DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 1(1)(2), BANGALORE vs. M/S. BANGALORE INTERNATIONAL AIRPORT LIMITED, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER

ITA No.191/Bang/2020 Assessment year : 2013-14

Bangalore International Airport Ltd., Vs. The Deputy Commissioner Alpha 2, Administration Block, of Income Tax, Kempegowda International Airport, Circle 1(1)(2), Devanhalli, Bangalore – 560 300. Bengaluru. PAN: AABCB 8973D APPELLANT RESPONDENT

ITA No.374/Bang/2020 Assessment year : 2013-14

The Deputy Commissioner Vs. Bangalore International Airport Ltd., of Income Tax, Devanhalli, Bangalore – 560 300. Circle 1(1)(2), Bengaluru. PAN: AABCB 8973D APPELLANT RESPONDENT

Appellant by : Shri T. Suryanarayana, Senior Advocate Respondent by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru.

Date of hearing : 31.05.2022 Date of Pronouncement : 14.06.2022 O R D E R Per Padmavathy S., Accountant Member These are cross appeals filed by the assessee and the revenue arising out of the order of the CIT(Appeals)–1, Bengaluru dated 18.03.2020 for the assessment year 2013-14.

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“The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under: 1. The Order/ Directions are bad in law and on facts The order issued by the Commissioner of Income Tax (Appeals) - I ['CIT(A)'], under section 250 of the Income-tax Act, 1961 ['the Act'], is partially bad in law and on facts and is in violation of the principles of natural justice. Tax effect: Nil 2. Deduction under section 80-IA of the Act 1. The CIT(A) has erred in law and on facts in treating other income from other deposits amounting to INR 113,389,608; 70% revenue share fee from food and beverage amounting to INR. 97,736,920 and 70% revenue share fee from retail outlets amounting to INR 237,416,659 as ineligible incomes while computing the deduction under section 80- IA of the Act 2. The CIT(A) have erred in law and on facts in holding that the interest income earned by the appellant from various deposits made are ineligible incomes while computing the deduction under section 80-IA of the Act. 3. The CIT(A) have erred in law and on facts in holding that the appellant has formed joint venture partnerships (JV) with the third parties and have earned revenue share from the entire JV activity, instead of letting out the space at reasonable rate and therefore considered the same as ineligible income under section 80IA of the Act. 4. The CIT(A) has erred in law and on facts in not giving cognizance that the Appellant is engaged in developing, operating and maintaining an infrastructure facility i.e., an airport and all such activities and revenue therefrom are inextricably linked to the operations and maintenance of the airport.

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Tax effect: Reduction in MAT credit - INR 145,529,837 3. Short grant of credit of taxes deducted at source The CIT(A) has erred in dismissing the above ground by not adjudicating the same. The Deputy Commissioner of Income Tax (Appeals) - I erred in facts by granting credit of taxes deducted at source amounting to INR 611,604,710 against credit of INR 611,717,836, as claimed in the return of income, resulting into short grant of TDS credit of INR 113,126. Tax effect: Reduction in refund - INR 113,126 4. Initiation of penalty proceedings That the AO have erred in facts and law in initiating proceedings under Section 271(1)(c) of the Act 5. Relief That the Appellant prays that directions be given to grant all such relief and arising from the above grounds and also relief consequential thereto That the Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal at any time before or during the hearing of the appeal.” 3. The revenue raised the following grounds:- “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. I. The Ld. CIT (A) erred in treating the concession fee as an ascertained liability. II- The Ld. CIT (A) erred in deleting the addition of concession fee by relying on its own decision in the case of the assessee for the earlier AY 2010-11 wherein the nature of liability was not the subject matter of appeal.

