DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-3(4) , MUMBAI vs. PATEL ENGINEERING LTD, MUMBAI

G. MANJUNATHA, AM:

These cross appeals filed by the assessee as well as the Revenue are directed against order of the Commissioner of Income Tax (Appeals) - 15 [in short CIT(A)], Mumbai dated 29-05-2017 and it pertains to AY 2013- 14. Since, the facts are identical and issues are common, these appeals were heard together and are disposed off by this common order for the

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sake of convenience. The assessee has raised following grounds of appeal: -

“1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not following the binding decision of the Hon'ble Tribunal in the assessee's own case and holding that the assessee is not eligible for deduction under section 80IA (4) in respect of Tuirial lot II Tuirial lot Ill and Lohari Nagpala projects.

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The Revenue has raised following grounds of appeal: -

“1. On the facts and in the circumstances of the case and in law, whether the CIT(A) was justified in holding the assessee as a developer and not a contractor in four projects out of the seven projects and allowing the deduction u/s 80IA(4) of the IT Act, 1961 and thus failed to appreciate section 80I4(4) as amended by the Finance Act, 2007, retrospectively from AY 2000-01 by inserting Explanation to section 80IA, which states that nothing contained in this section shall apply to a person who executes a work contract entered into with the undertaking or enterprise"

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exempt income u/s 14A of the Income Tax Act, 1961, denial of TDS credit on machinery advance and mobilization advance in the year of deduction and additions towards mismatch of AIR information. On the other hand, the Revenue, from these grounds of appeal has challenged the action of the learned CIT(A), who allowing partial relief in respect of deduction claimed u/s 80IA(4) of the Act, and relief allowed towards AIR reconciliation by accepting additional evidences filed by the assessee in spite of the AO’s objection to the same in the remand report on the basis of same being not reconciled.

i. Disallowance of deduction claimed under s. 80IA: ₹ 258,05,02,682/- ii. Disallowance under section 14A : ₹ 3,87,78,493/- iii. TDS credit on advances received : ₹ 19,52,82,263/- iv. Additions based on AIR reconciliation: ₹ 22,97, 86,725/- Vi. Initiation of Penalty proceedings under s. 271(1)(c)

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by constructing dam and spillway and other allied works for water supply and hydro- electric projects or akin to projects already developed by the assessee and considered by the ITAT. Therefore, there is no reason for the AO to consider that the assessee is only a works contractor executing works for development of infrastructure facility.

4A. The CIT(A) after considering the relevant submission of the assessee and also analysis of section 80IA(4) of the Act, observed that to claim deduction u/s 80IA(4) of the Act, the infrastructure facility should not only be developed but also operated by the assessee so as to make the profits derived from the infrastructure facility qualified for deduction under section 80IA of the Act. The CIT(A) further observed that unless the assessee really develops and begins to operate infrastructure facility, there is no question of granting any deduction for the reason that the period of deduction cannot commence unless the enterprise develops and begins to operate the infrastructure facility. The CIT(A) further observed that if the assessee activities are analyzed on the basis of above principle, it may be concluded that assessee is only engaged in executing a works contract and as such, has not developed any project nor it is maintained or operating any projects. The CIT(A) has discussed the projects undertaken by the assessee in the light of scope of work and agreements furnished during the course of hearing and come to conclusion that the assessee has bid for particular projects, on the basis of terms and conditions given by the government/ government undertaking to carry out a particular works contract as per the specification provided and other terms and conditions associated with the project. Time to time the assessee submits running bills for portion of work done and payments are made by the Government. At times, the assessee has executed only a part of the project so, it just cannot claim that it developed the full project so is to entitled for benefit u/s 80IA(4) of

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the Act. The CIT(A) after analyzing the scope of work and terms and conditions of contract between the assessee and the principles opined that the assessee is neither developed any infrastructure facility nor maintain any such facility. It is simply a works contract for development of the infrastructure facility and hence, not eligible for deduction under section 80IA(4) of the Act. The CIT(A), however, further observed that the ITAT Mumbai bench in assessee’s own case vide its order dated 18-11- 2015 in ITA No. 6605/Mum/2013 has allowed the claim of the assessee u/s 80IA of the Act, in respect of the first four projects. Therefore, by following the ITAT order allowed relief in respect of four projects, viz,. Ghatghar dam, Kameng hydro-electric project package 1, Kameng Hydro-electric project package 2 and Kameng hydro-electric project package 3. since, all projects are on-going projects and covered by the decision of ITAT. In so far as, three new projects, i.e. Tuirial lot II, Tuirial lot III and Lohari Nagpala projects, denied the benefit of deduction claimed u/s 80IA of the Act, by holding that the assessee is only a works contractor, developing infrastructure projects for the principle as per the terms of contract between them, therefore cannot be considered as developer of infrastructure facility eligible for deduction u/s 80IA(4) of the Act. The relevant portion of the order of the CIT(A) is extracted below:-

“8. I have carefully considered the facts of the case, submissions and contentions of the assessee as well as the order of the AO. I have also perused the copies of the Agreements/works contract of the various projects submitted by the assessee. Before proceeding further, I would like to discuss the provisions of see. 80IA of the I.T. Act as under: -

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(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.

