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Facts
The Revenue filed appeals against the orders of the CIT(A) allowing deduction under Section 80IA for infrastructure development projects. The core issue was whether the assessee was a developer or a mere contractor, and if the income was derived from operating an infrastructure facility.
Held
The Tribunal held that the conditions for deduction under Section 80IA(4) need not be satisfied cumulatively and that the assessee, having undertaken significant financial and entrepreneurial risks, qualified as a developer. The denial of deduction by the AO was considered untenable.
Key Issues
Whether the assessee is eligible for deduction under Section 80IA as a developer, and if the conditions for deduction are to be met cumulatively. Whether income from construction projects qualifies for deduction under Section 80IA, even if not from operating the facility.
Sections Cited
80IA, 143(1)
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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI MANU KUMAR GIRI & SHRI S.R.RAGHUNATHA
3. The common grounds raised
by Revenue for AY 2012-13, 2013-14 & 2017-18 read as under:-
1. The order of the learned Commissioner of Income tax (Appeals)-19,Chennai is against facts and circumstances of the case.
2. The learned Commissioner of Income tax (Appeals)-19, Chennai has erred in deciding that the assessee is eligible for deduction u/s. 80IA of the Income tax Act, 1961 without taking into consideration that the assessee has earned profit on percentage completion method, thus earning income and claiming deduction even before the whole work is completed and also it is to be noted that the assessee has not earned any income from operating an infrastructure facility.
3. On the facts and in the circumstances of the case, the ld.CIT(A) has failed to appreciate that the assessee is a mere "Contractor", but not a "Developer" without considering the findings of the assessing officer and thereby decided that the assessee is eligible for deduction u/s 80 IA of the Income tax Act, 1961.
4. On the facts and in the circumstances of the case, the ld.CIT(A) has failed to appreciate that the intention of the Legislature is to provide deduction u/s. 80IA only to the person directly engaged in developing, maintaining and operating the facility, and for this claim, there should be a complete development of the facility and not just a part of it.
5. On the facts and in the circumstances of the case, the ld.CIT(A) has failed to note that the assessee did not meet the condition for availing of this benefit under BOT or BOOT Schemes.
6. On the facts and in the circumstances of the case, the Id .CIT(A) has erred by placing reliance on various decisions without appreciating that the case laws relied upon are entirely on difference set of facts and the facts of the case under consideration is entirely difference and needs much less inference.
7. For these and other grounds that they may be adduced at the time of hearing, the order of Commissioner of Income tax (Appeals) may be cancelled and that of the Assessing restored.
4. The grounds raised by the Revenue for AY 2016-17 read as under:-
“1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
2. The learned CIT(A) erred in directing the assessing officer to decide the allowance of claim of deduction u/s.80IA amounting to 7.31 Crores as per the provisions of the Act, which is equivalent to setting aside the assessment, though the power of CIT(A) in setting aside the assessment and referring the case back to the assessing officer as per the provision of Sec.250(1) has been withdrawn by the Finance Act 2001.
3. The Ld.CIT(A) erred in stating that the assessee's claim of deduction under chapter VIA for earlier years also for the same project were allowed by the department, without appreciating that the decisions of CIT(A) for AY 2012-13, 2013-14 & 2017-18 deleting the disallowance u/s.80IA were contested by the department and the appeals before ITAT are pending, the issue has not reached finality.
4. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored.”
The brief facts of the case are that the Assessee RPP Infra Projects Limited is a company engaged in the business of developing infrastructure facilities as per contracts awarded by Central and State Governments and Local Authorities. The assessee filed its return of income by claiming deduction u/s.80IA(4) of Rs.4,11,08,393/- for the A.Y. 2013-14.
6. The core issue in the present batch of appeals relates to the disallowance of deduction claimed u/s.80IA of the Act made by the assessing officer primarily on the ground that the assessee was merely executing works contracts and did not satisfy the conditions stipulated u/s.80IA(4), specifically stating that the assessee did not operate and maintain the infrastructure nor undertook development under BOT/BOOT models by holding as under: “4. It is noticed that assessee has claimed deduction of Rs. 4,11,08,393/- under section 801A(4), In connection with this claim written submission is filed stating the assessee is developing certain infrastructure projects income of which is claimed as deduction under section 80IA(4). Regarding the eligibility of the deduction the main claim of assessee is that all the jobs undertaken by the assessee clearly satisfies the requirements stipulated by section 801A(4). It is further stated that assessee is not a works contractor' as defined in the explanation to section 80IA(4).
It is stated that during the assessment year under consideration assessed has derived profits from developing the below mentioned infrastructure projects which are claimed as deduction under section 80IA,
Contractee - PWD, WRO, Parambikulam Aliyar Basin Circle, Pollachi-3 Nature of work-Rehabilitation of contour canal from LS0.0 Km to 11.480 Km
Contractee-PWD, WRO, Parambikulam Aliyar Basin Circle, Pollachi-3 Nature of work - Rehabilitation of contour canal from LS30.10 Km to 49.30 Km
Contractee-PWD, WRO, Vaippar Basin Circle, Virudhunagar Nature of work Formation of flood carrier canal from Kanjampatti Odal Vilathikulam Taluk of Thoothukudi district to feed Sayalkudi tank and other tanks in Kamuth and Kadaladi taluks of Ramanathapuram district
Contractee PWD, WRO, Bhavani Basin Circle, Coimbatore Nature of work Providing screw gearing shutters to all slusices in the Lower Bhavani Project Main Canal from Mile 0/0 to mile 124-2-560 including branch canal and distributaries in Erode and Karur Districts
5. Contractee - PWD WRD. Vellar Basin Circle, Cuddalore Nature of work - Rehabilitation of Non System Tank and its supply channels from yal tank to pinnalvadi tank gadilam sub basin in sankarapuram, tirukoilur and ulundurpet taluk of villupuram district (package no. 01)
6. Contractee - PWD, WRD, Special Project Circle, Palani Nature of work Formation of tank across Nallathangal Odai near Kothayar village in Oddanchatram taluk of Dindigul District
7. Contractee - Executive Engineer Storm Water Drain Department. Chennai Nature of work Construction of Storm Water Drain work in Kolathur Water Shed Chennai
5. In brief assessee has made the following claims justifying the eligibility for deduction under section 80IA(4), i) that it has undertaken the work of bridges and water supply projects: ii) that it has maintained separate accounts in respect of each work; iii) that the activities carried out do not fall under the definition of Works Contract iv) that the infrastructure is developed and handed over to the Government and as explained by the CBDT vide its Circular dated 18/5/2010 such activity is eligible for deduction under section 80IA(4) of the Act and v) Reliance is placed on the judgements rendered in GVPR Engineers- Hyderabad Tribunal - (46 and 17 others) and M/s Nagarjuna Construction Co. Ltd. (7 & Others). and Patel Engineering Ltd. Vs. DCIT 84 TTJ (Mum) 646.
