Custom, Excise & Service Tax Appellate Tribunal (CESTAT), Hyderabad: In a case wherein, appeal filed against the service tax demands, interest, and penalties on amount received by the appellant-National Highways Authority of India (NHAI), from contractors for transfer of “user fee collection rights” for various toll plaza, the Division Bench of A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member)* affirmed service tax demand and held that the appellant transferred commercial rights to contractors for consideration and rendered taxable services.
Background
The appellant is a statutory authority constituted under the National Highways Authority of India Act, 1988 (NHAI Act) and functions as an executing agency of the Central Government. The user fee (toll) was a statutory levy under Section 7, National Highways Authority of India Act, 1956 and NHAI merely facilitated its collection. The appeal arose out of order-in-original passed by adjudicating authority confirming service tax demand, along with interest and penalties, on the amount received by the appellant, from contractors towards transfer of “user fee collection rights” for various toll plaza.
The Department submitted that the appellant, by assigning toll collection rights to contractors for consideration, had rendered taxable service and classifiable as “franchise service” for the period prior to 1 July 2012 and as taxable service, not covered under the negative list for the subsequent period.
The appellant submitted that the contractors did not receive any representational right, hence, the transaction could not be classified as “franchise service”. It was further submitted that there was no service provider and service recipient relationship between appellants and the contractor. The appellant acted as an agent of the Central Government, and therefore, the activity was in the nature of sovereign/statutory function. Thus, not liable to pay service tax.
Issues for consideration were:
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Whether transfer of “user fee collection rights” constituted a taxable service.
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Whether the consideration received by NHAI was chargeable to service tax.
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Whether the activity was excluded under Section 66-D(a) or Section 66-D(h), Finance Act, 1994.
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Whether NHAI performed sovereign functions and immune from taxation.
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Whether extended period of limitation, interest and penalties were sustainable.
Analysis, Law and Decision
The Tribunal noted that NHAI did not merely authorise contractors to assist in collection of tolls, it transferred valuable and exclusive commercial right to collect user free and appropriate the collection for fixed consideration. The contractors paid a predetermined amount irrespective of actual traffic. Thus, the consideration paid to NHAI was not a statutory toll itself, but a contractual consideration for assignment of exploitable business right. This transaction possessed essential characteristics of a commercial service arrangement and was distinct from the statutory levy, i.e., toll collected from road users.
The Tribunal noted that Section 65(47), Finance Act, 1994 (Finance Act) defined “franchise service” as an agreement whereby, representational rights to sell or provide services were granted for consideration. NHAI granted contractors the representational right to collect tolls in its name. Without such authorisation, contractors had no legal authority to collect tolls. The appellant had received lump sum amount as consideration for the said transfer of right. The Tribunal referred to Navayuga Engg. Co. Ltd. v. CCE & Service Tax (FINAL ORDER No. A/30902 of 2020, dated 3 July 2020, CESTAT-Hyderabad), wherein the Tribunal held that services rendered by NEPL to the contractors were in the nature of “franchise service”. The Tribunal noted that the assignement of “user fee collection rights” for consideration to a contractor constituted a declared economic activity and was therefore a “service” under Section 65-B(44), Finance Act. The activity was not covered under any exemption. Section 66-D(h), Finance Act excludes service by way of access to a road or bridge on payment of toll charges. The Tribunal observed that in the present case the concern was not the actual toll collected by the contractor from road users but the consideration received by NHAI from contractors for transfer of the right to collect such toll. The exclusion held to be inapplicable.
The Tribunal noted the submission of appellant that the transaction between the appellant and the contractor fell under Section 66-D(a), Finance Act since the services are deemed to have been rendered by the Central Government. The Tribunal observed that in the present case, issue was not involved to provide a facility, but to collect toll. Government had authorised the appellant to collect the toll by virtue of which appellant got the right to collect the toll. The appellant had transferred the right to the contractors and such transfer constituted a service. In the present case the appellant was not mere executing authority but had transferred the said right to collect the toll to the contractor.
The Tribunal further observed that though NHAI is a statutory authority, constitutted as a body corporate under Section 3(2), NHAI Act and is required to act on business principles under Section 10, NHAI Act. Transfer of toll collection rights through competitive bidding for commercial consideration was manifestly a business activity and not an inalienable sovereign function. Sovereign functions are those which can only be performed by the State, such as defence, legislation, policing and administration of justice sovereign functions cannot be delegated. The Tribunal held that commercial exploitation of toll collection rights did not fall within that category.
The Tribunal further addressing the issue of limitation noted that the appellants did not obtain service tax registration, did not file returns and did not pay tax, despite receiving substantial consideration over several years. The plea of bona fide belief could not be accepted, in view of the clear statutory provisions and the commercial nature of transaction. Accordingly, in the present case sustainability of extended period under Section 73(1), Finance Act could not be sustained. The demand of interest was also upheld in accordance with Section 75, Finance Act.
The Tribunal held that the appellant transferred valuable commercial rights to contractors for consideration and the transfer constituted “franchise service” up to 30 June 2012 and taxable service thereafter. Section 66-D(a) or Section 66-D(h), Finance Act was not applicable in the present case, as the transfer was not a sovereign function. Thus, appeal dismissed upholding the demand legally sustainable and extended period of limitation held to be rightly invoked and penalties properly imposed.
[NHAI v. CCE, 2026 SCC OnLine CESTAT 1372, decided on 2-6-2026]
*Order by Angad Prasad (Judicial Member)
Advocates who appeared in this case:
For the Appellant (s): C. Praneeth, Advocate
For Respondent(s): M PRV Ramanan, Authorised Representative
