The Learned Tribunal While Considering The Matter Has Followed The Decision Of The Hyderabad Bench In The Case Of M/S. Hindustan Ratna Jv v. Ito, Reported In (2014) 49 Itd 443 (Hyd.) And In Para-7 To 10 Of The Impugned Order, Has Held As Under

06. 27.11.2019 By way of this appeal, the appellant-Department has challenged the order dated 21.05.2015 passed by the Income Tax Appellate Tribunal, Cuttack Bench, Cuttack in I.T.A. No.497/CTK/2012. 2. We have heard Mr. S.S. Mohapatra, leaned Senior Standing Counsel for the appellant-Income Tax Department and perused the impugned order. 3. The learned Tribunal while considering the matter has followed the decision of the Hyderabad Bench in the case of M/s. Hindustan Ratna JV vs. ITO, reported in (2014) 49 ITD 443 (Hyd.) and in para-7 to 10 of the impugned order, has held as under: “7. Having gone through the orders of the lower authorities and the judgments referred to by the parties in the light of the rival submissions, we find that undisputedly the assessee was a Joint Venture, formed by HCIL and P.T.Adhikarya Persero in the ratio of 60% and 40% respectively, in order to obtain the contract from RVNL, New Delhi for construction of Road Bed, facilities and general electrification for doubling of railway lines, construction of major bridge in connection with New BG railway lines between Hariashpur-Paradeep, East Coast Railway in the State of Orissa. It is also undisputed fact that after obtaining the contract from the RVNL it was assigned to its constituents for its execution. On the execution of the contract by the constituents the payments were made to the assessee, the Joint Venture, by the RVNL on deduction of TDS. The payments received by the assessee were accordingly given to its constituents as per the ratio determined in the Joint Venture Agreement. It is also an undisputed fact that the constituents of the assessee JV have claimed the credit of TDS deducted against the payment made to JV. Therefore, now the issue arises as to whether the assessee JV was ITA Nos.496 & 497/12 ITA No.178/13 & ITA Nos.140&141/14 8 required to deduct the TDS on payments made to its constituents. The identical issue was examined by the Visakhapatnam Bench of the Tribunal in the case of UAN Raju Constructions (supra) (in which the undersigned was one of the Member to the order) and the Tribunal has held that there was no subletting of contract to the constituents by the Joint Venture. The relevant observations of the Tribunal are extracted hereunder :- “6. We have heard the parties and carefully perused the record. We have also gone through the “Joint venture partners Agreement” entered by the parties on 20-10-2003 and also the codicil entered between them. The main dispute is with regard to the assessability of income, if any, in the hands of the assessee-AOP. The case of the AO is that the “Joint Venture” and its members should be treated as separate persons and hence the contract allocated to the members should be treated as “Sub-contracting”. However, the case of the assessee is that the Joint Venture has come into existence only to procure and win the contracts and since the contracts were allocated between the members and further they were executed separately by each of the members, no income can be said to have arisen in the hands of the assessee-AOP. 7. In our country, the implementation of infrastructure projects is taking place in a massive scale. In this connection, global tenders are invited. Hence two or more business enterprises are joining hands by forming a consortium of Joint Venture in order to get qualified for participating in tender process. They regulate themselves, by entering into an agreement, the methodology to be adopted for executing the contract obtained. Before going into the main issues, we feel that it is imperative to discuss about the status and legal position of “Joint Venture” vis-a-vis Income tax Act. The Joint Ventures are not be governed by the provisions of the “Indian Partnership Act, 1932. It is also a known fact that there is no statute which governs a Joint Venture. Hence the issue regarding the relationship between the members and also between the members and the Joint venture has to be decided on the basis of the terms of agreement entered between the parties. Though the “Joint Venture Agreements” generally fall in the category of “Association of Persons” (AOP) under the Income tax Act, yet their assessability in the status of “AOP” was not free from doubt and we notice that the authorities have decided this issue on the basis of facts and circumstances of each case. 8. The Hon’ble Supreme Court has made a detailed discussion on the concept of “Joint Venture” in the case of Fazir Chand Gulati Vs. Uppal Agencies Private Ltd. (2008) 10 SCC 345. The relevant observations are extracted below:- “17. This Court had occasion to consider the nature of `joint venture' in New Horizons Ltd vs. Union of India [1995 (1) SCC 478). This Court held : ITA Nos.496 & 497/12 ITA No.178/13 & ITA Nos.140&141/14 9 "The expression "joint venture" is more frequently used in the United States. It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. [Black's Law Dictionary; Sixth Edition, p.839]. According to Words and Phrases, Permanent Edition, a joint venture is an association of two or more persons to carry out a single business enterprise for profit [P.117, Vol. 23]."