On examining the facts of assessee's case it is noticed that assessee has carried out construction work and profits earned from this activity is being claimed as deduction under section 80IA(4).
Sub-section (1) of 80IA provides for a deduction of an amount equal to hundred per cent of profits and gains derived from such business for ten consecutive assessment years. Further, sub-section (2) of section 80IA states that the deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or develops a special economic zone referred to in clause (iii) of sub-section (4) or generates power or commences transmission or distribution of power or undertakes substantial renovation and modernisation of the existing transmission or distribution line. Thus it is clear that deduction under section 80IA is allowable only when the enterprise begins to operate any infrastructure facility.
The language of section 80IA was materially amended vide finance bill of 2001. The explanatory memorandum for the Finance Bill 2001 recorded as under:
"Under the existing provisions of section 80IA, roads, highways, bridges, airports ports and rail systems are regarded as infrastructure facilities and the enterprises engaged in developing or operating and maintaining or developing, operating and maintaining such infrastructure are entitled to a tax holiday for five years and a deduction of 30% of profits for the next five years. The benefit may be availed by an enterprise in ten consecutive years out of fifteen years beginning with the year in which such enterprise develops the infrastructure facility.
An enterprise claiming such benefit has to enter into an agreement with the Central or State Government or a local authority or any other statutory authority, to which the enterprise which develops such facility has to transfer such facility to the Government or public authority after the stipulated period. In other words, the required condition for availing of this benefit is that transfer under BOT (Build. Own) Transfer) or BOOT (Build, Own, Operate and Transfer) schemes has to be met.
Investments in infrastructure has to compete with investment in other sectors and must therefore be attractive. There is, in particular, a need to encourage investment in the area of surface transport, water supply, water treatment system, irrigation project, sanitation and sewerage system or solid waste management systems.
The Bill, therefore, proposes to relax the existing two lier benefit to provide a ten year tax holiday. Keeping in view the capital intensive nature, the higher allowances of depreciation in the initial years in such enterprise and the need for improved cash flows, it is further proposed that for an infrastructure facility in the nature of a road including a toll road, bridge, rail system, highway project, water supply project, sanitation, sewerage and solid waste management system in place of two-tier tax holiday, a ten year tax holiday may be availed consecutively out of twenty years beginning from the year in which the undertaking begins operating the infrastructure facility. In the case of other infrastructure, namely, for airport, port, inland port and inland waterways it is also proposed to relax the existing two tier fiscal incentive. The Bill proposes an identical ten year tax holiday that may be availed in a block of fifteen years. It is also proposed to do away with the mandatory requirement that such infrastructure facility shall be transferred to the Central Government, State Government local authority or any other statutory authority" (also ref. CBDT Circular no. 14/2001 dated 9/11/2001)
Thus, as contained in the above clarification an assessee is entitled to deduction under section 80IA only after the infrastructure facility is developed and begins to operate. Further, as can be made out from the section the deduction will be in respect of income generated from operation of the infrastructure facility in the following specified years as mentioned in the section. Thus, it is clear that first an asset in the form of infrastructure facility has to come into existence, which may be a bridge, road, irrigation system, telecommunication system, power generation/distribution system, industrial park or special economic zone, and thereafter, income generated from this asset is eligible for deduction under section 80IA(4). Profit from erecting an infrastructure facility is not eligible for deduction under section 80IA.
The main purpose of providing the deduction under section 80IA(4) is to promote private sector to invest in infrastructure facilities, which the government is unable to provide due to paucity of funds. Therefore, the income generated out of such investment is allowed as deduction for certain period of years to compensate the investors for the amount invested in the project. Income from operation of the infrastructure facility is only therefore allowed as a deduction
Assessee is earning income only from setting up the, so called, infrastructure facility for the Central/State Government/Local Body/Authorities. It is the respective body/authority (Contractee) which subsequently operates the infrastructure facility if any. Investment in these projects are made by the government/authority. Assessee is funded for carrying out/setting up the projects in the form of mobilization advance and settlement of bills regularly submitted by her time to time on the basis of the terms of contract. Assessee is not investing any amount in the infrastructure project Further perusal of the works carried out by assessee also indicate that they are not in fact any infrastructure development work/project. Assessee has earned profit on erecting/setting up the projects, or the so called infrastructure facilities, Assessee has not earned any income from operating such infrastructure facility therefore the total income do not contain any income eligible for deduction under section 80IA(4).
It is further to be noticed that assessee is recognizing income from the projects on percentage completion method. Thus, even before the whole work of the project/infrastructure facility is completed assessee is recognizing income from the project and claiming deduction under section 80IA(4).
10 As analysed/discussed in the above paras assessee has not earned any income from operating an infrastructure facility, as required under section 801A(2) of the Income-tax Act, 1961. Therefore, assessee is not eligible for claiming deduction under section 801A(4) of the Income-tax Act, 1961.