(2) 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 lines :

Provided that where the assessee develops or operates and maintains or develops, operates and maintains any infrastructure facility referred to in clause (a) or clause (b)

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or clause (c) of the Explanation to clause (i) of sub-section (4), the provisions of this sub- section shall have effect as if for the words "fifteen years", the words "twenty years" had been substituted.

(2A) Notwithstanding anything contained in sub-section (1) or sub-section (2), the deduction in computing the total income of an undertaking providing telecommunication services, specified in clause (ii) of sub- section (4), shall be hundred per cent of the profits and gains of the eligible business for the first five assessment years commencing at any time during the periods as specified in sub-section (2) and thereafter, thirty per cent of such profits and gains for further five assessment years.

(3) This section applies to an undertaking referred to in clause (ii) or clause (iv) of sub- section (4) which fulfils all the following conditions, namely :—

(i) it is not formed by splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the

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circumstances and within the period specified in that section;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose:

Provided that nothing contained in this sub- section shall apply in the case of transfer, either in whole or in part, of machinery or plant previously used by a State Electricity Board referred to in clause (7) of section 2 of the Electricity Act, 2003 (36 of 2003), whether or not such transfer is in pursuance of the splitting up or reconstruction or reorganisation of the Board under Part XIII of that Act.

Explanation 1.—For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely :—

(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;

(b) such machinery or plant is imported into India from any country outside India; and

(c) no deduction on account of depreciation in respect of such machinery or plant has

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been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of machinery or plant by the assessee.

Explanation 2.—Where in the case of an undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.

(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

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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:

Provided that where an infrastructure facility is transferred on or after the 1st day of April, 1999 by an enterprise which developed such infrastructure facility (hereafter referred to in this section as the transferor enterprise) to another enterprise (hereafter in this section referred to as the transferee enterprise) for the purpose of operating and maintaining the infrastructure facility on its behalf in accordance with the agreement with the Central Government, State Government, local authority or statutory body, the provisions of this section shall apply to the transferee enterprise as if it were the enterprise to which this clause applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period during which the transferor enterprise would have been entitled to the deduction, if the transfer had not taken place.

Explanation.—For the purposes of this clause, "infrastructure facility" means—

(a) a road including toll road, a bridge or a rail system;

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(b) a highway project including housing or other activities being an integral part of the highway project;

(c) a water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system;

(d) a port, airport, inland waterway, inland port or navigational channel in the sea;

(i) Business of developing any infrastructure facility or

(ii) Business of operating and maintaining any infrastructure facility or

(iii) Business of developing, operating and maintaining any infrastructure facility.

Thus, section sub section (1) read with clause (i) of sub section (4) of 80IA envisages

I)) It is an enterprise of the assessee

II) The enterprise carrying on interalia

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(i) Business of developing any infrastructure facility or

(ii) Business of operating and maintaining any infrastructure facility or

(iii) Business of developing, operating and maintaining any infrastructure facility.

iv) Deduction of 100% of the profits and gains derived from the above eligible business and

V) Such deduction for a period of 10 consecutive assessment years

(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

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(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:

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operate infrastructure facility, there is no question of granting any deduction for the reason that the period of deduction cannot commence unless the enterprise develops and begins to operate the infrastructure facility. However, the cumulative effect of the conditions prescribed in sub clause (a), (b) and (c) of clause (i) of sub section (4) is that in order to quality for deduction the enterprise should not only develop and operate the infrastructure facility but also maintain such infrastructure facility. There is only one exception to the above principle and the proviso specifically provides the circumstances under which an enterprise which only operates and maintains an infrastructure facility but does not develop such infrastructure facility can claim benefit of deduction specified in Sub Section (1). Such a circumstance is envisaged where an enterprise develop such infrastructure facility, transfers it to another enterprise of the purpose of operating and maintaining such facility on its behalf in accordance with agreement with the Central Govt., State Govt., local authority or statutory body. In such a case Lite deduction from profits would be available to such transferee enterprise for the unexpired period if any, out of the 10 consecutive years. The above had always been the legal position ever since the new provisions under s. 80IA were brought in with effect from 1/4/2000. This has also been fortified by the Explanation to Sec. 80IA which clarifies that the deduction is not available to a business referred in sub section (4), which is in the nature of a works contract awarded by any person including the central or state govt. and executed by the enterprise

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referred to in sub section (1). Memorandum explaining the provisions of the Finance Act, 2007, explains the need for the insertion of the Explanation as under:-

Clarification regarding developer With reference to Infrastructure facility industrial park, etc. for the purpose of section 80IA.

Section 8014, intetalia provides for a ten year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, industrial parks and Special Economic Zones. The tax benefit was introduced for reason that industrial modernization requires a massive expansion of and quantitative improvement in, infrastructure (viz, express ways, highway, airports, ports and rapid urban rail transport systems) which was lacking in our country. The purpose of tax benefit has all along being for encouraging private sector participation by way of investment in development of the infrastructure section and not for the persons who merely execute the civil construction work or any other works contract. Accordingly, it is proposed to clarify that the provisions of section 8011% shall not apply to a person who executes a works contract entered into with the undertaking or enterprise referred to in the said section. Thus, in a case where a person makes the investment and himself execute the development work i.e. carries out the civil construction work, he will be eligible for tax benefit u/s. 8014. In contrast to this, a person who enters into a contract with another person (i.e. Undertaking

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or enterprise referred to in Sec. 80IA) for executing works contract, will not be eligible for the tax benefit u/s. 80IA. The amendment will taken retrospective effect from I" April, 2000 and will accordingly, apply in relation to the A. V. 2000-01 and subsequent years. From the above, it is clear that where an enterprise itself makes an investment to execute the civil construction work it will be eligible for tax benefit u/s. 801A. However, if an enterprise enters into a contract with another person including the gout, or an undertaking and executes a works contract, it is not eligible for tax benefit u/s. 80IA.

