Airport infrastructure deduction upheld for fuel farm project; hedge swap interest allowed, but treaty-based dividend tax ground was rejected.

An additional ground challenging Dividend Distribution Tax by reference to treaty rate was not admitted because that dispute did not arise from the regular assessment order and belonged to a separate appellate stream. The Tribunal held that an aviation fuel farm, feeder lines and hydrant system formed part of airport infrastructure, that an airport operator could satisfy the statutory agreement requirement, and that the BOOT-based project was not a mere works contract; deduction under section 80-IA was therefore allowed and required recomputation under section 80-IA(5). Interest paid under a hedge swap linked to business borrowing for the project was treated as financing cost incurred for business purposes and allowed as a revenue deduction.

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Issues: (i) Whether the assessee could raise, as an additional ground before the Tribunal, the challenge to Dividend Distribution Tax on the basis of the applicable treaty rate; (ii) whether the aviation fuel facility constituted an eligible infrastructure facility for deduction under section 80-IA; (iii) whether interest paid on the swap arrangement was allowable as revenue deduction.

Issue (i): Whether the assessee could raise, as an additional ground before the Tribunal, the challenge to Dividend Distribution Tax on the basis of the applicable treaty rate.

Analysis: The claim for relief in relation to Dividend Distribution Tax did not arise from the assessment order under section 143(3) and belonged to a distinct appellate stream contemplated under section 246A(1)(a) of the Income-tax Act, 1961. The Tribunal distinguished the authorities relied on for admission of new grounds and followed its own earlier view that the dispute on Dividend Distribution Tax could not be introduced for the first time in the appeal against the regular assessment order.

Conclusion: The additional ground on Dividend Distribution Tax was not admitted and was rejected, though liberty was indicated to pursue the appropriate appellate remedy.

Issue (ii): Whether the aviation fuel facility constituted an eligible infrastructure facility for deduction under section 80-IA.

Analysis: The concession and service provider arrangements showed that the fuel farm, feeder lines and hydrant system formed part of the airport infrastructure. The Tribunal held that the expression "airport" is to be understood in an inclusive sense, supported by the statutory meaning of aerodrome and airport-related civil aviation requirements, and that aircraft fuelling services are integral to airport operations. It further held that the project was carried out on a BOOT model and was not a mere works contract. On the agreement issue, the Tribunal held that the airport operator was an authority discharging public functions and thus satisfied the statutory condition of an agreement with a qualifying body. The Tribunal also applied section 80-IA(5) to direct recomputation of the eligible deduction without the mistaken set-off adopted by the assessee.

Conclusion: Deduction under section 80-IA was allowed on the income from operation and maintenance of the fuel farm facility, and the deduction quantum was directed to be recomputed.

Issue (iii): Whether interest paid on the swap arrangement was allowable as revenue deduction.

Analysis: The swap was entered into to hedge the business borrowing against foreign exchange and interest-rate exposure connected with the fuel farm project. The Tribunal applied the principle that interest on borrowed capital used for business is deductible, and treated the swap-related payment as part of the financing cost incurred for the business purpose of the project. It rejected the characterization of the payment as capital in nature on the facts presented.

Conclusion: The interest on the hedge swap was held allowable as a deduction.

Final Conclusion: The appeals succeeded only in part: the assessee obtained relief on the section 80-IA claim and the swap-interest claim, while the additional ground relating to Dividend Distribution Tax was rejected.

Ratio Decidendi: For deduction under section 80-IA, an airport-related facility that is integral to airport operations and undertaken under a development-operate-transfer style arrangement may qualify as an infrastructure facility; business interest expenditure incurred to hedge borrowing used for the project remains deductible when it is incurred for the purposes of the business.

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