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Income Tax Appellate Tribunal, “B”, BENCH KOLKATA
Before: SHRI A.T.VARKEY, JM &DR. A.L.SAINI, AM
आदेश / O R D E R
Per Dr. A. L. Saini:
The captioned two appeals filed by the assessee pertaining to assessment years 2011-12 and 2012-13 and an appeal filed by the revenue for assessment year 2013-14, are directed against the separate orders passed by the Commissioner of Income Tax (appeals)-5, Kolkata, which in turn arise out of separate assessment orders passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 [in short the ‘Act’].
Since the issues involved in all the appeals are common and identical , therefore these appeals have been heard together and are being disposed of by this consolidated order. For the sake of convenience, the grounds as well as the facts narrated in for assessment year 2013-14, have been taken into consideration for deciding the above appeals en masse.
All the grounds raised by the Assessee and Revenue were carefully perused by us. Most of the grounds according to us are either of academic or contentious nature. However, to meet the ends of Justice, we confine ourselves to the Core of Controversy, that is, whether the assessee is a developer or mere works contractor and not eligible for deduction u/s 80IA(4)(i) of the Act.
The brief facts qua the issue are that during the assessment proceedings, the Assessing Officer noted that the assessee in its return of income had claimed Page | 2
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 deduction for Rs.70,07,818/- under section 80IA(4)(i) of the Income Tax Act relating to water treatment system plant. During the assessment proceedings, the assessee company was asked to explain as to why it is eligible for deduction under section 80IA(4)(i) of the Act. In response, the assessee company filed the following necessary details and evidences in order to claim its contention regarding applicability of deduction under section 80IA(4)(i) of the Income Tax Act, 1961. i) Copy of the audit report in form No. 10CCB dated 20.09.2013. ii) Copy of form No. 29B dated 24.06.2013 for the assessment year 2013-14. iii)Copy of the work order dated 27.10.2008 for construction. iv) Copy of the work order dated 21.08.2009. v) Copy of the work order dated 23.10.2009. vi) Copy of the work order dated 20.11.2012. vii) Copy of communication dated 28.10.2009 regarding Acceptance cum work order for supply, installation commissioning, operation and maintenance of 90 cu.m/hr. capacity Iron Elimination plant for zone-VII at AA-1 of New Town Kolkata at P.H. Engg. Dte from the Executive, New Town Kolkata Water Supply division-I, PHE Directorate, Govt. of West Bengal.
The Assessing Officer, having gone through the above documents submitted by the assessee, noted that the assessee is engaged in ‘works contract’ and therefore not eligible to claim deduction u/s 80IA(4) (i) of the Act. The Assessing Officer also noted from the audited report of the assessee company in form No. 10CCB dated 29.06.2001, in column No. 14(c ) regarding “whether the operation and maintenance of the infrastructure facility has been received on transfer from its developer in accordance with central/state government/ local authority/ any other statutory body.
It is stated ‘ No’.
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 After going through the above remark in the audit report, the Assessing Officer was of the view that there is no element of ‘operating and maintaining, or developing’ infrastructure facility involved. The Assessing Officer noted that in fact the details submitted by the assessee explained that the assessee is engaged in the ‘ works contract’ and Assessing Officer further noted that it was quite evident that the assessee company has been awarded job of execution of ‘ work contract’ by the state government for design, construction commencing, surface water treatment plant and underground reservoir-cum-pumping station and other allied works as per specification mentioned in such ‘ work contract’ and under the supervision control and guidance of the party which has awarded such contract to the assessee. Therefore, the Assessing Officer noted that as such the assessee has not done any development work of any new infrastructure facility as claimed by it hence the assessee is merely engaged in the ‘ work contract’ of construction of surface water treatment plant, and underground reservoir-cum-pumping station and other allied works awarded to it by by the Government of West Bengal.
The Assessing Officer also noted from form No. 3CD, vide the audited report dated 24.06.2013, wherein it had stated the nature of business of the assessee company as ‘ civil contractor’. Therefore, the Assessing Officer was of the view that the assessee is only engaged in the execution of ‘work contract’ construction of surface water treatment plant awarded to it by the Government of West Bengal.
