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Karnataka State Beverages Corporation Ltd. Versus The Commissioner of Income-Tax, The Deputy Commissioner of Income-Tax, State of Karnataka, The Commissioner of Excise

2016 (3) TMI 461 - KARNATAKA HIGH COURT

Disallowance of Privilege fee paid u/s 40(a)(ii) or (iib) - sharing of revenue with the state - scope of any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains - Scope of any amount (A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name called, which is levied exclusively on; or (B) which .....

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t of tax. In this regard, reliance is placed on Har Shankar [1975 (1) TMI 89 - SUPREME COURT] which is clear on this aspect and therefore, it was not open for the Assessing Officer to opine that privilege fee appears to be relatable to the profit earned and a large chunk of it is transferred to the State Government in the name of privilege fee. It is settled law that there is no illegality committed by the petitioner in paying such privilege fee on the State Government having fixed such privileg .....

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aling with the privilege of the State Government to fix such a privilege fee. Therefore, it would aptly apply in the facts and circumstances of these cases insofar as the Assessing Officer having expressed an opinion of the State Government having exercised its power "unscientifically, illegally and irrationally". (sic) - Consequently, these petitions are allowed. The impugned assessments are set aside insofar as it treats the privilege fee paid as being taxable to income. - Decided in favou .....

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appearing for the petitioner, the learned Advocate General Shri Madhusudhan R. Naik appearing for Respondents 3 and 4 and Shri Jeevan J. Neeralagi appearing for Respondents 1 and 2. These petitions are all heard and disposed of by this common order, as they are by the same petitioner. However, the challenge is to assessment orders for different years, as is detailed hereunder. 2. The petitioner is a company, a Government of Karnataka Undertaking engaged in the business of canalization of liquor, .....

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on 143(3) of the Act for the assessment year 2011-12 and disallowed the Privilege fee of ₹ 695,14,70,000/- made disallowance under Section 14A of the Act in a sum of ₹ 19,20,039/-, disallowance of provision for ex-gratia ₹ 37,52,700/- and disallowance of expenditure on increase in share capital ₹ 4,85,000/-, by order dated 26.02.2014. Similarly, an assessment order was passed under Section 143(3) of the Act for the assessment year 2012-13 wherein the Assessing Officer had .....

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disallowance of privilege fee is as follows: Writ Petition Number Assessment Year Privilege Fee 12872/2013 2010-2011 Rs.570,14,37,000/- 14687/2014 2011-2012 Rs.695,14,70,000/- 15910/2015 2012-2013 Rs.829,41,58,944/- 17514/2015 2009-2010 Rs.479,36,60,000/- The Assessing Officer has disallowed the Privilege fee on the following grounds namely: i) The privilege fee paid is more than the surplus earned by the Company in the trade of liquor. ii) The distribution of profits arising in the hands of 50 .....

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every year and there is no fixed rate. vii) The percentage of privilege fee is not known to the company in advance or at the beginning of the year and the payments made by the company are against the provisions of the Companies Act, 1956, The Income-tax Act, 1961 and Accounting Standards. viii) The Government order on levying the privilege fee is passed purposefully only at the fag end of the financial year. ix) The petitioner - Company is parting with its taxable profits to the Government under .....

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ct, 1965 is illegal. 3. The learned counsel for the petitioner would contend that the several reasons assigned by the Assessing Officer in the Assessment orders pertaining to the above years would raise the following issues: i) Section 40(a)(iib) of the Income-tax Act disallows the privilege fee from the Assessment Year 2014-15 and subsequent years only and the amendment is prospective and not clarificatory. ii) The provisions of Section 40(a)(ii) are not applicable to the petitioner's case. .....

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ctly from a State Government undertaking by a State Government. Consequently in view of the said provision, no disallowance can be made to the impugned assessment years 2009-2010, 2010-2011, 2011-2012 and 2012-2013, for the reason that the above provision is applicable only from the assessment year 2014-15 and subsequent years and it is applicable prospectively. This is supported by the Memorandum explaining the provisions of the finance bill, Circular No.3/2014 dated 24.01.2014 and Note on clau .....

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imited vs. CIT, [1971] 82 ITD 913 (SC). c) CIT vs. Hero Cycles (Private) Limited, [1997] 94 Taxman 271/228 ITR 463(SC). d) State of Kerala and others vs. Kurian Abraham Private Limited and another, [2008] 303 ITR 284 (SC). Hence, the attempt to disallow the privilege fee in respect of the assessment years prior to 2014-15, is clearly without reference to any legal provision. The opinion expressed by the Assessing Officer is that the amendment to Section 40(a)(iib) is clarificatory in nature. The .....

