The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that where NHAI transfers to contractors, for fixed consideration, the right to collect user fee/toll and retain collections, the transaction is not the collection of statutory toll itself but a commercial assignment of a valuable right. Such transfer constitutes “franchise service” up to 30.06.2012 and taxable service thereafter. The exclusion under Section 66D(a) or Section 66D(h) of the Finance Act, 1994 is inapplicable because the impugned activity is neither a sovereign function nor the actual service by way of access to a road or bridge on payment of toll charges.
The Tribunal also held that the extended period of limitation was rightly invoked, since NHAI had not obtained registration, had not filed returns, and had not paid tax despite receiving substantial consideration over several years, and that interest and penalties were sustainable in the factual matrix.
The Division Bench comprising Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) observed that the agreement clearly established that NHAI did not merely authorize contractors to assist in collection of toll, but transferred a valuable and exclusive commercial right to collect user fee and appropriate the collection for fixed consideration. Since the contractors paid a predetermined amount irrespective of actual traffic, the consideration paid to NHAI was held to be not the statutory toll itself, but contractual consideration for assignment of an exploitable business right, distinct from the statutory levy collected from road users.
On the pre-01.07.2012 position, the Tribunal observed that Section 65(47) of the Finance Act, 1994 defined “franchise” as an agreement by which representational right to provide service is granted for consideration, and held that NHAI granted contractors the representational right to collect toll in its name. Without such authorization, the contractors had no legal authority to collect toll, the activity squarely fell within “franchise service.”
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For the period after 01.07.2012, the Tribunal observed that assignment of user fee collection rights for consideration constituted a “service” under Section 65B(44) of the Finance Act and that Section 66D(h), which excludes service by way of access to a road or bridge on payment of toll charges, did not apply because the case concerned not the toll collected from road users but the consideration received by NHAI from contractors for transfer of the right to collect toll. The Tribunal also rejected the reliance on Section 66D(a), holding that the issue was not provision of facility by Government, but transfer by NHAI of its right to collect toll for lump sum consideration.
The Tribunal further observed that, though NHAI is a statutory authority, it is constituted as a body corporate and is required to act on business principles under Section 10 of the NHAI Act. Transfer of toll collection rights through competitive bidding for commercial consideration was therefore held to be a business activity and not an inalienable sovereign function. It also distinguished the Board Circular dated 22.02.2012 and decisions dealing with non-taxability of toll collected from road users, holding that those authorities did not apply to the present factual matrix involving transfer of user fee collection rights.
Briefly, the appeals arose from Orders-in-Original confirming Service Tax demand, together with interest and penalties, on amounts received by the National Highways Authority of India (NHAI) from contractors towards transfer of “user fee collection rights” for various toll plazas. The Department’s case was that, by assigning toll collection rights to contractors for consideration, NHAI rendered a taxable service, classifiable as “franchise service” prior to 01.07.2012 and as a taxable service not covered under the negative list thereafter. NHAI contended that toll is a statutory levy, that contractors did not receive any representational right, that the activity was covered by Section 66D(h) and Section 66D(a) of the Finance Act, 1994, and that it was acting in the nature of a sovereign/statutory function.
The contract between NHAI and the contractor recorded that NHAI invited bids for collection of user fee for a defined period, that the contractor quoted a fixed amount in lieu of transfer of the Central Government’s user fee collection rights, and that such amount was to be remitted weekly to NHAI. The contract also stated that the contractor would carry out the job of user fee collection on behalf of the Authority.
