Separate roles and profits reduce ventures’ tax risks

By Pranay Bhatia and Janhavi Sharma, Economic Laws Practice

Recent Indian judicial decisions have increased uncertainty about taxes in respect of joint ventures where the venture is not a legal entity. Many such ventures are treated as an “association of persons” (AOP) – a tax concept leading to higher taxes on revenue. Indeed, the tax authorities have extended the AOP concept not only to industries with hard assets like infrastructure but also to industries such as media and entertainment.

What is an AOP?

The term AOP is not defined under the Income Tax Act, 1961. Section 2(31) of the act defines the term “person” which includes “an association of persons or a body of individuals, whether incorporated or not”. The explanation to the section clarifies that “an AOP shall be deemed to be a person, whether or not formed with the object of deriving income, profits or gains”.

Pranay Bhatia Partner Economic Laws Practice
Pranay Bhatia
Economic Laws Practice

Various judicial precedents have laid down the parameters that determine the existence of an AOP. The Supreme Court in the case of CIT v Indira Balkrinan (1960) held that a joint venture would be an AOP if the parties have come together with a common purpose to earn revenue from the venture.

The factors to determine an AOP have been further explained by the Authority for Advance Rulings (AAR) in cases such as Van Oord Acz BV (2001) and Hyundai Rotem Co (2008), in which the AAR held that the parties share the risks of the venture, in addition to coming together for a common purpose and sharing of revenues. Also, with regards to the revenue, each of the parties would ascertain its individual profits and losses from the arrangement. Mere collection and distribution of the revenues would not result in an AOP.

Further, the scope of work of the parties should not be mutually exclusive. All the parties should be in a position to undertake all the work assigned to the AOP as they would be not only jointly but also severally liable for the work to be undertaken.

Recent practice

The revenue authorities have lately gone after joint ventures where parties have come together to bid for a turnkey or infrastructure contract and treated them as an AOP. The authorities contend that the parties form a consortium with a sole intent to come together to earn revenue. This means that any arrangement or agreement where the parties come together to jointly undertake an activity or venture risks being treated as an AOP.

The tax authorities have relied mainly on the criteria of revenue sharing, without appreciating that in some instances, the primary objective to come together is to win the bid and execute the project independently. They have ignored other aspects such as sharing of risks, division of work, mutually exclusive scope of work and distribution of profits/losses from the venture.

In the case of Linde AG (2010), the AAR held that the consortium formed by the parties with a common purpose and to earn revenue would be an AOP.

Janhavi Sharma Associate Economic Laws Practice
Janhavi Sharma
Economic Laws

Key requirements

For a joint venture to be an AOP, it is not enough that the parties come together to jointly undertake a venture. It is the division of risks and rewards of the venture that is instrumental in determining an AOP. It is the agreement between the parties of the joint venture with regards to the sharing of revenue that needs to be looked into.

The risk of being treated as an AOP increases if the risks and liabilities of the parties of the joint venture are joint and several. It is essential that the scope of work of each of the parties is distinct and mutually exclusive as this is fundamental in determining an AOP.


It is essential that the parties to a joint venture or other arrangement articulate their arrangement specifically and clearly in the agreement that they present at the time of bids. The agreement should specifically lay down the terms of sharing of revenue and losses among the parties. It is essential to specify that each of the parties will bear its own profits and losses.

Where parties come together for a common goal or purpose, it is essential to demonstrate that the scope of work of each of the parties is distinct and mutually exclusive, and that the work of one party cannot be undertaken by any other party. This would substantiate the claim that the risks and rewards are not shared among the parties. Documenting the arrangement in the agreement is the key to averting the risk of being treated as an AOP.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Pranay Bhatia is a partner at the firm and Janhavi Sharma is an associate.


Economic Laws Practice

1502 A Wing, Dalamal Towers

Free Press Journal Road

Nariman Point, Mumbai 400021


Tel: +91 22 6636 7000

Fax: +91 22 6636 7172