TOLL COLLECTED ON BEHALF OF NATIONL HIGHWAYS AUTHORITY OF INDIA IS SUBJECT TO SERVICE TAX.

[Mr. M. GOVINDARAJAN]

                        National Highways Authority of India (“NHAI” for short) has been constituted under the National Highways Authority of India Act, 1988 for the development, maintenance and management of National Highways and for the matters connected therewith or incidental thereto.  The appellant in ‘Ideal Road Builders Private Limited V. Commissioner of Service Tax, Mumbai’ – 2012 (26) STR 316 (Tri. Mum) M/s Ideal Road Builders Limited entered into a contract with NHAI to collect the toll for the specified national highway and remit the same to NHAI from 1.7.2003 to 31.7.2006.   From 01.07.2006 to 31.7.2007 the appellant entered into a toll rights contract.   Under this contract the appellant would pay fixed monthly sum to NHAI and retained the entire collection with them. 

                        The Department was of the view that the services rendered by the appellant would come under the category of ‘Business Auxiliary Service’ and the appellant was liable to pay service tax.  The Department issued a show cause notice in this regard demanding service tax to the tune of Rs.96,36,209/- for the period from 01.07.2003 to 31.1.2007 by invoking the extended period of limitation under Section 73(1) of the Act along with interest under Section 75 of the Act and also penalties under Sections 75, 76, 77 and 78 of the Act.

                        The Adjudicating Authority held that the appellant was liable to service tax under the category of ‘Business Auxiliary Services’ and interest.  He also imposed penalty @

Rs.200/- per day from the due date of payment to the actual date of payment of service tax under Sec. 76 and also a penalty of Rs.8000/- under Section 77 for failure to file service tax returns for the period from July 2003 to March 2007. 

                        The appellant filed the present appeal before the Tribunal.   The appellant put forth the following arguments before the Tribunal for the stay of the impugned order:

• NHAI undertakes the activity of development, maintenance and management of national highways which is  a statutory function and the activity cannot be considered as ‘business activity’;
• The appellant is providing service to NHAI not in relation to any business, their activity could not be brought under the tax net under the category of ‘Business Auxiliary Service’ as defined under Section 65(19)(iv) and they are not liable to pay service tax;
• They have a very strong case on merits and prayed for the stay of the impugned order and recovery of dues adjudged pending final hearing and decision on their appeal.

The Department contended the following:

• NHAI is on the statutory organization and the functions of NHAI are not sovereign functions;
• Service tax is demanded from the appellants for the services rendered by them to NHAI in respect of collection of toll charges either on a fixed remuneration contract or on the basis of toll rights collection contract;

The Tribunal analyzed the provisions of the Act.  Sec. 16 of the Act deals with the functions of the Authority which reads as follows:

• Subject to the rules made by the Central Government in this behalf, it shall be the function of the Authority to develop, maintain and manage the national highways and any other highways vested in, or entrusted to, it by the Government;
• Without prejudice to the generality of the provisions contained the Authority may for the discharge of its functions:

1. survey, develop, maintain and manage highways vested in, or entrusted to it;
2. construct offices or workshops and establish and maintain hotels, motels, restaurants and rest rooms at or near the highways vested in, or entrusted to it;
3. construct residential buildings and townships for its employees;
4. regulate and control the plying of vehicles on the highways  vested in, or entrusted to, it for the proper management thereof;
5. develop and provide consultancy and construction services in India and abroad and carry on research activities in relation to the development, maintenance and management of highways or any functions thereat;
6. provide such facilities and amenities for the users of the highways vested in, or entrusted to, it as are, in the opinion of the Authority, necessary for the smooth flow of traffic on such highways;
7. from one or more companies under the Companies Act, 1956 to further the efficient discharge of the functions imposed by the Act;
8. engage or entrust any of its functions to, any person on such terms and conditions as may be prescribed;
9. advice the Central Government on matters relating to Highways;
10. assist, on such terms and conditions as may be mutually agreed upon, any State Government in the formation and implementation of schemes for highway development;
11. collect fees on behalf of the Central Government for services or benefits rendered under Section 7 of the National Highways Act, 1956 as amended from time to time, and such other fees on behalf of the State Governments on such terms and conditions as may be specified by such State Governments; and
12. take all steps as may be necessary or convenient for, or may be incidental to, the exercise of any power of the discharge of any function conferred or imposed on it by the Act.

Section 10 the Act provides that in discharge of its functions under this Act, the Authority shall act, so far as may be, on business principles.

                        The Tribunal held that NHAI is a statutory authority and collects fees on behalf of the Government of India for the services or benefits rendered at the rates specified by the Government.  It would appear that NHAI is only the statutory authority and not a constitutional authority.  Therefore the functions undertaken by NHAI are not sovereign in nature.  The Tribunal further indicated that sovereign functions are undertaken by the State and its organs and the powers that can be exercised by the State and its organs are defined in the Constitution.  To equate the toll fee collected by the NHAI with the tolls collected by Municipal Corporation will be illogical.  Merely because the terminology used in both cases is ‘toll’ it does not mean that the functions of the same or the nature of the levy is same.  Toll collected by NHAI is authorized by the statute not in the nature of a tax but in the nature of a fee for the services rendered.  While the tax imposition is made for the public purpose without reference to any service rendered by the State or any specific benefit conferred upon the tax payer, a fee is a payment levied by the State in respect of the services rendered by it for the benefit of the individual.  Further the NHAI Act itself provides under Section 18 that the fee collected by the authority shall be credited to its own fund and can be utilised for meeting its expenses in the discharge of its functions on salary and allowances and other remunerations provided to its members, officers or other employees etc.,  The Tribunal is of the view that the functions performed by  NHAI or its contract cannot be considered as sovereign functions nor the fees collected acquires the nature of tax or duty so as to be outside the scope of service tax.  NHAI is supposed to work on business principles and therefore it cannot be stated that it does not perform business activities.  Its business is development, maintenance and management of national highways.  Any services rendered in relation thereto would appear to merit classification under ‘Business Auxiliary Services’.  The Tribunal directed to deposit Rs.45 lakhs out of Rs.96.36 laksh.