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responsible for planning, designing, scheduling and resourcing for the contract, deciding on machinery, equipments, personnel and services to be installed in the infrastructure facility, to conduct geological and geotechnical investigations, carrying out topographical survey of the site, establish its own laboratory on site, install safety procedures, soil testing, earth tilling, installation of machinery etc., it has also argued that it takes lot of financial exposure/risk has to give guarantees to the government and some retention money is always kept by the government. However, the fact that the above activities are only part of overall works contract. and the assessee is only executing a 'works contract' as per the specifications provided by the government/govt. undertaking. In doing so the assessee as such is not taking any financial risk or any other risk nor does it have any ownership in the project , so its completion or successful running is not headache of the assessee Moreover whatever material is sourced at the site, the assessee takes advance from the government and whatever machinery is installed at the project site, the assessee gets advance for that also. Thus, as such, there is no financial risk involved at the end of the assessee. Not only this, the assessee time to time presents running bills to the government/ undertaking, which are paid to it. The moment running bills are not paid, the assessee stops the work. It means that the assessee puts in only that much of work for which payments or advance payments are made to it by the government. Therefore, clearly there is no financial risk at the end

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of the assessee. He is already paid for whatever he has done and ultimately the project succeeds or not, does not affect the assessee. No doubt in civil construction projects, a portion is retained by the government as 'retention money but the same is meant for ensuring quality checks as also complying to various conditions laid down. The retention money in any case is a very small amount of the overall project cost and may not be more than 2% to 5% of the project cost and is invariably released within six months of completion of the project. So its not a big deal and by keeping retention money doesn't mean that the assessee is taking any risk. The assessee has also argued that he has to carry out surveys and also create some infrastructure on the site including the access roads etc. to execute the project. However, these things are minor issues and are part and parcel of all such projects whether big or small and are part of the overall cost of the project and the assessee must have already provided for the costs of these items while submitting its bid documents.

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dated 18.11.2015 in ITA No. 6605/13 & CO No. 9/15 for AY 2005-06 has allowed the claim of the assessee u/s. 801A of the Act in respect of the first four projects after analyzing the facts of the case . For the sake of clarity, the relevant portion of the ITAT's order is reproduced hereunder:

"Rival contentions have been heard and record perused. The Revenue has challenged the decision of the CIT(A) in granting deduction u/s 8OIA(4) holding the assessee to be a developer of the infrastructure facilities (projects) and also that deduction is available to the assessee even when it has developed only a part of the project. We found that the CIT(A) has elaborately dealt with the contention of the AG at page 5 & 9 of his appellate order....

With regard to the contention of the 14 CIT DIR that assessee is a contractor, in so far as assessee has been mentioned as contractor in all the agreements, we rely on the following decisions:

i) In the assessee's own appeal for Al' 2000-01. 94 iTD 411 (Mum);

ii) ACIT vs Pratibha Industries 28Taxman.com 246 (mum), wherein Mahalaxmi Construction Gorpn Ltd it Asst CIT in ITA 4331Pn12007 has been relied upon;

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iii) ACIT vs Bharat Ltd Udyog Ltd 24 SOT 412 (mum). As regards the CIT DR's argument that the decision of the larger Bench in B 7' Pafil & Sons Belgaurn Construction P Ltd 126 TTJ 577 (Mum) is still good law, we rely on the confirmatory order (reported in 34 Taxmann.com 97 (Pune) passed by the Pune Bench.

In view of the above discussion, we uphold the action of the c17(A) for allowing claim of deduction u/s 80IA(4) in respect of all the projects.

16.1 However, the remaining 3 projects viz. Turial Lot II, Turial Lot III and LNP, are the new projects and deduction u/s. 80IA (4) has been claimed on them for the first time, therefore the claim of the assessee in respect of these projects need to be examined on the

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basis of principles laid down by the law, as discussed by me in the paragraphs S to 13 of this order. I would like to add over here that there is no order of any higher judicial forum, in respect of the above mentioned 3 projects regarding claim of deduction u/s. SOIA, therefore this issue need to be discussed completely on merits. It is gathered that for Turial Lot If and Turial Lot III projects, the assessee has entered into an agreement with North Eastern Electric Power Corporation Ltd (NEEPCO) and for Loharinagpala Project, the agreement has been entered into with National Thermal Power Corporation (NTPC). The terms of these agreement clearly says that the assessee has been awarded only works contract and its status is only as a 'contractor 'while the owner remains NTPC or North Eastern Electric Power Corporation Limited as is clear from the following:-

'Agreement dated 05/09/2006 Between NTPC Limited and

M/s Patel Engineering Ltd

This agreement made this day of September Two Thousand and Six Between NTPC Limited, a company incorporated under the companies Act 1956, having its registered office at WTPC Bhawan , Scope complex , 7 institutional Area, Lodi Road, New Delhi- 11 00031 herein referred to as "owner" or NTPC which expression shall include its

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administrators, successors, executors and assigns) of the One Part and M/s Patel Engineering Ltd, company incorporated under the companies act 1956, having its registered office at Pate! Estate Road, Jogeshwari (West) Munthai4001 02(hereira referred to as "contractor" which expfression shall unless the context requires otherwise include its administrator, successors, executors and permitted assigns) of the Other Pan.

