2024 (11) TMI 653 - HC - Income Tax

NHAI capital grant subsidy to highway concessionaires under BOOT contracts exempt from TDS under Section 194C

Delhi HC ruled that capital grant subsidy provided by NHAI to highway concessionaires under BOOT contracts does not attract TDS under Section 194C. The ... Payments to contractors under Section 194C - Meaning of 'work' for Section 194C - Capital grant / viability gap funding not being payment for work - Escrow account treatment and crediting to contractor's account - BOT/BOOT concessionaire ownership and equity supportPayments to contractors under Section 194C - Meaning of 'work' for Section 194C - Capital grant / viability gap funding not being payment for work - Escrow account treatment and crediting to contractor's account - BOT/BOOT concessionaire ownership and equity support - Whether NHAI was liable to deduct tax at source under Section 194C on capital grant/viability gap funding paid to concessionaires under the Concession Agreement - HELD THAT: - The Court held that Section 194C requires deduction of tax where a sum is paid to a contractor for carrying out any work - understood as the expenditure of labour or an operation producing a tangible result - and that the provision is principally concerned with payments that recompense physical or tangible activities. While Section 194C is not confined to classical 'works contracts', its scope is to capture payments linked to carrying out work or supply of labour. The capital grant/viability gap funding in the concession framework, however, is a form of financial support or equity participation to secure project viability: it is disbursed as 'Grant'/'Equity Support' in terms of the Model Concession Agreement, placed into a regulated Escrow Account and applied under prescribed priorities rather than being credited to or fungible in the concessionaire's general account as payment for physical work. The BOOT/BOT arrangement confers ownership and operational rights on the concessionaire during the concession period and contemplates the concessionaire raising funds and undertaking construction at its risk and cost; the grant operates as financial aid, not as remuneration for carrying out the physical work. Because the sums were not payments for the physical work performed and were not credited to the concessionaire's account in the sense contemplated by Section 194C(2), the statutory requirement to deduct tax at source under Section 194C did not apply. The Tribunal's conclusion that the capital grant subsidy did not attract deduction under Section 194C was accordingly sustained. [Paras 31, 39, 42, 43, 44]Tribunal correctly held that NHAI was not liable to deduct tax at source under Section 194C on the capital grant/viability gap funding paid to concessionaires; appeal dismissed.Final Conclusion: The High Court dismissed the Revenue's appeal and upheld the Tribunal's finding that the capital grant/viability gap funding paid by NHAI to concessionaires under the Concession Agreement did not attract deduction of tax at source under Section 194C. Issues Involved:1. Whether the capital grant subsidy given by the National Highways Authority of India (NHAI) to its Concessionaires is subject to withholding tax under Section 194C of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Nature of Capital Grant Subsidy:- The primary issue was whether the capital grant subsidy provided by NHAI to its Concessionaires falls under the ambit of Section 194C of the Income Tax Act, which mandates tax deduction at source for payments made to contractors for carrying out any work. The Tribunal had held that the subsidy was not a payment for work and thus not subject to withholding tax.- NHAI argued that the subsidy was financial support to address revenue shortfalls in projects where the Concessionaire's revenue was less than projected or where the total project cost could not be recovered. The subsidy was part of the viability gap funding and was not a revenue receipt in the hands of the Concessionaire.- The Tribunal noted that the Concessionaire was recognized as the owner of the assets created under the Build-Own-Operate-Transfer (BOOT) model, with the right to collect tolls during the concession period. The capital grant was deemed as equity support rather than a payment for work done.2. Interpretation of 'Work' under Section 194C:- The court examined the definition and scope of 'work' under Section 194C, which includes activities like advertising, broadcasting, carriage of goods, and manufacturing according to customer specifications. The definition is not exhaustive but indicates a focus on tangible, physical activities.- The court referenced various precedents, including the Supreme Court's decision in Associated Cement Company Ltd., which clarified that 'work' in Section 194C is not limited to works contracts but includes any work that involves physical or tangible activities.- The court concluded that the capital grant subsidy was not a payment for any physical work undertaken by the Concessionaire. It was a financial aid to ensure the economic viability of infrastructure projects, not directly linked to the execution of physical tasks.3. Role of the Escrow Account:- The subsidy was credited to an Escrow Account, which regulated the use of funds for the project. The court noted that the funds in the Escrow Account were not at the discretion of the Concessionaire and were used according to specific priorities outlined in the concession agreement.- This arrangement further supported the view that the subsidy was not a direct payment for work, as it was not deposited in the Concessionaire's account in a manner that would typically attract tax deduction under Section 194C.4. Tribunal's Conclusion:- The Tribunal's decision was upheld, affirming that the capital grant subsidy was not subject to withholding tax under Section 194C. The court agreed with the Tribunal's reasoning that the subsidy was a form of equity support, not a contractual payment for work.- The court emphasized that unless the appellant could establish that the subsidy was compensation for physical activities or labor, it could not be subjected to withholding tax under the specified section.In conclusion, the court dismissed the appeals, ruling that the capital grant subsidy provided by NHAI to its Concessionaires was not liable for tax deduction at source under Section 194C, as it did not constitute a payment for work as defined by the statute.