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TMI Blog2012 (8) TMI 1011X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and defect correction and liability period is to be computed by the Assessing Officer on pro rata basis of turnover. - ITA No. 1292/Hyd/2010 - - - Dated:- 27-8-2012 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and SHRI SAKTIJIT DEY, JUDICIAL MEMBER Appellant by: Sri S. Rama Rao Respondent by: Sri K. Gnana Prakash O R D E R PER CHANDRA POOJARI, AM: This appeal by the assessee is directed against the order of the CIT(A)-IV, Hyderabad dated 10.8.2010 for A.Y. 2007-08. 2. The assessee is in appeal before us with regard to disallowance of deduction u/s. 80IA of Income-tax Act, 1961. The assessee claimed deduction on various projects executed by the assessee claiming the work undertaken by it as execution of irrigation projects which constitute the business of development of infrastructure facilities as per definition of infrastructure facility given in section 80IA(4) of the Act. The same was denied by the lower authorities. Against this action of the lower authorities, the assessee is in appeal before us. 3. The learned authorised representative of the assessee drew our attention to the provisions of section 80 IA (4) of the Act. He re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amendment in section 10(23G) as a result of any future change in section Bo-IA regarding infrastructure. 17.4 This amendment will take effect from 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent assessment years. [Section 5(g)] Tax holiday for infrastructure rationalised 47.1 Under the provisions of section Bo-IA, roads, highways, bridges, airports, ports and rail systems are regarded as infrastructure facility and the enterprises engaged in developing or operating and maintaining or developing, operating and maintaining such infrastructure are entitled to a tax holiday for five years and a deduction of 30% of profits for the next five years. This benefit is applicable in respect of such specified infrastructural facility becoming operational on or after 1st April, 1995. The enterprise claiming such benefit has to enter into an agreement with the Central or State Government or a local authority or any other statutory authority, by which the enterprise which develops such facility, has to transfer such facility to the Government or public authority after the stipulated period. In other words, the req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e words industrial undertaking occurring in section 8O-IA, the word undertaking has also been substituted in the provision for the same reason. 47.6 These amendments will take effect from the 1st day of April, 2002, and will, apply in relation to the assessment years 2002-03 and subsequent years. On reading the above section and the notes on clauses / CBDT Circular it is very clear ~ that with effect from 1-4-2002 the enterprises engaged in developing or operating and maintaining or developing, operating and maintaining such infrastructure are entitled to a tax holiday. Earlier to the above substitution there was no 'or' between the word M developing, (ii) maintaining and operating or (iii) developing, maintaining and operating, on entering into an agreement with Government would be eligible for deduction under section 801A. 5. From the above, he submitted that the enterprises engaged in developing or operating and maintaining or developing, operating and maintaining such infrastructure are entitled to a tax holiday. Earlier to the above substitution there was no word 'or' between the word developing, (ii) maintaining and operating or (iii) dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eloping an infrastructure facility/project and is not maintaining nor operating it, obviously such an assessee would be paid for the cost incurred by it; otherwise, how would the person, who develops the infrastructure facility project, realize its cost? If the infrastructure facility, just after its development, is transferred to the Government, naturally the cost would be paid by the Government. 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 presupposes that there can be income to developer, i.e., to the person who is carrying on the activity of only developing infrastructure facility. Obvious, as it is, a developer would have income only if he is paid for development of infrastructural facility, for the simple reason that he is not having the right/authorization to operate the infrastructure facility and to collect toll there from and has no other source of recoupment of his cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e substituted Explanation. Clauses (a) to (d ) are the same as clause (a ) to (d) of the erstwhile Explanation III. However, the Explanation (e ) has now been inserted. [Para 26] What has weighed in the introduction of clause (e ) of the Explanation was ongoing litigation on the question as to whether TDS was deductible on outsourcing contracts. Clause (e) was introduced to bring clarity on this issue or, in other words, to remove the ambiguity on the question. Clause (e) as introduced contains a positive affirmation that the expression 'work' will cover manufacturing or supplying a product, according to the requirement or specification of a customer, by using material purchased from such a customer. Clause (e) has placed the position beyond doubt by incorporating language to the effect that the expression 'work' shall not include manufacture or supply of a product according to the requirement or specification of a customer by using material which is purchased from a person other than such customer. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, was in the nature of a clarification. Where an explanatory provision is brought to remove an ambiguity or to clear a doubt, it is reflective of the law as it has always stood in the past, whereas, in the instant case, an Explanation is introduced statutorily to adopt an understanding of the law-both in the form of the circulars of the CBDT and in judicial decision. The Parliament must be regarded as having intended to affirm that intent. In the instant case, the intent has held the field for over three decades. [Para 28) The fact that the specifications were provided by the assessee to the manufacturer/supplier would make no difference to the legal position. The agreement in the instant case was on a principal-to-principal basis. The manufacturer had his own establishment where the product was manufactured. The material required in the manufacture of the article or thing was obtained by the manufacturer from a person other than the assessee. The property in the articles passed upon the delivery of the product manufactured. Until delivery, the assessee had no title to the goods. The goods had an identifiable existence prior to delivery. [Para 31) The reason that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f project on turnkey basis. Broadly the technical nature of the work undertaken by the assessee is as follows: i) Designing and Manufacturing of pipes: The assessee specially designed and manufactured Pre-stressed concrete pipes and it has been done in accordance with specific requirements. ii) Design and manufacturing of pipe fittings or specials. iii) Transporting, Laying and Joining of pipes conforming with specifications. The activity involves earth work excavation, trench excavation, hard rook blasting, lowering and laying of pipes, fitting of specials, fitting of rubber rings at the joints, testing pipe joints and pipeline. iii) Construction of pump house, providing and fitting of pump sets. Supply and fitting of submersible pumps, centrifugal pumps, turbine pumps, submersible motors, motors for turbines and centrifugal pump sets, transformer, generator, panel boards etc. iv) Design and construction of raw water pumping stations, water treatment plant, treated water pumping station, treated water transmission main, construction of surge tank and pipe connection arrangement, booster stations, internal transmission main and feeder mains, cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt years. He submitted that out of the above agreements the contracts which are undertaken as turnkey projects are entitled for deduction u/s 80IA. 10. According to the authorised representative, all the contracts of the site which was handed over by the Government Bodies to the assessee for development of the infrastructure facility and on completion, in few cases after operation for certain period, the entire site with the infrastructure facility developed to the owner. He submitted that the lower authorities wrongly relied on the order of the Tribunal in the case of Patel Engineering Limited (94 ITD 411) wherein the Tribunal has not considered the retrospective amendment by Finance Act, 2007. According to the authorised representative, after amendment to section 80IA(4)(i)(b) which reads as 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 (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility; the word it means undertaking and develop is independent of operating and maintaining or developing, operating and maintai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made it a developer entitled to deduction. Shri Vijay Mehta, the learned counsel for the intervener contended that the works contract has not been defined in the context of section 8o-IA and, hence, in the absence of assignment of any definition by the statute, its meaning should be understood in the common parlance. According to him, a developer is a person who develops the facility and such person mayor may not be a contractor. On the other hand, a contractor is stated to be a legal term whose rights and duties vis-a-vis contract are determined by way of legal document called the contract. He cited an example that if a contract to construct a highway from Mumbai to Delhi is given to a person he is contractor as well as developer. As against that a person who has been given a contract for painting or beautification is merely a contractor but not a developer. According to him, while developing a project, a developer has to make technological inputs, entrepreneurial inputs, etc. Besides, there is financial involvement in terms of deployment of man and machine as well as bank guarantees. He went on to explain that the developer undertakes the risk and reward of the project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actments, cannot be automatically applied in the present context. In order to ascertain the meaning of a word not defined in the Act, a useful reference can be made to the General Clauses Act, 1897. If a particular word is not defined in the relevant statute but has been defined in the General Clauses Act, such definition throws ample light for guidance and adoption in the former enactment. According to section 3 of the General Clauses Act, the definitions given in this Act shall have applicability in all the Central Acts unless a contrary definition is provided of a particular word or expression. On scanning section 3 of the General Clauses Act, we observe that neither the word 'contractor' nor 'developer' has been defined therein. Thus, the General Clauses Act is also of no assistance in this regard. Going ahead, when these words are neither defined in the Income-tax Act, 1961 nor in the General Clauses Act, the next question is that where from to find the meaning of such words. There is no need to wander here and there in search of answer which has been aptly given by the Hon'ble jurisdictional High Court in the case of Abdulgafar A. Nadiadwala v. Asstt. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The role of developer is much larger than that of the contractor. It is no doubt true that in certain circumstances, a developer may also do the work of a contractor but a mere contractor per se can never be called as a developer, who undertakes to do work according to the pre-decided plan. 41. Further it is relevant to note that the word developing used in sub-section (4) is with reference to infrastructure facility . When we further peruse the meaning of the word infrastructure facility as per Explanation, it is found to have been defined exhaustively by referring to a road project, airport, port, etc., a highway project, a water supply project and irrigation project, etc. Therefore, the use of word developing in juxtaposition to infrastructure facility indicates that what is eligible for deduction under this sub-section is the profits and gains derived from the development of infrastructure facility and not something de hors it. So in order to be eligible for deduction the development should be that of the infrastructure facility as a whole and not a particular part of it, as has been contended by the Id. AR. It may be possible that some part of development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trued by the authorities at all material times, to cover within its purview the development of an infrastructure facility under a scheme by which an enterprise would build, own, lease and eventually transfer the facility. This was perhaps a practical realisation of the fact that a developer may not possess the wherewithal, expertise or resources to operate a facility, once constructed. Parliament eventually stepped in to clarify that it was not invariably necessary for a developer to operate and maintain the facility. In Bajaj Tempo v. CIT [1992]196 ITR 188, the Supreme Court emphasized that a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. In the present case, the administrative circulars issued Central Board of Direct Taxes proceeded on that basis by adopting a liberal view of the scope and ambit of the provisions of section 80-IA of the Act. Parliamentary intervention endorsed the administrative practice. After section 80-IA was amended by the Finance Act of 2001, the section applies to an enterprise carrying on the business of (i) developing; or (ii) operating; maintaining; or (iii) developing, operating and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by the assessee. Under the contracts, JNPT reserved the right to exercise the option to request the assessee to carry out both operation and maintenance during the lease period or to carry out only maintenance while operation was done by JNPT. The contracts stipulated, inter alia, the submission of a performance guarantee bond representing 10 per cent of the average annual contract value computed with reference both to maintenance and operation. The assessee assumed the responsibility of making the equipment available for operation for a minimum number of days as stipulated in the contract and became liable to pay liquidated damages for nonavailability of the equipment after commissioning. After the expiry of the lease period of ten years, the assessee was liable to hand over the equipment to JNPT free of cost. Under the contract the assessee furnished an indemnity to JNPT towards damages that may be sustained to the equipment or to any property of the port trust or to the lives persons or properties of others. The assessee assumed other contractual obligations including amongst them, the liability to insure the equipment, to indemnify JNPT towards the claims of workers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee was also maintaining the cranes was not disputed. The facility was commenced after April 1, 1995. The assessee was entitled to the special deduction under section 80-IA . 12. The learned counsel for the assessee placed reliance on two decisions- Mumbai High Court in the case of CIT vs. ABG Heavy industries Limited 322 ITR 323 and ITAT Pune Bench in the case of Laxmi Civil Engineering Pvt. Ltd., vs. Addl. CIT Kolhapur (unreported/ITA No. 766/Pn/09 dated 8-6-2011). It was urged by the learned authorised representative that these decisions supported the proposition that (i) the ITAT s decision in the case of B.T. Patil Sons, Larger Bench (Mumbai) reported in 126 TTJ 577 is no longer good law, and (ii) the distinction between developer and contractor is no longer relevant in the context of changed law explained by the Mumbai High Court in the case of ABG Heavy Industries (supra) and followed within its jurisdiction by the Pune Bench of the ITAT in the case of Laxmi Civil Engg. (supra). Further, he submitted that order of the Tribunal relied by the Departmental Representative in ITA No. 2932/Mumbai/2010 relating to the A.Y 2006-07 in the case of The Indian hom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of