By TIOL News Service

KOLKATA, APRIL 25, 2018: THE issue is - Whether construction companies which are exposed to substantial amount of risk by virtue of engaging their establishment in infrastructure projects, should not be construed as mere "works contractor", and hence outside the purview of Explanation to Section 80-IA(13). YES IS THE ANSWER.

Facts of the case:

The assessee is a joint venture between M/s Simplex Infrastructure Ltd and M/s Ho Hup Construction Company (India) Pvt Ltd. The said members entered into an agreement as per which they were to act in collaboration with each other for the purpose of participation and submission of Tender Bid to the National Highway Authority of India for construction of road. The assessee being a consortium of companies engaged in the business of development of infrastructure facility, filed its return for A.Y 2010-11 disclosing total income of Rs 43,80,800/- after claiming the deduction u/s 80IA of Rs 1,11,75,715/-. The AO observed that the assessee had been awarded a contract for 'Rehabilitation and Upgradation of existing 2 lane road to 4/6 lane divided carriageway configuration of Kavali to Ongole of National Highway No. 5 in Andhra Pradesh. The assessee JV had been following the completed contract method of accounting, as per which the total revenue and costs were required to be recognized only after completion of the contract and all expenses on the project incurred during the course of contract were required to be carried forward as Work in Progress to be claimed in the year. Accordingly, in accordance with erstwhile AS-7, the assessee recognized a sum of Rs 298,69,41,081/- as WIP. As the contract was completed during the year, the JV recognized its revenue and accordingly prepared its profit and loss account. The total revenue of Rs 287,86,15,699/- since inception of the contract had been recognized in the year of completion.

The AO however observed that the assessee during the A.Y 2010-11, had shown contractual receipts of Rs 287,86,15,699/- and had shown net profit of Rs 3,58,31,288/- before tax. In the audit report and in the return of income, the assessee claimed deduction u/s 80IA to the tune of Rs 1,11,75,715/- for the development of infrastructure facility. The AO invoked the provisions of Explanation to section 80IA with retrospective effect and observed that the assessee JV was merely executing the civil construction work in the nature of works contracts and receiving payment from the NHAI. The assessee was thus denied the deduction claimed u/s 80IA. On appeal, the FAA deleted the disallowance u/s 80IA by holding that the assessee in the instant case was a developer and hence explanation to section 80IA(13) did not apply to it.

Tribunal held that,

++ the assessee in the instant case is a consortium of companies which, pursuant to agreements with Government, engaged itself in development of infrastructure. The main dispute to be resolved in this appeal is as to whether the assessee is to be treated as a developer or contractor. From a plain reading of the provision, it is clear that deduction u/s 80-IA does not apply to works contract. Now the relevant question that arises here is, that does the term "work contract" include all contracts entered into by the assessee. As per the legislative intent behind the extension of tax holiday to the infrastructure industry u/s 80-IA, if it is interpreted that income from infrastructure development work undertaken under any contract with any person including the Central or State Government is not eligible for deduction u/s 80-IA, then the basic intention behind extension of said benefit will be defeated and Section 80IA(4) shall become redundant. The same will negate the grant of benefit to infrastructure industries under sub-section (4) pursuant to which an existence of agreement with Government authorities is essential for availing the tax holiday. On one hand, the main enactment mandates existence of an agreement with government and on the other hand the Explanation (as interpreted by AO) denies the benefit to the assessee if he undertakes infrastructure work under a contract/agreement. Thus, the interpretation of the Explanation adopted by the AO is clearly contradictory to and has the effect of negating the main enactment;

++ now, Section 80IA itself nowhere defines the term 'works contract', hence the natural meaning of the word shall apply. Thus going by the dictionary meaning, a works contract is a contract which involves effort or in other words labour of the contractor. Thus as per section 194C also, "works contract" does not include a contract wherein the contractor in addition to employing labour, procures material from a third party. Thus, contracts involving mere labour of the contractor are included in the purview of "works contract". The Supreme Court in the case of Associated Cement Co. Ltd. vs. CIT - 2002-TIOL-606-SC-IT laid out that the term "work" used in section 194C need not be restricted to "works contracts" because the sub-section expressly includes supply of labour to carry out work. Thus, it could be safely concluded that a works contract constitutes a contract under which the contractor is merely employing his efforts or labour. Under such a contract, the contractee provides the material and other requisites needed to carry out the desired work to the contractor who by applying his labour to the said material turns the material into a desired product. The Explanatory Memorandum clearly lays out that purpose of extending tax benefit u/s 80-IA was to encourage investments from the private sector and hence work contracts, i.e. contracts involving merely labour (or mere execution of construction without making investments) are outside the purview of the provisions of section 80-IA. Thus, the term "works contract" used in Explanation to section 80-IA(13) means a contract of developing infrastructure by merely employing labour and making no investments;

++ it is found that like any other entrepreneur who employs his material, plant, machinery, labour etc in a project and undertakes risk, the assessee was also exposed to a substantial amount of risk by virtue of engaging his establishment in the infrastructure projects. In addition, the assessee was exposed to risk of non-completion of work within time, any damage caused to the works, site etc. increase in prices of materials, labour etc. beyond what the Government had agreed to compensate as per the agreement. From the facts, it is clear that the assessee was a developer and not a mere works contractor. Thus, it is clearly outside the purview of the Explanation to section 80-IA(13) of the Act. The terms and conditions of agreement entered into between the assessee and National Highway Authority of India, clearly exhibit that it is not a case where the assessee was provided with the establishment and materials required to execute the work, which happens in case of works contract where the contractor gets the material and other requisites from the client and all he has to do is employ labour. The assessee in the given case was to procure raw material, make arrangements for power, water, plant machinery etc., and conduct all the other activities needed for construction.

(See 2018-TIOL-604-ITAT-KOL)