Joint ventures with a foreign entity could be treated as Association of Persons (AOP) and attract a higher rate of income tax applicable to Indian residents. The Authority for Advance Rulings (AAR) in a case related to a JV between Austrias Geoconsult and Rites and Secon ruled it would be treated as an AOP. Under the income-tax laws, an association of person is considered legally to be a resident of India and is taxed at similar rates at which an individual is taxed.
The ruling came in response to Geoconsults query about taxability of the earnings made by its joint venture company with Indian construction groups Rites and Secon. The present case dealt with the earnings made by the joint venture as part of its contract with Himachal Pradesh Road and Other Infrastructure Development Corporation (HPRIDC), for project consultancy to develop seven tunnels across the state of Himachal.
Geoconsult, which claimed to have rendered managerial and consultancy services, contended that it did not have any permanent establishment in India. Hence, it was argued that its earnings be termed as fees for technical services which attracts 10% tax deduction on its gross receipts. The revenue department, on its part, referred to the contractual agreement to highlight that a representative of the Austrian company stayed in India to oversee the project activities.
A close look into the various clauses (of the joint venture agreement) reveals that all essential ingredients of an AOP, stand satisfied in this case (Geoconsult-Rites-Secon combine), an AAR bench chaired by P V Reddi said. The quasi-judicial body in its ruling has directed the combined entity to pay tax at 41% on its net earnings made in India.