In a recent ruling in the case of Hyundai Rotem Korea and Mitsubishi Co Japan1 (together referred to as ‘Applicants’), the Authority for Advance Ruling (‘AAR’) has held that members of the consortium being independent of each other and having a designated role to play cannot be taxed as an Association of Persons (‘AOP’). The ruling of the AAR is discussed below.




Delhi Metro Rail Corporation (‘DMRC’) had issued tenders inviting bids under an International Competitive Bidding for Mass Rapid Transport System Phase II Contract/Tender RS3. Mitsubishi Corporation, Japan (‘MC’), Hyundai Rotem Company Korea (‘Rotem’), Mitsubishi Electric Corporation (‘MELCO’) and BEML Limited, India (‘BEML’) [‘Consortium’] entered into Consortium Agreement for the purposes of bidding for the Contract RS3. As per the terms of the Consortium Agreement, MC was appointed as the leader of the Consortium. Also for the purpose of execution of project, project board comprising of project directors from each member was constituted.


Under the Agreement, each member of the Consortium has been given with a defined responsibility. The members of the Consortium have also entered into a Supplementary Consortium Agreement (‘SCA’) which lays down the role and participation percentage of each member. The consideration amount under the tender is collected and distributed amongst the members in the pre-agreed ratio.


Applicant’s contentions:

Consortium was formed for the purpose of bidding and executing Contract RS3.

The Consortium does not constitute an AOP for the purposes of the Income Tax Act, 1961 (‘the Act’), as there is no agreement to share profits and losses or to jointly incur any expenditure. As per the Applicant, sharing of the profits, not merely gross receipts, is essential for constituting an

AOP. Otherwise, it would lead to anomalies in accounting and filing tax returns. Judicial precedents have not laid down that there need not be a division of profits, among members

for an AOP to come into existence.


Revenue’s contentions:

The following factors establish that the Consortium constitutes an AOP:

Formation of the Consortium and joint participation of the members in the tender process and

execution of a single contract.

Nomination of a leader of the Consortium leader and the constitution of the project board comprising of Project Director of each member for overall planning, organizing and controlling the execution of the project. Lump sum consideration and payments made from time to time in the name of the leader, ie, MC.

Joint and several liability towards DMRC. Risk and cost by reason of defect or damage is cast on the Consortium and not on individual members. Performance guarantee was provided by the Consortium.


Decision of AAR:

The nature of the work undertaken in capable of being executed by each party is different and the

scope of work assigned to one party cannot be undertaken or relocated to another. The members of the Consortium has different skill sets and interchangeability or re-assignment of work and overseeing each other’s work is not possible. The members do not act as an agent of each other.

The SCA provides that “nothing in the agreement is intended or shall be construed as creating a partnership, joint venture or any other legal entity among the parties”. 


When the original bid amount was reduced, the participation ratio has been varied with each party

agreeing for a certain percentage of its own discount. Apart from the above, profits and losses being borne by the individual members themselves and common expenditure not being incurred by them. In addition to the performance guarantee provided by the Consortium, DMRC had taken guarantee from the parent entity of each company of the Consortium. The joint and several liability were introduced as a safeguard to DMRC to have a better hold over the Consortium members.

In light of the above, the AAR held that the Consortium cannot be regarded as AOP and be assessed to tax on the basis that they are separate taxable entities.


Viewpoint : 


An AOP is regarded as an Indian tax resident where even a part of the control and management of its affairs is situated in India. Whereas, foreign companies are regarded as tax residents of India only where the whole of the control and management of its affairs is situated in India. Given that an Indian tax resident is taxable on its worldwide profits; foreign companies part of AOP would be taxable in India even in respect of off-shore supply, which would not otherwise be taxable if they were taxed independently.


This ruling has reiterated the established principle under the income-tax law that sharing of profits and not income would be primary factor in the determination of existence of an AOP. While the AAR also held that in addition to the aforesaid, other factors such as inter-changeability of skills between consortium members etc would also play a role in the determination of constitution of an AOP. In coming to its conclusion, the AAR discussed and distinguished judicial precedents in light of the facts of this case. This ruling should help in structuring of bids by consortium members in respect of future infrastructure projects. Further, existing consortiums would need to review their fact pattern to evaluate any potential AOP exposure.

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