In case of Ramky Energy and Environment Ltd. [1] (Taxpayer), where the Taxpayer is engaged in the business of biomedical and municipal solid waste management , the issue under consideration before the Hyderabad Income Tax Appellate Tribunal (Tribunal) was whether the Taxpayer had fulfilled the condition of entering into an agreement either with the central or state government or local authority or any other statutory authority when it had consent or authorization from the State Pollution Control Board.
The Indian Tax Laws (ITL) provide profit-linked deduction, subject to fulfillment of certain conditions, to eligible taxpayers. Section (S.) 80IA(4) of the ITL is one such provision which allows deduction of profits @ 100% to the taxpayer for 10 successive years out of 20 years, if it has entered into an “agreement” either with the central or state government or local authority or any other statutory authority, inter alia, for the purpose of developing and maintaining a new infrastructure facility. The term “infrastructure facility” is defined to, inter alia, include a solid waste management system.
As per the Bio-Medical Waste (Management and Handling) Rules, 1961, every operator of biomedical waste has to make an application for authorization of a facility from the prescribed authorities (i.e., Tamil Nadu State Pollution Control Board and Karnataka State Pollution Control Board; in case of the Taxpayer).
The Taxpayer contended that the consent granted by the State Pollution Control Board is sufficient criterion for claiming benefit under S.80-IA(4) of the ITL, as there is no specific format provided for an agreement in that provision. Reference was made to the Indian contract laws [2] to state that the essential requirement to constitute an agreement is that there must be two parties and there is a proposal/offer from one party and acceptance from the other party. “Consent” means voluntary agreement to another’s proposition. Thus, approval has the characteristics of an “agreement”. The Taxpayer also relied on the Madras High Court decision [3] which held that there is no need for specific execution of an agreement in a case where the proposal was accepted by the government on satisfaction of certain conditions. The requirement of agreement has not to be read in the strict sense. This proposition is supported by various case laws [4].
The tax authority contended that the word “agreement” cannot be substituted either by “approval or “consent”. In case of an agreement, there is a meeting of minds between the parties to the agreement to agree on certain terms and conditions, whereas for the approval/consent, no meeting of minds is required as it is granted on fulfillment of various conditions. The tax authority relied on the Supreme Court (SC) ruling in the case of Wipro Ltd. [5] where the SC had held that there should be strict compliance of the provisions of law whenever any exemption of income/or direction is claimed by the taxpayer.
The Hyderabad Tribunal ruled in the tax authority’s favor and held that there must be some agreement in existence prior to raising (creation) of any infrastructure, either with the central or state government or local authorities. Based on such an agreement, the Taxpayer should develop or operate and maintain the infrastructural facilities. The grant of approval by the State Pollution Control Board for running the facility of biomedical waste management would not amount to entering into an agreement to provide the infrastructure facility. There is a distinction between the statutory approval required for providing the facility and the agreement entered into by the Taxpayer with authorities for development of the infrastructure facilities. The Tribunal relied on the SC ruling in Wipro’s case (supra) to uphold that entering into an agreement with the specified authority is essential.
For the purposes of S.80IA(4) of the ITL, there must be some written agreement or an agreement can be inferred from the conduct of the parties agreeing to the construction of certain infrastructure facilities, which has to be submitted to the specified authority. In the present case, no such agreement was entered into between the Taxpayer and the specified authority for providing the infrastructure facility. Therefore, the tax authority had rightly denied the benefit under S.80IA(4) of the ITL.