investment and entrepreneurial resources from the private sector and a tax deduction from the government to enable recoupment of expenditure incurred. The BOT/BOOT models seek to augment infrastructural assets in addition to governmental spending and not simply feed on government expenditure. The deduction under section 80IA is, therefore, available to the former, and not to the latter forms of business. The deduction claimed under section 80IA of the Act as prescribed in sub-section (1) is in accordance with and subject to the provisions of this section.... in sub section (2), it is stated that the deduction is available for the specified number of years brining from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication services or... it is clear therefore that the deduction is inextricably connected to the commencement of operations of the infrastructure facility. It is immediately apparent that the facility has to be conceived of in its totality because part of the infrastructure facility has not existence independent of the whole. A certain number of kilometres of a highway o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the departmental representative in the reply that the issue whether the assessee was a developer for the purposes of section 80IA after the changes in law w.e.f. 1-4- 2002 is not material for adjudication of the grounds in the impugned appellate orders. This is because in so far as the contracts in question are in the nature of works contracts, the explanation inserted below section 80IA (13) with retrospective effect from 1-4-2000 has over-riding influence and debars the assessee s claim. Further it is contended that the introduction of the explanation below section 80 IA(13) in 2007 with retrospective effect from 1-4-2000 puts matters beyond doubt. The law on the subject of application of a retrospective amendment is clear from the special Bench decision of the Tribunal in the case of Aquarius Travels P Ltd. Vs. ITO (111 ITD 53). Such provisions should be applied in pending proceedings, even when they have not been involved earlier. As matters stand, therefore, the most important question for examination on facts is whether the business agreement in question can be termed a works contract or not. If the answer is in affirmative, nothing else matters because the Explanation take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e circumstances under which the enterprise in ABG Heavy Industries became akin to a developer, and do they obtain in the case of LCE? Such as 10 year ownership; retransfer; assumption of assured responsibility regarding operational readiness, etc., noticed in ABG Heavy Industries are not noticed in the facts of the case as digested by the afore mentioned decision of the Pune Bench of the ITAT in the case of LCE. iv) The unbundling of conditions of development, operation maintenance, and development operation and maintenance, in the sense of making them non cumulative by amendment of law effective from 1-4- 2002 is not the only relevant issue. The larger issue is whether the assessee is a developer in the first place. v) In the case of B.T. Patil, the cumulative or non cumulative satisfaction of conditions in section 80IA(4)(i) was never a material fact. This was so not only because the impugned appeals related to pre 1-4- 2002 period, but also because the matter was decided on the preliminary issue of whether the assessee was a developer or not in the first place. vi) Some of the attributes of a developer were discussed in the case of B.T. Patil, none of whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Mumbai High Court s order in ABG runs on completely different facts, it is respectfully pointed out that this decision cannot be a binding precedent, in any case, for the above-cited reason also and this issue can be seen in another perspective. There is nothing in the case of ABG Heavy Industries that supports the view that the developer has to e seen de hors the contract and its stipulations. In the case of ABG Heavy Industries the Revenue took the stand that the assessee was not a developer because it was only a supplier of the equipment. This did not find favour because it was held that the nature of the business had to be seen in terms of the obligations assumed under the contract which included not only supply and installation of the cranes but also testing, commitment of operational readiness for a period of ten years on the pain of liquidated damages and eventual re-transfer after such period. In the case of ABG Heavy Industries, the creation of certain standalone parts of the part complex qualified for being termed on infrastructure project because the Board Circular 793 dated 23-6- 2000 clarified that part of the project would qualify if so certified by the Port ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the terms of the relevant contract, it was possible to give a finding that the business was not one of development per se. Therefore, the changes in law after 1-4-2002 were not even called into play in the case of B.T. Patil. It is further submitted that the Mumbai High Court s decision in the case of ABG Heavy Industries not only runs on different facts, it does not even refer to the case of B T Patil. Furthermore, the Mumbai High Court s stand that the nature of the business should be seen in the context of the obligations assumed under the contract only complements, not contradicts the larger Bench s distinction between a developer and contractor