Where as NTPC desirous of setting up its Loharinag Pala Hydro Electric Power Project in Uttarkashi district of Uttaranchal wit/I an ultimate capacity of 600 MW (herein called the "Project") had invited tenders for the work of Construction of head race Tunnel Package' as per its bidding document No CS-5506908- 2.

AND Whereas M/s Patel Engineering Ltd. had participated in the above referred tendering vide their Stage- I (Techno . Commercial) Bid proposal No. 1001206814947 dated 1410912005 submitted and opened tin 15.09.2005 and stage -Ii (Price) Bid Proposal No. 1001206811971 dated 2410512006 submitted and opened on 1510912006 and NTPC accepted their aforesaid proposal and awarded the Contract for 'Construction of Head Race Tunnel Package' of Loharinag

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Pala Hydro Electric Power project (4 * 150MW) to M/s Patel Engineering Ltd. (the contractor) on terms and conditions contained in its letter of acceptance No. 011CS-5506-908-2-LOA-4709 dated 0610712006 and the documents referred to therein, which have been unequivocally accepted by M/s Patel Engineering Ltd. (the Contractor) resulting into a "CONTRACT'….

The scope of the Contract, Consideration, Terms of Payment, Loans and Advances, Price variation, security deposit taxes wherever applicable, Insurance , agreed Time Schedule, Liquidated Damages and all other terms and conditions contained in NTPC's letter of acceptance No. 01/C&5506- 9082-LOA-4 709 dated 0610712006 read In conjunction with aforesaid Contract Documents - The contract shall be duly performed by the contractor strictly and faithfully in accordance with the terms of this contract.

The Scope of work shall also include all such items which are not specially mentioned in the contract documents but which are reasonably implied for the satisfactory completion of the entire scope of work envisaged under this contract unless otherwise specifically excluded from the scope in the letter of acceptance."

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16.2 From the above clauses it is quite clear that the assessee is acting only as a contractor while NTPC remains the owner of the project and is executing contract as per terms of agreement /contract.

16.3 Similarly as per agreement dated 20/03/2003 between the assessee and North Eastern Electric Power Corporation Limited the assessee is acting only as a contractor and is to carry out the Civil Works of construction of power house , Switch Yard and Power Water Way and other allied works (Lot- III) under Tuirial Hydro Electric Power Station Project , Mizoram as is clear from the following:

This agreement made this 20th day of March, 2003- day of March ,2003 between MIs Pate! Engineering Ltd. having their registered office at Patel Estate Road, Jogeshwari (W) Mumbai- 08, and North Eastern Electric Power corporation Limited having their registered office at Brooke Land Compound, lower New Colony1 Shillong, Meghalaya, India.

Whereas the corporation has decided to carryout a The Civil Works of construction of power house , Switch Yard and Power Water Way and other allied works (Lot-III) under Tuirial Hydro Electric Power Station Project , Mizoram (herein after called 'the work') mentioned , enumerated and referred to in the schedule, condition of Contract, Technical Specifications and tendered drawings for

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"The Civil Works of Power House • Switch Yard and Power Way(Lot-III) under Tuirial Hydro Electric Power Station Project, Mizoram (herein after called the Rid documents) issued by the corporation and whereas the terms and conditions stipulated in the detailed invitation for Bid for the said works were further negotiated and settled between the parties and where as the corporation did accept the offer of the contractor for execution of the said work. Now this agreement witnessed and it is hereby agreed and decided as follows;-

In consideration of payments to be made to the contractor by the Corporation as herein mentioned , the contractor hereby covenants with the corporation its successor, and assigns that the contractor shall do and perform the said works and things in the contract mentioned and described or which are implied there-from or there in respectively within and at the times and in the mariner and subject to the terms conditions and stipulations mentioned in the schedule hereto; and in consideration of provisions and supervision and execution construction arid completion of the said works and the performance guarantee thereof as aforesaid, the corporations covenants with the contractor to pay the contractor the sums as per bill of' quantities and rates mentioned in the Detailed work order No.

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NEEPCO/GM/(C)/CONT/TRHEP/-VII/LOT- III/PT-II/01/02/1169 dated 03/03/03 and such other sums as may become payable, such payment to be made at such time and in such manner as is provided by the contract.

16.4 Subsequently a works order has been given to the assessee in respect of Tuirial Hydro Electric Power Station Project, Mizoram (herein after called 'the work') mentioned stating as under:-

Dear Sir,

It is evident from the recorded notes of minutes of meeting held on 2410112003 in New-Delhi wherein the time of completion has been reduced to 43 months against the work of construction of power house, switch yard and Power Water Way (Lot-III) the technical aspects of the Work were discussed on 24/01/2003 after the issue of the letter of Intent on 30/12/02 in presence of your representative and accordingly the same was reflected therein.

The work order as issued will automatically supersede the to! in this respect.

Please confirm the unconditional acceptance of the work order immediately for drawl of formal agreement.

