(2014) 365 ITR 1 (Del)
Definition of person; charge of income-tax; income deemed to accrue or arise in India
No, where the scope of work, responsibilities and remuneration of each member are separate and each bears its own risk and earns its own profit. A joint bid and joint liability to the customer do not by themselves create an association of persons.
Does a consortium formed by two companies to bid jointly for and execute a single turnkey project constitute an association of persons assessable as a separate taxable entity?
A German company and a Korean company formed a consortium to bid for a large turnkey project for an Indian public sector undertaking. The consortium submitted a single bid and the members accepted joint and several liability to the customer for performance of the contract as a whole. Internally, however, the contract and the consortium agreement divided the work between them: each member was responsible for a defined and separate scope, was remunerated separately for that scope, executed its portion with its own resources, and bore its own costs, risks and profit or loss. The Revenue assessed the consortium as an association of persons, which would have taxed the combined profits as those of a single entity.
The matter came before the Delhi High Court, which examined what is required before parties who cooperate on a project are treated as a single taxable association.
For the assessee
An association of persons requires the members to join in a common purpose to produce income jointly, sharing in the venture's overall result. Here the members simply divided the work and each earned its own remuneration for its own scope, with no pooling of profit and no joint management. Joint and several liability was assumed for the customer's protection and says nothing about how the members related to each other.
For the Revenue
The members bid jointly, contracted jointly, assumed joint liability for the whole and cooperated in delivering a single integrated facility. That is a common enterprise carried on together, and the profits of that enterprise should be assessed in the hands of the association rather than divided between the members.
The Court held that the essential element of an association of persons is that two or more persons join in a common purpose or common action with the object of producing income jointly, in which each has an interest in the combined result. Where parties come together only to the extent of presenting a single face to the customer, while internally dividing the work so that each performs a separate scope for separate remuneration and bears its own risk, they are not carrying on a joint enterprise for profit in the relevant sense. The Court held that joint and several liability to the employer is a feature commonly required in large infrastructure contracts for the customer's protection and does not convert separate performances into a common venture. Nor does the existence of coordination between members, which any integrated project requires. It examined the consortium agreement and the division of scope and consideration, found that each member's profit depended on its own performance and costs alone, and held that the consortium was not an association of persons. The members were therefore assessable separately on their own income, with their treaty positions determined individually.
Governs consortium bidding on infrastructure, energy and engineering projects, which is the standard structure for large Indian contracts. The question matters a great deal in practice: association status would consolidate the members' profits, disturb their separate treaty entitlements and alter the permanent establishment analysis for each. Under the IT Act 2025 the definition of person is in Section 2 and the deeming provisions in Section 9. Read with Ishikawajima-Harima and Hyundai Heavy Industries on splitting offshore and onshore elements of the same project.