Alstom Transport SA vs. DIT (AAR)

Composite contract cannot be split to exempt profits from offshore supply of goods. A joint contract constitutes an AOP despite separate responsibility of parties

The Applicant, a foreign company, entered into a consortium agreement with three other cpmpanies for the submission of a joint bid in response to the Bangalore Metro Rail Corporation Ltd’s (BMRC) tender for “design, manufacture, supply, installation, testing & commissioning of signaling/ train control and communication systems”. The consortium parties agreed to be jointly and severally liable to BMRC for the performance of all obligations under the contract. However, the respective obligations of the parties was split up & each was separately responsible for its own profit/loss. The bid was accepted by BMRC and a contract between BMRC and the Consortium was entered into. The applicant filed an applicant for advance ruling and claimed, relying on Ishikawajima–Harima 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corp 341 ITR 18 (AAR), that the income derived by it from offshore supply of plant and materials was not taxable in India as the title to the goods had passed, and payment was received, outside India. It was also claimed that as each consortium member had separate responsibility and was accountable for its own profit/ loss, the fact that the contract with BMRC was joint, did not make the consortium an “AOP”. HELD by the AAR rejecting the plea:

(i) Though in Ishikawajima–Harima 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corp 341 ITR 18 (AAR), it was held that that a composite contract was capable of being dissected and it was open to the assessee to raise the contention that parts of the contract should be treated separately for the purpose of deciding whether income from the performance of that part of the contract arose onshore or offshore and that part of the income attributable to offshore transaction cannot be taxed in India, this is no longer good law in view of the larger bench decision in Vodafone International Holdings where it was held that the transaction has to be looked at as a whole and not by adopting a dissecting approach. The basic principle in interpretation of a contract is to read it as a whole and to construe all its terms in the context of the object sought to be achieved. Reading parts of the contract as imposing distinct obligations is not the proper way to understand a composite contract;

(ii) On facts, the contract entered into with BMRC was a composite one for the design, manufacture, supply, installation, testing & commissioning of signaling system for which a lump sum consideration was paid. Such a contract cannot be split up into separate parts as consisting of independent supply or sale of goods and for installation at the work site, leading to the commissioning and so on (Linde AG AAR 962/2010 & Roxar Maximum (AAR) followed).

(iii) Further, as the applicant and the others came together for jointly executing the project, they constituted an AOP & were liable to be taxed as such. The argument that the obligations undertaken by the Consortium jointly and directly under the contract were not relevant in considering the question whether there was an AOP but what was relevant was only their relationship inter se is not acceptable. The fact that between themselves, the members of the Consortium divide the performance of the obligation does not affect the nature and content of the obligation undertaken by them jointly.