16.5 Therefore as per the terms of agreement, the assessee is executing only a works contract, in

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respect of the above projects. From the facts of the case, it cannot be said that the assessee is either developing the infrastructure facility or developing, operating and maintaining such infrastructure facility. Therefore, as laid down in the Explanation to Sec. 80IA(4) and explanatory notes thereto, as discussed in the foregoing paragraphs, I am of the considered view that the assessee is not eligible for deduction u/s. 801A(4) in respect of these projects. In fact it is noticed that the assessee is doing only a part of the total project and is not doing the entire project even as a contractor and therefore even remotely it cannot be said that it was developing the project . The assessee in this regard has also relied upon some case laws as mentioned in the submissions. However the nature of works carried out in respect of these projects and associated conditions with these projects are different and therefore in my humble opinion the raio of the said judgments is not applicable to the facts of the present case.

16.6 In view of the above discussion, the claim of the assessee towards deduction u/s. 801A in respect of these projects amounting to Rs. 45,26,50,680/- (20,61,96,227 + 3,57,41,165 + 21,07,13,288) is not acceptable. Consequently, the disallowance of deduction u/s 801A to the tune of Rs. 45,26,50,680/- made by the AO in respect of above mentioned three projects is upheld. However the overall deduction u/s 801A will be restricted to gross total income as prescribed u/s 80A(2) of the act . Consequently, this ground is partly allowed.”

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the contract. The contractor shall arrange its own resources for timely completion of work. Though, the contractor has been given mobilization advance equivalent to 10% of the contract value against bank guarantee, such advance has been given against bank guarantee. All progressive invoices paid by the principal or treated as interim payments till the final certificates were issued. The contractor at his own risk, has to finalize the general layout plan of construction and submit detailed drawings thereof. Likewise, the assessee has submitted scope of work and terms and conditions of contract with the principles in respect of all seven projects and argued that the nature of work and the terms and conditions in each of the work are exactly in the nature of development of infrastructure facility. Therefore, after considering the scope of work and terms and conditions, the ITAT has held that the assessee is a developer of infrastructure facility eligible for deduction u/s 80IA(4) of the Act.

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shall not apply to a business referred to in sub-section 4 which is in the nature of works contract awarded by any person and executed by the undertaking or the enterprise referred to in sub-section 1. But, the same has been considered by the Hon’ble ITAT, in the assessee’s own case for the earlier year and after considering the scope of work and terms and conditions of agreement came to the conclusion that the assessee is not only a works contract executing works for the entity developing infrastructure facility but the assessee itself develops infrastructure facility and eligible for deduction u/s 80IA(4) of the Act. The AR further referring to the decision of Hon’ble Bombay High Court in the case of CIT vs. ABG Heavy Industries Ltd. (supra) submitted that the Hon’ble Bombay High Court has considered the issue of developer for the provisions of section 80IA and after considering the provisions of section 80IA, held that if any enterprises engaged in the development of infrastructure facility, even though such facility has been operating and maintaining by another entity will also qualify for deduction under 80IA(4) of the act. In this regard relied upon the following judgments:-

i. B.T. Patil & Sons Belgaum Constructions (P.) Ltd V. ACIT CC (2013) 34 taxmann.com 97 (Pune Trib.)

ii. Patel KNR JV. V. ACIT and KNR Patel JV v. ACIT in ITA No. 7155 and 7156/Mum/2008 (ITAT Mum)

iii. CIT v. ABG Heavy Industries Limited (2010) 322 ITR 323 (Bom).

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is evident from the fact that the assessee is participating in tenders floated by various Government / Government Agencies for development of infrastructure facility and after successful tender process entered into an agreement within the principles which clearly establishes the fact that it is only a works contractor. The DR further submitted that if you go through the terms and conditions of agreement with the principles, the agreements entered into by the assessee clearly specify the principles as owner of the project and the assessee as contractor. The DR further submitted that the assessee has bid for particular projects on the basis of terms and conditions given by the principles to carry out a particular works contract as per the specifications provided and other terms and conditions associated with the project. The assessees, from time to time submit running bills for portion of works done and the payments were made by the Government. The assessee has executed only a part of big project and not total project. The moment construction work is over, the assessee hand over the same to the principal party. Though the assessee claims that its works on turn-key basis and is responsible for planning and designing, scheduling and resourcing for the contract, deciding on machinery, equipments, personnel and services to be installed in the infrastructure facility, to conduct zoological and geotechnical investigation and other services, the facts remains that the above activities are only a part of the overall contract and the assessee is only executing works contract as per the specification provided by the principles. In doing so, the assessee as such is not taken any financial risk or any other risk nor does it have any ownership in the project. The assessee is not having any financial risk and it was paid periodically by the principles on submission of running bills. No property of any kind is passed on to the assessee. All these facts goes to prove an undisputed inference that the assessee is only a works contractor undertakes works for the developer who develops infrastructure projects, but not a

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developer of infrastructure project. The learned DR referring to the explanation inserted by the Finance Act 2009 with retrospective effect from 01.04.2000, submitted that for the purpose of deduction under sub- section 1, any business referred to sub-section 4 which is in the nature of works contract awarded by any person and executed by the undertaking or the enterprise referred to in sub-section 1, then deduction provide u/s 80IA(4) is not allowable. The DR further argued that the Hon’ble Bombay High Court in the case of ABG Heavy Industries Ltd. (supra) have not considered the explanation inserted by the Finance Act 2009, therefore, the AO was correct in not following the Hon’ble Bombay High Court judgment and denial of deduction claimed u/s 80IA(4) of the Act.