However, the assessee company further filed a letter before the Assessing Officer stating that the assessee company has been carrying out its activity in the projects in different parts as per the copy enclosed with form No. 10CCB. The assessee company also claimed that it fulfilled all the conditions of section 80IA(4)(i) of the Act. Apart from this, the assessee company relied its contention in the case of CIT vs. J.K. Hosiary Factory [1986] 159 ITR 85(SC), Mysore Minerals Ltd. [1999] 239 ITR 775 (SC), CIT vs. Radha Devi Poddar [1991] 185 ITR 544 (Cal) etc.
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 However, the above justification and contentions of the assessee regarding its claim for deduction under 80IA (4)(i) of the Act were rejected by the Assessing Officer. The Assessing Officer while rejecting the contention of the assessee, assigned the following reasons: a) The assessee was engaged only in execution of ‘works contract’ awarded to it by the Government of West Bengal as per the specification and under the supervision and guidance of the representatives of the Government of West Bengal during the year ended on 31.03.2014. b) The assessee had itself filed and submitted application for contract labour with Government of West Bengal and Government has deducted tax at source under section 194C of the Act. c) The assessee has obtained separate certificate from the concerned departments affirming its work as ‘ development of infrastructure facility’ etc. which is not acceptable because it was not form the appropriate authority. d) The nature of business of the assessee is neither of developing nor operating and maintaining infrastructure facility as referred in section 80IA(4)(i) of the Act hence the assessee is not eligible to claim deduction u/s 80IA(4) (i) of the Act and therefore the Assessing Officer denied the deduction claimed by the assessee u/s 80IA(4) (i) to the tune of Rs. 70,19,787/-.
Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A) with success. Aggrieved, the Revenue as well as assessee are in appeal before us.
We have heard both the parties and perused the material available on record. The ld counsel for the assessee reiterated before us the submissions made before the ld CIT(A) and explained the Bench with help of various case law that assessee company is a “Developer” and fulfilled all the conditions to claim deduction under section 80IA(4) (i) of the Act. Whereas, the ld DR for the Revenue relied on the stand taken by the assessing officer and argued that assessee is engaged in ‘works Page | 5
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 contract’, therefore not eligible to claim deduction under section 80IA (4) (i) of the Act.
In these circumstances and considering the facts of the case, we note that the moot point which is to be adjudicated by us, is whether the assessee company is a developer or work contractor? Before we adjudicate this issue, let us go through the bare provisions of section 80IA(4) (i) of the Act, which is reproduced below for ready reference, to the extent applicable for our discussion: “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 eligibles 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.
(4) This section applies to- i) any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility which fulfils all the following conditions, namely :-
(a) it is owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act;
(b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility;
(c) it has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995.
(13) Nothing contained in this section shall apply to any Special Economic Zones notified on or after the 1st day of April, 2005 in accordance with the scheme referred to in sub-clause (iii) of clause (c) of sub-section (4).
Explanation.-For the removal of doubts, it is hereby declared that nothing contained in this section shall apply in relation to a business referred to in sub- section (4) which is in the nature of a works contract awarded by any person (including the Central or State Government) and executed by the undertaking or enterprise referred to in sub-section (1).
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 It is abundantly clear from the bare provisions of the Act, as noted above, that the deduction is admissible to a person who is carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility and not to a person who is carrying on the business of the nature of a works contract awarded by any person (including the Central or State Government). The issue in question is as to whether the assesseeis a 'Developer' or a mere ' Works Contractor'. The assessee's claim is that it is a ‘Developer’. Let us examine the assessee`s claim.
We note that as regards the contention that the assessee is not into a business of the nature of works contract. The DR for the Revenue draws reference from the definition of 'Work' as per the Explanation below section l94C of the Act, which reads as follows: “(iv) "work" shall include— (a) advertising; (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods or passengers by any mode of transport other than by railways; (d) catering; (e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.”
