TaxTMI 
TaxTMI 
2014 (9) TMI 1065
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....er-alia, engaged in the business of manufacture and sale of power driven pumps, Valves, Hydro Turbines, Machine, tools as well as trading in engineering and electrical products, project execution and services. For the assessment year under consideration, it filed a return of income on 29.11.2006 declaring total income of Rs. 1,03,47,89,228/- which was subject to scrutiny assessment. In the ensuing assessment various additions/disallowances were made which was the subject-matter of appeal before the CIT(A) who has allowed partial relief and accordingly assessee as well as Revenue are in appeal before us by way of the captioned cross-appeals. 4. The first major dispute between the assessee and the Revenue, as manifested by Ground of Appeal No.1 in assessee's appeal relates to assessee's claim for deduction u/s 80IA of the Act amounting to Rs. 40,02,10,981/- in relation to profits of an infrastructure project- 'Saurashtra Branch Canal Pumping Scheme' executed for M/s Sardar Sarovar Narmada Nigam Ltd. (hereinafter referred to as 'SSNNL'). The said claim of the assessee has been denied by the Assessing Officer as well as the CIT(A) on the ground that the conditions prescribed in sectio....
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.... the said order of the Commissioner has since been set-aside by the Tribunal on the limited aspect of the validity of invoking section 263 of the Act by the Commissioner and not on the merits of the admissibility or otherwise of assessee's claim of deduction u/s 80IA of the Act. However, in the captioned proceedings for assessment year 2006-07, the dispute relates to the merits of the claim. During the assessment proceedings, the Assessing Officer observed that the contract awarded to the assessee by SSNNL was in two parts, the first part for design, manufacture and supply of equipments and second part for execution and commissioning of the equipment supplied, operating and maintaining the equipment for a limited period to ensure satisfactory performance. As per the Assessing Officer, assessee was not a developer as envisaged in section 80IA(4) of the Act inasmuch as assessee merely carried out a job on workscontract basis for SSNNL and no infrastructure facility was created or developed by the assessee. It is also stated that project was neither financed by the assessee through its own investment and nor constructed under BOT, BOLT or BOOT basis and thus assessee was not eligible ....
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....einafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years.] ..................... (2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park [or develops] a special economic zone referred to in clause (iii) of sub-section (4)] or generates power or commences transmission or distribution of power [or undertakes substantial renovation and modernisation of the existing transmission or distribution lines] : [Provided that where the assessee develops or operates and maintains or develops, operates and maintains any infrastructure facility referred to in clause (a) or clause (b) or clause (c) of the Explanation to clause....
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....ntly, section 80IA(1) of the Act prescribes for a deduction with respect to the profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) of section 80IA of the Act. The claim of the assessee before us is that it has undertaken a business referred to in sub-section (4) of section 80IA of the Act while undertaking and executing the contract with SSNNL pertaining to the 'Saurashtra Branch Canal Pumping Scheme'. The eligible business for the present purpose is referred in clause (i) of sub-section (4) of section 80IA of the Act. The claim of the assessee is that it is carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining the infrastructure facility referred to as 'Saurashtra Branch Canal Pumping Scheme', and therefore such business qualifies to be an eligible business for the purposes of section 80IA(4) benefits. As per the assessee, the expression "infrastructure facility" has been defined in the Explanation below clause (i) of section 80IA(4) of the Act which, inter-alia, includes a water supply project, irrigation project, etc.. In this manner, assessee has soug....
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.... the said company is owned either by the Central or the State Government, yet it can only be called a 'Government company' but it does not come within the purview of the entities specified in sub-clause (b) of clause (i) of section 80IA(4) of the Act. The Revenue has supported its plea by referring to the judgement of the Hon'ble Supreme Court in the case of Steel Authority of India Ltd. vs. Shri Ambica Mills Ltd. & Ors., AIR 1998 SC 418. In terms of the said judgement, it is sought to be canvassed that although capital of SAIL was entirely owned by Government of India, but by virtue of its incorporation under the Companies Act, 1956 its personality was held to be distinct than that of the Government of India. Similarly, reliance has been placed on the judgement of the Hon'ble Supreme Court in the case of Heavy Engineering Mazdoor Union vs. State of Bihar, AIR 1970 SC 82 for the proposition that in the absence of statutory provisions, a commercial corporation acting on its own behalf, though controlled wholly or partially by a Government department, will be ordinarily presumed not to be a servant or agent of the State. On the aforesaid basis, it is sought to be made out that assess....