[Emphasis supplied] The following definition of 'joint venture' occurring in American Jurisprudence [2nd Edition, Vol.46 pages 19, 22 and 23] is relevant: "A joint venture is frequently defined as an association of two or more persons formed to carry out a single business enterprise for profit. More specifically, it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership, a corporation or other business entity, pursuant to an agreement that there shall be a community of interest among the parties as to the purpose of the undertaking, and that each joint venture must stand in the relation of principal, as well as agent, as to each of "A joint venture is frequently defined as an association of two or more persons formed to carry out a single business enterprise for profit. More specifically, it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership, a corporation or other business entity, pursuant to an agreement that there shall be a community of interest among the parties as to the purpose of the undertaking, and that each joint venture must stand in the relation of principal, as well as agent, as to each of the other covertures within the general scope of the enterprise. Joint ventures are, in general, governed by the same rules as partnerships. The relations of the parties to a joint venture and the nature of their association are so similar and closely akin to a partnership that their rights, duties, and liabilities are generally tested by rules which are closely analogous to and substantially the same, if not exactly the same as those which govern partnerships. Since the legal consequences of a joint venture are equivalent to those of a partnership, the courts freely apply partnership law to joint ventures when appropriate. In fact, it has been said that the trend in the law has been to blur the distinctions between a partnership and a joint venture, very little law being found applicable to one that does not apply to the other. Thus, the liability for torts of parties to a joint venture agreement is governed by the law applicable to partnerships." "A joint venture is to be distinguished from a relationship of independent contractor, the latter being one who, exercising an independent employment, contracts to do work according to his own methods and without being subject to the control of his employer except as to the result of the work, while a joint venture is a special combination of two or more persons where, in some specific venture, a profit is jointly sought without any actual partnership or corporate designation." (Emphasis supplied) To the same effect is the definition in Corpus Juris Secundum (Vol. 48A pages 314-315): "Joint venture," a term used interchangeably and synonymous with joint adventure', or coventure, has been defined as a special combination of two or more persons wherein some specific venture for profit is jointly sought without any actual partnership or corporate designation, or as an association of two or more persons to carry out a single business ITA Nos.496 & 497/12 ITA No.178/13 & ITA Nos.140&141/14 10 enterprise for profit or a special combination of persons undertaking jointly some specific adventure for profit, for which purpose they combine their property, money, effects, skill, and knowledge........ Among the acts or conduct which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are: (1) joint ownership and control of property; (2) sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings; (3) community of control over, and active participation in, management and direction of business enterprise; (4) intention of parties, express or implied; and (5) fixing of salaries by joint agreement." (emphasis supplied) Black's Law Dictionary (7th Edition, page 843) defines `joint venture' thus "Joint Venture: A business undertaking by two or more persons engaged in a single defined project. The necessary elements are: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member's equal voice in controlling the project." 9. On a careful reading of the order of the Hon’ble Supreme Court, we notice the following essential ingredients for a “Joint Venture”. (emphasis supplied) Black's Law Dictionary (7th Edition, page 843) defines `joint venture' thus "Joint Venture: A business undertaking by two or more persons engaged in a single defined project. The necessary elements are: (1) an express or implied agreement; (2) a common purpose that the group intends to carry out; (3) shared profits and losses; and (4) each member's equal voice in controlling the project." 