ACIT/DCIT 31(2), MUMBAI vs. PATEL PRATIBHA JV, MUMBAI

आयकर अपीऱीय अधिकरण, म ुंबई न्यायपीठ ‘सी’, म ुंबई । IN THE INCOME TAX APPELLATE TRIBUNAL “C”, BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM आमकय अऩीर सं./ITA No.200/Mum/2015 (नििाारण वषा / Assessment Year :2010-2011) ACIT/DCIT-31(2), Mumbai Vs. M/s Patel Pratibha JV, Patel Estate, Jogeshwari West, Mumbai-400102 स्थामी रेखा सं./ जीआइआय सं./ PAN/GIR No. : AAAAP 7150 R (अऩीराथी /Appellant) (प्रत्मथी / Respondent) .. याजस्व की ओर से /Revenue by : Shri Pradeep Kumar ननधाारयती की ओर से /Assessee by : Shri Harshwardhan Datar सुनवाई की तायीख / Date of Hearing : 18/08/2016 घोषणा की तायीख/Date of Pronouncement 28/09/2016 आदेश / O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the revenue against the order of CIT(A), Mumbai, for the assessment year 2010-2011, in the matter of order passed u/s.143(3) of I.T.Act. 2. First grievance of the revenue relates to addition made by the AO invoking provisions of Section 40A(2) of the I.T.Act. 3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a Joint Venture engaged in construction of tunnels, shafts etc. During the period under review it is observed that assessee was awarded a contract by MCGM. This was done on the basis of bid submitted by the J.V. to the municipal authorities on 20.10.2006. The contract awarded was to, construct tunnel from Malbar Hill to Cross

2 ITA No.200/15 Maidan, shafts and allied works. During the course of assessment proceedings A.O. observed that assessee has debited an amount of Rs.46.69 lakhs towards sub-contract charges that are paid to the persons covered under section 40A(2). Ld. AO asked the assessee to justify the reasonableness of these payments. Assessee gave the explanation which has been reproduced in the assessment order. Assessee explained that there are two components of the payment i.e. Rs. 46.69 lakhs. First part is supported by billing made to Municipal Corporation of Greater Mumbai i.e. MCGM to the tune of Rs. 46.46 Lakhs and Rs. 0.24 Lakhs is the amount of sundry balance written off u/s 41 of the Income Tax Act which assessee has been offered to the tax by assessee. In a nutshell, assessee argued that since market value towards the impugned expenditure is more than actual amount, addition is not warranted. In numerical terms, assessee submitted that comparable amounts are Rs. 46.70 Lakh (46.46 + 0.24 = 46.70) as against the expenses of Rs. 46.29 Lakh, addition should not be made. The AO rejected the explanation of the assessee. He adopted the percentage specified under section 44AD of the Income Tax Act, i.e. 8% of the turnover. He applied it on the turnover of the assessee and held value equal to 92% of the receipts is the market value of the services availed by the assessee from the related party and added Rs 3.95 crore. 4. By the impugned order, the CIT(A) allowed assessee’s claim after observing as under :- 4.4. I have gone through the assessment order, perused the submissions made. I find that assessee has brought the satisfactory

3 ITA No.200/15 comparable on record and Ld. AO has not brought any comparable on record. He has merely disbelieved the explanation rendered by the assessee and invoked the. rate of profit specified under section 44AD though provisions of this section are not applicable to the assessee. 4.5. The appellant also relied on the judgement of Hon'ble Mumbai ITAT in Batliwala & Karani Vs. ACIT (2005) 2 SOT 279 wherein it was held: "Unless there is a clear finding that market value of services taken from sister concern is less than price at which services are obtained, there cannot be occasion to apply disabling sections of 40A(2). This exercise, therefore, necessitates a finding about the fair market value of such services. For this reason alone, the disallowance under section 40A(2) is inherently unsustainable in law on the facts of this case. It is also noteworthy that the services in question are essentially of such a nature that there cannot even be any generalizations about as to what should be the fair market value. The charges of professional advice of X lawyer may not necessarily comparable with the charges of Y lawyer, and same should be the case of investment consultants. The factum of expenditure, as also the expenditure being in the nature of business expenses, is not in doubt. There is no material to even suggest, leave aside establish, that the expenditure incurred by the assesse is excessive vis-a-vis the fair market value of such services. We are, therefore, of the considered view that it was not a fit case for invoking the provisions of section 40A(2) on the facts of the case. " 4.6. The explanation of the appellant appears to be quite convincing in view of above. The AO. has verified the relevant details produced before him which has not been proved to be in pretentious. The A.O. has merely stated that since there is no margin between gross incomes of the assessee which is comparable against the impugned expenditure, he is estimating 8% margin. Further AO has not brought on record any evidence that the payment made was excessive as compared to market value. Accordingly, in view of decision to Hon'ble ITAT Mumbai as above, the addition made by the AO is directed to be deleted. Ground No. 1 & 2 are allowed. 5. We have considered rival contentions and carefully gone through the orders of authorities below and found from the record that nowhere the AO doubted genuineness of the expenditure and insufficiency of the details. Only reason given by AO was that payment was excessive or unreasonable. As per our considered view whenever provisions of Section 40A(2) is invoked, burden is on the revenue to show that payment made

