IRB Infrastructure Developers' prospects remain bright, despite an order by the Commissioner of Service Tax (CST) that the company pay Rs 60.5 crore, as well as the penalty (the entire tax payable) and interest (according to provisions of the Service Tax Act) as service tax. The tax is on the toll collected by three build-operate-transfer (BOT) project subsidiaries (special purpose vehicles, or SPVs) for the FY07-FY11 period.
If this condition is imposed on the company's ten operational BOT projects, the total tax payable for the same period would be Rs 290 crore. If one includes the penalty and interest, it would be Rs 600 crore (21 per cent of net worth, as estimated by Citi Research analyst Deepal Delivala).
However, IRB says its SPVs are not 'agents' of the National Highways Authority of India (NHAI), as considered by CST, but BOT concessionaires. Second, the Ministry of Finance has clarified service tax would not be levied on toll paid by road users, including those constructed by SPVs under an agreement between NHAI (or the state authority) and the concessionaire. Technically, toll road companies are in the negative list for payment of service tax. Last, the company has referred to a similar case in which the company (Swama Tollway PVT) secured a favourable ruling in an appellate tribunal and a high court. The case, however, is being considered by the Supreme Court.
IRB would appeal against the order in 90 days and seek a stay on it. It would also consult the auditors.
Though the stock initially fell (from Rs 128 levels), it held steady at Rs 124 levels. Analysts feel there is little possibility of the company losing the case. Deepal of Citi Research, says, “We believe given the case precedents, current legislation and the impact on the industry as a whole, the likelihood of IRB losing the case seems remote at this point.” A Sharekhan analyst says, “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, says, “Though a decision may take time, we believe the management has a strong case in its favour, owing to historical case laws and a Central Board of Direct Taxes circular issued earlier.”
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Analysts feel the issue would have no impact on the financial performance of the company. This is because the concession agreement between NHAI and the concessionaire has a clause under which the company would be able to recover the amount from NHAI/state authority if a law, or its interpretation, is changed. Also, service tax has to be paid by the recipient of a service (NHAI in this case). Sujit Jain, analyst, Asian Markets Securities, says, “The amount under dispute would be recorded as 'contingent liability’. Even if this is included in the balance sheet as a liability, a matching asset as ‘receivable from NHAI’ would be created.”
Analysts maintain their ‘Buy’ recommendation on the IRB stock, with a target price of Rs 234, an upside of 89 per cent. Emkay’s Motwani says, “We continue to like IRB's robust portfolio of cash flow generating operating assets and its strong balance sheet position, which would drive the company's accelerated asset accretion.”