No Service Tax Leviable On Toll Collection, Toll Collector Not A Commission Agent: CESTAT Mumbai

The Bench, consisting of Justice Dilip Gupta (President) and Technical Member C J Mathew, ruled that since the deficit in the returns arising from toll collection is to be borne only by the toll collector, hence the toll collector cannot be called a 'commission agent'.

The CESTAT added that the provisions of Section 66D (h) of the Finance Act, 1994 explicitly provides that any service by way of access to road or bridge on payment of toll charges is covered under the negative list and is thus immune from service tax liability.

A tender was floated by certain state agencies for 'toll collection' on specified sections of the highways situated in the states of Gujarat and Maharashtra. The appellant M/s Souvenir Developers India Pvt Ltd submitted its bid and was awarded the tender.

As per the contract between the appellant and the state agencies, the expenditure incurred for maintenance of the assigned sections of the highway was to be met from the toll collected by the appellant according to the rates determined by the government. Thereafter, after setting off the lumpsum payments guaranteed to be paid to the state agencies by the appellant under its bid, the balance was to be retained by the appellant. The appellant was issued a show cause notice by the service tax authorities on the ground that it had failed to pay service tax on the said balance amount retained by it.

Consequently, an order was passed by the service tax authorities against the appellant imposing service tax liability on the ground that the toll collection activity undertaken by the appellant constituted 'business auxiliary service' under Section 65(19) of the Finance Act, 1994 for the period prior to 1^st July 2012, and a 'service' under Section 65B (44) of the Finance Act, 1994 from 1^st July 2012 and onwards. The appellant filed an appeal before the CESTAT against this order.

Section 66D of the Finance Act, 1994 enumerates the negative list of services which are immune from service tax liability. Section 66D was inserted by the Finance Act, 2012, with effect from 1^st July 2012. As per the provisions of Section 66D (h), the service of providing access to a road or a bridge on payment of toll charges is covered under the negative list.

Section 65 (105) (zzb) of the Finance Act, 1994 provides that business auxiliary services, that includes within its purview services rendered as a commission agent, attracts service tax. However, the provisions of Section 65 were made inapplicable with effect from 1^st July 2012 vide Notification No.20/2012-ST, dated 5-6-2012.

The appellant M/s Souvenir Developers India contended before the CESTAT that the amount retained by it was not 'commission' but profit which is beyond the ambit of the Finance Act, 1994. The appellant averred that the activities undertaken by it did not fall within the category of 'business auxiliary service' as enumerated under Section 65(19) of Finance Act, 1994 for the period prior to 1^st July 2012, and hence no service tax was leviable under the Finance Act for the said period.

The appellant submitted that there was a 'principal to principal' transaction between the appellant and the state agencies, wherein the risk of loss was only assumed by the appellant, and thus the amount retained by the appellant was not 'commission' but profit.

The appellant added that services of providing access to a road or a bridge on payment of toll charges is enumerated in the 'negative list' under Section 66D of the Finance Act, 1994, which has been inserted by the Finance Act, 2012 with effect from 1^st July 2012, and hence the said activity performed by the appellant is not a 'taxable service' under the Finance Act with respect to the said period.

Thus, the appellant averred that no service tax was payable by the appellant with respect to the toll collection activity performed by it in respect to the entire period under consideration.

The revenue department averred that the appellant was a 'commission agency' who, in the course of undertaking toll collection, was providing 'business auxiliary service' as provided under Section 65 (19) of the Finance Act, 1994 in relation to the period prior to 1^st July 2012. Hence, the revenue department submitted that the amount retained by the appellant for undertaking toll collection activity was in the nature of a 'commission' that attracted service tax.

The CESTAT dismissed the submissions of the revenue department that the agencies of the state government were 'clients' of the appellant on whose behalf maintenance of roads was undertaken by the appellant. The CESTAT observed that the appellant had entered into a contract with the state agencies for undertaking collection of 'toll' or 'user fee' and for ensuring maintenance of roads.

The CESTAT noted that as per the provisions of the contract, possession of a constructed asset was transferred to the appellant in lieu of a stream of lumpsum payments to be made by the appellant in favour of the state agencies as per the guarantee made by it in its bid. The CESTAT ruled that a 'commission agent' is a channel partner in delivery of goods or services in which the risk of market rejection continues to be borne by the principal. However, the CESTAT observed that any deficit in the returns arising to the appellant from the said activity of toll collection, for instance from lower traffic or due to maintenance, was to be borne only by the appellant and hence the appellant could not be called a 'commission agent'.

The CESTAT held that any oversight maintained by the state agencies was with a view to ensure proper maintenance of the asset and that the rates were fixed by the government to prevent exploitation in public interest. The CESTAT added that the said oversight and rate fixation was not a facet of a principal-agent equation.

Therefore, the CESTAT ruled that the amount retained by the appellant while undertaking toll-collection activity was not taxable on the ground that the appellant was a 'commission agent' under Section 65(19) of Finance Act, 1994 for the period prior to the introduction of the 'negative list' regime, i.e., the period prior to 1^st July 2012.

The CESTAT noted that the revenue authorities had ruled that with respect to the period from 1^st July 2012 and onwards, the activity of toll collection performed by the appellant fell within the definition of 'service' under Section 65B (44) of Finance Act, 1994, which was inserted by the Finance Act, 2012 with effect from 1^st July 2012. The CESTAT observed that the revenue authorities had held that the activities enumerated in the 'negative list' in Section 66D of the Finance Act were restricted to the state and the agencies of the state.

The CESTAT held that the provisions of Section 66D (h) explicitly provide that any service by way of access to road or bridge on payment of toll charges is covered under the negative list and is immune from service tax liability.

The CESTAT added that Section 66D of the Finance Act, 1994 does not provide for any such restrictions that the said services enumerated in the negative list must be rendered by the state and the agencies of the state.

Therefore, the CESTAT ruled that merely because the responsibility for collection of toll was transferred to the appellant, the immunity from tax for the period of 1^st July 2012 and onwards cannot be denied to the appellant.

The CESTAT held that the revenue department had failed to appreciate the nature of the contract between the appellant and the state agencies and that the determination made by them was superficial.

"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 Court thus allowed the appeal and set aside the order of the revenue authorities.

Case Title: Souvenir Developers India Pvt Ltd versus Commissioner of Central Excise, Customs & Service Tax– I

Dated: 17.05.2022 (CESTAT Mumbai)

Representative for the Appellant: Bharat K Raichandani, Advocate

Representative for the Respondent: Nitin M Tagde, Joint Commissioner (Authorised Representative)

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