AKASH INFRA PROJECTS PVT.LTD.,,GANDHINAGAR vs. THE ACIT,GNR CIRCLE,, GANDHINAGAR

The brief facts leading to the issue is this that the appellant is a private limited company engaged in the business of Infrastructure Development, filed its return of income on 28.11.2003 declaring total income of Rs. 5,18,334/- which was processed under Section 143(1)(a) of the Act followed by a scrutiny proceeding. Notice under Section 143(2) dated 12.10.2004 was issued under Section 142(1) dated 20.06.2005 along with detailed questionnaire and after notice under Section 143(2) dated 20.06.2005. The assessee claimed deduction under Section 80IA(4)(i) of the Act of Rs. 48,19,950/- arising out of engagement in the development of roads for the year under consideration. The assessee claimed to have required qualification for coming under the zone of deduction in terms of the said section. However, such claim of the assessee was not found allowable and the assessment was completed with addition of Rs. 48,19,650/- disallowing claim under Section 80IA(4) & 04 others Asst.Year – 2003-04 to 2007-08 - 4 - which was, in turn, confirmed by the First Appellate Authority. Hence, the instant appeal before us.

At the time of hearing of the instant appeal the Ld. Counsel appearing for the assessee reiterated the submissions made before the authorities below. It was further submitted that the assessee has executed construction and development work of roads by entering into agreement with State Local Authorities and with other statutory authorities. It was further contended by the Ld. A.R. that the assessee has fulfilled all the conditions as mentioned under the provisions of Section 80IA(4) and in denying the claim of the assessee the AO wrongly construed that the assessee is a “contractor” and not carried out any development activities. It was further mentioned by the Ld. Counsel appearing for the assessee that the relief under Section 80IA(4) was granted to the assessee for A.Ys. 2009-10, 2010-11 & 2011-12 by the Ld. CIT(A) on the same set of facts. Moreso, no appeal has been preferred by the Revenue against those orders passed by the First Appellate Authorities. He further submitted that though the expression ‘works contract” has not been defined in the Act but various judicial pronouncements examined the issue and held that the term has wider meaning so as to state that if the activities carried out by the assessee involve development of project, engagement of various agencies, undertaking risk element, raises own finances and invests its own funds in the construction of the project, then the case of the assessee falls within the meaning of expression “developer”. A perusal of the tender documents clearly shows that the assessee has to arrange own finances, purchase own plant & machinery & 04 others Asst.Year – 2003-04 to 2007-08 - 5 - and purchase all materials at own cost, deploy of qualified personnel for construction and development of infra projects. The authorities gave only general specifications for the project. However, for the specific drawings & designs recommended by the assessee, the same has to be approved by the competent authority and becomes part of the tender. Further that once the tender is awarded, the assessee has to pay earnest money, security deposits, performance guarantee. The assessee is also liable for liquidated damages/penalty, free maintenance and repair during defect liability period. During the construction of project, the assessee has to make all the arrangements and is liable for procurement of water, electricity, all materials, skilled, semi-skilled staff, labourers, plant & machinery, equipments& tools, and also wellbeing of the staff/labourers. He submitted that the assessee is always burdened with financial risk to carry out the project work on own cost with the fixed rate specified in the tender. The payment would be made by the competent authority every after a period upon completion of certain work. The construction and development of infrastructure projects is highly technical and required special skill, adherence to quality etc. Moreso, the assessee is not compensated for increase in prices of materials, cost of labourers, overhead expenses etc. These facts clearly demonstrate that the financial and other risk, responsibility, obligations is undertaken by the assessee in construction and development of the various infrastructure projects. Hence, as per the ratio of the jurisdictional High Court in the case of Radhe Developers (supra), the assessee is not merely a works contractor, but is engaged in development of project as a whole, and therefore, entitled for claim of deduction under section 80IA(4) of the Act. The Ld.

On the other hand, the Ld. DR supported the orders passed by the authorities below.

We have heard the rival submissions made by the respective parties; we have also perused the relevant materials including the orders passed by the authorities below. It appears from the record that the Ld. AO has denied deduction claimed under section 80IA(4) of the Act by holding that the assessee has acted as work-contract in the project awarded by the statutory bodies.

