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TMI Blog2016 (9) TMI 1296X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 lakhs towards sub-contract charges that are paid to the persons covered under section 40A(2). Ld. AO asked the assessee to justify the reasonableness of these payments. Assessee gave the explanation which has been reproduced in the assessment order. Assessee explained that there are two components of the payment i.e. Rs. 46.69 lakhs. First part is supported by billing made to Municipal Corporation of Greater Mumbai i.e. MCGM to the tune of Rs. 46.46 Lakhs and Rs. 0.24 Lakhs is the amount of sundry balance written off u/s 41 of the Income Tax Act which assessee has been offered to the tax by assessee. In a nutshell, assessee argued that since market value towards the impugned expenditure is more than actual amount, addition is not warranted. In numerical terms, assessee submitted that comparable amounts are Rs. 46.70 Lakh (46.46 + 0.24 = 46.70) as against the expenses of Rs. 46.29 Lakh, addition should not be made. The AO rejected the explanation of the assessee. He adopted the percentage specified under section 44AD of the Income Tax Act, i.e. 8% of the turnover. He applied it on the turnover of the assessee and held value equal to 92% of the receipts is the market value of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, in view of decision to Hon'ble ITAT Mumbai as above, the addition made by the AO is directed to be deleted. Ground No. 1 & 2 are allowed. 5. We have considered rival contentions and carefully gone through the orders of authorities below and found from the record that nowhere the AO doubted genuineness of the expenditure and insufficiency of the details. Only reason given by AO was that payment was excessive or unreasonable. As per our considered view whenever provisions of Section 40A(2) is invoked, burden is on the revenue to show that payment made to sister concern is more than the fair market value for which similar service are available. However, there is no such finding by the AO to allege that payment so made was not reasonable or similar service were available to assessee at lower price than what was paid to the sister concern for getting the work done. After discussing the facts in detail, the CIT(A) has also applied the decision of ITAT Mumbai bench in the case of Batliwala & Karani Vs. ACIT (2005) 2 SOT 279, wherein it has been held that unless there is a clear finding that market value of services taken from sister concern is less than the price at which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s all the following conditions " Therefore, neither is the word 'development' or 'developer' nor the word 'contractor' used in these two sub-sections of Sec.80-1A. The pertinent questions which arise in this context are what is development and is there actually a difference between a contractor and a developer? In the Law Lexicon, the term "development" has been defined as under:- (i) The act, process or result of developing or growing or the causing to grow the state of being developed. (11) Happening The Supreme Court in Gujarat Industrial Development Corporation Vs CIT (227 ITR 414) has defined "development" as under:- "The word development should be understood in a wide sense. There is no warrant to exclude all development relating to any industry from the purview of the word 'development'. There is no indication in the Act that development envisaged therein should be confined to non-industrial activities. Development of a place can be accelerated through varieties of schemes and establishment of Industry is one of the modes of developing an area." Therefore, the term development is to be understood in its widest sense to include bringi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loper as such. However, we are unable to agree with this contention of the Revenue. A person, who enters into a contract with another person will be a contractor no doubt; and this assessee having entered into an agreement with the Government of Maharashtra and also with APSEB for development of the infrastructure projects; obviously a contractor but that does not derogate the assessee from being a developer as well. The term "contractor" is not essentially contradictory to the term "developer", On the other hand, rather section 80-IA(4) itself provides that assessee should develop the Infrastructure facility as per agreement with the Central Government, State Government or a local authority or a body under central or state act, so, entering into a lawful agreement and thereby becoming a contractor should, In no way, be a bar to the one being developer. The assessee, presently under consideration before us, has developed infrastructure facility as per agreement with Maharashtra State Government\APSEB. Therefore, merely because, in the agreement for development of Infrastructure facility, assessee Is referred to as contractor or because some basic specifications are laid down, it do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e civil construction work, he will be eligible for tax benefit u/s. 80lA. In contrast to this, a person who enters into contract with another person (Le. undertaking or enterprise referred to in section 80-lA) for executing work contracts will not be eligible for tax benefit u/s. 80-lA." The amendment therefore, makes it abundantly clear that it is only the work-contractor who will not be eligible for deduction u/s. 80-1A. It makes no distinction between a contractor or a developer, but only between a work contractor and a developer-contractor. 