TaxTMI 
TaxTMI 
2016 (9) TMI 1296
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....hat assessee has debited an amount of Rs. 46.69 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....
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....e that the payment made was excessive as compared to market value. Accordingly, 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....
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....ng or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility which fulfils 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 establish....
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....i in its order has observed as under:- "There has also been the contention of the Revenue that the assessee is a contractor, executing civil contract and so it cannot be the developer 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\APS....
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....rson 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 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 f....
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....ded with effect from 01.04.2002 which reads as under:- "80-IA (1) ..... (2) . (3) . (4) This section applies to - (i) any enterprise carrying on the business of (i) developing or (ii) operating and maintaining or (iii) developing operating & maintaining 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 wa....
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....ed to the deduction u/s. BO-IA on the profits of eligible infrastructure projects" 9. With regard to objection of AO that conditions specified u/s.80IA(4)(1)(c) is not fulfilled, the observation of CIT(A) was as under :- 7.3. I have gone through the facts, as well as the contentions of the appellant. As discussed in earlier 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....
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....ot applicable to the present assessee. (Emphasis supplied) Hence it cannot be stated that the appellant is not entitled to deduction under section 80-lA as one of the conditions. As stipulated in Sec.80-IA (4)(c) is not fulfilled, does not hold good after the Introduction of Explanation to subsection (13) of Sec. 80-lA and after the decision 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 ....
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....s within such business activity as is eligible for deduction under section 80-lA. Therefore, merely because the present assessee was paid by the Government, for development work, it cannot be denied deduction under section BD-lA (4). A ITA No.200/15 13 person, who enters into a contract with another person will be a contractor no doubt; and the assessee having entered into an 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 ....
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....vision was intended to give an incentive to investment for infrastructural growth in the country. The requirement that the operation and maintenance of the infrastructure facility should commence after 1st April 1995 has to be harmoniously construed with the main provision under which a deduction is available to an assessee who develops; or operates and maintains; or develops, operates and 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 emphasi....
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....April 2001 has been inserted by Finance (No.2) Act 2009 which is as under: [Explanation. - For the removal of doubts, it is hereby declared that nothing contained in this sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including the Central or State Government).} It is clear that effect of the above explanation is identical to that in section 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 ben....
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.... not involving safe of goods. " Para 16 The distinction between a contract of safe and a works contract found elaboration in the following observations: " ... If the intention is to transfer for a price a chattel in which the transferee had no previous property, then the contract is a contract for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be judged not by artificial rules but from the 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", ....
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....ale of goods and not for work and labour. However, the test is not decisive ... Para 21 Broadly speaking, three situations are involved in the manufacture of pharmaceutical products. In the first situation, the pharmaceutical company itself manufactures pharmaceutical preparations which are sold under its brand name. The second situation involves loan licensing where the raw materials are supplied by the pharmaceutical company to the licensee manufacturer who in turn manufactures 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 manufactur....
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....s a captive unit of the purchaser. Such a contract would be a contract of sale. Para 28, In other words, the circumstance that the requirements or specifications are provided by the purchaser is not regarded by the statute as being dispositive of the question as to whether a contract constitutes a contract of work or sale. What is of significance is whether material has been purchased from the customer, who orders the product. When the material is purchased from the customer who orders the product, 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....
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....) in infrastructure in the case of 'BT' with those of a developer in the case of 'BOT' or 'BOOT' is in our considered opinion, of no relevant bearing on the issue, in as much as a developer seems to have almost same rights, title or interest (except regarding mode of payment or collection of tolls) in infrastructure facility whether it be the case of BT or that of BOT or BOOT, in view of the discussions made by us above." 7.14. Therefore it is held that the appellant is entitled to claim deduction u/s. 80-lA. 7.15. As far as objection 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 su....
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....ucture facility developed by the assessee. The appellant carried out the entire development of its own by giving specifications and necessary Designs/plans as per the location of the site, which was done by the technical experts employed by the assessee. Thus, the assessee did the entire development of the infrastructure facility. We also found that the cost of development of the infrastructure facility was paid to the assessee and the same was received by the assessee as per the bills raised. The MCGM while making the payments, deducted tax at source under the provisions of section 194-C of the Act as the development of infrastructure 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.....