Category Archives: Circulars

Taxability of Consortium Members in Large Infrastructure Projects-CBDT Clarification

CircularNo. 07/2016

Government of India

Ministry of Finance

Department of Revenue

Central board of  Direct Taxes


North Block, New Delhi, the 7th of March, 2016

Subject: Clarification regarding taxability of consortium members-reg.-

A  Consortium of contractors is often formed to implement large infrastructure projects, particularly in Engineering , Procurement and Construction (‘EPC’)  Contracts and Turnkey Projects.  The tax authorities,  in many cases  have taken a position that such a consortium constitutes an Association of persons (‘AOP’) i.e.  a separate entity for charging tax.  The claim of tax payers,  on the other hand, is contrary  to this view. This  has led to tax disputes particularly  in those cases where each member of the consortium, although jointly and severally  liable to the contractee, has a clear distinction  and role in scope of work, responsibilities and liabilities of the consortium members.

2. The term AOP has not been specifically defined in the Income tax- Act, 1961 (‘Act’). The issue as to what would constitute an AOP was considered by the Apex Court in some cases. Although certain guidelines were prescribed in this regard , the Court opined that there is no formula of universal application so as to conclusively decide the existence  of an AOP and it would rather depend upon the particular facts and circumstances  of a case. In the specific context  of the EPC  contracts/Turnkey projects, there are several contrary  ruling of various Courts on what constitutes an AOP.

3. The matter has been examined. With a view to avoid tax-disputes and to have consistency in approach while handling these cases, the board has decided that a consortium arrangement for executing EPC/Turnkey contracts which has the following attributes may not be treated as an AOP:

a. each member is independently responsible  for executing its part of work  through its own  resources  and also bear the risk of its scope of work i.e. there is a clear demarcation in  the  work and costs  between the consortium members and each member incurs expenditure only in its specified area of work.

b. each member earns profit or incurs losses, based on performance of the contract falling strictly within its scope of work. However, consortium members may share contract price at gross level only to facilitate convenience in billing;

c. the men and materials used for any area of work are under the risk and control of respective consortium members;

d. the control and management of the consortium is not unified and common management is only for the enter –se coordination between the consortium members for administrative convenience;

4. There may be other additional factors also which may justify that consortium is not an AOP and the same shall depend upon the specific facts and circumstances of a particular case, which need to be taken in to consideration while taking a view in the matter .

5. It is further clarified that this Circular shall not be applicable in cases where all or some of the members of the consortium are Associated Enterprises within the meaning of section 92A of tha Act. In such cases, the assessing office will decide whether an AOP is formed or not keeping in view the relevant provisions of the Act and judicial jurisprudence on this issue .

6. The above may be brought to the notice of all for necessary compliance.

7. Hindi version to follow.

(Rohit Garg)

Deputy Secretary to the Government of India


CBDT Guidelines/Instructions for determining gains on sale of shares and securities whether Capital Gains or Business Income

Circular No.6/2016

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

North Block, New Delhi, the 29th of February, 2016

Sub: Issue of taxability of surplus on sale of shares and securities – Capital Gains or Business Income – Instructions in order to reduce litigation – reg.-

Sub-section (14) of Section 2 of the Income-tax Act, 1961 (‘Act’) defines the term “capital asset” to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities,the same can be held either as capital assets or stock-in-trade/ trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot ot uncertainty and litigation in the past.

  1. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes (‘CBDT’) has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.
  2. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following-

(a)   Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income.

(b)   In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;

(c)   In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.

  1. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain I Short Term Capital Loss or any other sham transactions.
  2. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.

(Rohit Garg)

Deputy Secretary Government of India

F.No.225/ 12/2016 -ITA-II