`When a UJV can be AOP for purpose of GST :
Unincorporated form of joint venture (UJV) or revenue sharing type arrangements can be formed for various purposes – e.g. builder and landowner, hospital and company providing administrative services, film distributor and cinema exhibitor etc.
Such UJV can be termed as “AOP’ (Association of Persons) if the members of such AOP provide service jointly, the contract cannot be split and responsibility of all members is joint and several.
Following are broad tests to determine whether an EPC contract is AOP –
♦ Joining of two or more parties for a common purpose
♦ Jointness in efforts and endeavour put in by two or more parties
♦ Common management and common action
♦ Joint liability of JV partners for execution of the project
♦ Sharing of profits and losses jointly by the parties
Hence, an UJV will not be AOP if following precautions are taken.
Object should be mutual cooperation and not conducting business together – The object of UJV or consortium should be ‘mutual cooperation for execution of a (divisible) contract’ and not conducting business together.
Scope of each party’s work – Scope of each party’s work should be clearly specified in consortium or Joint Venture Agreement. Contract should be divisible contract.
Remuneration of each partner to joint venture – Mode of remuneration of each partner in joint venture should be specified in the agreement. The remuneration can be on cost plus basis or profit basis or a combination of two. Sharing of income with some minimum remuneration (e.g. the partner will get 1% of income with minimum Rs. 1,00,000 per month) can be provided.
No joint control of operations – Each joint venture partner will do his part of the work. However, a coordinating committee consisting of representatives of all joint venture partners may be formed.
Receipt of income directly by each party or through escrow account wherever possible – Best arrangement would be if each partner of UJV gets his income directly from service receiver. If this is not possible, distribution of income can be through escrow account. Escrow account is advisable since a separate legal entity is not being formed. Alternatively, one of the parties should receive payments from service receiver and then distribute it. This should be specified in the consortium agreement.
Liability of each partner to JV – Since each partner is doing his part of the work, the other partner will not be responsible for acts of other joint venture partner. This should be clarified in the Agreement. Each party should give performance guarantee for his part of work only.
Conclusion – In my view, an Unincorporated Joint Venture (UJV) or revenue sharing arrangement cannot be held as ‘AOP’ (Association of Persons) if aforesaid precautions are taken.