Capital Grant Subsidy from NHAI is Financial Support, Not Payment for Work

[Kamal Aggarwal]

In an interesting judgement of COMMISSIONER OF INCOME TAX (TDS) -2 VERSUS NATIONAL HIGHWAY AUTHORITY OF INDIA - 2024 (11) TMI 653 - DELHI HIGH COURT the hon’ble Delhi High Court has upheld the ruling of hon’ble Tribunal that the subsidy or financial support extended by National Highway Authority of India (‘NHAI’) to the Concessionaire was only envisaged to work as viability gap funding and could not possibly have been construed as payment made for a work undertaken by the Concessionaire.

The main responsibility of NHAI is to develop, maintain, and operate national highways in India. It carries out its work through various Project Implementation Units (‘PIUs’), which are spread across the country and are responsible for managing and overseeing the highway projects. The PIUs receive funds from the Union Government through the NHAI Head Office, to support the projects that NHAI is working on.

The key issue is whether the capital grant subsidy provided by NHAI to the Concessionaire is subject to tax or withholding tax under Section 194C of the Income Tax Act, 1961 (‘IT Act’).

NHAI argued that under the concession agreements, Concessionaires develop and maintain highways and collect user fees as per government rates. The capital grant subsidy is provided to bridge the viability gap when projected revenue falls short. This funding is awarded through a competitive bidding process, with bidders selected based on the lowest subsidy requirement. NHAI clarified that under Build, Operate, Transfer (‘BOT’) contracts, Concessionaires own the assets and collect user fees, with the highway reverting to NHAI after the concession period. NHAI contended that the subsidy is financial support, not a sum paid for carrying out ‘work’, and therefore not subject to Section 194C of IT Act.

The Hon’ble High Court adverted to the relevant provisions of the Model Concession Agreement, approved by the Government of India, and observed that under the Concession Agreement, the primary responsibility for raising funds and implementing the project lies with the Concessionaire, who owns the project during the concession period. At the end of the period, the highway reverts to NHAI. While the Concessionaire must meet economic targets and secure financing, NHAI provides additional support through viability gap funding. The work involved in creating infrastructure, such as the six-laning of an expressway, is considered the physical component of the contract. Section 194C of the IT Act requires tax deduction at source for sums paid to contractors for carrying out any work, which includes a broad range of activities such as advertising, carriage of goods, catering, and manufacturing, as outlined in the statute.

Further it was held that Section 194C primarily relates to payments made for undertaking physical or tangible work, rather than for the mere granting of subsidies or financial assistance. For this, several case laws were relied upon to draw a conclusion that the capital grant subsidy from NHAI was financial support to ensure the project's viability, not payment for physical work. It was provided as equity support, alongside loans, and placed in an Escrow Account with specific withdrawal guidelines. This support was governed by the Concession Agreement, confirming it as a financial contribution, not a payment for work done.

The court, thus, held that the capital grant subsidy provided by NHAI to the Concessionaire was a form of financial support intended to address the project's viability gap, not a payment for physical work or labor. The subsidy was treated as equity capital and credited to an Escrow Account, not as a payment for a "work" as defined under Section 194C of the IT Act. The court concluded that Section 194C did not apply to the subsidy, as it was not linked to a work contract or payment for work undertaken, and thus dismissed the appeals against the Tribunal's decision. [Para 39 to 44]

The judgement highlights a crucial distinction in tax laws, clarifying that subsidies provided by NHAI to Concessionaires for bridging the viability gap in highway projects do not qualify as payments for work under Section 194C of the IT Act. The Court aptly noted that the capital grant subsidy was a form of financial support, not a payment for physical work, as it was treated as equity capital and placed in an Escrow Account. This decision emphasizes that financial assistance, even when linked to the execution of large-scale infrastructure projects, should not automatically be treated as a taxable "payment for work" unless it directly compensates for tangible work or labor. The ruling aligns with legal precedents and ensures that financial aid designed to support project viability is not burdened by withholding tax obligations. Thus, the nature of the transaction—whether it is a subsidy or a payment for work—determines its tax treatment.