IRB Infrastructure and Developers’ stock continues to be on solid ground (around Rs 120 levels) even after the company has received an order from Commissioner of Service Tax (CST), containing a demand of Rs 60.5 crore plus penalty (100% of the tax payable) and interest (at appropriate rates as per provisions of Service Tax Act) as service tax payable on tolls collected by three build-operate-transfer (BOT) project subsidiaries (read special purpose vehicle or SPVs) for the period FY07-11. If the same logic is applied to all its ten operational BOT projects, then the total tax payable amounts to Rs 290 crore for the same period. Including penalty and interest, the same totals to Rs 600 crore (21% of networth as estimated by Deepal Delivala, analyst Citi Research).
However IRB has defended the order on many grounds. Firstly it says that its SPVs are not ‘agents’ of NHAI (as considered by CST) but are termed as BOT concessionaires. Secondly, Ministry of Finance has clarified that service tax is not leviable on toll paid by users of roads including those constructed by SPVs created under an agreement between NHAI or state authority and concessionaire. In technical words, the toll road companies are in the negative list for payment of service tax. Lastly the company has drawn reference to a similar case in the past wherein the company (Swama Tollway PVT) won a favourable ruling in the appellate tribunal and High Court though the case is being heard in the Supreme Court currently.
IRB is going to appeal against the order within the next 90 days and also file for a stay in the order. It will also decide whether to provide for the same after consulting the auditors. Analysts strongly feel that there is very little possibility of company losing the case. Says Deepal of Citi Research, “We believe that given the case precedents, current legislation, impact for the industry as a whole, likelihood of IRB losing the case seems remote at this point.” Adds analyst from Sharekhan, “We believe IRB Infra would not face such an adverse situation (losing the appeal and not recovering from NHAI).” Ajit Motwani, analyst, Emkay Global Financial Services points out that although decision might take its own time, we believe the management has a strong case in their favour owing to historical case laws and CBDT circular issued earlier.
Broadly, analysts feel it will have no impact on financial performance of the company. This is because concession agreement between NHAI and concessionaire provides a clause under which the company will be able to recover the amount from NHAI/state authority in case of change in law or its interpretation. Also, service tax has to be paid by recipient of the service (NHAI in this case). Adds Sujit Jain, analyst, Asian Markets Securities, “The amount under dispute will be recorded as ‘contingent liability. Even if it is taken to balance sheet as a liability, a matching asset as ‘receivable from NHAI’ will be created.”
Analysts maintain their 'Buy' recommendation on the company with target price of Rs 234, which implies an upside of (89%). Says Ajit of Emkay, “We continue to like IRB’s robust portfolio of cash flow generating operating assets and strong balance sheet position which will drive the company’s accelerated asset accretion.”