Before the Ld. AO the assessee submitted as follows: “3. The assessee comport/vide letter doted 10.03.2006 stated as under : "Assessee co was incorporated and registered under the co. Act 1956 in May 1999. The Assessee co has installed a Paver" Pant at village Khorej Nr. Khodiyar railway station in the year & 04 others Asst.Year – 2003-04 to 2007-08 - 7 -

However, while rejecting the claim of the assessee the Ld. AO observed as follows: “4. The contention of the assesses is not accepted for the following grounds . i) The assessee company was not a developer of such facilities but, was a civil contractor not entitle to relief in as much as a) The appellant held no interest in land supporting the facility. b) The facility was owned by the Government. c) The appellant was not entrusted operation and maintenance of the facility after it was ready. d) The appellant was civil contractor. ii) The contract receipts claimed as deductible u/s 80IA(4) includes work done for BSNL, IFFCO etc. which are not central government, state government or Statutory body. iii) The representative of the assessee in his above reply stated that "entering in a lawful agreement and there by becoming a contractor should no way be bar to the one being a developer". In the case of & 04 others Asst.Year – 2003-04 to 2007-08 - 10 - assessee the issue is regarding the work carried out in the capacity of contractor not in a capacity of a developer. The assessee company token a work in a capacity of contractor not being a developer. iv) The assessee company has carried out construction of work of Ahmedabad Urban Development Authority, Road & Building Department of various district and Panchayat by filing a competitive tender to open market and agreed to work as specification of design, type of work, material etc. designed by the statutory authority. Hence the work done as per terms and conditions of the contract and design, structure, thickness of metal work, asphalt etc. so the assessee company has to work within the frame work decided by the statutory authority. v) If the contention of the assessee is treated as accepted then the every subcontractor engaged by the assessee company for this work would eligible for deduction u/s 80IA(4). Like transport contractor to carriage grit, sand, asphalt etc., a labor contractor even a financer would claim that they develop infrastructure facility. vi) The assessee company sighted the decision of the Hon’ble I.TAT. Bench-F, Mumbai in case of Patel Engineering Ltd. 94 ITD 411. I have gone to the said judgment. The facts of assessee company are different than the facts referred judgment. Some of them are stated under: a) Patel Engineering Ltd. was taken a two major work of contracts, to construct under ground tunnel and specialized structure to supply water from river to power house and back to river and another project is to construct in let tunnel for water supply up to point of power house which requires design, architecture, structure design, specification etc. whereas the assessee company carry out the construction of part of road as specified in the contract, design, structure planning etc. were already done by statutory body. b) On going through the judgment it is noticed that the following words appearing. "The assessee had developed infrastructure facility as agreement with the Maharashtra State Government/APSEB. Therefore merely because in the agreement for development of infrastructure facility". So, it is cleared from the above text that Patel Engineering Ltd. Had entered and agreement for development not for merely contract. As the copy/details of the same agreement is not available it could not be stated that what sort of & 04 others Asst.Year – 2003-04 to 2007-08 - 11 - development was agreed by Patel Engineering Ltd. Whereas in the case of assessee company no development agreement entered with any government or statutory body which the prime requirement of provisions of section 80IA(4) Income Tax Act, 1961. c) It is further noticed from the text of the judgment that the Patel Engineering Ltd. had entered into an agreement with the Government of Maharashtra and with APSEB. APSEB is a statutory body. Whereas the assessee company make a contract with AUDA and other statutory body for the specified work according to design, structure, style as agreed in contract. The Government of Gujarat (State Government) vii) The work carried out by the assessee company are in nature of contract only, as the roads, stated be developed are the portion of whole infrastructure facility by the statutory body. viii) The statement by the assessee company that "the owner is ultimate designer of the facilities or has developed the infrastructure facility. Therefore govt. & not carrying on any business of construction activity, but the govt. is interested in development of infrastructure project to facilitate the growth." is incorrect. The statutory body i.e. AUDA and other R & B departments are definite/absolute owner of the rood constructed by the assessee company. Further the assessee company stated that the infrastructure facility was transferred back. The contention is incorrect as the ownership was never transferred to the assessee company by Government of statutory body. ix) The possession of a Drum mixed plant. Paver Project, JCB machine, roller, dumper and other equipment, skill persons, engineers, machine operators etc, does not qualify the assessee company for deduction u/s 80IA(4). x) The assessee company stated that they have carried out work as per agreement executed in whatever form and acted according to the terms of agreement and cost of that agreement. The assessee company fails to establish that work (as per the agreement) involves any development work. All the specification design etc. are provided by the other party not by the assessee company. xi) Even though the H'onble I.T.A.T., Mumbai given the decision in favor of Patel Engineering Ltd. It is not known that the department has accepted the findings of the H'onble I.TAT., Mumbai. However it is cleared that the Assessing Officer at Mumbai and the CIT(Appeals) did not accepted the contention of the contractor assessee.” & 04 others Asst.Year – 2003-04 to 2007-08 - 12 -