4 ITA No.200/15 to sister concern is more than the fair market value for which similar service are available. However, there is no such finding by the AO to allege that payment so made was not reasonable or similar service were available to assessee at lower price than what was paid to the sister concern for getting the work done. After discussing the facts in detail, the CIT(A) has also applied the decision of ITAT Mumbai bench in the case of Batliwala & Karani Vs. ACIT (2005) 2 SOT 279, wherein it has been held that unless there is a clear finding that market value of services taken from sister concern is less than the price at which services are obtained, there cannot be an occasion to apply disabling provisions of Section 40A(2). The detailed findings so recorded by CIT(A) are as per material on record, therefore, do not require any interference on our part for deleting the addition made u/s.40A(2). 6. Next grievance of the assessee relates to disallowance of claim of deduction of Rs.40,744/- u/s.80IA(4). 7. We have considered rival contentions and found that assessee is an AOP, which is engaged in accepting infrastructure development project relating to the water supply project in Mumbai City under the project awarded by Municipal Corporation of Greater Mumbai. The AO declined assessee’s claim of deduction u/s.80IA on the plea that assessee is not a developer but only a contractor, condition is specified u/s.80IA(2) and 80IA(4)(1)(c) was not fulfilled and lastly TDS was deducted as a contractor. By the impugned order, CIT(A) allowed the assessee’s claim after observing as under :-

5 ITA No.200/15 “5.3. I have gone through the facts as well as the contentions of the appellant. Section 80-IA of Act provides for- deduction of 100% of profit derived by an enterprise or undertaking from any business referred to in sub-section (4) of Sec.80-lA. Section 80-lA (1) reads as under:- 80-IA Deduction in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development, etc. - "80lA (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." The term used in the section is therefore 'undertaking' or 'enterprise' which refers to the assessee. Section 80-IA (4) (i) which qualifies the types of eligible businesses reads as under:- "80-IA (1) . (2) …… (3) …….. (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 " Therefore, neither is the word 'development' or 'developer' nor the word 'contractor' used in these two sub-sections of Sec.80-1A. The pertinent questions which arise in this context are what is development and is there actually a difference between a contractor and a developer? In the Law Lexicon, the term "development" has been defined as under:- (i) The act, process or result of developing or growing or the causing to grow the state of being developed. (11) Happening The Supreme Court in Gujarat Industrial Development Corporation Vs CIT (227 ITR 414) has defined "development" as under:-

6 ITA No.200/15 "The word development should be understood in a wide sense. There is no warrant to exclude all development relating to any industry from the purview of the word 'development'. There is no indication in the Act that development envisaged therein should be confined to non-industrial activities. Development of a place can be accelerated through varieties of schemes and establishment of Industry is one of the modes of developing an area." Therefore, the term development is to be understood in its widest sense to include bringing about or producing new facilities by developing the natural resource. The term developer would then refer to a person who makes things happen. It is pertinent here to refer the decision of the Mumbai Tribunal in the case of Patel Engineering Ltd. (supra) where while dealing with the question of what constitutes development and who is a developer it has been observed as under:- "The illustration of the artist, given by the assessee's counsel during the course of his arguments, is aptly illustrative and befitting. If an artist is asked to paint a beautiful picture and for such painting, payment is made by another person, the creator of the painting will be the artist and not the person who paid for it." 5.4. Further, as per the Law Lexicon, a contractor is a person or entity who, as a part of independent business, becomes obligated to provide and for services for a price. The Inland Revenue Service of US defines an independent contractor as a contractor who retains control over how the work they are hired to do gets done. The person or company, paying the independent contractor, only controls the outcome products or services. Therefore, in essence, an independent contractor is akin to a developer and there is no difference between the two. It is again necessary to refer the decision of Mumbai ITAT In the case of Patel Engg. Ltd. (supra) where the question of whether or not there is a difference between a developer and a contractor has been addressed. The facts in that case were that the appellant was the civil contractor having executed the Srisailam Project involving water supply, irrigation and generation of hydro power as well as the Koyana Project Andhra Pradesh. It was claimed by the assessee that the above two projects were infrastructure projects and the assessee had developed the same and was therefore, entitled to deduction u/s.80-IA of the Act, in respect of profit derived from the execution of development of the two projects. AO rejected the claim of the assessee and the CIT (A) upheld the action of the AO mainly for the reasons that the assessee was not a developer of the above mentioned two projects. The matter therefore went to ITAT, Mumbai. The ITAT, Mumbai in its order has observed as under:- "There has also been the contention of the Revenue that the assessee is a contractor, executing civil contract and so it cannot be the developer as such. However, we are unable to agree with this

7 ITA No.200/15 contention of the Revenue. A person, who enters into a contract with another person will be a contractor no doubt; and this assessee having entered into an agreement with the Government of Maharashtra and also with APSEB for development of the infrastructure projects; 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 section 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 or a body under central or state act, so, entering into a lawful agreement and thereby becoming a contractor should, In no way, be a bar to the one being developer. The assessee, presently under consideration before us, has developed infrastructure facility as per agreement with Maharashtra State Government\APSEB. 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 section 80-IA(4). Discussed/considered as above, we hold that the assessee having carried out the work of constructing the abovementioned two project, namely Srisailam Project and Koyana Project, as detailed above, is appropriately a developer of the said two infrastructure facilities, and In turn Is entitled, and entitled Justifiably, to claim deduction under section 80 IA(4) This from the above, it clearly follows that there is no difference between a contractor and a developer and that mere development of an Infrastructure facility also entitles the appellant to claim deduction u/s.80-1A. 5.5. At this juncture, it is also pertinent to refer to the amendment brought by the Finance Act, 2009 whereby a new Explanation has been added to sub-section (13) of section 80lA, with retrospective effect from 01.04.2000, which reads as under:- "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 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)." From the amendment it is clear that it is only the work contractor who is barred from claiming the deduction u/s.80-1A. The legislative intent behind the introduction of the above amendment as arising from the explanatory memorandum further clarifies the issue as under:- "The tax benefit was introduced for the reasons that industrial modernisation requires a massive expansion of, and qualitative improvement in, infrastructure which was lacking in our country. The

