Circular regarding Joint Ventures and levy of service tax

Cir­cu­lar No. 179/5/2014-ST

Dat­ed: 24^th Sep’ 2014

Cer­tain doubts have been raised regard­ing the levy of ser­vice tax on tax­able ser­vices pro­vid­ed (i) by the mem­bers of the Joint Ven­ture (JV) to the JV and vice ver­sa; and (ii) inter se between the mem­bers of the JV. In addi­tion, doubts have also been raised regard­ing tax­a­tion of cash calls or cap­i­tal con­tri­bu­tion made by the mem­bers to the JV and also admin­is­tra­tive ser­vices pro­vid­ed by a mem­ber to the JV.

2. The issue has been exam­ined. With effect from 1^stJuly, 2012, under the neg­a­tive list approach, all ser­vices are tax­able sub­ject to the def­i­n­i­tion of the ser­vice [avail­able in sec­tion 65B (44) of the Finance Act, 1994], oth­er than the ser­vices spec­i­fied in the neg­a­tive list [sec­tion 66D] and exemp­tion noti­fi­ca­tion [Noti­fi­ca­tion No. 25/2012-ST]. Accord­ing to Expla­na­tion 3(a) of the def­i­n­i­tion of ser­vice, “an unin­cor­po­rat­ed asso­ci­a­tion or a body of per­sons, as the case may be, and a mem­ber there­of shall be treat­ed as dis­tinct per­sons”. In accor­dance with the above expla­na­tion, JV and the mem­bers of the JV are treat­ed as dis­tinct per­sons and there­fore, tax­able ser­vices pro­vid­ed for con­sid­er­a­tion, by the JV to its mem­bers or vice ver­sa and between the mem­bers of the JV are taxable.

3. In the con­text of a JV project, cash calls are cap­i­tal con­tri­bu­tions made by the mem­bers of JV to the JV. If cash calls are merelya trans­ac­tion in mon­ey, they are exclud­ed from the def­i­n­i­tion of ser­vice pro­vid­ed in sec­tion 65B(44) of the Finance Act, 1994. Whether a ‘cash call’ is ‘mere­ly… a trans­ac­tion in mon­ey’ [in terms of sec­tion 65B(44) of the Finance Act, 1994] and hence not in the nature of con­sid­er­a­tion for tax­able ser­vice, would depend on the terms of the Joint Ven­ture Agree­ment, which may vary from case to case.

4. Detailed and close scruti­ny of the terms of JV agree­ment may be required in each case, to deter­mine the ser­vice tax treat­ment of cash calls. Some impor­tant aspects, by way of illus­tra­tion, which could be exam­ined in this regard, are:-

4.1     Tax­able ser­vice pro­vid­ed by a JV to its members:

Cash calls, some­times, could be in the nature of advance pay­ments made by mem­bers towards tax­able ser­vices to be received from the JV. For instance, JV which receives the cash call from its mem­bers may in return agree to do some­thing of direct ben­e­fit either to the mem­ber or on the behest of a mem­ber to a third par­ty, such as grant­i­ng of right, reserv­ing pro­duc­tion capac­i­ty or pro­vid­ing an option on future supplies.

4.1.1   Tax­able ser­vices received by a JV from its mem­bers or third party:

Pay­ments made out of cash calls pooled by a JV, towards tax­able ser­vices received from a mem­ber or a third par­ty is in the nature of con­sid­er­a­tion and hence attracts ser­vice tax.

4.2      Tax­able ser­vices pro­vid­ed by mem­bers to the JV:

Usu­al­ly respon­si­bil­i­ty of man­ag­ing the cash calls of the JV is assigned to one or some of the mem­bers of the JV, by way of a con­trac­tu­al agree­ment, for which he/they may receive a con­sid­er­a­tion either in cash or kind (say, goods or services).

A mem­ber of JV may pro­vide sup­port ser­vices (for exam­ple, admin­is­tra­tive ser­vice in the form of set­ting up/management of a project office/site office) to the JV for a con­sid­er­a­tion either in cash or kind (say, goods or services).

5. JV being an unin­cor­po­rat­ed tem­po­rary asso­ci­a­tion con­sti­tut­ed for the lim­it­ed pur­pose of car­ry­ing out a spec­i­fied project with­in a time frame, a com­pre­hen­sive exam­i­na­tion of the var­i­ous JV agree­ments (at times, there could be num­ber of inter se agree­ments between mem­bers of the JV) holds the key to under­stand­ing of the tax­a­tion of trans­ac­tions involv­ing tax­able ser­vices between the JV and its mem­bers or inter-se  between the mem­bers of a JV. There­fore offi­cers in the field for­ma­tions are advised to care­ful­ly exam­ine the levi­a­bil­i­ty of ser­vice tax with ref­er­ence to the spe­cif­ic terms/clauses of each JV agreement.

6.        All con­cerned are request­ed to acknowl­edge the receipt of this circular.