To reduce litigation and bring consistency in approach, the
Central Board of Direct Taxes has clarified the tax treatment of a
consortium of contractors implementing EPC contracts and turnkey
Taxpayers and tax authorities have had divergent views on
whether a consortium formed to carry out Engineering, Procurement
and Construction (EPC) contracts and turnkey projects would
constitute an Association of Persons (AOP) and be taxed
accordingly. Indian courts too have expressed contradictory views
on this. In order to bring parity and reduce litigation, the
Central Board of Direct Taxes (CBDT) has issued a circular dated 7
March 2016 clarifying the tax treatment of a consortium of
contractors implementing EPC contracts and turnkey projects.
The CBDT has specified that a consortium arrangement for
executing EPC contracts and turnkey projects that has the following
four attributes will not be treated as an AOP:
(a) Each member is independently responsible for executing its
part of the work and there is a clear demarcation in the work and
costs between the consortium members;
(b) Each member earns profit or incurs losses, based on
performance of the contract falling strictly within its scope of
work.Contract price at gross level may be shared to facilitate
convenience in billing;
(c) Men and materials used for any area of work are under the
risk and control of the respective consortium members;
(d) Control and management of the consortium is not merged and
common management is exercised for inter-se coordination between
consortium members for administrative convenience.
The attributes listed by the CBDT are not exhaustive and the
circular states that there may be additional factors, depending
upon specific facts of a particular case, which will need to be
considered while taking a view in the matter.
Further, it has been clarified that the circular will not apply
in cases where members of the consortium are 'associated
enterprises' as per Indian transfer pricing regulations under
the Income Tax Act, 1961. This inapplicability is a limitation as
the attributes set out in the circular are based on judicial
pronouncements and should have been applied to both related and
unrelated parties. Therefore, it remains to be seen whether
principles set out in the judicial pronouncements can be precluded
by way of the circular.
However, despite this limitation, CBDT's clarification is a
welcome move and will go a long way in reducing tax disputes on a
subject which has seen much controversy.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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