8 ITA No.200/15 purpose of tax benefit has all along been for encouraging private sector participation by way of investment in development of the infrastructure sector and not for the persons who merely executes the civil construction work or any other works contract. Accordingly, it is proposed to clarify that the provisions of section 80lA of the Act 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 executes the development work i.e. carries out the civil construction work, he will be eligible for tax benefit u/s. 80lA. In contrast to this, a person who enters into contract with another person (Le. undertaking or enterprise referred to in section 80-lA) for executing work contracts will not be eligible for tax benefit u/s. 80-lA." The amendment therefore, makes it abundantly clear that it is only the work-contractor who will not be eligible for deduction u/s. 80-1A. It makes no distinction between a contractor or a developer, but only between a work contractor and a developer-contractor. 5.6. During the appellate proceedings, the appellant was required to substantiate its role in the execution of infrastructure development project. Break up of investment was given relating to the period under consideration, which was examined. It is seen that the investments are in (a) fixed assets including sophisticated earth excavation machineries and tower cranes, etc. (b) Investment by way of fixed deposits and advances to contractors and credits to the government department, (c) stock of cement/steel etc. Further, on analysis of the nature of project executed by the appellant, it was revealed that the appellant was exposed to various kinds of risks namely - (a) completion of contract within stipulated period, (b) risk of maintenance, (c) risk of delayed payments or bad debts, (d) arbitration & litigation risk and (e) geological risks. Hence, the factual position, which emerges, is that not only was the appellant also making its own investments in the development of infrastructure projects, but the process of creating the infrastructure facilities in itself was fraught with inherent risks and it was not that the appellant was engaged in blindly executing civil work contracts. It needs to be pointed out here that if the interpretation of the AO of a developer as only a persons who conceives the idea is correct, in that case, the deduction u/s 80lA could be claimed in almost each and every case, only by Government/local bodies/statutory authorities, as the infrastructure projects would always be conceived by them and they will not be having an agreement with the specified authority and hence, deduction shall not be available to anyone. This was not the legislative intention behind the introduction of the provisions of section 801A. The fact that the appellant executed infrastructure project is not disputed by the AO, even further nature of the project is within the stricture of the term infrastructure facility is not disputed by AO. What is disputed is that the appellant was not a

9 ITA No.200/15 developer, but merely a contractor. As is clear from the discussion above, the AO's reasoning is faulty. It is further an undisputed fact that the appellant is not a sub-contractor. That being so, the appellant is entitled to claim the deduction u/s. 80IA(4) for all these reasons and placing reliance on the various decisions, it is thus held that even as a developer the appellant, as it is not a subcontractor, is entitled to claim the deduction U/S.80IA.” 8. With regard to AO’s objection that assessee is neither BOT nor BOOT but BT only, therefore, not entitled deduction u/s.80IA. In this regard, observations of CIT(A) are as under :- 6.3. I have gone through the relevant facts and the contentions of the appellant. Section 80-lA(4)(i) has been amended with effect from 01.04.2002 which reads as under:- "80-IA (1) ..... (2) . (3) . (4) This section applies to - (i) any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing operating & maintaining any infrastructure facility which fulfils all the following conditions, ",,,, " 6.4. Therefore, a plain reading of the sub-section itself makes It clear that an enterprise which is engaged only in the development of infrastructure facility is also entitled to claim deduction u/s.80IA(4), as also any enterprise carrying on the business of operating and maintaining or developing, operating and maintaining any infrastructure facility. 6.5. In the present case, the undisputed facts are that the appellant has developed Infrastructure facilities, which have been transferred after completion by handing over the possession thereof. It is therefore, BT i.e. Build /Transfer and not BOT or BOOT which is applicable. The question of whether, in the case of mere developer, where there is no requirement to operate, the deduction u/s.80-IA be allowable on the recoupment of cost it receives by way of payments from the government/authority, has also been discussed In the decision of M/s. Patel Engg .. Ltd. (supra). The facts in the case of M/s. Patel Engineering Ltd. were exactly similar to that of the assessee; in that case assessee had transferred the infrastructure facility developed by it, by handing over possession thereof to the Government of Maharashtra / APSEB, as required by the agreement, The question which was raised therefore was whether the deduction u/s.SO-IA was also available to an