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only be treated as prospective from a plain reading thereof and it cannot be construed as being clarificatory. In this regard, attention is drawn to the decision in Vatica Township supra. It is further contended that privilege fee is not any rate or tax levied. Disallowance was only when the payment was either rate or tax and when it is fee, cess, royalty, these further items have been brought in only by the Finance Act, 2013 with effect from the assessment year 2014-15. Section 10(4) of the 192 .....

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sis of any such profits or gains. It is also pointed out that several types of taxes have been allowed as business expenditure in computing the income. For instance, sales tax, entry tax, import duty, export duty, purchase tax, liability excise duty, etc. Royalty paid has always been allowed as allowable business expenditure. It is also pointed out that the revenue who has replaced several distributors who have been paying such fee would also have to take into account that the revenue has never .....

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lege fee far in excess of what the shareholder would be entitled to, is also an observation which is irrelevant. It is also pointed out that even appropriation of income directly or indirectly is covered by the inserted provision of Section 40(a)(iib) of the Act. The petitioner would not be provided with Distributor Licence without payment of privilege fee to the Government. The State Government being a shareholder of the petitioner, is immaterial. The capacity of receiving privilege fee is as a .....

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essee. The State Government alone has the power to decide the quantum of the privilege fee. The notification issued by the State Government in exercise of powers conferred under Section 24 of the Karnataka Excise Act, 1965 read with Rule 8(4) of the Karnataka Excise (Sale of Indian & Foreign Liquors) Rules, 1968 is legitimate and in order. The State Government has fixed certain percentage on the purchase value of the Indian made liquor (IML) and the extent of levy is by the State Government .....

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ro Cycles (P) Ltd. vs. CIT 128 DTR 1 (SC). It is pointed out that if a certain amount is fixed at the beginning of the year, it would be impossible for the petitioner to make payments, as the extent of business is uncertain. The business model is also such that one can sell at only certain prices. How a price is fixed is left to the contracting parties and the Income Tax Department sitting in judgment as to the mode and the manner in fixing such amount, is impermissible. The levy of privilege fe .....

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of transactions of the petitioner company. The intention behind fixing the fee at the end of the year is to ensure that the petitioner is not saddled with losses and undue hardship, in view of the privilege fee being far in excess of the turnover. As for example, it is pointed out that if the privilege fee is fixed at ₹ 75 crore per month, it would be ₹ 900 crore for the entire year, in which event, the revenue would have allowed the entire expenditure and if the resultant amount is .....

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TR 17 (SC). The dividends paid by the petitioner for the relevant assessment years, is as follows: Assessment Year Amount of Dividend 2010-2011 Rs.2.00 Crore 2011-2012 Rs.2.40 Crore 2012-2013 Rs.2.40 Crore 2009-2010 Rs.2.00 Crore It is then pointed out that if the payment of privilege fee, if it is treated as dividends, would lead to an absurdity. The percentage of dividend if relatable to the privilege fee, would be unheard of in the corporate history of any company for any year, which comparis .....

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out or expended wholly and exclusively for the purpose of business and it is allowable as expenditure under Section 37(1) of the IT Act. It is levied on landed cost or purchase cost and not on profit. Therefore, it is contended that the levy of privilege fee is reasonable and allowable as business expenditure under Section 37(1) of the Act. Reliance is placed on the following judgments in support of the same: a) Sassoon J. David and Company, Private Limited vs. CIT, (1979) 118 ITR 261 (SC). b) .....

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uch legislation was irrational, unscientific and unreasonable, it is open for the Department to question it before the appropriate forum and the power of the State Government to bring about such amendment also cannot be questioned. In that, the amendments made to the Excise Act are in relation to Section 24 of the Excise Act, Rule 3 Clause (11), Rule 8 sub-rule (4), Rule 8 sub-rule (5) and Rule 8 subrule (13) of the Karnataka Excise (Sale of Indian & Foreign Liquors) Rules, 1968. It is point .....

