TMI Blog2016 (9) TMI 1296X X X X Extracts X X X X X X X X Extracts X X X X ..... g the addition made u/s.40A(2). - Decided in favour of assessee Disallowance of claim of deduction u/s.80IA(4) - absence of the operation and maintenance - Held that:- 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 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement for getting benefit of deduction under section 80-lA of the Act. Thus as 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) for allowing assessee’s claim for deduction u/s.80IA - Decided in favour of assessee - ITA No.200/Mum/2015 - - - Dated:- 28-9-2016 - SHRI R.C.SHARMA, AM SHRI AMARJIT SINGH, JM Revenue by : Shri Pradeep Kumar Assessee by : Shri Harshwardhan Datar ORDER 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving as under :- 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsection (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 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration' 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 canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 80lA 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 becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lfil 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 subclause (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: 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1st April 2001 has been inserted by Finance (No.2) Act 2009 which is as under: [Explanation. For the remo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer 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 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 manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract for work. On the other hand, where a manufacturer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 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 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, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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