10 ITA No.200/15 assessee, who undertakes merely "development" of Infrastructure facility without the "operating" aspect of the same. It was held that - "the handing over of infrastructure facility project by developer to government local authority statutory body takes place after recoupment of developer's costs whether it is BT or BOT or BOOT and in BOT and BOOT this recoupment is by way of collection of toll there from whereas in 'B1' it is by way of periodical payment by the Government! local authority statutory body. Since in 'B1' (the case of an assessee being a mere developer) the developer not being required I authorized to 'operate' has no option of recoupment of its costs by collection of tolls from infrastructure. The land involved in infrastructure facility I project always belongs to the Government I local authority I statutory body, whether it be the case of BOT or BOOT or BT, and it is handed over by the Government I local authority I statutory body to the developer for development of infrastructure facility project. The same has been the position In the Instant case as well. Undisputedly, the deduction u/s, 80lA is also available to an assessee, who undertakes merely 'development' of infrastructure facility without 'operating' aspect of the same, (Emphasis supplied) Hence It is clear from the above that though in BT, i.e. the case of mere developer, the 'operating' aspect is absent, it is still entitled to claim deduction u/s. SO-IA(4) on the recoupment of costs from the Govt.! statutory authority. On the basis of – (a) Fact that the section itself, after the amendment, as discussed, makes It clear that enterprises only developing infrastructure projects will also be entitled to claim deduction u/s 80-lA, and (b) various decisions cited supra it is held that the appellant is entitled to the deduction u/s. BO-IA on the profits of eligible infrastructure projects” 9. With regard to objection of AO that conditions specified u/s.80IA(4)(1)(c) is not fulfilled, the observation of CIT(A) was as under :- 7.3. I have gone through the facts, as well as the contentions of the appellant. As discussed in earlier para of this appeal order, after the Introduction of Explanation to sub- section (13) of section 80-lA, with retrospective effect from 01.04.2000, the only person barred from claiming deduction under this section is a work-contractor. It is an undisputed fact that the appellant is not a sub-contractor and appellant has used his own resources to execute the work. Therefore, as per the section itself, the appellant, solely engaged in the work of development and transfer of infrastructure facilities, is entitled to claim deduction u/s. 80-lA on the Income thus arising. I have gone through various decisions, as relied by the Ld. AR, they are being dealt with as under:

11 ITA No.200/15 It has been held in the decision of M/s Patel Engineering (supra) in as under:- We find that Finance Act, 1995 inserted clause (4A) for providing deduction to any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility. Sub-clause (iii) of sub-section (4A) provides the condition that the Infrastructure facility is operated on or after the first day of April, 1995. In respect of facility whose operation and maintenance has already started before 1 st April, 1995, an assessee was not eligible for deduction under section 80-1A. The Finance Act, 1999 has enlarged the scope of section 80-IA and with effect from assessment year 2000- 01 any enterprise is carrying on the business of any maintaining and operating the infrastructure facility is also entitled to deduction under section 80-IA(4) and any enterprise which is developing as well as maintaining and operating, the infrastructure facility is also entitled to deduction under section 80- IA(4). It is noteworthy that the condition at clause (c:) which reads "It has stated or starts operating and maintaining the infrastructure facility on or after 18th day of April, 1995" Is obviously applicable to an enterprise which is "maintaining and operating' the infrastructure facility, it cannot apply to the case of an enterprise, which has undertaken merely 'development" of infrastructure facility, and not its 'maintenance and operation' and so 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 learned GIT, Departmental Representative is accepted, it would obviously! understandably lead to manifestly absurd results. When the Act provides deduction for a person who is only developing the Infrastructure facility, unaccompanied by 'operating' thereof by such person, there can be no question of providing a condition for such an enterprise to start operating and maintaining the infrastructure facility on or after 1 st April .1995. In that view of the matter we find substance in the contentions of the learned Authorised Representative of assessee and inescapably we have but to hold that the condition at clause (c) is applicable to an enterprise, which is carrying on the business of maintaining and operating or developing, maintaining and operating an infrastructure facility. As such, viewed as above, we hold that since the assessee is only a developer of the infrastructure project subsection (4) is not applicable to the present assessee. (Emphasis supplied) Hence it cannot be stated that the appellant is not entitled to deduction under section 80-lA as one of the conditions. As stipulated in Sec.80-IA (4)(c) is not fulfilled, does not hold good after the Introduction of Explanation to subsection (13) of Sec. 80-lA and after the decision in the case of M/s. Patel Engg. Ltd. (supra) as discussed above. Therefore, even though the clause of operating of Infrastructure facility is not fulfilled by the appellant since it is not applicable to it, it is entitled to claim deduction u/s.80-IA.

12 ITA No.200/15 7.4. It has been further observed by the Hon Mumbai ITAT in matter of the ACIT v Pratibha Industries Limited 141 ITO 151 that assessee was awarded the job, wherein the assessee had placed the bank guarantee, against the tendered cost, which proved beyond doubt that the assessee, itself was doing the development of infrastructure facility, on behalf of the Government, besides placing its own funds at risk and peril. It is worth mentioning here that the same Pratibha Industries Limited is the member cum partner in assessee JV. 7.5. It has been further observed by the Hon Mumbai IT AT in matter of the ACIT v Bharat Udyog Limited 24 SOT 412 that , "9. The interpretation of revenue is absurd also in view of the rational of the provisions of section BO-IA (4) ( i). From the assessment year 2000-01, deduction is available if the assessee carries on the business of anyone of the abovementioned 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 infra- structure facility, just after its development, is transferred to the Government, naturally the cost would be paid by the Government. Therefore, merely because the transferor 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 section 80-lA (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 would be eligible for deduction, it pre- supposes 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/authorisation to operate the infrastructure facility and to collect toll therefrom, has no other source of recoupment of his cost of development. Considered as such, the business activity of the nature of "BT" (build and transfer) also falls within eligible construction activity, that is, activity eligible for deduction under section 80-lA 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 section 80-lA. Therefore, merely because the present assessee was paid by the Government, for development work, it cannot be denied deduction under section BD-lA (4). A

