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TMI Blog2005 (11) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... irming the disallowance of the claim of the assessee for deduction under s. 80-IA of Rs. 2,96,09,123 on the income derived by it from the business of O&M of ports. 2(a) That the learned AO and CIT(A) erred in law and in the facts and circumstances of the case in confirming the disallowance of the claim made by the assessee for deduction under s. 80-IA notwithstanding the fact that the assessee's case is fully covered by the proviso to s. 80-IA(4)(i) and, as such, the assessee is eligible for deduction under the said section. 2(b) The learned AO and CIT(A) ought to have appreciated that as provided in the said proviso, the developer of the infrastructure facility (port) has transferred or in other words handed over the infrastructure facility to the assessee for operating and maintaining the same on its behalf in accordance with the agreement with the specified authorities, and as such, the claim of the assessee for deduction under s. 80-IA is perfectly justified and requires to be upheld. 3. That learned CIT(A) has erred in law and in the facts and circumstances of the case in confirming the disallowance of the claim of the appellant for deduction under s. 33AC while comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company with the said developers of the ports. (i) Reg. : Kakinada Port : (a) International Seaports (P) Ltd. entered into a concession agreement with the Government of Andhra Pradesh on 19th March, 1999 for development, operation and maintenance of the Kakinada Deep Water Port. (b) This concession was subsequently assigned in favour of Cocanada Port Company (P) Ltd. The said Cocanada Port Company (P) Ltd. changed its name to Kakinada Seaports Ltd. on 18th Sept., 2001. (c) Kakinada Seaports Ltd. is a special purpose vehicle of International Seaports (P) Ltd., the awardees of the contract which was formed to execute the contract/concession agreement. As per the concession agreement, the project commencement was stated as 1st April, 1999, and the concession is valid upto March, 2019. (d) As per this agreement, the concessionaire is allowed total freedom in operations and the services can be subcontracted as and where found necessary. (e) Further, the concession agreement provided that on the expiry of the concession period, including any extension granted, the infrastructure facility, i.e., the Kakinada Port would be transferred or, in other words, handed ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the above, the licensee, viz., RPTL subcontracted operations and maintenance services to the appellant-company as outsourcing is permissible under the port policy. (c) Accordingly, the assessee-company entered into an agreement with Reliance Ports and Terminals Ltd. (RPTL) vide LOC No. RPTL/Jam/Mech/LOC/010, dt. 24th June, 1999 and RPRL/Jam/Mech/LOC/00ll, dt. 1st July, 1999 to carry out various services of O&M of the jetty at Jamnagar developed by the aforesaid company. (d) Under the contract, the assessee was required to render the services of pilotage, mooring, radio operator, cleaning of hold, etc. in connection with the operation and maintenance of the port developed by Reliance Ports and Terminals Ltd. (e) The said services have been certified to be essential part of the maintenance and operation of the port facilities by Reliance Ports and Terminals Ltd. (f) Further, the Gujarat Maritime Board vide letter No. GMB/CNO/Ahd/12/8754, dt. 24th Nov., 2004 has also certified that: Under the license agreement between M/s Reliance Port Terminal Ltd. (RPTL) and Gujarat Maritime Board, the licensee has agreed to undertake operations, maintenance, administration and devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G) and 80-IA(12)(ca) of the Act, the AO commented that in the instant case the port refers to 'physical structure' like any other infrastructure, e.g., an airport, a railway station etc., the development or maintenance plus operation of port alone comes under the purview of s. 80IA. He further observed that the services or other activities rendered or the operations carried out at the port does not come under this ambit. The assessee-company merely entered into a contract for offering certain specialized services to other corporate entities, who are maintaining and operating the infrastructure facility. Referring to several agreements with the developers as mentioned above, the AO alleged that the assessee has been paid compensation for the specific services rendered as per the contractual obligations for which TDS has been deducted treating the assessee as contractor. He further admitting (sic) that the assessee is offering certain specified professional/contractual services at the ports, alleged that it is not the assessee who is maintaining and operating the port infrastructure. The assessee is assisting the above three companies in maintaining and operating of the infra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A). After considering the arguments advanced on behalf of the assessee and discussing in detail the observation of the AO mentioned in the assessment order, the CIT(A), in a nutshell, observed as under: (i) On going through the agreements entered into by the appellant, it appears that the appellant-company has done, if not the entire O&M operation, at least a part of O&M operation, in respect of 3 ports and, therefore, prima facie, the appellant should be eligible for deduction under s. 80-IA. (ii) However. s. 80-IA(4) stipulates other conditions and one of the conditions at (i) (b) is that the company should have entered into an agreement with the