5.6. During the appellate proceedings, the appellant was required to substantiate its role in the execution of infrastructure development project. Break up of investment was given relating to the period under consideration, which was examined. It is seen that the investments are in (a) fixed assets including sophisticated earth excavation machineries and tower cranes, etc. (b) Investment by way of fixed deposits and advances to contractors and credits to the government department, (c) stock of cement/steel etc. Further, on analysis of the nature of project executed by the appellant, it was revealed that the appellant was exposed to vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any infrastructure facility which fulfils all the following conditions, ",,,, " 6.4. Therefore, a plain reading of the sub-section itself makes It clear that an enterprise which is engaged only in the development of infrastructure facility is also entitled to claim deduction u/s.80IA(4), as also any enterprise carrying on the business of operating and maintaining or developing, operating and maintaining any infrastructure facility. 6.5. In the present case, the undisputed facts are that the appellant has developed Infrastructure facilities, which have been transferred after completion by handing over the possession thereof. It is therefore, BT i.e. Build /Transfer and not BOT or BOOT which is applicable. The question of whether, in the case of mere developer, where there is no requirement to operate, the deduction u/s.80-IA be allowable on the recoupment of cost it receives by way of payments from the government/authority, has also been discussed In the decision of M/s. Patel Engg .. Ltd. (supra). The facts in the case of M/s. Patel Engineering Ltd. were exactly similar to that of the assessee; in that case assessee had transferred the infrastructure facility developed by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier para of this appeal order, after the Introduction of Explanation to subsection (13) of section 80-lA, with retrospective effect from 01.04.2000, the only person barred from claiming deduction under this section is a work-contractor. It is an undisputed fact that the appellant is not a sub-contractor and appellant has used his own resources to execute the work. Therefore, as per the section itself, the appellant, solely engaged in the work of development and transfer of infrastructure facilities, is entitled to claim deduction u/s. 80-lA on the Income thus arising. I have gone through various decisions, as relied by the Ld. AR, they are being dealt with as under: It has been held in the decision of M/s Patel Engineering (supra) in as under:- We find that Finance Act, 1995 inserted clause (4A) for providing deduction to any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility. Sub-clause (iii) of sub-section (4A) provides the condition that the Infrastructure facility is operated on or after the first day of April, 1995. In respect of facility whose operation and maintenance has already started before 1 st April, 1995, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of M/s. Patel Engg. Ltd. (supra) as discussed above. Therefore, even though the clause of operating of Infrastructure facility is not fulfilled by the appellant since it is not applicable to it, it is entitled to claim deduction u/s.80-IA. 7.4. It has been further observed by the Hon Mumbai ITAT in matter of the ACIT v Pratibha Industries Limited 141 ITO 151 that assessee was awarded the job, wherein the assessee had placed the bank guarantee, against the tendered cost, which proved beyond doubt that the assessee, itself was doing the development of infrastructure facility, on behalf of the Government, besides placing its own funds at risk and peril. It is worth mentioning here that the same Pratibha Industries Limited is the member cum partner in assessee JV. 7.5. It has been further observed by the Hon Mumbai IT AT in matter of the ACIT v Bharat Udyog Limited 24 SOT 412 that , "9. The interpretation of revenue is absurd also in view of the rational of the provisions of section BO-IA (4) ( i). From the assessment year 2000-01, deduction is available if the assessee carries on the business of anyone of the abovementioned three types of activities. When an asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agreement with the Government agencies for development of the infrastructure projects, is obviously a contractor but that does not derogate the assessee from being a developer as well. The term "contractor" is not essentially contradictory to the term "developer"(emphasis applied). On the other hand, rather section 80-lA (4) itself provides that assessee should develop the infrastructure facility as per agreement with the