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TMI Blog2012 (5) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is that the company had been allotted the work of development of infrastructure and handed it over to the Government as an infrastructure after completion and hence it is to be allowed as deduction under section 80IA(4) of the Act. In this case, the assessee has undertaken infrastructure development activities either individually or in a consortium of companies which is developing, maintaining and operating and developing, maintaining and operating as under:- 1. NALCO Captie Power Plant 2. NTPC Thermal Power 3. RITES Railway Lines 4. TATA Telecom 5. Reliance Inds In consortium with NIKO Resources of Canada Natural Gas The lower authorities were of the opinion that the assessee has not undertaken the infrastructure activities and it does not own the infrastructure itself and according to the assessing authority, the assessee only contractor carrying on construction of the infrastructure and therefore not eligible for deduction under section 80IA(4) of the Act. Accordingly, deduction under section 80IA(4) was denied by the lower authorities to the assessee. Aggrieved by the order of the CIT(A), the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 80-18 will not be included in computing the total income. This will remove the requirement of consequential 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tricity and specified marketable services in telecom. Instead of the 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/CBOT 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 80-IA." 4. 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) mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only developing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the question as to whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... move 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 specification or requirement is enunciated by the assessee constitutes a matter of business expedienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acility developed to the owner. He drew our attention to the copies of agreement entered with the State Government. He drew our attention to para-5 of the assessment order where the assessing officer noted as follows:- "5. In view of the aforesaid judicial pronouncements, "it can be held that deduction u/s 80-IA cannot be computed in respect those who only built the infrastructure facility but did not began to operate it, since in such cases, the computation provision of sub section (2) of section 80-IA fail. The harmonious construction of section 80-IA(2) and sub-clause (b) of clause (i) of sub-section (4) of section 80IA with other parts of section 80-IA is that the word 'developer' refer to an enterprise who builds and starts operating the infrastructure facility. The enterprise would be eligible for deduction from the year in which it starts operating the infrastructure facility. Without such operation, he cannot recoup its cost. The other way to recoup its cost is to transfer the facility to another person for certain consideration who in turn will recoup its cost of acquisition by operating it. But in such situation, the deduction will be allowed to the operator only and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the entire capital investment-was made by the Government/local authority/statutory body who awarded the contracts to the assessee. Hence it cannot be said that the assessee has entered into these contracts for developing an infrastructure facility in view of my discussion above where I have held that development of an infrastructure facility conceiving, designing, planning, financing, building and operating facility. 7.1 The Agreements entered by the assessee were for building or constructing the whole or part of the projects in which the entire investment was made by the Government and the assessee was paid on 'running bill to bill' basis. Hence, there was no stipulation in any of the contracts that the facility build will be transferred or handed over back to the owner/employer. Such contracts are not envisaged by the legislature for allowing the benefit of section 80IA of the Act. Thus, the assessee has, not fulfilled this condition of section 80IA(4)(i)(b)." He drew our attention to a sample of the agreement in which the nature of work is "Surveying, design, supply, installation, testing and commissioning lift irrigation on turnkey basis consisting of the following: Pumping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inserted the word 'or' between (i) and (ii) with effect from 1-4-2002, which is applicable to assessment year 2002-03. So with effect from the assessment year 2002-03, not only the enterprise (i) developing, (ii) operating and maintaining the infrastructure facility shall be entitled to deduction, but also the enterprise which is only (i) developing or (ii) operating and maintaining the infrastructure facility. From such year onwards the enterprise which only develops the infrastructure facility and thereafter transfers it to someone else for operating and maintaining on behalf of transferee shall also be covered for the purposes of granting benefit. The difference in the situation between assessment year 2002-03 onwards and prior two years is that whereas the operation and maintenance of the infrastructure facility on behalf of the enterprise developing is necessary in the former period, but in the later period, the operation and maintenance shall be on behalf of the transferee enterprise itself. Since in the years in question, the transfer of the enterprise for operation and maintenance has necessarily to be on behalf of the enterprise developing the infrastructure facility, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich it has been observed that in a contract for work, the person producing has no property in the thing produced as a whole, even if part or whole of the material used by him may have been his property earlier. He also relied on another judgment of the Hon'ble Supreme Court in the case of Tamil Nadu v. Anandam Vishwanathan [1989) 1 SCC 613 in which it was held that the nature of contract can be found only when the intention of parties is found out. The fact that in the execution of the works contract some material are used and the property in the goods so used passes to the other party, the contractor undertaking the work will not necessarily be deemed, on that account, to sell the material. It was, therefore, argued that the developer is a person who brings in additional resources by way of investment and technical expertise for developing the infrastructure facilities. Since the assessee had simply done a part of work of civil construction relating to the infrastructure facility, he stated that it is not eligible for deduction. 39. We find it as an undisputed position that the words 'developer' and 'contractor' have not been defined in or for the purposes of section 80-1A. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oming back to our point of ascertaining the meaning of the words 'contractor' as well as 'developer', which have neither been defined in the Act nor in the General Clauses Act, we fall upon Oxford Advanced Learner's Dictionary to find out their meaning. According to this dictionary, "developer" is a person or company that designs and creates new products, whereas "contractor" is a person or a company that has a contract to do work or provides services or goods to another. The New Shorter Oxford Dictionary defines the word "contractor" as : person who enters into a contract or agreement. Now chiefly spec. a person or firm that undertakes work by contract, esp. for building to specified plans". In the light of the meaning ascribed to these words by the dictionaries, it is observed that the developer is a person who designs and creates new products. He is the one who conceives the project. He may execute the entire project himself or assign some parts of it to others. On the contrary, the contractor is the one who is assigned a particular job to be accomplished on the behalf of the developer. His duty is to translate such design into reality. There may, in certain circumstances, be ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nceived with a view to provide an impetus to private sector participation in infrastructural projects. Contemporaneously, with the provisions which were made by Parliament in section 80-IA of the Act, explanatory circulars issued in an administrative capacity by the Central Board of Direct Taxes held the field. These circulars gave expression to the scope and ambit of the concession was provided by section 80-lA. The evolution of section 80-lA would show a progressive liberalisation of the legislative scheme, in the interests of aiding the growth of infrastructure. The administrative circulars issued by the Central Board of Direct Taxes in implementation of section 80-IA similarly liberalised the scheme, consistent with the Act. The expression "development" has not been artificially defined for the purposes of section 80-lA of the Act and must, therefore, receive its ordinary and natural meaning. An assessee does not have to develop the entire port in order to qualify for a deduction under section 80-lA. Parliament did not legislate a condition impossible of compliance. A port is defined to be an infrastructure facility and the circular of the Board clarified that a structure for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t intent underlying the amendment of the provision by the Finance Act of 2001 would be defeated. A harmonious reading of the provision in its entirety would lead to the conclusion that the deduction is available to an enterprise which (i) develops; or (ii) operates and maintains; or (iii) develops maintains and operates that infrastructure facility. However, the commencement of the operation and maintenance of the infrastructure facility should be after April 1, 1995. The assessee, in terms of the policy of the Government of India to encourage private sector participation in the development of infrastructure, bid for and was awarded a contract for leasing of container handling cranes at the Jawaharlal Nehru Port Trust (JNPT). In pursuance of the contract, the assessee deployed rail mounted quay side cranes, rail mounted gantry cranes and rubber tired gantry cranes at the container handling terminal of the JNPT. JNPT had a dedicated container handling terminal. According to the assessee, the only activities of the terminal consisted of loading, unloading and storage of containers. Under contracts dated September 2, 1994 and October 16, 1995, JNPT accepted the bid submitted by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cranes would be transferred to the port trust at no cost on the expiry of a period of ten years of the commencement of the contract. The obligations which had been assumed by the assessee under the terms of the contract were obligations involving the development of an infrastructure facility. Section 80-IA of the Act essentially contemplated a deduction in a situation where an enterprise carried on the business of developing, maintaining and operating an infrastructure facility. A port was defined to be included within the purview of the expression "infrastructure facility". The obligations which the assessee assumed under the terms of the contract were not merely for supply and installation of the cranes, but involved a continuous obligation right from the supply of the cranes to installation, testing, commissioning, operation and maintenance of the cranes for a term of ten years after which the cranes were to vest in JNPT free of cost. An assessee did not have to develop the entire port in order to qualify for a deduction under section 80-IA. The condition of a certificate from the port authority was fulfilled and JNPT certified that the facility provided by the assessee was an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The statutory provisions as would be apparent from the Circulars and Explanatory Notes referred to herein-above seek to incorporate a quid pro quo between introduction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the agreement, the assessee cannot be seen as a developer, instead he plays the role of an executor/contractor. Be that as it may, it was urged by 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 80IA(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. v. ITO [2008] 111 ITD 53 (Delhi). 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 whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, there is no point of comparability between the Pune Bench decision and the other cases. The unanswered questions emerging there-from are - (i) Can we assume that there was a BOLT contract or was it a works contract? (ii) Can we assume that the assessee took ownership control of the asset created? (iii) The circumstances under which the enterprise in ABG Heavy Industries Ltd. (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e jurisdictional High Court, prevails over an order of the Special Bench even though it is from the jurisdictional Bench of the Tribunal, however, where the judgment of the non jurisdictional High Court, though the only judgment on the point, has been rendered without having been informed about certain statutory provisions that are directly relevant, it is not to be followed." 19. Without prejudice to the argument that the stand that the 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 Ltd. (supra) that supports the view that the 'developer' has to seen de hors the contract and its stipulations. In the case of ABG Heavy Industries Ltd. (supra) 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain tests to determine whether the business was one of a 'developer' or a mere 'contractor'. The briefly stated facts are as follows: "The distinction between creation of product vs. Rendering of service (para-40), owner vs. Executor of owner's plan with reference to project specification (para-42), vesting of property, subject to retransfer if need be (para 46) and need for interpretation to avoid absurd results (para 50)" 20. The DR submitted that in view 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 & Sons Belgaum Construction (P.) Ltd. (supra). It is further submitted that the Mumbai High Court's decision in the case of ABG Heavy Industries Ltd. (supra) not only runs on different facts, it does not even refer to the case of B.T. Patil & Sons Belgaum Construction (P.) Ltd. (supra). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s clears that the enterprises carrying on development of infrastructure development should be owned by the company and not that the infrastructure facility should be owned by a company. The provisions are made applicable to the person to whom such enterprise belongs to is explained in sub-clause (a). Therefore, the word "ownership" is attributable only to the enterprise 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. 22. 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. 23. The next question is to be answered i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eloping the infrastructure facility. The losses suffered either by the Govt. or the people in the process of such development would be that of the assessee. The assessee hands over the developed infrastructure facility to the Government on completion of the development. Thereafter, the assessee has to undertake maintenance 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct would not be eligible for deductions under section 80IA of the Act. But, certainly, the Explanation cannot be read to do away with the eligibility of the developer; otherwise, the parliament would have simply reversed the Amendment made in the Finance Act, 2001. 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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