We note that the significance of the term 'work', as defined in the Explanation to section l94C, as mentioned above, is restricted to the context of section l94C alone, i.e. for determining the amount on which tax is deductible under that section. It would be evident from a plain reading of the very beginning of the Explanation, which states, 'For the purposes of this section'. Therefore, the definition of “Work” mentioned in the Explanation to section l94C can not be used for the assessee under consideration for the purpose of section 80IA(4)(i) of the Act. Moreover, just because the assessee has deducted TDS while making some payment or received amount after deducting TDS as per provisions of section Page | 7
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 194C, does not make the assessee to be engaged in execution of ‘works contract’. This makes it amply clear that the above definition is relevant for the purpose of section l94C only. The definition of work, for the purpose of section 194C, excludes the manufacturing or supplying a product according to the requirement of specification of a customer by using material purchased from a person, other than such customer, because for the purpose of section 194C, it is necessary to determine the amount on which tax is to be deducted under that section. The reason as to why clause (e) has been incorporated in the Explanation which has been clarified in the explanatory notes to the provisions of the Finance (No. 2) Act, 2009 [Circular No. 5/2010/F. No. 142/13/2010-SO (TPL)], Dated 03.06.2010]. Clause 49.4 of the Circular reads as follows:
49.4 Clarification regarding “work” under section 194C A) There is ongoing litigation as to whether TDS is deductible under section 194C on outsourcing contracts and whether outsourcing constitutes work or not. To bring clarity on this issue, it is provided that “work” shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for ‘sale’. This will however not apply to a contract which does not entail manufacture or supply of an article or thing (e.g. a construction contract). Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer is also included, within the definition of ‘work’. It is further provided that in such a case TDS shall be deducted on the invoice value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value.
From the above clarification provided in the Memorandum leaves no element of doubt and the definition of ‘work’ as occurring in Explanation below to section 194Cof the Act, does not apply to the assessee under consideration so far his claim of deduction under section 80IA (4) (i) of the Act is concerned. The deduction under section 80IA(4) (i) of the Act can be availed by the assessee provided the assessee fulfilled certain conditions mentioned in that section and thus cannot be correlated with the provisions of section 194C of the Act. Thus, we are of the view Page | 8
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 that deduction of tax at source under section 194C of the Income Tax Act, on amount paid to the assessee cannot be the ground to deny deduction U/s 80IA(4)(i) of the Act, if all the conditions laid down under section 80IA(4)(i) are met and complied with by the assessee company.
In order to decide the moot point whether the assessee company is a ‘developer’ or ‘works contractor’, one has to see the various projects awarded to the assessee and the scope of the work allotted to the assessee. We note that on examining the various projects awarded to the assessee, the scope of the work allotted to the assessee company are as follows: i. The scope of work includes planning, design, drawing and construction of civil works with foundation for the various units of the plant, planning, design, drawing, manufacture, supply, delivery at site and erection of all mechanical and all other electrical and electrical equipment as per detail technical specification. ii. The agreement is not for a specific work, it is for development of facility as a whole. The material required is to be brought in by the assessee by sticking to the quality and quantity irrespective of the cost of such material. The Govt. does not provide any material to the assessee. It provides the works in packages and not as a works contract. iii. The assessee utilizes its funds, its expertise, its employees and takes the responsibility of developing the infrastructure facility. The losses suffered either by the Govt. or the people in the process of such development would be that of the assessee. The assessee hands over the developed infrastructure facility to the Govt. on completion of the development. iv. Thereafter, the assessee has to undertake maintenance of the said infrastructure for a period of 12 months. During this period, if any damages are occurred it shall be the responsibility of the assessee. Page | 9
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 v. Further during this period, the entire infrastructure shall have to be maintained by the assessee alone.
We note that above mentioned scope of work, makes it clear, that the assessee cannot be classified as a works contractor. The assessee is doing the activity of development of an infrastructure as provided u/s 80-IA(4)(i) of the Act. The project is a turnkey project and cannot have the Character of a works contract. Therefore, the assessee is a ‘developer’.