13 ITA No.200/15 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"(emphasis applied). On the other hand, rather section 80-lA (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 section 80-IA(4)" 7.6. Ld. AR further has further relied upon the decision dated 08/06/2011 of Pune Bench of Hon. ITAT in matter of M/s Laxmi Civil Engineering Pvt. Ltd v Addl. CIT ITA No.766/PN/2009 in which it has been held as under: The judgment of the Hon'ble High Court is delivered in the case of CIT v ABG Heavy Engg Lld ITA No 1687 of 2009, who is a contractor for the JNP Trust and that contactor, assessee is found to be an eligible developer for making claim of deduction u/s section 80lA (4) of the Act. From the above, it is evident that the person who only develops the infrastructure does not have the occasion to operate and maintain the infrastructure. It is further evident that the harmonious reading is necessary and mandatory in view of High Court's judgment 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 80lA (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 fulfil the condition at sub clause (c) which is an impossibility and the requirements to fulfil the said condition shall amount to absurdity and therefore uncalled for. Therefore, we find requirement of harmonious reading of sub-clause (c) vis-a-vis of clause (i) of section 80lA (4) of the Act. Thus, the discussion in High Court's decision in paragraph-22 extracted above, is directly applicable to the facts of the case and eventually is entitled for the deduction under section 80lA (4) of the Act. 7.7. Ld. AR further has further relied upon the decision dated 15/02/2010 of Hon.Bombay High Court in matter of CIT v M/s ABG Heavy Engg Ltd ITA No 1687 of 2009 in which it has been held as under:

14 ITA No.200/15 "The fact that in such a Scheme, an enterprise would not operate the facility itself was not regarded as being a statutory bar to the entitlement to a deduction under Section 80lA of the Act. The Court cannot be unmindful in the present case of the underlying objects and reasons for a grant of deduction to an enterprise engaged in the development of an infrastructure facility. The provision was intended to give an incentive to investment for infrastructural growth in the country The requirement that the operation and maintenance of the infrastructure facility should commence after 1st April 1995 has to be harmoniously construed with the main provision under which a deduction is available to an assessee who develops; or operates and maintains; or develops, operates and maintains an infrastructure facility. Unless both the provisions are harmoniously construed, the object and intent underlying the amendment in the provision by the Finance Act of 2001 would be defeated. A harmonious reading of the provision in its entirety would lead to the conclusion that the deduction is available to an enterprise which (i) develops; or (ii) operates and maintains; or (iii) develops, maintains and operates that infrastructure facility. In the light of the ratio of the above decision of Hon. Bombay High Court being the jurisdictional high court, argument that in absence of the operation and maintenance, assessee is not eligible for the deduction u/s 80lA is without any merit. 7.8. It is observed from the perusal of the assessment order that Ld. AO has laid a lot emphasis on explanation inserted to the section 80lA by Finance Act (No.2) 2009 which has been made operational retrospectively with effect from 1 st April 2000, which is as under: "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)" Ld. AO has even held that as per the amendment under the Finance Act 2009, it is clear that any work contract awarded by the Central or State Government does not qualify for the deduction under section 80lA. Above Interpretation canvassed by the AO, is devoid of any merits. The explanation has been misconstrued by him. Correct interpretation of the impugned explanation is that what has been debarred from the claiming the deduction is the business which is in nature of the works contract from any person and the business of the development of infrastructure facility under the contract which is not the works contract is eligible for the deduction.

15 ITA No.200/15 In the light of the above principles, it would be imperative to examine whether the business of the assessee is in nature of the works contract or something more than that. Followings are the undisputed facts arising from the audited financial statements : a. Assessee has arranged various equip en, plan sand machineries that are required for the execution of the work either on his own or on hire. b. Assessee has arranged for all the materials and resources for the projects. c. As a matter of fact, assessee has incurred the substantial amounts of purchases of various materials and incurred substantial direct expenses on his own on execution work during the year under consideration. d. Municipal Corporation of Greater Mumbai i.e. MCGM has not given to assessee anything except the payment of amount of monthly billing. No other material or equipment has been supplied by MCGM. On the basis of the above facts legal propositions is to be analysed. It has been pointed out by the Ld. AR during the hearing that in the section 8018 (10) which provides the deduction from taxable income from the business of development of housing project, identical explanation with retrospective effect from 1 si April 2001 has been inserted by Finance (No.2) Act 2009 which is as under: [Explanation. -For the removal of doubts, it is hereby declared that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including the Central or State Government).} It is clear that effect of the above explanation is identical to that in section 80lA to disqualify the business of execution of works contract after segregating the same from development contract. In the context of the section 80IB(10) after examining the retrospective effect of explanation Hon.Gujarat High Court in matter of CIT V. Radhe Developers 204 Taxmann 543 (ITA 546 of 2008) has held as under :- Para 30. The essence of sub-section (10) of Section 80IB, therefore, requires involvement of an undertaking in developing and building housing projects approved by the local authority. Apparently, such provision would be aimed at giving encouragement to providing housing units in the urban and semi- urban areas, where there is perennial and acute shortage of housing, particularly, for the middle income group citizens. To