Without prejudice to the facts discussed above assessee is claiming that it is a developer and not a works contractor and is therefore eligible for deduction under section 80 IA(4). Even if it is held that assessee is a developer, only income earned from operating the developed infrastructure facility is eligible for deduction under section 80IA(4) r.w.s 80IA(2), Since assessee has not earned any income from operating any infrastructure facility the question whether assessee is a developer or contractor becomes immaterial/irrelevant.
In the written submission filed during the reassessment proceedings assessee has referred to CBDT Circular dated 18/5/10 and has stated that the same mentions that the infrastructure developed and handed over to the Government is also eligible for deduction under section 80IA(4) of the Act. Also reference is made to the decision of the ITAT, Mumbai Bench in the case of Patel Engineering Ltd. Vs. DCIT 84 TTJ 646.
The CBDT circular has been perused. The operating part of the Circular is reproduced below, "Section 80-IA(4) (i) provides for a deduction to an undertaking engaged developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility subject to satisfaction of the conditions laid down in the section. The Explanation to section 80-1A(4)(i) states that for the purpose of this clause, infrastructure facility means inter alia:
(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.....
The issue has been examined by the Board. It has been decided that widening of an existing Road by constructing additional lanes as a part of a highway project by an undertaking would be regarded as a new infrastructure facility for the purpose of section 80-1A(4)(i). However, simply relaying of an existing Road would not be classifiable as a new infrastructure facility for this purpose."
The Circular nowhere mentions that infrastructure developed and handed over to the Government is also eligible for deduction under section 801A(4) of the Act. The submission filed by assessee in this regard is therefore incorrect.
In the case of Patel Engineering Ltd. though the Hon'ble ITAT has held that the assessee is a developer and eligible for deduction under section 801A(4) the honorable ITAT has not dealt with the provisions of section 80IA(2) which clearly states that income from operating the eligible project is entitled for deduction under section 80IA(4) The explanatory notes to the finance bill 2001 also clarifies this point.
The Hon’ble ITAT Bangalore has in the case of Yojaka Marine (P) Ltd Vs. ACIT 2013 Tax Pub(DT) 0031 / 054 SOT 0293 held that assessee was not eligible for deduction under section 801A(4). This assessee had carried out work relating to canal and water bank protection.
Decision of the ITAT (Mum)(LB) in the case of B.T Patil & Sons Belgaum Construction (P.) Ltd. (2010) 35 SOT 171 is against the assessee.
12. For the reasons discussed in the above paras it is clear that assessee is not eligible for deduction under section 80IA(4) The deduction claimed of Rs 4,11,08,393/- is therefore being disallowed and added to the total income.”
7. Aggrieved, assessee challenged the order of the AO before the ld.CIT(A). The Ld.CIT(A)- 19, Chennai has allowed the grounds of the assessee by stating that the assessee had executed the projects as a developer and could not be construed as a mere contractor by holding as under: “14. A perusal of the section indicates that the conjunction used in the section is "or" and not "and" and there is merit in the argument of the appellant that cumulative satisfaction of the conditions is not mandated by the provisions of law. It is further relevant to observe that the intent of the legislature is to benefit those companies that are involved in creating the prescribed infrastructure facilities and hence if a restricted interpretation is drawn by the AO, it would make the beneficial provision otiose and ineffective. Thus it is clear from the provisions of the section and as supported by the afore-mentioned relevant judgments, deduction under section 80-IA(4) is available, from A Y 2002-03 onwards even if a particular taxpayer/ assessee carries on any one of the three types of activities viz. (i) developing, (ii) maintaining or (iii) operating eligible infrastructure facility. The provisions as it stood in the relevant point in time do not mandate that the tax payer must adopt a model of BOT/BOOT and will have to necessarily maintain the infrastructure facility for particular period. This inference is supported by the afire-mentioned judicial decisions. 15. It is apposite to mention that the provisions u/s 80IA (4A) of the Act were deleted from the Act when the provisions of Section 80IA (4) of the Act were introduced afresh by the Finance Act, 1999, The deduction available for any enterprise earlier u/s 80IA (4A) has also been made available u/s 80IA(4) itself. His relevant to observe that the legislature mentioned the words (i) "developing" or (ii) "operating and maintaining" or (iii)"developing, operating and maintaining" and this very fact clearly indicates that any enterprise which carried on any of these three activities would become entitled for deduction. Thus I find no ambiguity in the Act and I am of the view that the AOs conclusion on this point is untenable in view of the provisions of the Act as a developer simpliciter is eligible to claim deduction u/s.80IA(4) of the Act subject to the fulfilment of conditions stipulated therein. …………………………………………………….. ……………………………………………………..
The issue to be addressed is as to whether the appellant is a developer or mere works contractor. An amendment by way of Explanation to section 80-IA was inserted by the Finance Act,2007 and later on amended by the Finance (No.2) Act, 2009 which was made applicable with retrospective effect from 1-4-2000. This explanation contemplates restriction of tax benefit of deduction u/s 80-IA(4) of the Act to a tax payer that executes a project which is in the nature of works contract. Ii is therefore imperative to appreciate the difference between a 'developer' and a 'contractor'. The distinction as to whether the assessee is a developer or works contractor depends on the nature of the work undertaken by the assessee that could be deciphered by analyzing the agreement and the scope of work of each project with reference to the clauses and the conduct of the assessee in executing the work. It is possible that the agreement entered into with the Government or the Government body may be for carrying out a mere works contract or for development of infrastructure facility.