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III- The Ld. CIT (A) erred in allowing the assessee's claim of deduction u/s 80IA on "Other Income" which was not directly derived from its business activity. IV- The Ld. CIT (A) erred in allowing the assessee's claim of deduction u/s 80IA on "Revenue share fee from food and beverages" by giving relief of 30% of revenue from non- aeronautical activity i.e. from food and beverages which is not sources from the business operation of assessee i.e. build, operate and maintenance of airport. V- The Ld. CIT (A) erred in allowing the assessee's claim of deduction u/s 80IA on "Revenue share fee from rental outlets" by giving relief of 30% of revenue from rental outlets which is not sources from the business operation of assessee i.e. build, operate and maintenance of airport. 3. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the Ld. CIT (A) be reversed and that of the Assessing Officer be restored. 4. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of appeal.” 3. The main issues arising out of these cross appeals are as follows:-

(1) Eligibility to claim deduction under Section 80IA of the Act by the Assessee in respect of the following income (Assessee’s appeal Ground No.2 and Revenue’s appeal ground Nos. 2.III to 2.V): - Other income: Rs. 16,47,89,608/-; - Revenue share fee from food and beverage: Rs. 13,96,24,171/- and - Revenue share fee from retail outlets: Rs. 33,91,66,656/-.; and (2) Disallowance of concession fee under Section 43B of the Act (Revenue’s appeal Ground No.2.I and 2.II)

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Other income of Rs. 16,47,89,608/-

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tenders. Further it had borrowed funds from various banks and as per the lending agreements, the Assessee is required to place funds in fixed deposits with the said banks, to adhere to the covenants in the relevant trust and retention agreements. As per the covenants, the Assessee is required to maintain debt service reserve amount and on the deposits so maintained, the Assessee earned incidental interest. Therefore, the assessee submitted that the tender fee and the interest are integral part of the business of the assessee and therefore eligible for deduction u/s.80IA.

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tender fees is earned for awarding tender which is part of the business operations of the assessee i.e., operation and management of the Bangalore International Airport. In a recent decision the Odissa High Court in the case of 12. Odisha Power Generation Corporation Ltd. Vs ACIT (ITA Nos.1, 2, 3 of 2015 and 24 and 25 of 2009 dated 11/03/2022) dealt with the issue of whether, interest on Bond having direct nexus with business is eligible for deduction Section 80-IA. The Hon’ble High Court held as follows:- “7. It was submitted that the amount shown under the head ‘other income’ is nothing but the outcome of the generation and distribution of power by the Assessee since the Assessee does not have any other source of business. Reliance was placed on the decision of the Supreme Court of India in Commissioner of Income Tax v. Meghalaya Steels Ltd. (2016) 6 SCC 747. 8. Countering the above submissions, Mr. Satapathy, learned Senior Standing Counsel for the Department contended that the critical words in Section 80-IA of the IT Act were that the other income must be derived from the business of generation of electricity and not merely ‘attributable’ to it. In other words, such income should have a direct and active nexus to the main activity. It was contended that the income, profit or gain cannot be said to have been ‘derived’ from an activity merely because such activities may have helped the Assessee earn income or profit in an indirect manner. According to Mr. Satapathy, applying the test evolved in Pandian Chemicals Ltd. (supra), the AO, the CIT (A) and the ITAT were correct in disallowing the above sum as deduction under Section 80-IA of the IT Act under the head “other income”. 9. The relevant portion of Section 80-IA (4)(iv)(a) of the IT Act reads as under:

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80 IA (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub- section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years. (2) – (3) ….. (4) This section applies to— (i) xx xx xx (iv) an undertaking which, — (a) is set up in any part of India for the generation or generation and distribution of power if it begins to generate power at any time during the period beginning on the 1st day of April, 1993 and ending on the 31st March, 2017.” 10. Thus Section 80-IA(1) states that where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4), which includes the business of power generation, there shall be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred percent of the profits and gains ‘derived from’ such business for ten consecutive assessment years. It must be noted that this is almost similarly worded as Section 80IB and 80IC of the Act. These provisions use the expression ‘profits and gains derived from any business’. The deduction of the entire profits and gains is allowed for a certain period of time to encourage the setting up of certain core or essential industries. 11. In the instant case, the Assessee has no other source of income except through generation and sale of power. All its receipts and expenditure relate to a single activity of power generation. There is no dispute that it is an industrial undertaking covered under Section 80 IA of the Act and that its net profit is