Central Government or a local authority or any other statutory body for (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining the new infrastructure facility, subject to the condition that such infrastructure shall be transferred to the Central Government, State Government, local authority or such other statutory body, as the case may be, within the period stipulated in the agreement. (iii) I am not convinced by the argument of the Authorised Representative that the agreement entered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed deduction under s. 80-IA for these years. On the above context, the CIT(A) held that the assessee has not satisfied the three conditions contained in s. 80-IA and the AO has rightly rejected the claim of deduction made by the assessee for these assessment years under appeal. Aggrieved, the assessee is in appeal before the Tribunal. 8.1 At the outset, the assessee's learned counsel pointed out the points of agreement and disagreements by the CIT(A) on the claim of deduction under s. 80-IA of the Act. He submitted that the assessee has complied with the requisite conditions specified in s. 80-IA(4) and as such is entitled to deduction under the said section. Referring to proviso to s. 80-IA(4)(i), he contended that the proviso to the said section carves out an exceptional situation where deduction under this section would still be available to an enterprise if the following conditions are fulfilled: (i) The infrastructure facility is handed over or, in other words, transferred on or after 1st April, 1999. (ii) by an enterprise which developed such infrastructure facility (hereinafter referred to as the 'transferor enterprise') to another enterprise (hereinaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other conditions be satisfied. In such a case, the proviso does not require any direct agreement between the transferee enterprise and the specified authority. However, it provides that there should be an agreement between the transferor enterprise and the specified authority for development, operation and maintenance of the infrastructure facility and after development, the transferor enterprise should hand over the infrastructure facility to the transferee enterprise for the purpose of operation and maintenance on its behalf in accordance with the terms of the original agreement between the transferor enterprise and the specified authority. 8.2 Referring to the observations of the AO as well as the CIT(A), Shri S.K. Tulsiyan, learned counsel, pointed out that according to the CIT(A), in case the developer of the infrastructure facility has operated and maintained the facility for some time and thereafter subcontracted the O&M to a sub-contractor, it is the original company which is doing the O&M and not the sub-contractor company. The AO's views and interpretation of the applicability of the proviso to s. 80-IA(4)(i) is just the opposite to that of the learned CIT(A). Again, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted that the services rendered by the assessee-company are essentially in the nature of operation and maintenance of the port infrastructure. This fact is corroborated by the confirmations received from the counter-parties to the agreements who have certified that the services rendered by the assessee are essential part of the maintenance and operation of the port facilities. These confirmations are placed at pp. 15, 16, 56 and 128 of the paper book. According to the learned counsel s. 80-IA(4), inter alia, qualifies an enterprise engaged in the business of operating and maintaining an infrastructure facility, for deduction under the said section and this is exactly the nature of the assessee's business. Even the learned CIT(A) at para 2.12 of the appellate order has admitted that the assessee has done, if not the entire operation and maintenance, at least a part of O&M in respect of the 3 ports, and, therefore, prima facie, the appellant should be eligible for deduction under s. 80-IA. Sec. 80-IA nowhere requires that the entire operation and maintenance of an infrastructure should be done by only one enterprise. All that the said section requires is that the enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... policy of the Gujarat Maritime Board placed at pp. 58 to 75 of the paper book and also the agreement between the Gujarat Maritime Board and Reliance Ports & Terminal Ltd. placed at pp. 17-47 of the paper book. Finally, it was submitted that on perusal of the facts of the case, it would be evident that the assessee has complied with all the conditions specified in s. 80-IA(4) in respect of the O&M business of Kakinada port and Jamnagar Jetty and as such there is no reason why deduction under the said section should be denied to the assessee. In the alternative, the deduction under s. 33AC is allowable. 