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2016 (11) TMI 75

e infrastructure facility. In order to do so, it deployed its various resources, materials, labour, supervisor, Engineers etc. It made substantial investments and exposed itself to various risks. Hence it is clear that the assessee was a developer in the aforesaid project and hence is eligible for deduction U/S 80-IA. - ITA No.1291-1292/Kol/2013 - 24-8-2016 - Shri Waseem Ahmed, Accountant Member and Shri S.S.Viswanethra Ravi, Judicial Member For The Appellant : Shri H.K.Lal, CIT-DR For The Respondent : Shri Ravi Tulsiyan, FCA ORDER PER Waseem Ahmed, Accountant Member:- Both appeal by Revenue are against the separate orders of Commissioner of Income Tax (Appeals)-XXXVIII, Kolkata in appeal No.204-205/CC-XXVIII/CIT(A)- C-I/11-12 by even date i.e. 24.01.2012. Assessments were framed by DCIT.CC.XXVIII, Kolkata u/s 143(3)/147 of the Income Tax Act, 1961 (hereinafter referred to as the Act ) vide his order dated 29.12.2011 for assessment years 2006-07 & 2009-10 respectively. 2. Both the appeals are heard together and are being disposed of by way of consolidate order for the sake of convenience. Shri Ravi Tulsiyn Ld. Authorized Representative appeared on behalf of assessee and Shri H. .....

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eciate that when an assessee execute a contract against a pre-determined amount of revenue, it cease to undertake any entrepreneurial risk and investment risk and thus loses the character of a 'Developer' to which the incentive of deduction u/s 80-IA has all along been aimed, i) That the Ld. CLTCA) has failed to appreciate that the simple fact that tax was deducted u/s 194C from all the alleged 'eligible projects' makes it clear that the assessee was into a simple construction contract and thus was not entitled to deduction u/s 80-IA, j) That the Ld. CIT(A) has failed to realise that when an assessee executes a project of infrastructure development with the advance received from the Government or the Local Authorities, the very purpose and intent of Private Sector participation in the development of infrastructure is defeated and, accordingly, the assessee ceases to be entitled to the deduction. going both by words and spirit of section 80-IA, k) That the Ld. CITCA) has erred in facts as well as in the circumstances of the case in placing reliance upon the decisions of various courts of Law which are yet to reach finality, 1) That in view of the grounds (c) to (k) a .....

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h involves effort or in other words labour of the contractor. Further as per the Black s Law Dictionary, the term work means labour or in other words physical and mental exertion to attain an end esp. as controlled by and for the benefit of the employer. Thus as per Blacks Law also a works contract is a labour contract under which the contractor merely employs his labour as per the directions of the contractee. The assessee also submitted that the work as defined under section 194C of the Act is also not applicable even to the activities of the assessee. Thus as per Sec. 194C also, works contract does not include a contract wherein the contractor in addition to employing labour, procures material from a third party. Thus, contracts involving mere labour of the contractor are included in the purview of works contract . Further assessee submitted that explanatory memorandum in the Finance Bill, 2007 has explained the purpose extending tax benefit u/s 80-IA of the Act was to encourage investment from the private sector. The assessee, in the instant case, has deployed its fund of labor and materials therefore it cannot be covered under the definition of works contract. Therefore, the a .....

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or the development of infrastructure facilities. Accordingly the assessee is entitled for the deduction 80IA of the Act. The ld. AR also submitted that the AO has not disputed the facts of the assessee business activities. The works contract is a contract under which the contractor is merely supplying/ employing the labour but in the instant case the assessee is also provides the material and other requisites including machineries in addition to the capital investment in the project. Thus, it is not a case where the assessee is acting as a works contractor and the Government authority has provided the assessee with the entire set up i.e. plant & machinery, materials and the infrastructure needed to support construction. It is also not a case that the assessee had to employ only labour to carry out construction. Instead, the assessee had provided an entire enterprise which was needed to convert the site (given by the Government) into an infrastructural facility. Regardless to say the aforesaid activities undertaken by the assessee involved a substantial amount of risk. Like any other entrepreneur who employs his material, plant, machinery, labour etc. in a project and undertakes .....