16 ITA No.200/15 ensure that the benefit reaches the people, certain conditions were provided in sub-Section (10) such as specifying date by which the undertaking must commence the developing and construction also providing for the minimum area of plot of land on which such project would be put up as well as maximum built up area of each of the residential units to be located thereon. The provisions nowhere required that only those developers who themselves own the land would receive the deduction under Section 8018 (10) of the Act. In para 38, Hon. High Court has further held that addition of the Explanation to Section 8018 with retrospective effect of 1.4.2001 would have no material bearing in the cases on hand if contract is not work contract. After relying upon the decision of Hon. Bombay High Court in matter of CIT v. Glenmark Pharmaceuticals Limited 324 ITR 199 Hon. Gujarat High Court held that nature of the contract was not the work contract and assessee is eligible for the deduction u/s 801B. It has been held by Hon. Bombay High Court in matter of CIT v. Glenmark Pharmaceuticals Limited 324 ITR 199 as under: Para 15. In Govt. of Andhra Pradesh V/So Guntur Tobaccos Ltd. A.IR. 1965 Supreme Court 1396, the Supreme Court held that in the execution of a contract of work some materials may be used and property in the goods so used passes to the other party. However, the contractor who undertakes to do the work will not necessarily be deemed on that account to sell the materials. The Supreme Court noted that a contract for work in the execution of which goods are used may have taken one or three forms. Those three forms were elaborated as follows:- "The contract may be for work to be done for remuneration and for supply of materials used in the execution of the works for a price; it may be a contract for work, in which the use of materials is accessory or incidental to the execution of the work; or it may be a contract for work and use or supply of materials though not accessory to the execution of the contract is voluntary or gratuitous. In the last class there is no sale because though property passes it does not pass for a price. Whether a contract is of the first or the second class must depend upon the circumstances: if it is of the first; it is a composite contract for work and sale of goods: where it is of the second category, it is a contract for execution of work not involving safe of goods. " Para 16 The distinction between a contract of safe and a works contract found elaboration in the following observations:

17 ITA No.200/15 “ ... If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the intention of the parties to the contract. In a "contract of sale", the main object is the transfer of property and delivery of possession of the property, where as the main object in a "contract for work" is not the transfer of the property but it is one for work and labour. Another test often to be applied is: when and how the property of the leader in such a transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a "sale"; if it is the latter, it is a "works contract". Therefore, in judging whether the contract is for "sale" or for "Work and labour", the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a "sale" or a "works contract". Essentially, the question is of interpretation of the "contract". It is settled law that the substance and not the form of the contract is material in determining the nature of transaction.” Para 17., In Hindustan Shipyard Ltd. Vs. State of Andhra Pradesh [2000]119 STC 533, the Supreme Court enunciated certain principles which were deduced from he decided cases on the distinction between the two concepts. The second, third and fourth principles laid down in the judgment of the Supreme Court, read thus :- "(2) Transfer of property of goods for a price is the linchpin of the definition of "sale". Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties found out from an overview of the terms of the contract, the circumstances of the transaction and the custom of the trade. It is the substance of the contract documents and not merely the form, which has to be looked into. The court may form an opinion that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour. (3) If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. If A may transfer property for a price in a thing in which B had no previous property then the contact is a contract for

18 ITA No.200/15 sale. On the other hand where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour. (4) The bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not for work and labour. However, the test is not decisive ... Para 21 Broadly speaking, three situations are involved in the manufacture of pharmaceutical products. In the first situation, the pharmaceutical company itself manufactures pharmaceutical preparations which are sold under its brand name. The second situation involves loan licensing where the raw materials are supplied by the pharmaceutical company to the licensee manufacturer who in turn manufactures a pharmaceutical product on behalf of the Company. The third situation is one where by an agreement between a pharmaceutical company and a manufacturer, it is the manufacturer who procures the raw materials and manufactures the product under the specifications of the company and sells the end product to the Company. In the third situation, the manufacturer may also affix the trade mark or brand name of the Company, which in turn markets the product. The present case relates to the third category where admittedly, the entire process of manufacturing is carried out by a third party with whom the assessee has a contract. The work of manufacture is carried out at the establishment of the third party manufacturer. The raw materials are purchased by the third party manufacturer. The contract envisages that the trade-mark of the assessee is to be affixed to the goods manufactured by the third party. Para 24 The submission that the contract is not a contract of sale because, specifications are provided to the manufacturer by the purchaser cannot be accepted. That has not been the understanding of the law at any point of time. The fact that the purchaser provides specifications to the manufacturer has never been construed even by the Revenue to be a circumstance which should lead to the inference that the contract is not a contract of sale. Firstly, the circulars issued by the Central Board of Direct Taxes right since 29 May, 1972 consistently took the position that furnishing of specifications to the manufacturer of goods by the purchaser would not detract from a contract being regarded as a contract for sale so long as the property in the goods passes upon delivery. The consideration which was regarded by the Revenue as having relevance was whether the material was supplied to the contractor by the Government, or, as the case may be, by a specified person. Where the material is provided by the purchaser and the work of fabrication or manufacture is carried out by the contractor, the agreement would, it was clarified, constitute a contract for work. On the other hand, where a manufacturer

19 ITA No.200/15 produces goods to the specifications of the purchaser and the property passes to the purchaser only upon delivery, the contract would be regarded as a contract of sale if the raw material is sourced by manufacturer and is not supplied to him by the purchaser. Secondly, the consistent view which held the field in several High Courts was that contracts where (i) property passes to the purchaser upon the delivery of the goods and (ii) the raw material was sourced by the manufacturer and was not supplied by the purchaser do not fall within the scope and ambit of Section 194C. The judgment of the Division Bench of this Court in matter of BOA Ltd., therefore, clearly reflected the position of law that providing a specification to the manufacturer who produces the article or thing would not detract from the nature of the transaction as a sale so long as the purchaser had not supplied raw material to the seller; and there was nothing to indicate that the seller was a captive unit of the purchaser. Such a contract would be a contract of sale. Para 28, In other words, the circumstance that the requirements or specifications are provided by the purchaser is not regarded by the statute as being dispositive of the question as to whether a contract constitutes a contract of work or sale. What is of significance is whether material has been purchased from the customer, who orders the product. When the material is purchased from the customer who orders the product, it constitutes a contract of work while on the other hand, where the manufacturer has sourced the material from a person other than the customer, it would constitute a sale. (emphasis supplied) 7.9. In the context of the above following facts are undisputed: a. Assessee has procured his own materials and they were not given by MCGM. b. In other words, materials and resources needed for the execution of the project have not been purchased by assessee from MCGM and have been bought from his own resources. 7.10. By considering the above facts and legal proposition in light of the decisions of Hon. Gujarat High Court and Hon. Bombay High Court, it is held that contract of the project under which assessee has executed the infrastructure development project is not the work contract as meant in the explanation to section 80lA and on this account assessee is eligible for the deduction u/s 801A. 7.11. During the course of appeal proceedings, Ld. AR was specifically asked to comment on the applicability of the larger bench decision of Hon. Mumbai ITAT in Matter of M/s BT Patil & Sons Belgaum Constructions Private Limited 35 SOT 171. 7.12. Ld. AR vehemently contended that the said decision of the larger bench of Hon. ITAT has been recalled for fresh hearing by