While analyzing the work pattern of the assessee we would like to mention the following details available on record particularly the tender document, the financial statement of the assessee and other details annexed to the Paper Book filed before us for determination of the issue as to whether the assessee is a “work contractor” or “developer” and is entitled to deduction claimed under Section 80IA(4) of the Act even after the Explanation inserted after sub-Section 13 of Section 80IA of the Act by the Finance (No.2) Act 2009 w.e.f. 01-04-2000.

The above explanation has denied the benefit of deduction under Section 80IA(4) of the Act to a person who executes a project which is in the nature of works contract. In that view of the matter, the first and foremost condition imposed upon an assessee is to establish that he worked not as ‘work contractor’, but as a ‘developer’. & 04 others Asst.Year – 2003-04 to 2007-08 - 13 - 12. On the other hand, a 'contractor' is a person who undertakes work on a contract basis. He does not assume risks and responsibilities like that of a developer. He merely carries out the work as has been instructed to him by the principal. Moreover, in case of such work the contractor gets fixed amount of revenue for executing such work and is not entitled to any share of profit from revenue generated by the developer/land owner. In other words, the developer acts as a principal whereas the 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 whereas the contractors are those persons who merely execute part of these functions on behalf of developer and do not own any risks and responsibilities of the work. In such cases, the contractors may not be eligible for the deduction under Section 80-IA of the Act as they are not developing any infrastructure facility but only providing assistance to the actual developer.

In view of the above, in order to ascertain whether a civil construction work is assigned on development basis or contract basis only the terms and conditions of the agreement needs to be considered. Only on the basis of the terms and conditions and the scope, ambit and nature of the contract assigned it could be ascertained whether it is a "work contract" or a "development contract”. & 04 others Asst.Year – 2003-04 to 2007-08 - 14 - 14. It is admitted fact that the assessee is registered as category I contractor for Road with the State Government. The appellant company has also deposited Rs. 22,50,000/- for granting of Registration which is to be refunded only on surrender of said Registration Certificate. For coming under the zone of construction as eligible for participating in the Tender processes/Bid as per the Tender document available before us being part of the Paper Book the appellant has to be the owner of the following equipments as available at Page 12 & 13 thereof: “a. Tractor trolly-2 b. Dozer, 80HP @ 20 cum per hour c. Hydraulic Excavator d. Motor Grader e. Tractor Rotavator f. Water Tanker 6 KL capacity g. Wet Mix Plants h. Batch Mix HMP i. Electric Generator j. Front end Loader 1 cum bucket capacity k. Paver finisher hydrostatic with sensor control l. Vibratory Roller m. Tipper n. Mechanical Broom o. Air Compressor p. Bitumen pressure distributor q. Emulsion pressure distributor r. Concrete Mixer s. Asphalt Tanker t. Set of all laboratory Testing Equipments u. Weigh bridge(preferably with electronic set up)” 15. Clause 1 of the Tender document clearly specifies that no contract will be awarded except to responsible bidders capable of performing the class of work contemplated. Before the award of the contract, any bidder may be required to show that he has necessary facilities, experience, ability and financial resources to perform the work in satisfactory manner & 04 others Asst.Year – 2003-04 to 2007-08 - 15 - within the time stipulated. The bidder may be required to furnish the department with the statement as to their experience and financial status.

Clause 1 of the general rules and directions for the guidance of the bidders available at Page 24 of the tender document and Clause 14.4 of Page 33 clarify that the specific drawings and designs are recommended by the contractor which shall be approved by the competent authority and shall part of the accepted Tender. The Tender document further specifies that the bidder has to bring the required qualitative materials at his own cost.

