Income Tax Appellate Tribunal - Hyderabad
Koya & Company Constructions Pvt. Ltd, ... vs Department Of Income Tax on 21 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 1843/Hyd/2012
Assessment year 2007-08
The Deputy CIT Vs. M/s. Koya & Company
Circle-2(1) Constructions Pvt. Ltd.
Hyderabad Hyderabad
PAN: AACCK3240R
Appellant Respondent
C.O. No. 10/Hyd/2013
In ITA No. 1843/Hyd/2012
Assessment year 2007-08
M/s. Koya & Company Vs. The Deputy CIT
Constructions Pvt. Ltd. Circle-2(1)
Hyderabad Hyderabad
PAN: AACCK3240R
Appellant Respondent
Revenue by: Smt. Amisha S. Gupt
Assessee by: Sri K.C. Devadas
Date of hearing: 21.03.2013
Date of pronouncement: 05.04.2013
ORDER
PER CHANDRA POOJARI, AM:
This appeal by the Revenue is directed against the order of the CIT(A), Vijayawada dated 26.6.2012 for assessment year 2007-08.
2. The Revenue raised the following grounds:
1. The learned CIT(A) erred on facts and in law in granting relief to the assessee.
2. The CIT(A) erred in law in directing the AO to make afresh verification and take a decision which amounts to set-aside which is beyond the scope of powers of the CIT(A).2 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013
M/s. Koya & Company Constructions Pvt. Ltd. ==================================
3. The CIT(A) erred in law in directing the AO to examine the issue afresh with refe rence to each contract for the purpose of risk, investment, etc., while giving finding at the same that the assessee has incurred risk and invested amounts.
4. The CIT(A) erred in law setting aside the matter though no entrepreneurial risk and investment is undertaken by the assessee.
5. The CIT(A) erred in law in considering works contracts for deduction u/s. 80IA though they are not eligible under law for such deduction.
3. The assessee in the CO raised the following grounds:
The learned CIT(A)-I, Vijayawada ought to have clearly held that
1. Having regard to the technical nature of the work under taken by the Respondent which was demonstrated before him and therefore ought to have clearly held that the Respondent was entitled for deduction u/s 80-IA(4) of the IT Act 1961.
2. The learned CIT (A)-I, Vijayawada having found as a matter of fact on the basis of Tender documents produced before him that the projects undertaken by the Respondent involved development, operating, maintenance, financial involvement, defect correction and liability period and hence ought to have clearly held that the Respondent was an Infrastructure developer within the meaning of section 80IA(4) of the IT Act 1961 and was therefore eligible for the deduction of the profits derived therefrom.
3. The learned CIT(A)-I, Vijayawada ought to have held that the respondent is entitled to deduction u/s 80IA(4) at Rs. 9,48,73,909 as against Rs.
4,89,85,407 and the same is to be allowed
4. The learned CIT(A)-I, Vijayawada ought to have held that the respondent is entitled to deduction u/s 80IA (4) of the Income Tax Act, 1961 in respect of the sum of Rs. 50 lakhs added during assessment proceedings.
3 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013M/s. Koya & Company Constructions Pvt. Ltd. ==================================
4. We have heard both the parties and perused the material on record. After hearing both the parties we are of the opinion that the allowability of deduction u/s. 80IA is subject matter of appeal before this Tribunal in various cases and the Tribunal given a finding in these cases. The same issue came for consideration before this Tribunal in assessee's own case in ITA Nos. 180/Hyd/2016, 167/Hyd/2008 and 168/Hyd/2008 for A.Ys. 2003-04, 2004-05 and 2005-06, respectively. The Tribunal vide order dated 22.3.2012 held as follows:
"22. In our opinion, this issue came for consideration in M/s. Koya & Co. Construction (P) Ltd. v. ACIT, 51 SOT 203 (Hyd) (URO) wherein the Tribunal held as follows:
"24. ... We find that the provisions of Section 80IA (4) of the Act when introduced afresh by the Finance Act, 1999, the provisions under section 80IA (4A) of the Act were deleted from the Act. The deduction available for any enterprise earlier under section 80IA (4A) are also made available under Section 80IA (4) itself. Further, the very fact that the legislature mentioned the words (i) "developing" or
(ii) "operating and maintaining" or (iii) "developing, operating and maintaining" clearly indicates that any enterprise which carried on any of these three activities would become eligible for deduction.