20 ITA No.200/15 Hon. Bench by allowing the Miscellaneous Application under section 254 of the Income Tax Act 1961 in light of the decision of Hon. Bombay High Court in matter of ABG Heavy Industries Limited (Stated Supra). Apart from above, he submitted that after recall, fresh decision has been pronounced by Hon. ITAT 59 SOT 61 and it has been held that assessee is eligible for the deduction under section 80lA of the Act. During the course of hearing he has produced copies of various judicial decisions to substantiate the fact. 7.13. I have gone through the facts on record as well as the contentions of the AO. It is the requirement as per section 80-1A (4)(i)(b) that the infrastructure facility developed by the enterprise should be transferred to the Govt. within the period stipulated in the agreement. It was asked to the Ld. AR that in BT, BOOT and BOT there was limited ownership which was transferred to the Govt or Statutory authority, but in BT, as there was no such right or interest in the infrastructure facility there could not be any transfer. Ld. AR submitted that it is pertinent again to refer to the decision of the Mumbai ITAT in the case of M/s, Patel Engg. (supra) where similar question arose of whether there could be any transfer of Infrastructure facility in the absence of any 'rights' or 'interest' as in the case of a BT, i.e. a mere developer. It was observed that in a case of a BT, the only way of recoupment of cost was by way periodical or lump-sum payment by the Govt. / the Statutory Authority, whether during the progress or after completion of the development work. It was further held as under: "in that view of the matter, the question of comparing the right, title, or interest of an assessee (a developer) in infrastructure in the case of 'BT' with those of a developer in the case of 'BOT' or 'BOOT' is in our considered opinion, of no relevant bearing on the issue, in as much as a developer seems to have almost same rights, title or interest (except regarding mode of payment or collection of tolls) in infrastructure facility whether it be the case of BT or that of BOT or BOOT, in view of the discussions made by us above." 7.14. Therefore it is held that the appellant is entitled to claim deduction u/s. 80-lA. 7.15. As far as objection raised by the Ld. AO that merely obtaining the contract from MCGM to lay down and construct tunnels, shaft from Malabar Hill to Cross Maidan in Mumbai City does not make the assessee developer of the project, is concerned, it is found that assessee has been given the whole contract on lumpsum and on turnkey basis. It involves the work of creating the underground tunnel from one part of the city to another to supply the water. It is not the work in nature of the repair or petty work to the existing

21 ITA No.200/15 infrastructure facility. Hence, on this count also, objection of Ld. AO has no legs to stand. 7.16. To summarise the issue at hand, In view of following facts, viz. (a) the amendment to section 80-IA(4)(i) to include as eligible business - (i) developing or (ii) operating and maintaining or (iii) developing, operating or maintaining infrastructure facility; as also (b) The introduction, with retrospective from 01.04.2000, of the Explanation to sub section (13) of section 80-lA, whereby It has been clarified that the deduction u/s. 80lA is available to an undertaking or enterprise who makes investment and executes development work and not to any person entering into a work contract; and (c) the various decisions of the various courts have exactly similar facts as the appellant's, allowing the claim of deduction u/s. 80-lA, the action of the AO in rejecting the appellant's claim of deduction u/s. 80-lA on grounds that - (a) The appellant was not a developer but merely a contractor, (b) The concept of BOT I BOOT was absent, and. (c) Conditions specified u/s. 80-lA (2) and 80-lA (4) (i)(c) were not satisfied, (d) Assessee does not fit in the category of persons for whom benefit of this provision was introduced. (e) The assessee is engaged in business of work contract within the meaning of the explanation to section 80lA cannot be upheld. The AO has in the assessment order, without any elaboration, merely stated that the facts in the cases relied by Assessee are not identical with this case. On the contrary, however, as has been examined above, not only are the fact exactly similar, but the very same issues as raised by the departmental OR in the case of M/s. Patel Engg. Ltd. On the basis of the detailed discussion as above, it is held that the appellant is entitled to claim deduction u/s.80-lA. AO is directed to allow the deduction under sec. 80lA. Ground No. 3, 4 and 5 are allowed” 10. We have considered rival contentions and carefully gone through the orders of authorities below and found from the record that assessee has entered into an agreement with the Local Authority as stipulated in terms of provisions of section 80- IA(4)(i)(b) of the Act and developing the

