TMI Blog2005 (11) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure 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. In the proviso it is said provided that where an infrastructure facility is transferred . The proviso to s. 80-IA(4)(i) only provides for an intermediary phase between the development of the infrastructure facility by the developer and its ultimate transfer to the specified authority. It is during this period that an O M contractor (assessee) may step in for the purpose of operation and maintenance of the infrastructure facility on behalf of the developer before the ultimate transfer of the infrastructure facility to the specified authority and claim deduction in respect of profit earned from such activity u/s 80-IA. Here, in our considered view, the term 'transfer' should not be construed in a conservative manner so as to mean the transfer of ownership of the infrastructure facility to the specified authority. As stated earlier, the ownership of ports do not even vest with the developers of the port since waterfront is the sovereign right of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue to the file of the AO to recompute the deduction eligible u/s 33AC in respect of Dahej Port. In the result, the appeals of the assessee are partly allowed. - HON'BLE D. MANMOHAN, J.M. AND C. DHANUNJAYA RAO, A.M. For the Appellant : S.K. Tulsiyan, Adv. For the Respondent : Y.R. Rao, Adv. ORDER C. Dhanunjaya Rao, A.M.: 1. These two appeals by the assessee are directed against the consolidated order of the learned CIT(A)-III, Hyderabad, dt. 13th Aug., 2003 pertaining to asst. yrs. 2000-01 and 2001-02. As common issues are involved in both these appeals of the assessee, they are being disposed of by this common order for the sake of convenience. 2. The issue involved in these two appeals relate to deduction under s. 80-IA/33AC of the Act on the income derived by the assessee from the business of operation and maintenance of ports. Originally, the assessee raised grounds which were narrative in nature. Subsequently, the assessee filed revised grounds of appeal on the same issue, which are reproduced below: 1. The 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 assessee for deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 80-IA to the tune of Rs. 2,84,01,650 and Rs. 2,96,09,123, respectively. The claim under s. 80-IA was calculated at Rs. 3,16,15,016 and Rs. 4,16,25.384. however, the same was restricted to Rs. 2,84,01,650 and Rs. 2,96,09,123, respectively, for the asst. yrs. 2000-01 and 2001-02, being the income available before claiming the above deduction. The assessments were completed under s. 143(3) determining the total income of the assessee at Rs. 2,59,50,240 and Rs. 2,97,17,900 for these two years after disallowing the deduction claimed by it under s. 80-IA of the Act. 4. On perusal of the orders of the Revenue authorities and the documents filed, in the paper book, it is found that the assessee-company had entered into agreements in respect of development, operation and maintenance of the infrastructure facilities, viz., ports, with the developers thereof as under: (i) Kakinada Port-Cocanada Port Co. Ltd. (ii) Dahej Port-Dahej Harbour and Infrastructure Ltd. (iii) Jamnagar Jetty-Reliance Ports and Terminals Ltd. It would be pertinent to give a summary of the various agreements entered into by the assessee-company with the said developers of the ports. (i) Reg. : Kakinada Port : (a) I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. regarding sub-contracting of operation and maintenance service contract to the appellant-company-pp. 15 and 16. (ii) Re : Dahej Port The assessee-company had entered into an agreement with M/s Dahej Harbour Infrastructure Ltd. (DHIL) vide agreement dt. 29th July, 1998 to carry out operation and maintenance services of the port at Dahej. The said DHIL had entered into an agreement with Gujarat Maritime Board vide agreement dt. 11th Aug., 1999 (in continuation with original agreement) to develop, maintain and operate the port facility at the jetty at Dahej. The aforesaid port facility has been notified by the CBDT as infrastructure facility under s. 80-IA(4). (iii) Re : Jamnagar Jetty (a) Reliance Ports and Terminals Ltd. (RPTL) entered into an agreement with the Gujarat Maritime Board, a Board constituted under the Gujarat Maritime Board Act, 1981, on 28th July, 1999 to develop, maintain and operate the port infrastructure facilities located at Port Sikka, Jarimagar, on license basis on build, transfer, operate and maintain basis (b) In view of the above, the licensee, viz., RPTL subcontracted operations and maintenance services to the appellant-company as outsourcing is permissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had the power to sub-contract the operation and maintenance of the port infrastructure as and where necessary. Accordingly, the operation and maintenance services were sub-contracted to the assessee-company in accordance with the original agreement with the specified authorities. As