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d other parts of works. (para 10.3) (vi) Water and Electricity: The cost of all water connections necessary for the execution of the work and the cost of water consumed and hire charges of meters and the cost of electricity consumed in connection with the execution of work was to be paid by the assessee. (page 19, clause 36B) (vii) Site office, staff quarters etc.: The assessee was to have an office near the site and a clerk for service of communication notices.(page 37, para 8.1) Further, all the expenses in connection with purchase or construction or maintenance of site office, staff quarters was to be borne by the assessee. (para 7.13, page 37) (viii) Royalties and taxes: The assessee was to pay all royalties, octroi and other taxes and duties in respect of materials consumed on public work. (Clause 36A on page 19). ix) Insurance: The assessee was to take accident insurance and third party insurance. (para 7.2 on page 3). The responsibility of timely payment of premiums was that of the assessee. (x) Quality assurance system: The assessee was to institute a quality assurance system to demonstrate compliance with requirements of the contract. (para 7.6 on page 36) (xi) Rights of w .....

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nt of the entire infrastructure facility. In order to do so, it deployed its various resources, materials, labour, supervisor, Engineers etc. It made substantial investments and exposed itself to various risks. Hence it is clear that the assessee was a developer in the aforesaid project and hence is eligible for deduction U/S 80-1A. II. Santaldih Thermal Power project, West Bengal: ₹ 4,08,58,949/- The agreement between the assessee and The West Bengal Power Development Corporation Ltd., for the aforesaid project is enclosed at pages 70-146 of paper book. The following conditions listed in the agreement clearly establish that the assessee was a developer and not a mere works contractor: A. Scope of Work: (i) Drawings: The assessee was responsible for developing detailed drawings to adopt equipment and materials to be supplied to the requirements indicated in the specification. Further, it was responsible for and was to pay for any alterations of work due to discrepancies in the drawings. (pg. no 92 & 93, para 13) (ii) Materials: The assessee was responsible for arrangement of materials required for the work. (pg. 93). Further, the assessee was required to establish on site .....

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ages due to the owner for failure of the assessee to met his obligations under the contract. The said guarantee would be released at the end of the Warranty period. (page 84) A perusal of Project Balance Sheet on page 148 shows an investment of ₹ 13,69,87,730/- on the said project. C. Risks: (i) The assessee was to finish the work specified in the contract within time failing which the assessee would be liable to liquidated damages. (page 91) (ii) As already discussed above, the performance guarantee made by the assessee was to be released not on completion of the works, but at the end of warranty period. Thus, the completion of the work did not absolve the assessee of all its responsibilities. The said guarantee was to provide for payment of any claims/damages due to the owner for failure of the assessee to met his obligations under the contract. (see page 97) (iii) The assessee was to indemnify the owner of all costs, charges, expenses on account of any claims, demands, actions and proceedings against the owner in respect of any injury, loss or damage. (page 114) D. Conclusion: From the aforesaid conditions, it is clear that the assessee was not merely responsible for suppl .....

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page 234) (ix) Operation & Maintenance of the system: As per scope of work on page 150, the assessee was responsible for proper operation of the installations for 2 years. Further it was to maintain the system in good order for 1 yr [see page 210 clause (f)] B. Investment: In order to undertake the said project the assessee was to furnish an Earnest money deposit equal to 1% and further security deposit equal to 6.5% of the cost of work for diligent and due fulfillment of all obligations under the contract (page 209). The said deposit was to be refunded after the final bills are paid or after 12 months from the date of completion of work during which period the work was to be maintained by the assessee in good order [page 210, clause (f)]. A perusal of Project Balance Sheet on page 243 shows an investment of ₹ 1,10,31,129/- on the said project. C. Risks: (i) The assessee was to finish the work specified in the contract within time failing which the assessee would be liable to liquidated damages. (para 41.1, page 190) (ii) As already discussed above, the security deposit made by the assessee was to be released not on completion of the works, but at the end of maintenance p .....