9. On a careful reading of the order of the Hon’ble Supreme Court, we notice the following essential ingredients for a “Joint Venture”. a) It connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit. (or) b) it is in association of persons with intent, by way of contract, express or implied, to engage in and carry out a single business venture for joint profit, for which purpose such persons combine their property, money, effects, skill, and knowledge, without creating a partnership. (or) c) a special combination of two or more persons wherein some specific venture for profit is jointly sought without any actual partnership or corporate designation, or as an association of two or more persons to carry out a single business enterprise for profit. d) that each joint venturer must stand in the relation of principal, as well as agent, as to each of the other covertures within the general scope of the enterprise. e) Among the acts or conduct which are indicative of a joint venture, no single one of which is controlling in determining whether a joint venture exists, are: (1) joint ownership and control of property; (2) sharing of expenses, profits and losses, and having and exercising some voice in determining division of net earnings; (3) community of control over, and active participation in, management and direction of business enterprise; (4) intention of parties, express or implied; and (5) fixing of salaries by joint agreement." 10. As stated earlier, in order to participate in the global tender process, some of the foreign companies have established joint ventures with the Indian Companies. With regard to the issue of the assessability of Joint ventures, the ITA Nos.496 & 497/12 ITA No.178/13 & ITA Nos.140&141/14 11 foreign companies have approached the Authority for Advance Ruling (AAR). We discuss below the decision rendered by AAR in brief. a) Van Oord ACZ BV (248 ITR 399): In this case the parties therein had specifically provided in the agreement that each party will bear its own loss and retain the profits separately. There was also specific declaration that it was not the intention to create a joint venture to carry on business in common. The parties therein had undertaken separate scope of works according to their respective technical skills. There was no control and connection between the work done by each of the parties. Thus it was noticed that there was no intention to carry out any business in common. Under these factual circumstances, the AAR held that the consortium cannot be treated as Association of Persons under the Income Tax Act. It is pertinent to note that this decision was rendered prior to 1.4.2002, i.e. prior to the insertion of the Explanation to section 2(31). b) Geo Consult ZT GMBH (304 ITR 283): In this case, though the work was allotted to each of the members and each member has to bear its own costs and expenses, yet it was noticed that the agreement stated that the members will collaborate for all the work associated with the project which is to be managed on a joint basis by all the members. Further the agreement provided that the members are jointly and severally responsible for execution of project. The AAR has expressed opinion, by placing reliance on the decision of Hon’ble Supreme Court in the case of N.V.Shanmugam and Co. V CIT (1971) 81 ITR 301, that the ultimate division of profits amongst members of the joint enterprise is not a relevant criterion. Finally it was held that the Joint venture is assessable as “AOP”. b) Geo Consult ZT GMBH (304 ITR 283): In this case, though the work was allotted to each of the members and each member has to bear its own costs and expenses, yet it was noticed that the agreement stated that the members will collaborate for all the work associated with the project which is to be managed on a joint basis by all the members. Further the agreement provided that the members are jointly and severally responsible for execution of project. The AAR has expressed opinion, by placing reliance on the decision of Hon’ble Supreme Court in the case of N.V.Shanmugam and Co. V CIT (1971) 81 ITR 301, that the ultimate division of profits amongst members of the joint enterprise is not a relevant criterion. Finally it was held that the Joint venture is assessable as “AOP”. c) M/s Hyundau Rotem Co., Korea and M/s Mitsubishi Co., Japan (AAR Nos. 798-799 of 2008 dt. 23-03-2010. In this case, the AAR has held that the Consortium formed by four members is not assessable as AOP, since the AAR has felt that the facts of the case are similar to the facts relating to Van Oord ACZ BV, supra. Section 2(31) of the Act defines the term “Person”, which interalia, includes “an association of persons or a body of individuals, whether incorporated or not. Since the term “Association of Persons” (AOP) was not defined in the Act, the Courts have interpreted to mean that it is an association established to produce income. Hence the Finance Act 2002 has inserted an “Explanation” to section 2(31), according to which, an AOP shall be deemed to be a person, whether or not such AOP was formed or established with the object of deriving income, profits or gains. However, in the instant case, there is no dispute with regard to the assessability of the “Joint Venture” per se. Both the assessee and the department have taken the stand that the “Joint Venture” is assessable in the status of “Association of Person”. However, the issue is whether the AO is right in treating the Joint Venture-AOP as the main contractor and its members as the sub-contractors, thereby estimating the income which was not earned by the Joint Venture. 