such, the assessee-company's case being fully covered by the proviso to s. 80-IA(4)(i), it is righteously entitled to deduction under s. 80-IA of the Act. 6. The explanation and submission of the assessee were not found to be satisfactory to the AO. According to him, for claiming deduction under s. 80-IA(4)(i) of the Act, all the conditions enumerated in the said section must be satisfied. The section does not provide that satisfying one or few conditions by the assessee will entitle it for claiming deduction under this section. The assessee is not in the development of any infrastructure facility. The assessee claims that it has maintained and operated various infrastructure facilities, more specifically the ports. Referring to ss. 10(23G) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and at the end of the period, the second enterprise would handover the infrastructure back to Government/authority. On going through the observations of the AO, it is thus evident that the primary objection of the AO is that since the assessee is not required to hand over the infrastructure facility back to the Government/authority, its case is not hit by the said proviso. His other objection was that the assessee is not required to operate and maintain the entire infrastructure facility but only required to extend some specific services under the contract and this does not tantamount to maintaining and operating port infrastructure. To support his conclusion, the AO exemplified the issue by a chart appearing on p. 11 of the assessment order. It is in this context that the AO held that the claim of the assessee for deduction under s. 80-IA for both the assessment years under appeal for operating and maintaining infrastructure facility does not hold good and thus rejected. 7. The assessee went in appeal before the CIT(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( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tractor of a house or a mason and the appellant-company cannot put in the shoes of the owner. In these circumstances, I hold that the appellant has not fulfilled another important condition for getting deduction under s. 80-IA 8. Finally, referring to the explanatory notes from Circular No. 779, dt. 14th Sept., 1999 [(1999) 156 CTR (St) 17] with regard to amendment of s. 80-IA, the CIT(A) held that it is clear that only when the enterprise which developed the infrastructure had handed over the operation and maintenance of that infrastructure to a transferee company like that of the appellant, say in the seventh year, and the original developer had claimed deduction under s. 80-IA say, for six years, then for the remaining four years, the deduction under s. 80-IA can be given to the O M operator, provided the same deduction is not claimed by the original developer for those four years. According to the CIT(A), the assessee could not bring on record any evidence to show that the original promoters have not 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferor enterprise would have been entitled to the deduction, if the transfer had not taken place. As such, the proviso aims at providing deduction to enterprises engaged in operating and maintaining an infrastructure facility developed and transferred by the third category of enterprise referred to in sub-cl. (b) of s. 80-IA(4)(i) (developer-cum-operator-cum-maintainer) for the unexpired period during which the latter would have been entitled to deduction, if the transfer had not taken place. In this regard, it is pertinent to note that the proviso requires the transferee enterprise to operate and maintain the infrastructure facility on behalf of the transferor enterprise, meaning thereby that originally the transferor enterprise was required to operate and maintain such facility after development in accordance with the agreement with the specified authority. Thus, the proviso aims at qualifying the transferee enterprise, as enterprise eligible for deduction under this section provided the 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed either by the enterprise developing the infrastructure facility or by the enterprise operating and maintaining the said facility. Our attention was drawn to the order of the Mumbai Tribunal in the case of Patel Engineering Co. Ltd. vs. Dy. CIT, ITA No. 1221/Mum/2004 in which the Tribunal has categorically held that the enterprise need not be the owner of the infrastructure facility in order to claim deduction under s. 80-IA(4). It has been held that sub-cl. (a) of cl. (i) of s. 80-IA(4) requires 'the enterprise' and not 'the infrastructure facility' to be owned by a company registered in India. In the instant case, the assessee is a limited company registered in India. As such, the enterprise operating and maintaining the port infrastructure is owned by a company registered in India. As regards the contention of the AO that the assessee is not operating and maintaining the entire infrastructure facility, but only rendering certain specific service under the contract, it was 