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ive powers to make laws for the State in respect of any of the matters enumerated in List-II in the Seventh Schedule as per the provisions of Article 246(3) of the Constitution of India. The fee or charges received by the Government for parting with its exclusive right to distribute as per the provisions of Section 24 of the Excise Act and 1968 Rules, is allowable expenditure as per the provisions of the IT Act. The Assessing Officer, seeking to question the State's power to levy fees in a f .....

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on the purchase price of liquor. 2011-2012 No.FD 26 EAA 2011 dated 24.03.2011 6.90% of purchase cost of liquor. 2012-2013 No.FD 26 EAA 2011 (1) dated 24.03.2012 6.90% on the purchase cost of Liquor for the period April, 2011 to June, 2011. No.FD 26 EAA 2011 (2) dated 24.03.2012 7.00% on the purchase cost of Liquor for the period July, 2011 to March, 2012. 2009-2010 No.FD 02 PES 2007 dated 25.03.2009 6.85% on the purchase cost. It is contended by Shri Shankar that in the amendment in the Karnatak .....

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tral legislation would prevail in terms of Article 254 of the Constitution of India, is not tenable. It is not open for the Assessing Officer to raise constitutional issues in an assessment order and create a tax liability. It is on account of this extralegal authority exercised by the Assessing Officer that an alternative remedy of appeal insofar as the assessment orders was not found feasible and appropriate. Hence, the present petitions. It is in this vein that the learned counsel Shri Shanka .....

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isions of the Act. He contends that there is sufficient identification of the various types of income arising out of sources like business or profession. A plain reading of Section 37 of the IT Act would indicate that an expenditure to be allowed under this section should fit into the central theme of the section and the question was, of allowing or disallowing the deduction claimed as privilege fee in the present case on hand and this has extensively been dealt with by the Assessing Officer in .....

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has only proceeded to address the constitutional validity of the imposition of privilege fee and the determination of the taxable income of the petitioner - Company in relation to the provisions of the Act. The State Government has the exclusive right to pass legislation with regard to production manufacture, sale, etc., of intoxicating liquors and also the right to levy excise duty on the same. The disallowance of privilege fee does not affect in any manner the right of the State Government to .....

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of Karnataka. In order to control the menace of tax evasion, the Government of Karnataka introduced the necessary legislative changes to ensure that the entire wholesale liquor distributors are canalized through the petitioner herein which was incorporated in the year 2003. The Government of Karnataka is admittedly the 100% shareholder of the petitioner. The petitioner has taken over the distribution business hitherto conducted by about 50 license holders. Therefore, the distribution of profit a .....

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of decision of the government regarding the amount paid Method of calculation of privilege fee Income from sources other than liquor business for the year Taxable Income 2004-05 21.79 21.5 02.11.2004 Lump sum 3.89 0.29 2005-06 38.57 32.00 30.03.2005 Lump sum 10.07 6.57 2006-07 47.96 41.00 20.03.2006 Lump sum 10.08 6.96 2007-08 170.67 165.54 27.03.2007 5.15.% on IML sales value 14.82 5.13 2008-09 376.97 345.38 31.03.2008 6.00% on IML sales value 29.11 31.59 2009-10 486.26 479.64 23.03.2009 6.85% .....

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figures. The main reason for such startling and alarming decrease is the payment of privilege fee by the petitioner to the State Government which, it is demonstrated, has increased from ₹ 21.5 crore to ₹ 695.15 crore during the corresponding period. It is also pointed out that the taxable income remained lower than the other income which consists of interest, dividend, etc., which again has been taken away by the State Government. It is thereby sought to be contended that the privile .....

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y its hands on the same without the same being brought to tax. Therefore, the interpretation of the provisions of the State Act relating to privilege fee and the claim of the petitioner that such fee is a first charge on profit preceding the charge of incometax, is certainly required to be discouraged, being repugnant and inoperative. In other words, in interpreting the provisions of the said Act, the provisions of imposition of privilege fee should be construed harmoniously with the obligation .....

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nd others AIR 1962 SC 1044 in this regard. 5. On a consideration of the above contentions and the facts and circumstances, it is not in dispute that the privilege fee which was paid by the petitioner to the State Government for the years 2004-05, 2005-06, 2006-07 was allowed as business expenditure. The respondents 1 and 2 have drawn inspiration from the 2013 amendment, whereby Clause (iib) of sub-clause (a) of Section 40 of the IT Act was inserted by the Finance Act, 2013 with effect from 1.4.2 .....