As per the discussion held by various Courts and Tribunals cited above and as per common parlance a person is referred as 'developer' who undertakes a project with a view to developing/constructing on its own responsibility and takes the attendant risks associated with the execution and development of the project. These responsibilities and risk would include the following broad features: (a) In a development contract" responsibility is fully assigned to the developer to do all acts for execution and completion of work right from designing/ synthesizing and modification of design relating to the project till finalization of the project and handing over to the authority concerned. It is noticed that the agreements are for developing bridge/ irrigation canal for a longer period of stretch as a whole. It is quite obvious that the ownership of land would continue to vest with the Government/Local authority even during the execution of the impugned project. However, the developer would exercise and maintain the site /land on which the project is executed during the period of agreement. It is quite possible that in certain situations, the Government would give broad design contour of the work; the developer would modify the design with the approval from the engineers of the Government agencies/ local authority being the contractee but that would not alter the status of the developer as works contractor.
(b) Developer is required to lake over the existing premises/ site of the projects and would hand over the site with the infrastructure facility to the government agencies concerned. (c) Developer needs to display managerial responsibility by engaging the suitable and requisite qualified/ skilled/ semi-skilled staff the laborers and other Supporting staff.; has to deploy manpower for developing the infrastructure facility by assuming responsibility. (d) The developer Will have to utilize its expertise, experience including its technical knowhow in the development of the project. (e) That a developer has bear financial responsibility and the attendant risks. A developer is therefore expected to mobilize finances on its own either from out of its internal accruals or Out of borrowings in order to develop the project at its own risk. (f) Developer undertakes entrepreneurial and investment risk besides the business risk. (g) Developer is required to bring the qualitative material and the contractee agency does not usually provide material to the developer; and is 'required to bring plant and machineries to be utilized in the project. (h) Developer will have to bear any loss caused to the public or the Government in the process by assuming responsibility. (i) Developer would stand as guarantor in the event of defect / default in quality of the project for the project developed by it and will have to remedy it. (j) Developer shall be visited with penal charges penalty in case of infraction in any of the clauses mentioned in the agreement entered into with the contractee agency. These are few broad sample qualities/ parameters of a developer through Which the character of a developer can be defined. 28.1. Per contra, a Works contractor denotes a person that undertakes work on basis of providing labour and supply on contract basis. He does not assume risks and responsibilities unlike a developer. He merely carries out the work as has been instructed to him by the contractee.
In nutshell, a developer acts as a principal Whereas a contractor acts as an agent in performing the functions as required by the developer. The developers, in true sense, are the persons who are carrying out the business of developing or operating and maintaining or developing, operating and maintaining the infrastructure facility the infrastructure facility Whereas the contractors are those persons who merely execute Works.
29.1.As could be seen from the provisions of the section 80IA of the Act, a person being a Company has to enter into an agreement with the Government or Government undertaking, Such an agreement is a contract and for the purpose of the agreement a person may be called as a contractor as he entered into a contract. But the word "contractor" is used to denote a person entering into an agreement for undertaking the development of infrastructure facility. Every agreement entered into is a contract. The word "contractor" is used to denote the person who enters into such contract. Even a person who enters into a contract for development of infrastructure facility is a contractor. Therefore, the contractor and r,, developer cannot be viewed differently. Every contractor may not be a developer but every developer developing infrastructure facility on behalf of the Government is a contractor. 30.in the backdrop of the above discussion, the facts of the present case to find out whether the assessee is acting as a developer or contractor; whether the appellant has derived income/profits from developing infrastructure facility and deduction has been claimed from out of the profits on developing those projects by analyzing the agreements and documents concerned with regard to the projects for which the appellant has claimed deduction are analyzed. 31.Perusal of agreements in respect of the afore-mentioned projects cited in para 9 supra, it is noticed that the appellant has satisfied all the conditions stipulated under section 80IA(4) relating to (i)primary conditions as per sec 80 IA(4) inasmuch as all these jobs clearly satisfy all the requirements stipulated by sec 80IA(4), the excerpts of which are reproduced as follows: “… any enterprise carrying on the business of developing or operating and maintaining or developing operating and maintaining any infrastructure facility which fulfils all the following conditions namely: It is owned by a company registered in lndia ..... b. It has entered into an agreement with the Central Government or the State Government or local authority ...... c. It has started or starts operating and maintaining the infrastructural facility on or after first day of april 1995 "and inasmuch as the appellant is a registered company in India. entered into agreements with the State Government and commenced the activities only after the stipulated date ie., April 1995 by entering agreements with the Public Works Department and TWAD of the Government of Tamilnadu (ii)eligibility of the activities inasmuch as all these jobs squarely fall under the activities eligible as defined by the explanation u/s.80 IA(c) viz.,, 80IA(c): "o water supply project, water treatment system, irrigation project, ... "(iii)maintenance of separate accounts and production of certificate from Chartered Accountant inasmuch as the appellant has maintained separate accounts in respect of each of the contracts involved in the said deduction and produced before the AO.
32.Perusal of the agreements, tender documents, BOQ in respect of the projects viz Irrigate, contour canal at Azhaliyar with PWD Parambikulam(.000 km to 11.480 km) and 30.100 km to 49.300 km with PWD/WRO Parambikulam, Azhaliyar Basin and GIS lamvvaram, Cuddalore indicate that the appellant has carried out canal work for the entire stretch as per the tender document including excavation of ground for foundation, earth work, concrete, reinforcemen1; fabrication of steel structure and laying of Storm water & sewerage system at Kolathur under Jawarharlal Nehru Urban Renewal Infrastructure Project where the appellant has undertaken the execution of storm water drain work for carrying excess rain water into nearby river; of formation of flood carrier canal at VCS Virthunagar site and KPM Nalathangal indicate that the appellant was entrusted with the task of formation of tank for irrigation purpose; and of LBB Lower Bhavani Shutter work when the appellant has provided Screw Gearing Shutters after designing in Lower Bhavani Project Main canal. As per the clauses, the appellant has entered into agreement with the respective authorities such as PWD, and Rural Roads Division of the Government of Tamilnadu, and Local authorities to carry out Irrigation projects and bridge work; that the appellant had to execute the work by mobilizing men, material; the appellant had to give Guarantee money; the appellant is under obligation to pay liquidated damages in case of default in quality for a stipulated period as mentioned in the agreement. A perusal of the agreements entered into by the appellant with the agency that awarded the works indicates that the appellant is under an obligation to undertake risks relating to financial, technical and entrepreneurial and managerial risks associated with erecting/ developing the works /projects concerned. It is also to be noted that the appellant is fastened with a liability period for the works/contracts as per the terms and conditions mentioned therein.