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otherwise eligible for deduction under Section 80-IA of the Act. The very object of enacting Section 80-IA was to encourage setting up of an industry involved in the generation and distribution of electricity or any other form of energy and the production, manufacture and construction of articles specified in the 5th Schedule to the Act. The idea was to provide incentives for promoting efficiency in the industry. 12. The Assessee offered an explanation regarding interest income earned by it, from advances given to its employees as well as provision of electricity and water charges collected from water through its employees and contractors for facilities in the township, receipt from transit hostel, sale of scrap, insurance claim etc. The facilities were given to its employees for better conditions of employment. This was to improve the overall efficiency of the undertaking which is devoted to the single purpose of generation of power. The Court, therefore, has no difficulty in accepting the submission of the Assessee that the interest received on advances and loans given to its employees are receipts in normal course of carrying its business and should be considered as income derived from its essential business activities. Likewise, the late payment by GRIDCO for the electricity supplied, is sought to be made up by GRIDCO by issuing bonds on which the Assessee earns interest. This also therefore, has a direct nexus with the essential business activity of the Assessee. 13. In CIT v. Meghalaya Steels Ltd. (supra), the Respondent there was engaged in manufacturing steel and ferro silicon. The interest earned on the subsidies were treated as not income derived from business of the Assessee and therefore, not having a close and direct nexus with the business of the Assessee. The subsidies, according to the Department, did not qualify for deduction. The Assessee’s argument on the other hand was that the subsidies were given only in order that the cost of manufacture would be reduced. These subsidies were reimbursement for either the entire or partial costs incurred towards transporting raw materials to the Assessee’s factory or finished products to its dealers, who then sell the finished products. Further, power subsidy, interest subsidy and insurance subsidy were also reimbursed, either wholly or partially, power

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being a necessary element of the cost of manufacture of the Respondent’s products. 14. Interpreting the similar expression contained in Section 80 IB, the Supreme Court in CIT v. Meghalaya Steel Ltd. (supra) referred to the decisions in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 2 SCC 644; CIT v. Sterling Foods (1999) 4 SCC 98 and Pandian Chemicals Ltd. (supra) and observed as under: “18. …..What is to be seen for the applicability of Sections 80-IB and 80- IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The “profits and gains” spoken of by Sections 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains are derived from the business of the assessee, namely profits arrived at after deducting manufacturing cost and selling costs reimbursed to the assessee by the Government concerned.” 15. Extending the same analogy and reasoning to the interpretation of Section 80-IA, this Court is satisfied that on the netting principle, since there is no other activity of the Assessee except power generation, the AO, the CIT(A) and the ITAT, were in error in disallowing the aforementioned sum as deduction under 80-IA of the IT Act. There is merit in the contention of Assessee that the interest received from the bonds issued by GRIDCO have a direct nexus with its essential business activity and therefore, was income derived from it, thus, making it eligible for such deduction. 16. The question framed by this Court is, therefore, answered in the negative i.e. in favour of the Assessee and against the Department. The impugned orders of the ITAT and the

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corresponding orders of the AO and the CIT (A) to the above extent for the AYs 2002-03, 2003-04, 2007-08 and 2008-09 are hereby set aside. 17. ITA Nos.24 and 25 of 2009 and ITA No.1 and 2 of 2015 are accordingly disposed of 6. The ratio emanating from the various judicial pronouncement discussed in the case of Odisha Power Generation Corporation Ltd (supra) is that if there is direct nexus between income earned / expenses incurred to the business of the assessee then the net profits and gains after considering those incomes / expenses are ‘derived from the business’ of the assessee and therefore would be eligible for deduction u/s. 80IA. Therefore in the given case of the assessee, the important factor to be checked for determination ‘Other Income’ to be eligible for deduction u/s.80IA is, whether the income is inextricably linked and is having direct and proximate connection/nexus with the Assessee’s business of operation and management of the Bangalore International Airport. We therefore remand the issue to the AO for factually verifying the ‘Other Income’ earned by the assessee and its nexus with the business of the assessee in order to decide the eligibility for deduction u/s.80IA of the Act as per law. The AO is directed accordingly, after giving reasonable opportunity of being heard to the assessee. This ground raised by the revenue is dismissed.

Revenue share fee from food and beverage and retails outlets

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Government has granted the Assessee the exclusive right and privilege to carry out the development, design, construction, commissioning, maintenance, operation and management of the Bangalore International Airport. In terms of the agreement, the Assessee is required to operate and maintain the airport in accordance with good industry practices and standards, some of which include restaurants and eating facilities, general retail shops. The assessee entered into Joint Venture (JV) agreements with third parties for running restaurants, bars and other refreshment facilities as per the terms of which the assessee would get a revenue share in the business activities carried on by the third parties. The income thus earned is classified as income from non-aeronautical activities in the financials of the assessee. The assessee claimed deduction u/s.80IA on the profits including this income. The AO disallowed the deduction stating that the income of revenue share earned by the assessee is not ‘derived from the business’ and therefore not eligible for deduction u/s.80IA. The AO also stated that the income as shown in the financials of the assessee as non-aeronautical income is not linked to the business of the assessee and on that count too not eligible for deduction u/s.80IA.

