Transfer Of Toll Collection Rights By NHAI Taxable As Service, Not Sovereign Function: CESTAT Hyderabad

On 2 June, the Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that consideration received by the National Highways Authority of India (NHAI) from contractors for transferring toll collection rights constitutes a taxable service and does not qualify as a sovereign function.

Judicial Member Angad Prasad and Technical Member A.K. Jyotishi dismissed three appeals filed by NHAI challenging service tax demands, interest, and penalties arising from agreements granting toll collection rights at various toll plazas in Andhra Pradesh. The Bench held:

“...The consideration paid to NHAI is not a statutory toll itself, but a contractual consideration for assignment of exploitable business right. This transaction possesses essential characteristics of a commercial service arrangement and is distinct from the statutory levy i.e. Toll collected from road users.”

The dispute arose from agreements under which NHAI granted private contractors the right to collect toll at designated plazas. NHAI argued that toll constitutes a statutory levy collected on behalf of the Government and that the arrangement involves either a sovereign function or a service covered under the negative list relating to access to roads on payment of toll. It also contended that no service provider–recipient relationship exists between NHAI and the contractors.

The Tribunal rejected these submissions. It held that the payments NHAI received do not constitute toll collected from road users but represent independent consideration that contractors pay for acquiring an exclusive right to collect and retain toll revenue.

It noted that contractors pay fixed amounts to NHAI irrespective of actual traffic or toll collections. It held that this arrangement demonstrates a commercial transaction involving the transfer of valuable business rights.

For the period prior to 1 July 2012, the Tribunal held that the activity qualifies as “franchise service”, since NHAI grants contractors representational rights to collect toll in its name. For the post-2012 period, it held that the activity remains taxable under the negative list regime, as no exemption covers the transfer of toll collection rights.

The Tribunal held that Section 66D(h) of the Finance Act, 1994, which excludes services by way of access to roads or bridges on payment of toll, does not apply. It clarified that the present case concerns consideration that contractors pay to NHAI, not toll that motorists pay. The Bench held:

“...Transfer of toll collection rights through competitive bidding for commercial consideration is manifestly a business activity and not an inalienable sovereign function…”

The Bench relied on its earlier ruling in the Navayuga Engineering case, where it had treated similar arrangements involving toll collection rights as taxable franchise services.

On limitation, it held that NHAI neither obtained service tax registration nor filed returns despite receiving substantial consideration over several years. It upheld invocation of the extended limitation period and sustained the demands for interest and penalties. It stated:

“...Appellant NHAI transferred valuable commercial rights to contractors for consideration, Such transfer constitutes “franchise service” up to 30.06.2012 and taxable service thereafter…”

Accordingly, the CESTAT dismissed all three appeals and affirmed the service tax demands, holding that NHAI transferred commercially valuable rights to contractors for consideration and rendered taxable services.

For Appellant: C. Praneeth, Advocate

For Respondent: PRV Ramanan, AR (Special Counsel), Authorized Representative