Mere co-operation doesn’t result in an AOP: DHC

In an important ruling that seems to provide clarity on taxation of turnkey contract consortiums, the Delhi High Court ruled that ‘mere corporation’ between consortium members should not result in an Association of Persons (“AOP”) tax risk in India.

The Court said where there is an independent or separate scope of work for each member of the consortium coupled with no profit or loss or risk sharing between the members, there should be no AOP under Indian domestic law, notwithstanding that a consortium may have signed an agreement with the project owner jointly.

“An association of persons (AOP) for taxation needs to exhibit some trappings of a partnership”, the Court said, adding “Merely being jointly and severally liable to a third party does not make two or more people form an Association of Persons. The question as to whether the consortium members formed an Association of Persons would have to be determined by the level of association and the extent of collaboration as agreed between them.”

After reviewing plethora of case law on this subject, the Court stated that a consortium should exhibit the following essential features to be considered as a separate taxable entity:

(i) must be constituted by two or more persons.

(ii) the constituent members must have come together for a common purpose.

(iii) the association must move by common action and there must be some scheme of common management.

(iv) the cooperation and association amongst the constituent members must not be perfunctory and/or merely in form. The association amongst members must be real and substantial which is sufficient to treat the association as a separate homogenous taxable entity.

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