We note that the assessee company has fulfilled all the conditions for availing of deduction u/s 80-IA(4)(i) of the Income-tax Act, which we are going to discuss below:
(i). The assessee is a company registered in India. (ii). The assesseehas entered into an agreement with the Govt. of West Bengal for development of an infrastructure facility. In explanation (c) to Section 80-IA(4) infrastructure facility includes “a water supply project, water solid waste management system”. (iii). The assessee company has started operations after 1st day of July, 1995. (iv). The A.O. in the assessment order has highlighted that none of the four projects is owned by the assessee. All the four projects in which the assessee is engaged, are owned by the Govt. of West Bengal and the assessee has merely executed the works contract of construction of these projects awarded to it by the Govt. of West Bengal. We note that ownership of the development project is not sine quo non for availing deduction u/s. 80-IA(4)(i) of the Act, as held by the Coordinate Bench in the case of ACITs vs. M/s. Simplex Somdatta Builders, wherein it was held as follows:
"We find that the word 'owned' in sub-clause (a) of clause (i) of sub section (4) of Section 80IA of the Act refer to the enterprise. By reading of the section, it is clear that the enterprises carrying on development of infrastructure development should be owned by the company and not that Page | 10
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 the infrastructure facility should be owned by a company. The provisions are made applicable to the person to whom such enterprise belongs to, is explained in sub-clause (a). Therefore, the word 'ownership' is attributable only to the enterprise, carrying on the business which would mean that only companies are eligible for deduction under section 80IA (4) and not any other person like individual, HUF, Firm etc. We also find that according to sub-clause (a), clause (i) of sub section (4) of 80-IA the word 'it' denotes the enterprise carrying on the business. The word 'it' cannot be related to the infrastructure facility, particularly in view of the fact that infrastructure facility includes Rail- system, Highway project, Water treatment system, Irrigation project, a port, an airport or an inland port which cannot be owned by any one. Even otherwise, the word 'it' is used to denote an enterprise. Therefore, there is no requirement that the assessee should have been the owner of the infrastructure facility.”
We note that the assessee company is the owner of the enterprise carrying out the business of developing infrastructure for the West Bengal and is eligible for deduction under section 80-IA (4) (i) of the Act, on his income derived from the enterprise as held by the Coordinate Bench in the case of M/s. Simplex Somdatta Builders (supra).
(v). The A.O in his order has stated that on perusal of the documents as submitted vide 4(i) i.e. in the audit report in form No. 10CCE dated 29.06.2012, it is seen that in the column no. 14(c) – regarding ‘whether the operation and maintenance of the infrastructure facility has been received on transfer from its developer in accordance with the Central/State Government/Local Authority /any other statutory body and it is stated 'No'. From the above it is clear that that there is no element of "operating and Maintaining" or "Developing, Operating and maintaining" infrastructure facility, involved". The contention of the AO that the assessee is not entitled to claim deduction under section 80IA(4) (i) of the Act, because the operationand maintenance of the infrastructure facility has not been transferred by the developer. We note that it is against the spirit of section 80IA(4) of the Act,as held by the Hon`ble Bombay High Court in ABG Heavy Industries Limited (322 ITR 323) (Bom), wherein it was held that the person who, only develops the Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 infrastructure does not always have the occasion to operate and maintain the infrastructure. It is further evident that the harmonious reading is necessary and mandatory in the case of an enterprise carrying on business or developing which is the case of the assessee. All the conditions referred to clause (i) of section 80IA (4) should refer to the conditions as applicable to the developer. In other words, the developer who is only developing the infrastructure facilities since he does not operate and maintain Infrastructural facilities, cannot be expected to fulfill the condition at sub clause (c) which is an impossibility and the requirements to fulfill the said condition shall amount to absurdity and therefore uncalled for.
(vi) We note that what is required is a harmonious reading of sub-clause (c) vis-a- vis of clause (i) of section 80IA (4) of the Act. Thus, in a case where the enterprise has entered into an agreement with the State Government only for the development of new infrastructure facility, it has to recoup its investment from someone because it has not entered into a contract to simultaneously maintain and operate such developed new infrastructure facility. In such cases, the developer receives the money from the personwith whom agreement for development of facility is made. Such payment also include profit element of the enterprise eligible for deduction u/s 80IA(4), subject to fulfilment of other conditions.