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 confirmatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transferor/developer enterprise and the specified authority. This agreement should provide for the ultimate transfer of the infrastructure facility to the specified authority. As far as the transferee enterprise is concerned, it is only required to operate and maintain the infrastructure facility on behalf of the transferor enterprise subject to condition that at the end of the period stipulated in the original agreement, the transferor or the developer enterprise would transfer or in other words hand over the infrastructure facility to the specified authority. In this connection, reference was made to the Circular No. 779, dt. 14th Sept., 1999 (Expl.) (F.A. 1999). It was, therefore, contended that the CIT(A)s' contention that since the appellant-company is not required to transfer the infrastructure facility to the specified authority and thus it is not entitled to deduction under s. 80-IA(4), is misconceived. In this connection, the learned counsel invited our attention to the Boot 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue have been elaborately discussed above in this order and hence we proceed to consider the issue on the undisputed facts as found by the tax authorities and wherever necessary, we shall clarify the specific facts. Before proceeding with the issue raised by both the parties, it may be necessary to reproduce the relevant s. 80IA which reads as under: 80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. (4) This section applies to- (i) any enterprise carrying on the business of (i) developing, (ii) maintaining and operating or (iii) developing, maintaining and operating any infrastructure facility which fulfils all the following conditions, namely: (a) it is owned by a company registered in India or by a consortium of such companies; (b) it has entered into an agreement with the Central Government or a State Government or a local authority or any other statutory body for (i) developing, (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 Central Government, St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) of s. 80-IA(4)(i) for the purpose of developing, operating and maintaining the said infrastructure facility, viz., port. (iv) That the said agreements between the developers and the specified authorities provided that the infrastructure facility would be transferred to the latter within the period stipulated in the agreement. However, the learned CIT(A) has denied the deduction to the assessee mainly on the following grounds: (i) That the appellant has not entered into an agreement with the Government. (ii) That the appellant has not transferred the infrastructure facility to the Government. (iii) That it is not ensured that two persons are not getting deduction under s. 80-IA for maintenance of the same facility. As per s. 80-IA(4)(i), three conditions are required to be satisfied for claiming deduction under the said section. There is no dispute about the first condition that the assessee is a company registered in India. There is also no 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Therefore, the objections raised by the CIT(A) that the assessee-company had not entered into an agreement with the Government and that it has not transferred the infrastructure facility to the Government and hence deduction of claim under s. 80-IA is not eligible to it, are beyond the aims and spirit provided in the said proviso to s. 80-IA(4)(i). Our above view also gets support from Circular No. 779, dt. 14th Sept., 1999 (Expl.) (F.A. 1999), the relevant portion reads as under: 39.5 Concession for infrastructure facility and industrial parks may be availed of by persons operating 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period. In the case of Patel Engineering Ltd., the Mumbai Tribunal has ruled that the handing over of the possession of the developed infrastructure facility/project is the transfer of infrastructure facility/project by the developer to the Government/authority. Here, in this case, the developer is required to transfer the infrastructure facility to the specified authority within the period stipulated in the original agreement between the developer and the authority. As such, the learned CIT(A)'s contention that since the appellant-company is not required to transfer the infrastructure facility to the specified authority, it is not entitled to deduction under s. 80-IA(4) is, in our opinion, misunderstood. The assessee has filed Boot policy of the Gujarat Maritime Board which throws light on this issue. Pages 33 and 39 of the Boot policy state as under: Page 33 Government will grant licence/concession to private developer to build, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance of the port infrastructure. In our opinion, therefore, the assessee, has complied with the requisite conditions specified under the proviso to s. 80-IA(4)(i) of the Act and entitled to deduction. In this connection, it would not be out of the context to refer to the decision of Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. vs. CIT (1992) 104 CTR (SC) 116 : (1992) 196 ITR 188 (SC) wherein it has been held that the deduction provisions should be construed liberally. It has been further held as under: A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. 