simpliciter, as noted hereinabove. It would be wrong and therefore to suggest that the case of B.T. Patil has been impliedly over-ruled by the High Court s decision. The departmental representative also places reliance on another decision of the Mumbai Bench of the Tribunal in the case of Indian Hume Pipe Co. Ltd., vs. DCIT ITA No. 5172/Mum/2008, dated 29-7-2011 for assessment year 2004-05 wherein held that the company was not entitled to deduction u/s 80IA(4) of the Income Tax Act 1961 as it was only a works contract and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise carrying on the business which would mean that only companies are eligible for deduction under section 80IA (4) and not any other person like individual, HUF, Firm etc. 25. We also find that according to sub-clause (a), clause (i) of sub section (4) of Section 80-IA the word it denotes the enterprise carrying on the business. The word it cannot be related to the infrastructure facility, particularly in view of the fact that infrastructure facility includes Rail system, Highway project, Water treatment system, Irrigation project, a Port, an Airport or an Inland port which cannot be owned by any one. Even otherwise, the word it is used to denote an enterprise. Therefore, there is no requirement that the assessee should have been the owner of the infrastructure facility. 26. The next question is to be answered is whether the assessee is a developer or mere works contractor. The Revenue relied on the amendments brought in by the Finance Act 2007 and 2009 to mention that the activity undertaken by the assessee is akin to works contract and he is not eligible for deduction under section 80IA (4) of the Act. Whether the assessee is a developer or works co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the said infrastructure for a period of 12 to 24 months. During this period, if any damages are occurred it shall be the responsibility of the assessee. Further, during this period, the entire infrastructure shall have to be maintained by the assessee alone without hindrance to the regular traffic. Therefore, it is clear that from an un-developed area, infrastructure is developed and handed over to the Government and as explained by the CBDT vide its Circular dated 18-05-2010, such activity is eligible for deduction under section 80IA (4) of the Act. This cannot be considered as a mere works contract but has to be considered as a development of infrastructure facility. Therefore, the assessee is a developer and not a works contractor as presumed by the Revenue. The circular issued by the Board, relied on by learned counsel for the assessee, clearly indicate that the assessee is eligible for deduction under section 80IA (4) of the Act. The department is not correct in holding that the assessee is a mere contractor of the work and not a developer. 27. We also find that as per the provisions of the section 80IA of the Act, a person being a company has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the aforesaid Explanation was inserted, certainly, to deny the tax holiday to the entities who does only mere works contact or sub-contract as distinct from the developer. This is clear from the express intension of the parliament while introducing the Explanation. The explanatory memorandum to Finance Act 2007 states that the purpose of the tax benefit has all along been to encourage investment in development of infrastructure sector and not for the persons who merely execute the civil construction work. It categorically states that the deduction under section 80IA of the Act is available to developers who undertakes entrepreneurial and investment risk and not for the contractors, who undertakes only business risk. Without any doubt, the learned counsel for the assessee clearly demonstrated before us that the assessee at present has undertaken huge risks in terms of deployment of technical personnel, plant and machinery, technical know-how, expertise and financial resources. 29. As per submission of the assessee s counsel broadly the technical nature of the work undertaken by the assessee is as follows: i) Designing and Manufacturing of pipes: The assessee spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has been inserted w.e.f. 1-4-2002 by Finance Act 2001. 31. Accordingly, the assessee is entitled for deduction under section 80IA of the Act on the projects which involve above activities. Therefore, in our considered view, the assessee should not be denied the deduction under section 80IA of the Act if the contracts involves development, operating, maintenance, financial involvement, and defect correction and liability period, then such contracts cannot be called as simple works contract to deny the deduction u/s 80IA of Act. In our opinion the contracts which contain above features to be segregated on this deduction u/s. 80-IA has to be granted and the other agreements which are pure works contracts hit by the explanation section 80IA(13), those work are not entitle for deduction u/s 80IA of the Act. The profit from the contracts which involves development, operating, maintenance, financial involvement, and defect correction and liability period is to be computed by assessing officer on pro-rata basis of turnover. The assessing officer is directed to examine the records accordingly and grant deduction on eligible turnover as directed above. It is needless to say that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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