8.5 The learned Departmental Representative, on the other hand, placed reliance on the orders of the Revenue authorities and submitted that the claim of the assessee for deduction does not come under the purview of s. 80-IA(4)(i) of the Act and hence the same has rightly been denied. He has taken us through the provisions of s. 80-IA of the Act to submit that legislative intention was to allow the benefit to only those persons who fulfil all the conditions and even if, per chance, some of the conditions are fulfilled, it cannot be said that such an assessee is entitled to claim dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintaining and operating or (iii) developing, maintaining and operating a new infrastructure facility subject to the condition that such infrastructure facility shall be transferred to the Central Government, State Government, local authority or such other statutory body, as the case may be, within the period stipulated in the agreement; (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 transfere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o dispute about the third condition about the date of starting of operating and maintaining the infrastructure facility. However, the second condition is that it has to enter into an agreement with the Central or State Government or specified authority for (i) developing, (ii) maintaining and operating; or (iii) developing, maintaining and operating a new infrastructure facility subject to the condition that such infrastructure facility shall be transferred to the Government or specified authority within the stipulated period mentioned in the agreement. According to the Revenue authorities, this condition has not been fulfilled in the instant case. But if we go through the proviso below s. 80-IA(4)(i), we see some exception in case where an infrastructure facility is transferred on or after the 1st day of April, 1999 by an enterprise (transferor) which developed such infrastructure facility to another enterprise (transferee) for the purpose of operating and maintaining the infrastructure facility on its behalf in accordance with the agreement with the Government and/or specified authorities and in that case the provisions of this section shall equally apply to the transferee enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating and maintaining it 39.5.1. The provisions of s. 80-IA provide that an infrastructure facility developed by an enterprise has to be ultimately transferred to the Central, State Government or local authority or such other statutory body, as the case may be within the stipulated period. To further encourage private sector participation, it is now provided in the newly inserted proviso to cl. (i) of sub-s. (4) of s. 80-IA that any person other than a developer (i.e., the O&M Contractor) may undertake operation and maintenance, before handing such facility to the Central Government, State Governments or statutory body, if the terms of the agreement so provide. The benefits and concession under s. 80-IA in such cases, for the remaining period out of the period of ten consecutive years, may be availed by the undertaking operating and maintaining such facility. Other conditions would remain the same in the amended provision." On reading of the above, it would be evident that with a view to encourage private sector participation, proviso to s. 80-IA(4)(i) was inserted. It says that O&M contractor may undertake operation and maintenance before handing over such facility to the Gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uild, own, operate and manage port facilities for a specific period. The Government will permit the developer to create a mortgage/hypothecation of real estate as a security for lenders to the project. This permission will be limited to BOOT period, after which the assets will be transferred back to the Government. The ownership of the land and waterfront will always vest with the Government." Emphasis, italicised in print, supplied). Page 39 "(III) Ownership rights of different parties 1. Ownership rights of the Government: The Government is vested with sovereign rights as owner, overseer and conservator of the waterfront and licensor to the contract. 2. Ownership rights and responsibilities of the developer: The ownership rights of the developer would include The right to mortgage, hypothecate or to execute such covenants as may be required for effectively vesting a charge on the port assets in favour of a lender. * The right to sell, conveyor transfer to another entity, the right title and interest and concession vested in the developer, on the request of a lender to the project, subject to contractual documents. The new developer will be selected by the lender in consult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsured that two persons are not getting deduction under s. 80-IA for maintenance of the same facility. This objection also has no basis to stand on. As stated above and admitted by the CIT(A) himself that at least a part of operation and maintenance in respect of infrastructure facility of three ports was being done by the assessee entitling it for deduction under s. 80-IA. The assessee's claim was restricted to its performance of job and it was concerned with that only. Therefore, this objection of the CIT(A) is not acceptable. 15. As noticed earlier, the observations of the AO and the CIT(A) are somewhat contradictory. In his appellate order, the CIT(A) has discussed the issue on the ownership basis by putting an example of a landlord. It is true that the assessee-company is not owner of the infrastructure facility. But s. 80-IA(4) does not provide that the infrastructure facility should be owned either by the enterprise developing the infrastructure facility or by the enterprise operating and maintaining the said facility. Proviso aims at granting deduction to enterprises engaged in the operation and maintenance of the infrastructure facility on behalf of the developers and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the profits earned on account of Kakinada Port and Jamnagar Jetty, the alternative contention of the claim of deduction under s. 33AC need not be considered. However, with regard to the income from Dahej Port operation, the case falls outside the proviso of s. 80-IA(4) since O&M of infrastructure facility has commenced prior to 1st April, 1999. It may not be out of place to mention that the deduction under s. 80-IA with regard to the profits from other two ports was also based upon proviso which is