Scrutiny, prima facie reveals that the appellant had to provide bid documents including bill of quantities that shall contain items for construction, installation, testing, commissioning of the projects; the appellant had to provide works, materials, matters and things incidental and necessary for the entire completion of works of the project; the appellant had to undertake all extra and varied works. It is further seen that the BOQ will be used to calculate the contract price and the appellant will have to carry out the work as per broad technical specifications and would be paid on the change in basic quantities that implies that the appellant has the responsibility to execute the work as per the conditions prevailing at different locations. 33.1 The id documents including the bill of Quantity indicates that the contracts awarded on a specification basis and the appellant based on the indicative drawing/specification will have to design and of course, will have to take the approval of the Engineer of the department concerned. The appellant has the responsibility to procure all materials, for the projects.
33.2. It has been provided that all materials required for the work shall be procured and supplied by the appellant itself and it has been stipulated that the quality of materials shall be of good quality and conforming to relevant BIS. In fact, the appellant has paid the requisite performance security in favour of the authorities concerned for the due and faithful performance. There is a condition that the said performance security is liable to be forfeited in cases where the appellant fails to carry out the work in accordance with the terms and conditions of the contract leading to termination of the contract.
As discussed in para 31 to 33 supra, the appellant has entered into agreement with the respective authorities of the Government of Tamilnadu to carry out the eligible Irrigation projects and Sanitation and sewerage systems ; that the appellant had to execute the work by mobilizing men, material; the appellant had to give Guarantee money; the appellant is under obligation to pay liquidated damages in case of default in quality for a stipulated period as mentioned in the agreement. A perusal of the agreements entered into by the appellant with the agency that awarded the works indicates that the appellant is under an obligation to undertake risks relating to financial, technical and entrepreneurial and managerial risks associated with erecting/ developing the works /projects concerned. It is also to be noted that the appellant is fastened with a liability period for the works/contracts as per the terms and conditions mentioned herein.
The responsibility of the assessee is to develop the said area into more useful infrastructure facility. In the process, every act required (whether mentioned in the agreement or not) in converting the area into more useful one shall be that of the assessee. The assessee has to undertake the responsibility of developing bridges and Irrigation facilities and they been, after completion of the development of infrastructure, handed over to the Government. The appellant is under obligation for prescribed period to pay damages in case of quality. From the above facts, it is clear that the assessee has executed and handed over development work to the Government/Government Bodies. The substantive work carried out by the appellant in respect of the projects mentioned above partake the character of eligible infrastructure facility that has not been disputed by the AO inasmuch as the appellant has carried out the work clearing the ground and has executed the projects after procuring materials, mobilizing funds and incurring the requisite risks by way of exposure to technical, financial and entrepreneurial risks in executing this project. in the capacity of a developer.
The Assessing Officer has referred to the mobilization advance received by the appellant for some projects as one of the grounds for denying the deduction as the said act mitigates the financial risks. The Appellant per contra submitted that such mobilization advances are purely liability in nature that need to be given back to project awarder in case of failures/ deviations from the conditions laid down in the project agreement; those mobilization advances are given only against the bank guarantees provided by the appellant and failure of satisfaction of conditions laid down in the project agreement would result in invocation of bank guarantees against the mobilization advances; such mobilization advance should be treated similar to a loans taken from any banks; and therefore that that the financial risk is completely lying on the assessee even though the mobilization advances are received for certain projects. Perusal of contract agreement indicates that the entrepreneurial and financials risks of each contract are borne by the appellant apart from all the other operational risks.
The appellant, as noticed from the financials attached with its return of income, has raised its financial resources from institutional borrowing and has deployed the funds for the projects, which is one of the essential features of a developer as enunciated by the jurisdictional High Court in the case of Principal CIT Vs. V.A. Tech Wabag Tax Case Ltd (supra). The appellant has deployed its resources (material, machinery, labour etc.) in the construction work indicates the risks undertaken. The appellant was under obligation to furnish a security deposit to the agencies and indemnify at the same time of any losses/damage caused to any property/life in course of execution of works. The assessee was responsible for the correction of defects arising in the works at its own cost for which the Government agency retained prescribed money payable to the appellant as ways and means to ensure the quality of the work and to make the appellant liable in case of defect, if any. 38. ln view of the above, there is considerable force in the argument of the appellant inasmuch as it is a developer in terms of the provision and it is not a works contactor for it had incurred significant financial, entrepreneurial, technical and managerial risks and qualifies for the impugned deduction by raising funds, undertakes work from inception to commissioning and beyond in the form of maintenance responsibility, risk of buying all the materials, transporting them, technical expertise, technical know-how, deployment of technical personnel, mobilizing the laborers, plant and machinery, supervision and coordination and control to complete the projects.
Thus, it is clear that the agreement is on a Principal to Principal basis and therefore was not a works contractor simpliciter but a developer. It is seen that from an un-developed area that existed at the time of agreement, the eligible infrastructure is developed and handed over to the Government and as explained by the CBDT vide its Circular dated 18-05-201 0, such activity is eligible for deduction under section 80IA (4) of the Act. This cannot be considered as a mere works contract but appellant has to be considered as a developer of infrastructure facility and in this year all the three projects are eligible infrastructure facilities. Therefore, the assessee is a developer and not a works contractor as held by the AO. Hence, in the light of the facts of the case of the appellant, it is not hit by Explanation to section 80-IA(13) of the Act.
