TMI Blog2014 (9) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... a statute and not created by a statute is not an important criteria. The test relating to the purpose, State control and functions performed are more important and determinative of the issue. Such tests, in our view, are clearly applicable in the case of SSNNL, and it is to be understood as an entity specified in section 80IA(4)(i)(b) of the Act.In the light of the aforesaid discussion, in our view, SSNNL being a mere extended arm of the Government of Gujarat carrying out governmental functions can be understood as an entity qualifying for consideration u/s 80IA(4)(i)(b) of the Act. The objection of the Revenue in this context is thus rejected. Whether assessee was not a ‘developer’ so as to be eligible for deduction u/s 80IA(4) of the Act? - Held that:- . In the present case, the assessee has used own-developed technology and its own resources to conceptualize, design, erect, commission, test and operate the ‘Saurashtra Branch Canal Pumping Scheme’. Therefore, in our view, assessee is to be understood as a ‘developer’, and distinct from a ‘contractor’ qua the impugned contract awarded by SSNNL. The judgement of the Hon’ble Bombay High Court in the case of CIT vs. ABG Heavy Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts undertaken by the assessee in different assessment years. So however, such a difference can only be a basis to further verify the factual aspects, but the difference in profit-ratio by itself, cannot be a ground to disbelieve the same. The Assessing Officer has not brought out any cogent material or evidence to say that the profits declared by the assessee, based on the audited books of account suffer from any infirmity. Therefore, action of the CIT(A) deleting the disallowance of ₹ 6,63,61,181/- out of deduction u/s 80IA of the Act is hereby affirmed. Allowance of Provision for warranty - Held that:- It was a common point between the parties that the Provision for warranty cannot be considered as a contingent liability following the judgement of the Hon’ble Supreme Court in the case of Rotork Control India P. Ltd. (2009 (5) TMI 16 - SUPREME COURT OF INDIA ). The CIT(A), in our view, has correctly decided the issue in the light of the judgement of the Hon’ble Supreme Court, which we hereby affirm - ITA No. 657/PN/2010 & ITA No. 671/PN/2010 - - - Dated:- 17-9-2014 - SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER Assessee by: Mr. C.H. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he core business of undertaking large infrastructure projects in Water Supply, Power Plants and Irrigation, as well as supply of Industrial Pumps, Agricultural Pumps and Domestic Pumps, Valves, Motors and Hydro Turbines, etc.. During the financial year 2002-03, assessee was awarded the work of Saurashtra Branch Canal Pumping Scheme to be executed on Turnkey Contract basis by SSNNL, a fully Government of Gujarat owned entity. Sardar Sarovar dam is constructed at Nagagam, Dist. Bharuch (Gujarat). One canal from the dam goes to the State of Rajasthan for irrigation and water supply purposes. A branch of this main canal has been carried out in the westerly direction towards the area of Saurashtra Kutch, which are perennially drought affected areas of Gujarat State. While taking water through this branch canal to Saurashtra area, having regard to topography of the area the water had to be lifted to a height of about 200 feet in a stretch of 44 KMs. Since SSNNL did not have the necessary solution, assessee company was appointed to execute the said pumping scheme. Accordingly, assessee executed the pumping scheme by conceptualizing, designing, engineering, manufacturing, erecting, tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80IA of the Act was not fulfilled. As per the Assessing Officer, assessee was merely engaged in the activity of manufacture and supply of pumps and related equipments; and, the consideration was received for supply of pumps and equipments to SSNNL. Further, the Assessing Officer held that assessee executed a works contract and acted as a contractor, and he also referred to the Explanation inserted below section 80IA of the Act by Finance (No.2) Act, 2009 w.r.e.f. 01.04.2000 whereby it is clarified that such deduction would not be available in relation to a business which involves execution of a works contract. As per the Assessing Officer, entire investment in the project has not been made by the assessee company and 80% of the project cost has been received from SSNNL, hence it could not be said that assessee funded the project without assistance from SSNNL. For all the above reasons, the claim of deduction u/s 80IA(4) of the Act was denied by the Assessing Officer. The CIT(A) has also upheld the stand of the Assessing