Companies participating jointly in mega infrastructure development contracts may find it easier to do business in India from the tax perspective. Typically, companies, including foreign players, get together and form a consortium to bid for large equipment procurement and construction (EPC) contracts.
Tax officials, in many cases, have held the consortium to be an `Association of Persons' (AOP) and levied tax at a high rate of 40%. The Central Board of Direct Taxes (CBDT), in its recent circular, has clarified that if certain conditions are met, the consortium will not be taxed as an AOP. Instead, each member company will be taxed at the rate applicable to the nature of activities performed by it and its share of income or profit. To illustrate, a foreign company , supplying technical design will now pay tax at just 10% as the income earned by it is in the nature of fees for technical services. CBDT's clarification will translate into a lower tax outgo for many members of the consortium.However, the circular doesn't apply where any members of the consortium are related parties.
"Taxation of consortiums has been a long-standing contentious issue, given the complex structures in volved, multiple sub-contracting arrangements and issues surrounding divisibility of EPC contracts. In this context, the circular is welcome," says Jairaj Purandare, chairperson, JMP Advisors.
CBDT's circular clarifies that if the consortium arrangement has certain attributes such as a clear demarcation of work and associated responsibilities and costs among participating members, sharing of profits by participating members based on their individual scope of work and lastly no unified control and management of the consortium (expect for the purpose of co-ordination for administrative convenience), it will not be treated as an AOP.
"Prior to this circular, even when intra-company legal documents clearly specified that each participating company has independent responsibilities for its own share of work, as the consortium as a whole is accountable to the client (say a state government), tax officials, in many cases levied tax at the consortium level itself," points out Sanjay Sanghvi, tax partner at law firm Khaitan and Co. Latest Comment
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"As tax was levied at the consortium level, it resulted in a higher tax incidence on all participating companies.Further, no treaty benefit was available. In this context, the CBDT's circular will reduce litigation and result in tax certainty ," adds Sanghvi. "If the consortium was taxed as an AOP, the losses, arising on the EPC contract could not be set off aga inst any profits which the member companies earned from other projects," adds Purandare.
However, the circular doesn't apply to consortium arrangements where related parties (such as an Indian subsidiary and its overseas group company) are participants."Taxation of such cases has been left to the discretion of the tax officer, who has to determine whether or not an AOP is constituted. In such cases, the litigation is expected to continue," says Purandare.