If, an enterprise which only develops the infrastructure facility, would not receive the money from the Central Government or a State Government or local authority, its entire investment in development would be a loss because it could not transfer the facility developed by it to any other enterprise for maintenance and operation to recover its investment. Therefore, in the cases where an enterprise has only developed the infrastructure facility as per contract and receive the money in one go or in phases from the government for executing the work, it cannot be said that such an enterprise was only a contractor who has executed the works contract in lieu of money from the government or local authority etc. The assessee, therefore, is eligible for 80IA(4)(i) deduction as he fulfils all conditions for ‘developer’ of infrastructure facilities as per the Act. Page | 12
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 14. We note that the A.O. in his order had relied on the Apex Court’s decision in the case of CIT vs NC Budhiraja & Co. [204 ITR 412] in support of his contention that the assessee was not entitled to deduction u/s 80IA(4). However, this decision of the Apex Court is distinguished and not applicable to the facts of the case under appeal. The Apex Court’s decision in NC Budharaja & Co. relates to Section 80HH of the Income Tax Act and is regarding, industrial undertakings, engaged in the manufacturing or production of articles and business of a hotel to which that section applies. The main issue in the case is whether the assessee, engaged in construction of a dam cannot be said to be engaged in manufacturing or production of an article inasmuch as a dam is constructed and not manufactured. We note that the contention of the assessee for eligibility for deduction under section 80IA(4) is fortified by certificate from the Superintendent Engineer, Municipal Engineering Directorate of the West Bengal Govt., in which it was clarified, that the assessee is developing a new infrastructure facility/project of public interest meant for Drinking Water Supply Project to improve health & sanitation and to provide civic amenities for local people.
Our views are fortified by the judgment of the co-ordinate bench of this Tribunal in the case of SPML Infra Ltd., in to 1292/Kol/2013 assessment year 2009-10, order dated 24.08.2016, wherein, on similar and identical facts, it was held as follows:
8.5 From the above it is clear that even if an assessee is merely developing the infrastructural facility (without operating and maintaining the same), it is entitled to deduction u/s 80-1A. Further, condition (b) laid out in sub-section 4 of section 80-IA mandates the existence of an agreement with the Government. Moreover, if section 80-IA grants deduction on profits from the activity of development carried out in pursuance of an agreement with the Government it presupposes that assessee will earn some profits from mere development (without operating and maintaining) of the infrastructure facility. Now the relevant question that arises here is that how would an assessee engaged in mere developmental activity (and no operation) pursuant to an agreement with the Government earn profits? The obvious answer is that the assessee will recover its cost of development from the Government otherwise the entire cost of development will be a loss in its hands. Thus, if deduction u/s 80-IA is denied on the ground that the assessee had received payments from Government, then an assessee who is only a "developer" (and not an operator) will never be entitled to deduction u/s 80-IA, which is Page | 13
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 clearly not the intention of legislature as discussed by the Bombay High Court in case of ABG Heavy Industries Ltd. Thus, merely because the assessee was paid by the Government for development work it cannot be denied deduction under section 80-IA(4). The contention of the assessee finds strength from the following judgments:
The ITAT (Mumbai) in case of ACIT v. Bharat Udyog Ltd. (2009) 123 TTJ 0689 : (2009) 23 DTR 0433 : (2009) 118 ITD 0336 : (2008) 24 SOT 0412
“After the amendment effected by Finance Act, 1999 w.e.f. 1st April, 2000, the deduction under s. 80-IA(4) has become available to any enterprise carrying on the business of (i) developing, or (ii) maintaining and operating, or (iii) developing, maintaining and operating any infrastructure facility. Sub-cl. (c) of cl. (i) of s. 80-IA(4) is obviously applicable to an enterprise which is engaged in ‘operating and maintaining’ the infrastructure facility on or after 1st April, 1995. It is not applicable to the case of an enterprise which is engaged in mere ‘development’ of infrastructure facility and not its ‘operation’ and ‘maintenance’. Therefore, the question of ‘operating and maintaining’ of infrastructure facility by such enterprise before or after any cut off date cannot arise. However, if the contention of the Departmental Representative is accepted, it would obviously/understandably