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• Income forming integral part of business and inextricably linked with the developing, operating and maintain the airport would be eligible for deduction under section 80-IA of the Act. • As per the Concession agreement and various other agreements/guidelines discussed above, Airport is defined to include not only the landing and taking off area for aircrafts but also the passenger facilities along with any / all buildings, sheds, vessels, piers, and other structures thereon or appertaining thereto used for landing or departure of the aircraft. • The Concession agreement entered between the Company and GOI, recognises the different activities into airport and non- airport activities. The Company only performs activities mentioned under the Airport activities and therefore none of the revenue earned is through non-airport activities. • The bifurcation of aeronautical stream of income and non- aeronautical stream of income has been done by the AERA Act only for the purpose of computing and collecting the tariff. However, the AO has erroneously taken the non-aeronautical stream of income as income from non-airport income thereby disallowing the deduction under section 80IA of the Act on such income. • As per Concession agreement, BCAS, IATA and various other agreements/guidelines discussed above, BIAL is expected to develop, maintain and operate the airport to meet the international standards by undertaking various activities in relation to security, passenger convenience, operation and maintenance of the airport 8. In the light of the above submission, the assessee submitted that the non-aeronautical income (revenue from retail outlets, sale of food and beverages,) and other income are integral and part and parcel for developing, operating and maintaining of the airport and therefore such income are eligible for deduction under section 80-IA of the Act.

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“- It is submitted that in order to be eligible for deduction under Section 80IA of the Act, the profits and gains must be derived by an undertaking from any business referred to Section 80IA(4), meaning in that the income must be inextricably and intrinsically linked to the said business. Undisputedly, the airport infrastructure is an eligible business as defined in Section 80IA(4). - It is submitted that the services rendered by the Assessee are, as per the concession agreement, mandatorily required to be rendered by it and are therefore intrinsically linked to its business of development, design, construction, commissioning, maintenance, operation and management of the Bangalore International Airport. The relevant clauses in the agreement which demonstrate the above are as under: Article 1.1 (page 3 of the agreement): Definition of “airport activities” means the “provision, at or in relation to the Airport, of the activities set out in Schedule 3, Part 1 as amended from time to time, pursuant to the ICAO guidelines, provided that any activities that are not materially similar to those contemplated in Schedule 3, Part 1 shall require the mutual agreement of the Parties.” Article 1.1 (page 3 of the agreement): Definition of “airport” means "the greenfield international airport comprising of the initial Phase, to be constructed and operated by BIAL at Devanahalli, near Bangalore in the State of Karnataka and includes all its buildings, equipment, facilities and systems ……..” Schedule 3 (pages 64 and 65 of the agreement):

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Airport activities include the following services, facilities and equipment: …..duty free sales, general retails shops, restaurants, bars and other refreshment facilities. Standards- IATA Global Airport Monitor Standards (page 86 of the agreement): The following criteria shall be measured on an annual basis in accordance with Article 9. The surveys shall be scored in accordance with the IATA Global Airport Monitor scoring mechanism: (viii) restaurant and eating facilities; (ix) shopping facilities. Article 9.2.5- Monitoring of performance standards (page 32 of the agreement): Should BIAL fail to produce such action plan or if the Airport continues to be rated in respect of the service standards under BIAL’s direct control, as lower than 3.5% in the survey conducted in respect of the year after implementation of such action plan, Government of India shall have the right to impose liquidated damages and/or to give directives to Relevant Authorities participating in the joint coordination committee referred to in Article 8.2 to assist BIAL in improving the rating. Article 9.2.7 (page 33 of the agreement): If the Airport continues to be rated as lower than 3.5% in respect of the service standards under BIAL’s direct control due to BIAL’s poor performance in the survey conducted in respect of the 2 years following the date that BIAL first becomes liable to pay such liquidated damages, Government of India shall have the right to terminate this agreement. Schedule 12- Tax benefits (page 89 of the agreement):