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sation. [page 309, clause 30(a)] (iv) Plant: All tools and plants required for the work including sheet piles and timber for shoring and strutting, pump sets etc. was to be supplied by the assessee at its own cost.( para 17 on page 278 and clause 20 on page 306) (v) Water and Electricity: The assessee was to make its own arrangement for the fresh water required for manufacturing of the pipes, construction of civil works and testing of pipelines as well as potable water required for his factory and labour camps. (para 2 on page 275) Further he was to make its arrangements for the electrical energy required at the site. (para 3 on page 275) (vi) Survey stations: The assessee was to, at his own expense, provide and maintain survey stations required to carry out surveys, measurements etc. in connection with works (para 4 on page 275) (vii) Other infrastructural facilities: • The assessee was to erect and maintain in a good condition temporary fences and gates along the boundaries. (para 5 on page 276) • Provision of septic tank/pit latrines at the construction site/camps (para 15.10 on page 286) • Provision of creches for working women labour (para 15.10 on page 286) &bu .....

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ms and loss arising out of such accidents and indemnify the Employer from all such claims and expenses. (Para 2, page 279) (also see clause 19, page 306) (iv) Conclusion: From the aforesaid conditions, it is clear that the assessee was not merely responsible for supplying labour for the aforesaid project, but rather was responsible for the development of the entire infrastructure facility. In order to do so, it deployed its various resources, materials, labour, supervisor, Engineers etc. It made substantial investments and exposed itself to various risks. Hence, it is clear that the assessee was a developer in the aforesaid project and hence is eligible for deduction u/s 80-IA. Hence in the light of the above, the assessee is entitled to deduction u/s 80-IA of the Act. In addition to the above, the assessee was even assessed to VAT on the aforesaid projects. The given fact further strengthens the claim of the assessee that the said contracts constitute development contracts and not works contract. Lastly attention is invited to the recent judgment of the Kolkata Tribunal in case of Simplex-Som Dutt Builders J.V and Simplex-Subhash J.V & Simplex Projects Ltd.(order enclosed at p .....

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applies and the deduction from profits and gains would be available to such transferee enterprise for the unexpired period during which the transferor enterprise would have been entitled to the deduction, if the transfer had not taken place. From the above it is clear in order to avail deduction u/s 80-IA all the following conditions should be satisfied: (i) The assessee is a company or a consortium of companies; (ii) There exists an agreement with the Central Government, State Government, Local authority or any other statutory body and (iii) Pursuant to the agreement specified in point (ii) the company engages itself in any of the following activities: (a) Development of infrastructure facility (b) Operation and maintenance of infrastructure facility (c) Development, operation and maintenance of infrastructure facility 8.1 Now the assessee in the given case is a company which, pursuant to agreements with various Government bodies, engaged itself in the development of infrastructure facility as defined in the Explanation to sub section 4 of section 80-IA . These set of facts have not been disputed by the AO. The Ld. AO disallowed the claim on the ground that the assessee was a mere .....

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d from a person, other than such customer." Thus as per section 194C also, "works contract" does not include a contract wherein the contractor in addition to employing labour, procures material from a third party. Thus, contracts involving mere labour of the contractor are included in the purview of "works contract". Further, attention is invited to the judgment of the Supreme Court in case of Associated Cement Co. Ltd. vs. CIT [201 ITR 435], wherein the Hon'ble Court while interpreting the term 'work' u/s 194C held that Words any work' in sub-s. (1) of s. 194C means any work including supply of labour to carry out work and is not intended to be confined to or restricted to works contract, therefore, a person who credits to the account of or pays to a contractor any sum payable on behalf of organizations specified in s. 194C(1) for carrying out any work (including supply of labour for carrying out any work) is liable to deduct income-tax as required under that sub-section. The words in the sub-sections (1) of 194C on income comprised therein' appearing immediately after the words deduct an amount equal to two per cent of such sum as inco .....