lead to manifestly absurd results. When the Act provides for deduction undisputedly for an enterprise who is only ‘developing’ the infrastructure facility, unaccompanied by ‘operating and maintaining’ thereof by such person, there cannot be any question of providing a condition for such an enterprise to start operating and maintaining the infrastructure facility on or after 1st April, 1995. Since the assessee is only a developer of the infrastructure project and it is not maintaining and operating the infrastructure facility, sub-cl. (c) of cl. (i) of sub-s. (4) of s. 80-IA is not applicable. The interpretation of Revenue is absurd also in view of the rationale of the provisions of s. 80-IA(4)(i). From the asst. yr. 2000-01, deduction is available if the assessee carries on the business of any one of the three types of activities. When an assessee is only developing an infrastructure facility project and is not maintaining nor operating it, obviously such an assessee will be paid for the cost incurred by it; otherwise, how will the person who develops the infrastructure facility project, realise its cost ? If the infrastructure facility, just after its development, is transferred to the Government, naturally the cost would be paid by the Government. Therefore, merely because the transferee has paid for the development of infrastructure facility carried out by the assessee, it cannot be said that the assessee did not develop the infrastructure facility. If the interpretation canvassed by the Revenue authorities is accepted, no enterprise, carrying on the business of only developing the infrastructure facility, would be entitled to deduction under s. 80-IA(4), which is not the intention of the law. If a person who only develops the infrastructure facility is not paid by the Government, the entire cost of development would be a loss in the hands of the developer as he is not operating the infrastructure facility. When the legislature has provided that the income of the developer of the infrastructure project Page | 14
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 would be eligible for deduction, it presupposes that there can be income to developer, i.e., to the person who is carrying on the activity of only developing infrastructure facility. Obvious as it is, a developer would have income only if he is paid for development of infrastructure facility, for the simple reason that he is not having the right/authorization to operate the infrastructure facility and to collect toll therefrom, and has no other source of recoupment of his cost of development. Considered as such, the business activity of the nature of build and transfer also falls within eligible construction activity, that is, activity eligible for deduction under s. 80-IA inasmuch as mere ‘development’ as such and unassociated/ unaccompanied with ‘operate’ and ‘maintenance’ also falls within such business activity as is eligible for deduction under s. 80-IA. Therefore, merely because the present assessee was paid by the Government for development work, it cannot be denied deduction under s. 80-IA(4). A person who enters into a contract with another person will be a contractor no doubt; and the assessee having entered into an agreement with the Government agencies for development of the infrastructure projects, is obviously a contractor but that does not derogate the assessee from being a developer as well. The term "contractor" is not essentially contradictory to the term "developer". On the other hand, rather s. 80-IA(4) itself provides that assessee should develop the infrastructure facility as per agreement with the Central Government, State Government or a local authority. So, entering into a lawful agreement and thereby becoming a contractor should, in no way, be a bar to the one being a developer. Therefore, merely because in the agreement for development of infrastructure facility, assessee is referred to as contractor or because some basic specifications are laid down, it does not detract the assessee from the position of being a developer; nor will it debar the assessee from claiming deduction under s. 80-IA(4). Therefore, an assessee who is only engaged in the developing the infrastructural facility i.e., road and not engaged in the ‘operating and maintaining’ the said facility is entitled to the benefits of the deduction under s. 80-IA(4).—Patel Engineering Ltd. vs. Dy. CIT (2004) 84 TTJ (Mumbai) 646 followed.Provisions of sub-cl. (c) of cl. (i) of s. 80-IA(4) are inapplicable to the assessee which is engaged in mere developing of the infrastructure facility and, therefore, an assessee who is only engaged in developing the infrastructure facility and not in ‘operating and maintaining’ the said facility is entitled to the benefit of deduction under s. 80-IA(4); merely because assessee is referred to as ‘contractor’ in the agreement for development of infrastructure facility or some basic specifications are laid down, would not debar the assessee from claiming deduction under s. 80-IA(4).”
