Joint ventures with local taxpayers in India could become more expensive for overseas companies after the decision by the Authority for Advance Rulings (AAR) in the Geoconsult case.
Austria's Geoconsult argued that income from its joint venture with Rites and Secon, an Indian construction group, should be taxed as fees for technical services as it did not have a permanent establishment (PE) in India.
The tax authorities contested that the consortium arrangement between the Geoconsult and its Indian partners was an Association of Persons (AOP) and should be assessed on a net income basis.
The ruling shows the existence of an AOP is determined by the tax authorities on a case-by-case basis and that it is something that should be considered by companies entering into a joint venture.
"When two or more persons join in a common purpose or common action, with an object of producing income, profits or gains then such association is assessable as AOP," said Ankita Maheshka of BMR Advisors in India.
"This ruling brings out the key ingredients required to be assessed as an AOP," Nayak said. "Although the ruling is only binding on the applicant in respect of the transaction, it does have persuasive value and the Indian courts, revenue authorities and appellate authorities do recognise the principles and ration laid down by the AAR while deciding other cases," he said.
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