Central Government, State Government or a local authority. So, entering into a lawful agreement and thereby becoming a contractor should, in no way, be a bar to the one being a developer. Therefore, merely because, in the agreement for development of infrastructure facility, assessee is referred to as contractor or because some basic specifications are laid down, it does not detract the assessee from the position of being a developer; nor will it debar the assessee from claiming deduction under section 80-IA(4)" 7.6. Ld. AR further has further relied upon the decision dated 08/06/2011 of Pune Bench of Hon. ITAT in matter of M/s Laxmi Civil Engineering Pvt. Ltd v Addl. CIT ITA No.766/PN/2009 in which it has been held as under: The judgment of the Hon'ble Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintains an infrastructure facility. Unless both the provisions are harmoniously construed, the object and intent underlying the amendment in 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. In the light of the ratio of the above decision of Hon. Bombay High Court being the jurisdictional high court, argument that in absence of the operation and maintenance, assessee is not eligible for the deduction u/s 80lA is without any merit. 7.8. It is observed from the perusal of the assessment order that Ld. AO has laid a lot emphasis on explanation inserted to the section 80lA by Finance Act (No.2) 2009 which has been made operational retrospectively with effect from 1 st April 2000, which is as under: "For the removal of doubts, it is hereby declared that nothing contained in this section shall apply in relation to a business referred to in sub-section (4) which is in the nature of a works contract awarded by any person (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 80lA to disqualify the business of execution of works contract after segregating the same from development contract. In the context of the section 80IB(10) after examining the retrospective effect of explanation Hon.Gujarat High Court in matter of CIT V. Radhe Developers 204 Taxmann 543 (ITA 546 of 2008) has held as under :- Para 30. The essence of sub-section (10) of Section 80IB, therefore, requires involvement of an undertaking in developing and building housing projects approved by the local authority. Apparently, such provision would be aimed at giving encouragement to providing housing units in the urban and semi-urban areas, where there is perennial and acute shortage of housing, particularly, for the middle income group citizens. To ensure that the benefit reaches the people, certain conditions were provided in sub-Section (10) such as specifying date by which the undertaking must commence the developing and construction also providing for the minimum area of plot of land on which such project would be put up as well as maximum built up area of each of the residential units to be located thereon. The provisions nowhere required that only those developers who themselves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention of the parties to the contract. In a "contract of sale", the main object is the transfer of property and delivery of possession of the property, where as the main object in a "contract for work" is not the transfer of the property but it is one for work and labour. Another test often to be applied is: when and how the property of the leader in such a transaction passes to the customer: is it by transfer at the time of delivery of the finished article as a chattel or by accession during the procession of work on fusion to the movable property of the customer? If it is the former, it is a "sale"; if it is the latter, it is a "works contract". Therefore, in judging whether the contract is for "sale" or for "Work and labour", the essence of the contract or the reality of the transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a "sale" or a "works contract". Essentially, the question is of interpretation of the "contract". It is settled law that the substance and not the form of the contract is material in determining the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a pharmaceutical product on behalf of the Company. The third situation is one where by an agreement between a pharmaceutical company and a manufacturer, it is the manufacturer who procures the raw materials and manufactures the product under the specifications of the company and sells the end product to the Company. In the third situation, the manufacturer may also affix the trade mark or brand name of the Company, which in turn markets the product. The present case relates to the third category where admittedly, the entire process of manufacturing is carried out by a third party with whom the assessee has a contract. The work of manufacture is carried out at the establishment of the third party manufacturer. The raw materials are purchased by the third party manufacturer. The contract envisages that the trade-mark of the assessee is to be affixed to the goods manufactured by the third party. Para 24 The submission that the contract is not a contract of sale because, specifications are provided to the manufacturer by the purchaser cannot be accepted. That has not been the understanding of the law at any point of time. The fact that the purchaser provides specifications to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it constitutes a contract of work while on the other hand, where the manufacturer has sourced the material from a person other than the customer, it would constitute a sale. (emphasis supplied) 7.9. In the context of the above following facts are undisputed: a. Assessee has procured his own materials and they were not given by MCGM. b. In other words, materials and resources needed for the execution of the project have not been purchased by assessee from MCGM and have been bought from his own resources. 