TMI Blog2012 (11) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... he invoices raised by the assessee do not indicate separate amounts as privilege fee or special privilege fee or sports privilege fee. And with respect to the newly inserted section 4B, the manner of computation is not specified under 4B and the computation needs to be made u/s 23A and the implication of AS-22 is to be examined. As the CIT has no occasion to consider the amendments passed by the Andhra Pradesh Legislature on 16-04-2012 as the said amendments came after the CIT passed the order u/s 263 on 29/03/2011 the order of the CIT is to be set aside and restore the issue back to his file with a direction to decide the issue de-novo after examining the said amendments and in accordance with law - in favour of assessee for statistical purposes. - ITA No. 693/HYD/2011 - - - Dated:- 30-7-2012 - SHRI CHANDRA POOJARI AND SMT. ASHA VIJAYARAGHAVAN, JJ. Appellant by : Shri K. Vasant Kumar Respondent by : S/Shri V. Srinivas/YVST Sai ORDER PER ASHA VIJAYARAGHAVAN, J.M.: This appeal is filed by the assessee directed against the order of CIT-I, Hyderabad dated 29/03/2011 passed u/s 263 of the Act, for the assessment year 2006-07. 2. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, it was submitted that Section 23A clearly lays down that the consideration of the privilege conferred on the Corporation, the margin special privilege fee, any other receipts and any other amount realized by the corporation from whatever source after deducting the expenses incurred by the corporation shall be paid as privilege fee or special privilege fee or any other fee by whatever name called. The Commissioner was of the view that the assessee has to pass on the entire sale consideration after deducting the expenses incurred by the corporation to the State Government. Therefore the Commissioner was of the opinion that it is a profit margin this is paid in the name of fee. The State Government by G O dated 22.02.2005 had directed the corporation to re-fix the margin after finalization of tender. The assessee contended before the CIT that whatever manner the amount is paid, what is paid as privilege fee is for the Government granting commercial right to the assessee corporation for carrying on its business of bottling and distribution of liquor. This would amount to grant of license for the purpose of carrying on business by the assessee and therefore any payment in whatever m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant is that the expenditure is paid towards the Privilege Right and hence, it should be allowed. 6. It is contended by the appellant that section 68A r.w.s. 23A of Excise Act shows that the income derived from the trade cannot be held to be belonging to the appellant and hence, the payment is by overriding title. 7. It is stated that the corporation is doing the business as an authority on behalf of the state and hence, Article 289 of the Constitution applies and the profits earned there-from are exempt from income tax. Section 23A and Article 289 are to be read together so as to exempt assessee from income tax 8. The appellant s counter given with respect to Karnataka Beverages Corporation is stated to be ignored in the order u/s. 263. 9. It is claimed that proprietor is the state and hence, the profit is given back to the state. 10. In summary the arguments of the Ld. Counsel contain serious contradictions, which are listed as below : (a) APBCL is totally exempt as run by state government whereas it is again claimed that this is a distinct entity and it pays sales tax and other taxes. It also files income-tax returns declaring itself as a corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the profits, but was only appropriated or distributed from out of the profits / margins earned. The distinction between payment out of profits and a payment to earn the profit is unexceptionable. Even if the claim were to be considered u/s.37, the wording of section 23A and the computation according to section 23A of the Excise Act has to be followed. The word expense used in the said section must be construed in the commercial sense and as per the Accounting Standards and Company Law etc. Since the word expenses has not been defined in the Excise Act and in that sense is not subject to any restricted meaning, it should receive its natural, plain, or ordinary meaning. This, as held by the Supreme Court in Md. Ali Khan vs CWT, 224 ITR 672, 675 is a cardinal principle of construction . In this context, therefore, the word expenditure has to be seen as any outgoing that has to be provided for before ascertainment of profit available for the enjoyment of the proprietor. This the position sanctified by AS 22. It is also reinforced by the fact that in sec 40(a)(ii) the Income Tax Act found it necessary to specifically exclude Income Tax from eligible expenses in the computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r not etc. When we apply these criteria we go back to section 23A of Excise Act which is the basis of the claim and accordingly all the arguments of interpretation of section 23A spring back to life and the expenditure is to be disallowed. The concept of fee and the judgments of the Supreme Court also come back to life and hence, assessee s arguments are not acceptable. 9. Even if it were to be considered otherwise it can clearly be seen that this is a case of application of profit as the total margin is given away and accordingly case laws referred to by the department apply and this is a case of application of income. 10. Even otherwise, if all the arguments / provisions are ignored for a minute and we examine the question i.e., profit being given back for obtaining the right of privilege to trade in liquor , it can be seen that the expenditure is capital in nature and hence, the judgment of Supreme Court in the cases of Jalan Trading Company and Vibhuti Glass Works would squarely apply and the same is to be disallowed even on this count. 11. Accounting Standards is part of Company law and the same is to be recognized. Even for the purpose of income-tax the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government was to take away the profit from trading in liquor as privilege fee or by any other name called . This is very clear in the scheme of things adopted and the language of section 23A of the Excise Act and the self declaration on the website. 