Linde AG, Linde Engineering Division v. Dy. DIT

SUBSCRIBE FOR FULL CONTENT


The Tax Publishers2014 TaxPub(DT) 2223 (Del-HC) : (2014) 059 (I) ITCL 0520 : (2014) 365 ITR 0001 : (2014) 268 CTR 0274 : (2014) 103 DTR 0137 Linde AG, Linde Engineering Division v. Dy. DIT INCOME TAX ACT, 1961 --Person --AOPCommon performance of turnkey project--In order to consider independent agencies as an Association of Persons (AoP), it is necessary that parties form a joint enterprise with a greater level of common management, an element of mutual agency and joint action for mutual purpose is also necessary. Mere obligation to exchange information between independent agencies for conditioning their independent tasks would not result in an inference that the agencies had constituted an AoP, as such, facts of this case do not indicate a sufficient degree of joint action between Linde and Samsung or either in execution of management of the project to justify a conclusion that they had formed an AOP and in this view, authority erred in concluding so. It is material to note that even, as per the terms of the Contract, the scope of work to be executed by Linde and Samsung was separate and was accordingly specified in the annexures to the Contract. The payments to be made for separate items of work were also specified. The currency in which the payments were to be made was also separately indicated. Thus, insofar as execution of the work was concerned, even OPAL recognised that different items constituting the Contract would be performed independently by Linde and Samsung. The consideration for the work performed was to be made directly to the concerned member of the Consortium in accordance with the work performed by him. Annexure C of the Contract specified the payment schedule, i.e., the amount to be paid for the supply of goods and services rendered by both the members of consortium. Linde and Samsung were to be paid on the basis of the separate invoices raised by them respectively. There was no arrangement for sharing of profits and losses between Linde and Samsung. And, each of them would make profits or incur losses based on the price as agreed by them and the costs incurred by them for performance of the contract falling within their independent scope of work. [Para 47] It follows from the above, that Linde and Samsung had joined together to (a) bid for the contract; (b) present a facade of a consortium to OPAL for execution of the contract and accept joint and several liability towards OPAL for due performance of the contract and completion of the project; and (c) put in place a management structure for inter se coordination and execution of the project. However, in all other respects, both Linde and Samsung were independent of each other and were responsible for their own deliverables under the Contract, without reference to each other. [Para 48] A plain reading of the Contract clearly indicates that insofar as OPAL is concerned, the consortium members were treated as a single party for due performance of the Contract. However, the annexures to the contract provided for the split of the Contract between the consortium members and amounts payable to each of the consortium members is detailed separately. The scope of work of each of the members was also separately listed. The Contract specified that an organisation structure would be set up which would facilitate OPAL in dealing with the consortium members collectively and not separately. The only conclusion one can draw is that while OPAL treated the consortium members as a single entity for imposing liability for due performance of the Contract, OPAL also recognized that each consortium member would perform the items of work falling within their respective scope of work, independently. [Para 51] While, it is relevant as to how a third party deals with the members of a consortium, the same would not be conclusive in determining whether the consortium members constitute an Association of Persons. It is indisputable that the purpose of Linde and Samsung in collaborating with each other was to procure the Contract and, to that end, both the said members had agreed to present themselves as a consortium. However, as stated earlier the question as to whether the said 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. The fact that a third party is desirous to deal with the members as one consortium cannot be the determinative factor in considering whether the members constitute an Association of Persons for the purposes of being assessed for taxation. Both the consortium members had agreed to present a common face. However, the agreement inter se between the members clearly