Therefore, there is no ambiguity in the Income-Tax Act. We find that where an assessee incurred expenditure for purchase of materials himself and 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 assessee, who enters into a contract with another person including Government or an undertaking or enterprise referred to in Section 80 IA of the Act, for executing works contract, will not be eligible for the tax benefit under section 80 IA of the Act. We find that the word "owned" in sub- clause (a) of clause (1) of sub section (4) of Section 4 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd. ================================== 80IA of the Act refer to the enterprise. By reading of the section, it is clears that the enterprises carrying on development of infrastructure development should be owned by the company and not that the infrastructure facility should be owned by a company. The provisions are made applicable to the person to whom such enterprise belongs to is explained in sub-clause (a). Therefore, the word "ownership" is attributable only to the enterprise carrying on the business which would mean that only companies are eligible for deduction under section 80IA (4) and not any other person like individual, HUF, Firm etc.
25. We also find that according to sub-clause (a), clause (i) of sub section (4) of Section 80-IA the word "it" denotes the enterprise carrying on the business. The word "it" cannot be related to the infrastructure facility, particularly in view of the fact that infrastructure facility includes Rail system, Highway project, Water treatment system, Irrigation project, a Port, an Airport or an Inland port which cannot be owned by any one. Even otherwise, the word "it" is used to denote an enterprise. Therefore, there is no requirement that the assessee should have been the owner of the infrastructure facility.
26. The next question is to be answered is whether the assessee is a developer or mere works contractor. The Revenue relied on the amendments brought in by the Finance Act 2007 and 2009 to mention that the activity undertaken by the assessee is akin to works contract and he is not eligible for deduction under section 80IA (4) of the Act. Whether the assessee is a developer or works contractor is purely depends on the nature of the work undertaken by the assessee. Each of the work undertaken has to be analyzed and a conclusion has to be drawn about the nature of the work undertaken by the assessee. The agreement entered into with the Government or the Government body may be a mere works contract or for development of infrastructure. It is to be seen from the agreements entered into by the assessee with the Government. We find that the Government handed over the possession of the premises of projects to the assessee for the development of infrastructure facility. It is the assessee's responsibility to do all 5 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd. ================================== acts till the possession of property is handed over to the Government. The first phase is to take over the existing premises of the projects and thereafter developing the same into infrastructure facility. Secondly, the assessee shall facilitate the people to use the available existing facility even while the process of development is in progress. Any loss to the public caused in the process would be the responsibility of the assessee. The assessee has to develop the infrastructure facility. In the process, all the works are to be executed by the assessee. It may be laying of a drainage system; may be construction of a project; provision of way for the cattle and bullock carts in the village; provision for traffic without any hindrance, the assessee's duty is to develop infrastructure whether it involves construction of a particular item as agreed to in the agreement or not. The agreement is not for a specific work, it is for development of facility as a whole. The assessee is not entrusted with any specific work to be done by the assessee. 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 un-developed 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 eligible for deduction under section 80IA (4) of the Act. This cannot be considered as a mere works contract but has to be considered as a development of infrastructure 6 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd. ================================== facility. Therefore, the assessee is a developer and not a works contractor as presumed by the Revenue. The circular issued by the Board, relied on by learned counsel for the assessee, clearly indicate that the assessee is eligible for deduction under section 80IA (4) of the Act. The department is not correct in holding that the assessee is a mere contractor of the work and not a developer.
27. We also find that as per the provisions of the section 80IA of the Act, a person being a company has to enter into an agreement with the Government or Government undertakings. Such an agreement is a contract and for the purpose of the agreement a person may be called as a contractor as he entered into a contract. But the word "contractor" is used to denote a person entering into an agreement for undertaking the development of infrastructure facility. Every agreement entered into is a contract. The word "contractor" is used to denote the person who enters into such contract. Even a person who enters into a contract for development of infrastructure facility is a contractor. Therefore, the contractor and the developer cannot be viewed differently. Every contractor may not be a developer but every developer developing infrastructure facility on behalf of the Government is a contractor.
28. We find that the decision relied on by the learned counsel for the assessee in the case of CIT vs. Laxmi civil Engineering works [supra] squarely applicable to the issue under dispute which is in favour of the assessee wherein it was held that mere development of a infrastructure facility is an eligible activity for claiming deduction under section 80IA of the Act after considering the Judgement of the Mumbai High Court in the case of ABG Heavy Engineering [supra]. The case of ABG is not the pure developer whereas, in the present case, the assessee is the pure developer. We also find that Section 80IA of the Act, intended to cover the entities carrying out developing, operating and maintaining the infrastructure facility keeping in mind the present business models and intend to grant the incentives to such entities. The CBDT, on several occasions, clarified that pure developer should also be eligible to claim deduction under 7 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd. ================================== section 80IA of the Act, which ultimately culminated into Amendment under section 80IA of the Act, in the Finance Act 2001, to give effect to the aforesaid circulars issued by the CBDT. We also find that, to avoid misuse of the aforesaid amendment, an Explanation was inserted in Section 80IA of the Act, in the Finance Act-2007 and 2009, to clarify that mere works contract would not be eligible for deductions under section 80IA of the Act. But, certainly, the Explanation cannot be read to do away with the eligibility of the developer; otherwise, the parliament would have simply reversed the Amendment made in the Finance Act, 2001. Thus, the aforesaid Explanation was inserted, certainly, to deny the tax holiday to the entities who does only mere works contact or sub-contract as distinct from the developer. This is clear from the express intension of the parliament while introducing the Explanation. The explanatory memorandum to Finance Act 2007 states that the purpose of the tax benefit has all along been to encourage investment in development of 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 us that the assessee at present has undertaken huge risks in terms of deployment of technical personnel, plant and machinery, technical know-how, expertise and financial resources.