18. Immediately after the department noticed the declaration on the website and the order u/s. 263 was passed, this disclosure was deleted from the website on the specious plea of resolving technical problems. 19. Reality of the situation is that whenever margins were increased such increased amounts were asked to be paid to the State Govt (read proprietor) in the name of privilege fee or by any other name. The manner of computation itself evidences this fact that it was the profit that was being taken. This was the truth recognized on the website, which upon turning inconvenient in the light of proceedings u/s 263, had to be removed. 20. The mechanism of conducting the business is not crucial to determination of income. The payments may be made in treasury or collected by the assessee and paid in the treasury. This does not alter the character of receipt or the expenditure, given the fact that assessee is a Corporation. 21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gether hence, the claim cannot be allowed under Excise Act unless incometax is first deducted. 27. If the word fee is to be considered as per the case laws the conditions laid down by the Supreme Court are not fulfilled so as to allow the same. If it were to be considered as fee also, it is to be disallowed and rather allowed after deduction of income tax. 28. Ignoring for a minute all the other provisions and arguments, even if we were to consider favourably the arguments of the assessee, the payments made are for a capital right and therefore, the expenditure is a capital expenditure and hence, to be disallowed as per the judgments of Supreme Court (Jalan Trading Company and Vibhuti Glass Works) submitted hereinabove. 29. For elaborate reasons mentioned in paragraphs 7.17 to 7.22 on pages 10-13 of the order u/s.263 the argument of the assessee that the payment was made by overriding title is not tenable. The consideration was part of the sale receipt. According to its own P L Account both the receipts and the expenditure are forming part of this account and hence payment by overriding title does not arise. Case laws applicable to the facts of the case on this aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Rajasthan Excise Rules 1962 was payable by the assessee as consideration for acquiring an exclusive privilege. It was neither fee or tax but the consideration for grant of approval by the Government as terms of contract in exercise of its right to enter into a contract in respect of the exclusive right to deal in bottling liquor in all its manifestations. The High Court was right in holding that the amount did not fall within the purview of Section 43B. The requirement of Section 43B is actual payment and not deemed payment as a condition precedent for making the claim for deduction in respect of any expenditure incurred by the assessee during he relevant previous year specified in Section 43B. The furnishing of bank guarantee cannot be equated with actual payment which requires that money must flow from he assessee to the public exchequer as required under Section 43B. By no stretch of imagination can furnishing of bank guarantee be actual payment of the tax due in cash 17. It was argued by the learned counsel that what was before the Apex Court was whether the fee for the grant of the right of bottling and distribution under the Excise Act and Rules payable by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een that the privilege fee was compulsory to start the business activity. In our considered view, the levy of privilege fee is like license fee to start the business, otherwise the assessee could not have started the manufacturing and vend he liquor. The assessee has earned a huge profit even after paying this privilege fee as the return filed by the assessee was of Rs.4.98 crores or so. The department has raised an objection that the Excise Commissioner is also the Director of the assessee company. Therefore, this is a well planned activity and has to be treated as application of money. In our considered view, this objection of the department is also not tenable for the simple reason, this objection of the department is also not tenable for the simple reason that any authority under any Act can be deputed as a Director or in any other capacity by the Government to look after the business activity. The fee is not levied by the Excise Commissioner but is levied on behalf of the Excise Department, Excise Department is not a shareholder in the assessee company as the shareholder is the Rajasthan Government. Therefore, this objection of the department also does not hold good. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reported in 42 ITD 349, the Chennai Tribunal had held that vending fee and additional vending fee (which are similar to privilege fee and special privilege fee) payable by the assessee corporation is allowable by observing as under: the sale vend fee and additional vend fee were nothing but the price or consideration charged by the State government in its capacity as a trade for parting with one of its valuable rights and privileges, namely the right and privilege of supplying, by wholesale, Indian made foreign liquor throughtout the State of Tamilnadu. Such fee are directly relatable to the executive power of the State to carry on any trade under article 298 of the Constitution. This being the essence of the matter, irrespective of the mode and mechanics of collection of the fees, irrespective of the quantum of the fees levied, and irrespective also of the fact that the provisions relating to the levy are contained in the Prohibition Act and Rules made thereunder, the fees in question could not be regarded either as fees within the meaning of entry 66 of the State List or as a duty within the meaning of entry 51A of the State List, or as a tax proper. If, as demonstrated ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 4A, 4B and 4C in the AP (Regulation of Trade in IMFL, Foreign Liquor) Act, 1993 with retrospective effect from 21- 07-1993. The said Act also repeals sections 23A and 23B of AP Excise Act from a date to be notified by the State Government. The AR surprisingly stated that they have no further arguments to make in the present proceedings though these latest amendments are taken as grounds in certain other proceedings. In order to render full justice to the case, there is necessity to consider these amendments also. 2. It is submitted that the above amendments are of wide import and have deep bearing on the present proceedings. It has been argued by the learned Counsel of the assessee in the present proceedings that the obligation of the assessee to pay privilege fee is only contractual in nature. However, the present amendments indicate that such obligation is not contractual simpliciter. In view of these latest amendments, the decisions in the cases of McDowells Ltd (314 ITR 167) and TASMAC Ltd. (42 ITD 349) are no longer applicable to the case of the assessee. 