spelt out that except for presenting a common face and complying with the conditions as imposed by OPAL, the members would conduct their business independently with no interference from the other. This, clearly indicates that Linde and Samsung had no intention to form an Association of Persons. Clause 4.8 of the MOU and 16 of the Internal Consortium Agreement expressly recorded that the members did not have any intention to form an association. [Para 52] This court is also unable to accept the contention that the fact that Samsung and Linde had agreed to be jointly and severally liable for performance of the contract, would be sufficient to hold that they constituted an Association of Persons for the purposes of the Act. Linde and Samsung agreeing to be jointly and severally liable to OPAL for due performance of the Contract only indicates that Linde and Samsung had accepted a contractual obligation towards a third party, the same does not, by itself, lead to a conclusion that the said members had formed an Association of Persons. Any entity/individual may agree, for its own business purposes, to accept a liability for due performance of an obligation of another. This by itself would not lead to a conclusion that the said persons had formed a common enterprise or an association which was moved by joint action for a common purpose. As a matter of illustration, let Court takes a case where a director of a company provides a personal guarantee for a loan taken by the company. Having stood as a surety for the company, the director and the company would be jointly and severally liable to the lender. However, they continue to be independent of each other and the fact that are jointly and severally liable cannot possibly lead to the conclusion that the company and its director constitute an Association of Persons for the purposes of the Act. In order for independent entities/individuals to be considered as an Association of Persons, they must exhibit some trappings of a partnership in relation to their common enterprise. [Para 53] Both Linde and Samsung were managing the execution of their part of the contract separately without interference by the other member. Neither Samsung nor Linde could carry out the work agreed to be performed by the other. Neither of the parties exercised any control over the quality of the equipment/plant supplied by the other or exercised any control with respect to the quality of the works executed. Each of the parties, thus, were responsible for executing the project through their own personnel and through their independent resources. There was no pooling of resources to form a common management. Each of the parties conducted its business independently. However, in terms of the MOU, Linde and Samsung had agreed to share information and material to enable the other member to perform its work. The Gantt Chart annexed to the Contract indicated the schedule in accordance with which each member was expected to complete the various tasks and works within their respective scope of works. This would undoubtedly, require co-ordination between Linde and Samsung. [Para 54] Since the said participants do not act as a single cohesive entity, but perform their independent allocated works, they cannot be considered as an Association of Persons. In order to consider independent agencies as an Association of Persons, it is necessary that they form a joint enterprise with a greater level of common management. An element of mutual agency and joint action for mutual purpose is also necessary. Mere obligation to exchange information, between independent agencies, for co-ordinating their independent tasks would not result in an inference that the agencies had constituted an Association of Persons. [Para 55] It is relevant to keep in mind that Linde and Samsung shared neither the costs nor risks. Both Linde and Samsung managed their own deliverables. As discussed above, the facts of this case do not indicate a sufficient degree of joint action between Linde and Samsung either in execution or management of the project to justify a conclusion that they had formed an Association of Persons and in our view, the Authority erred in concluding so. [Para 56] In projects where various foreign companies form a consortium for a coordinated execution of the project on turnkey basis, their limited collaboration for coordination of their inter-related tasks would not be sufficient to constitute an Association of Persons under the Act. [Para 58] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2014 TaxPub(DT) 2223 (Del-HC) : (2014) 059 (I) ITCL 0520 : (2014) 365 ITR 0001 : (2014) 268 CTR 0274 : (2014) 103 DTR 0137