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uraging private sector participation by way of investment in development of the infrastructure sector and not {or the persons who merely execute the civil construction work or any other works contract. Accordingly, it is proposed to clarify that the provisions of section 80- IA shall not apply to a person who executes a works contract entered into with the undertaking or enterprise referred to in the said section. Thus, in a case where a person makes the investment and himself executes the development work, i.e., carries out the civil construction work he will be eligible for tax benefit under section 80- IA of the Act. In contrast to this, a person who enters into a contract with another person (i.e., undertaking or enterprise referred to in section 80-IA) for executing works contract, will not be eligible for tax benefit under section 80- IA. This amendment will take retrospective effect from 1st April 2000 and will accordingly apply in relation to the assessment year 2000-01 and subsequent years. The Explanatory Memorandum clearly lays out that purpose of extending tax benefit u/s 80-IA was to encourage investments from the private sector and hence work contracts, i.e. contracts .....

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ssessee. The material required is to be brought in by the assessee by sticking to the quality and quantity irrespective of the cost of such material. The Government does not provide any material to the assessee. It provides the works in packages and not as a works contract. The assessee utilizes its funds, its expertise, its employees and takes the responsibility of developing 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 undeveloped 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 el .....

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on work undertaken under the various projects. The assessee was provided with the site alone and by putting its own inputs (not labour alone) he converted the site into an infrastructural facility. 8.4 Further, ITAT (Hyderabad) in case of Siva Swathi Constructions Pvt. Ltd. vs DCIT, Circle-3(2) in ITA No.1008-09/Hyd/2013 for AYs 2009-10 & 2010-11 dated 25.10.2013 held that "The next reason given by the CIT(A) is with regard to nonfinancial participation by the assessee, as the assessee has got mobilization advance. The mobilization advance has not been given freely. It has been given only after the assessee furnished a bank guarantee, and the bank guarantee has been given by the bank only after getting enough security from the assessee, to protect itself from any risk on account of any default on the part of the assessee. The assessee has taken financial assistance from bank and paid huge interest of ₹ 2,87,10,943.00 for assessment year 2009-10 and of ₹ 9,35,78,373.00 for assessment year 2010-11, as seen from the Profit and Loss Account of the assessee for the relevant years ending on 31.3.2009 and 31.3.2010 respectively, copies of which are furnished by the as .....

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A of the Act. " 8.5 From the above it is clear that even if an assessee is merely developing the infrastructural facility (without operating and maintaining the same), it is entitled to deduction u/s 80-1A. Further, condition (b) laid out in sub-section 4 of section 80-IA mandates the existence of an agreement with the Government. Moreover, if section 80-IA grants deduction on profits from the activity of development carried out in pursuance of an agreement with the Government it presupposes that assessee will earn some profits from mere development (without operating and maintaining) of the infrastructure facility. Now the relevant question that arises here is that how would an assessee engaged in mere developmental activity (and no operation) pursuant to an agreement with the Government earn profits? The obvious answer is that the assessee will recover its cost of development from the Government otherwise the entire cost of development will be a loss in its hands. Thus, if deduction u/s 80-IA is denied on the ground that the assessee had received payments from Government, then an assessee who is only a "developer" (and not an operator) will never be entitled to ded .....

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it; otherwise, how will the person who develops the infrastructure facility project, realise its cost ? If the infrastructure facility, just after its development, is transferred to the Government, naturally the cost would be paid by the Government. Therefore, merely because the transferee has paid for the development of infrastructure facility carried out by the assessee, it cannot be said that the assessee did not develop the infrastructure facility. If the interpretation canvassed by the Revenue authorities is accepted, no enterprise, carrying on the business of only developing the infrastructure facility, would be entitled to deduction under s. 80-IA(4), which is not the intention of the law. 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 facil .....

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developing the infrastructure facility and not in operating and maintaining the said facility is entitled to the benefit of deduction under s. 80-IA(4); merely because assessee is referred to as contractor in the agreement for development of infrastructure facility or some basic specifications are laid down, would not debar the assessee from claiming deduction under s. 80-IA(4). If a person who only develops the infrastructure facility was not paid by the Government, the entire cost of development would be a loss in the hands of the developer as he was not operating the infrastructure facility. Merely because the assessee was paid by the Government for development work it could not be denied deduction under section 80-IA(4). The Chennai Bench of Tribunal in case of R.R. Constructions, Chennai vs. Department of Income tax held that "When an assessee is only developing an infrastructure facility project and is not maintaining nor operating it, obviously such an assessee will be paid for the cost incurred by it; otherwise, how will the person, who develops the infrastructure facility project, realize its cost? If the infrastructure facility, just after its development, is transf .....

