A typical Engineering, Procurement and Construction (EPC) contract in any field requires a number of specialised areas of expertise. As a result most of the EPC contracts are executed by an un-incorporated association of companies. Driven by the requirement of different skill sets, there is usually an equipment supplier and a turnkey construction contractor in the consortium. These consortiums are neither partnership firms nor joint ventures. It is not a novelty as this pattern of doing business has been followed for quite a few decades now. In this kind of arrangement, scope of work is clearly agreed between the members and the proportion of revenue sharing is pre-defined as per their respective scope of work. The owner would release the entire revenue to the lead member of the consortium as the internal arrangement between the members is not shared with the owner. The money collected by lead member is further transferred to the accounts of members as per their corresponding share.
Is it that the consortium members rendering services to the principal owner in their individual capacity or is it, just because the money is received in lead member’s account and shared further, members are inter se rendering services to lead member?
Similarly, in oil exploration business Government of India invites bids from firms having previous experience in the field of oil exploration. These consortiums periodically contribute funds into a common account to meet the expenses towards such exploration. In many cases where they fail to find oil, the consortium is dismantled and the members respectively write off their share of expenses as loss. However, where they succeed in finding oil, such oil is sold by the consortium to the Government of India, which transfers the revenue into the common account or the account of the lead manger, which is further shared by the members of the cartel. The question from a service tax perspective is similar to the question posed earlier in context of EPC contractors. Are the members of the consortium receiving services from the lead member of the consortium because they pay funds into a bank account operated by the lead member?
There are many examples of revenue sharing that one encounters in the course of working in various industries. In all such cases, our view is that the consortium acts collectively to further some common business objective, and do not provide services to each other. In the case of the EPC contract, the members of the consortium pool their efforts to design and build a steel plant or a petrochemicals complex, etc. They provide services to the owner and not to each other. In the case of the consortium formed for oil exploration, the members contribute to a venture that is aimed at discovering oil. It is not the case that the operator of the consortium provides services to the other members, for which it receives a consideration by way of funds being remitted into the bank account opened in the name of the operator.
However, the service tax authorities frequently take the position that the members are providing services to the consortium. This creates considerable uncertainty and disputes as the lead member of the consortium tries to explain the overall arrangement to a sceptical revenue officer.
Similar to revenue sharing there could be arrangements for cost sharing between parties, which could simply exist to garner the synergies of volume, ease of payment or such similar benefits.
Groups of companies under common ownership frequently take a building on lease to run their businesses. In this arrangement, a lead company pays lease rent, electricity and other charges. Periodically, these entire expenses are divided amongst the occupants in an agreed proportion.
Again the question remains the same, as to whether these occupants are in receipt of services in their individual capacity from the owner of the building or the electricity board which is supplying electricity, or is the lead company rendering services to all others?
This question is academic in cases where the services are taxable, such as with a construction contract. If the members are providing services to the lead member, he can take credit for the service tax billed and bill it in turn to the customer. However, in the oil and gas consortium a single company engaged in oil exploration would not attract service tax. In the cost sharing example, the effect of treating the cost sharing as a taxable service is that non taxable costs such as electricity and water charges are converted into taxable services simply because of a recharge of costs. The Government had brought out the concept of a ‘pure agent’ earlier, in a similar fashion, perhaps it could lay down tests where a revenue share or a cost share would not be subject to service tax.
(Supported by Tajinder Singh)
The Author is Leader, Indirect Tax Practice, PricewaterhouseCoopers pwctls.nd@in.pwc.com