Further, In view of the foregoing discussions, I am of the view that the enterprise is in the business of developing the afore-mentioned infrastructure project; the enterprise is owned by the appellant, a company registered in India; the appellant has entered into agreements with the stipulated authorities to develop such works; and it has started developing such projects; that separate accounts have been maintained by the appellant and certified by an Accountant in terms of sub-section 7; that the projects fall within the ambit of infrastructure projects and bridges in terms of Explanation (c) to sub- section 4(i) and the same has not been disputed by the AO. 41.3. I have gone through the decision relied on by the AR of the appellant in the case of CIT Vs. Laxmi Civil Engineering works [supra] wherein it was held that mere development of a infrastructure facility is an eligible activity for claiming deduction under section 80IA of the Act after considering the Judgement of the Mumbai High Court in the case of ABG Heavy Engineering [supra]. The case of ABG is not the pure developer whereas, in the present case, the appellant is the developer. Section 80IA of the Act is meant to cover the entities carrying out developing or operating and maintaining the infrastructure facility keeping in view the present business models and to grant the incentives to such entities. The CBDT, on several occasions, clarified that pure developer should also be eligible to claim deduction under section 80IA of the Act which ultimately culminated into Amendment under section 80lA of the Act, in the Finance Act 2001, to give effect to the aforesaid circulars issued by the CBDT. The afore-mentioned Explanation was inserted in Section 80IA of the Act, in the Finance Act-2007 and 2009, to clarify that mere works contract would not be eligible for deductions under section 80IA of the Act. But, certainly, the Explanation cannot be read to do away with the eligibility of the developer; otherwise, the parliament would have simply reversed the Amendment made in the Finance Act, 2001. Thus, the aforesaid Explanation was inserted, certainly, to deny the tax holiday to the entities who does only mere works contact or sub- contract as distinct from the developer. This is clear from the express intension of the parliament while introducing the Explanation. The explanatory memorandum to Finance Ac 2007 states that the purpose of the tax benefit has all along been to encourage investmen1 in development of infrastructure sector and not for the persons who merely execute the civil construction work. It categorically states that deduction under section 801A of the Act is available to developers who undertakes ei1trepreneurial and investment risk and not for the contractors, who undertakes only business risk. The appellant has undertaken risks in terms of deployment of technical personnel, plant and machinery, expertise and financial resources. Further the order of Tribunal in the case of B.T.Patil cited supra is prior to amendment to sec 80IA(4), after the amendment the section 80IA(4) read as (i) developing or (ii)
operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility, prior to amendment the "or" between three activities was not there, after the amendment" "or" has been inserted w.e.f. 1-4-2002 by Finance Act 2001. Further, in similar circumstances, the Hon'ble ITAT in the case of M/s. GVPR Engineers Ltd. Hyderabad in & others vide order dated 29th February 2012 has taken similar view and granted deduction under section 80IA of the Act.
The AO has referred to the percentage completion method being followed by the appellant and has cited as one of the reasons for the refusal to grant the impugned disallowance. This reasoning is untenable inasmuch as it is not the case of the AO that the appellant has not followed this method of account regularly and consistently; there is no prohibition in the provisions; that the appellant has worked out income and has to claim the deductions from the proportionate revenue from the execution of projects by factoring direct and indirect costs as seen from the statement of Profit and Loss account of 80IA projects for the year ended 31st March 2013. In fact, the appellant has been maintain separate accounts for each project on a cost centre basis and the revenue is recognized from the impugned projects on the percentage completion method for each projects - both in respect of projects eligible for deduction and for non-eligible projects. In the circumstances and the facts of the case of the appellant, l hold that A O's denial of the benefit of deduction is untenable as I do not see any infirmity in the claim of the appellant on this score.
45.The appellant has submitted that as per project wise maintenance of accounts both for these 80IA eligible projects and other non-80IA projects, total income of Rs 10,23,95,780 has been offered for taxation after factoring the deduction of Rs.4,11,08,393/- that has been arrived after considering book depreciation. The total book depreciation of Rs 9,14,44,735 was considered to arrive at the profit before tax both for 80IA projects and Non- 80IA projects. ft is mandatory to adopt depreciation as per the Act to work out the eligible deduction and hence the IT depreciation relatable to the 80IA projects needs to be worked out on the basis of ratio of apportionment as direct operating cost for 80 IA projects bears to the total direct operating cost for both 80IA projects and other projects as per the returns. The depreciation as per the IT Act claimed as per the return of income is Rs 10,06,86,503. Thus, the depreciation for the afore-mentioned eligible 80IA projects for the AY under consideration in the present appeal as per the above ratio works out to Rs 2,81,92,221.Thus the profit before tax for the 80IA projects, after factoring depreciation as per the Act is Rs 3,83,80,455. Thus the AO is directed to restrict the deduction u/s 80 IA of the Act to Rs 3,83,80,455as against the appellant's claim of Rs.4,11,08,393.
In view of the foregoing discussions with reference to the facts of the case of the appellant and in view of the decisions discussed supra, I hold that the AO has not considered the aforementioned aspects, in correct perspective including the eligibility of deduction for a developer simpliciter, the distinction between a developer and a works contractor considering the scope of work executed by the appellant with ref ere nee to tested principles on the said distinction, the financial, technical, materials, entrepreneurial and managerial risks incurred by the appellant, the nature of eligible projects executed by the appellant during the A Y under consideration. Therefore, the AO's disallowance is untenable and consequently the appellant is therefore eligible to claim the impugned deduction for the AY under consideration. However, in view of the observation in para 45 supra with reference to adoption of depreciation as per the Act, the appellant is eligible for the deduction of Rs 3,83,80,455/- only and accordingly the appellant's ground on this issue is partly allowed.”