applicable only to cases where the O&M is sub-contracted after 1st April, 1999. Hence, the learned counsel restricted his contentions for deduction under s. 33AC in respect of Dahej Port only. 18. The learned counsel has filed written submission on this issue wherein he has highlighted the objections of the AO, as well as CIT(A) and also the reasons from the point of view of the assessee-company as to why the claim of deduction under s. 33AC is in accordance with law. The case of the learned counsel as per his written submissions are as under: "Without prejudice to the above, it is alternatively argued that the assessee should be granted deduction under s. 33AC of the IT Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inseparable part of its business of port operation and maintenance. Operation, of ports without tugs cannot be conceived. Reference was made to object-clause of the memorandum of the assessee-company at pp. 194 to 195 of the paper book, in particular cl. (3) of the main objects of the company, p. 195 and submitted that operation of ships is one of the main objects of the company. As such, the assessee has complied with the first part of sub-s. (1) of s. 33AC which qualifies a public limited company with the main object of carrying on the business of operation of ships for deduction under the said section. Regarding the business of operation of ships, it may be noted that the AO himself has admitted to the fact that the assessee has used 'ships' in its business. The assessee's contentions in this regard are that it has not only used' ships in its business, but is actually engaged in the business of operation of ships and has also earned profits from such business. For instance, for the years under appeal, the assessee had entered into an agreement with Reliance Port and Terminals Ltd. for technical management of 5 tugs belonging to Reliance Port and Terminals Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept the prohibited items in cl. (b) of sub-s. (2) the assessee is free to use the amount credited to the special reserve for the general purposes of the business of the assessee till it acquires a new ship. Thus, it can be seen that it is not a pre-condition at the threshold level that the assessee should own a ship for claiming the deduction under s. 33AC, but the assessee should be a Government company or a public company with the main object of carrying on the business of operation of ships. Whenever the legislature wanted to insist on the ownership of an asset it has specifically mentioned so, as in ss. 32, 32A, 32AB, 33 and 33A. As nothing is mentioned in s. 33AC about the ownership of ships, the legislature was not intending to make the ownership of ship a pre-condition at the threshold level for claiming deduction under S. 33AC. Even in the circulars issued by the CBDT, namely, Circular No. 554 of 13th Feb., 1990 and No. 636 of 31st Aug., 1992, wherein certain amendments of s. 33AC have been explained, the Board has been silent about the ownership of ship by the assessee at the threshold level. Unlike in s. 36(1)(viii), in s. 33AC there is a licence given to the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I to r. 5 of the IT Rules, 1962, and profits earned from operation of tugs will qualify for deduction under s. 33AC of the Act. Further, the assessee is also operating its own tugs at the Dahej Port and the Kakinada Port. These tugs have been registered as ships under s. 34 of the Merchant Shipping Act, 1958. As such, it is confirmed that both under the IT Rules, 1962 and under the Merchant Shipping Act, 1958, tugs are considered as ships. Again, as per the requirement of s. 33AC(1), the assessee-company has also transferred a sum of Rs. 2 crores each for asst. yrs. 2000-01 and 2001-02 out of the profits earned from the business of operation of ships to a reserve account viz. 'fleet reserve account' and these reserves have been utilized by the assessee in the manner laid down under sub-s. (2) of s. 33AC of the Act. As such, the assessee is entitled to deduction @ 50 per cent of the profits earned from operation of tugs for asst. yr. 2000-01 and 100 per cent of such profits for asst. yr. 2001-02 for all the three ports, viz. Dahej, Kakinada and Jamnagar subject to the amount transferred to 'fleet reserve account'. In the unlikely event that deduction under s. 80-IA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f profits in the P&L a/c cannot form a basis of denying deduction under s. 33AC of the Act. It is prayed that if an opportunity is given to the assessee, it is in a position to clarify the issue and work out the profits from the business of operation of ships and its claim under s. 33AC of the Act". 19. On the other hand, the learned Departmental Representative relied upon the orders of the authorities below. 20. It may be noted that in the preceding assessment year, the AO has allowed similar claim of the assessee under s. 33AC and it was also not disputed that the tugs are also considered as ships. In other words, the allowability of deduction under s. 33AC is not seriously challenged but merely contended that the provisions are not fulfilled. 21. We have carefully considered the rival contentions and perused the record. Admittedly similar claim was allowed in the previous year, but in the years under consideration the Revenue did not consider the alternative claim of the assessee for deduction under s. 33AC. Learned CIT(A) disallowed the claim mainly on the ground that the tugs are not ships and the assessee-enterprise is not a public company, overlooking the fact that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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