22 ITA No.200/15 infrastructural facilities. The financial, technical and all the other resources required for the development of the infrastructure facility were of the appellant and it was not correct that the MCGM financed the infrastructure facility developed by the assessee. The appellant carried out the entire development of its own by giving specifications and necessary Designs/plans as per the location of the site, which was done by the technical experts employed by the assessee. Thus, the assessee did the entire development of the infrastructure facility. We also found that the cost of development of the infrastructure facility was paid to the assessee and the same was received by the assessee as per the bills raised. The MCGM while making the payments, deducted tax at source under the provisions of section 194-C of the Act as the development of infrastructure facility was as per the agreement entered into which was contract between the Government Authority and the assessee and the provisions of Section 194-C of the Act were applicable. However, merely because the tax was deducted in terms of provisions of section 194-C of the Act, It did not make the assessee a mere contractor executing the works contract. In the development of the project it was the technical personnel of the assessee that made the proper specifications etc. from time to time as per the location of the site and as the project progressed. Developer does not mean merely a person who was conceiving the idea. Any enterprise developing infrastructural facilities is a developer of such facility since all the responsibility of the project was that of the enterprise from the start of the project till Its completion, Therefore, It would not be said

23 ITA No.200/15 that merely because the idea was conceived by the government and more Importantly on the land, etc. which was in domain of the government, that the government was the developer. For this purpose reliance may be placed on the decision of the Mumbai ITAT in the case of ACIT v. M/s Pratibha Industries Limited 141 ITO 151) and ACIT vs Bharat Udyog Limited 24 SOT 412 and decision of Jaipur ITAT in matter of Om Metal Infraprojects Limited ITA 722/JP/200S and decision of the Rajkot ITAT in the case of M/s Tarmat Bel JV ITA 1111/RJT/2010 and decision of Pune bench of ITAT in matter of Mahalaxmi Construction Corporation Limited v. ACIT ITA. 433/PN/2007 and decision of Pune bench of ITAT in matter of Pratibha Construction & Engineering Pvt Ltd. vs. ACIT ITA 27S/PN/1 0 and decision of Pune bench of ITAT in matter of Laxmi Civil Engg Pvt. Ltd. vs Add!. CIT ITA 766/PN/2009 and decision of Chennai Bench of ITAT in matter of ACIT v. RR Construction ITA No. 2061/MOSI 2010 and decision of Hyderabad Bench of ITAT in matter of GVPR Engineers v. ACIT ITA No. 1473/HYO/2011 and decision of Hyderabad Bench of ITAT in matter of KMC Constructions Ltd. v. ACIT ITA No. 84/HYD/2010 and decision of Hyderabad Bench of ITAT in matter of Koya and Company Construction Pvt Ltd. vs. ACIT ITA 221/HYD/2009. 11. The issue is also squarely covered by the decision of Hon’ble Bombay High Court in matter of ABG Heavy Industries Limited ITA 2121 of 2009 against which SLP of Revenue has been dismissed by Hon. Apex Court. The fact that the TDS was deducted did not in any way bar the

24 ITA No.200/15 appellant from claiming the benefit of deduction u/s.80-IA, as the fact remained that the appellant was a developer of Infrastructural facilities. 12. With regard to the AO’s objection that assessee is neither BOT nor BOOT, we found that the wordings of the section prior to the amendment made w.e.f. 01.04.2000 did not have any alternative by usage of the word 'OR' in sub-section (4) of section 80lA of the Act and hence, the provision of section 80lA of the Act was available only to an assessee who not only developed but after developing also operated and maintained the Infrastructure facility. Thus, while introducing the provisions of section 80lA of the Act, the concept of BOT /BOOT prevailed and it was in this context that the Department issued circular nO.717 dated 14/8/1995, which clearly explained the new provisions of section 80-lA of the Act in terms of Infrastructural development. While doing so, the Legislature itself realized that such concept was not feasible in all cases and therefore the provisions of section 80-IA of the Act were substantially relaxed and the benefits of section 80-IA of the Act were enlarged by providing for deduction to three categories as under:- (i) enterprise being a developer; OR (ii) enterprise being operating and maintaining; OR (iii) enterprise developing, operating and maintaining. Thus, the concept of BOT IBOOT underwent changes in the year 2000. If the Intention was only to give benefit to enterprises on the income earned from operating and maintaining the Infrastructure facility, In that case, the provision would not have been amended in such a manner so as to also allow benefit to the enterprise which was merely developing the facility.

25 ITA No.200/15 Further, there would have been no necessity to make the amendment if the enterprise was to be allowed in respect of Income earned from operating and maintaining the facility. When the provision of section 80lA of the Act had been substantially amended and where the enterprise was only a developer of the Infrastructure facility, deduction could not be denied under section 80-lA of the Act on the ground that the concept of BOT/BOOT was the main requirement for getting benefit of deduction under section 80-lA of the Act. 13. In view of the above discussion and the detailed finding so recorded by CIT(A) and also keeping in view that assessee in earlier years have already been allowed deduction 80IA(1) by the AO, we do not find any infirmity in the order of CIT(A) fo r allowing assessee’s claim for deduction u/s.80IA amounting to Rs.40,744/-. 14. In the result, appeal of the revenue is dismissed. Order pronounced in the open court on this 28/09/2016. Sd/- sd/- AMARJIT SINGH R.C.SHARMA न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक Dated 28/09/2016 प्र.कु.मभ/pkm, नन.स/ PS आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A), Mumbai. 3. आमकय आमुक्त / CIT 4. आदेशाि सार/ BY ORDER, ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai 5. गार्ा पाईर / Guard file. 6. उप/सहायक पुंजीकार सत्मावऩत प्रनत //True Copy// (Asstt. Registrar) आयकर अपीऱीय अधिकरण, भुंफई / ITAT, Mumbai

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