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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SHRI A. MOHAN ALANKAMONY & SHRI V. DURGA RAO
ORDER PER A. MOHAN ALANKAMONY, AM.:
The captioned appeal is filed by the Revenue and the Cross Objection is filed by the assessee against the order of the Ld. CIT (A)-5, Hyderabad in appeal No. 0687/2014-15/CIT (A)-5, dated 29/03/2016 passed U/s. 143(3) r.w.s. 250(6) of the Act for the AY 2012-13. Considering the affidavit filed by the Revenue we hereby condone the 10 days delay in filing the appeal before the Tribunal.
The Revenue is aggrieved by the order of the Ld. CIT (A) because, the ld. CIT (A) had granted deduction to the assessee U/s. 80IA of the Act which the ld. AO had disallowed. The assessee is aggrieved by the order of the ld. CIT (A) because the Ld. CIT (A) had held that the assessee is not entitled for deduction U/s. 80IA of the Act with respect to Fluoride Removal Unit and Arsenic Removal Units.
The brief facts of the case are that the assessee is a private limited Company engaged in the business of developing, operating and maintaining community water system and contamination removal water system, filed its return of income for the AY 2012-13 declaring its income as Rs. 55,19,189/-. Thereafter, the case was selected for scrutiny under CASS and assessment was completed on 4/3/2015 U/s. 143(3) of the Act wherein the Ld. AO disallowed the claim of deduction U/s. 80IA of the Act and thereby made addition of Rs. 2,72,58,451/- by holding that the assessee is not a developer in community water system but merely executing works contract on behalf of the State Government.
The assessee had explained before the Ld. AO the following facts:-
“1) The work undertaken is establishment of Community Water System providing purified water to the villages: 2) The assessee is entrusted with the entire work of establishing water treatment plant, as can be seen from the following: a) The Government of the respective State entrust the work of supply, erection , commissioning and operation and maintenance of the water treatment plant to the assessee; b) The duties and responsibilities of the assessee include location of the place in the village along with the officials of village panchayat; c) preparation of drawings for construction of the building / shed for installation of the water treatment plant; d) the assessee designs the building, provide plan / drawings for such construction and undertakes construction of the building necessary for installation of the plant and equipment; e) The water treatment plat is supplied to the village and such plant is erected in the building so constructed. f) The trial run is conducted to verify the working of the system. 3) The assessee undertakes maintenance of the plant for a period of 10 years. It supplies drinking water to the villagers at a cost of Rs. 2 to Rs. 7 per jar of twenty litres each. 4) The assessee undertakes maintenance during the said period of 10 years. 5) The assessee thus locates the place, prepares designs for construction of the building, undertakes construction of the building with its funds. 6) The assessee purchases the plant and erect at the place. All the necessary expenditure is incurred by the assessee for the above works out of it own funds initially and lter it would be reimbursed partly by the Government and partly through the sale of purified water during the period of operation and maintenance. It undertakes the financial risk and all other risks in the process of completing the erection of the plant; operation of the plant for purification of drinking water and supply such purified water to the villagers. The assessee is submitting a copy of the agreement with the Government of Karnatka. It can be seen from the agreement that the entire work of supply, erection and commissioning of the Water Treatment Plant is done by the assessee and the operation and maintenance of the plact is also undertaken by it. The work also involves, investigation, testing; designing; supply and installation of the RO plants after construction of the Shelter. It is clear from the agreement that the supply and installation of the plant, maintenance of water quality tests; repairs and replacements to the plant should be undertaken by the assessee; the assessee should provide men and material required; make payment of wages and salaries. It has a right to deliver the purified water at a price fixed by the Government. It is entitled only for 80% of the amount initially and the balance is to be collected by sale of water. From the above, it is very clear that the entire work of development and infrastructure facility is entrusted to the assessee and the assessee is not a mere works contractor. In this regard, the assessee relied on the following decisions…….”
Thereafter, the assessee has furnished the details of the equipment provided to the State Government with respect to the Water Treatment Plant. However, the Ld. AO rejected the explanation submitted by the assessee for the following reasons:-
(i) The Core execution of work pertains to civil contract. (ii) Predominantly the assessee had only supplied and installed water plant as per the contract.
(iii) Finance Act 2009 had made it clear that deduction U/s. 80IA of the Act is not available for works contract. (iv) The assessee is not acting in the capacity as a developer.
On appeal, the ld. CIT (A) held the issue in favour of the assessee after examining the tender papers and terms of contract, however disallowed deduction with respect to Fluoride Removal Unit and Arsenic Removal Units because the assessee had only supplied those plants and therefore, it cannot be treated as infrastructure development.
Before us, the Ld. DR vehemently argued in support of the order of the ld. AO while as the ld. AR argued in support of the order of the Ld. CIT (A) partially on the issues which were favourably decided and further pleaded that the assessee is entitled for deduction u/s. 80IA of the Act with respect to supply of Fluoride Removal Unit and Arsenic Removal Units which was held against by the Ld. CIT (A).
We have heard the rival submissions and carefully perused the materials on record. On examining the entire issue, we find that there are two limbs to the transactions involved. Firstly, it appears that the assessee had supplied equipment and machinery for water treatment plant and also erected the same. The second limb to the transaction is that the assessee is entrusted with the job of operating and maintaining the water treatment plant / water treatment system. Provisions of section 80IA(4) and explanation (1) of the Act is crystal clear that the assessee shall be entitled for the benefit of deduction if it is carrying on the business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facilities provided the conditions stipulated under 80IA(4)(i)(a)(b)(c) of the Act are fulfilled. Explanation to section 80IA(4) also makes it clear that infrastructure facility means a water supply project, water treatment system, irrigation project, sanitation and sewage system or solid waste management system. From the above, it is abundantly clear that the assessee shall be entitled for deduction U/s. 80IA(4) of the Act with respect to operating and maintaining of the water treatment system / water supply project. It is also clear that the assessee is not a developer but only operating and maintaining the water treatment system / water supply project. The contract work entrusted to the assessee for procurement and supply of water treatment system / water supply project will obviously not fall under the ambit of section 80IA (4) of the Act which the Ld. CIT (A) had also made it clear in his order by disallowing the deduction for supplying Fluoride Removal Unit and Arsenic Removal Units and it is appropriate. For procuring, supplying and erecting water treatment plant by virtue of job contract, the assessee will not be entitled for deduction U/s. 80IA(4) of the Act unless he is a developer and from the facts of the case it is apparent that the assessee is not a developer. Accordingly, we hereby hold that:-
(i) The assessee shall be entitled for the benefit of deduction U/s. 80IA(4) of the Act with respect to the profit earned out of operating and maintaining water treatment system / water supply project; (ii) However, the assessee shall not be entitled for benefit of deduction U/s. 80IA(4) of the Act with respect to the profit earned by supplying and erection of water treatment system / water supply project / Fluoride Removal Unit and Arsenic Removal Units as it is not a developer but only engaged in the task as works contractor.
It is ordered accordingly.
In the result, the appeal of the Revenue is partly allowed and the Cross Objection of the assessee is dismissed.
Pronounced in the open Court on 17th January, 2020.