Patna HC Denies Service Tax Exemption to BRPNNL for Centage and Toll Services, Says It’s Not a Governmental Authority [Read Order]

Bihar Rajya Pul Nirman Nigam,petitioner-assessee, a government-owned company involved in road and bridge construction in Bihar, was issued a show cause notice under Section 73of the Finance Act, 1994. Authorities alleged non-payment of service tax on amounts collected as centage, penalties, and toll-related charges from contractors, totaling ₹262.70 crore and ₹16.73 crore respectively, along with applicable interest and penalties. The extended limitation period of five years was invoked on grounds of alleged suppression of facts.

The petitioner contended that it was established by the Bihar government to execute infrastructure projects and collect tolls. It acted as a nodal agency, preparing project reports, receiving government funding, appointing contractors, and transferring completed projects to the State.

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The company maintained that it rendered services solely for the government and was therefore entitled to service tax exemption under Clause 13 of the Mega Exemption Notification (No. 25/2012-ST).

It argued that the centage charges earlier at 13.5% and later revised to 12.5% were reimbursements for establishment and administrative expenses and not taxable services. Similarly, for toll collection, the company retained 15% of the gross collection to cover administrative costs, claiming this amount was also reimbursable and not liable for service tax. Reliance was placed on a 2022 GST circular, which clarified that penalties and compensations were not taxable, and the company argued that the same logic applied under the earlier service tax regime.
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The petitioner further asserted that its works contracts for roads and bridges were excluded from the scope of service tax under Section 65(105)(zzzza) of the Finance Act and that its functions, being governmental in nature, were exempt under the negative list in Section 66D. It stressed that there was no intention to evade tax and that its role as an executing agency for public infrastructure ruled out any element of wilful suppression.

However, in the adjudication order dated March 28, 2024, the department held otherwise. It was noted that BRPNNL did not undertake construction work itself but appointed private contractors. The centage it earned was for technical supervision and administrative management, which constituted taxable services and did not fall under the exemption notification.

Regarding toll collection, the department found that BRPNNL had appointed vendors for collection and retained a share of the toll amount. While toll charges themselves were exempt, the service of collecting tolls on behalf of the government was taxable. Circulars and CBEC guidance notes were cited to support this position.

The adjudicating authority (AA) found that the petitioner failed to provide clear explanations regarding its earnings from toll receipts, penalties, and construction services. While BRPNNL argued that penalties imposed on contractors were compensatory and often waived, no evidence was produced. Initially, these were treated as “declared services” under Section 66E(e) for tolerating breach of contract.

However, after considering relevant circulars and judicial precedents, the authority dropped the ₹2.48 crore demand on this issue, finding such penalties to be non-taxable compensations.

Significantly, the petitioner’s claim for exemption as a “governmental authority” was rejected. Although fully owned by the Bihar government, BRPNNL was incorporated under the Companies Act and not established by an Act of Parliament or State Legislature—a necessary condition for the exemption. The department clarified that mere government ownership did not render an entity as “government” or “local authority” for tax purposes.

Justice Rajeev Ranjan Prasad and Justice Sourendra Pandey reviewed the legal definitions and referred to the Shapoorji Pallonji judgment, which said an entity must be created by law or be government-controlled with municipal functions to qualify as a governmental authority. Since BRPNNL did not meet these conditions, its claim for exemption was rejected.

The Court also found that BRPNNL had not filed its service tax returns (ST-3) or claimed exemption under the Mega Exemption Notification for the years 2015 to 2017. When asked, BRPNNL’s lawyer admitted this should have been done.

The tax department discovered these issues through information from the Income Tax Department. Due to this non-disclosure and lack of cooperation, the Court agreed with the department that there was wilful suppression, allowing the extended limitation period.

BRPNNL relied on earlier Supreme Court rulings, but the bench found those cases different and not applicable here. Unlike those cases, BRPNNL had not filed returns or used the statutory appeal process under Section 86 of the Finance Act.

In the end, the Court dismissed BRPNNL’s writ petition, saying no jurisdictional error was shown. However, it allowed petitioner to file an appeal under Section 86 within eight weeks and asked the appellate authority to consider the time spent in the writ petition while calculating limitation.

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