For claiming deduction U/s. 80IA(4), twin conditions that is investment in eligible project and execution of the project by itself, are required to be satisfied

Briefly stated, the relevant material facts are like this. The assessee is engaged in the business of manufacture of Hume pipes and execution of civil projects. During the relevant previous year, the assessee had business income earned from execution of projects relevant to development of infrastructure facility such as water supply and sewerage projects – composite, and part of composite, projects. The claim of the assessee was that composite water supply projects mean undertaking water supply projects from source to distribution system, which includes manufacturing, supplying, laying, joining of pipeline and includes construction of pump house, delivery, commissioning of turbine pump sets, installation of booster mains, branch mains and elevator reservoirs etc. With this explanation of activity, it was contended that the assessee was engaged in development of infrastructure facility as defined in explanation (c) to Section 80IA(4). The assessee, on these facts and relying upon Tribunal’s decision in the case of Patel Engineering Ltd (84 TTJ 646), claimed a deduction of ~.11,39,42,000 u/s. 80IA of the Act. The Assessing Officer, however, did not accept the said claim. He was of the view that the assessee was a contractor and not developer. Relying upon Honourable Supreme Court’s judgement in the case of CIT vs. N.C.Budhiraja & Co. (204 ITR 412), the Assessing officer concluded that the assessee cannot be termed as developer of a project merely because assessee has executed the project for actual developer of infrastructure facility, i.e. Government or Semi-government body concerned, and that the assessee company cannot be construed as an enterprise carrying on business of developing, operating and maintaining of any infrastructure facility. As regards decision of a coordinate bench in the case of Patel Engineering (supra), the Assessing Officer observed that the decision has been challenged before Hon’ble Bombay High Court and does not thus give finality to the dispute. The Assessing Officer thus declined the deduction u/s. 80IA, amounting to Rs. .11,39,42,000 to the assessee. Aggrieved, assessee carried the matter in appeal but without any success. Learned CIT(A) upheld the stand of the Assessing Officer and, inter alia, observed as follows:

‘9. I have considered the submissions put forth on behalf of the appellant by the learned AR. The filters and parameters of viewing the eligibility of an assessee for a claim under section 80IA(4) of the Act, have been materially altered by virtue of an amendment, inserted by way of an Explanation in Section 80IA, by the Finance Act, 2007, with retrospective effect from 1^st April, 2000; a matter which has been ignored by the appellant in its detailed submissions. The omission of the appellant to discuss the eligibility of its claim from the perspectives of the said amendment, is indeed conspicuous by the absence. The said explanation, which has an overriding impact in the matter of the appellant’s eligibility of its claim for a deduction u/s.80IA(4) of the Act, is reproduced below:-

“Explanation-for removal of doubts, it is hereby declared that nothing contained in this section shall apply to a person who executes a work contract, entered into with the undertaking or enterprise, as the case may be.”

10. This amendment is of recent vintage. In the ‘MEMORANDUM EXPLAINING THE PROVISIONS IN THE FINANCE BILL 2007’, its purpose and ambit has been discussed as under:-

‘Clarification regarding developer with reference to infrastructure facility, industrial park etc. for the purposes of Section 80IA interalia, provides for a ten year tax benefit to an enterprise or an undertaking engaged in development of infrastructure facilities, industrial parks and special economic zones.

The tax benefit was introduced for the reason that industrial modernization requires a massive expansion of and qualitative improvement in infrastructure (viz. expressways, highways, airports, ports and rapid urban rail transport systems) which was lacking in our country. The purpose of the tax benefit has all along been for encouraging private sector participation by way of investment in development of the infrastructure sector and not for the persons who merely execute the civil construction work or any other works contract.

Accordingly it is proposed to clarify that the provisions of section 80-IA shall not apply to a person 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 carries out the development work i.e. carries out the civil construction work, he will be eligible for tax benefit under section 80-IA. In contrast to this a person who enters into a contract with another person [i.e. undertaking or enterprise referred to in section 80-IA] for executing works contract, will not be eligible for the tax benefit under section 80-IA.

This amendment will take retrospective effect from 1^st April, 2000 and will accordingly apply in relation to the assessment year 2000-2001 and subsequent years.

11. It is clear fro the above amendment that an assessee can claim a deduction under section 80IA(4) only if, it makes the investment in the eligible project and itself executes the development work. An assessee will be denied a deduction u/s.80IA(4) if it enters into a contract with another person, for executing a works contract. While those who participate in an eligible project as per the impugned section by way of investment are entitled to seek a deduction u/s.80IA(4), on the other hand those assesses who merely execute a civil construction work or other works contract are not entitled to claim such a deduction. It is pertinent here to discuss the meaning of a works contract for this purpose. A works contract has not been defined in section 80IA of the Act. A works contract is a contract for labour, work or service and not for sale of goods, though goods are used in executing the contract for labour, work or service e.g. when a contractor constructs a building the developer pays for the cast, which includes the cost of building material, labour and other services offered by the contractor. The Supreme Court while laying down the judicial ratio in the case of HAL Ltd. v. State of Orissa, 55 STC 327 observed that in a contract for work, the person producing has ‘no property’ in the thing produced as a whole, even if part or even whole of material used by him may have been his property earlier. The Apex Court further stated in the case of state of Tamilnadu v. Anandam Vishwanathan (1989) 1 SCC 613 that the nature of contract can be found only when the intentions of the parties are found out. The fact that in the execution of works contract some materials are used and the property in the goods so used, passes to the other party, the contractor undertaking the work will not necessarily be deemed on that account to sell the materials. Primary difference between a contract of work or service and a contract of sale is that in the former, there is the person performing or rendering service, no property in the thing produced as a whole, notwithstanding that a part or even the whole of the material used by him may have been his property. When the finished product supplied to a particular customer is not commercial commodity in the sense that it cannot be sold in the market to any other person (other than who commissioned the contractor), the transaction is only a works contract. It was held by the SC, in the case of State of Gujarat v. Variety Body Builders AIR 1976 SC 2108 that where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for labour and work.

12. This has been reaffirmed and reiterated by the Supreme Court, in a recent judgment pronounced in the case of State of Andhra Pradesh v. Kone Elevators (India) Ltd., 3 SCC 389 (2005), where it was stated as under :-

“it can be treated as well settled that there is no standard formula by which oe can distinguish a “contract for sale” from a “work contract”. The question is largely one of fact depending upon the terms of the contract including the nature of the obligations to be discharged there under and the surrounding circumstances. If the intention 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, whereas 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 dealer 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 contracts”. Therefore, in judging whether the contract is for a “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 “work 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 nature of transaction. No definite rule can be formulated to determine the question as to whether a particular given contract is a contract for sale of goods or is a works contracts. Ultimately, the terms of a given contract would be determinative of the nature of the transaction, whether it is a “sale” of a work contract. Therefore, this question has to be ascertained on facts of each case, on proper construction of terms and conditions of the contract between the parties.”

13. The contracts executed by the appellant, pursuant to which it has claimed a deduction u/s.80IA(4) must therefore, be measured from the above metrics laid down by the Supreme Court in the matter of works contract. I have perused the copies of the agreements with various undertakings which were executed by the appellant for executing the impugned contracts, which are claimed to fall within the domain of section 80IA(4). It is clear from them that the underlying statues of the appellant in each of them is that of a contractor, who has been engaged in a works contract.