Officer and accordingly, assessee is in appeal before us. 6. Before us, the learned counsel for the assessee has furnished a detailed Paper Book which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d maintaining or (iii) developing, operating and maintaining] 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 [or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act;] [(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 or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility;] (c) it has started or starts operating and maintaining the infrastructure facility on or after the 1st day of April, 1995: Provided that where an infrastructure facility is transferred on or after the 1st day of April, 1999 by an enterprise which developed such infrastructure facility (hereafter referred to in this section as the transferor enterprise) to another enterprise (hereafter in this section referred to as the transferee enterprise) for the purpose of operating and maintaining the infrastructure facility on its behalf in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (4) of section 80IA of the Act prescribes that the enterprise referred therein shall fulfill the conditions prescribed by way of sub-clauses (a), (b) and (c). In terms of sub-clause (a), it is provided that enterprise carrying on the eligible business should be owned by a company registered in India or by a consortium of such companies or by an authority or a board or a corporation or any other body established or constituted under any Central or State Act. Sub-clause (b) provides that the enterprise carrying on the eligible business should have entered into an agreement with the Central Government or State Government or a local authority or any other statutory body for (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining a new infrastructure facility. Sub-clause (c) prescribes that the enterprise should start operating and maintaining the infrastructure facility on or after the 1st day of April, 1995. Ostensibly, the aforesaid three conditions are required to be fulfilled before an enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndition prescribed in section 80IA (4)(i)(b) of the Act has not been complied with. 11. Per contra, the learned counsel for the assessee has vehemently reiterated the position of the assessee taken before the lower authorities to the effect that the contract with SSNNL fulfills the condition prescribed in section 80IA(4)(i)(b) of the Act. The arguments of the assessee are two-fold. Firstly, it has referred to the judgements of the Hon ble Supreme Court in the case of (i) Som Prakash Rekhi vs. Union of India Anr., 1981 AIR 212; and, (ii) Pradeep Kumar Biswas Ors. vs. Indian Institute of Chemical dated 06.04.2002, copies of which have been placed on record. On the basis of the aforesaid judgements, it is canvassed that an entity, like SSNNL, is liable to be considered as an instrumentality or an agency of the Government, and thus, it qualifies to an entity specified in section 80IA(4)(i) of the Act. Secondly, it is sought to be made out that having regard to the background and peculiar features of SSNNL, the said concern is executing Governmental functions and is not engaged in any commercial activities. A reference has also been made to the Memorandum and Articles of Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdar Sarovar Construction Advisory Committee set up by the Central Government pursuant to the decision of the Narmada Water Disputes Tribunal. The directions that may be issued by the Narmada Control Authority and the Review Committee appointed by the Central Government pursuant to the decision of the Narmada Water Disputes Tribunal are also required to be complied by SSNNL. 13. The other objects, inter-alia, include undertaking resettlement and rehabilitation of the population affected by the Sardar Sarovar project; to construct, operate and maintain hydro power generation stations along with 1 canal system, transmission lines, etc.. The objects also include promoting schemes in the State of Gujarat for flood control in the Narmada river basin and schemes for irrigation and water supply in the State for utilization of water from Sardar Sarovar. In sum and substance, the objects to be pursued by SSNNL are pre-dominantly functions which are ordinarily performed by Government. 