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all the grounds has contended that the contracts entered into by the assessee were merely 'construction contracts' since the assessee is not exposed to any entrepreneurial and investment risk. In this regard, the AO has observed that the assessee is executing the contract against predetermined revenue w.r.t the above, it is submitted that under the impugned contracts, the assessee was merely carrying out the civil construction work. It was responsible for overall development of the infrastructure facility. It was merely provided with the site which it had to develop into an infrastructural facility by deploying his resources i.e. material, plant & machinery, labour, supervisors etc. It was responsible for any damage/loss caused to any property or life in course of execution of the works. It was even responsible for remedying of the defects in the works at its cost. It was also required to operate and maintain the infrastructure facility. Hence, it cannot be said that the contract with the Government was to carry out mere civil construction. Attention in this regard is invited to the following: (i) The ITAT (Ahmedabad) in case of Sugam Construction (P) Ltd. vs. ITO [56 .....

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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 the court that the assessee at present has undertaken huge risks in terms of deployment of technical personnel, plant and machinery, technical knowhow, expertise and financial resources. " Thus the fact that the assessee deploys its resources (material, machinery, labour etc.) in the construction work clearly exhibits the risks undertaken by the assessee. Further, the assessee vide the agreements has clearly demonstrated the various risks undertaken by it. The assessee was to furnish a security deposit to the Employer and indemnify the employer of any losses/damage caused to any property/life in course of execution of works. Further, it was responsible for the correction of defects arising in the works at it cost. Thus, it cannot be said that the assessee had not undertaken any risk. The ITA .....

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taining the same. Thus, clearly the assessee is eligible for deduction u/s 80-1A. In our considered view do not find any reason to interfere in the order of ld. CIT(A). Hence this ground of appeal of the Revenue is dismissed. 10. In the result, Revenue s appeal is dismissed. Coming to ITA No.1292/Kol/2013 for A.Y 09-10. 11. Revenue has raised per its appeal as under:- a) That the order of the Ld. CIT(A) is bad in law as the same has been passed in the name of M/s Subhash Projects & Marketing Ltd while the name of the assessee has changed to M/s SPML Infra Ltd w.e.f. 12.04.2010, b) That the Ld. CIT(A) has served a copy of the Remand Report furnished by this office to the assessee but has not provided any opportunity to this office to offer its comments on the rejoinder filed by the assessee in response to the said Remand Report and, thus, has violated the principles of natural justice, c) That the Ld. CIT(A) has failed to appreciate that the definition of the term 'Works Contract' as occurring in Explanation below section 80-IA(13) has not been provided in the Income-tax Act and, hence, the same has to be imported from the related Acts. d) That the Ld. CIT(A) has failed .....

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ell as in the circumstances of the case in placing reliance upon the decisions of various courts of Law which are yet to reach finality, 1) That in view of the grounds (c) to (k) above, the Ld. CIT(A) has erred in facts as well as in the circumstances of the case in directing to delete the disallowance of deduction u/s 80-IA to the tune of ₹ 61,86,38,683/- m) That as regards the disallowance of deduction u/s 80G, the Ld. CIT(A) has erred in Law in admitting additional evidence without having recorded the reasons for such admission and consequently, in directing to restrict the disallowance to ₹ 2,50,000/-; and n) That the Department craves the right to add, delete, modify or abrogate the grounds of appeal during the course of hearing of the case. 12. The first inter-connected issue raised in ground No. (a) to (l) by Revenue is that Ld. CIT(A) erred in allowing deduction under section 80-IA of the Act. 13. We have already decided the same issue in favour of the assessee in ITA 1291/Kol/2013 of Revenue s appeal, since the facts are exactly identical both the parties are agreed whatever view taken in the above appeal in ITA No. 1291/Kol/2013, may be taken in ITA No. 1292/K .....

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