See one time penalty of Rs 300cr on IRB Infra, says CMD

IRB Infra has received a service tax demand notice from the IT department on September 10 and VD Mhaiskar, CMD of IRB said they are looking at a one time penalty of around Rs 300 crore applied on three of its operational special purpose vehicles (SPVs). According to him, going ahead there is also a possibility of the promoter entity selling its stake in the company.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Can you tell us about this demand notice that you have received and what would be the financial impact if in case this does come through and the company loses the appeal?

A: The service tax demand that has come is for three of the 10 SPVs which are operational. What they have done is they have calculated a service tax on the gross toll amount collected by SPV and tax it at the prevailing service tax breaks. If we have to look at the total order believing that it would apply for all the ten SPVs, then it would come close to Rs 300 crore.

Q: Including the penalties as well?

A: No, it would be one time penalty and interest would be extra.

Q: What is the composite amount you are looking at before we come to the tenability of that amount?

A: Rs 300 crore would be the demand. Rs 300 crore can be the one time penalty and the interest would have to be calculated on the individual year.

Q: What is the sense you are getting in terms of how long it takes to resolve? You have indicated that you are contesting the demand?

A: Within 90 days we have to apply for the appeal and after that along with the appeal we will have to file for the stay as well and we do not see a major challenge in that.

Q: Do you see this impact other BOT projects as well?

A: No, that is what I am saying that if we have to apply the same logic to all the ten operational projects, that is the demand I had stated earlier.

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Q: This is the fact that your SPVs collect toll as concessionaire is certainly not any pathbreaking new idea, this has been the way in which tolls have been collected. So any idea as to whether this will now be repeated to other BOT participants as well?

A: I think before if it applies to us, it would naturally apply to everyone in the industry. But to throw light on the fact, the things which we feel are erroneous in this case is that  in passing these orders, the CST has committed errors of classification and also valuation of service. They have not appreciated that under a BOT contract, the concessionaire predominantly deals with construction and maintenance with toll collection activity being ancillary in nature.

The CST also has not appreciated that the concessionaire collects, retains and appropriates toll on its own right and authority and not as an agent. The misconception is apparently so overwhelming that it even led CST not to follow the circular number 152 of 2012 issued by Ministry of Finance which unequivocally and rightly instructs that service tax is not leviable on toll collected from users of roads built by concessionaires under BOT contract and also that concessionaire is not an agent of the authority.

Guided by this misconception, the CST erroneously classified the services under a BOT contract as composite and has treated toll collection activity as a predominant service. I will just read two more lines from the order itself, which they are trying to put as the predominant activities of a BOT contract and the list goes like this.

A] The scrutiny of the contract reveals that IRBPL has performed various functions, which are summarized as under – collection of fee at each service lane at the designated rate by issuing tickets, safe keeping of the fee amount collected, deposition of the fee amount in the designated bank on daily basis and handing over the counter foil of such deposition to the officer in-charge, accounting and reporting at prescribed frequency, maintenance of toll plaza and toll officer, maintenance of vehicular traffic data on shift basis, security of equipments and machinery which were entrusted to IRBPL for their use, proper arrangement of the traffic for the purpose of collection fees at toll plaza. If one has to categorize these as the predominant activities of a BOT contract then I cannot help that but to appeal.

Q: If you do see this Rs 300 crore impact, how are you planning to provide for it?

A: I do not think we need to provide for this at all because first thing service tax is a tax which we have to collect from the recipient of the service, which according to this notice is the client itself. If we have to apply any provision for this, we have to also apply for provision for receivable from NHAI or NSRDC in this.

Q: There are so much talk about the promoters selling stake in the company, I just want you to clarify what the view is on that end?

A: I think the promoter group entities have even the past sold stake and in the future also there is every possibility that they would be willing to sell their balance holding.

On the contrary as a promoter, I have been buying it and as a promoter group, they might be willing to sell their portion.

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Q: So how much is the promoter holding and how much would they be looking to pare off?

A: They hold presently 7% of the company and I do not have any exact figures as to how much they would be willing to sell at whatever price and time that they might have in mind.

Q: You would sense that you still have the appetite to buy more?

A: Yes.

Q: If it is indeed treated as an agent of the government, you have said somewhere in your note that you can recover it completely from the government itself, is that the case that in any case it will be the end liability of your SPV?

A: Certainly not because under the changing law of concession agreement, there is a provision which says that a change in the interpretation or application of any applicable law by a court of record has compared to such interpretation or application by a court of record prior to the date of commencement of this contract is covered under the change in law. If the department decides to interpret concessionaire as an agent then it is certainly a change of interpretation.

Q: So when you report your September 30 numbers, you would not have to account for this in any fashion except as perhaps in the notes to account?

A: Certainly not. Even in the notes to account, I do not think we will have to provide for this. If we have to make a provision then we have to make a matching provision of receivable from NHAI or NSRDC.