The clarification pertains to taxation of consortium formed by contractors to implement large infrastructure projects, particularly in Engineering, Procurement and Construction (EPC) contracts and Turnkey projects.
The Central Board of Direct Taxes (CBDT) said that the consortium arrangement will not be taxed as AOP if "each member earns profit or incur losses, based on performance of the contract, falling strictly within its scope of work".
Also, it added there will be no AOP, "if the control and management of the consortium is not unified and common management is only for the inter-se coordination between consortium member for administrative convenience".
A consortium of contractor is often formed to implement large infrastructure projects, particularly in EPC contracts and Turnkey projects.
The tax authorities, in many cases have taken a position that such as consortium constitutes an Association of Persons i.e. a separate entity for charging tax.
The department said the term AOP has not been specifically defined in the Income-tax Act 1961.
The CBDT further said that the consortium arrangement will not be taxed as AOP if the men and materials used for any area of work under the risk and control of respective consortium members.
It said there may be other additional factors which may justify that consortium is not an AOP and the same shall depend upon the specific facts and circumstances of a particular case, which needs to be taken under consideration while taking a view in the matter.
Comenting on the circular, Hemal Zobalia, Partner, Deloitte Haskins & Sells LLP said it reiterates some of the principles which were already laid down by judicial precedents.
"However, this may not help in resolving all the issues surrounding AOP as a lot is left at the discretion of the tax officer..." Zobalia said.
According to him, large turnkey infrastructure projects are executed by consortium of construction companies through an EPC contract.
There are certain cases where the tax authorities have taxed all the consortium members as one taxable unit -- Association of Persons.
"This leads to number of issues like being taxed at maximum marginal rate, inability to set-off losses of other projects, non-availability of tax credit for non-resident, etc. These issues bring in uncertainty and increase the overall tax cost. Vide this Circular, CBDT has sought to clarify the taxation of such EPC consortiums," the tax expert said.