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project is so as to claim that it has developed the project. The assessee has also been unable to establish as to how it made investment in the various projects executed apart from not been able to prove that it had not executed a work contract as is evident above. The AO referring to the explanation inserted by the Finance Act 2009, observed that the provisions of section 80IA is not applicable and assessee would not be eligible for deduction, if the business referred to in sub section 4 which is in the nature of 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). The AO has discussed each and every project undertaken by the assessee in the light of provision of section 80IA of the Act and terms and conditions of agreement between the assessee and the principles to come to the conclusion that the nature of work undertaken by the assessee is in the nature of works contract, but not for development of infrastructure facility as defined in section 80IA of the Act.

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developing infrastructure projects for Government / Government agencies, it cannot be considered that the works undertaken by the assessee is in the nature of works contract. The assessee further submitted that out of the total seven projects, four projects namely Ghatghar dam, Kameng hydro-electric project package I, Kameng hydro- electric project package II, Kameng hydro-electric project package III were existing projects which were already analyzed and considered by the ITAT in earlier years. The ITAT after analyzing scope of work and terms and conditions of contract categorically held that the assessee is a eligible for deduction u/s 80IA(4) of the Act, on those projects as assessee was a developer of those projects and that all the conditions laid down u/s 80IA(4) of the Act have been satisfied. As regards the remaining three projects the development on which has commenced during the year, viz., Tuirial lot II, Tuirial lot III and Lohari Nagpala projects, the nature and scope of work is identical to a number of other projects on which deduction u/s 80IA(4) of the Act has been granted in the earlier years and hence, also eligible for deduction u/s 80IA(4) of the Act. The assessee has filed copies of agreement entered into with principle in respect of all projects and demonstrates that all these projects are identical to each other and in all projects the assessee is carrying out similar nature of work with similar terms and conditions. The assessee has filed a chart in a tabular format in respect of all seven projects explaining the nature of works undertaken, scope of work, terms and conditions of contract to argue that all these contracts including those contracts commenced development work during the year under consideration or all related to developing an infrastructure facility within the meaning of section 80IA of the Act and hence, the CIT(A) was erred in rejecting the deduction claimed u/s 80IA(4) of the Act in respect of three new projects.

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complete infrastructure project of hydro-electric power project which includes development of civil and mechanical works, construction of dams and allied works and construction of head race tunnel. All these projects are related to either water supply or hydro-electric power generation plants. The terms of contract entered into within the principles are identical to each other, as per which the assessee has to develop the project right from the stage of planning to operation of the project and also maintain the project during the liability period which is 12 months form the date of completion of work. The assessee has to arrange men and machinery for executing the project and also arrange materials design and execute the work with its own resources. The risk and responsibilities associated with this work is clearly establishes the fact that the assessee is not merely executing works for the development of infrastructure facility, but itself develops infrastructure facility. The assessee shall undertake all the risk of executing works and all obtain materials required for the purpose of the contract and all works executed shall be at his own risk until a completion certificate for works has been issued by the principles. The developer has to ensure all works at sight including third party insurance to persons and damage to property. The assessee shall be liable to indemnify the principle against damage to persons and properties. All these terms and conditions of contract along its scope of work clearly proves an undisputed fact that the nature of works undertaken by the assessee is certainly in the nature of developing infrastructure facility which would qualify for deduction u/s 80IA of the Act.

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provision of section 80IA(4) of the Act and explanation inserted by the Finance Act 2009 with effect from 01-04-2009 and after considering the scope of work and terms and conditions of contract executed by the assessee, came to the conclusion that the assessee is a developer of infrastructure facility within the meaning of section 80IA(4) of the Act and eligible for deduction towards profits and gains of undertaking. We further notice that the ITAT has analyzed each of the project developed by the assessee in terms of contract agreement, observed that the projects executed by the assessee were highly technical and specialized and also involved huge risks. The assessee has also deployed people, plant and machinery, technical assistance, know-how, the financial resources. Moreover all sums received till final completion certificate is issued on completion of the work till defect liability period are considered to be an interim payment. The ITAT, also taken into account the decision of Hon’ble Bombay High court, in the case of CIT vs. ABG Heavy Industries Ltd. (supra) to come to the conclusion that the assessee is a developer, but not a contractor and the relevant portion of the order of ITAT is extracted below:-

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and at page 19 para 6.6 of her order, the CIT(A) held that the contract documents show that the projects executed were highly technical and specialized and involved huge risk; the assessee has also deployed people, plant and machinery, technical expertise, knowhow and financial resources; moreover, all sums received till the final completion certificate is issued on completion of the defect liability period, are considered interim payments. While holding so the CIT(A) relied on the decisions of the Hon'ble Bombay High Court in ABG Heavy Industries Ltd. 322 ITR 323 (para 5 of that order), assessee's own case for AY 2000-01 reported in 94 ITD 411 (paras 46 and 47) and Bharat Udyog Ltd. 24 SOT 412 to hold that the assessee is a developer and not a contractor.

