Understand Toll Collection Rights as intangible assets under Schedule III of the Companies Act, 2013. Explore the legal treatment, taxation, and depreciation benefits for project developers. Clarifications from the Hyderabad Special Bench of the Income-Tax Appellate Tribunal are discussed regarding the nature of toll collection rights as intangible assets, despite CBDT circulars.
Toll Collection Rights are licenses granted to developers of public utility services, allowing them to collect tolls as a means to recoup their investments in the respective projects. According to Section 52 of the Indian Easements Act, 1882, a license is a permission granted by the property owner for specific activities on their immovable property. It is revocable and does not confer any ownership or interest in the property itself.
In the context of toll collection, a concession is a license awarded by a government authority to a private sector entity, granting them certain exclusive rights for a limited period. The project assets remain the property of the authority, and the private entity possesses them constructively. Once the concession period ends, the project assets are returned to the authority.
These toll collection rights are considered “intangible assets” under Schedule III of the Companies Act, 2013. They fall under the category of “Licenses and Franchise” as per Note J to Part I of Schedule III. From an income tax perspective, these rights are covered by Ind AS 115, Revenue from Contracts with Customers. The costs incurred for constructing and developing infrastructure facilities can be amortized and claimed as allowable business expenditure under Ind AS 38. If these rights are treated as intangible assets, the owner can claim depreciation under Section 32 of the Income Tax Act, 1961.
In a ruling by the Hyderabad Special Bench of Income-Tax Appellate Tribunal, it was held that the right to operate toll roads and collect toll charges is indeed an intangible asset and a business or commercial right. The Tribunal concluded that the collection of toll charges cannot occur without the completion of the associated project, making the right to collect tolls an essential part of the intangible asset. This ruling clarified any doubts for infrastructure companies regarding the treatment of toll collection rights as intangible assets, despite a circular issued by the Central Board of Direct Taxes (CBDT) allowing the amortization of construction costs. The Tribunal upheld the validity of the CBDT circular while recognizing the intangible nature of toll collection rights.
The Hyderabad Special Bench of Income-Tax Appellate Tribunal (Tribunal), in a ruling in the case of ACIT vs Progressive Construction Ltd. in ITA No. 1845 (HYD) of 2014 dated 14/02/2017 held that the right to operate toll roads and collect toll charges is an “intangible asset” and can also be considered a business or commercial right. The Tribunal held that a project developer cannot complete the project without his investment in the project asset. Thus, unless and until the project is completed, the right to collect the toll doesn’t take birth. Ergo, the right to collect toll charges was an intangible asset and on which the taxpayer is eligible to claim depreciation. This ruling by the Tribunal cleared the air of infra companies whether the right to collect toll charges is an intangible asset despite CBDT Circular no.9 of 2014 dated 23.4.2014 providing the project developers to amortise the cost of construction. The Tribunal though held the CBDT circular as righteous.
Also Read:
Depreciation allowable on Right to operate project facility & collect toll charges
Depreciation on Toll Road allowed at rate allowed for intangible asset
Expenditure for executing a project is an intangible asset eligible for depreciation
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