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....tended that even if such like entities are incorporated under the provisions of the Companies Act, 1956 still having regard to the functions performed, they have to be considered as mere extensions of the Government. By referring to the features of SSNNL, the learned counsel has sought to demonstrate that the tests laid down by the Hon'ble Supreme Court in the case of Som Prakash Rekhi (supra) and Pradeep Kumar Biswas & Ors. (supra) are fulfilled and SSNNL is liable to be considered as a 'statutory body' falling within the meaning of section 80IA(4)(i(b) of the Act. 12. Before we proceed further, it would be appropriate to briefly refer to the salient features and objects of SSNNL. In this regard, we have perused the Memorandum and Articles of Association of SSNNL, a company incorporated under the provisions of the Companies Act, 1956. The main object of the said company is to execute, operate and maintain the Sardar Sarovar project comprising of a dam across river Narmada in the Nandod Taluka of Bharuch district in the State of Gujarat; a canal system emanating from the reservoir called the Sardar Sarovar impounded by the construction of the said dam; power houses at the foot of ....
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....nt and started erection work of the dam. In around 1988, the Government of Gujarat was advised that for efficient administration, execution and accountability the work may be carried out by a Nigam (i.e. a corporate body). Accordingly, the Government of Gujarat passed a resolution No. NMD/1073(86)33/(2)H dated 21.03.1988 which converted NDD into a fully owned Government company, namely, SSNNL. Accordingly, a corporate entity was incorporated by the Government of Gujarat under the provisions of the Companies Act, 1956 for execution of Sardar Sarovar project. Subsequently, the Government of Gujarat vide a resolution dated 31.08.1988 transferred the entire staff and officers working under the control of the Narmada Development Department to SSNNL. The Gujarat Government also transferred the assets of the Sardar Sarovar project to SSNNL vide a G.R. No. COR-1488-H dated 27th October, 1988. 16. The aforesaid background of the manner in which SSNNL came to be incorporated and read with the main objects contained in the Memorandum and Articles of Association of SSNNL, show that it was to work under the direct supervision and control of the Government of Gujarat. The other objects which we....
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....mportant criterion although it may be an indicium." 18. As per the Hon'ble Supreme Court, if the aforesaid tests are fulfilled by an entity, it would qualify to be understood as an instrumentality of State. As per the Hon'ble Supreme Court, the aforesaid tests provide an aid to determine whether a particular body is a State within meaning of Article 12 of the Constitution of India. Emphasizing the import of the aforesaid tests, the Hon'ble Supreme Court noted that true test is not how the legal entity in question was created but why it was created. The Hon'ble Supreme Court also observed that all the tests may not be applicable or satisfied in a given case, but one will have to arrive at a conclusion based on the cumulative effect of the said tests. 19. The claim of the assessee before us is that SSNNL complies with all the tests laid down by the Hon'ble Supreme Court in the case of Som Prakash Rekhi (supra). First test is whether the share capital of the corporation is held by the Government. In the present case, the entire share capital of SSNNL is admittedly owned and held by the Government of Gujarat. The second test is as to whether the State exercises unusual degree of cont....
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.... State. In our view, the said test is also fulfilled in the face of the fact that the incorporation of SSNNL, its ownership, management, control as well as the powers have a unmistakable stamp of a Government. 20. In view of the aforesaid discussion, in our view, the tests laid down by the Hon'ble Supreme Court in the case of Som Prakash Rekhi (supra) are fulfilled in the present case and it would be appropriate to deduce that SSNNL is an instrumentality or an agency of the State. Therefore, SSNNL is to be understood as an entity akin to those specified in sub-clause (b) of clause (i) to sub-section (4) of section 80IA of the Act. Therefore, the objection of the Revenue that SSNNL was a company incorporated under the provisions of the Companies Act, 1956 and is therefore outside the purview of section 80IA(4)(i) of the Act is unfounded. In-fact, the Hon'ble Supreme Court in the case of Som Prakash Rekhi (supra) specifically observed that merely because an entity is created under 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, i....