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2007 and 2009 and held, after considering various judicial pronouncements, that the amendment does not impact development contracts. On pages 63 to 66 paras 6.16 and 6.17, the ClT(A) noted that for the Koyna and Udhampur projects, the assessee has already been held to be a developer by the Hon'ble ITAT in its own case in the earlier years. Moreover, the Koyna project has also been held to be eligible for deduction in B.T. Patil& Sons Belgaum Construction Pvt. Ltd. After analyzing the terms of the contract, the CIT(A) reiterated that for all the projects, based on the investment, financial and technical risks undertaken by the contractor, the assessee is a developer of the respective projects. As regards the issue whether, to be eligible for deduction, the assessee has to develop the entire infrastructure facility and not only a part thereof, the CIT(A) relied on the CBDT circular no. 4/2010, the decisions of the ITAT in the assessee's own case, B.T. Patil& Sons Belgaum Construction Ltd. 34 Taxmann.com 97 and the Hon'ble Bombay High Court in ABG Heavy Industries Ltd.

i) Patel Engineering Ltd. v. OCIT 94 ITO 411;

ii) B.T. Patil & Sons Belgaum Constructions (P.) Ltd. v. ACIT, 34 taxmann.com 97;

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iii) ACIT v. Patel KNR Joint Venture ITA 5230/M/2012;

iv) CIT v. ABG Heavy Industries Ltd. 322 ITR 323;

v) DClT v. V.R.M. (India) Ltd. ITA 811/Del/2008;

vi) KCL BEL Tarmat JV v, ITO, ITA 111/Rjt/2010.

As regards the clarificatory Explanation inserted in section 80lA by the Finance Acts 2007 and 2009, we place our reliance on the following decisions:

i) B.T. Patil& Sons Belgaum Constructions (P.) Ltd. v. ACIT 34 taxmann.com 97;

ii) ACIT v. Pate I KNR Joint Venture ITA 5230/M/2012;

iii) DClT v. V.R.M. (India) Ltd. ITA 811/Del/2008;

iv) KCL BEL Tarmat JV v, ITO ITA 111/Rjt/2010;

v) GVPR Engineers Ltd. v. ACIT 21 Taxmann.com 25 (Hyd);

vi) KMC Constructions Ltd. v. ACIT 21 Taxmann.com 138 (Hyd).

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been mentioned as contractor in all the agreements, we rely on the following decisions :-

i) In the assessee's own appeal for AY 2000- 01, 94 ITD 411 (Mum);

ii) ACIT v. Pratibha Industries 28 Taxmann.com 246 (Mum) ,wherein Mahalaxmi Construction Corpn. Ltd. v. Asstt. CIT in ITA 433/Pn/2007 has been relied upon;

iii) ACIT v. Bharat Udyog Ltd. 24 SOT 412 (Mum)

As regards the CIT DR's argument that the decision of the larger Bench in B.T. Patil & Sons Belgaum Construction Pvt. Ltd. 126 TTJ 577 (Mum) is still good law, we rely on the confirmatory order [reported in 34 Taxmann.com 97) (Pune)] passed by the Pune Bench.

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given, financial and technical resources committed, performance guarantee, interim payments received, liabilities towards liquidity damages and the commitments performed are similar to the projects on which deduction has already been granted by the ITAT in other projects. Therefore, we are of the considered view that to be qualified for claiming deduction u/s 80IA of the Act, the assessee should be a developer of infrastructure facility whether on its own or on behalf of third party principles, but if such activity is in the nature of developing an infrastructure facility within the meaning of section 80IA, then the assessee is eligible for deduction towards profits and gains of undertakings which carried out development of infrastructure facility. In this case, all the projects developed by the assessee including on-going projects and new projects on which the development has been commenced during the year under consideration are all related to developing an infrastructure facility for water supply schemes and hydro- electric power generation, which are in the nature of infrastructure facilities as defined u/s 80IA(4) of the Act. The scope and nature of work and terms of contract clearly establishes an undisputed fact that the assessee is a developer of infrastructure facility which would entails the assessee deduction u/s 80IA(4) of the Act. Hence, we are of the considered view that the AO has erred in denying deduction claimed u/s 80IA(4) of the Income Tax, 1961. The learned CIT(A), though in principle accepted the fact that the nature of works undertaken by the assessee in respect of three new projects are similar to the nature of works undertaken by the assessee in respect of projects already considered by the ITAT, denied the deduction claimed u/s 80IA of the Act, by holding that the assessee is merely a works contractor executing works for development of infrastructure facility. Hence, we reverse the findings of the CIT(A) in respect of three new projects and direct the AO to allow deduction claimed u/s 80IA(4) of the Act, in respect of all seven projects.

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the Act. If the assessee accepts applicability of section 14A, then it has also to follow provision of Rule 8D which provides for mechanism of disallowance, however the same has not been done. With these reservations, upheld disallowance worked out by the AO u/s 14A of the Act.

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prescribed method provided under rule 8D and hence, the AO was right in working out disallowance by invoking rule 8D and his order should be upheld.