If a person who only develops the infrastructure facility was not paid by the Government, the entire cost of development would be a loss in the hands of the developer as he was not operating the infrastructure facility. Merely because the assessee was paid by the Government for development work it could not be denied deduction under section 80-IA(4). The Chennai Bench of Tribunal in case of R.R. Constructions, Chennai vs. Department of Income tax held that "When an assessee is only developing an infrastructure facility project and is not maintaining nor operating it, obviously such an assessee will be paid for the cost Page | 15
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 incurred by it; otherwise, how will the person, who develops the infrastructure facility project, realize its cost? If the infrastructure facility, just after its development, is transferred to the Government, naturally the cost would be paid by the Government. Therefore, merely because the transferee had paid for the development of infrastructure facility carried out by the assessee, it cannot be said that the assessee did not develop the infrastructure facility. If the interpretation done by the Assessing Officer is accepted, no enterprise carrying on the business of only developing he infrastructure facility would be entitled to deduction under section 80IA(4), which is not the intention of the law. An enterprise, which develops the infrastructure facility is not paid by the Government, the entire cost of development would be a loss in the hands of the developer as he is not operating the infrastructure facility. The legislature has provided that the income of the developer of the infrastructure project would be eligible for deduction. It presupposes that there can be income to developer i.e. to the person who is carrying on the activity of only development infrastructure facility. Ostensibly, a developer would have income only if he is paid for the development of infrastructure facility, for the simple reason that he is not having the right/authorization to operate the infrastructure facility and to collect toll there from, has no other source of recoupment of his cost of development. The Indore Bench of the Tribunal in case of Sanee Infrastructure Pvt. Ltd. vs. ACIT [138 ITD 433] held that "As per our considered view, after amendment by the Finance Act, 2002 for claim of deduction u/s 80IA(4) infrastructure facility is only required to be developed and there is no condition that assessee should also operate the same. Thus, after amendment, when the assessee is not required to operate the facility, the payment for development of such infrastructure is required to be made by the Government only. "After amendment, when assessee undertakes to develop the infrastructure facility only, it is the Government who will make payment to assessee in respect of infrastructure facility developed by it in terms of agreement so entered with Government. Thus, we do not find any infringement of conditions {or claim of deduction"
8.6 Thus from the above, it is clear that the fact that the assessee had received payments from the Government in progress of its work has no bearing on eligibility of deduction u/s 80- IA. Further, the Revenue in all the grounds has contended that the contracts entered into by the assessee were merely 'construction contracts' since the assessee is not exposed to any entrepreneurial and investment risk. In this regard, the AO has observed that the assessee is executing the contract against predetermined revenue w.r.t the above, it is submitted that under the impugned contracts, the assessee was merely carrying out the civil construction work. It was responsible for overall development of the infrastructure facility. It was merely provided with the site which it had to develop into an infrastructural facility by deploying his resources i.e. material, plant & machinery, labour, supervisors etc. It was responsible for any damage/loss caused to any property or life in course of execution of the works. It was even responsible for remedying of the defects in the works at its cost. It was also required to operate and maintain the infrastructure facility. Hence, it cannot be said that the contract with the Government was to carry out mere civil construction. Attention in this regard is invited to the following:
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 (i) The ITAT (Ahmadabad) in case of Sugam Construction (P) Ltd. vs. ITO [56 SOT 45] held that "It is also gathered (a) That a developer is a person who undertakes the responsibility to develop a project. (b) That a developer is therefore not a civil contractor simplicitor. (c) That if we apply the commercial aspect, then a developer has to execute both managerial as well as financial responsibility. (d) That the role of a developer, according to us, is larger than that of a contractor. (e) That when a person is acting as a developer, then he is under obligation to design the project, it is another aspect that such design has to be approved by the owner of the project, i. e. the Government in the present case. (f) That he has not only to execute the construction work in the capacity of a contractor but also he is assigned with the duty to develop, maintain and operate such project. (g) That to ascertain whether a civil construction work is assigned on development basis or contract basis can only be decided on the basis of the terms and conditions of the agreement. Only on the basis of the terms and conditions it can be ascertained about the nature of the contract assigned that whether it is a "work contract" or a "development contract". (h) That in a development contract" responsibility is fully assigned to the developer for execution and completion of work. (i) That although the ownership of the site or the ownership over the land remains with the owner but during the period of development agreement the developer exercise complete domain over the land or the project. That a developer is not expected to raise bills at every step of construction but he is expected to charge the cost of construction plus mark-up of his profit from the assignee of the contract. (k) That a developer is therefore expected to arrange finances and also to undertake risk. (I) That in contrast to the rights of a "contractor" a "developer" is authorized to raise funds either by private placement or by financial institutions on the basis of the project. These are few broad qualities of a developer through which the character of a developer can be defined. "
(ii) ITAT(Hyderabad) in case of Koya and Co. Construction (P) Ltd. vs ACIT [51 SOT 203] held that "The explanatory memorandum to Finance Act 2007 states that the purpose of the tax benefit has all long been to encourage investment in development of infrastructure sector and not for the persons who merely execute the civil construction work. It categorically states that the deduction under section 80IA of the Act is available to developers who undertakes entrepreneurial and investment risk and not for the contractors, who undertakes only business risk. Without any doubt, the learned counsel for the assessee clearly demonstrated before the court that the assessee at present has undertaken huge risks in terms of deployment of technical personnel, plant and machinery, technical knowhow, expertise and financial resources. "
Thus the fact that the assessee deploys its resources (material, machinery, labour etc.) in the construction work clearly exhibits the risks undertaken by the assessee. Further, the assessee vide the agreements has clearly demonstrated the various risks undertaken by it. The assessee was to furnish a security deposit to the Employer and indemnify the employer of any losses/damage caused to any property/life in course of execution of works. Further, it was responsible for the correction of defects arising in the works at it cost. Thus, it cannot be said that the assessee had not undertaken any risk.
