The increase in the number of large infrastructure projects in
the country to meet the demand for development of infrastructure
has led to a significant increase in the number of Equipment
Procurement and Construction (EPC) contracts. These EPC contracts
typically involve various entities across the globe. Due to the
requirement of expertise, and specialised resources in each
specific area of such EPC contracts and turnkey projects, entities
participating in EPC contracts usually form a consortium to
represent a single point of contact for the client.
Typically, in EPC contracts and turnkey projects, each member of
the consortium would be jointly and severally liable to the client
despite having a clear distinction in role, scope of work,
responsibilities and labilities inter se the consortium
members. This has given rise to a number of tax disputes, where the
tax authorities have mooted that a consortium constitutes an
'Association of Persons' (AoP) and should be chargeable to
tax as such. This creates an exposure for the consortium AoP i.e.
the joint venture, to be treated as a person 'resident in
India' in which case global income of such joint venture would
be taxed as its 'business income' in India, in certain
cases at the rate applicable to a non-resident entity, i.e. 40%
(plus applicable surcharge and cess). This results in higher tax
incidence on the income of the consortium and its resident and
non-resident members. No treaty benefit reduces this tax incidence.
AoP is not defined under the Income Tax Act, 1961 (IT Act) and
judicial precedents have some overlapping and conflicting guidance
on determination of AoP. With a view to address this issue and
bring certainty to the taxability of EPC contracts, the Central
Board of Direct Taxes (CBDT), apex body governing the direct taxes
under the Ministry of Finance, has now issued a circular 07/2016
(dated 7 March 2016) (Circular).
Circular issued by the CBDT
The Circular clarifies that if a consortium arrangement has
certain attributes such as the following, it may not be treated as
Clear demarcation of scope of work and associated
costs: Each member of the consortium is independently
responsible for executing its part of the work through its own
resources. The consortium members should also bear the risk
and expenses related only to such specified scope of work i.e. a
clear demarcation in the work and costs between the consortium
Profits/loss based on scope of work:
Each member earns profits/ incurs losses based on performance of
the contract strictly falling within its scope of work,
the consortium members may however share a contract price for the
purpose of facilitating convenience in billing;
Risk and control of resources: The
labour and materials used for any area of work are under the risk
and control of the respective consortium members;
No unified control and management of the
consortium: The control and management of the consortium
is not unified and common management is only for coordination
between the consortium members for administrative convenience.
The Circular also recognises that there may be additional
attributes which may demonstrate that the consortium is not an AoP,
depending on the specific facts and circumstances.
Further, the Circular will not apply to consortiums where all or
some members are 'Associated Enterprises' (AE). AE, for
this purpose, would be the same as that under transfer pricing
regulations. This would inter alia include a situation
where a consortium member participates directly or indirectly in
the control, management or capital of other member of the
consortium. In such cases, the tax authorities will rely on the
provisions of the IT Act and judicial precedents to decide whether
or not an AoP is constituted.
The Circular brings welcome clarity and it reinforces the
Government's commitment towards a non-adversarial tax regime in
India. It provides a breather to the infrastructure sector,
especially non-resident companies who are members of a consortium,
as the risk of AoP always loomed over the parties forming a
consortium to undertake EPC contracts and turnkey projects. The
clarification contained in the Circular would serve as a guiding
light to the income tax authorities, and thus reduce inconsistency
in the approach adopted by them while evaluating consortium
Majority of the large EPC contractors have Indian subsidiaries.
Hence, not excluding related parties/AE would have brought much
more clarity to this vexatious issue of AoP exposure on EPC
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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