14. On this point, we may refer to the decision of the Ahmedabad Bench of the Tribunal in the case of JCIT vs. Sardar Sarovar Narmada Nigam Ltd., (2005) 93 ITD 321 (Ahd). Though the said decision has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in the case of Som Prakash Rekhi (supra). In the said case, dispute was between Burmah Shell, a company under the Companies Act, 1956, and one of its former employees. The company M/s Burmah Shell was acquired by Government of India and later it was known as Bharat Petroleum. A Writ Petition was filed by the employee against Bharat Petroleum. A preliminarily objection arose as to whether the Writ Petition was maintainable against M/s Bharat Petroleum as it was neither a statutory corporation and nor a Government department. The Court examined whether it was a State within the meaning of Article 12 of the Constitution of India. The Hon ble Supreme Court laid down certain tests in this context and the relevant portion of the Head notes of judgement is as under :- 2. Some of the tests laid down by this Court for deciding whether a body is State within the meaning of Article 12 are : (i) If the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of the Government. (ii) A finding of State financial supports plus an unusual degree of control over the mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmedabad Bench of the Tribunal in the case of Sardar Sarovar Narmada Nigam Ltd.. Moreover, the Memorandum of Association and Articles of Association of SSNNL clearly establish that the said concern is operating under superintendence and direction of the Government of Gujarat. It has also been pointed out before us that the Directors of the SSNNL are drawn from the officials of the Government of Gujarat. The next test is the existence of deep and pervasive State control. In this context, it emerges that the Board of Directors of SSNNL are appointed by the Gujarat Government and it consists of the Government employees of the rank of Secretary/Additional Secretaries. The next test is whether the corporation enjoys monopoly status which is otherwise conferred on a State. The objects to be pursued by the SSNNL, the powers conferred on it, as revealed by the Memorandum of Association clearly suggest that SSNNL is in the activity of executing, operating and maintaining the Sardar Sarovar project comprising of a dam across river Narmada, a canal system, the Sardar Sarovar power houses at the foot of the said dam, etc.. All these aspects clearly show that SSNNL is involved in carrying out S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appearing for the Revenue has relied on the judgement of the Hon ble Supreme Court in the case of Steel Authority of India Ltd. (supra) and that of Heavy Engineering Mazdoor Union (supra) to say that entities such like SSNNL cannot be considered as statutory bodies even though the entire share capital is owned by the Government of India. We have considered the said judgements and find that the ratio decided therein has no relevance to the issue in dispute before us. In the case of Steel Authority of India Ltd. (supra), dispute related to certain commercial transactions between a private company and SAIL and no issue arose as to whether Steel Authority of India Ltd. was special purpose vehicle carrying out State functions or not. It may also be important to note that Steel Authority of India Ltd. is in the business of sale and manufacturing of steel which perhaps cannot be looked upon as a State monopoly function as distinct from the activities of SSNNL, which is the subject-matter for consideration before us. 22. In the case of Heavy Engineering Mazdoor Union (supra) also the emphasis was again with respect to the functions of commercial corporation, though wholly owned by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee before the lower authorities and the same is also placed in the Paper Book filed before us, including other material in the form of contract with SSNNL, communications with Government of Gujarat and SSNNL, etc. to justify that assessee was not merely acting as a contractor. 26. Having regard to the scope of work executed by the assessee, it is difficult to comprehended that assessee was merely acting as a contractor. In common parlance, a contractor is understood as a person who carries out the assigned work as per the directions given by the contractee. In the present case, the assessee has used own-developed technology and its own resources to conceptualize, design, erect, commission, test and operate the Saurashtra Branch Canal Pumping Scheme . Therefore, in our view, assessee is to be understood as a developer , and distinct from a contractor qua the impugned contract awarded by SSNNL. The Chennai Bench of the Tribunal in the case of ACIT vs. Indwel Lingins (P) Ltd., 122 TTJ 137 (Chennai) has noted that a developer is a person who designs and creates new projects whereas a contractor is a person who has a contract to do work. In the present case, as the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k assigned by SSNNL and it is to be understood as a developer within the meaning of section 80IA(4) of the Act. 29. Another objection taken by the Revenue is that assessee only constructed/developed the infrastructure facility but did not operate the same. This aspect of the controversy has been clearly answered by the Hon ble Bombay High Court in the case of ABG Heavy Industries Ltd. (supra). Even an enterprise which is engaged only in development of an infrastructure facility has also been held to be eligible for section 80IA benefits. Therefore, the said objection of the Revenue is not justified. In any case, it has also been pointed out before us that assessee has operated the infrastructure facility for a period of two years. Be that as it may, we find no justification in the aforesaid objection, which is dismissed. 