2o. We have heard both the parties and perused the material available on record. The fact with regard to huge investment in shares of subsidiaries and capital in JVs is not disputed. It is also an undisputed fact that the assessee has made investment of ₹ 562.48 crores in shares and capital account of subsidiaries and JVs and received dividend income of ₹ 19,42,996/-. The assessee also suo-moto disallowed ₹ 1500 u/s 14A of the Act. The AO disallowed expenses incurred in relation to exempt income by invoking rule 8D(2) and determined disallowances of ₹ 10,11,05,698/- under rule 8D(2)(ii) and 8D(2)(iii), however, restricted disallowance to the extent of exempt income of ₹ 3,87,79,993/-. It is the contention of the assessee that disallowance worked out by the AO is incorrect as its investment in shares and capital account of subsidiaries and JVs are strategic investment for the purpose of controlling stake as its infrastructure project which are developed under JVs and in the name of subsidiaries. The assessee further contended that its investments are out of its own interest free funds as its own funds are more than the value of investment in shares and capital accounts and hence, a general presumption is drawn that if its own funds are more than investments, the investment in shares are out of its own funds. The assessee also made an alternative submission to the effect that if at all disallowance is required it should be restricted to the extent of exempt income earned for the year.

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investments for the purpose of controlling interest as its infrastructure projects are developed under JVs and in the name of subsidiaries. We further noticed that the assessee’s own fund in the form of share capital and reserves is more than its investment in shares and capital account of subsidiaries and JVs. Once, its own funds are more than its investment, then it is deemed that its investment are out of its own funds and no interest bearing fund is used for making investment and hence, no disallowance is called for in respect of interest expenses. This legal proportion is supported by the decision of Hon’ble Bombay high court in the case of CIT vs Reliance utilities and power ltd. (supra) and CIT vs HDFC Bank ltd. 366 ITR 515 wherein it is held that if the assessee is having both interest free as well as interest bearing funds at his disposal, the presumption has to be that the interest free funds have been utilized for interest free loans. In this case, admittedly assessee’s own funds are more than its investment in shares and capital accounts and hence, we are of the considered view that the AO has erred in disallowing interest expenses under rule 8D(2)(ii) of the IT Rules.

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we are of the considered view that investments in foreign subsidiaries needs to be excluded for the purpose of determination of average value of investments to work out disallowances under rule 8D(2)(iii) of the Rules. If disallowances worked out under Rule 8D(2)(iii) is more than the amount of dividend income received during the year, than the AO is directed to restrict the disallowances to the extent of exempt income earned during the year as the disallowances contemplated u/s 14A of the Act cannot swallow the entire exempt income earned during the year as held by the Hon’ble Delhi High court in the case of Joint Investment (P) Ltd. As ACIT(Supra). Hence, we set aside the issue to the file of the AO and direct the AO to recompute the disallowances u/s 14A of the Act, in the light of our discussion above.

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credit for TDS shall be given in the year of deduction or in the year in which such income is assessable to tax. The co-ordinate Bench, after considering another order of ITAT, in the case of CIT vs. Patil & Sons Belgaum Constructions (P.) Vs. ACIT CC (2013) 34 taxmann.com 97 (Pune –Trib), held that credit for TDS shall be given in the year of deduction. The relevant portion of order is extracted below:

“33. In respect of advance against work and material, we found that the said advance is reflected as reduction from construction work in progress, which itself is valued at contract rates i.e. selling price. In other words, the income pertaining to such advance is already impregnated in the work in progress offered for tax during the impugned year itself. The Tribunal in ACIT v. Patel KNR Joint Venture ITA 5230/Mum/2012, on identical facts, following Toyo Engineering Ltd., decided in favour of the assessee. Respectfully, following the decision of the coordinate bench in the case of associate concern of the assessee vis-à-vis other decisions referred above, we direct the AO to allow the credit for TDs in year of deduction itself. We direct accordingly.”

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the assessee failed to provide relevant documents in respect of an amount of ₹ 22,97,86,725/-, the AO made additions to the total income of the assessee. During the course of appellate proceedings, the assessee has filed reconciliation statement in respect of entries appearing in the AIR and also supporting additional evidences in the form of ledger accounts and other documents supporting its claim. The CIT(A) forward the additional evidences filed by the assessee to the AO for his verification. The AO vide his remand report dated 25-11-2017 submitted that the assessee was given enough opportunity to furnish the details / clarifications in this regard, but it failed to do so without sufficient and valid reasons. Besides, the AO argued that sum of the entries, the assessee still was not able to reconcile and therefore she argued that the claim of the assessee in this regards may be rejected. A copy of the remand report of the AO was provided to the assessee for rejoinder if any. In response, the assessee filed a detailed rejoinder which is reproduced by the CIT(A) in his order at paragraph 33 page No 93 to 97. The CIT(A) after considering the relevant submissions of the assessee and also taken into account the remand report of the AO, has analyzed credits appearing in AIR information in respect of each party and out of the total additions of ₹ 22.97 crores an amount of ₹ 3,73,00,835/- has been deleted and the balance amount of ₹ 19,24,85,890/- has been confirmed. The relevant portion of the CIT(A) is extracted below.

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Re: Ground No. 3. TDS Claimed on Advances

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any claim in the return of income. The assessee father contended that it has reconciled TDS credit appeared in Form 26-AS with corresponding receipts in its books of accounts however, the AO ignored TDS credit merely for the reason that such credit has not been claimed in the return of income.

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Order pronounced in the open court on 14-02-2018.

Sd/- Sd/- (MAHAVIR SINGH) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated: 14-02-2018 Sudip Sarkar /Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT BY ORDER, 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// Assistant Registrar ITAT, MUMBAI