DECEMBER 15, 2014

By Akella A S Prakasa Rao, B.E.( Hons ), LLB

RECENTLY Maharashtra Sales Tax Tribunal has passed an order on 10.09.2014 in Appeal No.138 of 2003 in the matter of M/ s.Ashoka Infrastructures Vs The State of Maharashtra. The questions referred to the bench in this appeal are as under:

1. Whether the contract taken up by the appellant on Build, Operate, Transfer (BOT) basis could be said to be works contract

2. Whether he could be said to be a dealer and liable to pay tax on the turnover of sales in respect of the goods used at the time of construction of the road and other constructions.

While deciding the matter, the bench considered the question as whether the contract taken up by the appellant on B.O.T. basis could be said to be transfer of property in goods involved in execution of works contract.

For the question, whether the contract under BOT is works contract, their Lordships have concluded that B.O.T. is built, operate and transfer project. B.O.T. project involves both goods , labour and services and therefore, it is a works contract. They have relied on several settled case laws while coming to this conclusion.

As per the definition of ‘dealer' mentioned in Section 2(d) of the Works Contract Act dealer means a person who, whether for valuable consideration, commission, remuneration or otherwise, transfers property in goods involved in the execution of works contracts and includes any State Government and the Central Government which so transfers such property in goods, and any society, club or association of persons which so transfers the property in goods to its members.

The argument by the appellant is that he cannot be called as a dealer for the reason that,

(i) No price is paid by Government

(ii) There is no element of profits

(iii) In view of the lease, entire property is of their ownership and therefore cannot be any transfer to himself

(iv) Even if, price is paid that is not by the Government, but by third party

(v) In fact, it is barter.

The Bench answered the points raised by the appellant as under

(i) Instead of the State, price is paid by the public at large by way of toll, therefore there is element of price involved.

(ii) The word ‘free of cost' used does not mean that the appellants are to work for loss by investing their amounts, skill and labour . Handing over the project free of cost is after the concession period is over, as it is deemed that entire cost of the project, inclusive of interest and expenses and profits have been realized. Therefore, contention of the appellant that he is not earning any profit cannot be accepted.

(iii) The ownership of the project continues to vest with the Government and that the entrepreneur is not entitled to any revenue except toll from user of the vehicles. Lease is for specific period to carry out work, and not to vest entire title to the appellant.

(iv) As of law, it is the State who can alone collect the toll. This right of collection of toll for use of the road has been given to the appellant to be collected from the public at large. In fact though amount of toll is paid by the public at large for use of the road, in fact this payment made is for and on behalf of State.

(v) Barter is exchange of goods for goods. In fact, land is given on lease for construction, where appellant has to use his own infrastructure, finance, labour , skill, goods etc. In exchange of it, price is paid by way of collection of toll to the extent of recovery of entire project cost which includes profit.

Thus it is held that the appellant is a dealer and he has to pay tax on the turnover of sales in respect of goods and accordingly dismissed the appeal.

This is a very interesting decision and though it is for an earlier period during the sales tax regime, it has ramifications even now for the fact that the rules governing the works contract remain the same after introduction of VAT. The following interesting observations are made for further elucidation by the learned readers.

1. If BOT is considered as a taxable transaction, then what is the point to discharge the tax liability? This is relevant for the reason that the release from the so called lease will be on completion of the concession period and not at the time of commencement of toll collection on completion of the project. There is an apparent contradiction in the judgment when it is said that the ownership of the project continues to vest with Government. If it is the case, then what is the taxable event when there is no transfer of ownership?

2. For academic discussion, we accept that it is a taxable transaction, then what is the consideration which should be suffering the tax? Is it the entire toll collected during the concession period or the only the project cost? Since the sub-contractors turnover can be deducted for arriving at the taxable turnover in the hands of main contractor, which turnover is to be taken for arriving at the taxable turnover - is it the total toll collected during the concession period or the project cost? This is relevant for the reason that the sub-contract gets paid on completion of the project, but toll collection continues till the concession period and the toll collection is supposed to be inclusive of interest, expenses, profits etc.

3. What is the impact of this decision under the service tax laws? How to discharge the service tax liability - both in terms of point of levy and the quantum of levy? This is relevant for the reason that when the service to be considered as complete? Should it be treated as continuous supply of services during the concession period or on completion of the project or completion of concession period? What would the taxable turnover for payment of service tax? What rate the tax is to be paid - is it the one prevailing at the time of completion or during the concession period or at the time of completion of lease and handing over of the project?

4. In view of the recent decision by Mumbai High Court in the matter of North Karnataka Expressway Ltd Vs CIT - 2014-TIOL-1931-HC-MUM-IT, wherein the depreciation is not allowed on toll road constructed under BOT basis since the toll road is owned by the Government and not by the developer, the issue becomes still more interesting as regards the question of transfer of ownership. Of course, this decision did not consider the Circular No.9 dt.23.04.2014 issued by CBDT regarding the amortization of cost of construction in the hands of developer. Another point for further litigation.

Hence I leave it to the esteemed readers to share their views on these interesting developments and also urge them to watch the further proceedings in these matters in the years to come.