29. As per submission of the assessee's counsel broadly the technical nature of the work undertaken by the assessee is as follows:
i) Designing and Manufacturing of pipes: The assessee specially designed and manufactured Pre-stressed concrete pipes and it has been done in accordance with specific requirements.
ii) Design and manufacturing of pipe fittings or specials 8 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd.
==================================
ii) Transporting, Laying and Joining of pipes conforming with specifications. The activity involves earth work excavation, trench excavation, hard rook blasting, lowering and laying of pipes, fitting of specials, fitting of rubber rings at the joints, testing pipe joints and pipeline.
iii) Construction of pump house, providing and fitting of pump sets. Supply and fitting of submersible pumps, centrifugal pumps, turbine pumps, submersible motors, motors for turbines and centrifugal pump sets, transformer, generator, panel boards etc.
iv) Design and construction of raw water pumping stations, water treatment plant, treated water pumping station, treated water transmission main, construction of surge tank and pipe connection arrangement, booster stations, internal transmission main and feeder mains, construction of service reservoirs and master reservoirs.
v) Mobilisation of labourers, [preparation of plans technical expertise, supervision, co- ordination and control, set up manufacturing facility nearby the project site to manufacture project specific pipes as per the required specifications which requires well equipped machines, employment of skilled labour and technical experts, equipment to transport heavy pipes to laying sites, equipment to lift and lowering of pipes at the excavated sites, provide qualified and experience engineer for each project site etc to bring in to existence an infrastructure facility. Manufacturing of pipes to sites, excavation under various conditions of soil and rock, lowering and laying of pipes, jointing and testing of pipe joint and pipe line as a whole, construction of pump houses, storage tank/collection well, treatment plants, distribution plants etc and all these together develop in to a new infrastructure water supply facility.
30. Further, the order of Tribunal in the case of B.T. Patil cited supra is prior to amendment to sec 9 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd. ================================== 80IA(4), after the amendment the section 80IA(4) read as (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility, prior to amendment the "or" between three activities was not there, after the amendment "or" has been inserted w.e.f. 1-4-2002 by Finance Act 2001.
31. Accordingly, the assessee is entitled for deduction under section 80IA of the Act on the projects which involve above activities. Therefore, in our considered view, the assessee should not be denied the deduction under section 80IA of the Act if the contracts involves development, operating, maintenance, financial involvement, and defect correction and liability period, then such contracts cannot be called as simple works contract to deny the deduction u/s 80IA of Act. In our opinion the contracts which contain above features to be segregated on this deduction u/s. 80-IA has to be granted and the other agreements which are pure works contracts hit by the explanation section 80IA(13), those work are not entitle for deduction u/s 80IA of the Act. The profit from the contracts which involves development, operating, maintenance, financial involvement, and defect correction and liability period is to be computed by assessing officer on pro-rata basis of turnover. The assessing officer is directed to examine the records accordingly and grant deduction on eligible turnover as directed above. It is needless to say that similar view has been taken by the Chennai Bench of the Tribunal and deduction u/s. 80IA was granted in the case of M/s. Chettinad Lignite Transport Services (P) Ltd., in ITA No. 2287/Mds/06 order dated 27th July, 2007 for the assessment year 2004-05. Later in ITA No. 1179/Mds/08 vide order dated 26th February, 2010 the Tribunal has taken the same view. ..."
5. In the case of GVPR Engineers Ltd. v. ACIT, 51 SOT 207 (Hyd) (URO) wherein the Tribunal held that deduction u/s. 80IA is available to developers who undertake entrepreneurial investment risk and not for the contractors, who undertake only business risk. Without any doubt, the assessee clearly 10 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd. ================================== demonstrated that the plant and machinery, technical know- how, expertise and financial resources. Therefore, if the contracts involve design, development, operation & maintenance, financial involvement and defect correction and liability period, then such contracts cannot be called as simple works contract, to deny the deduction under section 80IA. The contracts which contain above features to be segregated have to be granted deduction under section 80IA and the other agreements which are pure works contracts hit by the Explanation to section 80IA(13) are not entitled for deduction under section 80IA. The profit from the contracts which involve design, development, operating & maintenance, financial involvement and defect correction and liability period is to be computed by the Assessing Officer on pro rata basis of turnover. The Assessing Officer is directed to examine the records, accordingly, and grant deduction on eligible turnover.