8. Aggrieved by the orders of the ld.CIT(A) the revenue is in further appeals before us.
9. The first argument raised by the Revenue before us is on the ground that the ld.CIT(A) failed to notice that the activities of the assessee does not satisfy the conditions stipulated u/s.80IA(4), specifically stating that the Assessee did not operate and maintain the infrastructure nor undertook development under BOT/BOOT models. The ld. CIT DR argued that the projects were carried out by the assessee as a contractor and not as a developer and placed on record certain extracts of the contracts entered into by the assessee for executing various projects. The ld.DR further pleaded for restoring the order of the assessing officer by allowing the grounds raised
by the Revenue. The second line of argument advanced by the Revenue before us is that the deduction u/s.80IA of the Act cannot be granted to the assessee since the income has been reported under percentage completion method and the ld.DR submitted that the assessee had earned income before completion of work proving the fact that the assessee is not a developer and the ld.DR further raised that the assessee had not earned any income from operating the infrastructure facilities. The third facet of argument placed before us by the ld. DR is that the assessee is not a developer but a works contractor and in this regard, the Ld. DR pointed out that the assessee had entered into a contract to carry out the scope of the work and the nature of activity carried out by the assessee are only in the nature of contract. The Ld. DR drew our attention to the relevant pages of the Paper book filed at the time of hearing. Further, the ld.DR canvassed that whether the contracts executed by the assessee are in the nature of work contract or not and whether the assessee qualifies as a 'developer' or acts merely as a ‘works contractor’. The AO has referred to the amendments introduced by the Finance Acts of 2007 and 2009, which clarified that where an assessee undertakes activities in the nature of a 'works contract,' the benefit of deduction u/s.80IA(4) of the Act shall not be available. These amendments, with retrospective effect from 1.4.2000, restrict the tax benefit u/s.80IA(4) for projects executed as works contracts. Thus, a clear distinction between a 'developer' and a 'contractor' is crucial. The nature of the assessee's work, discerned through a detailed analysis of agreements, scope of work, and conduct during execution, determines whether the assessee is a 'developer' or 'works contractor.'
10. In support of the above arguments the ld.DR submitted the written submissions. The summary of the same are given below: - The ld.DR relied upon the following agreements to understand the nature of activities carried out by the assessee entered with (a) Tamilnadu Water supply and drainage board dated 10.04.2014, (b) Suptd. Engineer, PWD, Vaippar Basin Circle, WRO, Virudhanagar, dated 13.04.2012 and (c) EE, Storm Water Drain Dept, GCC, Chennai – 3 dated April 2010 and (d)Suptd. Engineer, Storm Water Drain Dept, GCC, Chennai – 3 dated April 2010. The ld.DR contended these agreements are filed by the assessee before the settlement commission. - The above agreements shows that the work awarded is in the nature of construction, erection and installation (Page No.3170 to 3176 of the paper book filed by the Assessee) - These works are under the overall in-charge of the Government authorities. - The technical staff provided by the assessee is as per the specification given by the Government authorities - The price adjustment is also provided in the agreement to compensate to the assessee based the variation in the cost. - The drawings of the contract work is also provided by the Government authorities - The quality of the material to be used in the contract is decided by the Government authorities only In the light of the above submissions, the ld.DR prayed for setting the order of ld.CIT(A) and restore the order of the AO.
11. On the contrary, the authorised representative (‘AR’ in short) appearing for the assessee argued that the assessee had taken financial risk as well as acted as a developer by providing the design, skilled team and other related technical support towards the infrastructural projects.
The Ld.AR for the Assessee rebutted that there is no mandate under the provisions of the Act to develop, operate and maintain the infrastructure to avail the benefit envisage u/s.80IA of the Act and referred to the proviso to Section 80IA(2) which reads as under: [Provided that where the assessee develops or operates and maintain, develops, operates and maintains any infrastructure facility referred to; clause (a) or clause (b) or clause (c) of the Explanation to clause (i) of subsection (4), the provisions of this sub-section shall have effect as if for the words "fifteen years", the words "twenty years" had been substituted.][ Substituted by Act 14 of 2001, Section 44, for the proviso (w.e.f. 1.4.2002).] The Ld. AR further submitted that the ld.CIT(A) had rightly observed that the provisions in Section 80IA of the Act clearly mentions eligibility for deductions to entities involved in either (i) developing, (ii) operating and maintaining, or (iii) developing, operating, and maintaining infrastructure facilities and argued that the cumulatively meeting these conditions is not mandatory under the Act and the assessee being a developer simpliciter is eligible for deduction u/s.80IA(4) of the Act.
Further, in support of the above arguments the ld.AR relied on the following judicial precedents: i) Judgement of Hon’ble Madras High Court dated 07.03.2019 in the case of PCIT Vs VA Tech Wabag P.Ltd. in TCA Nos.196 – 201 of 2019. ii) Judgement of Hon’ble Madras High Court dated 12.03.2019 in the case of CIT Vs Chettinad Lignite Transport Services P. Ltd.(107 taxmann.com 362) iii) Judgement of Hon’ble Bombay High Court dated 15.02.2010 in the case of CIT Vs ABG Heavy Industries Ltd. (189 taxman 54). iv) Judgement of Hon’ble Gujarat High Court dated 19.02.2023 in the case of PCIT Vs Monte Carlo Construction Ltd. in T.A No.786/2023. v) Decision of ITAT., Mumbai Benches in the case of Bhinmal Contractors Property & Land Developers P. Ltd. Vs. ACIT (03 taxmann.com 296) 14. Further, the ld.AR referred paras 14 to 26 of ld.CIT(A) order in support of the claim that the assessee is eligible for the deduction as provided in section 80IA(4) of the Act as a developer. The Ld.AR submitted that the Explanation u/s.80IA(13), which disqualifies "works contracts," was specifically aimed at sub- contractors or persons merely executing tasks without any entrepreneurial or financial risk and further argued that the Ld.CIT(A) had rightly observed that merely because the assessee had entered into a contract to carry out the scope of the work, it need not imply that the activity carried on by the assessee are in the nature of a works contract and it has to be seen along with the other relevant factors including the entrepreneurial and financial risk. He further submitted that in the present case for the purpose of developing the project, the assessee had incurred huge financial risks apart from other inherent risks in addition to designing the plant, procurement of materials, technical plans and execution etc. and argued that the activities of the assessee involved substantial financial, operational, and entrepreneurial risk, clearly differentiating it from a mere works contractor. Therefore, the ld.AR prayed for dismissing the appeals of the revenue by confirming the order of the ld.CIT(A).