3. It is submitted that the present amendment to the AP (Regulation of trade in IMFL, Foreign Liquor) Act vindic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P High Court in the case of AP Civil Supplies Corporation Ltd. The relevant portion of the judgment of Hon ble Supreme Court in the case of APSRTC Ltd is quoted below for the kind consideration of Hon ble ITAT. If a trade or business is carried on by the State departmentally and income is derived from it, there would be no difficulty in holding that the said income is the income of the State. If a trade or business is carried on by a State through its agents appointed exclusively for that purpose, and the agents carry it on entirely on behalf of the State and not on their own account, there would be no difficulty in holding that the income made from such trade or business is the income of the State. But difficulties arise when we are dealing with trade or business carried on by a corporation established by a State by issuing a notification under the relevant provisions of the Act. The corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other share-holders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that careful examination of the above decision reveals the following findings : i) A corporation has a personality that is distinct from the State and hence normally income of a Corporation cannot be treated as income of State; ii) The corporation is its own master and is answerable as fully as any other person or corporation. It is not the Crown and has none of the immunities or privileges of the Crown. Its servants are not civil servants, and its property is not Crown property. It is as much bound by Acts of Parliament as any other subject of the King. iii) A corporation (constituted through a State Act) is of course a public authority and its purposes, no doubt, are public purposes, but it is not a government department nor do its powers fall within the province of government. iv) Trading activity carried on by the corporation is not a trading activity carried on by the State departmentally, nor is it a trading activity carried on by a State through its agents appointed in that behalf. v) State may issue a notification under the Statute under which the Corporation is constituted, providing expressly or by necessary implication that the income derived by the corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporation is held by Government, it would go a long way towards indicating that the Corporation is an instrumentality or agency of Government. 2. Existence of deep and pervasive State control may afford an indication that the Corporation is a State agency or instrumentality. 3. It may also be a relevant factor..... whether the Corporation enjoys monopoly status which is State conferred or State protected. 4. If the functions of the Corporation are of public importance and closely related to governmental functions, it would be a relevant factor on classifying the Corporation as an instrumentality or agency of Government. 5. Specifically, if a department of Government is transferred to a corporation, it would be a strong factor supportive of the inference of the Corporation being an instrumentality or agency of Government" 9. The Hon ble AP High Court found that the Corporation was meeting all the tests to be termed as instrumentality of the State. Even in such case, the High Court decided that an instrumentality is different from the State and its income cannot be equated to that of State. Relevant portion of the decision is quoted below: An agency or instrumentality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he income of the company is different from the income of the State, a specific provision is made declaring that it shall belong to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh. Once it is the income of the company under the provisions of the I.T. Act, it is liable to tax and out of the gross income, after making allowance for such deductible expenditure as is permitted under the I.T. Act, the net amount shall be the income of the company. It is this income that is stated to belong to the Price Equalisation/Stabilisation Fund under the Department of Civil Supplies, Government of Andhra Pradesh. The fact that this amount is said to belong to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, does not establish that it is the income of the Department. The income of the company being distinct from the income of the State, immunity from taxation provided under art. 289(1) of the Constitution is not attracted . Emphasis supplied 10. It is also submitted that in light of the above, it is clear that income of the assessee Corporation is distinct from that of the State. If section 4C is interpreted to the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lahabad High Court in the case of UP Jal Nigam Ltd (202 Taxman 285). Relevant portion of the decision is reproduced below: 71. One other aspect of the matter requires consideration. The Income Tax Act, 1961, has been legislated by the Union of India in pursuance of powers conferred by Article 246 of the Constitution read with Entry 82 List 1 of Schedule VII of the Constitution. Under Entry 82, the Union of India has right to legislate the law for taxes in income other than agricultural income, whereas, the State has got power to impose tax on agriculture income under Entry 46 List II of Schedule VII of the Constitution. 