7.10. By considering the above facts and legal proposition in light of the decisions of Hon. Gujarat High Court and Hon. Bombay High Court, it is held that contract of the project under which assessee has executed the infrastructure development project is not the work contract as meant in the explanation to section 80lA and on this account assessee is eligible for the deduction u/s 801A. 7.11. During the course of appeal proceedings, Ld. AR was specifically asked to comment on the applicability of the larger bench decision of Hon. Mumbai ITAT in Matter of M/s BT Patil & Sons Belgaum Constructions Private Limited 35 SOT 171. 7.12. Ld. AR vehemently contended that the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jection raised by the Ld. AO that merely obtaining the contract from MCGM to lay down and construct tunnels, shaft from Malabar Hill to Cross Maidan in Mumbai City does not make the assessee developer of the project, is concerned, it is found that assessee has been given the whole contract on lumpsum and on turnkey basis. It involves the work of creating the underground tunnel from one part of the city to another to supply the water. It is not the work in nature of the repair or petty work to the existing infrastructure facility. Hence, on this count also, objection of Ld. AO has no legs to stand. 7.16. To summarise the issue at hand, In view of following facts, viz. (a) the amendment to section 80-IA(4)(i) to include as eligible business - (i) developing or (ii) operating and maintaining or (iii) developing, operating or maintaining infrastructure facility; as also (b) The introduction, with retrospective from 01.04.2000, of the Explanation to sub section (13) of section 80-lA, whereby It has been clarified that the deduction u/s. 80lA is available to an undertaking or enterprise who makes investment and executes development work and not to any person entering into a work contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure facility was as per the agreement entered into which was contract between the Government Authority and the assessee and the provisions of Section 194-C of the Act were applicable. However, merely because the tax was deducted in terms of provisions of section 194-C of the Act, It did not make the assessee a mere contractor executing the works contract. In the development of the project it was the technical personnel of the assessee that made the proper specifications etc. from time to time as per the location of the site and as the project progressed. Developer does not mean merely a person who was conceiving the idea. Any enterprise developing infrastructural facilities is a developer of such facility since all the responsibility of the project was that of the enterprise from the start of the project till Its completion, Therefore, It would not be said that merely because the idea was conceived by the government and more Importantly on the land, etc. which was in domain of the government, that the government was the developer. For this purpose reliance may be placed on the decision of the Mumbai ITAT in the case of ACIT v. M/s Pratibha Industries Limited 141 ITO 151) and ACIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r deduction to three categories as under:- (i) enterprise being a developer; OR (ii) enterprise being operating and maintaining; OR (iii) enterprise developing, operating and maintaining. Thus, the concept of BOT IBOOT underwent changes in the year 2000. If the Intention was only to give benefit to enterprises on the income earned from operating and maintaining the Infrastructure facility, In that case, the provision would not have been amended in such a manner so as to also allow benefit to the enterprise which was merely developing the facility. Further, there would have been no necessity to make the amendment if the enterprise was to be allowed in respect of Income earned from operating and maintaining the facility. When the provision of section 80lA of the Act had been substantially amended and where the enterprise was only a developer of the Infrastructure facility, deduction could not be denied under section 80-lA of the Act on the ground that the concept of BOT/BOOT was the main requirement for getting benefit of deduction under section 80-lA of the Act. 13. In view of the above discussion and the detailed finding so recorded by CIT(A) and also keeping in view that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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