We have heard the rival contentions and perused the materials available on record and gone through the orders of lower authorities along with paper books and case law relied on. The first issue to be addressed in the present appeal to determine the allowability of disputed deduction is whether the condition as specified in Section 80IA(4) of the Act i.e. (i) develops or (ii) operates and maintains or (iii) develops, maintains and operates that infrastructure facility requires to be satisfied cumulatively.
We have gone through the order of the CIT(A)-19, Chennai who had examined the said issue and have analysed various Judgements interpreting the said issue. From a plain reading of the section shows the use of "or" and not "and", thereby supporting the assessee's position that satisfying all conditions cumulatively is not necessary. It is equally pertinent to note that the legislative intent was to extend the benefit of deduction to entities engaged in the development, maintenance, or operation of prescribed infrastructure facilities. A restrictive construction, as sought to be placed by the Assessing Officer, would render the beneficial provision otiose and defeat the very object sought to be achieved by the legislature. The legislature's intent was to promote companies involved in infrastructure development, and a narrow interpretation would nullify this benefit. We find that the judgements rendered by various Hon’ble Courts have been relied on by the ld.CIT(A) which have been captured in Page No.14 and 15 of the impugned order had interpreted that the conditions need not be cumulatively satisfied especially in view of the usage of the terminology ‘or’ as against ‘and’. Therefore, respectfully following the judicial precedents, we are of the considered view that there is no pre- requisite to satisfy all the conditions cumulatively to be eligible for deduction u/s.80IA of the Act. Hence, the argument of the revenue that the assessee should have earned income by operating an infrastructural facility by concluding that the conditions are to cumulatively satisfied deserves to be rejected. As a consequence, we are inclined to agree with the argument of the assessee and hence the grounds raised
by the Revenue in this regard are dismissed.
17. We have examined the reporting made by the assessee and it is important to note that the deduction u/s.80IA of the Act is granted to the taxpayers with respect to income generated from the specified activity. The method of recognising income based on the generally accepted accounting principles / accounting standards would not alter the nature of contract entered into by the assessee. Moreover, the deduction claimed u/s.80IA of the Act relates to the extent of amount recognised as income during the assessment years under consideration and hence the deduction cannot be denied on this count. In view of the above findings, the grounds raised by the revenue in this regard are dismissed.
18. We have further examined the copies of the agreements placed on record by the Revenue and the following factors emanate from the same: (1) The assessee is giving bank guarantee for executing the projects and the price escalation clause, liquidated damages clause and retention clause forming part of the said agreements would establish the financial risk taken by the assessee in the said projects. In the context of works contract, the contractor would not take any financial risk, and such financial risk are taken only by a developer. (2) The assessee also undertakes entrepreneurial and investment risks by investing money into the project and in this regard, it is important to note that the assessee has mobilised funds on its own either out of its internal accruals or out of borrowings towards developing the project. Therefore, the entrepreneurial and investment risk is taken only by a developer and not by contractor. (3) The assessee had also furnished the preliminary description of the proposed work method and schedule including drawings and charts as necessary at the time of applying for tender of such projects. The drawings and technical knowhow/ expertise can be given only by a developer and not by a mere contractor. (4) The assessee further employs the qualified/ skilled/ semi- skilled human resource required for the project based on the requirements / norms of each project thereby taking managerial responsibility for developing the infrastructure. It is further noted from certain agreements that the assessee is permitted to engage a sub-contractor for delegating specific tasks relating to the said project. Hence, it can be concluded that the contract entered into by the assessee with the State Government should be reckoned as project for development of infrastructural facilities and if at all the contract entered into in delegating the specific tasks by the assessee to various sub-contractors alone could be reckoned as work contracts. (5) From the perusal of nature of contracts / projects carried out by the assessee involves execution of extensive developmental works, including canal excavation, bridge construction, storm water drainage systems, and tank formation projects across Tamil Nadu which establishes the fact that the assessee had undertaken full-fledged development responsibilities and hence the projects carried out cannot be equated to a mere works contract assignments.
In light of the above factual matrix, we are of the considered opinion that the projects carried out by the assessee was only as a developer and not as a contractor. Hence, we dismiss the grounds raised
by the Revenue.
20. Our above adjudication rendered for the assessment year 2013-14 in would apply mutatis mutandis to & 335/Chny/2021, and 847/Chny/2022 for assessment years 2012-13, 2017-18 & 2016-17 also. Hence, the appeals filed for the assessment years 2012-13, 2016-17 and 2017-18 are also dismissed.
With regard to the appeal filed for the A.Y.2016-17, the said adjustment is also made in the intimation order issued u/s.143(1) of the Act, on this aspect, we concur with the order of the ld.CIT(A) that the said adjustment would fall outside the scope of Section 143(1) of the Act. Hence, we uphold the order of the ld.CIT(A) by dismissing the related grounds of appeal raised by the Revenue.
In the result, all these four appeals filed by the Revenue are dismissed. Order pronounced in the open court on 16th May, 2025