The tax liability of foreign investors who bid for infrastructure projects as consortium partners could come down substantially,with a tax authority ruling that these firms would be taxed individually,not at the consortium level. The Authority for Advance Rulings (AAR) order,which many tax experts termed as landmark,would effectively mean that in most cases foreign entities in such partnerships would pay much less tax than what they would have paid as association of persons,which is how a consortium is defined in the tax law. Experts feel the order is positive for the firms bidding for contracts in India,as depending on the character of income (royalty,fee from technical services and the like in addition to normal business income),tax could now be levied at comparatively low rates of 10-20%. In contrast,the effective tax liability of an association of persons could be as high as 42% on the whole income,if the lead partner is a foreign firm. The ruling came in the case of a consortium bidding for a Delhi Metro Rail Corporation (DMRC) project. The AAR said the firms in the consortium would be taxed as separate taxable entities. The tax rate could vary for each partner,depending on the character of its income. Certain kinds of income could even be exempt. So,effectively,getting taxed as an independent taxable entity would mean a lower tax liability in many cases,besides clarity on taxation for firms coming together to take up a project in India. The AAR,while stating that companies would have to be taxed independently,pointed out,the first and foremost thing is that the nature of work undertaken and capable of being executed by each party is very much different and the scope of work assigned to one party cannot be undertaken or relocated to another. This is a landmark ruling as it clarifies that in the infrastructure sector companies come together to execute a project rather than for sharing profit or loss, said Satish Aggarwal,a Delhi-based tax expert. Aggarwal added that earlier,being taxed as an association of persons was a hassle for companies,especially when profit-sharing ratios were not determined. Four firms,Mitsubishi Corporation of Japan,Hyundai Rotem Company of South Korea,Mitsubishi Electric Corporation of Japan and Indias BEML Ltd had entered into a consortium agreement,collectively referred to as MRMB,to bid and execute a project for the Delhi Metro Rail Corporation. It is,however,not clear whether the ruling would also apply to consortia of Indian firms. The authority said,it is ruled that the MRMB Consortium cannot be treated as association of persons for the purposes of assessment under the Income-tax Act,1961 and the applicants can only be subjected to taxation on the basis that they are separate taxable entities. The revenue department wanted DMRC Consortium to be taxed as association of persons where the tax rate would depend on the rate applicable to the lead partner,if the ratio was not mentioned.