11. On the basis of the understanding of the concept of “Joint Venture”, let us consider the facts in the present case. The amended clause 3 reads as under: “a) The joint venturers shall subject to the provisions hereinafter contained, be entitled to share the work as mutually agreed on item wise, depending on the work schedule. Sharing of the work and execution of the ITA Nos.496 & 497/12 ITA No.178/13 & ITA Nos.140&141/14 12 work can be altered at any given time with mutual consent of both the J.V. Partner’s”. As per the original clause 3(a), the members of Joint Venture would share in a prescribed percentage in all profits arising out of joint venture. However, the said clause was in contradiction to the preamble of the agreement; wherein it had been stated that the members are desirous of sharing the contract amount. In view of the above, it appears that the Clause 3(a) was amended in accordance with the original intention of the members. However in clause 12 dealing with Final Accounts, we find a mention about sharing of profit or loss, but there is no mention about the proportion. However, in reality, the members have shared the work only and hence there was no profit or loss for the Joint Venture. 11.1 Further, clause 9 of the agreement which deals with the “Resources” specifically states that each joint venturer shall provide plant and equipment required for the execution of their portion of contract and such plant and machinery shall not become asset of the joint venture. Thus there is no clear provision in the Joint Venture which provide for joint execution of the project and joint realization of profit. 11.2 Clause-4 deals with the relationship between the members of the joint ventures. Sub-clauses (c) and (d) are relevant. “c. This Agreement shall not be construed by either Joint Venturer hereto as constituting each of them the agent of the other nor the Joint Venture as the agent for either of them. 11.1 Further, clause 9 of the agreement which deals with the “Resources” specifically states that each joint venturer shall provide plant and equipment required for the execution of their portion of contract and such plant and machinery shall not become asset of the joint venture. Thus there is no clear provision in the Joint Venture which provide for joint execution of the project and joint realization of profit. 11.2 Clause-4 deals with the relationship between the members of the joint ventures. Sub-clauses (c) and (d) are relevant. “c. This Agreement shall not be construed by either Joint Venturer hereto as constituting each of them the agent of the other nor the Joint Venture as the agent for either of them. “e. The Joint Venturers agree that this Agreement shall not constitute a partnership and any liabilities of any sort whatsoever which one Joint Venturer may incur towards or on behalf of the other Joint Venturers shall be in accordance with this Agreement and be thereto limited”. As per the concept of the Joint Venture, each joint venturer shall stand in the relation of a principal as well as an agent of the other. However clause 4(c) of the agreement specifically states that the members do not constitute the agent of each other. The said clause also states that the “Joint venture” should not be taken as the agent of the members also. Thus, according to the agreement, each member stands in its own right and no specific relationship is created between the Joint Venture and its members. 12. Thus, on an understanding of the concept of the “Joint Venture” and the terms of agreement between the members of the present case, we are of the view that in the instant case, the consortium of Joint Venture has been formed only to procure the contract works. By way of the agreement, the parties have only regulated the relationship inter se with respect to their joint responsibility that existed in relation to the Principal, viz., M/s Konkan Railway. In reality, both the parties have divided the contract works between themselves and they have executed their share of work on their own risks. It is pertinent to note here that the AO has not given any finding on the issues like that each member had authority to interfere with or control the work executed by the other member; that both the members have jointly executed the project and thus produced the income jointly. In our opinion, the finding on the lines stated above is crucial to determine the issue of availability of income in the hands of Joint Venture- AOP. On the contrary, the AO is on record that the each of the ITA Nos.496 & 497/12 ITA No.178/13 & ITA Nos.140&141/14 13 members has declared the income derived from their respective share of contract works in their hands. In this kind of situation, we do not find any merit in the presumption made by the AO that the Joint Venture is the “Main Contractor” and the members are the “Sub-contractors”. Once this presumption has been found to be wrong, then the question of estimation of income by way of Sub-contract commission does not arise. So also the question of deduction of tax u/s 194C(2) of the Act and the disallowance u/s 40(a)(ia) does not arise. In view of the fore going discussions, we do not find any infirmity in the decision reached by the Ld CIT(A).” 