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14 The ITAT (Hyderabad] in case of Siva Swathi Construction (P) Ltd. (supra) held that "Further reason given by the ld. CIT(A) for denying deduction under S.80IA to the assessee is that the assessee has not undertaken any risks. The observations of the ld. CIT(A) in this behalf are also not valid and correct. It was clearly mentioned in the agreement that the assessee shall execute and furnish indemnity bond for a period of four years, indemnifying the Government against any loss or expenditure incurred, to repair any defect noticed due to faulty working done by the contractor or substandard material used by the contractor. Further, it is also mentioned in the contract agreement that the assessee shall not claim for any loss due to foreseen circumstances, including suspension of work due to cause. It is also provided that in the event of accident to people employed by the assessee resulting in compensation to be paid as per the Workmen's Compensation Act the same shall be paid by the contractor, viz. the assessee only. In view of the various specific clauses in the agreement fastening the risks to be undertaken by the assessee, discussed above, it cannot be said that the assessee has not undertaken any risk.
8.7 From the above, it is clear that the contention of the AO that the assessee had not undertaken any entrepreneurial and investment risk is an incorrect interpretation of the facts. Lastly, with regard to the project O&M, Bangalore (on which a deduction of Rs. 35,16,9411- was claimed), it is submitted that it is an operation and maintenance project, to which Explanation to section 80-IA(13) does not apply. Explanation to section 80-IA(13) merely distinguishes between a developer and works contractor. It clarifies that a works contractor shall not be included in the category of 'developer' u/s 80-1A. Thus, the Explanation clearly does not apply to O&M projects. Hence, deduction of Rs. 35,16,9411- claimed for the aforesaid project u/s 80-IA cannot be denied by invoking the explanation to section 80-1A.”
Further the Co-ordinate Bench of this Tribunal in in the case of M/s Symplex Infrastructure Ltd. order dated 10.03.207 held on the similar facts that the assessee is not a work contractor but he is a developer therefore eligible to claim the deduction u/s 80IA(4)(i) of the Act.
From the perusal of the terms and conditions in the agreement, it is abundantly clear that the assesseeis not a works contractor. The assessee company is a developer. Thus, clearly the assessee is eligible for deduction under section 801A(4)(i) of the Act. In our considered view, we do not find any reason to interfere in the order of ld. CIT(A). Hence this ground of appeal of the Revenue is dismissed. Page | 18
Porel Dass Water & Effluent Control Pvt. Ltd. ITA No.2402/Kol/2016& ITANo.2441/Kol/2017 Assessment Years: 2012-13,2011-12&2013-14
In the result, the appeal filed by the assessee in for assessment year 2011-12 and appeal filed by the assessee in I.T.A. No. 1354/Kol/2015, for assessment year 2012-13 are allowed whereas the appeal filed by the Revenue in I.T.A. No. 2441/Kol/2017, for assessment year 2013-14 is dismissed.
Order is pronounced in the open court on 06.03.2019.