The determination of whether a joint venture constitutes an association of persons for tax purposes depends on the nature and extent of collaboration between the members, and whether the joint venture exhibits the essential features of a separate taxable entity.

S. Ravindra Bhat

1. The question of law which the revenue seeks to urge in these two appeals, being ITA Nos. 444-445/2014, which involve common questions of fact arising from a common order of the Income Tax Appellate Tribunal (ITAT) in ITA Nos. 2691-92/Del/2012 dated 07-02- 2014 is as follows:

“Whether a proportion of the project receipts, commensurate with the risks/performance obligations, should be attributed to the assessee JV to whom tender had been awarded for the project and undertook significant risks and responsibilities for the completion of the project and whether it is allowable for the assessee to divert the entire receipts to its JV partners by designing a sub-contract to that effect?”

2. The assessee in ITA No. 444/2014 is a joint venture (JV) between M/s Oriental Structural Engineers P. Ltd, New Delhi and M/s KMC Construction Ltd. Hyderabad, which was formed to undertake projects awarded by NHAI. The assessee reported NIL income for the relevant years and claimed refunds. The case was processed under Section 143(1) of the Income Tax Act, 1961 (hereafter “the Act”) and later on selected for scrutiny under compulsory scrutiny norms. Therefore, statutory notices were issued to the assessee and served. From the Profit and Loss Account, it was noticed that the assessee received gross receipt of Rs.92,31,33,229/-. Against this receipt, the assessee debited an amount of Rs.90,46,70,560/- towards payment to subcontractors, i.e. the JV partners itself. Apart from this, the JV paid work contract tax of Rs.1,84,62,669/- apart from other small expenses like bank charges, professional fees etc. The payment made to sub-contractors was 97.99% of the total receipts. The balance was utilized to make payment for work contract tax, professional fees, audit fees etc.

3. Similarly, the assessee in ITA No. 445/2014 is a joint venture (JV) between M/s Oriental Structural Engineers P. Ltd, New Delhi and M/s Gammon India Ltd., Mumbai, formed to undertake projects awarded by NHAI. The assessee in the said appeal reported NIL income for the relevant years and claimed refunds. The case was processed under Section 143(1) of the Act, and later on selected for scrutiny under compulsory scrutiny norms. Statutory notices were issued to the assessee and served. From the Profit and Loss Account, it was noticed that the assessee received gross receipt of Rs.9,98,86,286/-. Against this receipt, the assessee debited an amount of Rs.9,88,52,617/- towards payment to sub-contractors, i.e. the JV partners itself. Apart from this, the JV paid VAT/Sales Tax of Rs.8,30,907/- apart from other small expenses like bank charges, professional fees etc. The payment made to sub-contractors was 98.96% of the total receipts. The balance was utilized to make payment for VAT/Sales Tax, audit fees etc.

4. The AO, on the basis of his evaluation of the risk and responsibilities undertaken by the assessee JV, the liabilities it undertook while accepting the contract awarded to it by NHAI, the sub-contracting of the said award to its partners and other such related factors, formed the view that the JV partners had,

"for their own purposes and benefits, not declared the income/profits in the hand of the assessee JV, which is a separate taxable entity as far as Income Tax Act, 1961, is concerned and have deliberately included such income/profits in their books in order that the exact profits are not distinguishable easily in the complexities involved in their books, given the wide range of their respective business activities and operations.”

The AO considered it

"reasonable and appropriate to assessee (sic) the income in the hands of the assessee JV at 5% of the gross contractual receipts."

5. The AO's decisions were challenged before the Commissioner (Appeals) - i.e. CIT (A). The latter, by his order, reversed the findings of the AO and held inter alia, after analyzing the contents of the MOU of the assessee, as follows:

"The constituent of this JV are separate legal