30. It is also a plea of the Revenue that the infrastructure facility is to be owned by the assessee for the purposes of claiming benefit u/s 80IA of the Act. In our view, the aforesaid objection of the Revenue is devoid of any statutory support from the provisions of section 80IA(4)(i) of the Act. The same is therefore rejected. 31. One of the objection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LIC for the pension benefits of its employees. The learned Departmental Representative appearing for the Revenue has supported the orders of the authorities below by placing reliance on the same. 35. After hearing both the parties and perusing the material available on record, we find that this issue is covered by the decision of the Hon ble Calcutta High Court in the case of CIT vs. National Insurance Co. India (supra) and the decision of the Hon ble Bombay High Court in the case of CIT vs. Mahindra and Mahindra Ltd. (2006) 284 ITR 679 (Bom). Further the Hon ble Supreme Court in the case of Bharat Earth Movers vs. CIT, (2000) 245 ITR 428 has held that the liability was not a contingent liability. In this view of the matter, we are of the opinion that this issue is required to be remitted back to the file of the Assessing Officer for ascertaining the reasonableness of the provision made by the company for meeting the incremental liability of this year incurred by it under pension scheme; proportionate with the entitlement earned by the employees in question, subject to any ceiling if any prescribed in the said scheme as applicable on the relevant period. The Assessing Officer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee against which deduction u/s 80IA of the Act was claimed. This resulted in a disallowance of ₹ 6,63,61,181/- out of deduction claimed u/s 80IA of the Act. 38. The CIT(A) has disagreed with the Assessing Officer on this aspect. The CIT(A) noted that the Assessing Officer did not point out in discrepancy or defect in the audited Profit Loss Account of the Godavari project to show that the profit declared by the assessee was inflated or manipulated so as to claim higher deduction u/s 80IA of the Act. The CIT(A) has further noticed that the assessee had explained the reasons for higher profit, namely, that due to import of motors and rotating assembly from Brazil and Japan, the profit in the Godavari project was on a higher side, and such reason was not controverted by the Assessing Officer. For all the above reasons, the CIT(A) has deemed it fit to disregard the action of the Assessing Officer and accordingly the disallowance of ₹ 6,63,61,181/- made out of the deduction u/s 80IA of the Act has been deleted by him. At the same time, the CIT(A) noted that the interest expenditure debited to the Profit Loss Account was not appropriately allocated by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the variation in allocation of interest expenditure and thus the action of the CIT(A) is hereby affirmed on this aspect also. 42. Resultantly, the Grounds raised by the Revenue as well as assessee with respect to the quantification of deduction u/s 80IA of the Act relating to the Godavari project are dismissed. 43. In the result, appeal of the assessee is partly allowed. 44. Now, we may take-up the remaining Ground of Appeal in the crossappeal of the Revenue. The only Ground remaining is with regard to the action of the CIT(A) in allowing relief of ₹ 9,10,110/- in respect of Provision for warranty, which was disallowed by the Assessing Officer. 45. In brief, the relevant facts are that the Assessing Officer made a total disallowance of ₹ 1,76,13,328/- on account of Provision for warranty. The Assessing Officer denied the claim of the assessee on the basis of a similar disallowance made in the immediately preceding assessment year 2005-06. However, in the course of proceedings before the CIT(A), assessee contended that the Assessing Officer erred in confusing the calculation made for assessment years 2005-06 and 2006-07 because the Provision made for the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X
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