72. Applying the aforesaid principle, the State Government cannot exercise power to an item meant for the Central Government. The local authority should be defined keeping in view the provisions contained in Part IX and IXA of the Constitution and Section 10 (20) of the Income Tax Act read with Chapter-III of the Income Tax Act, 1961. Merely because the State legislature has used the word, local authority in sub-section (3) of Section 3 of the 1975 Act, it shall not entitled the U.P. Jal Nigam to claim exemption unless Income Tax Act itself provide. REPUGNA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed from its sales and as per its own calculations. The invoices raised by the assessee do not indicate separate amounts as privilege fee or special privilege fee or sports privilege fee. Therefore, the arguments of the assessee are self-contradictory in light of the newly inserted section 4A. 14. As per new section 4B, the amount of privilege fee needs to be remitted to Government in the manner specified by the Government. However, the manner of computation is not specified u/s 4B. Therefore, the computation still needs to be made u/s 23A which specifies that the margins after meeting expenditure shall be paid as privilege fees. In this context, the stand of the Department that income tax is an expense in commercial sense and as per the mandate in AS 22 remains un-assailed. There is a primary distinction between the case of the assessee and that of the corporations of other States. In the case of the assessee, it makes its own computations, derives the surplus at the end of the day and pays the same in the name of fee , whereas in other cases, the fee is a fixed amount under the rules or a specific amount based on stock quantity determined as per the rules. If section 23A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the judgements of the Apex Court on Aritcle 289 of the Constitution and on tax liability of a corporation vis- -vis the state government. 16. The first case related to TASMAC was decided by ITAT (42 ITD 349) where it was held that sec 43B did not apply to vend fee since it was more in the nature of a price paid to the State rather than a tax or duty. The facts of the said case are totally distinguishable from that of the case of the assessee, where the privilege fee was residuary and in the nature of a balancing figure. As on date one more case is pending before the Hon ble ITAT, Chennai Bench, and the facts in dispute in the said case are totally different. a) In the case of TASMAC, the issue pending before ITAT, Chennai Bench is not on the admissibility of privilege fee. b) The issue in the said case is on retrospective determination of special privilege fee/additional vend fee after the closure of the financial year through a GO issued by State Government. c) As per section 17C of the Tamil Nadu Prohibition Act, 1937, State Government is empowered to levy privilege fee/vend fee as per the rules framed in this behalf. Proper rules are framed by the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived only after meeting the expenditure which for this purpose should include income tax. Thus, income-tax is to be paid first and the resultant surplus is to be paid as appropriation of profit may be in the name of fee or by whatever name called. 19. Without prejudice to the above, it is also submitted that fee involves element of quid pro quo as held by the Supreme Court in the case of The Hingir-Rampur Coal Company Ltd [1961 AIR 459]. In the said decision, the Apex Court held that it is true that between a tax and a fee there is no generic difference. Both are compulsory exactions of money by public authorities; but whereas a tax is imposed for public purposes and is not, and need not, be supported by any consideration of service rendered in return, a fee is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it. If specific services are rendered to a specific area or to a specific class of persons or trade or business in any local area, and as a condition precedent for the said services or in return for them cess is levied against the said area or the said cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facility/services. Every benefit is measured in terms of cost which has to be reimbursed by compensatory tax or in the form of compensatory tax. In other words, compensatory tax is a recompense/reimbursement. In the context of Article 301, therefore, compensatory tax is a compulsory contribution levied broadly in proportion to the special benefits derived to defray the costs of regulation or to meet the outlay incurred for some special advantage to trade, commerce and intercourse. 21. It may also be submitted that the Supreme Court had no occasion to consider the above decisions in McDowells case because the issue was limited to applicability of section 43B and not on the true nature of the levy . Without prejudice to this, it may be submitted that even in the case of McDowells, the fee was quantifiable and not amounting to appropriation of entire profit. In light of this, it is very difficult in the instant case to call the privilege fee as fee as all the elements of tax or levy are missing and also in that no specific services are rendered by the government in return for the fee . It is also a fact that the entire amount goes to the Consolidate fund of the State but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the RTI Act through the hand book displayed on the website during the said period. The assertion of the AR in earlier hearings that removal of the material after noticing of the same by Income Tax Department is not deliberate but due to technical problems related to website is too good to be believed, because the RTI information hand books displayed on the website in the earlier period clearly mentioned the fact that profits are ploughed back in the name of privilege fee and the relevant figures are also given, whereas the present information booklet on the website specifically omits such data and the assertion. As the case is that of appropriation of profit, the disallowance of privilege fee, special privilege fee and sports privilege fee may kindly be sustained. 25. The case of the department is clearly elaborated in the order u/s. 263. The AP. Excise Act, Accounting Standards, the judgements of Apex Court and the jurisdictional High Court, Website of the assessee, past conduct of the assessee amply justify the action taken by the department form the basis and also justify the action taken by the department, irrespective of the latest amendments. No doubt, the amendmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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