8. Following this order of the Tribunal, the Hyderabad Bench of the Tribunal has taken similar view in case of M/s Hindustan Ratna JV (supra) by holding that there could not be any sub-contract between JV and its constituents as the JV has been formed only to procure contract works from Government. The relevant observations of the Tribunal are extracted hereunder for the sake of reference :- 8. Following this order of the Tribunal, the Hyderabad Bench of the Tribunal has taken similar view in case of M/s Hindustan Ratna JV (supra) by holding that there could not be any sub-contract between JV and its constituents as the JV has been formed only to procure contract works from Government. The relevant observations of the Tribunal are extracted hereunder for the sake of reference :- “22. In view of the above discussion and considering the facts and circumstances of the case, we are of the view that the relationship created by the Partnership Deed dated 31st August, 2007 and partners cannot be considered as sub-contractors of the firm and they are jointly and severally liable towards the owners for the execution of the contract commitments in accordance with the contract conditions. Being so, the provisions of section 194C cannot be attracted so as to treat them as subcontractors of the firm thereby invoking the provisions of section 40(a)(ia). In other words, we can safely conclude that there is no sub-contract between JV and the constituents and since the JV has been formed only to procure contract works from the Government and the contract is being executed by the constituent partners in their sharing ratio 60:40 as per the terms of JV, it cannot be said that the JV is a contractor and its constituents are subcontractors. Accordingly, we set aside the orders of the revenue authorities and delete the disallowance of Rs. 111,09,23,018/- made by the Assessing Officer by invoking the provisions of section 40(a)(ia) of the Act. 23. In the result, appeal of the assessee is allowed. 9. It is also undisputed fact that the deductee has already paid the taxes on the payments received from the JV. Since the tax has been paid on the receipts by the deductee, the deductor cannot be held to be assessee in default. In this regard a reference was made to the orders of ITA Nos.496 & 497/12 ITA No.178/13 & ITA Nos.140&141/14 14 the Tribunal in case of Raja Chkravarty (supra) and Rajeev Kumar Agarwal (supra), in which it has been held that once the deductee has made the payment of taxes on the receipts the deductor cannot be held to be assessee in default. Therefore, on both counts, the assessee cannot be held to be in default u/s.201(1) of the Act. 10. So far as the interest charged u/s.201(1A) of the Act is concerned, the same cannot be charged once it is held that there is no liability to deduct the TDS on the payments made by the assessee to its constituents. It is irrelevant that in few assessment SKJ years, the assessee has deducted the TDS on payments made to its constituents. If the assessee has done something wrong, it does not make him responsible to commit mistake in succeeding years. Following the view taken by the Tribunal in different cases, we are of the considered view that the Joint Venture is not responsible to deduct the TDS on the payments made to its constituents for the work executed by them in the light of the facts, where the Joint Venture was formed to obtain the contract from the Government and the contract was executed by the constituents. We, therefore, of the view in the instant case that, the assessee was not liable to deduct the TDS, therefore, he cannot be held to be in default and liable to be charged interest u/s.201(1A) of the Act. Accordingly, we set aside the order of the CIT(A) and hold that the assessee is not liable to deduct TDS, ITA Nos.496 & 497/12 ITA No.178/13 & ITA Nos.140&141/14 15 therefore, he cannot be held to be in default u/s.201(1) of the Act and liable for any interest to be charged u/s.201(1A) of the Act.” 4. In view of the above observations made by the learned Tribunal in para-7 to 10, we are in complete agreement with view the taken by the learned Tribunal. No case is made out by the Department. 5. The writ petition is dismissed being devoid of merit. The connected I.A./Misc. Case, if any, also stands dismissed. Certified copy of this order be granted on proper application. .…….......……………… ( K.S. Jhaveri ) Chief Justice 4. In view of the above observations made by the learned Tribunal in para-7 to 10, we are in complete agreement with view the taken by the learned Tribunal. No case is made out by the Department. 5. The writ petition is dismissed being devoid of merit. The connected I.A./Misc. Case, if any, also stands dismissed. Certified copy of this order be granted on proper application. .…….......……………… ( K.S. Jhaveri ) Chief Justice ………………..……… (Pramath Patnaik) Judge