Linde AG, Linde Engineering Division v. Dy. DIT

INCOME TAX ACT, 1961

--Person --AOPCommon performance of turnkey project--In order to consider independent agencies as an Association of Persons (AoP), it is necessary that parties form a joint enterprise with a greater level of common management, an element of mutual agency and joint action for mutual purpose is also necessary. Mere obligation to exchange information between independent agencies for conditioning their independent tasks would not result in an inference that the agencies had constituted an AoP, as such, facts of this case do not indicate a sufficient degree of joint action between Linde and Samsung or either in execution of management of the project to justify a conclusion that they had formed an AOP and in this view, authority erred in concluding so.

It is material to note that even, as per the terms of the Contract, the scope of work to be executed by Linde and Samsung was separate and was accordingly specified in the annexures to the Contract. The payments to be made for separate items of work were also specified. The currency in which the payments were to be made was also separately indicated. Thus, insofar as execution of the work was concerned, even OPAL recognised that different items constituting the Contract would be performed independently by Linde and Samsung. The consideration for the work performed was to be made directly to the concerned member of the Consortium in accordance with the work performed by him. Annexure C of the Contract specified the payment schedule, i.e., the amount to be paid for the supply of goods and services rendered by both the members of consortium. Linde and Samsung were to be paid on the basis of the separate invoices raised by them respectively. There was no arrangement for sharing of profits and losses between Linde and Samsung. And, each of them would make profits or incur losses based on the price as agreed by them and the costs incurred by them for performance of the contract falling within their independent scope of work. [Para 47] It follows from the above, that Linde and Samsung had joined together to (a) bid for the contract; (b) present a facade of a consortium to OPAL for execution of the contract and accept joint and several liability towards OPAL for due performance of the contract and completion of the project; and (c) put in place a management structure for inter se coordination and execution of the project. However, in all other respects, both Linde and Samsung were independent of each other and were responsible for their own deliverables under the Contract, without reference to each other. [Para 48] A plain reading of the Contract clearly indicates that insofar as OPAL is concerned, the consortium members were treated as a single party for due performance of the Contract. However, the annexures to the contract provided for the split of the Contract between the consortium members and amounts payable to each of the consortium members is detailed separately. The scope of work of each of the members was also separately listed. The Contract specified that an organisation structure would be set up which would facilitate OPAL in dealing with the consortium members collectively and not separately. The only conclusion one can draw is that while OPAL treated the consortium members as a single entity for imposing liability for due performance of the Contract, OPAL also recognized that each consortium member would perform the items of work falling within their respective scope of work, independently. [Para 51] While, it is relevant as to how a third party deals with the members of a consortium, the same would not be conclusive in determining whether the consortium members constitute an Association of Persons. It is indisputable that the purpose of Linde and Samsung in collaborating with each other was to procure the Contract and, to that end, both the said members had agreed to present themselves as a consortium. However, as stated earlier the question as to whether the said 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. The fact that a third party is desirous to deal with the members as one consortium cannot be the determinative factor in considering whether the members constitute an Association of Persons for the purposes of being assessed for taxation. Both the consortium members had agreed to present a common face. However, the agreement inter se between the members clearly spelt out that except for presenting a common face and complying with the conditions as imposed by OPAL, the members would conduct their business independently with no interference from the other. This, clearly indicates that Linde and Samsung had no intention to form an Association of Persons. Clause 4.8 of the MOU and 16 of the Internal Consortium Agreement expressly recorded that the members did not have any intention to form an association. [Para 52] This court is also unable to accept the contention that the fact that Samsung and Linde had agreed to be jointly and severally liable for performance of the contract, would be sufficient to hold that they constituted an Association of Persons for the purposes of the Act. Linde and Samsung agreeing to be jointly and severally liable to OPAL for due performance of the Contract only indicates that Linde and Samsung had accepted a contractual obligation towards a third party, the same does not, by itself, lead to a conclusion that the said members had formed an Association of Persons. Any entity/individual may agree, for its own business purposes, to accept a liability for due performance of an obligation of another. This by itself would not lead to a conclusion that the said persons had formed a common enterprise or an association which was moved by joint action for a common purpose. As a matter of illustration, let Court takes a case where a director of a company provides a personal guarantee for a loan taken by the company. Having stood as a surety for the company, the director and the company would be jointly and severally liable to the lender. However, they continue to be independent of each other and the fact that are jointly and severally liable cannot possibly lead to the conclusion that the company and its director constitute an Association of Persons for the purposes of the Act. In order for independent entities/individuals to be considered as an Association of Persons, they must exhibit some trappings of a partnership in relation to their common enterprise. [Para 53] Both Linde and Samsung were managing the execution of their part of the contract separately without interference by the other member. Neither Samsung nor Linde could carry out the work agreed to be performed by the other. Neither of the parties exercised any control over the quality of the equipment/plant supplied by the other or exercised any control with respect to the quality of the works executed. Each of the parties, thus, were responsible for executing the project through their own personnel and through their independent resources. There was no pooling of resources to form a common management. Each of the parties conducted its business independently. However, in terms of the MOU, Linde and Samsung had agreed to share information and material to enable the other member to perform its work. The Gantt Chart annexed to the Contract indicated the schedule in accordance with which each member was expected to complete the various tasks and works within their respective scope of works. This would undoubtedly, require co-ordination between Linde and Samsung. [Para 54] Since the said participants do not act as a single cohesive entity, but perform their independent allocated works, they cannot be considered as an Association of Persons. In order to consider independent agencies as an Association of Persons, it is necessary that they form a joint enterprise with a greater level of common management. An element of mutual agency and joint action for mutual purpose is also necessary. Mere obligation to exchange information, between independent agencies, for co-ordinating their independent tasks would not result in an inference that the agencies had constituted an Association of Persons. [Para 55] It is relevant to keep in mind that Linde and Samsung shared neither the costs nor risks. Both Linde and Samsung managed their own deliverables. As discussed above, the facts of this case do not indicate a sufficient degree of joint action between Linde and Samsung either in execution or management of the project to justify a conclusion that they had formed an Association of Persons and in our view, the Authority erred in concluding so. [Para 56] In projects where various foreign companies form a consortium for a coordinated execution of the project on turnkey basis, their limited collaboration for coordination of their inter-related tasks would not be sufficient to constitute an Association of Persons under the Act. [Para 58]