6. In the case of KMC Construction Ltd. v. ACIT, 51 SOT 214 (Hyd) (URO) wherein the Tribunal has taken the same view.
7. In the case of Sushee Hi-Tech Constructions Pvt. Ltd. vs. DCIT, in ITA Nos. 269 & 1165/Hyd/2009 and ITA No. 1171/Hyd/2010 dated 16th March, 2012 wherein the Tribunal held as follows:
" ... The assessee should not be denied the deduction under section 80IA of the Act as the contracts involves, development, operating, maintenance, financial involvement, and defect correction and liability period, then such contracts cannot be called as simple works contract. In our opinion the contracts which contain above features to be segregated and on this deduction u/s. 80-IA has to be granted and the other agreements which are pure works contracts hit by the explanation section 80IA(13), those work are not entitle for deduction u/s 80IA of the Act. The profit from such contracts which involves development, operating, maintenance, financial involvement, and defect correction and liability period is 11 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd. ================================== to be computed by assessing officer on pro-rata basis of turnover. The assessing officer is directed to examine and grant deduction on eligible turnover as directed above."
26. In view of the above orders of the Tribunal on similar issue relating to deduction u/s. section 80-IA(4), we are inclined to remit the issue back to the file of the Assessing Officer to decide the issue in the light of the above order."
8. Further the same issue came for consideration in the case of Bhooratnam Construction Co. Pvt. Ltd. in ITA Nos. 270 & 271/Hyd/ 2011. The Tribunal vide order dated 7.9.2012 held as follows:
"8. We have heard both the parties and perused the material on record. In our opinion, as seen from the facts of the case, the assessee has not produced copies of tender/contract executed by it before the lower authorities. Before us the assessee filed certain copies of tenders suggesting nature of activity carried on by the assessee and argued that the issue is already decided by this Tribunal in favour of the assessee by various decisions cited supra. However, at this stage we are not in a position to express any opinion on the nature of activities carried on by the assessee. The lower authorities had no occasion to examine the nature of activities carried on by the assessee. Being so, in our opinion, it is appropriate to remit the issue back to the file of Assessing Officer for fresh consideration. While doing so, the Assessing Officer has to see whether the assessee carried on contract for sale or contract for work and the applicability of Explanation below section 80IA(13) of the Act. The Assessing Officer is directed to examine the terms of contract including the nature of obligation to be discharged by the assessee while executing the contract. For claiming deduction u/s. 80IA(4) the assessee shall satisfy the two conditions viz., investment in eligible projects and (2) execution of project by itself. If the assessee satisfies the above conditions and the above Explanation if not applicable then only the assessee is entitled for deduction u/s. 80IA(4) of the Act. With this observation, we remit the entire issue back to the file of the Assessing Officer for fresh consideration and to decide in accordance with law."
9. In view of the above order of the Tribunal, we are inclined to remit the issue back to the file of the Assessing Officer with a direction to examine the issue afresh and to see whether the 12 ITA No. 1840/Hyd/2012 & CO No. 10/Hyd/2013 M/s. Koya & Company Constructions Pvt. Ltd. ================================== assessee carried on the development of infrastructure facilities cumulatively with the activities of design, development, operation, maintenance, financial involvement, defect correction of the contract executed by the assessee itself. In the event, the assessee itself carried on the development of infrastructure facilities/contract along with design, development, operation, maintenance, financial involvement, defect correction of the contract during the warranty period, then such contract to be considered as a development of infrastructure facility executed by the assessee and thereby eligible for deduction u/s. 80IA of the Act.
10. Since the issue raised by the Revenue is remitted back to the file of the Assessing Officer for fresh consideration, the CO by the assessee at this stage becomes infructuous and accordingly dismissed.
11. In the result, Revenue appeal allowed for statistical purposes and the CO by the assessee is dismissed.
Order pronounced in the open court on 5th April, 2013.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated the 5th April, 2013
Copy forwarded to:
1. The Deputy CIT, Circle-2(1), 8th Floor, B Block, IT Towers, Hyderabad.
2. M/s. Koya & Company Constructions Pvt. Ltd., 12-2-831/ 38/1, 72 MIGH, Mehdipatnam, Hyderabad-73.
3. The CIT(A), Vijayawada.
4. The CIT-II, Hyderabad.
5. The DR - B Bench, ITAT, Hyderabad.
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