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Benefit under Section 80IA of the Income-tax Act 1961 for tax exemption in respect of profits & gains from the business of development of the infrastructure facility viz. airport is available to BIAL. (emphasis supplied) Moreover, it is important to note that the CIT(A) has rendered a categoric finding that that the two revenue sources are linked to the overall business of the airport (please see para 8.6.7 on page 37 of the CIT(A)’s order). Having held so, the CIT(A)’s action in rejecting the claim for deduction on the ground that the so-called extra income earned by the Assessee is not derived from the eligible business is baseless in as much as there is no provision in Section 80IA of the Act to artificially split the eligible deduction. In any event, earning of extra income cannot take away the nature of the income from being business income eligible for deduction. In view of the above, it is submitted that the income earned by the Assessee from retail outlets and food and beverages have a direct nexus with the eligible business, and therefore the deduction as claimed by the Assessee ought to be allowed.”

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(i) Whether the Food & Restaurants and Retail outlets fall within the definition of ‘infrastructure facility’ under explanation to section 80IA(4); &

(ii) Whether the income from revenue share of Food & Restaurants and Retail outlets is ‘derived from the business’ of airport operation to be eligible for deduction u/s.80IA.

- General retail shops – BIAL to make investment for providing basic infrastructure facilities only. - Restaurants, bars and other refreshment facilities - BIAL to make investment for providing basic infrastructure facilities only.

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Explanation.—For the purposes of this clause, "infrastructure facility" means— (a) a road including toll road, a bridge or a rail system; (b) a highway project including housing or other activities being an integral part of the highway project; (c) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system; (d) a port, airport, inland waterway, inland port or navigational channel in the sea;

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revenue share is not derived from the ‘Airport Activities’ which allows the assessee to make investment for providing basic infrastructure facilities only and that the income from revenue share is much more than what is derived from providing basic infrastructure facilities. As per the Concession Agreement, the assessee is granted the exclusive right and privilege to carry out the development, design, financing, construction commissioning, maintenance operation and management of the Airport. The assessee in order to provide amenities and facilities to the users of the airport, had entered into various agreements for establishing and operating retail outlets and restaurants. The assessee invites tender for granting rights for utilization of the premises by these third parties and the premises is allotted to the lowest bidder. The fact that the assessee is allotting only the “right to utilize the premises” to the third party is evidenced by the sample agreements i.e. Agreement with Bread Basket Private Limited dated 12/07/2012 and Agreement with Shoppers Stop Limited dated 19th September 2013. The consideration for such utilization of premises is in the form of revenue share. Clause 4.2.1 which reads as under:- “4.2.1 The Operator shall pay BIAL, a monthly minimum guaranteed revenue share as per Schedule A (the “Minimum Guaranteed Revenue Share”); or, a fee payable every month during the Term, as per Schedule B (the “Revenue Share”), whichever is higher, based on actuals, within five (5) days after each month end, throughout the Term. The Operator shall make the payments of the revenue share online, by way of Real Time Gross Settlement System (‘RTGS’) to provide for real time inter-bank payment, in favour of “Bangalore International Airport Limited”.”

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Disallowance of concession fee under Section 43B

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the year under consideration, the Assessee accrued the fee payable and created a provision of Rs. 25,42,00,000/- by debiting the profit and loss account. The Assessing Officer disallowed the amount under Section 43B(a) of the Act stating that the concession fee falls within the words ‘any sum payable by way of tax, duty cess or fee by whatever name called’ and that the same is allowable only on payment basis in the absence of any specific date mentioned in the said section.

- Order dated 27.01.2014 passed by the CIT(A) in the Assessee’s case for the assessment year 2010-11 paras 3.2 to 3.5 on pages 13-18.

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It is submitted that the Revenue did not challenge the relief granted in the said year before the Tribunal, and therefore has accepted the position.

- CIT v. McDowell & Co. Ltd. (reported in (2009) 180 Taxman 514 (SC)); and - CIT v. Sri Balaji & Co. (reported in (2001) 114 Taxman 682 (Kar).

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the decision of CIT(A). This ground of the revenue is therefore dismissed.

Pronounced in the open court on this 14th day of June, 2022..

Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore, Dated, the 14th June 2022. /Desai S Murthy /

Copy to:

Assistant Registrar ITAT, Bangalore.