2022 (5) TMI 868 - AT - Service Tax

Taxability - business auxiliary service - submission is that the agencies of the state government are clients of the appellant on whose behalf maintenance of roads is undertaken appears to have overlooked the underlying scheme of the tender which brought the appellant in to the transaction - HELD THAT - Toll is a constitutionally authorized levy assigned to governments of constituent states of the Union and, unarguably, to be collected under the authority of the state government. It is not the case of the service tax officers that the mechanism erected for such collection compromises the characteristic of the levy into two toll and other but that denomination of the latter as commission in the contract constitutes two activities of which only one was taxable. Concatenating the deprivation of authority to determine the charges leviable from users and the monitorial oversight by the agencies of the state government, the adjudicating authority concluded that principal and agent relationship existed. The megatrends in infrastructure development of the country in recent decades have increasingly incorporated private sector participation, to a lesser or larger degree, in big projects requiring massive investment for transfer of risk to the private entity whose core competency it is and, in return for assured lumpsum payment, also the potential earnings through models such as build operate transfer (BOT) and build own operate transfer (BOOT). The terms of engagement is thus clear possession of the upgraded/constructed asset is transferred to the appellant for the stream of lumpsum payment guaranteed by the appellant while alienating risk of sub-optimal use and risk of asset deterioration - Oversight by agencies of the state is intended to assure proper maintenance of the asset and fixation of rates is retained by the government to prevent exploitative exaction both of which are mandated by public interest and not as a facet of principal-agent equation. Thus, tax liability does not arise by way of being commission agent in section 65(19) of Finance Act, 1994 for the period prior to introduction of negative list regime. Adjudication should have been limited to taxability arising from rendering commission agent service without venturing also to emplace the activity of the appellant under other enumerations that fall within the definition of the said service. The impugned proceedings has not appreciated the nature of the contract and, having limited itself to superficial determination with reference to random phrases, has overlooked the substantive difference in risk assumption that is the key to principal-principal transaction. The circular of Central Board of Excise Customs has been assigned undeserved emphasis and the exclusion by way of negative list has been improperly construed by the adjudicating authority. Appeal allowed.

Issues Involved:
1. Tax liability under section 73 of the Finance Act, 1994.
2. Classification of the transaction as 'business auxiliary service' under section 65(19) of the Finance Act, 1994.
3. Applicability of penalties under sections 77 and 78 of the Finance Act, 1994.
4. Distinction between 'commission' and 'profit' in the context of toll collection.
5. Interpretation of 'principal to principal' transaction versus 'agent' relationship.
6. Applicability of the 'negative list' under section 66D of the Finance Act, 1994 for the period post-1st July 2012.

Detailed Analysis:

1. Tax Liability under Section 73 of the Finance Act, 1994:
The appellant was charged with a tax liability of Rs. 2,97,28,305 under section 73 of the Finance Act, 1994, along with interest under section 75, for providing 'business auxiliary service' during the period from October 2008 to June 2012 and for providing 'service' from July 2012 to March 2013 in the course of undertaking 'toll collection'. The non-payment of tax on this 'consideration' led to the issuance of a show cause notice culminating in the impugned order.

2. Classification of the Transaction as 'Business Auxiliary Service' under Section 65(19) of the Finance Act, 1994:
The appellant contended that their transaction was a 'principal to principal' transaction with the risk of loss assumed by them, and the amount retained was not 'commission' but profit, which is beyond the reach of the Finance Act, 1994. The Tribunal cited various precedents supporting the appellant's stance, including decisions in Intertoll India Consultants (P) Ltd, Ideal Road Builders P Ltd, Patel Infrastructure Pvt Ltd, and Ashoka Buildcon Ltd. The Tribunal held that the adjudicating authority's determination that the amounts retained by the appellant out of the 'toll' and 'user fee' were liable to tax under section 65(105)(zzb) as 'consideration' for rendering 'business auxiliary service' was influenced by the deployment of 'commission' to describe such amounts and the seeming appearance of being an agent.

3. Applicability of Penalties under Sections 77 and 78 of the Finance Act, 1994:
The Tribunal did not specifically address the imposition of penalties under sections 77 and 78, but the setting aside of the tax liability implicitly nullifies the penalties associated with the alleged tax evasion.

4. Distinction between 'Commission' and 'Profit' in the Context of Toll Collection:
The Tribunal emphasized that the amounts retained by the appellant were profit, not commission. The contractual arrangement between the appellant and the state agencies was for undertaking toll collection and ensuring road maintenance, with the appellant bearing the risk of sub-optimal use and asset deterioration. This arrangement was not akin to a 'commission agent' relationship where the risk continues to be borne by the principal.

5. Interpretation of 'Principal to Principal' Transaction versus 'Agent' Relationship:
The Tribunal noted that the oversight by state agencies was intended to assure proper maintenance of the asset and prevent exploitative exaction, mandated by public interest, and not indicative of a principal-agent relationship. The appellant's role involved risk assumption, distinguishing it from a 'commission agent' service.

6. Applicability of the 'Negative List' under Section 66D of the Finance Act, 1994 for the Period Post-1st July 2012:
For the period after 1st July 2012, the adjudicating authority determined that the activity conformed to the definition of 'service' in section 65B(44) but was not excluded by section 66D(h) of the Finance Act, 1994. The Tribunal found that the exclusion of 'service by way of access to road or a bridge on payment of toll charges' in section 66D did not restrict the provider of service to state agencies, thereby granting immunity from tax for the period post-1st July 2012.

Conclusion:
The Tribunal concluded that the adjudicating authority had not appreciated the nature of the contract and had limited itself to a superficial determination. The substantive difference in risk assumption indicated a 'principal-principal' transaction rather than a 'commission agent' relationship. The circular of the Central Board of Excise & Customs was given undue emphasis, and the exclusion by way of the 'negative list' was improperly construed. Consequently, the impugned order was set aside, and the appeal was allowed.

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