately. There was also specific declaration that it was not the intention to create a joint venture to carry on business in common. The parties therein had undertaken separate scope of works according to their respective technical skills. There was no control and connection between the work done by each of the parties. Thus it was noticed that there was no intention to carry out any business in common. Under these factual circumstances, the AAR held that the consortium cannot be treated as Association of Persons under the Income Tax Act. It is pertinent to note that this decision was rendered prior to 1.4.2002,
i.e. prior to the insertion of the Explanation to section 2(31).
(b)
Geo Consult ZT GMBH ( 304 ITR 283 ) = (2008-TII-11-ARA-INTL): In this case, though the work was allotted to each of the members and each member has to bear its own costs and expenses, yet it was noticed that the agreement stated that the members will collaborate for all the work associated with the project which is to be managed on a joint basis by all the members. Further the agreement provided that the members are jointly and severally responsible for execution of project. The AAR has expressed opinion, by placing reliance on the decision of Hon'ble Supreme Court in the case of N
.V. Shanmugam and Co. v.
CIT [1971] 81 ITR 301 = (2002-TII-43-SC-INTL), that the ultimate division of profits amongst members of the joint enterprise is not a relevant criterion. Finally it was held that the Joint venture is assessable as "AOP".
(c)
M/s Hyundau Rotem Co., Korea and M/s Mitsubishi Co., Japan (AAR Nos. 798-799 of 2008 dt. 23-03-2010 = (2010-TII-22-ARA-INTL). In this case, the AAR has held that the Consortium formed by four members is not assessable as AOP, since the AAR has felt that the facts of the case are similar to the facts relating to Van Oord ACZ BV,
supra.
Section 2(31) of the Act defines the term "Person", which interalia, includes "an association of persons or a body of individuals, whether incorporated or not. Since the term "Association of Persons" (AOP) was not defined in the Act, the Courts have interpreted to mean that it is an association established to produce income. Hence the Finance Act 2002 has inserted an "Explanation" to section 2(31), according to which, an AOP shall be deemed to be a person, whether or not such AOP was formed or established with the object of deriving income, profits or gains. However, in the instant case, there is no dispute with regard to the assessability of the "Joint Venture" per se. Both the assessee and the department have taken the stand that the "Joint Venture" is assessable in the status of "Association of Person". However, the issue is whether the AO is right in treating the Joint Venture-AOP as the main contractor and its members as the sub-contractors, thereby estimating the income which was not earned by the Joint Venture.
11. On the basis of the understanding of the concept of "Joint Venture", let us consider the facts in the present case. The amended clause 3 reads as under:
"(a) The joint venturers shall subject to the provisions hereinafter contained, be entitled to share the work as mutually agreed on item wise, depending on the work schedule. Sharing of the work and execution of the work can be altered at any given time with mutual consent of both the J.V. Partner's".
As per the original clause 3(a), the members of Joint Venture would share in a prescribed percentage in all profits arising out of joint venture. However, the said clause was in contradiction to the preamble of the agreement; wherein it had been stated that the members are desirous of sharing the contract amount. In view of the above, it appears that the Clause 3(a) was amended in accordance with the original intention of the members. However in clause 12 dealing with Final Accounts, we find a mention about sharing of profit or loss, but there is no mention about the proportion. However, in reality, the members have shared the work only and hence there was no profit or loss for the Joint Venture.
11.1 Further, clause 9 of the agreement which deals with the "Resources" specifically states that each joint venturer shall provide plant and equipment required for the execution of their portion of contract and such plant and machinery shall not become asset of the joint venture. Thus there is no clear provision in the Joint Venture which provides for joint execution of the project and joint realization of profit.
11.2 Clause-4 deals with the relationship between the members of the joint ventures. Sub-clauses (c) and (d) are relevant.
"(c) This Agreement shall not be construed by either Joint Venturer hereto as constituting each of them the agent of the other nor the Joint Venture as the agent for either of them.
"(e) The Joint Venturers agree that this Agreement shall not constitute a partnership and any liabilities of any sort whatsoever which one Joint Venturer may incur towards or on behalf of the other Joint Venturers shall be in accordance with this Agreement and be thereto limited"
As per the concept of the Joint Venture, each joint venturer shall stand in the relation of a principal as well as an agent of the other. However clause 4(c) of the agreement specifically states that the members do not constitute the agent of each other. The said clause also states that the "Joint venture" should not be taken as the agent of the members also. Thus, according to the agreement, each member stands in its own right and no specific relationship is created between the Joint Venture and its members.
12. Thus, on an understanding of the concept of the "Joint Venture" and the terms of agreement between the members of the present case, we are of the view that in the instant case, the consortium of Joint Venture has been formed only to procure the contract works. By way of the agreement, the parties have only regulated the relationship inter se with respect to their joint responsibility that existed in relation to the Principal, viz., M/s Konkan Railway. In reality, both the parties have divided the contract works between themselves and they have executed their share of work on their own risks. It is pertinent to note here that the AO has not given any finding on the issues like that each member had authority to interfere with or control the work executed by the other member; that both the members have jointly executed the project and thus produced the income jointly. In our opinion, the finding on the lines stated above is crucial to determine the issue of availability of income in the hands of Joint Venture- AOP. On the contrary, the AO is on record that the each of the members has declared the income derived from their respective share of contract works in their hands. In this kind of situation, we do not find any merit in the presumption made by the AO that the Joint Venture is the "Main Contractor" and the members are the "Sub-contractors". Once this presumption has been found to be wrong, then the question of estimation of income by way of Sub-contract commission does not arise. So also the question of deduction of tax u/s 194C(2) of the Act and the disallowance u/s 40(a)( ia) does not arise. In view of the foregoing discussions, we do not find any infirmity in the decision reached by the Ld CIT(A).
13. In the result, both the appeals of the revenue are dismissed.