Thursday 20 November 2014

Delhi High Court rules toll roads constructed under BOT arrangement as “building” (Moradabad Toll Road)

We are pleased to release a Tax Alert which summarizes a recent ruling of the Delhi High Court (HC) in the case of Moradabad Toll Road Co. Ltd. (Taxpayer) on the eligibility to claim tax depreciation on development of toll road under Build-Operate-Transfer (BOT) arrangement under the Indian Tax Laws (ITL). The HC considered the specific definitions of the terms, “building,” and “plant” under the ITL, whereby “building” has been defined to include roads within its fold, whereas, the term “plant” specifically excludes building from its ambit. The HC concluded that by implication, definition of “plant” excludes roads. Even otherwise, to qualify as “plant,” the functional test, i.e., usage as a tool or an apparatus in the business is to be satisfied. As the toll road does not satisfy the functional test, the same will not qualify as “plant.” Accordingly, the Taxpayer is not entitled to claim tax deprecation on road as plant (i.e., tax depreciation at the rate of 25%) but as building (i.e., tax depreciation at the rate of 10%).


Presently, there is no specific statutory treatment accorded to expenditure incurred for infrastructure development under a BOT arrangement under the ITL. There is however, a divergent view from the Indian judiciary on the tax treatment of such expenditure. In some cases, deduction in the form of tax depreciation has been permitted by treating right to collect toll as an intangible asset on the basis that the ownership of concessionaire right vests in the person. In certain other cases, amortization of such expenditure over the period of BOT arrangement has been granted. Furthermore, in certain cases, tax depreciation is granted by treating road to be a building. The present ruling fortifies this judicial view. In the present ruling, HC applied the “functional test” to mean that “plant” means tool or equipment used for purposes of business whereas toll road as capital asset is the very business carried on by the taxpayer, and is a tool used for its business.

Recently, the Bombay HC, in the case of North Karnataka Expressway Ltd, considering the various provisions of the National Highways Act, 1956 (NHA) which deals with development of roads, ruled that the ownership in such roads vests only with GOI. Merely because the taxpayer is permitted to build, maintain, manage, and operate the facility, would not vest the “ownership” therein, and GOI continues to be the owner thereof. Consequently, the HC ruled that in the absence of “ownership,” depreciation under the ITL is not admissible.

It may be noted that the taxpayers in the present ruling as well as the recent Bombay HC ruling did not put forth the claim that tax depreciation is claimed on account of treating the right to collect toll as an intangible asset of which the taxpayer is the owner.

Incidentally, the CBDT in its Circular dated 23 April 2014 has clarified that while expenditure on development of infrastructure facility (including roads, highways) is not eligible for depreciation in absence of satisfaction of ownership condition but the expenditure is deductible over the tenure of the agreement. The Circular has not been considered by either of the Courts. 

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