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40 of the IT Act, the Assessing Officer feels fortified in his view on such amendment and it is also his opinion that it is merely clarificatory in nature and that such expenditure cannot be allowed as business expenditure and is liable to tax and the liability is with retrospective effect and hence is justified in seeking to disallow such expenditure over the years. On a further reasoning, it is sought to be demonstrated with reference to comparison of the privilege fee, the turnover, taxable .....

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de tax. In this regard, as pointed out by the learned Advocate General Shri Madhusudan Naik, a Constitution Bench of the Supreme Court in the case of Har Shankar v. Deputy Excise and Taxation Commissioner AIR 1975 SC 1121, has expounded on the distinction between a 'tax' and 'fee' and the characteristics of these two as also excise duty, in the following words: 55. Since rights in regard to intoxicants belong to the State, it is open to the Government to part with those rights fo .....

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ent, nor can there be any infringement of Article 14 , if the Government tries to get the best available price for its valuable rights." Section 27 of the Act recognises the right of the Government to grant a lease of its right to 'manufacture, supply or sell intoxicants. Section 34 of the Act read with Section 59(d) empowers the Financial Commissioner to direct that a licence, permit or pass be granted under the Act on payment of such fees and subject to such restrictions and on such c .....

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xed to the price determine either the true nature of the charge levied by the Government or its right to levy the same. 56. The distinction which the Constitution makes for legislative purposes between a 'tax' and a 'fee' and the characteristic of these two as also of 'excise duty' are well-known. "A tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not a payment for services rendered". Per Latham, C.J. in Ma .....

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1967 SC 1512). The amounts, charged to the licensees in the instant case are, evidently, neither in the nature of tax nor excise duty. But then, the 'Licence fee' which the State Government charged to the licensees through the medium of auctions or the 'Fixed fee' which it charged to the vendors of foreign liquor holding licences in Forms L-3, L-4 and L- 5 need bear no, quid pro quo to the services rendered to the licencees. The word 'fee' is not used in the Act or the Ru .....

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a centrally administrated area, the power was not fettered by legislative lists loses its relevance in the view we are taking. It is true that in that case it was permissible to the court to find, as in fact it did, that the fee imposed on the licences was, "more in the nature of a tax than a licence fee". As the authority which levied the fee had the power to exact a tax, the levy could be upheld as a tax, even if it could not be justified as a 'fee', in the constitutional se .....

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it would no longer be possible for the petitioner to claim that the said privilege fee is not taxable. The question as to whether the said provision can be applied with retrospective effect, is the only question that would remain for consideration. As rightly pointed out by Shri Shankar, a plain reading of the provision would not indicate that it is to be applied with retrospective effect. There are other provisions which were also amended, and wherever the Legislature intended that certain prov .....

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in the case of State Government Undertakings: 12.1 The provisions of Section 40 of the Income-tax Act, 1961 before its amendment by the Act, specifies the amounts which shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". The non-deductible expense under the said section also includes statutory dues like fringe benefit tax, incometax, wealth-tax, etc. Disputes have arisen in respect of income-tax assessment of some State .....

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ed law that State Government undertakings are separate legal entities than the State and are liable to income-tax. 12.2. In order to protect the tax base of State Government undertakings vis-a-vis exclusive levy of fee, charge, etc. or appropriation of amount by the State Governments from its undertakings, section 40 of the Income-tax Act has been amended to provide that any amount paid by way of fee, charge, etc., which is levied exclusively on, or any amount appropriated, directly or indirectl .....

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Government; (iii) a company in which more than fifty per cent, of the paid-up equity share capital is held by the entity referred to in clause (i) or clause (ii) (whether singly or taken together); (iv) a company or corporation in which the State Government has the right to appoint the majority of the directors or to control the management or policy decisions, directly or indirectly, including by virtue of its shareholding or management rights or shareholders agreements or voting agreements or i .....

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tion 40 of the Income-tax Act relating to amounts not deductible. The provisions of Section 40 specify the amounts which shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". It is proposed to insert a new sub-clause (iib) in clause (a) of the aforesaid section so as to provide that any amount paid by way of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge, by whatever name calle .....

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ccordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years." Therefore, it can safely be said that the privilege fee payable by the petitioner to the State Government would be taxable with effect from 1.4.2014 and not prior thereto. The unreasonableness of the privilege fee payable is also not a ground to hold that it is a device by which the petitioner and the State Government are avoiding payment of tax. In this regard, reliance is placed on Har Shankar s .....

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