14. The other objection raised by the CIT(A) is that it is not ensured 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 faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst this our attention was drawn by the Authorised Representative to pp. 15, 16, 56 and 128 of the paper book wherein the confirmations from the counter-parties to the agreements admitting that the services rendered by the assessee-company are essentially in the nature of operation and maintenance of the port infrastructure. Sec. 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 and hence, in our considered opinion, the assessee is eligible for deduction in terms of proviso to s. 80-IA(4)(i) of the Act. Hence, we direct the AO to compute the deduction allowable under s. 80-IA(4) in respect of the profits pertaining to Kakinada Port and Jamnagar Jetty Port. 17. Since we have accepted the main contention of the assessee with regard 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sub-s. (2) of the said section. Further, the second proviso to s. 33AC(1) provides 100 per cent deduction in respect of profits earned from operation of ships for five assessment years commencing on or after the 1st day of April. 2001, and ending before the 1st day of April, 2006. The primary objection of the AO is that the assessee is engaged in various port operations and that although the assessee is using ships in its business but operation of ships is not yielding revenue. In this regard, it is pertinent to note that the assessee has never denied that it is engaged in port operations. Rather, the assessee-company's engagement in the business of port operation and maintenance is the very basis for claiming deduction under s. 80-IA. This, however, does not alter the fact that the assessee is also engaged in the business of operation of ships (i.e., tugs), which forms an integral and 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year. Thus, it can be seen that the deduction is only income based and not asset related. Further, cl. (b) of sub-s. (2) of s. 33AC gives a licence to the assessee to utilise the amount credited to the special reserve for the purposes of the business of the assessee other than for distribution of dividends or profits or for remittance outside India as profits or for creation of any asset outside India until the acquisition of a new ship as contemplated in cl. (a) of sub-s. (2) of s. 33AC. Thus, the assessee is entitled and empowered by cl. (b) of sub-s. (2) of s. 33AC to utilise the profits credited to the special reserve for the purposes of its business (other than for acquiring the ship) until the acquisition of a new ship except by way of distribution of dividends or profits or for remittance outside India as profits or for creation of any asset outside India. In other words, except 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has, however, opined that the appellant-company was formed to carryon O M operations in ports and during such O M operations, the appellant-company has to run some tugs, but operating the tugs cannot be equated with operation of ships. In this regard, it is submitted that the term 'ship' per se has not been defined in the IT Act, 1961. However. 'ship' has been defined under Appendix I to r. 5 of the IT Rules, 1962 as under: 'IV. Ships (1) Ocean-going ships including dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purposes and fishing vessels with wooden hull. (2) Vessels ordinarily operating on inland waters, not covered by sub-item (3) below. (3) Vessels ordinarily operating on inland waters being speed boats.' As such, tugs, are also ships in accordance with the express definition provided under Appendix 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing much needs to be said in this regard. The name of the appellant-company, viz., 'Ocean Sparkle Ltd.' itself suggests that it is a public limited company and not a private limited company. The allegation of the CIT(A) is baseless and without taking into consideration the factual aspects of the case. Another ground taken by the AO in denying the assessee's claim under s. 33AC is that the books of account and records are not maintained in such a way to ascertain the profits derived from the operation of ships. In this regard, it is most humbly submitted that no opportunity of being heard was given to the assessee. The business of operation of tugs is a part of the assessee's business of port operation and maintenance and as such, the overall profit from port operation was depicted in the P L a/c of the company. However, the manner of presentation of 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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