We have also perused the quantitative purchase of the Audit Report under Section 44AB of the Act available at the Paper Book filed before us. It is also evident on record that particularly from the Audit Accounts available at Page 112 of the Paper Book that the assessee has purchased the materials of Rs. 3,19,38,994/- during the year under consideration. It is relevant to mention that various materials and mix were required to be tested by the assessee itself as its own cost from time to time at Government recognized laboratories as specified by the Tender document.

It is also on record that the assessee has to arrange own finance by raising adequate capital, reserves & surplus, secures & unsecured loans evident in the Balance Sheet available at Page 107 of the Paper Book. The assessee has raised total amount of Rs. 3,56,47,029/- for the year under consideration. The assessee has to use and invest heavily in purchasing plant and machinery in order to fulfilment the eligibility & 04 others Asst.Year – 2003-04 to 2007-08 - 16 - criteria to bid the Tender and to carry out the project of development of roads. In this regard, we have noted that the gross block of assets are to the tune of Rs. 2,01,36,510/-. Moreso, the assessee has to employ own teams of qualified Civil Engineers and arrange for skilled and semi- skilled and unskilled workers.

So far as the financial risk is concerned the appellant has to pay Security Deposit at 10% of the total work order over a contract period. Relevant to mention that the amount of Security Deposit over a period was to Rs. 1,02,47,932/-. It was specifically mentioned in the Clause 1 of terms and conditions of the contract that 50% of the Security Deposit alongwith performance bond shall be refundable within 15 days after the final completion certificate issued as per Clause-7. All dues under this contract or other contract, or otherwise including the royalty charge shall be recovered from the aforesaid amount of 50% of the said Security Deposit in the event no due certificate is produced before the authorities. The remaining 50% of the security deposit shall be refunded after the expiry of the Defect Liability Period in terms of Clause-17 and 17A upon deduction of the amount of expenses, if any, due to the Government under this contract. So far as the liquidated damages is concerned terms have been stipulated that if the contractor fails to complete contract by the stipulated date he shall pay liquated damages of 0.1% of the contract value per day from the date of delaying said work up to the date of completion and handing over to contract. & 04 others Asst.Year – 2003-04 to 2007-08 - 17 - 20. The Defect Liability Period is the period of 6 to 12 months for free maintenance and guarantee period from the certified date of completion work.

It was also mentioned in the Tender document that the assessee has to arrange for labour and is also responsible for safety of all concerned. The assessee has to take “Contractor’s all risk insurance”, Workmen compensation insurance, Vaccination Certificate, Medical Aid. The assessee has to provide several equipments, build sufficient huts, providing drinking water, proper sanitation, drainage, rest rooms etc. as per different clause under the contract guidelines. The bidder has to provide canteen to be run on no profit or loss basis and keep the canteen accounts and to get them audited. The contractor will have to construct shed for storing Material at work site having double locking arrangements, has to provide suitable scaffolds and working platforms, gangways, stair ways, and shall comply all types of safety measures. The contractor is not permissible to set fire to any standing general trees, bush, wood or grass without written permission and has to take necessary measures to prevent fire spreading or otherwise damaging surrounding property. The Clause has also made it clear that the contractor would be liable for any damage done in or outside work area. It has to take all necessary measures for safety of traffic during construction and provide, erect and maintain barricades including signs and coma, marking, flags, lights and flagmen, as may be required. The contractor is not permitted to set the work without written approval in default the contract shall be & 04 others Asst.Year – 2003-04 to 2007-08 - 18 - rescinded and the Security Deposit would stand forfeited as per Clause 26 of the Tender document.

In terms of Clause 3 of Tender document if the contractor defaults in work or violates the term of the contract it shall be liable to penalty in terms of lien of Government over the plant, machinery, equipments etc. and forfeiture of security deposit too.

In view of the above detailed paper books containing the above tender documents comprising agreement clauses (relevant clauses have already dealt with by us hereinabove) the contents whereof would definitely suggest that the assessee has been entrusted with the work of development infrastructure facilities, and therefore being a ’developer’, the assessee would be entitled for deduction under Section 80IA(4) of the Act. Relevant to mention that perusal of all tender documents in respect of the years also mentioned hereinabove reveals that the terms and conditions mentioned therein are almost same except the figures and name of the project.

