Facts of the Case

The respondent, National Highway Authority of India (NHAI), is a statutory authority constituted under the National Highways Authority of India Act, 1988 and is responsible for development, maintenance and operation of national highways. NHAI entered into concession agreements with private concessionaires under the Build-Operate-Transfer (BOT) model for construction, operation and maintenance of highways.

Under the concession agreements, NHAI provided capital grant subsidy, also referred to as viability gap funding, to concessionaires as financial support to make projects viable where projected revenues were insufficient. The Assessing Officer held that such payments constituted contractual payments for carrying out work and that NHAI had failed to deduct tax at source under Section 194C. Orders under Sections 201(1) and 201(1A) were passed for non-deduction of TDS. The Commissioner of Income Tax (Appeals) affirmed the demand.

The Income Tax Appellate Tribunal, by orders dated 10.04.2017 for Assessment Year 2010–11 and 18.03.2021 for Assessment Year 2011–12, held in favour of NHAI and concluded that the capital grant subsidy was not subject to TDS under Section 194C. Aggrieved, the Revenue filed appeals before the Delhi High Court.

Issues Involved

Whether capital grant subsidy or viability gap funding paid by NHAI to concessionaires under BOT concession agreements constitutes payment for carrying out any work so as to attract deduction of tax at source under Section 194C of the Income-tax Act, 1961.

Petitioner’s Arguments (Revenue)

The Revenue contended that Section 194C has a wide ambit and is not confined to works contracts. It was argued that payments made by NHAI to concessionaires were pursuant to concession agreements and therefore constituted payments for work. According to the Revenue, nomenclature as “grant” could not alter the true nature of the transaction and TDS was required to be deducted.

Respondent’s Arguments (Assessee)

NHAI submitted that BOT concession agreements are public-private partnership arrangements where concessionaires construct, operate and maintain highways at their own risk and cost and are treated as owners of the project assets during the concession period. The capital grant subsidy was contended to be equity support or financial assistance to bridge revenue shortfall and not consideration for any work executed for NHAI. It was argued that the relationship between NHAI and concessionaires was principal-to-principal and not contractor–contractee.

Court Order / Findings

The Delhi High Court examined the concession agreements, the Model Concession Agreement, and the nature of BOT projects in detail. The Court held that although Section 194C is not confined to works contracts, its applicability depends on whether the payment is made for carrying out work under a contract.

The Court found that under BOT arrangements, concessionaires undertake construction, operation and maintenance of highways at their own risk and cost, are entitled to collect tolls, and are treated as owners of the assets during the concession period. The capital grant subsidy is provided as equity support or viability gap funding to make projects financially viable and is not a payment made for execution of work for NHAI.

The Court agreed with the Tribunal that the relationship between NHAI and concessionaires is not that of contractor and contractee but is in the nature of a joint venture or public-private partnership. Consequently, the capital grant subsidy could not be treated as contractual payment liable for deduction of tax at source under Section 194C.

Important Clarification

The Court clarified that while Section 194C has a wide scope, its application depends on the true nature of the transaction. Capital grants or equity support provided under BOT concession agreements as viability gap funding do not constitute consideration for work and therefore fall outside the ambit of Section 194C.

Final Outcome

Both appeals filed by the Revenue were dismissed. The Delhi High Court upheld the orders of the Income Tax Appellate Tribunal and held that NHAI was not liable to deduct tax at source under Section 194C on capital grant subsidy or viability gap funding paid to concessionaires under BOT concession agreements.

 

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