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....SSNNL. As per the Assessing Officer, assessee has executed a works contract and therefore, it was merely a 'contractor'. 25. On this aspect, it would be appropriate to refer to the scope of work carried out by the assessee. Notably, assessee was awarded the work of 'Saurashtra Branch Canal Pumping Scheme' to be executed on turnkey basis. In the course of execution of the project, assessee was required to conceptualize, design, engineering, manufacture, erect, test and commission and also operate five pumping stations. It has also been pointed out by the assessee that the pumping scheme carried out one of the largest irrigation scheme, which irrigated about 5.4 lakh hectares of land and provided drinking water to 4620 towns and villages. It has also been pointed out by the assessee that it developed certain new technologies in the course of executing the project, namely, Siphon Technology, and the same was got patented also. The assessee also imported Concrete Volute Pump Technology for the project. The use of such technology ensured saving in energy bills. The assessee has also pointed out before the lower authorities that the import of technology and development of new technology....
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.... the Revenue and held that the contract executed by the assessee for supply, installation, testing, commissioning and maintenance of container handling cranes at the JNPT terminal tantamounted to development of an infrastructure facility within the meaning of section 80IA of the Act. In our considered opinion, the said judgement of the Hon'ble High Court clearly covers the case of the assessee of being a 'developer' and not merely a 'contractor' for the purposes of section 80IA(4) of the Act. 27. Remaining on this objection, it has also been asserted by the assessee before us that the scope of work assigned by the SSNNL was identical to the scope of work assigned by the Government of Andhra Pradesh to the assessee for its Godavari Lift Irrigation scheme. In so far as the profits relating to the project of Godavari Lift Irrigation scheme is concerned, the benefits of section 80IA has been allowed to the assessee and the assessee has not been treated as a 'contractor'. It has been pointed out that on account of the aforesaid, the stand of the Revenue in relation to the project executed for SSNNL is self-contradictory. 28. Before us, the aforesaid assertions of the assessee have not....
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....uction was allowed u/s 80IA of the Act. Thus, we do not find any justification to deny the claim of deduction u/s 80IA(4) of the Act merely because the cost of the project executed by the assessee was not fully funded by the assessee itself. 32. In view of the aforesaid discussion, we therefore hold that assessee is eligible for the claim of deduction u/s 80IA of the Act amounting to Rs. 40,02,10,981/- in respect of the profits derived from development of infrastructure facility for SSNNL. The order of the CIT(A) is set-aside and the Assessing Officer is directed to allow the deduction. 33. The next Ground of Appeal is with regard to a disallowance of Rs. 2,49,66,190/- representing Provision for Pension scheme for employees. The claim has been denied on the ground that it was a contingent liability and not an ascertained liability. 34. The claim of the assessee was based on the decision of the Hon'ble Calcutta High Court in the case of CIT vs. National Insurance Company of India, 127 ITR 54 (Cal). At the time of hearing, learned counsel for the assessee submitted that a similar issue has been considered by the Tribunal in the case of Kirloskar Pneumatic Co. Ltd. vs. JCIT vide ....
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....e of Rs. 6,63,61,181/- but made a disallowance of Rs. 18,70,849/- on account of the fact that interest expenditure was not allocated to the Godavari project. The assessee is in appeal challenging the disallowance of deduction u/s 80IA of the Act to the extent of Rs. 18,70,849/- and the Revenue by way of Grounds of Appeal Nos. 1 to 3 in the cross-appeal has challenged the action of the CIT(A) in setting aside the disallowance of deduction u/s 80IA to the extent of Rs. 6,63,61,181/- made by the Assessing Officer. Since the cross-grounds relate to a similar issue, they are being disposed-off together. 37. It was noted by the Assessing Officer that the profit declared by the assessee from the Godavari Lift Irrigation project was 45% whereas in respect of other projects the average profits were in the range of 30%. In arriving at the average profit of 30%, the Assessing Officer took into consideration the profit margin of various projects undertaken by the assessee in different years. Therefore, the Assessing Officer invoked the provisions of section 80IA(8) of the Act and arrived at the mean of average profits at 37.5% and applying this rate the eligible profit computed on the basis o....
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....he Act with respect to the Godavari project is concerned there is no dispute. We are in agreement with the CIT(A) that the profit shown by the assessee in its books of account relating to the Godavari project has been disregarded by the Assessing Officer on mere conjectures and surmises. No doubt, the profit ratio in case of the Godavari project is higher in comparison to other projects 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 Rs. 6,63,61,181/- out of deduction u/s 80IA of the Act is hereby affirmed. 41. In so far as the action of the CIT(A) in scaling down the deduction u/s 80IA of the Act to the extent of Rs. 18,70,849/- on account of allocation of interest expenditure is concerned, we find that the same is quite justified. The assessee has n....