The primary condition is that the enterprise must carry on the work of "developing" an infrastructure facility. As mentioned above, Explanation under sub-Section (13) of Section 80-IA clarifies that this section will not apply to any business which is in the nature of a "works contract". In other words, the essence of this section is that, the benefit of Section 80-IA(4) would be available to a developer and not to a contractor simplicitor. In the present case the lower authorities have denied the benefit of Section 80-IA(4) to the appellant-company on the ITA No.2826/Ahd/2007 & 04 others Asst.Year – 2003-04 to 2007-08 - 19 - assumption that the appellant-company is engaged in executing merely a work contract and it is not carrying on the business of developing an infrastructure facility. The assessee has undertaken entirely and exclusively the projects awarded by the local government authorities, as it is evident from the records as explained and already narrated hereinabove and therefore, there is hardly any basis for assuming that it is merely a contractor executing a works contract. The difference between a "developer" and a "contractor" has to be properly analyzed and understood. This issue has come up before the Hon'ble ITAT, Amritsar Bench in the case of M/s. TRG Industries P. Ltd. in etc./Asr/2009. The Tribunal after relying various case laws has laid down the following parameters when to treat an assessee as a developer or contractor.

We have already dealt with relevant clauses of the tender documents stipulating various conditions viz. financial involvements, risks, obligations and responsibilities of the assessee in developing, operating and maintaining of infrastructure facilities, which clearly make the case of the assessee within the scope and ambit of Section 80IA(4) of the Act so as to claim the impugned deduction.

We have considered the judgements relied upon by the Ld. AR passed by different judicial forums including the judgement passed in the matter of Patel infrastructure and Katira construction (supra) passed by the Rajkot Bench and Katira construction passed by the Hon’ble jurisdictional High Court wherein the constitutional validity of insertion of explanation below sub-Section 13 of Section 80 IA of the Act was challenged. The Ld. Representative appearing for the Revenue vehemently argued on this point that the jurisdictional High Court in the said matter already decided the issue against the assessee. Fact remains that the jurisdictional High Court in that particular matter dealt with the constitutional validity of the insertion of explanation as mentioned hereinabove and decided the same in favour of the revenue to this effect that such explanation brought with retrospective effect from 01.04.2000 by the Finance Act No. 2 of 2009 was very well within the competence of Parliament. As such there was no issue whether the assessee was acting as a developer or contractor was raised before the Hon’ble & 04 others Asst.Year – 2003-04 to 2007-08 - 21 - Jurisdictional High Court neither the said has been decided in the said judgement.

We are further noted that relief under Section 80IA(4) of the Act has been granted in favour of the assessee for A.Y. 2009-10, 2010-11 & 2011-12 by the Ld. CIT(A). Upon perusal of the said orders passed by the Ld. CIT(A) being part of the Paper Book filed before us it appears that the Ld. CIT(A) has considered identical work pattern executed by the assessee and finally decided the issue in favour of the assessee. It is relevant to mention that no appeal has been preferred by the Revenue against these orders.

In the light of the above discussion and perusal of various clauses of Tender documents and case laws relied upon by both the parties, it reveals that the tender work under consideration are not for a specific work, rather they are for development facility as a whole. The responsibility is fully assigned to the developer for execution and completion of the work. Various stipulations contained in the Tender documents demonstrate various risks undertaken by the assessee for execution of the project work awarded by the competent authority in terms of financial resources, manpower deployment, both technical and administrative expertise, drawing and designing of the project specifications and getting approval from the competent authority, safety and security of project and human resources, compliances of various statutory rules and laws. Therefore, merely because in the agreement for development of infrastructure facility, assessee is referred to as & 04 others Asst.Year – 2003-04 to 2007-08 - 22 - contractor or because if some basic specifications are laid down, it does not detract the assessee from the position of being a developer, nor will deprive the assessee from claiming deduction under Section 80IA(4) of the Act. As such, looking to the overall aspects of work undertaken by the assessee we can safely come to the conclusion that the assessee is engaged in development of the infrastructure facility and therefore, a developer, which entails the assessee to claim benefits under Section 80IA(4) of the Act. Thus, the issue of claim of deduction under Section 80IA(4) of the Act is allowed in favour of the assessee and against the Revenue. This common ground raised in all the appeals are accordingly disposed of.

Ground No.2 in A.Y. 2007-08: